-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EQykIF+LZN//ayn9WJdcQekO3Kl5OkPosY2jhWsdeHIuCMhXYCQJOFN2IXzhJPAF 6xH9dOggDCEuEoR9tqUNZg== 0000912558-97-000001.txt : 19970328 0000912558-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000912558-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRYPHON HOLDINGS INC CENTRAL INDEX KEY: 0000912558 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133287060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22820 FILM NUMBER: 97565301 BUSINESS ADDRESS: STREET 1: 30 WALL ST STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 2128251200 MAIL ADDRESS: STREET 1: 30 WALL ST STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 10-K 1 -ii- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Gryphon Holdings Inc. 30 Wall Street New York, New York 10005-2201 (212) 825-1200 Commission file number 0-5537 State of Incorporation: Delaware I.R.S. Employer Identification No. 13-3287060 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock NASDAQ National Market (par value $.01 per share) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ ] As of March 13, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $94,731,229. As of March 13, 1997, the number of shares outstanding of the Registrant's Common Stock, par value $.01 per share, was 6,668,340. DOCUMENTS INCORPORATED BY REFERENCE Proxy statement for the Annual Meeting of Shareholders to be held on May 8, 1997, which is incorporated into Part III of this Form 10-K. FORM 10-K TABLE OF CONTENTS Page Part I Item 1. Business 1 Item 2. Properties 21 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Part II Item 5. Market for Company's Common Equity and Related Stockholder Matters 22 Item 6. Selected Consolidated Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 30 Part III 30 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30 PART I ITEM 1. BUSINESS. (a) General Development of Business. Gryphon Holdings Inc. (the "Company") was incorporated under the laws of the State of Delaware in 1983. The Company is a holding company that, through its subsidiaries, underwrites specialized commercial property and casualty insurance coverages in selected niche markets. The Company has developed expertise in lines of insurance typically not emphasized by standard lines insurers, including architects' and engineers' professional liability ("A&E"), difference in conditions ("DIC") (primarily earthquake coverage), and various other specialty coverages. The Company focuses on providing coverage for small to medium-sized insureds. The Company employs a disciplined approach to underwriting to achieve an overall underwriting profit, even if it is necessary to limit premium growth at times. The Company emphasizes quality service in all areas of its operations and believes that this approach has enabled the Company to maintain strong relationships with its insurance producers, which are primarily excess and surplus lines brokers and general agents. On December 28, 1993 and January 6, 1994, Willis Corroon Group plc, a public company organized under the laws of England and Wales ("Willis Corroon"), through a wholly owned subsidiary sold 4,500,000 shares and 632,100 shares, respectively, of the outstanding common stock (the "Common Stock"), par value $.01 per share, of the Company to the public pursuant to the initial public offering (the "Offering") of the Company. The Company did not receive any proceeds from the Offering. As a result of the Offering, Willis Corroon's ownership was reduced from 100% to 36.1%. In September 1995, the Company purchased 1.5 million shares of its Common Stock from Willis Corroon for a purchase price of $25.5 million, including related expenses, in a private transaction. This transaction reduced Willis Corroon's ownership in the Company to 21.6%. In November 1995, Willis Corroon sold its remaining ownership interest in the Company in transactions that were effected on the NASDAQ stock exchange. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." Historically, the Company's insurance subsidiaries, Associated International Insurance Company, a California- domiciled insurance corporation ("Associated"), and Calvert Insurance Company, a Pennsylvania-domiciled insurance corporation ("Calvert"), operated primarily as independent, indirect subsidiaries of Willis Corroon, each having its own underwriting, marketing, claims processing and administrative staff. Associated is an admitted carrier in California and an approved excess and surplus lines insurer in 48 other states. Calvert is a specialty property and casualty carrier that is admitted in all states, the District of Columbia and Canada and all of its provinces. Business Plan Since the Offering, the Company has pursued a business plan that has emphasized a more coordinated and integrated approach to the businesses of its two major underwriting subsidiaries. Through this strategy, the Company has endeavored to better utilize the complementary state licensing of the subsidiaries by making available to all underwriting personnel of the Company the policy issuance capability of either its admitted insurance company subsidiary, Calvert, or its non-admitted subsidiary, Associated. In addition, the Company has attempted to enhance profitability by increasing the net per-risk retentions of its smaller subsidiary, Calvert, by making available to it the financial resources of the Company's larger subsidiary, Associated. In pursuit of these objectives, the Company has implemented two significant changes, effective January 1, 1996. On that date, all of the operating-level personnel previously employed by Associated and Calvert, became employees of a new management and service subsidiary, Gryphon Insurance Group Inc. ("GIG"). The consolidation into a single company has created a more efficient organization, has facilitated a more uniform approach to underwriting and related operations, with freer access to either issuing company, and has encouraged a single- company culture. Secondly, the Company has put into place a pooling arrangement between Associated and Calvert through which the financial resources of the two subsidiaries are, in effect, combined into one larger and stronger entity. This arrangement has enhanced various operating ratios and facilitated the use of higher net retentions in selected lines of business. Underwriting Strategy The Company seeks to optimize underwriting profitability regardless of market conditions by providing specialty insurance products to small and medium-sized commercial insureds. Using its expertise in specialized lines of insurance, the Company endeavors to maintain adequate pricing by exercising underwriting discipline, particularly during times of excess underwriting capacity and greater competition among insurers. The principal elements of this strategy are set forth below. Focus on Specialized Lines. The Company focuses on specialized lines of insurance where the Company expects that its particular expertise in evaluating and pricing risks will give it a competitive advantage. By underwriting a variety of specialty insurance programs, the Company diversifies its risk among lines of insurance. Underwriting Discipline. The Company seeks to write insurance at prices and terms that it believes will generate overall underwriting profits. In underwriting, the Company typically reviews the type of risk, the attractiveness of the pricing and terms relative to the risk and the Company's aggregate exposure to similar risks. Opportunistic Approach. The Company changes its mix of business as market conditions change and opportunities arise. The Company generally emphasizes insurance products which have greater potential for underwriting profitability. The Company avoids underwriting a line of business if the line cannot be priced profitably. The Company does not emphasize market share. Commitment to Service. The Company focuses on providing consistent, high quality service to its insurance producers and insureds in both underwriting and claims handling. The Company believes its producers and insureds benefit from the extensive experience of its underwriting and claims personnel. Use of Sophisticated Computer Modeling Techniques. In addition to employing standard insurance underwriting techniques, the Company's underwriters utilize the Insurance/Investment Risk Assessment System ("IRAS"), a sophisticated computer model which estimates the probable maximum loss ("PML") from earthquakes of varying frequency and severity, to quantify the risk of and assist in determining the price and terms of DIC coverage. The Company also uses IRAS on an ongoing basis to monitor aggregate earthquake exposure. Emphasis on Relationships with Producers. The Company utilizes select excess and surplus lines producers, including general agents and wholesale brokers, to distribute its insurance products, expand market reach and provide specialized knowledge of particular coverages, markets and customers. The Company generally seeks to be a substantial underwriter for its producers, in order to enhance the likelihood of receiving the most desirable underwriting opportunities. (b) Financial Information about Industry Segments. The Company operates in only one industry segment, the property and casualty insurance industry. (c) Narrative Description of Business. Principal Business Lines and Products The following tables set forth the gross and net premiums written by principal lines of business of the Company for the periods indicated: Gross Premiums Written by Principal Lines of Business (Dollars in thousands)
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent Lines of Business Architects'& Engineers' Liability $17,843 11.4% $14,452 9.2% $15,910 11.4% $16,677 14.9% $18,539 20.0% Casualty 29,234 18.6 26,902 17.2 21,284 15.3 19,680 17.6 18,381 19.9 Commercial Automobile 18,337 11.7 18,580 11.8 14,258 10.3 3,201 2.9 Difference in Conditions 38,500 24.5 45,213 28.8 43,259 31.1 34,035 30.5 26,914 29.1 Other Property 24,192 15.4 27,601 17.6 18,424 13.2 13,159 11.8 9,792 10.6 Specialty Lines 28,831 18.4 24,232 15.4 26,014 18.7 24,588 22.0 17,507 18.9 Run-Off Business 2 323 .3 1,424 1.5 _______ _____ _______ _____ _______ _____ _______ _____ _______ _____ TOTAL $156,937 100.0% $156,980 100.0% $139,151 100.0% $111,663 100.0% $92,557 100.0
Net Premiums Written by Principal Lines of Business (Dollars in thousands)
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent Lines of Business Architects' & Engineers' Liability $12,884 13.6% $10,576 11.7% $11,381 16.5% $12,302 19.8% $14,971 28.3% Casualty 20,775 22.0 17,266 19.2 14,611 21.1 12,538 20.2 13,080 24.8 Commercial Automobile 13,947 14.7 13,111 14.5 6,022 8.7 2,341 3.7 Difference in Conditions 20,238 21.4 22,497 25.0 17,247 24.9 18,008 29.0 11,372 21.5 Other Property 9,843 10.4 10,454 11.6 4,916 7.1 3,724 6.0 4,541 8.6 Specialty Lines 16,920 17.9 16,271 18.0 15,008 21.7 12,931 20.8 7,558 14.3 Run-Off Business 2 323 .5 1,324 2.5 _______ _____ _______ _____ _______ _____ _______ _____ _______ _____ TOTAL $94,607 100.0% $90,175 100.0% $69,187 100.0% $62,167 100.0% $52,846 100.0%
Architects' and Engineers' Liability. A&E insurance protects architects, engineers and other design professionals against liability to third parties due to the insured's negligence. A&E policies are written by the Company exclusively as claims-made coverage. A&E policies written by the Company protect insureds for up to $5 million. The Company generally concentrates on smaller architectural and engineering firms (i.e., those with $10 million or less in annual billings) where the principals actively participate in the operations of the business. Based upon gross premiums written, approximately 49.0% and 54.1% of the A&E insurance was written for firms located in California for the years ended December 31, 1996 and 1995, respectively. The Company has generated its A&E business exclusively through Risk Administration & Management Company ("RAMCO") for over 9 years. RAMCO has been granted binding authority, subject to A&E underwriting guidelines specified by the Company. The Company may cancel any policy, subject to applicable insurance regulations, if it is inconsistent with such guidelines. All A&E claims are handled by RAMCO with oversight by the Company. The Company conducts semi-annual audits of RAMCO's underwriting files and reviews claims with RAMCO on a quarterly basis. As compensation for A&E insurance produced by RAMCO, the Company pays RAMCO commissions based upon a percentage of gross A&E premiums written. RAMCO also receives a contingent commission based upon the profitability of A&E insurance policies it produces. Casualty. The Company specializes in casualty policies which provide coverage above an insured's self-insured retention ("SIR policies"), umbrella and buffer or excess layer casualty coverage, including general liability and products liability coverage. SIR policies have minimum attachment points of $100,000 on automobile liability and $50,000 on general liability. The Company's commercial umbrella coverage is generally written in excess of primary liability insurance coverage provided by other insurance carriers. The Company also writes primary general liability and commercial multi-peril package policies. Commercial Automobile. The Company underwrites commercial automobile policies for owner-operators and small commercial fleets for local, intermediate and long-haul trucking risks produced through selected general agents. The policies provide liability, physical damage and cargo insurance with liability protection up to $1 million. Difference in Conditions. Substantially all of the DIC policies written by the Company are for California earthquake coverage. The Company uses IRAS, a computer modeling program, in connection with underwriting DIC coverage to estimate PML from earthquakes of varying severity. IRAS evaluates seismic hazard by matching structural information provided by the Company regarding a particular building, group of exposures or portfolio with the IRAS database, which includes information concerning earthquake severity and frequency, soil composition, and proximity to known faults. Although IRAS is available to other property and casualty insurers, the Company believes that the amount and quality of information input into IRAS by the Company results in more effective utilization of IRAS' capabilities. The Company further believes that its use of IRAS prior to actual risk selection enables the Company to differentiate its pricing and terms with respect to particular risks on DIC coverage. Other Property. The Company's other property coverage consists primarily of fire insurance, inland marine and plate glass insurance written on either a primary or an excess and surplus basis. The Company also writes course-of-construction coverage on engineering projects, national accounts, railroad and utilities coverage on an excess-of-loss basis. Specialty Lines. Other specialty insurance products provided by the Company include liquor liability insurance, special events insurance (for events such as concerts and contests), directors' and officers' liability insurance for "not-for-profit" organizations, fiduciary liability insurance for pension fund trustees, public officials liability and miscellaneous errors and omissions. The Company has expanded its specialty lines business to diversify its risk exposure. Marketing The Company writes business through wholesale excess and surplus lines brokers and general agents. The Company believes that close working relationships with these insurance producers are essential to its success. These producers provide specialized knowledge of particular products, markets and customers, and enable the Company to capitalize on underwriting opportunities. The Company seeks to be a substantial underwriter for its producers in order to enhance the likelihood of receiving the most desirable underwriting opportunities. The Company pays brokers and agents commissions based on the amount of premiums and types of business underwritten. These payments constitute part of the Company's acquisition costs and are included in its underwriting expenses. The Company also pays RAMCO and other general agents contingent commissions based upon the profitability of the policies they produce for the Company. See "Principal Business Lines and Products--Architects' and Engineers' Liability." Gross premiums written in the State of California amounted to approximately 43.7% and 48.7% of the aggregate gross premiums written by the Company for the years ended December 31, 1996 and 1995, respectively. In the State of New York, the Company's gross premiums written were 7.6% and 12.8% of total premiums for the years ended December 31, 1996 and 1995, respectively. Gross premiums written in any other state did not exceed 10% of gross premiums written during 1996 or 1995. Management emphasizes quality service in all phases of its operations and believes that this approach has enabled the Company to maintain strong relationships with its producers. To deliver prompt service while ensuring consistent disciplined underwriting, the Company has granted selected general agents the authority to sell and bind insurance coverages in accordance with detailed procedures and limitations established by the Company. The Company promptly reviews coverages bound by these agents, decides whether the insurance is written in accordance with such procedures and limitations and may cancel policies that are not in compliance with such procedures and limitations. Approximately 35.6% and 25.4% of the Company's gross premiums for the years ended December 31, 1996 and 1995, respectively, were written by general agents with binding authority. Underwriting The Company employs a disciplined approach to underwriting to achieve an overall underwriting profit, even if it is necessary to limit premium growth at times. At December 31, 1996, the Company's thirty-three underwriters had an average of 19 years of underwriting experience. By focusing on specialized classes of insurance, the Company is able to take advantage of its underwriters' experience to underwrite complicated insurance risks on a case-by-case basis. In accepting risks, each underwriter is required to comply with risk parameters, retention limits and rates prescribed by the Company. Compensation of senior underwriters depends in part on the profitability of the lines of business for which they are responsible. The Company's computer systems are capable of generating specific risk reports, which include a variety of historical data regarding individual risks underwritten by the Company. These reports inform the underwriters of the historical annual premium quoted with respect to the risk, the reported losses and loss adjustment expenses ("LAE") relating to the risk, cumulative underwriting profitability and other relevant information. The Company's underwriters generally perform a complete underwriting evaluation of applicants and determine premiums and coverage provisions before an insurance quotation is issued. While the Company's business is primarily underwritten in-house (except for A&E coverage, which is underwritten exclusively by RAMCO), the Company has granted selected agents binding authority to underwrite programs for the Company, subject to specific guidelines that have been established by the Company. See "Marketing." Claims Management and Administration In accordance with its emphasis on underwriting profitability, the Company has an active approach to claims management that is designed to investigate claims as soon as practicable, manage and anticipate developments and service producing brokers and insureds throughout the process. The Company maintains an experienced claims management staff at each of its major offices, with eight claims examiners in Woodland Hills, California and five claims examiners in Hoboken, New Jersey. Claims in respect of A&E insurance written by the Company are administered by RAMCO under the Company's supervision. Each of the A&E policies written by the Company is on a claims-made basis and includes defense costs within the policy limit. Due to the nature of this line of professional liability coverage, the Company generally has needed to retain counsel for a majority of its A&E claims. When the estimated value of a claim exceeds the Company's attachment level on a particular policy, RAMCO provides the Company with documentation and a caption report, recommends appropriate reserve levels and sends requests for claims payments directly to the Company for processing. The Company reviews each claim that is submitted and makes the payment it believes is appropriate. Reserves The Company's loss reserves are estimates of amounts that may be needed in the future to pay losses as well as expenses related to the final adjustment of those losses. Reserves for losses and LAE have been estimated by the Company utilizing its own historical experience as well as that of the industry. These estimates include two components: case reserves and non-case reserves. Case reserves are estimates of losses and LAE for reported claims and are established by the Company's claims departments. Non-case reserves, which include a provision for losses that have occurred but have not been reported to the Company as well as development on reported claims, are the difference between (i) the sum of case reserves and paid losses and (ii) estimated ultimate incurred losses. Ultimate incurred losses are an estimate of total losses and LAE necessary for the ultimate settlement of all reported claims, including amounts already paid and incurred but not reported claims. The Company engages independent actuarial consultants to perform periodic loss and LAE reserve analyses. The Company's management believes its loss and LAE reserves are adequate for the ultimate net cost of all losses incurred by the Company. The Company does not discount its reserves. The Company will continue to make additional adjustments to loss and LAE reserve calculations based on additional analyses and information as available. Notwithstanding the foregoing, the Company can give no assurances as to the ultimate accuracy of current reserves for losses or LAE, or that additional development will not occur in the future since the process of establishing and estimating loss and LAE reserves is, by its nature, imprecise. The following loss and LAE development table illustrates the change over time of reserves established for property-liability losses and LAE at the end of various calendar years. The amounts shown for each year on the top line of the table represent the Company's estimate of its gross liability for future payments of losses and LAE as of the balance sheet date as originally reported. The next line represents the amount of ceded reserves recoverable from reinsurers for losses and LAE for the same period, followed by the net losses and LAE unpaid on the Company's business. The upper half of the table includes re- estimates of the original balance sheet net liability for unpaid losses and LAE at the end of each period following the original report date. The estimates change as more information is known about the frequency and severity patterns of claims for each year. A redundancy (deficiency) exists when the reserve as originally reported is greater (less) than the amount re-estimated at each December 31. The cumulative redundancy (deficiency) depicted in the table for a particular calendar year shows the aggregate change in estimates over the period of years subsequent to the original calendar year. As of December 31, 1996, the cumulative deficiency of $4,298,000 resulted principally from additional loss and LAE development from a truck leasing program and a used car dealers program, each in run-off, which during 1996 produced $5.3 million and $2.2 million of losses, respectively, in excess of existing reserves; and an increase of $2.2 million in reserves for environmental and asbestos-related exposures on business written prior to 1985. Such increases were partially offset by favorable development of A&E reserves and a re-estimation of IBNR reserves pertaining to other property business. The lower portion of the table shows the cumulative amount of the original net liability that has been paid in each succeeding year. In evaluating the information in the table, it should be noted that each column includes the effects of all changes in amounts for prior periods. The table does not present accident year or policy year development data. Conditions and trends that have affected the development of liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. Analysis of Loss and Loss Adjustment Expense Development (Dollars in thousands)
December 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gross liability for unpaid losses and LAE $93,492 $109,557 $115,796 $151,952 $163,818 $201,057 $231,415 $275,660 $315,691 $308,886 $309,259 Deduct: reinsurance recoverable on unpaid losses and LAE 53,077 58,396 57,097 83,574 77,334 87,927 104,352 133,783 169,889 152,975 137,952 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Net liability for unpaid losses and LAE $40,415 $51,161 $58,699 $68,378 $86,484 $113,130 $127,063 $141,877 $145,802 $155,911 $171,307 Liability re-estimated as of: One year later 40,627 49,839 61,040 67,584 83,630 111,197 125,372 133,367 146,194 160,209 Two years late 41,233 52,808 58,037 66,774 82,672 110,056 118,354 128,675 143,131 Three years later 44,159 51,360 57,297 66,244 82,271 102,436 114,577 123,942 Four years later 44,876 51,188 56,583 65,745 76,339 98,812 110,989 Five years later 45,712 52,219 55,042 61,067 72,766 96,907 Six years later 45,845 50,122 51,921 58,220 71,686 Seven years later 44,728 48,719 48,290 58,509 Eight years later 43,354 45,261 50,370 Nine years later 39,938 48,154 Ten years later 42,619 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ ________ Cumulative redundancy (deficiency) $(2,204) $3,007 $8,329 $9,869 $14,798 $16,223 $16,074 $17,935 $2,671 $(4,298) $0 Cumulative liability paid as of: One year later $6,186 $9,321 $8,854 $8,253 $2,692 $16,014 $16,692 $24,152 $28,911 $30,784 Two years later 12,541 16,078 13,539 11,135 12,648 27,223 34,302 42,402 47,380 Three years later 17,772 20,020 15,143 17,906 20,788 39,657 45,587 53,752 Four years later 21,114 20,936 18,221 21,485 28,381 46,314 52,959 Five years later 21,939 23,453 19,748 26,127 33,633 51,038 Six years later 22,775 23,847 22,641 29,941 36,714 Seven years later 22,939 25,571 25,814 32,322 Eight years later 23,470 28,348 27,552 Nine years later 25,986 29,682 Ten years later 27,321
Prior to June 30, 1985, the Company wrote casualty insurance coverage at high attachment levels on an excess-of-loss basis. The Company's net retention was generally $50,000 per risk on such coverage. As was customary for the insurance industry at that time, such policies sometimes included coverage for sudden and accidental, as well as cumulative, environmental impairment and asbestos-related risks that involve significant unresolved issues regarding liability, policy coverage and other matters. Given the nature of this business, the pre-1985 casualty book of business has an extremely long tail, creating uncertainty in the estimation of ultimate losses to be paid. The Company generally establishes reserves for such claims if it believes that the attachment level of such policies is likely to be reached. The Company's reserves also reflect certain facultative and treaty casualty and professional liability reinsurance assumed (written) prior to 1985. The inherent uncertainties in estimating reserves are greater for reinsurance than for primary insurance due to the diversity of the development patterns among different types of reinsurance contracts, the longer period between the occurrence of a claim and the reporting of such claim to the reinsurer, the necessary reliance on ceding companies or reinsurance intermediaries for information regarding reported claims and different reserving practices among ceding companies. A reinsurer's internal data is often supplemented with industry data to provide the basis for reserve analysis. Thus, management's judgments about the applicability of industry data to the Company's reinsurance assumed business adds an additional element of uncertainty to the reserving process. The Company no longer writes this business. The insurance industry experienced a number of reinsurance company failures in the 1980's and certain of the Company's treaty reinsurers relating to the pre-1985 book of casualty business have become insolvent or are financially impaired. The Company has written off all debts due from insolvent companies and all receivables for paid losses and LAE and reserves ceded to companies it believes to be financially impaired. Since 1985, the Company has changed the type of casualty insurance it writes and the risks it covers and has amended the policy forms it uses to expressly exclude from the coverage any risks directly associated with pollution and asbestos. Associated revised its casualty coverage to meet the severity of loss requirements of sophisticated commercial insureds by providing coverage over an SIR together with first layer umbrella and buffer/excess layer policies. The policies generally have minimum SIR's of $50,000 for general liability and $100,000 for commercial automobile. As a result, coverage now attaches at much lower levels and the reporting tail for claims is much shorter than for the pre-1986 book of business. The Company has also developed specialty programs which focus on lower-severity business and, in addition, writes A&E coverage only on a claims-made basis and includes defense costs within A&E policy limits. The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the Company for each of the years in the three-year period ended December 31, 1996, as computed in accordance with GAAP. Reconciliation of Liability for Loss and Loss Adjustment Expenses (Dollars in thousands)
Year ended December 31, 1996 1995 1994 Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660 Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783 ________ ________ ________ Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877 -------- -------- -------- Add:Provision for losses and LAE for claims occurring in: The current year 53,402 50,424 49,047 Prior years 4,298 392 (8,510) -------- -------- -------- Total net incurred losses and LAE 57,700 50,816 40,537 -------- -------- -------- Less:Losses and LAE payments for claims occurring in: The current year 11,520 11,796 12,460 Prior years 30,784 28,911 24,152 -------- -------- -------- Total net paid losses and LAE 42,304 40,707 36,612 -------- -------- -------- Reserves for net losses and LAE at end of year 171,307 155,911 145,802 Reinsurance recoverable on unpaid losses 137,952 152,975 169,889 -------- -------- -------- Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the Company for each of the years in the three-year period ended December 31, 1996 for environmental impairment and asbestos-related liabilities. Reconciliation of Environmental Impairment and Asbestos-related Liability for Loss and Loss Adjustment Expenses (Dollars in thousands)
Year ended December 31, 1996 1995 1994 Environmental Impairment Liability Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000 Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000 ------- ------- ------- Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000 Add: Provision for losses and LAE for claims occurring in prior years 1,598 3 (58) Less: Losses and LAE payments for claims occurring in prior years 774 1,123 842 ------- ------- ------- Reserves for net losses and LAE at end of year 8,804 7,980 9,100 Reinsurance recoverable on unpaid losses 4,177 3,958 5,100 ------- ------- ------- Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200 Year ended December 31, 1996 1995 1994 Asbestos-related Liability Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000 Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250 Net reserves for losses and LAE at the beginning of the year 640 700 750 Add: Provision for losses and LAE for claims occurring in the prior years 583 612 (158) Less: Losses and LAE payments for claims occurring in the prior years 212 672 (108) Reserves for net losses and LAE at end of year 1,011 640 700 Reinsurance recoverable on unpaid losses 3,110 1,060 3,350 Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
At December 31, 1996, the reserve for unpaid environmental impairment losses and related loss adjustment expenses was approximately $8.8 million, net of reinsurance recoverables deemed probable of collection by the Company of approximately $4.2 million. The range of gross reserves for unpaid environmental impairment losses and loss adjustment expenses is estimated to be $13.0 million to $22.0 million and the range of reserves, net of reinsurance recoverable, for unpaid environmental impairment losses and loss adjustment expenses is estimated to be approximately $8.8 million to $13.3 million. At December 31, 1996, the reserve for unpaid asbestos- related losses and related loss adjustment expenses was $1.0 million, net of reinsurance recoverables deemed probable of collection by the Company of approximately $3.1 million. The range of gross reserves for unpaid asbestos-related losses and loss adjustment expenses is estimated to be $4.1 million to $8.3 million and the range of reserves, net of reinsurance recoverable, for unpaid asbestos-related losses and loss adjustment expenses is estimated to be approximately $1.0 million to $2.0 million. At December 31, 1996, reserves for incurred but not reported losses and LAE for environmental impairment and asbestos- related claims were $5.3 million and $0.8 million, respectively. The range of reserves, net of reinsurance recoverable, for unpaid environmental impairment and asbestos-related losses and loss adjustment expenses is estimated to be approximately $9.8 million to $15.3 million. At December 31, 1996 and 1995, the Company had 232 and 229 environmental impairment liability claims, respectively, covering 154 and 103 policyholders, respectively. At December 31, 1996 and 1995, the Company had 66 and 61 asbestos claims, respectively, covering 53 and 39 policyholders, respectively. The Company disputes coverage on substantially all of its environmental impairment and asbestos-related claims since such underlying policies were generally written with certain coverage exclusions. In a majority of cases, coverage is being determined through judicial interpretation, which can vary from jurisdiction to jurisdiction. There are significant uncertainties in estimating the amount of the Company's environmental impairment and asbestos- related liabilities resulting from a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, and complex, unresolved legal issues regarding policy coverage and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when a loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs are includible as insured property damage. These issues are not likely to be resolved in the near future. As a result of these issues, the ultimate number and cost of these claims may generate losses that vary materially from the amounts currently recorded and could have a material adverse effect on the Company's results of operations and financial condition. While management believes the Company's reserves for these coverages are appropriately established, because of the uncertainty of circumstances surrounding many critical factors that affect environmental impairment and asbestos-related liabilities, there can be no assurance that the Company's reserves for and losses from these claims will not increase in the future. Investments The Company's investment policy has an overall objective of enhancing after-tax return, through allocations among a range of investment-grade securities having varying tax characteristics, maturities and ratings. The precise allocation varies depending upon investment opportunities, economic conditions and tax considerations. The Company's investment portfolio continues to be professionally managed with emphasis on municipal bonds, U.S. Treasury securities and corporate bonds. As of December 31, 1996, the portfolio had an estimated effective modified duration of approximately 5 years. The Company utilizes outside professional investment managers who currently invest substantially all of the Company's invested assets. The outside investment managers consult frequently with management regarding the Company's tax position and aggregate portfolio characteristics. The Investment Committee of the Company's Board of Directors meets quarterly with management to review and amend investment policy and monitor the performance of the Company's investment managers. The Company's investment portfolio is subject to several risks, including interest rate and reinvestment risk. Fixed maturity security values generally fluctuate inversely with movements in interest rates. The Company's corporate and municipal bond investments may contain call and sinking fund features which may result in early redemptions and the Company's mortgage-backed securities are subject to prepayment risk. Declines in interest rates could cause early redemptions or prepayments, which would require the Company to reinvest at lower rates. Effective January 1, 1994, the Company changed its method of accounting for investments, in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the accounting pronouncement, the Company's securities are classified as available for sale and reported at fair value, with unrealized gains and losses, net of deferred income taxes, included in stockholders' equity. The following table summarizes the investment results of the Company for the periods indicated. Investment Results (Dollars in thousands)
Year ended December 31, 1996 1995 1994 Average invested assets $287,210 $263,674 $244,296 Net investment income 16,453 15,839 13,099 Realized gains (losses) on investments 1,203 3,647 (2,046) Pre-tax yield on average assets (excluding realized gains on investments) 5.7% 6.0% 5.4%
The following table summarizes the Company's fixed maturity portfolio, excluding short-term investments, by sector as of December 31, 1996. Fixed Maturity Portfolio by Sector (Dollars in thousands)
December 31, 1996 Amortized Percent of Fair Cost Total Value U.S. Government and government agencies $55,845 20.3% $56,584 Debt securities issued by foreign governments 5,747 2.1 5,923 States and political subdivisions 141,686 51.6 146,335 Corporate securities 27,856 10.2 27,861 Mortgage-backed securities 43,381 15.8 43,461 Total $274,515 100.0% $280,164
The following table summarizes the Company's fixed maturity portfolio by rating as of December 31, 1996. Fixed Maturity Portfolio by Rating (1) (Dollars in thousands)
December 31, 1996 Fair Percent of Value Total U.S. Government and government agencies $84,910 30.3% Aaa 107,743 38.5 Aa 49,030 17.5 A 30,059 10.7 Baa 8,422 3.0 Total $280,164 100.0% (1) Ratings as assigned by Moody's. Such ratings are generally assigned upon the issuance of the securities, subject to revision on the basis of ongoing evaluations. Bonds rated Aaa by Moody's are judged to be of the best quality and are considered to carry the smallest degree of investment risk.
The following table summarizes the Company's fixed maturity portfolio by years to stated maturity as of December 31, 1996. Fixed Maturity Portfolio by Stated Maturity (Dollars in thousands)
December 31, 1996 Fair Percent of Value Total 1 year or less $5,148 1.8% Over 1 year through 5 47,012 16.8 Over 5 years through 10 years 78,610 28.1 Over 10 years through 20 years 97,808 34.9 Over 20 years 8,125 2.9 Mortgage-backed securities 43,461 15.5 Total $280,164 100.0%
At December 31, 1996, investments in Federal National Mortgage Association securities aggregating approximately $24.7 million represented the only investments in any entity in excess of 10% of stockholders' equity other than those investments issued or guaranteed by the U.S. Government. The Company is subject to state laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain investment categories. As of December 31, 1996, the Company's investments complied with all such laws and regulations. Reinsurance Insurance companies purchase reinsurance to spread risk on individual exposures, protect against catastrophic losses and increase their capacity to write insurance. Reinsurance involves an insurance company transferring, or ceding, all or a portion of its exposure on insurance to a reinsurer. The reinsurer assumes the exposure in return for a portion of the premium received by the insurance company. Reinsurance does not discharge the insurer from its obligations to its insureds. If the reinsurer fails to meet its obligations, the ceding insurer remains liable to pay the insured. The Company cedes a material amount of its business to reinsurers to spread risk and limit loss per exposure. During 1996, 1995 and 1994, the Company ceded premiums of $62.3 million, $66.8 million and $70.0 million, respectively, which constituted 39.7%, 42.6%, and 50.3% respectively, of gross premiums written in each year. Management seeks to mitigate exposure to adverse reinsurance pricing conditions and its credit risk by maintaining a diversity of reinsurers. Catastrophe reinsurance protects an insurer from significant aggregate loss exposure arising from a single event such as an earthquake, hurricane, riot, tornado or other extraordinary event. The Company uses IRAS to evaluate its earthquake exposure in connection with purchasing catastrophe reinsurance coverage. Effective January 1, 1997, The Company maintains a six- layer catastrophe reinsurance program covering its DIC writings. The catastrophe reinsurance program covers 95% of the annual aggregate amount of property claims up to $138 million per occurrence, subject to a retention of $2.5 million per occurrence. The Company limits its net retention to $100,000 per risk for DIC. Most other exposures, including Casualty, A&E, Specialty Lines, Commercial Auto and certain Other Property risks have been consolidated in a new three-layer reinsurance program arranged in late 1996. The new program provides for indemnity of $24.5 million in excess of an increased net retention of $500,000 per risk. In addition to per-risk coverage, the new program provides casualty clash & contingency and certain non-DIC property catastrophe protection on an occurrence basis, subject to the same net retention. The new program was effective as of October 1, 1996 but will not incorporate some of the lines of business until the expiration of previously existing reinsurance contracts in the first half of 1997. Effective January 1, 1997, the Company entered into an aggregate stop loss reinsurance agreement with Scandinavian Reinsurance Company, Ltd. This agreement is for a three-year term and automatically renews annually unless canceled by either party at the end of any fiscal year. Under the terms of the agreement, the reinsurer provides indemnity if accident-year loss and LAE ratios exceed 55%, subject to an aggregate limit of approximately $45,000,000 over the three-year term. Certain terms apply which may increase the loss and LAE threshold to 60% of the Company's net earned premiums for the 1999 accident year. The Company continually evaluates the credit risk related to its reinsurers and has established a minimum A.M. Best rating of "A-" for its domestic and Bermuda-based reinsurers and also requires at least $50 million of policyholder surplus for all domestic and foreign reinsurers. The Company works with intermediaries to continually monitor the financial condition of its reinsurers, as appropriate. If a reinsurer of the Company were to become insolvent or unable to make payments under the terms of a reinsurance agreement, it could have a material adverse effect on the Company. Competition The property and casualty insurance industry is highly competitive. The Company competes with national and smaller regional insurers in each state in which it operates, as well as with monoline specialty insurers. Certain of these competitors are larger and have greater financial resources than the Company. Among other things, competition may take the form of lower prices, broader coverage, greater product flexibility, higher quality services or an insurer's rating by independent rating agencies. The Company competes with admitted insurers, surplus line insurers, new forms of insurance organizations such as risk retention groups, and alternative self-insurance mechanisms. Increased public and regulatory concerns regarding the financial stability of participants in the insurance industry have resulted in greater emphasis being placed by policyholders upon insurance company ratings and have created some measure of competitive advantage for insurance carriers with higher ratings. Associated's and Calvert's financial strength and claims-paying ability are currently rated "A p (Excellent)" by A.M. Best. Also, A.M. Best has assigned the financial size category of Class VII to both companies under its pooling arrangement. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves and the experience and competence of the management. The ratings assigned by A.M. Best are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors. Cyclicality Historically, the overall financial performance of the property and casualty industry has tended to fluctuate in cyclical market patterns. These cycles can be more pronounced for insurance companies, such as the Company, that underwrite business on a surplus lines basis. During a soft market, heightened competition for premiums not only increases competition among surplus lines insurers, but also causes admitted insurers to offer coverages for risks generally underwritten by the surplus lines insurers. During a hard market, the constriction of available capital among admitted carriers, combined with the opportunity for increased underwriting profit in their more traditional lines of business, tends to cause admitted carriers to reduce their underwriting of surplus lines coverages. This may increase the overall number of risks submitted to the surplus lines insurers and consequently may enhance the opportunity of surplus lines companies to increase premium volume and improve pricing. Surplus lines insurance is generally placed by wholesale brokers and general agents who specialize in particular lines of coverage or classes of insureds. These insureds tend to be sophisticated and price-conscious insurance purchasers. As a result, surplus lines insurers may experience increased premium rate competition and volume competition in soft markets. At present, the property and casualty insurance industry is experiencing a prolonged soft market. Employees As of December 31, 1996, the Company employed approximately 130 persons, all in the United States. None of its employees is represented by a labor union, and the Company believes that its employee relations are excellent. Regulation and Other Matters As a general rule, an insurance company must be licensed to transact insurance business in each jurisdiction in which it operates, and almost all significant operations of a licensed insurer are subject to regulatory scrutiny. Licensed insurance companies are generally known as "admitted" insurers. Most states provide a limited exemption from licensing for insurers issuing insurance coverages that generally are not available from admitted insurers. These coverages are referred to as "surplus lines" insurance and these insurers are referred to as surplus lines or "non-admitted" companies. The Company's admitted insurance businesses are subject to comprehensive, detailed regulation throughout the United States and Canada. Various jurisdictions have established supervisory agencies with broad authority to regulate, among other things, licenses to transact business, premium rates for certain coverages, trade practices, agent licensing, policy forms, cancellation and renewal practices, underwriting and claims practices, reserve adequacy and insurer solvency. Many jurisdictions also regulate investment activities on the basis of quality, distribution and other quantitative criteria. Further, most jurisdictions in the United States require admitted insurance companies to participate in their respective guaranty funds. Insurers admitted to transact business in such jurisdictions are required to cover losses of insolvent insurers and are generally subject to annual assessments of 1% to 2% of direct premiums written in that jurisdiction to pay claims of insolvent insurers. In addition, most jurisdictions compel participation in, and regulate the composition of, various shared and residual market mechanisms under which insurers are induced to provide certain coverages. Generally, non-admitted insurers are subject to less regulatory scrutiny than admitted companies. The eligibility of the Company to write insurance on a surplus lines basis in most jurisdictions is dependent on its compliance with certain financial standards, including the maintenance of a requisite level of capital and surplus and the establishment of certain statutory deposits. State surplus lines laws typically: (i) require the insurance producer placing the business to show that he or she was unable to place the coverage with admitted insurers; (ii) establish minimum financial requirements for surplus lines insurers operating in the state; and (iii) require the insurance producer to obtain a special surplus lines license. In recent years, many jurisdictions have increased the minimum financial standards applicable to surplus lines eligibility. State insurance regulators have the discretionary authority, in connection with the licensing of an insurance company, to limit or prohibit writing new business within their jurisdiction when, in the state's judgment, the insurance company is not maintaining adequate statutory surplus or capital. The Company does not currently anticipate that any regulator would limit the amount of new business that Associated or Calvert may write, given their respective current levels of statutory surplus. Most states have enacted legislation that regulates insurance holding company systems, including acquisitions, dividends, the terms of surplus notes, the terms of affiliate transactions and other related matters. Typically, such statutes require the Company to periodically file information with the state insurance commissioner, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase a specified percentage (commonly 10% or more) of the Company's outstanding voting securities would be required to obtain prior regulatory approval of the purchase. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies, in order to protect their solvency. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The insurance industry has been subject to increased scrutiny. A number of state legislatures have considered or enacted legislative proposals that alter and, in many cases, increase the authority of state agencies to regulate insurance companies and holding company systems. In addition, legislation has been introduced in several of the past sessions of Congress which, if enacted, could result in the federal government assuming some role in the regulation of the insurance industry. Several committees of Congress have made inquiries and conducted hearings as part of a broad study of the regulation of United States insurance companies. The National Association of Insurance Commissioners (the "NAIC") and insurance regulators continue to re-examine existing laws and regulations and their application to insurance companies. In particular, this re-examination has focused on insurance company investment and solvency issues and, in some instances, has resulted in new interpretations of existing law, the development of new laws and the implementation of non-statutory guidelines. The NAIC has formed groups to study and formulate regulatory proposals on such diverse issues as the use of surplus debentures, accounting for reinsurance transactions, and the adoption of risk-based capital rules. In connection with its accreditation of states and as part of its program to monitor the solvency of insurance companies, the NAIC requires states to adopt model NAIC laws and regulations on specific topics, such as holding company regulations and the definition of extraordinary dividends. The NAIC adopted a new system for assessing the adequacy of statutory capital and surplus for all property and casualty insurers. Based on the NAIC guidelines and computations made by the Company in conformity with such risk-based capital guidelines, Associated and Calvert satisfy the required levels of capital. There can be no assurance, however, that capital requirements applicable to the Company's businesses will not increase in the future. The NAIC has developed through the years a set of financial relationships or "tests" called the Insurance Regulatory Information System ("IRIS") that are designed for early identification of companies which may require special attention by insurance regulatory authorities. Insurance companies submit data on an annual basis to the NAIC, which in turn analyzes the data. Generally, an insurance company will become subject to regulatory scrutiny if it fails to satisfy NAIC standards for such factors as leverage, profitability, liquidity and loss reserve development. Failure to satisfy these standards may result in action by regulatory authorities to constrain a company's underwriting capacity. No such action has been taken with respect to the Company. It is not possible to predict the future impact of changing state and federal regulations on the Company's operations. ITEM 2. PROPERTIES. The Company leases approximately 49,500 square feet of office space, including its corporate headquarters located in New York, New York and underwriting offices located in Woodland Hills, California and Hoboken, New Jersey, respectively. The headquarters in New York, which consists of 3,900 square feet, is leased for a term ending in the year 1999. The Woodland Hills office space consists of 30,275 square feet and is leased for a term ending in the year 2008. The Hoboken office space consists of 13,525 square feet and is leased for a term ending in the year 2000. The Company also leases small regional offices in Grand Rapids, Michigan and Denver, Colorado. ITEM 3. LEGAL PROCEEDINGS. The Company is subject to litigation and arbitration in the normal course of its business. The Company does not believe that any pending litigation or arbitration to which it is a party, or of which any of its property is the subject, is likely to have a material adverse effect on its consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ National Market under the symbol "GRYP". The following table reflects the high and low prices for the quarterly periods during the years ended December 31,1996 and 1995, as furnished by the NASDAQ National Market: 1996 1995 High Low High Low First Quarter $20 1/4 $16 7/8 $14 1/4 $12 5/8 Second Quarter 19 1/2 14 5/8 16 5/8 13 1/2 Third Quarter 15 1/4 12 17 14 3/8 Fourth Quarter 16 12 1/2 19 3/8 15 As of February 10, 1997, there were approximately 45 record holders of the Common Stock, which does not include beneficial owners of shares registered in nominee or street name. Since the Offering, the Company has not paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's term-loan agreement contains a covenant restricting its ability to declare or pay any cash dividends to its shareholders. Because the Company is a holding company and operates through its subsidiaries, its cash flow and consequent ability to pay dividends are dependent upon the earnings of its subsidiaries and the distribution of those earnings to the Company. Also, the ability of the Company's subsidiaries to pay dividends to the Company is subject to certain regulatory restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 9 of Notes to Consolidated Financial Statements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following table sets forth selected consolidated financial data of the Company for the periods indicated. The selected consolidated financial data for the five years ended December 31, 1996 set forth below are derived from the audited consolidated financial statements of the Company. The selected statutory data have been derived from the financial statements of Associated and Calvert prepared in accordance with statutory accounting practices ("SAP") and filed with insurance regulatory authorities. The following information should be read in conjunction with the Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere herein. Gryphon Holdings Inc. Selected Consolidated Financial Data
Year ended December 31, 1996 1995 1994 1993 1992 (Dollars and shares in thousands, except per-share amounts) Statement of Operations Data: Gross premiums written $156,937 $156,980 $139,151 $111,663 $92,557 Net premiums written $94,607 $90,175 $69,187 $62,167 $52,846 Net premiums earned $87,929 $83,399 $61,605 $57,933 $53,511 Net investment income 16,453 15,839 13,099 12,216 12,367 Realized gains (losses) on investments 1,203 3,647 (2,046) 5,163 2,377 Other income 1,059 Total revenues 106,644 102,885 72,658 75,312 68,255 Losses and loss adjustment expenses 57,700 50,816 40,537 37,065 32,535 Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721 18,481 17,771 Proposition 103 settlement expense 2,000(1) Bonuses paid by Willis Corroon 2,670(2) Interest expenses 1,761 595 172 437 Total expenses 100,428 86,001 66,258 60,388 50,743 Income before income taxes 6,216 16,884 6,400 14,924 17,512 Provision for income taxes 53 3,959 169 2,772(3) 5,014 Net income $6,163 $12,925 $6,231 $12,152 $12,498 Net income per share $.93 $1.69 $.77 $1.62 $1.67 Weighted average shares outstanding 6,656 7,648 8,132 7,485 7,478 Pro forma net income per share(4) $1.51 $1.57 GAAP Ratios: Loss and loss adjustment expense ratio 65.6% 60.9% 65.8% 64.0% 60.8% Underwriting expense ratio, excluding Proposition 103 settlement 46.6 41.5 41.8 31.9 33.2 Combined ratio, excluding Proposition 103 settlement 112.2 102.4 107.6 95.9 94.0 Proposition 103 settlement 3.5(1) Combined ratio 112.2% 102.4% 107.6% 99.4% 94.0% Selected Statutory Data: Statutory net income $7,298 $13,876 $5,296 $7,459(1)(5)$11,091 Statutory surplus (at end of period) 82,566 83,433 72,220 69,161 59,123 Ratio of net premiums written to surplus 1.1:1 1.1:1 1.0:1 0.9:1 0.9:1 Balance Sheet Data (at end of period): Investments, including cash and cash equivalents $303,869 $288,602 $245,242 $237,442 $204,094 Total assets 526,984 530,989 492,717 432,080 362,201 Loss and loss adjustment expense reserves 309,259 308,886 315,691 275,660 231,415 Long-term debt 24,625 25,500 6,690 Stockholders' equity 95,136 93,222 93,773 91,489 68,254 Book value per share 14.28 14.02 11.51 11.25 9.13 ____________________ (1) As part of a stipulation and consent order with the California Department of Insurance to settle outstanding obligations under Proposition 103, the Company refunded to policyholders $2.0 million, including interest. This amount has been reflected as a charge to net income for the year ended December 31, 1993. (2) In connection with the Offering, Willis Corroon paid bonuses to certain executives. The bonuses, consisting of cash and common stock and aggregating approximately $2,670,000, are shown as an expense and were offset by a capital contribution equal to the after-tax cost of such bonuses. (3) Includes the effect of the Company's adoption of SFAS No. 109, which resulted in a one-time cumulative tax benefit of $0.7 million ($.09 per share) for the year ended December 31, 1993. (4) After giving pro forma effect to the cancellation of an intercompany loan in the amount of $7.9 million and the issuance of 651,833 shares of Common Stock in connection with the Offering. (5) Includes the effect of $5.0 million of additional environmental impairment and asbestos-related reserves recorded in GAAP financial statements in prior periods. The effect of such addition was to increase the 1993 statutory combined ratio from 97.7% to 106.3%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General The Company is a holding company that, through its subsidiaries, underwrites specialty property and casualty insurance in sectors of the insurance industry that are generally considered difficult to insure. Many of the coverages written by the Company can be categorized as excess and surplus lines, which generally means that the risks are nonstandard, or that the policies in respect of the risks are written with unusual limits or at deviated rates. The property and casualty insurance industry is highly cyclical. The excess and surplus lines sectors of the property and casualty insurance industry are often subject to greater cyclicality and volatility than the industry in general. During soft markets, large standard lines insurers often utilize excess capacity to assume risks in excess and surplus and specialty lines. During hard markets, such insurers tend to abandon the excess and surplus and specialty lines to the carriers that concentrate in these sectors. Thus, capacity in these lines will fluctuate substantially, often with fluctuations in revenues or profits, or both. Results of Operations Year Ended December 31, 1996 Compared with Year Ended December 31, 1995 Gross Premiums Written. Gross premiums written were $156.9 million for the year ended December 31, 1996 compared to $157.0 million for the year ended December 31, 1995. In 1996, the Company's gross premiums written experienced increases in the following lines of business: a $4.6 million increase in premiums from specialty lines, primarily due to a new animal mortality program; a $3.4 million increase in A&E liability due to expanded marketing and enhanced coverages offered; and a $2.3 million increase in casualty premiums, primarily due to new programs, but offset in part by business lost because of competitive market conditions in other casualty business written. Such increases were offset by a $6.7 million decrease in DIC premiums, resulting from the sharing of premiums with a companion carrier and, to a lesser extent, from an increase in competition with respect to certain types of DIC risks; a $3.4 million decrease in premiums from other property, due to increased competition, mitigated in part by new business from plate glass and fire policies; and a $0.2 million decrease in commercial automobile, where the non- renewal of a truck leasing program offset growth resulting from new business written. Net Premiums. Net premiums written increased 4.9% to $94.6 million for the year ended December 31, 1996 from $90.2 million for the year ended December 31, 1995. This resulted primarily from a shift in the mix of business toward lines with higher net retention levels. Also, the Company paid $2.2 million of catastrophe reinsurance reinstatement premiums in 1995, which had the effect of increasing ceded premiums and reducing net premiums written. Net premiums earned increased by 5.4% to $87.9 million in the year ended December 31, 1996 from $83.4 million in the year ended December 31, 1995. Net Investment Income. Net investment income increased 3.9% to $16.5 million for the year ended December 31, 1996 from $15.8 million for the year ended December 31, 1995. The increase is primarily due to additional funds available for investment in 1996 and was partially mitigated by lower average pre-tax interest rates in 1996 than in 1995, resulting from a greater component of tax-exempt securities in 1996. Net Realized Gains on Investments. For the year ended December 31, 1996, the Company realized a net gain of $1.2 million, compared with a net gain of $3.6 million for the year ended December 31, 1995. Portfolio sales were effected in each year to optimize the mix of taxable and tax-exempt securities. Other Income. For the year ended December 31, 1996, the Company recorded $1.1 million of underwriting management fees for DIC business underwritten on behalf of a companion carrier. Losses and Loss Adjustment Expenses. Losses and LAE increased by 13.5% to $57.7 million for the year ended December 31, 1996 from $50.8 million for the year ended December 31, 1995, due to additional losses and reserve strengthening for a truck leasing program ($5.3 million) and used- car dealers program ($2.2 million), each discontinued during 1995; an increase of $2.2 million in reserves for environmental impairment and asbestos-related exposures on business written prior to 1985; other reserve increases pertaining to previous accident years; and, more generally, increases in earned premium exposures. Such increases were partially offset by reserve redundancies resulting from favorable development of A&E case reserves and a re-estimate of other property liabilities. In 1995, the Company recorded catastrophe losses of $1.9 million related to hailstorms and the Northridge earthquake of 1994. Underwriting, Acquisition, and Insurance Expenses. Underwriting, acquisition, and insurance expenses increased by 18.4% to $41.0 million for the year ended December 31, 1996 from $34.6 million for the year ended December 31, 1995. The expense growth was primarily attributable to increased acquisition costs, resulting from a change in the mix of business written; additions to staff, related to new business; and new facilities for the operating companies. Also, in 1996, the Company expensed an additional $1.4 million of deferred acquisition costs. Interest Expense. Interest expense was $1.8 million for the year ended December 31, 1996, compared with $0.6 million for the year ended December 31, 1995. Interest expense resulted from a term loan of $25.5 million borrowed in 1995 to finance the purchase of 1.5 million shares of the Company's common stock. Interest expense was lower in 1995 because it accrued only from the date of the take-down, in September. Income Taxes. Income taxes were $53,000 for the year ended December 31, 1996, compared with $4.0 million for 1995. In 1996, income taxes were reduced by the tax benefit from additional reserve strengthening on discontinued lines of business, increased underwriting expenses and tax-exempt investment income. In 1995, the income tax expense was reduced by the tax benefit from net claims costs and reinstatement premiums relating to the Northridge earthquake and tax-exempt investment income. Net Income. Net income was $6.2 million for the year ended December 31, 1996, compared with $12.9 million for the year ended December 31, 1995. Weighted Average Shares Outstanding. Average shares outstanding were 6.7 million in 1996, compared with 7.6 million in 1995, reflecting the effect of the purchase by the Company of 1.5 million shares of the Company's Common Stock in September of 1995. Year Ended December 31, 1995 Compared with Year Ended December 31, 1994 Material Event. The Company writes a substantial amount of DIC coverage in California, including the San Fernando Valley area, which was struck by a major earthquake on January 17, 1994. As a result of losses sustained in that event, the Company recorded net pre-tax costs of $8.2 million for the year ended December 31, 1994. The costs consisted of $4.3 million of claims expense and $3.9 million of reinsurance reinstatement premiums. In 1995, the Company recorded additional net pre-tax charges of $3.0 million for expected additional loss development. These charges consisted of $0.8 million of claims costs and $2.2 million of reinsurance reinstatement premiums. Gross Premiums Written. Gross premiums written increased 12.8% to $157.0 million for the year ended December 31, 1995 from $139.2 million for the year ended December 31, 1994. The increase in gross premiums written was attributable to a $9.2 million increase in premiums from other property, due to new business and a hardening of property markets; a $5.6 million increase in casualty premiums, resulting from additional general liability policies written; a $4.3 million increase in commercial automobile premiums, resulting from new policies written; and a $2.0 million increase in DIC premiums, resulting from changes in market conditions for earthquake coverages. Such increases were partially offset by a $1.8 million decrease in premiums from specialty lines, due to the discontinuance of a used car dealers program, and a $1.5 million decrease in premiums caused by competitive market conditions in the A&E business. Net Premiums. Net premiums written increased 30.3% to $90.2 million for the year ended December 31, 1995 from $69.2 million for the year ended December 31, 1994 as a result of most of the factors described above, which were enhanced by increased retention levels in commercial automobile policies and plate glass policies. Also, catastrophe reinsurance reinstatement premiums ceded with respect to DIC policies decreased by $1.7 million in 1995. Net premiums earned increased by 35.4% to $83.4 million in the year ended December 31, 1995 from $61.6 million in the year ended December 31, 1994. Net Investment Income. Net investment income increased 20.9% to $15.8 million for the year ended December 31, 1995 from $13.1 million for the year ended December 31, 1994. The increase is primarily due to additional funds available for investment in 1995. To a lesser extent, net investment income, which is reported before taxes, increased as a result of a greater component of taxable securities in 1995 than in 1994. Net Realized Gains (Losses) on Investments. For the year ended December 31, 1995, the Company realized a net gain of $3.6 million compared to a net loss of $2.0 million for the year ended December 31, 1994. Portfolio sales were effected in each year to optimize the mix of taxable and tax-exempt securities. Losses and Loss Adjustment Expenses. Losses and LAE increased by 25.4% to $50.8 million for the year ended December 31, 1995 from $40.5 million for the year ended December 31, 1994, primarily due to increases in earned premium exposures and catastrophe losses of $1.9 million, from Texas hailstorms and additional reserves for the Northridge earthquake. In 1994, the Company recorded net claims costs of $4.3 million from the Northridge earthquake and additional reserves for specialty lines, partially offset by favorable development in other property reserves, as well as A&E coverages. Underwriting, Acquisition, and Insurance Expenses. Underwriting, acquisition, and insurance expenses increased by 34.5% to $34.6 million for the year ended December 31, 1995 from $25.7 million for the year ended December 31, 1994, primarily due to increased acquisition costs and additions to staff related to new business. Interest Expense. For the year ended December 31, 1995, the Company recorded $0.6 million for interest expense associated with a term loan of $25.5 million in connection with the purchase of 1.5 million shares of its common stock in September of 1995. Income Taxes. Income taxes were $4.0 million for the year ended December 31, 1995, compared with $0.2 million for 1994. In 1994, the income tax expense was impacted by net claims costs and reinstatement premiums relating to the Northridge earthquake, net realized losses on investments, and a shift from taxable to tax- exempt investments. Net Income. Net income was $12.9 million for the year ended December 31, 1995, compared with $6.2 million for the year ended December 31, 1994. Weighted Average Shares Outstanding. Average shares outstanding were 7.6 million in 1995, compared with 8.1 million in 1994, reflecting the effect of the purchase by the Company of 1.5 million shares of the Company's Common Stock in September of 1995. Liquidity and Capital Resources The Company receives cash from premiums and, to a lesser extent, investment income. The principal cash outflows are for the payment of claims, reinsurance premiums, policy acquisition costs and general and administrative expenses. Net cash provided by operations was $24.7 million in 1996, $22.0 million in 1995, and $17.8 million in 1994. At December 31, 1996, the Company maintained cash and cash equivalents of $23.4 million to meet payment obligations. In addition, the Company's investment portfolio could be substantially liquidated without any material financial impact. Substantially all of the cash and investments of the Company at December 31, 1996 were held by its subsidiaries. Reinsurance recoverables on unpaid losses were $138.0 million at December 31, 1996 and $153.0 million at December 31, 1995. Because of the high limits on many policies relative to the Company's net retentions, reinsurance recoverable on unpaid losses can fluctuate significantly depending upon the emergence and severity of reported and unreported losses. In September 1995, the Company purchased 1.5 million shares of its Common Stock from Willis Corroon for a total purchase price of $25.5 million, including related expenses. The Company financed its purchase of such shares through the proceeds of borrowing from commercial lending institutions. As a result of the interest on this indebtedness, the Company's corporate overhead expenses increased by approximately $1.8 million. As a holding company, the Company depends principally on dividends from its insurance company subsidiaries to pay corporate overhead expenses, including principal and interest on its borrowings. The Company's subsidiaries are subject to state insurance laws that restrict their ability to collectively pay dividends. See "Regulation and Other Matters." Under the insurance code of Pennsylvania, dividends from Calvert are limited to the greater of 10% of surplus as regards policyholders as of the preceding year end or the net income for the previous year, without prior approval from the Pennsylvania Department of Insurance. Under the insurance code of California, dividends from Associated are limited to the greater of 10% of policyholders' statutory surplus as of the preceding year end or the company's statutory net income for the previous year, without prior approval from the California Department of Insurance. In 1996, 1995 and 1994, the aggregate dividends paid by the two subsidiaries were $4.7 million, $2.0 million and $1.3 million, respectively. The NAIC has adopted a risk-based capital system for assessing the adequacy of statutory capital and surplus for all property and casualty insurers. Based on the guidelines and computations made by the Company in conformity with such guidelines, Associated and Calvert have exceeded the required levels of capital. There can be no assurance that capital requirements applicable to the Company's business will not increase in the future. The Company has no present plans to make any significant capital expenditures in the foreseeable future. The Company has no off-balance-sheet obligations that are not disclosed in its financial statements. The Company believes that retained earnings will be sufficient to satisfy its long- term capital requirements to fund growth. Effects of Inflation There was no significant impact on the Company's operations as a result of inflation during 1996, 1995 and 1994. However, there can be no assurance that inflation will not have a material impact on the Company's operations in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. An index to financial statements and required financial statement schedules is set forth at Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information required in Part III (Items 10, 11, 12 and 13) is hereby incorporated by reference from the Company's definitive Proxy Statement, which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements. See the index immediately following the signature pages. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of the year ended December 31, 1996. (c) Exhibits. All exhibits listed below are filed with this Annual Report on Form 10-K unless specifically stated to be incorporated by reference to other documents previously filed with the Securities and Exchange Commission. Exhibit No. 3.1 Amended and Restated Certificate of Incorporation incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (the "Registration Statement") filed with the Securities and Exchange Commission (the "SEC") on September 23, 1993. 3.2 Amended and Restated By-Laws incorporated herein by reference to Exhibit 3.2 of the 1995 Form 10-K. 4.1 Specimen Common Stock certificate incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement filed with the SEC on December 14, 1993. 10.1 Loan Agreement, dated September 8, 1995, in the principal amount of $25,500,000 by and among Gryphon Holdings Inc., CIBC Inc. and Canadian Imperial Bank of Commerce incorporated herein by reference to Exhibit 10.1 of the 1995 Form 10-K. 10.2 Tax Sharing Agreement among Willis Corroon Group plc, the Company and certain other parties thereto incorporated herein by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement. 10.3 General Indemnity Agreement between Willis Corroon Group plc and the Company incorporated herein by reference to Exhibit 10.3 to Amendment No. 1 to the Registration Statement. 10.4 Form of Indemnification Agreement between the Company and each of its directors and executive officers incorporated herein by reference to Exhibit 10.4 to the Registration Statement. 10.5 1993 Stock Option Plan of the Company incorporated herein by reference to Exhibit 10.5 to Amendment No. 1 to the Registration Statement. 10.6 Contractual Management Subsidiary Agreement, dated July 1, 1987, between Associated and RAMCO incorporated herein by reference to Exhibit 10.6 to the Registration Statement. 10.7 Non-Competition and Confidentiality Agreement, dated January 15, 1993, among Willis Corroon Group plc and Stewart Smith (Canada) Limited, in favor of Wellington Insurance Company incorporated herein by reference to Exhibit 10.7 to the Registration Statement. 10.8 Severance and Confidentiality Agreement among the Company, Willis Corroon Group plc and John F. Iannucci incorporated herein by reference to Exhibit 10.30 of Amendment No. 1 to the Registration Statement. 10.9 Severance and Confidentiality Agreement among the Company, Willis Corroon Group plc and John H. Walton incorporated herein by reference to Exhibit 10.31 of Amendment No. 1 to the Registration Statement. 10.10 Severance and Confidentiality Agreement between the Company and Stephen A. Crane incorporated herein by reference to Exhibit 10.32 of Amendment No. 1 to the Registration Statement. 10.11 Loan Cancellation Agreement between Willis Corroon Group plc and the Company incorporated herein by reference to Exhibit 10.33 of Amendment No. 1 to the Registration Statement. 10.12 Restricted Stock Plan of the Company incorporated herein by reference to Exhibit 10.34 of Amendment No. 1 to the Registration Statement. 10.13 Severance and Confidentiality Agreement dated as of March 21, 1994 between the Company and Robert P. Cuthbert incorporated herein by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for 1994 (the "1994 Form 10-K"). 10.14 Severance and Confidentiality Agreement dated as of November 11, 1994 between the Company and Robert M. Coffee incorporated herein by reference to Exhibit 10.36 of the 1994 Form 10-K. 10.15 Amendment to Severance and Confidentiality Agreement dated as of November 11, 1994 between the Company and Stephen A. Crane incorporated herein by reference to Exhibit 10.37 of the 1994 Form 10-K. 10.16 Amendment to Severance and Confidentiality Agreement dated as of November 11, 1994 between the Company and Robert P. Cuthbert incorporated herein by reference to Exhibit 10.38 of the 1994 Form 10-K. 10.17 Amendment to Severance and Confidentiality Agreement dated as of November 11, 1994 by and among Willis Corroon Group plc, the Company and John F. Iannucci incorporated herein by reference to Exhibit 10.39 of the 1994 Form 10- K. 10.18 Amendment to Severance and Confidentiality Agreement dated as of November 11, 1994 by and among Willis Corroon Group plc, the Company and John H. Walton incorporated herein by reference to Exhibit 10.40 of the 1994 Form 10- K. 10.19 Casualty First Excess of Loss Reinsurance Agreement, effective July 1, 1994, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.41 of the 1994 Form 10-K. 10.20 Casualty Second Excess of Loss Reinsurance Agreement, effective July 1, 1994, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.42 of the 1994 Form 10-K. 10.21 Casualty Clash and Contingency, First Excess of Loss Reinsurance Agreement, effective July 1, 1993, as amended, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.43 of the 1994 Form 10-K. 10.22 Casualty Clash and Contingency, Second Excess of Loss Reinsurance Agreement, effective July 1, 1993, as amended, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.44 of the 1994 Form 10-K. 10.23 Casualty Quota Share Treaty, effective December 1, 1994, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.45 of the 1994 Form 10-K. 10.24 Property Quota Share Reinsurance Contract, effective July 1, 1994, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.46 of the 1994 Form 10-K. 10.25 Property Quota Share Reinsurance Contract, effective July 1, 1993, as amended, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.47 of the 1994 Form 10-K. 10.26 New York Trucking Quota Share Treaty, effective December 31, 1993, among Calvert and various reinsurers incorporated herein by reference to Exhibit 10.48 of the 1994 Form 10-K. 10.27 Property Excess Per Risk Reinsurance Contract, effective January 1, 1995, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.49 of the 1994 Form 10-K. 10.28 Preliminary Property Excess Per Risk Reinsurance Contract, effective January 1, 1996, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.44 of the 1995 Form 10-K. 10.29 Combined Coded Inside Excess Per Risk and Quota Share Reinsurance Contract, effective October 1, 1992 through June 30, 1994, among Associated and various reinsurers stated therein incorporated herein by reference to Exhibit 10.50 of the 1994 Form 10-K. 10.30 Property Excess & Surplus Lines Excess Per Risk Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.51 of the 1994 Form 10-K. 10.31 Excess Catastrophe Reinsurance Contract, effective January 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.52 of the 1994 Form 10-K. 10.32 External Third through Sixth Excess Catastrophe Reinsurance Contract, effective January 1, 1996, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.53 of the 1994 Form 10-K. 10.32 External Third through Sixth Excess Catastrophe Reinsurance Contract, effective January 1, 1995, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.49 of the 1995 Form 10-K. 10.34 Casualty Excess of Loss Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.54 of the 1994 Form 10-K. 10.35 Casualty Excess of Loss Reinsurance Contract, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.51 of the 1995 Form 10-K. 10.36 First Excess Multiple Line Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.55 of the 1994 Form 10-K. 10.37 Second Excess Multiple Line Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.56 of the 1994 Form 10-K. 10.38 Form of Stock Option Agreement under the 1995 Non- Employee Directors Stock Option Plan incorporated herein by reference to Exhibit 10.54 of the 1995 Form 10-K. 10.39 Combined Casualty 1st Excess of Loss and Quota Share Reinsurance Contract, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.55 of the 1995 Form 10-K. 10.40 Casualty Second Excess of Loss Reinsurance Agreement, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.56 of the 1995 Form 10-K. 10.41 Multi-Line Excess of Loss Reinsurance Contract, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.57 of the 1995 Form 10-K. 10.42 First Contingency Excess of Loss Reinsurance Contract, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.58 of the 1995 Form 10-K. 10.43 Second Contingency Excess of Loss Reinsurance Contract, effective July 1, 1995, among Associated, Calvert, Timberline Insurance Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.59 of the 1995 Form 10-K. 10.44 First Excess Casualty Contingency Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.60 of the 1995 Form 10-K. 10.45 Second Excess Casualty Contingency Reinsurance Contract, effective July 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.61 of the 1995 Form 10-K. 10.46 Casualty Excess of Loss Reinsurance Contract, effective July 1, 1993, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.62 of the 1995 Form 10-K. 10.47 First Excess Casualty Contingency Reinsurance Contract, effective October 1, 1992, among Associated and various reinsurers stated therein incorporated herein by reference to Exhibit 10.63 of the 1995 Form 10-K. 10.48 Second Excess Casualty Contingency Reinsurance Contract, effective October 1, 1992, among Associated and various reinsurers stated therein incorporated herein by reference to Exhibit 10.64 of the 1995 Form 10-K. 10.49 First Excess Casualty Contingency Reinsurance Contract, effective July 1, 1993, among Associated and various reinsurers stated therein incorporated herein by reference to Exhibit 10.65 of the 1995 Form 10-K. 10.50 Second Excess Casualty Contingency Reinsurance Contract, effective July 1, 1993, among Associated and various reinsurers stated therein incorporated herein by reference to Exhibit 10.66 of the 1995 Form 10-K. 10.51 External Third through Fifth Excess Catastrophe Reinsurance Contract, effective January 1, 1994, among Associated, Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.67 of the 1995 Form 10-K. 10.52 Preliminary Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract, effective January 1, 1996, among Associated, Calvert, all other subsidiaries of the Company (the "Subsidiaries") and various reinsurers stated therein incorporated herein by reference to Exhibit 10.68 of the 1995 Form 10-K. 10.53 Preliminary Property Excess and Surplus Lines Excess Carve Out Reinsurance Contract, effective January 1, 1996, among Associated, Calvert, the Subsidiaries and various reinsurers stated therein incorporated herein by reference to Exhibit 10.69 of the 1995 Form 10-K. 10.54 Preliminary Franchise Excess of Loss Reinsurance Contract, effective January 1, 1996, among Associated, Calvert, the Subsidiaries and various reinsurers stated therein incorporated herein by reference to Exhibit 10.70 of the 1995 Form 10-K. 10.55 Property Quota Share Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.71 of the 1995 Form 10-K. 10.56 Property First Per Risk Excess Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.72 of the 1995 Form 10-K. 10.57 First Catastrophe Excess Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.73 of the 1995 Form 10-K. 10.58 Second Catastrophe Excess Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.74 of the 1995 Form 10-K. 10.59 Third Catastrophe Excess Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.75 of the 1995 Form 10-K. 10.60 Fourth Catastrophe Excess Reinsurance Agreement, dated July 1, 1995, among Calvert and various reinsurers stated therein incorporated herein by reference to Exhibit 10.76 of the 1995 Form 10-K. 10.61 Casualty First Excess of Loss Reinsurance Contract, dated July 1, 1995, among Calvert, the Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.77 of the 1995 Form 10-K. 10.62 Casualty Second Excess of Loss Reinsurance Contract, dated July 1, 1995, among Calvert, the Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.78 of the 1995 Form 10-K. 10.63 Casualty Third Excess of Loss Reinsurance Contract, dated July 1, 1995, among Calvert, the Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.79 of the 1995 Form 10-K. 10.64 Casualty Fourth Excess of Loss Reinsurance Contract, dated July 1, 1995, among Calvert, the Company and various reinsurers stated therein incorporated herein by reference to Exhibit 10.80 of the 1995 Form 10-K. 10.65 Property Excess Per Risk Reinsurance Contract, dated January 1, 1997 between the subsidiaries of the Company and various reinsurers stated therein. 10.66 Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract, dated January 1, 1997 between the subsidiaries of the Company and various reinsurers stated therein. 10.67 Franchise Excess Loss Reinsurance Contract, dated January 1, 1997 between the subsidiaries of the Company and various reinsurers stated therein. 10.68 External Third Through Seventh Catastrophe Excess Reinsurance Contract, dated January 1, 1997 between the subsidiaries of the Company and various reinsurers stated therein. 10.69 Aggregate Excess of Loss Reinsurance Contract, dated January 1, 1997 between the subsidiaries of the Company and various reinsurers stated therein. 10.70 Per Event Reinsurance Contract, dated October 1, 1996 between the subsidiaries of the Company and various reinsurers stated therein. 10.71 "Working" Per Event Reinsurance Contract, dated October 1, 1996 between the subsidiaries of the Company and various reinsurers stated therein. 10.72 Excess Per Event Reinsurance Contract, dated October 1, 1996 between the subsidiaries of the Company and various reinsurers stated therein. 21.1 Subsidiaries of the Company (included in Notes to the Consolidated Financial Statements). 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule (d) Financial Statement Schedules The financial statement schedules required by Regulation S-K are incorporated by reference to Item 14(a). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Gryphon Holdings Inc. has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. GRYPHON HOLDINGS INC. Dated: March 25, 1997 By: Stephen A. Crane Stephen A. Crane President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date Stephen A. Crane Director and President March 25, 1997 Stephen A. Crane (Chief Executive Officer) Robert P. Cuthbert Chief Financial Officer March 25, 1997 Robert P. Cuthbert and Chief Accounting Officer John F. Iannucci Executive Vice President March 25, 1997 John F. Iannucci and Director Robert M. Baylis Director March 25, 1997 Robert M. Baylis Franklin L. Damon Director March 25, 1997 Franklin L. Damon Robert R. Douglass Director March 25, 1997 Robert R. Douglass David H. Elliott Director March 25, 1997 David H. Elliott Hadley C. Ford Director March 25, 1997 Hadley C. Ford Richard W. Hanselman Director March 25, 1997 Richard W. Hanselman Joe M. Rodgers Director March 25, 1997 Joe M. Rodgers George L. Yeager Director March 25, 1997 George L. Yeager Form 10-K--Item 14(a)(1) and (2) Gryphon Holdings Inc. and Subsidiaries Index of Financial Statements and Financial Statement Schedules Page Reports of Independent Auditors: KPMG Peat Marwick LLP F-2 Ernst & Young LLP F-3 The following audited consolidated financial statements of Gryphon Holdings Inc. and subsidiaries are included in Item 8: Consolidated Balance Sheets at December 31, 1996 and 1995 F-4 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-8 The following consolidated financial statement schedules of Gryphon Holdings Inc. and subsidiaries are included in Item 14(d): Schedules I Summary of Investments -- Other Than Investments in Related Parties S-1 II Condensed Financial Information of Registrant S-2 III Supplemental Insurance Information S-4 IV Reinsurance S-5 VI Supplemental Information Concerning Property/Casualty Insurance Operations S-6 All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are not applicable and, therefore, have been omitted. REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Gryphon Holdings Inc. We have audited the accompanying consolidated balance sheets of Gryphon Holdings Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two-year period then ended. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules, as of and for the years ended December 31, 1996 and 1995, as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gryphon Holdings Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules as of and for the year ended December 31, 1996 and 1995, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP New York, New York February 14, 1997 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Gryphon Holdings Inc. We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of Gryphon Holdings Inc. and subsidiaries (the "Company") for the year ended December 31, 1994. Our audit also included the financial statement schedules for the year ended December 31, 1994 listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements of Gryphon Holdings Inc. and subsidiaries referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company made an accounting change in 1994. Ernst & Young LLP New York, New York February 21, 1995 Gryphon Holdings Inc. and Subsidiaries Consolidated Balance Sheets
December 31, 1996 1995 (Dollars in thousands) Assets Investments: Fixed maturities, available for sale, at fair value (amortized cost: 1996 - $274,515; 1995 - $248,324) $280,164 $260,728 Short-term investments, at cost, which approximates market 307 537 Total investments 280,471 261,265 Cash and cash equivalents 23,398 27,337 Accrued investment income 3,919 4,080 Premiums receivable 18,509 17,475 Reinsurance recoverable on paid losses 14,326 24,489 Reinsurance recoverable on unpaid losses 137,952 152,975 Prepaid reinsurance premiums 18,965 20,434 Deferred policy acquisition costs 12,415 12,182 Deferred income taxes 10,282 6,582 Other assets 6,747 4,170 Total assets $526,984 $530,989 Liabilities and Stockholders' Equity Policy liabilities: Unpaid losses and loss adjustment expenses $309,259 $308,886 Unearned premiums 68,683 63,472 Total policy liabilities 377,942 372,358 Reinsurance balances payable 16,207 29,373 Income taxes payable 55 387 Long-term debt 24,625 25,500 Other liabilities 13,019 10,149 Total liabilities 431,848 437,767 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 15,000,000 shares authorized; 8,148,050 shares issued 81 81 Additional paid-in capital 30,847 30,850 Foreign currency translation adjustment, net of tax (219) (209) Net unrealized investment gains, net of tax 3,672 8,063 Deferred compensation (257) (193) Retained earnings 86,271 80,108 Treasury stock, at cost; shares 1996: 1,487,075: 1995: 1,500,000 (25,259) (25,478) Total stockholders' equity 95,136 93,222 Total liabilities and stockholders' equity $526,984 $530,989 See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries Consolidated Statements of Income
Year ended December 31, 1996 1995 1994 (Dollars and shares in thousands, except per-share data) Revenues Net premiums earned $87,929 $83,399 $61,605 Net investment income 16,453 15,839 13,099 Realized gains (losses) on investments 1,203 3,647 (2,046) Other income 1,059 Total revenues 106,644 102,885 72,658 Expenses Losses and loss adjustment expenses 57,700 50,816 40,537 Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721 Interest expense 1,761 595 Total expenses 100,428 86,001 66,258 Income before income taxes 6,216 16,884 6,400 Provision for income taxes (benefit): Current 1,389 2,969 507 Deferred (1,336) 990 (338) Total income taxes 53 3,959 169 Net income $6,163 $12,925 $6,231 Net income per-share $.93 $1.69 $.77 Weighted average shares outstanding 6,656 7,648 8,132 See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Foreign Additional Currency Unrealized Common Paid-in Translation Investment Deferred Retained Treasury Stock Capital Adjustment Gains (Losses) Compensation Earnings Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Balances at January 1, 1994 $81 $30,602 $(146) $60,952 $91,489 Add (deduct): Net income 6,231 6,231 Translation adjustment (113) (113) Cumulative effect of a change in accounting principle $6,143 6,143 Net unrealized investment losses, net of tax (9,983) (9,983) Stock award plans 248 $(242) 6 Balances at December 31, 1994 81 30,850 (259) (3,840) (242) 67,183 93,773 Add (deduct): Net income 12,925 12,925 Translation adjustment 50 50 Stock award plans 49 49 Net unrealized investment gains, net of tax 11,903 11,903 Purchase of common stock for treasury $(25,478) (25,478) Balances at December 31, 1995 81 30,850 (209) 8,063 (193) 80,108 (25,478) 93,222 Add (deduct): Net income 6,163 6,163 Translation adjustment (10) (10) Stock award plans (3) (64) 219 152 Net unrealized investment losses, net of tax (4,391) (4,391) Balances at December 31, 1996 $81 $30,847 $(219) $3,672 $(257) $86,271 $(25,259) $95,136 See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31, 1996 1995 1994 (Dollars in thousands) Operating activities Net income $6,163 $12,925 $6,231 Adjustments to reconcile net income to net cash provided by operating activities: Increase in net policy liabilities 32,239 4,958 2,854 Increase in premiums receivable (1,034) (3,196) (3,073) Increase in deferred policy acquisition costs (233) (2,388) (2,853) Deferred income tax provision (1,336) 990 (338) Decrease (increase) in other assets and liabilities 1,543 (539) 5,169 Amortization and depreciation 595 402 389 Amortization of bond discount, net 944 370 1,332 Realized (gains) losses on investments (1,203) (3,647) 2,046 Increase (decrease) in reinsurance balances payable (13,166) 12,341 5,874 Decrease (increase) in accrued investment income 161 (175) 169 Net cash provided by operating activities 24,673 22,041 17,800 Investing activities Sales of fixed maturities 281,728 221,026 159,484 Purchases of fixed maturities (310,660) (249,119) (185,184) Maturities or calls of fixed maturities 3,000 4,775 3,010 Net sales of Short-term investments 230 Capital expenditures (2,111) (366) (540) Net cash used by investing activities (27,813) (23,684) (23,230) Financing activities Proceeds from long-term debt 25,500 Common stock acquired for treasury (25,478) Principal payment on long-term debt (875) Issuance of common stock 217 Deferred compensation (131) Net cash provided by financing activities (789) 22 Effect of exchange rate changes on cash (10) 50 (113) Decrease in cash and cash equivalents (3,939) (1,571) (5,543) Cash and cash equivalents at beginning of year 27,337 28,908 34,451 Cash and cash equivalents at end of year $23,398 $27,337 $28,908 Supplemental disclosure of cash flow information Income taxes paid $1,701 $2,783 $245 Interest paid 1,761 586 See accompanying notes to consolidated financial statements.
1. Summary of Significant Accounting Policies The significant accounting policies followed by Gryphon Holdings Inc. (the "Company") are summarized below. Basis of Presentation and Principles of Consolidation Gryphon Holdings Inc.'s wholly owned insurance company subsidiaries are Associated International Insurance Company ("Associated") and Calvert Insurance Company ("Calvert"), which operate in the property and casualty insurance industry. Associated writes the majority of its property and casualty insurance policies in the State of California. Calvert writes property and casualty insurance policies throughout the United States and Canada. The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"), which as to the two insurance subsidiaries differ from the statutory accounting practices ("SAP") prescribed or permitted by regulatory authorities, and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the financial statements in conformity with GAAP requires the use of estimates and assumptions that affect amounts reported in the financial statements and the accompanying notes. Actual results could differ from such estimates. Premium Revenues Direct, assumed and ceded property and liability insurance premiums written are recognized as earned on a pro rata basis over the terms of the policies. Unearned premiums are calculated principally by the application of pro rata fractions and represent the portion of premiums written that is applicable to unexpired terms of policies in force. Recoverable policy acquisition costs that vary with and are directly related to the production of business, consisting of commissions, premium taxes and other underwriting expenses incurred, net of ceding allowances, are deferred and amortized to income as the related premiums are earned. The Company does not consider anticipated investment income when determining the recoverability of amounts deferred. Amortization of policy acquisition costs amounted to $30.1 million, $26.7 million, and $18.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Reinsurance Assumed reinsurance premiums written, commissions and unpaid losses and loss adjustment expenses are accounted for based principally on the reports received from the ceding insurance companies and in a manner consistent with the terms of the related reinsurance agreements. To limit its risks, the Company acquires reinsurance coverage with retentions and limits that management believes are appropriate for the circumstances. Reinsurance arrangements effected under quota-share reinsurance contracts and excess-of- loss reinsurance contracts provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The accompanying consolidated financial statements reflect premiums earned, losses and loss adjustment expenses (LAE) and underwriting, acquisition and insurance expenses, net of reinsurance ceded. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Contingent commissions and retrospectively-rated premiums are accounted for on an earned basis and are accrued, in accordance with the terms of the applicable reinsurance agreement, based on the estimated ultimate level of profitability relating to such reinsured business. Accordingly, the profitability of the reinsured business is continually reviewed and as adjustments become necessary, such adjustments are reflected in current operations. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments Effective January 1, 1994, the Company changed its method of accounting for investments, in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the accounting pronouncement, the Company's debt and equity securities are classified as available for sale and reported at fair value, with unrealized gains and losses, net of deferred income taxes, included in stockholders' equity. Fair values are based on quoted market prices, when available, or estimates based on market prices for similar securities, when quotes are not available. Short-term investments are carried at cost, which approximates their fair value. Realized gains and losses from sales or liquidations of investments are determined on the basis of the specific identification method and are included in net income. Investment income is recognized when earned. The amortization of premium and accretion of discount for fixed maturity securities are computed utilizing the interest method. Losses and Loss Adjustment Expenses The liabilities for unpaid losses and loss adjustment expenses are based on the Company's estimates of the ultimate cost of unpaid losses reported prior to the close of the accounting period, incurred but not reported losses, and the related loss adjustment expenses. These liabilities are estimated by management utilizing methods and procedures which it believes are reasonable and necessarily are subject to the impact of future changes in claim severity and frequency, as well as numerous other factors. Although management believes that the estimated liabilities for losses and loss adjustment expenses are reasonable, because of the extended period of time over which such losses are reported and settled, the subsequent development of these liabilities may not conform to the assumptions inherent in their determination and, accordingly, may vary from the estimated amounts included in the accompanying consolidated financial statements. To the extent that the actual emerging loss experience varies from the assumptions used in the determination of these liabilities, they are adjusted to reflect actual experience. Such adjustments, to the extent they occur, are reported in the period recognized. The Company's liabilities for unpaid losses and loss adjustment expenses include estimates for certain types of latent exposures, such as environmental impairment and asbestos-related claims, relating to business written prior to 1985 and which are generally difficult to establish with traditional reserving techniques. The Company wrote environmental impairment and asbestos-related coverages at high attachment levels and obtained reinsurance coverage reducing its net retention to $50,000 per occurrence. Among the complications of reserving for this type of business are a lack of sufficient historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, and complex, unresolved legal issues regarding policy coverage and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when a loss occurred and which policies provide coverage, which claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether clean-up costs are includible as insured property damage. These legal issues are not likely to be resolved in the near future. The establishment of appropriate reserves is an inherently uncertain process, and there can be no assurance that the ultimate liability, particularly with respect to latent exposures such as environmental impairment and asbestos, will not materially exceed the Company's current liability for unpaid loss and loss adjustment expense reserve estimates and have a material adverse effect on its future results of operations and financial condition. Furthermore, due to the inherent uncertainty of estimating such liabilities, particularly with respect to such latent exposures, it has been, and may over time continue to be, necessary to revise such estimated liabilities. However, on the basis of the Company's internal procedures, which analyze, among other things, its experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims, and product mix, as well as court decisions, economic conditions and public attitudes, management believes that adequate provision has been made for the Company's liabilities for unpaid losses and loss adjustment expenses. Foreign Currency Transactions denominated in foreign currencies are translated at the rate of exchange at the transaction date. Revenues and expenses are translated at average exchange rates. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Earnings per Share Earnings per common share are based on the average number of shares outstanding during each year; the exercise of outstanding stock options would have no significant dilutive effect on earnings per share. 2. Investments The major categories of net investment income are summarized as follows:
Year ended December 31 1996 1995 1994 (Dollars in thousands) Fixed maturities $16,256 $15,245 $12,471 Cash, cash equivalents and short-term investments 1,117 1,610 1,455 Total investment income 17,373 16,855 13,926 Less related expenses (920) (1,016) (827) Net investment income $16,453 $15,839 $13,099
The gross realized gains and losses from sales of fixed maturity securities are as follows:
Year ended December 31 1996 1995 1994 (Dollars in thousands) Gross realized gains $3,074 $4,306 $1,666 Gross realized losses (1,871) (659) (3,712) Net realized gains (losses) on sales $1,203 $3,647 $(2,046)
At December 31, 1996 and 1995, the amortized cost and estimated fair values of investments in fixed maturities, by categories of securities, and short-term investments were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) December 31, 1996 U.S. Treasury securities and obligations of U.S. government corporations and agencies $55,845 $826 $(87) $56,584 Debt securities issued by foreign governments 5,747 186 (10) 5,923 Tax-exempt obligations of states and political subdivisions 141,686 4,718 (69) 146,335 Mortgage-backed securities 43,381 294 (214) 43,461 Corporate securities 27,856 345 (340) 27,861 274,515 6,369 (720) 280,164 Short-term investments 307 307 $274,822 $6,369 $(720) $280,471 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) December 31, 1995 U.S. Treasury securities and obligations of U.S. government corporations and agencies $48,292 $3,101 $(8) $51,385 Debt securities issued by foreign governments 4,078 158 4,236 Tax-exempt obligations of states and political subdivisions 124,073 6,702 (40) 130,735 Mortgage-backed securities 36,616 976 37,592 Corporate securities 35,265 1,571 (56) 36,780 248,324 12,508 (104) 260,728 Short-term investments 537 537 $248,861 $12,508 $(104) $261,265
At December 31, 1996, the amortized cost and estimated fair value of fixed maturities, by contractual maturity, are shown below. Expected maturities, which are best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. December 31, 1996 Amortized Fair Cost Value (Dollars in thousands) Due in one year or less $5,108 $5,148 Due after one year through five years 46,142 47,012 Due after five years through ten years 76,941 78,610 Due after ten years 102,943 105,933 231,134 236,703 Mortgage-backed securities 43,381 43,461 Total $274,515 $280,164 At December 31, 1996, investments in Federal National Mortgage Association securities aggregating $24.7 million represented the only investments in any entity in excess of 10.0% of stockholders' equity other than those investments issued or guaranteed by the U.S. government. Securities on Deposit At December 31, 1996 and 1995, securities with a fair value of approximately $18.6 million and $16.2 million, respectively were on deposit with various state or governmental insurance departments in order to comply with statutory insurance laws. 3. Losses and Loss Adjustment Expenses The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the Company for each of the years in the three-year period ended December 31, 1996 as computed in accordance with GAAP. Reconciliation of Liability for Loss and Loss Adjustment Expenses (Dollars in thousands)
Year ended December 31, 1996 1995 1994 Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660 Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783 Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877 Add:Provision for losses and LAE for claims occurring in: The current year 53,402 50,424 49,047 Prior years 4,298 392 (8,510) Total net incurred losses and LAE 57,700 50,816 40,537 Less:Losses and LAE payments for claims occurring in: The current year 11,520 11,796 12,460 Prior years 30,784 28,911 24,152 Total net paid losses and LAE 42,304 40,707 36,612 Reserves for net losses and LAE at end of year 171,307 155,911 145,802 Reinsurance recoverable on unpaid losses 137,952 152,975 169,889 Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
The provision for losses and LAE for claims occurring in prior years shows an unfavorable development of $4.3 million in 1996. The unfavorable development resulted principally from additional losses and reserve strengthening for a truck leasing program ($5.3 million) and used-car dealers program ($2.2 million), each discontinued during 1995; and an increase of $2.2 million in reserves for environmental impairment and asbestos- related exposures on business written prior to 1985. Such increases were partially offset by favorable development of A&E reserves and a re-estimation of IBNR reserves pertaining to other property business. The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of the Company for each of the years in the three-year period ended December 31, 1996 for environmental impairment and asbestos-related liabilities. Reconciliation of Environmental Impairment and Asbestos-related Liability for Loss and Loss Adjustment Expenses (Dollars in thousands)
Year ended December 31, Environmental Impairment Liability 1996 1995 1994 Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000 Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000 Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000 Add: Provision for losses and LAE for claims occurring in prior years 1,598 3 (58) Less: Losses and LAE payments for claims occurring in prior years 774 1,123 842 Reserves for net losses and LAE at end of year 8,804 7,980 9,100 Reinsurance recoverable on unpaid losses 4,177 3,958 5,100 Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200 Year ended December 31, Asbestos-related Liability 1996 1995 1994 Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000 Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250 Net reserves for losses and LAE at the beginning of the year 640 700 750 Add: Provision for losses and LAE for claims occurring in the prior years 583 612 (158) Less: Losses and LAE payments for claims occurring in the prior years 212 672 (108) Reserves for net losses and LAE at end of year 1,011 640 700 Reinsurance recoverable on unpaid losses 3,110 1,060 3,350 Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
At December 31, 1996, the reserve for unpaid environmental impairment losses and related loss adjustment expenses was approximately $8.8 million, net of reinsurance recoverables deemed probable of collection by the Company of approximately $4.2 million. The range of gross reserves for unpaid environmental impairment losses and loss adjustment expenses is estimated to be $13.0 million to $22.0 million and the range of reserves, net of reinsurance recoverable, for unpaid environmental impairment losses and loss adjustment expenses is estimated to be approximately $8.8 million to $13.3 million. At December 31, 1996, the reserve for unpaid asbestos- related losses and related loss adjustment expenses was $1.0 million, net of reinsurance recoverables deemed probable of collection by the Company of approximately $3.1 million. The range of gross reserves for unpaid asbestos-related losses and loss adjustment expenses is estimated to be $4.1 million to $8.3 million and the range of reserves, net of reinsurance recoverable, for unpaid asbestos-related losses and loss adjustment expenses is estimated to be approximately $1.0 million to $2.0 million. There are significant uncertainties in estimating the amount of the Company's environmental impairment and asbestos- related liabilities resulting from a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, and complex, unresolved legal issues regarding policy coverage and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when a loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs are includible as insured property damage. These issues are not likely to be resolved in the near future. As a result of these issues, the ultimate number and cost of these claims may generate losses that vary materially from the amounts currently recorded and could have a material adverse effect on the Company's results of operations and financial condition. While management believes the Company's reserves for these coverages are appropriately established, because of the uncertainty of circumstances surrounding many critical factors that affect environmental impairment and asbestos-related liabilities, there can be no assurance that the Company's reserves for and losses from these claims will not increase in the future. 4. Reinsurance Certain premiums and losses are assumed from and ceded to other insurance companies under various reinsurance agreements. The Company cedes a portion of its business through quota share treaties, excess of loss treaties and facultative placements, and generally retains net amounts of risk ranging from $100,000 to $500,000 per risk. The Company continually evaluates the credit risk related to its reinsurers and has established a minimum A.M. Best rating of "A-" for its domestic and Bermuda-based reinsurers and also requires at least $50 million of policyholder surplus for all domestic and foreign reinsurers. The Company works with intermediaries to continually monitor the financial condition of its reinsurers, as appropriate. If a reinsurer of the Company were to become insolvent or unable to make payments under the terms of a reinsurance agreement, it could have a material adverse effect on the Company. The following table sets forth the significant reinsurance receivables due from reinsurers as of December 31, 1996. Year ended December 31, 1996 (Dollars in thousands) Reinsurance A.M. Best's Reinsurer Receivables Rating Munich American Reinsurance Company $18,411 A+ Kemper Reinsurance Company 13,590 A- Odyssey Reinsurance Corporation 11,454 A- St. Paul Fire and Marine Insurance Company 11,366 A+ Lloyd's Underwriters 11,329 * Signet Star Reinsurance Corporation 10,994 A American Re-Insurance Company 9,653 A+ Western Atlantic Reinsurance Corporation 7,869 A * A.M. Best does not assign ratings to Lloyd's syndicates. The amount and cost of reinsurance available to companies specializing in property and casualty insurance are subject, in large part, to prevailing market conditions beyond the control of the Company. The Company's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends to a significant extent upon its ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position. For the years ended December 31, 1996, 1995 and 1994, amounts relating to assumed and ceded reinsurance premiums written and earned and losses and loss adjustment expenses incurred reflected in the accompanying consolidated statements of income approximated the following: Year ended December 31, 1996 1995 1994 (Dollars in thousands) Premiums Written: Assumed $2,390 $2,076 $3,638 Ceded 62,330 66,805 69,964 Premiums Earned: Assumed $2,209 $1,715 $3,661 Ceded 63,824 66,064 68,221 Losses & LAE Incurred: Assumed $4,455 $2,585 $4,803 Ceded 42,052 52,089 92,796 At December 31, 1996 the Company held letters of credit of approximately $9.1 million securing amounts due from reinsurers. During 1996, Associated maintained a five-layer property catastrophe reinsurance program which covered 95% of the annual aggregate amount of property claims up to $115.0 million per occurrence, subject to a retention of $2.5 million per occurrence. During 1996, Calvert maintained a four-layer property catastrophe reinsurance program which covered 95% of any one property loss occurrence exceeding $0.6 million, up to $5.5 million of any one occurrence, and up to a $10.0 million annual aggregate loss. Associated limits its net retention to $100,000 per risk for difference in conditions ("DIC"). Until October 1, 1996, Associated retained $250,000 per risk for casualty, architects' and engineers' professional liability, specialty lines, and commercial auto and up to $500,000 per risk for non-DIC property policies. Calvert reinsured various lines of business through quota share treaties, excess of loss treaties and facultative placements which limited Calvert's net retention per risk to a maximum of $200,000 for property and casualty. Effective October 1, 1996, the Company's reinsurance program was restructured to provide protection for loss events covering property and casualty classes of business, excluding DIC and certain other property business. The program provides for $24.5 million of coverage in excess of the Company's retention of $500,000 for each and every event. Certain businesses that are excluded from this agreement are covered by quota share treaties that limit the Company's net retention per risk to a maximum of $250,000. Reinsurance ceded contracts do not relieve the Company of its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. In addition, as is often the case in the normal course of business, the Company is involved in disputes with reinsurers regarding certain loss recoverables. Although the Company believes that such issues will be resolved in the Company's favor, there can be no assurance that the Company will prevail. 5. Federal Income Taxes Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 establishes an asset and liability approach for financial accounting and reporting for income taxes as compared to the concept of matching tax expense to pretax income. Under the liability method, deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these temporary differences are expected to reverse. The principal assets and liabilities giving rise to such differences are loss and LAE reserves, unearned premiums, deferred policy acquisition costs, and net unrealized investment gains (losses). The components of the net deferred income tax asset are as follows: Year ended December 31, 1996 1995 (Dollars in thousands) Discount on loss reserves $12,270 $12,239 Unearned premium reserve 3,477 3,015 Alternative minimum tax credit 1,099 56 Other, net 129 110 Deferred income tax asset 16,975 15,420 Deferred policy acquisitions costs (4,345) (4,264) Unrealized gains on investments (1,977) (4,341) Other, net (371) (233) Deferred income tax liability (6,693) (8,838) Net deferred income tax asset $10,282 $6,582 The Company has not established a valuation reserve because the Company believes it is more likely than not that the net deferred tax asset will be fully realized. A reconciliation of income taxes computed at the statutory federal income tax rate to the income tax provision is presented below:
1996 1995 1994 % of Pre-Tax % of Pre-Tax % of Pre-Tax Amount Income Amount Income Amount Income ------- --------- ------ -------- ------ -------- (Dollars in thousands) Taxes based on statutory federal income tax rate $2,176 35.0% $5,909 35.0% $2,240 35.0% Add (deduct): Tax-exempt interest (2,338) (37.6) (2,131) (12.6) (2,230) (34.8) Other, net 215 3.5 181 1.1 159 2.4 Total income taxes $53 .9% $3,959 23.5% $169 2.6%
6. Long-Term Debt In September 1995, the Company purchased 1.5 million shares of its common stock beneficially owned by Willis Corroon for a purchase price of $25.5 million, including related expenses. The Company financed its purchase through an unsecured term loan from commercial lending institutions. This loan matures in varying amounts through 2002 with interest payable at least quarterly. The term loan interest rate is equivalent to either the bank's prime rate or the London Interbank Offered Rate ("LIBOR") plus 1%, at the discretion of the Company. The term loan agreement contains certain restrictive covenants, including restrictions on the Company's ability to declare or pay any cash dividends to its shareholders. As of December 31, 1996, the weighted average interest rate was 6.91%, and the fair value of the loan approximated the carrying value. Principal payments due on the term loan are as follows: Year ending December 31, Principal Amount (Dollars in thousands) 1997 $3,500 1998 3,625 1999 4,125 2000 4,625 2001 5,000 Thereafter 3,750 Total $24,625 In October of 1995, the Company entered into an interest rate swap agreement with a commercial lending institution in order to reduce the impact of interest rate fluctuations on the Company's term loan. The interest rate swap was effected with respect to the first $15.5 million of scheduled principal amortizations of the $25.5 million loan. The impact of the swap was to create an effective fixed rate of 6.97% on the $15.5 million principal amount. As of December 31, 1996, the fair value of the interest rate swap approximated the carrying value. 7. Fair Value of Financial Instruments The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 requires disclosure of an estimate of the fair value of financial instruments. The Statement defines the fair value of financial instruments as the amount at which the instruments could be exchanged in a current transaction between willing parties. The following table summarizes the carrying amount and estimated fair value of the Company's financial instruments at December 31, 1996 and 1995. Year ended December 31 1996 1995 (Dollars in thousands) Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Financial assets: Investments and cash $303,869 $303,869 $288,602 $288,602 Financial liabilities: Long-term debt 24,625 24,651 25,500 25,713 The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Investments and cash The fair values of fixed maturities are based on quoted market prices. The fair value of short-term instruments approximate amortized cost. The fair value of cash and cash equivalents approximates amortized cost. Long-term debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same maturities. The fair value includes the effect of the interest rate swap. 8. Commitments and Contingencies Leases The Company and its subsidiaries lease certain office facilities and computer equipment. Minimum rental commitments for these leases, exclusive of escalations due to real estate taxes and operating expenses, are as follows: Year ending December 31, (Dollars in thousands) 1997 $1,157 1998 1,163 1999 1,130 2000 964 2001 755 Thereafter 5,512 $10,681 Total rent expense for all leases was $1,310,000, $959,000 and $856,000 in 1996, 1995 and 1994, respectively. 9. Dividends and Stockholders' Equity Dividends Associated, a California domiciled company, and Calvert, a Pennsylvania domiciled company, are required to file with the Department of Insurance of various states an annual convention statement, which is prepared in conformity with accounting practices prescribed or permitted by the respective states. These practices vary from GAAP principally in that policy acquisition costs are charged to expense when incurred, deferred federal income taxes are not recognized, investments are reflected at amortized cost, and nonadmitted assets are excluded from the balance sheet. Under state insurance laws of Pennsylvania, the maximum amount of dividends which can be paid by Pennsylvania domiciled insurance companies without prior approval of the Insurance Commissioner is limited to the greater of 10% of surplus as regards policyholders as of the preceding year end or the insurance company's net income for the previous year. Under state insurance laws of California, Associated is permitted to pay as dividends to the Company, after advance notice to the California Insurance Department, an amount equal to the greater of 10% of Associated's policyholders surplus at the end of the preceding year or its statutory net income for the preceding year. Dividends in excess of these amounts require the prior approval of the California Insurance Department. Dividends may be paid only out of earned surplus. As such, at December 31, 1996, the maximum amount of dividends that Associated could pay in 1997 without California Insurance Department approval amounted to approximately $6.6 million and the maximum amount of dividends that Calvert could pay in 1997 without Pennsylvania Insurance Department approval amounted to approximately $1.7 million. Stockholders' Equity A reconciliation of the two insurance subsidiaries' net income and stockholders' equity for each of the years in the three years ended December 31, 1996 and as of December 31, 1996 and 1995, as reported to the various regulatory authorities in accordance with SAP, to the related GAAP amounts included in the accompanying consolidated financial statements is as follows:
Stockholders' Net Income Equity 1996 1995 1994 1996 1995 (Dollars in thousands) Associated's and Calvert's statutory- basis amounts $7,298 $13,876 $5,296 $82,566 $83,433 Add (deduct): Deferred policy acquisition costs 233 2,388 2,853 12,415 12,182 Deferred income taxes 341 (728) (12) 11,175 10,835 Nonadmitted assets 3,090 950 Unauthorized reinsurance 3,980 1,977 Foreign currency translation adjustment (68) (110) (74) Unrealized investment gains 816 3,672 8,063 Other, net (67) 25 (33) Associated's and Calvert's GAAP amounts 8,553 15,451 8,063 116,865 117,440 Holding Company: Non-insurance company expenses (2,390) (2,526) (1,832) GAAP equity (21,729) (24,218) Consolidated amounts -- GAAP basis $6,163 $12,925 $6,231 $95,136 $93,222
10. Shareholder Rights Plan In June 1995, the Board of Directors declared a dividend of one right for each outstanding share of Common Stock. Each right entitles the holder to purchase from the Company a unit consisting of 1/100 of a share of Junior Participating Cumulative Preferred Stock at a price of $50 per unit. Initially, the rights will not be exercisable and will trade with the Common Stock. In the event a person or group acquires 20% or more of the Common Stock, or commences a tender offer for the outstanding shares, the rights become exercisable. If a person or group acquires 20% or more of the Common Stock, the rights will entitle a holder (other than the acquiring person or group of acquiring persons) to buy shares of Common Stock having a market value of twice the exercise price of the right. If the Company is subsequently involved in a merger or other business combination with a holder of 20% or more of the stock of the Company, the rights will entitle a holder to buy shares of common stock of the acquiring corporation having a market value of twice the exercise price of the right. The rights may be redeemed by the Company at $.001 per right at any time prior to the acquisition by any person or group of 20% or more of the Company's shares. The rights have no voting power and will expire in June 2005, if not previously redeemed. 11. Property and Equipment Property and equipment is classified with other assets in the accompanying balance sheets and is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related property and equipment and ranges principally from three to seven years. Property and equipment, included in other assets in the balance sheet, is comprised of the following: Year ended December 31, 1996 1995 (Dollars in thousands) Furniture, fixtures and leasehold improvements $2,475 $1,168 Computers 1,011 1,328 Office equipment 354 273 3,840 2,769 Less: Accumulated depreciation and amortization 1,116 1,690 $2,724 $1,079 12. Stock Option and Restricted Stock Plans The Company's stock option plans provide for granting of stock options to key employees and non-employee directors. Options are granted at a price not less than the market price on the date of grant. Options that have been granted under the plans will become exercisable in four annual installments of 25% each commencing on the second anniversary of the date of grant and will expire ten years from the date of grant. The Company's restricted stock award plan provides for the granting of up to 100,000 shares of common stock to key employees, subject to restrictions as to continuous employment except in the case of death or normal retirement. Restrictions generally expire over a five-year period from date of grant. Compensation expense is recognized over the restriction period. As of December 31, 1996, 26,000 shares were outstanding under the plan. The Financial Accounting Standards Board has issued SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 provides an option either to continue the Company's current method of accounting for stock-based compensation, or to adopt the fair value method of accounting for stock-based employee compensation plans, which would require the Company to expense the fair value of its stock options at the date of grant over the vesting period. The Company has elected to follow Accounting Principle Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option and restricted stock plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for restricted stock awards. Although the Company elected to continue to follow APB No. 25, it is required to provide additional disclosures including pro forma net income and earnings per share as if the Company adopted the new fair value method for recognition purposes in 1995. A summary of stock option activity during the three years ended December 31, 1996, follows:
Available Weighted for Grant Outstanding Average of Exercise Price of Outstanding Options -------- ----------- ------------- Balance, December 31, 1993 92,500 307,500 $13.00 Granted (59,500) 59,500 14.11 Canceled 1,000 (1,000) 13.88 Balance, December 31, 1994 34,000 366,000 13.18 Authorized 100,000 Granted (114,000) 114,000 14.89 Canceled 21,000 (21,000) 13.07 Balance, December 31, 1995 41,000 459,000 13.61 Authorized 250,000 Granted (162,500) 162,500 17.44 Exercised (3,925) 13.00 Canceled 59,250 (59,250) 15.03 Balance, December 31, 1996 187,750 558,325 $14.58
The following table summarizes outstanding and exercisable options as of December 31, 1996.
Options Outstanding Options Excersiable --------------------- --------------------- Weighted Year Range Number Average Weighted Number Weighted of of Outstanding Remaining Average Exercisable Average Grant Exercise Contractual Exercise Exercise Prices Life Price Price 1993 $13 254,825 7.00 $13.00 125,450 $13.00 1994 $13 - $15 57,500 7.45 14.11 14,375 14.11 1995 $13 - $16 109,000 8.49 14.92 14.92 1996 $14 - $20 137,000 9.36 17.44 17.44 558,325 139,825
The pro forma net income and earnings per share determined consistent with SFAS No. 123 is as follows: Pro forma (1) 1996 1995 Net income $5,974 $12,880 Earnings per share $.90 $1.68 (1) During the initial phase-in period of SFAS No. 123, the effects of applying the standard for either recognizing compensation cost or providing pro forma disclosures are not likely to be representative of the effects on reported net income for future years, based on the fact that options vest over several years and additional awards generally are made each year. The weighted average fair value of options granted during 1996 and 1995 were $7.64 and $6.29, respectively. The Black- Scholes option-pricing model was used with the following weighted average assumptions: volatility of 24.3%, risk-free interest rate of 6.81% in 1996 and 6.18% in 1995, and expected life of 7 years. 13. Employee Benefits and Incentive Bonus Plans The Company maintains a defined contribution retirement 401(k) & Profit Sharing Plan. Participation in the plan is available to all employees upon their satisfaction of specified eligibility requirements. Under the 401(k) component of the plan, the Company matches, on a dollar-for-dollar basis, each employee's contribution up to 3% of eligible compensation. Under the profit sharing component of the plan, annual contributions may be authorized by the Board of Directors based upon the Company's performance for the relevant year. The Company's costs are charged to income and amounted to $0.5 million in 1996, $0.4 million in 1995 and $0.3 million in 1994. The Company maintains an annual incentive bonus plan for officers and other key employees. Bonuses are based upon predetermined objectives established by the Compensation Committee. The Company's total incentive bonus plan expense for the years ended December 31, 1996, 1995 and 1994 was $0.6 million, $1.6 million and $1.2 million, respectively. 14. Concentrations of Business Gross premiums written in the State of California amounted to approximately $68,663,000, $76,396,000 and $73,943,000 in 1996, 1995 and 1994, respectively. In the State of New York, the Company's gross premiums written were $11,975,000, $20,141,000 and $16,821,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Gross premiums written in any other state do not exceed 10% of gross premiums written. The Company's architects' and engineers' professional liability insurance business is produced by Risk Administration and Management Company ("RAMCO"), an unaffiliated managing general agent. For the years ended December 31, 1996, 1995 and 1994, direct premiums written by RAMCO for the Company amounted to approximately $17,843,000, $14,452,000 and $15,910,000, respectively. 15. Quarterly Financial Information (unaudited) Quarterly financial information (unaudited) for the year ended December 31, 1996 is presented below:
Three months ended March 31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 (Dollars and shares in thousands, except per share amounts) Gross premiums written $34,919 $39,017 $44,807 $38,194 Net premiums written 21,213 22,585 28,165 22,644 Net premiums earned 21,951 21,180 22,292 22,506 Net investment income 4,159 3,921 4,065 4,308 Realized gains (losses) on investments 802 (190) 4 587 Other income 270 285 389 115 Total revenues 27,182 25,196 26,750 27,516 Income (loss) before income taxes 4,658 (294) 2,249 (397) Net income 3,505 337 1,986 335 Net income per share $.53 $.05 $.30 $.05 Weighted average shares outstanding 6,648 6,656 6,660 6,661
Quarterly financial information (unaudited) for the year ended December 31, 1995 is presented below:
Three months ended March 31, June 30, Sept. 30, Dec. 31, 1995 1995 1995 1995 (Dollars and shares in thousands, except per share amounts) Gross premiums written $35,209 $43,444 $43,747 $34,580 Net premiums written 17,872 25,703 25,086 21,514 Net premiums earned 17,697 21,019 20,324 24,359 Net investment income 3,666 4,133 4,030 4,010 Realized gains on investments 276 1,554 736 1,081 Total revenues 21,639 26,706 25,090 29,450 Income before income taxes 3,738 4,614 2,670 5,862 Net income 3,002 3,485 2,355 4,083 Net income per share $.37 $.43 $.31 $.61 Weighted average shares outstanding 8,148 8,148 7,648 6,648 As a result of the Company's purchase of its Common Stock, the average number of shares outstanding varies from quarter to quarter, and the sum of the quarterly earnings per common share may not equal the total for the year.
At December 31, 1996 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES COLUMN COLUMN COLUMN COLUMN A B C D Amount at which shown in the balance Type of Investment Cost Value sheet (Dollars in thousands) Fixed maturities: Bonds: United States Government and government agencies and authorities $55,845 $56,584 $56,584 States, municipalities and political subdivisions 141,686 146,335 146,335 Foreign governments 5,747 5,923 5,923 Mortgage-backed securities 43,381 43,461 43,461 Corporate bonds 27,856 27,861 27,861 Total fixed maturities 274,515 280,164 280,164 Short-term investments 307 307 307 Total investments $274,822 $280,471 $280,471 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT Balance Sheets December 31, 1996 1995 (Dollars in thousands) Assets Cash and cash equivalents $289 $469 Investment in subsidiaries 118,336 118,970 Income tax recoverable 439 660 Deferred income taxes 1,084 89 Other assets 268 215 Total assets $120,416 $120,403 Liabilities and stockholders' equity Liabilities: Other liabilities 655 $1,681 Long-term debt 24,625 25,500 Total liabilities 25,280 27,181 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 15,000,000 shares authorized; 8,148,050 shares issued 81 81 Additional paid-in capital 30,847 30,850 Foreign currency translation adjustment, net of tax (219) (209) Net unrealized gains, net of tax 3,672 8,063 Deferred compensation (257) (193) Retained earnings 86,271 80,108 Treasury stock, at cost; shares 1996: 1,487,075: 1995: 1,500,000 (25,259) (25,478) Total stockholders' equity 95,136 93,222 Total liabilities and stockholders' equity $120,416 $120,403 Statements of Income Year ended December 31, 1996 1995 1994 (Dollars in thousands) Revenue Net investment income $24 $28 $11 Total revenues 24 28 11 Expenses Operating expenses 1,921 3,282 2,563 Interest expense 1,761 595 Total expenses 3,682 3,877 2,563 Loss before income taxes and equity in undistributed income of subsidiaries (3,658) (3,849) (2,552) Income tax benefit 1,268 1,323 720 Loss before equity in undistributed income of subsidiaries (2,390) (2,526) (1,832) Equity in undistributed income of subsidiaries 8,553 15,451 8,063 Net income $6,163 $12,925 $6,231 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT Statements of Cash Flows
Year ended December 31, 1996 1995 1994 (Dollars in thousands) Operating activities Loss before equity in undistributed income of subsidiaries $(2,390) $(2,526) $(1,832) Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in income tax recoverable (487) 796 Deferred income tax provision (995) 261 (350) Amortization and depreciation 68 85 88 Decrease (increase) in other assets and liabilities (798) 825 (80) Net cash used by operating activities (4,115) (1,842) (1,378) Investing activities Capital expenditures (2) (5) (114) Net cash used by investing activities (2) (5) (114) Financing activities Dividends received 4,726 2,000 1,250 Proceeds from long-term debt 25,500 Common stock acquired for treasury (25,478) Issuance of common stock 217 Deferred compensation (131) Principal payment on long term debt (875) Net cash provided by financing activities 3,937 2,022 1,250 Increase (decrease) in cash and cash equivalents(180) 175 (242) Cash and cash equivalents at beginning of year 469 294 536 Cash and cash equivalents at end of year $289 $469 $294
Year ended December 31, SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J Future Policy Other Benefits, Policy Benefits, Underwriting, Deferred Losses, Claims Claims Acquisition, Policy Claims and Net Losses & and Year and Acquisition and Loss Unearned Benefits Premium Investment Settlement Insurance Premiums Segment Costs Expenses Premiums Payable Revenue Income Expenses Expense Written - -------- --------- -------- -------- -------- ------- -------- --------- --------- -------- (Dollars in thousands) 1996 Property/Casualty $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607 Total $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607 1995 Property/Casualty $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175 Total $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175 1994 Property/Casualty $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187 Total $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187
Year ended December 31, SCHEDULE IV--REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Percentage Assumed of Amount Ceded to from Assumed Direct Other Other Net to Amount Companies Companies Amount Net (Dollars in thousands) 1996 Premiums: Property/Casualty Insurance $154,547 $62,330 $2,390 $94,607 2.5% Total Premiums $154,547 $62,330 $2,390 $94,607 2.5% 1995 Premiums: Property/Casualty Insurance $154,904 $66,805 $2,076 $90,175 2.3% Total Premiums $154,904 $66,805 $2,076 $90,175 2.3% 1994 Premiums: Property/Casualty Insurance $135,513 $69,964 $3,638 $69,187 5.3% Total Premiums $135,513 $69,964 $3,638 $69,187 5.3%
Year ended December 31, SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K Reserves for Claims & Claim Amortization Unpaid Discount, Adjustment Expenses of Deferred Claims if any, Incurred Related to Deferred Paid Claims Affiliation Policy and Claim Deducted Net (1) (2) Policy and Claim with Acquisition Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums Company Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written (Dollars in thousands) 1996 Consolidated Property/ Casualty Entities $12,415 $309,259 $-0- $68,683 $87,929 $16,453 $53,402 $4,298 $30,062 $42,304 $94,607 1995 Consolidated Property/ Casualty Entities $12,182 $308,886 $-0- $63,472 $83,399 $15,839 $50,424 $392 $26,706 $40,707 $90,175 1994 Consolidated Property/ Casualty Entities $9,794 $315,691 $-0- $55,979 $61,605 $13,099 $49,047 $(8,510) $18,085 $36,612 $69,187
EX-10.65 2 R:\97RIL\11339.DOC Property Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Property Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder First Property Excess Per Risk Reinsurance Reinsurers Participations Allmerica Re, A Division of The Hanover Insurance Company 1.40% AXA Reinsurance Company 34.40 First Excess and Reinsurance Corporation 6.00 Gerling Global Reinsurance Corporation, U. S. Branch 2.00 Great Lakes American Reinsurance Company 5.00 PMA Reinsurance Corporation 3.00 Republic Western Insurance Company 3.20 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 29.00 SOREMA North America Reinsurance Company 1.00 Through Denis M. Clayton & Co. Ltd. Companies Per Signing Schedule(s) 15.00 Total 100.00% Second Property Excess Per Risk Reinsurance Reinsurers Participations Allmerica Re, A Division of The Hanover Insurance Company 1.00% AXA Reinsurance Company 30.00 Everest Reinsurance Company 10.80 First Excess and Reinsurance Corporation 5.00 Gerling Global Reinsurance Corporation, U. S. Branch 7.00 Hannover Ruckversicherungs-Aktiengesellschaft 5.00 Inter-Ocean Re-Insurance Company, Ltd. 7.00 Patriot Re Corporation (for Certain Underwriting Members of Lloyd's) 3.00 PMA Reinsurance Corporation 3.00 Republic Western Insurance Company 3.20 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 7.00 SOREMA North America Reinsurance Company 2.00 USF RE Insurance Company 4.00 Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s 12.00 Total 100.00% Third Property Excess Per Risk Reinsurance Reinsurers Participations First Excess and Reinsurance Corporation 6.00% Gerling Global Reinsurance Corporation, U. S. Branch 4.00 Great Lakes American Reinsurance Company 2.00 Hannover Ruckversicherungs-Aktiengesellschaft 1.25 Inter-Ocean Re-Insurance Company, Ltd. 40.00 Munich American Reinsurance Company 5.00 SOREMA North America Reinsurance Company 2.00 Transatlantic Reinsurance Company 18.75 USF RE Insurance Company 6.00 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 10.00 Through Denis M. Clayton & Co. Ltd. Companies Per Signing Schedule(s) 5.00 Total 100.00% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Classes of Business Reinsured 1 II Term 1 III Territory 2 IV Exclusions 2 V Retention and Limit 4 VI Reinstatement: Third Property Excess Per Risk 5 VII Other Reinsurance 6 VIII Definitions 6 IX Losses and Loss Adjustment Expense 9 X Special Provisions 10 XI Salvage and Subrogation 10 XII Premium 10 XIII Offset (BRMA 36C) 12 XIV Access to Records (BRMA 1D) 12 XV Liability of the Reinsurer 12 XVI Net Retained Lines (BRMA 32E) 13 XVII Errors and Omissions (BRMA 14F) 13 XVIII Currency (BRMA 12A) 13 XIX Taxes (BRMA 50C) 13 XX Federal Excise Tax (BRMA 17A) 13 XXI Unauthorized Reinsurers 14 XXII Insolvency 15 XXIII Arbitration 16 XXIV Service of Suit (BRMA 49C) 17 XXV Agency Agreement 18 XXVI Intermediary (BRMA 23A) 18 Property Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Property business underwritten by Associated International Insurance Company, Woodland Hills, California, subject to the terms, conditions and limitations hereinafter set forth. Article II - Term A. This Contract shall become effective on January 1, 1997, with respect to losses occurring on or after that date, and shall remain in force until December 31, 1997, both days inclusive. B. Unless the Company elects that the Reinsurer have no liability for losses occurring after the effective date of expiration, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of expiration, reinsurance hereunder on business in force on the effective date of expiration shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months plus odd time (not exceeding 18 months in all as respects Builders' Risk policies) following the effective date of expiration. Article III - Territory This Contract shall apply to the territorial limits set forth in the Company's policies reinsured hereunder. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Loss or liability excluded under the provisions of the "Pools, Associations and Syndicates Exclusion Clause" attached to and forming part of this Contract. 2. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" and the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)" attached to and forming part of this Contract. 3. All reinsurance assumed, with the exception of intra- company reinsurance and specific insureds whose reinsurance is written through their own captive company and quoted by a non-related entity. 4. Risks of war, whether or not declared, invasion, civil war, insurrection, rebellion, revolution or confiscation by duly constituted governmental or civil authority as excluded under a standard policy containing a standard War Exclusion Clause. 5. Hail insurance or reinsurance covering growing, drying or standing crops when written as such. 6. Flood when written as such; however, this exclusion shall not apply to flood when included in Difference in Conditions, Inland Marine and All Risk policies. 7. All armored car business except when written in excess of $500,000. 8. Credit, financial or insolvency guarantees. 9. Livestock insurance or reinsurance when written as such. 10. Third Party Bodily Injury and Property Damage Liability, Medical Payments, Workers' Compensation, Fidelity and Surety, whether written separately or as part of a Multiple Peril policy. However, nothing herein contained shall be construed as excluding liability for damage to property in an insured's care, custody or control or for which the insured may be liable. 11. Ocean Marine when written as such. 12. Aircraft, meaning direct damage to hulls insured under Aircraft Hull policies, but not to exclude aircraft hulls insured under regular Fire, Inland Marine and All Risk policies (other than Aircraft Hull policies). In no event shall any liability attach to the Reinsurer hereunder in respect of aircraft while in flight or taxiing. 13. Offshore drilling rigs. 14. Automobile risks insured under Automobile policies with the exception of floor plans. 15. Boiler and Machinery when written as such. 16. Space and space related risks for the intention of ignition of the launch vehicle which includes taxiing within the launch site area and in flight. 17. Grain elevators. 18. Mechanical breakdowns when written as such. 19. Petrochemical risks and refineries. 20. Underground mining. 21. Inland Marine policies covering jewelers block and motor truck cargo. 22. Mortgage Impairment insurance. 23. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 24. Kidnap and Ransom. 25. Residual Value and Credit insurance. 26. Crop insurance. 27. Burglary and Theft when written as such. 28. Strike insurance. 29. Product impairment, recall and tampering. 30. Data processing companies whose sole purpose is to provide data processing services to other companies which include media exposures defined as material on which data is to be or is already stored (i.e., disks, magnetic and paper tapes, drums, cores and programs). 31. Transmission and distribution lines. B. These exclusions do not apply where the excluded class or operations constitutes a minor part of or incidental to the main operations of the insured except for exclusions 2, 3, 4, 8, 11, 12, 13, 16, 23 and 31 of paragraph A. Article V - Retention and Limit A. First Property Excess Per Risk Reinsurance The Company shall retain and be liable for the first $100,000 of ultimate net loss as respects any one risk, each loss. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,400,000 as respects any one risk, each loss, nor shall it exceed $7,500,000 as respects all risks involved in any one loss occurrence. B. Second Property Excess Per Risk Reinsurance The Company shall retain and be liable for the first $2,500,000 of ultimate net loss as respects any one risk, each loss. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,500,000 as respects any one risk, each loss, nor shall it exceed $10,000,000 as respects all risks involved in any one loss occurrence. C. Third Property Excess Per Risk Reinsurance The Company shall retain and be liable for the first $5,000,000 of ultimate net loss as respects any one risk, each loss. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $5,000,000 as respects any one risk, each loss, nor shall it exceed $10,000,000 as respects all risks involved in any one loss occurrence. D. The Company shall be the sole judge of what constitutes "one risk," except that in no event shall a building and its contents be considered more than one risk. Article VI - Reinstatement: Third Property Excess Per Risk A. As respects the Third Property Excess Per Risk layer hereunder, in the event all or any portion of the reinsurance hereunder is exhausted by loss arising out of any one loss occurrence, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. 1. For the first $10,000,000 of ultimate net loss so reinstated the Company shall pay no additional premium. 2. For the second $10,000,000 of ultimate net loss so reinstated the Company agrees to pay additional premium equal to the product of the following: a. The percentage of the occurrence limit reinstated (based on the ultimate net loss paid by the Reinsurer); times b. One-half of the earned reinsurance premium for that excess layer for the term of this Contract (exclusive of reinstatement premium). 3. For the third $10,000,000 of ultimate net loss so reinstated the Company agrees to pay additional premium equal to the product of the following: a. The percentage of the occurrence limit reinstated (based on the ultimate net loss paid by the Reinsurer); times b. The earned reinsurance premium for that excess layer for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any ultimate net loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer under the Third Property Excess Per Risk reinsurance shall not exceed $10,000,000 as respects all risks involved in any one loss occurrence, nor shall it exceed $40,000,000 in all during the term of this Contract. Article VII - Other Reinsurance A. The Company shall be permitted to carry excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. B. With regard to business written in the General E&S division of the Company, the Company shall be permitted to carry excess and/or pro rata reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. C. The Company shall be permitted to purchase facultative reinsurance, recoveries under which may inure to the benefit of this Contract. If such reinsurance does not inure to the benefit of this Contract, it will be entirely disregarded as respects this Contract. Article VIII - Definitions A. The term "ultimate net loss" shall mean the actual loss incurred by the Company under policies covered hereunder. Such loss shall include sums paid in settlement of claims and suits and in satisfaction of judgments, including prejudgment interest when added to a judgment. Such loss also shall include any losses in excess of policy limits and any extra contractual obligations incurred by the Company. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the net loss. Nothing herein shall be construed to mean losses are not recoverable until the net loss to the Company finally has been ascertained. B. "Loss adjustment expense" as used herein shall include: 1. Expenses sustained in connection with settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the pro rata share of the Company's outside employees according to the time occupied in adjusting such loss and the salaries and expenses of the Company's employees while diverted from their normal duties to the service of field adjustment, but shall not include any salaries of officers nor normal overhead expenses of the Company); 2. Legal expenses and costs incurred in connection with coverage questions and legal actions, including declaratory judgment actions, connected thereto; 3. All interest on judgments other than prejudgment interest when added to a judgment, and; 4. Expenses sustained to obtain recoveries, salvages and other reimbursements, or to secure the reversal or reduction of a verdict or judgment. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. There will be no recovery hereunder for an extra contractual obligation or loss in excess of policy limits that has been incurred due to fraud committed by a member of the board of directors or a corporate officer of the Company, acting individually, collectively, or in collusion with a member of the board of directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Company. The date on which any extra contractual obligation and/or loss in excess of policy limits is incurred by the Company will be deemed, in all circumstances, to be the date of the original loss occurrence. Nothing in this Article will be construed to create a separate or distinct loss occurrence apart from the original covered loss occurrence that gave rise to the extra contractual obligations and/or loss in excess of policy limits discussed in the preceding paragraphs. In no event will the total liability of the Reinsurer exceeds its applicable limit of liability as set forth in Article V. Recoveries from any form of insurance or inuring reinsurance, if any, which protects the Company against claims the subject matter of this paragraph shall inure to the benefit of this Contract. D. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs anywhere in the world but limited in the United States of America and Canada to the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph D) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." Except for those "loss occurrences" referred to in subparagraphs 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. E. "Net earned premium" as used herein is defined as the Company's gross earned premium for the classes of business subject to this Contract, less only the earned portion of premiums, if any, ceded by the Company for reinsurance which inures to the benefit of this Contract. F. "Losses incurred" as used herein shall mean losses and loss adjustment expense paid by the Reinsurer as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, all as respects losses occurring during the term of this Contract. For all loss occurrences during the term of this Contract which have two or fewer policies with loss subject to this Contract, up to two policies having the largest subject loss recoverables during the term of this Contract shall be deemed to have a maximum loss and loss adjustment expense recovery of $900,000 included in losses incurred hereunder. Article IX - Losses and Loss Adjustment Expense A. Whenever a loss sustained by the Company appears likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of the loss at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. C. In the event of loss hereunder, loss adjustment expenses (as defined in Article VIII) incurred by the Company in connection therewith shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total ultimate net loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage and other recoveries. The Reinsurer's liability for loss adjustment expenses shall be in addition to its limit of liability for ultimate net loss. D. In the event the ultimate net loss subject to recovery hereunder includes an amount of loss in excess of policy limits and/or extra contractual obligations, then the actual ultimate net loss recovered hereunder shall be allocated among indemnity loss, loss in excess of policy limits and/or extra contractual obligations as follows: 1. When the limits defined in paragraphs A, B and/or C of Article V with regard to all risks subject to recovery hereunder involved in any one loss occurrence have not been exceeded, the actual ultimate net loss recovered hereunder as respects any one risk, each loss shall be allocated to indemnity loss, loss in excess of policy limits and/or extra contractual obligations in the same proportion that each bears to the total ultimate net loss subject to recovery on that risk. 2. When the limits defined in paragraphs A, B and/or C of Article V with regard to all risks subject to recovery hereunder involved in any one loss occurrence have been exceeded, the actual ultimate net loss recovered hereunder as respects any one loss occurrence shall be allocated to indemnity loss, loss in excess of policy limits and/or extra contractual obligations in the same proportion that each bears, before application of the applicable per occurrence limit, to the total ultimate net loss subject to recovery on that loss occurrence. Article X - Special Provisions As respects loss or damage or costs or expenses arising from asbestos or seepage and/or pollution and/or contamination, other than contamination from smoke damage, the maximum sublimit shall be $25,000 per risk, each loss, or so deemed. Nevertheless, this does not preclude payment of the cost of removal of debris of property damaged by a loss otherwise covered hereunder. Article XI - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XII - Premium A. First Property Excess Per Risk Reinsurance 1. As provisional premium for the First Property Excess Per Risk Reinsurance provided hereunder, the Company shall pay the Reinsurer a deposit premium of $1,980,000 in four equal installments of $495,000 on January 1, April 1, July 1 and October 1 of 1997. The provisional premium paid by the Company shall be adjusted periodically in accordance with the provisions set forth herein. For purposes hereof, the "term of this Contract" shall be from the effective date of this Contract through the date of expiration if this Contract expires on a "cutoff" basis or the end of the runoff period if this Contract expires on a "runoff" basis. 2. The adjusted premium for the term of this Contract shall be equal to the Reinsurer's losses incurred for the term of this Contract, plus 2.75% of the Company's net earned premium for the term of this Contract, but the adjusted premium shall not be less than an amount equal to 2.75% of the Company's net earned premium for the term of this Contract, nor shall it exceed an amount equal to 5.50% of the Company's net earned premium for the term of this Contract. 3. In the event this Contract expires on a "runoff" basis, on January 1, 1998, the Company shall pay an additional deposit premium of 4.50% of the Company's subject net unearned premium as of December 31, 1997. The Company shall calculate and report the adjusted premium for the term of this Contract in accordance with subparagraph 2 within 60 days following 12 months after the expiration of this Contract and within 60 days after the end of each 12-month period thereafter until all losses occurring during the term of this Contract have been finally settled. If the adjusted premium exceeds the reinsurance premiums previously paid for the term of this Contract, the Company shall remit the difference to the Reinsurer with its report. If the adjusted premium is less than reinsurance premiums previously paid for the term of this Contract, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. B. Second Property Excess Per Risk Reinsurance 1. As premium for the Second Property Excess Per Risk Reinsurance provided hereunder during the period January 1, 1997 through December 31, 1997, the Company shall pay the Reinsurer 6.50% of its net earned premium for such period. 2. The Company shall pay the Reinsurer a deposit premium of $2,860,000 in four equal installments of $715,000 on January 1, April 1, July 1 and October 1 of 1997. 3. As promptly as possible after December 31, 1997, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with subparagraph 1, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. 4. In the event this Contract expires on a "runoff" basis, on January 1, 1998, the Company shall pay an additional deposit premium of 6.50% of the Company's subject net unearned premium as of December 31, 1997. The Company shall calculate and report the adjusted premium for the term of this Contract in accordance with subparagraph 1 within 60 days following 12 months after the expiration of this Contract and within 60 days after the end of each 12-month period thereafter until all losses occurring during the term of this Contract have been finally settled. If the adjusted premium exceeds the reinsurance premiums previously paid for the term of this Contract, the Company shall remit the difference to the Reinsurer with its report. If the adjusted premium is less than reinsurance premiums previously paid for the term of this Contract, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. C. Third Property Excess Per Risk Reinsurance 1. As premium for the Third Property Excess Per Risk Reinsurance provided hereunder during the period January 1, 1997 through December 31, 1997, the Company shall pay the Reinsurer 2.80% of its net earned premium for such period, subject to a minimum premium of $1,000,000 for the term of this Contract. 2. The Company shall pay the Reinsurer a deposit premium of $1,200,000 in four equal installments of $300,000 on January 1, April 1, July 1 and October 1 of 1997. 3. As promptly as possible after December 31, 1997, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with subparagraph 1, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. 4. In the event this Contract expires on a "runoff" basis, on January 1, 1998, the Company shall pay an additional deposit premium of 2.80% of the Company's subject net unearned premium as of December 31, 1997. The Company shall calculate and report the adjusted premium for the term of this Contract in accordance with subparagraph 1 within 60 days following 12 months after the expiration of this Contract and within 60 days after the end of each 12-month period thereafter until all losses occurring during the term of this Contract have been finally settled. If the adjusted premium exceeds the reinsurance premiums previously paid for the term of this Contract, the Company shall remit the difference to the Reinsurer with its report. If the adjusted premium is less than reinsurance premiums previously paid for the term of this Contract, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVI - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XVIII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XIX - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XXI - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada, the Reinsurer agrees to fund 115% of its share of the Company's ceded Canadian outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. A clean, irrevocable and unconditional letter of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a Canadian bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, for no more than 15/115ths of the total funding required; and/or 2. Cash advances for the remaining balance of the funding required; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. C. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1) or C(3), or in the case of C(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIII - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at Woodland Hills, California, unless otherwise mutually agreed. F. It is agreed that the jurisdiction of the Arbiters to make or render any decision or award shall be limited by the limit of liability expressly hereinbefore set forth, and that the Arbiters shall have no jurisdiction to make any decision or render any award exceeding such expressly stated limit of liability of the Reinsurer, nor do they have the jurisdiction to authorize any punitive, exemplary or consequential damage awards between the parties hereto. Article XXIV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXV - Agency Agreement Associated International Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVI - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Woodland Hills, California,this _______ day of _______________________________ 199___. __________________________________________________ ___ Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE Section A: Excluding: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. Section B: It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals, Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where The Total Insured Value over all interests of the risk in question is less than $300,000,000. (b) To interests traditionally underwritten as Inland Marine or stock and/or contents written on a blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than railroad schedules) and builder's risks on the classes of risks specified in this subsection (d) only. Where this clause attaches to Catastrophe Excesses, the following Section C is added: Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in: (1) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association AND (2) All "Fair Plan" business for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such "Coastal Pool" or "Fair Plan" to meet its liability. (ii) Any claim against such "Coastal Pool" or "Fair Plan" or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). EX-10.66 3 E. W. BLANCH CO. R:\97R\11341.DOC Reinsurance Services Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder Reinsurers Participations American Re-Insurance Company 33.0% Employers Reinsurance Corporation 8.0 First Excess and Reinsurance Corporation 3.5 Great Lakes American Reinsurance Company 6.5 Munich American Reinsurance Company 5.0 NAC Reinsurance Corporation 7.5 SOREMA North America Reinsurance Company 5.0 Transatlantic Reinsurance Company 7.5 Through Minet Burn & Roche Pty. Ltd. GIO Insurance Ltd. (trading as GIO Reinsurance) 20.0 Through Denis M. Clayton & Co. Ltd. Companies Per Signing Schedule(s) 4.0 Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 4 VI Other Reinsurance 5 VII Definitions 5 VIII Losses and Loss Adjustment Expense 8 IX Special Provisions 9 X Salvage and Subrogation 10 XI Commission (BRMA 10A) 10 XII Premium 10 XIII Profit Sharing 11 XIV Offset (BRMA 36C) 12 XV Access to Records (BRMA 1D) 12 XVI Liability of the Reinsurer 12 XVII Net Retained Lines (BRMA 32E) 13 XVIII Errors and Omissions (BRMA 14F) 13 XIX Taxes (BRMA 50C) 13 XX Federal Excise Tax (BRMA 17A) 13 XXI Unauthorized Reinsurers 14 XXII Insolvency 15 XXIII Arbitration 16 XXIV Service of Suit (BRMA 49C) 17 XXV Agency Agreement 17 XXVI Intermediary (BRMA 23A) 18 Appendix A Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Classes of Business Reinsured A. By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept reinsurance of the Company's liability under policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, underwritten in the General E&S Division and classified by the Company as Fire and Allied Lines, Commercial Multiple Peril (property perils only), Homeowners (property perils only) and Inland Marine, subject to the terms, conditions and limitations set forth herein and in Appendix A attached to and forming part of this Contract. B. It is understood that west coast earthquake business underwritten in the General E&S Division, other than earthquake on Course of Construction policies, is not subject to this Contract. Article II - Term A. This Contract shall become effective on January 1, 1997, with respect to losses occurring on or after that date, and shall remain in force until December 31, 1997, both days inclusive. B. Reinsurance hereunder on business in force on the effective date of expiration shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond the effective date of expiration as follows: 1. As regards Course of Construction policies, 36 months; 2. As regards all other policies, 12 months plus odd time not to exceed 18 months. C. Notwithstanding the provisions of paragraph B above, the Company shall have the option of reassuming the unexpired liability of the Reinsurer hereunder on business in force on the effective date of expiration, in which event the Reinsurer shall return to the Company the ceded unearned premium hereunder as of the effective date of termination (less ceding commission allowed thereon) and the Reinsurer shall have no liability hereunder with respect to losses occurring after the date of expiration. D. In the event renewal negotiations are not completed by December 31, 1997, at the Company's option, this Contract shall be extended through March 31, 1998. Article III - Territory This Contract shall apply to the territorial limits set forth in the Company's policies reinsured hereunder. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Loss or liability excluded under the terms of the "Pools, Associations & Syndicates Exclusion Clause" attached to and forming part of this Contract. 2. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)," the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)," and the "Nuclear Energy Risks Exclusion Clause - Reinsurance (Worldwide Excluding U.S.A. & Canada)," attached to and forming part of this Contract. 3. All reinsurance assumed, except intra-company reinsurance. However, this exclusion shall not apply to reinsurance of captive companies when pricing for business reinsured is quoted by a non-related entity. 4. Risks of war, whether or not declared, invasion, civil war, insurrection, rebellion, revolution or confiscation by duly constituted governmental or civil authority as excluded under a standard policy containing a standard War Exclusion Clause. 5. Hail insurance or reinsurance covering growing, drying or standing crops when written as such. 6. Flood when written as such. However, this exclusion shall not apply to flood when included in Difference in Conditions, Inland Marine and All Risk policies. 7. All armored car business, except when written in excess of $500,000. 8. Credit, financial or insolvency guarantees. 9. Livestock insurance or reinsurance when written as such. 10. Third Party Bodily Injury and Property Damage Liability, Medical Payments, Workers' Compensation, Fidelity and Surety, whether written separately or as part of a Multiple Peril policy. However, nothing herein contained shall be construed as excluding liability for damage to property in an insured's care, custody or control or for which the insured may be liable. 11. Ocean Marine when written as such. 12. Aircraft, meaning direct damage to hulls insured under Aircraft Hull policies, but not to exclude aircraft hulls insured under regular Fire, Inland Marine and All Risk policies (other than Aircraft Hull policies). In no event shall any liability attach to the Reinsurer hereunder in respect of aircraft while in flight or taxiing. 13. Offshore drilling rigs. 14. Onshore drilling rigs. 15. Grain elevators. 16. Petrochemical risks and refineries. 17. Underground mining. 18. Automobile risks insured under Automobile policies, with the exception of "floor plans." 19. Space and space related risks for the intention of ignition of the launch vehicle which includes taxiing within the launch site area and in flight. 20. Inland Marine policies covering jeweler's block and motor truck cargo. 21. Mortgage Impairment insurance. 22. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 23. Kidnap and Ransom. 24. Residual Value and Credit insurance. 25. Crop Insurance. 26. Burglary and Theft when written as such. 27. Strike Insurance. 28. Product impairment, recall and tampering. 29. Data processing companies and media exposures. 30. Equipment maintenance, warranty or similar coverages. However, this exclusion shall not be construed to apply to business classified as Course of Construction or Utilities where testing of equipment is involved. 31. Risks as detailed in the "Target Risks Exclusion Clause" attached to and forming part of this Contract. B. Notwithstanding the foregoing, any exclusion set forth in paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13, 19, 22 and 31) shall be waived automatically when, in the opinion of the Company, the exposure excluded therein is incidental to the principal exposure on the risk in question. Article V - Retention and Limit A. The Company shall retain and be liable for the first $500,000 of ultimate net loss as respects any one risk, each loss. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $9,500,000 as respects any one risk, each loss, nor shall it exceed $20,000,000 as respects all risks involved in any one loss occurrence. B. The Company shall be the sole judge of what constitutes "one risk," except that in no event shall a building and its contents be considered more than one risk. Article VI - Other Reinsurance A. The Company shall be permitted to carry excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. B. The Company shall purchase or be deemed to have purchased inuring excess reinsurance to limit its ultimate net loss under any one policy so as to comply with the maximum policy limits set forth in Article IX. Article VII - Definitions A. The term "ultimate net loss" shall mean the actual loss incurred by the Company under policies covered hereunder. Such loss shall include sums paid in settlement of claims and suits and in satisfaction of judgments, including prejudgment interest when added to a judgment. Such loss also shall include any losses in excess of policy limits and any extra contractual obligations incurred by the Company. It is understood that the term "incurred" as used in this paragraph shall mean those sums paid or imminent to be paid by the Company. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the net loss. Nothing herein shall be construed to mean losses are not recoverable until the net loss to the Company finally has been ascertained. B. "Loss adjustment expense" as used herein shall include: 1. Expenses sustained in connection with settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the pro rata share of the Company's outside employees according to the time occupied in adjusting such loss and the salaries and expenses of the Company's employees while diverted from their normal duties to the service of field adjustment, but shall not include any salaries of officers nor normal overhead expenses of the Company); 2. Legal expenses and costs incurred in connection with coverage questions and legal actions, including declaratory judgment actions, connected thereto; 3. All interest on judgments other than prejudgment interest when added to a judgment, and; 4. Expenses sustained to obtain recoveries, salvages and other reimbursements, or to secure the reversal or reduction of a verdict or judgment. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. There will be no recovery hereunder for an extra contractual obligation or loss in excess of policy limits that has been incurred due to fraud committed by a member of the board of directors or a corporate officer of the Company, acting individually, collectively, or in collusion with a member of the board of directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Company. The date on which any extra contractual obligation and/or loss in excess of policy limits is incurred by the Company will be deemed, in all circumstances, to be the date of the original loss occurrence. Nothing in this Article will be construed to create a separate or distinct loss occurrence apart from the original covered loss occurrence that gave rise to the extra contractual obligations and/or loss in excess of policy limits discussed in the preceding paragraphs. In no event will the total liability of the Reinsurer exceed its applicable limit of liability as set forth in Article V. Recoveries from any form of insurance or inuring reinsurance, if any, which protects the Company against claims the subject matter of this paragraph shall inure to the benefit of this Contract. D. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs anywhere in the world but limited in the United States of America and Canada to the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph D) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." Except for those "loss occurrences" referred to in subparagraphs 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. E. "Premiums earned" as used herein shall mean ceded net written premium for policies which are in force on the effective date of this Contract or have effective or renewal dates during the term of this Contract, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies which are in force on the effective date of this Contract or have effective or renewal dates during the term of this Contract shall be credited to this Contract, unless this Contract expires on a "cut-off" basis, in which event the unearned reinsurance premium (less previously allowed commission) as of the date of expiration shall be returned by the Reinsurer to the Company. F. "Losses incurred" as used herein shall mean ceded losses and loss adjustment expense paid as of the effective date of calculation, plus: 1. The ceded reserves for losses and loss adjustment expense outstanding as of the same date; 2. An amount representing Incurred But Not Reported Losses (hereinafter called "IBNR") equal to 20.0% of the premiums earned for Course of Construction business hereunder for the term of this Contract (said IBNR factor to be applied) until all premiums for Course of Construction business are earned, at which time no further amounts of IBNR will be added); it being understood and agreed that all losses and related loss adjustment expense under policies which are in force on the effective date of this Contract or have effective or renewal dates during the term of this Contract shall be charged to this Contract, regardless of the date said losses actually occur, unless this Contract expires on a "cutoff" basis, in which event the Reinsurer shall have no liability for losses occurring after the effective date of expiration. Article VIII - Losses and Loss Adjustment Expense A. Whenever a loss sustained by the Company appears likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of the loss at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. C. In the event of loss hereunder, loss adjustment expenses (as defined in Article VII) incurred by the Company in connection therewith shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total ultimate net loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage and other recoveries. The Reinsurer's liability for loss adjustment expenses shall be in addition to its limit of liability for ultimate net loss. Notwithstanding the foregoing, if the ultimate net loss to the Company (exclusive of loss adjustment expenses) is less than the Company's retention stated in Article V, then loss adjustment expenses shall be included in the ultimate net loss for purposes of recovery hereunder, but subject to the limit of liability stated in Article V. D. In the event the ultimate net loss subject to recovery hereunder includes an amount of loss in excess of policy limits and/or extra contractual obligations, then the actual ultimate net loss recovered hereunder shall be allocated among indemnity loss, loss in excess of policy limits and/or extra contractual obligations as follows: 1. When the limit defined in paragraph A of Article V with regard to all risks subject to recovery hereunder involved in any one loss occurrence has not been exceeded, the actual ultimate net loss recovered hereunder as respects any one risk, each loss shall be allocated to indemnity loss, loss in excess of policy limits and/or extra contractual obligations in the same proportion that each bears to the total ultimate net loss subject to recovery on that risk. 2. When the limit defined in paragraph A of Article V with regard to all risks subject to recovery hereunder involved in any one loss occurrence has been exceeded, the actual ultimate net loss recovered hereunder as respects any one loss occurrence shall be allocated to indemnity loss, loss in excess of policy limits and/or extra contractual obligations in the same proportion that each bears, before application of the per occurrence limit, to the total ultimate net loss subject to recovery on that loss occurrence. Article IX - Special Provisions A. The Company's maximum policy limits subject to this Contract shall be as follows: 1. $10,000,000 for all policies except as outlined in subparagraph 2 below, or so deemed; 2. As respects coverage for Transmission and Distribution lines, the maximum policy limit subject hereto shall not exceed $1,000,000 each risk, or so deemed. B. As respects loss or damage or costs or expenses arising from asbestos or seepage and/or pollution and/or contamination, other than contamination from smoke damage, the maximum sublimit shall be $25,000 per risk, each loss except business classified as Railroad in which case the sublimit shall be $250,000 each risk, each loss. Nevertheless, this does not preclude payment of the cost of removal of debris of property damaged by a loss otherwise covered hereunder. Article X - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XI - Commission (BRMA 10A) A. The Reinsurer shall allow the Company a 30.0% commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. 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 loss adjustment expense. Article XII - Premium A. With respect to business issued or renewed on or after the effective date of this Contract, as premium for the reinsurance provided hereunder, the Company shall pay to the Reinsurer a reinsurance premium based on Appendix A and calculated by applying the applicable Coded Excess Factor to the gross written premium of each policy ceded hereunder. With respect to business in force on the effective date of this Contract, as premium for the reinsurance provided hereunder, the Company shall pay to the Reinsurer a reinsurance premium based on Appendix A and calculated by applying the applicable Coded Excess Factor to the gross unearned premium, as of January 1, 1997, of each policy ceded hereunder. 1. The Coded Excess Factor will be determined based upon: a. The size of the gross policy limit (before all other reinsurance); b. The attachment point; c. The Company's participation in the primary insurance limit; and will be in compliance with the Coded Excess Factor Table included in Appendix A attached to and forming part of this Contract. It is understood and agreed that the Coded Excess Factor Table included in Appendix A cannot contemplate each specific combination of gross policy limit and attachment point for business subject to this Contract. In the event the combination of gross policy limit and attachment point on a specific risk does not coincide with the Coded Excess Factor Tables, the Company shall be permitted to utilize the original formula methodology used to construct the Coded Excess Factor Tables in determining the appropriate reinsurance premium for such risk. 2. The gross written premium and gross unearned premium will be the gross premium of the policy for the coverage provided before deduction of premium for all other reinsurance. B. At inception, the Company shall report its gross unearned premium applicable to subject business in force at inception. The premium due the Reinsurer, based upon the cessions outlined in paragraph A, shall be paid by the Company with its report. C. Within 60 days after the end of each calendar quarter, the Company shall report its gross written premium for the quarter. The premium due the Reinsurer, based upon the cessions outlined in paragraph A above, shall be paid by the Company with its report. D. As respects business classified as "National Accounts," the Company shall provide a quarterly report to the Reinsurer detailing the following for each insured: 1. Total insured values and California, Texas, Florida and Puerto Rico total insured values; 2. Overall gross rate for coverage provided; 3. Gross written premium for coverages provided; and 4. Premium split between earthquake and all other perils/all other lines covered. E. Annually, the Company shall furnish the Reinsurer with such information as the Reinsurer may require to complete its Annual Convention Statement. Article XIII - Profit Sharing A. The Reinsurer shall pay the Company profit sharing equal to 50.0% of the net profit, if any, accruing to the Reinsurer during the term of this Contract. B. The Reinsurer's net profit for the term of this Contract shall be calculated in accordance with the following formula, it being understood that a positive balance equals net profit and a negative balance equals net loss: 1. Premiums earned for the term of this Contract; less 2. Ceding commission allowed the Company on premiums earned for the term of this Contract; less 3. Expenses incurred by the Reinsurer at 30.0% of premiums earned for the term of this Contract; less 4. Losses incurred for the term of this Contract. C. The Company shall calculate and report the Reinsurer's net profit no sooner than 12 months following the expiration of this Contract, and no sooner than 12 months following the end of each 12-month period thereafter until all premiums subject hereto have earned and all losses subject hereto have been finally settled. Each such calculation shall be based on cumulative transactions hereunder from the beginning of the term of this Contract through the date of calculation. As respects the initial calculation referred to above, any profit sharing shown to be due the Company shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. As respects each recalculation, any additional profit sharing shown to be due the Company shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. Any return profit sharing shown to be due the Reinsurer shall be paid by the Company with its report. Article XIV - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XVI - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVII - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVIII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XIX - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XXI - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada, the Reinsurer agrees to fund 115% of its share of the Company's ceded Canadian unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. A clean, irrevocable and unconditional letter of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a Canadian bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, for no more than 15/115ths of the total funding required; and/or 2. Cash advances for the remaining balance of the funding required; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. C. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1), C(2) or C(4), or in the case of C(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIII - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at Woodland Hills, California, unless otherwise mutually agreed. F. It is agreed that the jurisdiction of the Arbiters to make or render any decision or award shall be limited by the limit of liability expressly hereinbefore set forth, and that the Arbiters shall have no jurisdiction to make any decision or render any award exceeding such expressly stated limit of liability of the Reinsurer, nor do they have the jurisdiction to authorize any punitive, exemplary or consequential damage awards between the parties hereto. Article XXIV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXV - Agency Agreement Associated International Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVI - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Woodland Hills, California, this ________ day of ______________________________ 199___. __________________________________________________ ___ Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company Appendix A Property Excess and Surplus Lines Excess Per Risk Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder General E&S Division Property Rating Grid
XOL 9,500 Reten 500,00 Q.S. % 0% Placeme 100.00% Limit ,000 tion 0 nt % Limit Exposed 50.00 80.00 90.00 93.33 95.00%63.33% 47.50% 38.00% 19.00% 9.50% % % % % Gross 1,000 2,500 5,000 7,500 10,00015,000, 20,000 25,000, 50,000,100,00 Limit ,000 ,000 ,000 ,000 ,000 000 ,000 000 000 0,000 Attachm ent Point 0 14.25 28.19 36.21 40.17 42.71% 27.17% 19.72% 15.40% 7.16% 3.34% % % % % 100,000 26.88 47.45 57.10 61.36 63.93% 40.08% 28.78% 22.27% 10.06% 4.58% % % % % 250,000 32.63 55.52 65.36 69.48 71.89% 45.26% 32.54% 25.17% 11.33% 5.12% % % % % 500,000 37.42 62.09 71.93 75.85 78.08% 49.55% 35.76% 27.73% 12.51% 5.63% % % % % 1,000,0 41.78 68.05 77.82 81.51 83.55% 53.60% 38.96% 30.35% 13.83% 6.24% 00 % % % % 2,500,0 45.92 73.86 83.59 87.03 88.86% 57.85% 42.50% 33.39% 15.56% 7.12% 00 % % % % 5,000,0 47.78 76.57 86.34 89.69 91.42% 60.03% 44.42% 35.10% 16.69% 7.78% 00 % % % % 7,500,0 48.47 77.62 87.42 90.75 92.44% 60.94% 45.24% 35.85% 17.22% 8.12% 00 % % % % 10,000, 48.83 78.17 88.01 91.33 93.01% 61.45% 45.71% 36.28% 17.55% 8.34% 000 % % % % 25,000, 49.52 79.24 89.16 92.47 94.13% 62.49% 46.68% 37.20% 18.28% 8.88% 000 % % % % 50,000, 49.76 79.61 89.57 92.89 94.55% 62.89% 47.07% 37.57% 18.60% 9.14% 000 % % % % 100,000 49.88 79.81 89.78 93.11 94.77% 63.11% 47.28% 37.78% 18.79% 9.30% ,000 % % % %
When AIIC parti cipat es in a layer of insur ance, the reins uranc e premi um facto r from the above table will be calcu lated as follo ws: Limit Expos ed (AIIC net) / Limit Expos ed (Gros s Layer ) * Facto r for Gross Layer at given attac hment . Examp Layer $10M le: : part of $100M xs $100M R/I 95.0 Facto / 9.5 r * 9.3 = 93.0% of AIIC' s actua l gross premi um to be ceded to reins urers . Examp le is for the combi ned 1st and 2nd layer s. *Gross Rate applied to WP net of Fac. but before any Q/S. POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE Section A: Excluding: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. Section B: It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals, Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where The Total Insured Value over all interests of the risk in question is less than $300,000,000. (b) To interests traditionally underwritten as Inland Marine or stock and/or contents written on a blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than railroad schedules) and builder's risks on the classes of risks specified in this subsection (d) only. Where this clause attaches to Catastrophe Excesses, the following Section C is added: Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in: (1) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association AND (2) All "Fair Plan" business for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such "Coastal Pool" or "Fair Plan" to meet its liability. (ii) Any claim against such "Coastal Pool" or "Fair Plan" or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). EX-10.67 4 R:\97R\11342.DOC Franchise Excess of Loss Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Franchise Excess of Loss Reinsurance Contract Effective: January 1, 19967 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder Reinsurers Participations Underwriters Reinsurance Company 10.0% Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s) 90.0 Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Classes of Business Reinsured 1 II Term 1 III Territory 2 IV Exclusions 2 V Retention and Limit 2 VI Definitions 2 VII Loss Notices and Settlements 4 VIII Special Provisions 4 IX Salvage and Subrogation 4 X Premium 4 XI Offset (BRMA 36C) 5 XII Access to Records (BRMA 1D) 5 XIII Net Retained Lines (BRMA 32B) 5 XIV Errors and Omissions (BRMA 14F) 5 XV Currency (BRMA 12A) 5 XVI Taxes (BRMA 50C) 6 XVII Federal Excise Tax (BRMA 17A) 6 XVIII Unauthorized Reinsurers 6 XIX Insolvency 7 XX Arbitration 8 XXI Service of Suit (BRMA 49C) 9 XXII Agency Agreement 9 XXIII Intermediary (BRMA 23A) 9 Franchise Excess of Loss Reinsurance Contract Effective: January 1, 19967 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Property business underwritten by Associated International Insurance Company, Woodland Hills, California, subject to the terms, conditions and limitations hereinafter set forth. However, this Contract shall only apply to losses sustained by the Company, either directly or indirectly, as a result of seismic activity and/or volcanic eruption. Article II - Term A. This Contract shall become effective on January 1, 19967, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 19967, both days inclusive. B. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article III - Territory This Contract shall apply to losses occurring anywhere within the State of California. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Loss or liability excluded under the provisions of the "Pools, Associations and Syndicates Exclusions Clause" attached to and forming part of this Contract. 2. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" and the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)" attached to and forming part of this Contract. 3. All reinsurance assumed, with the exception of intra- company reinsurance and specific insureds whose reinsurance is written through their own captive company and quoted by a non-related entity. 4. Risks of war, whether or not declared, invasion, civil war, insurrection, rebellion, revolution or confiscation by duly constituted government of civil authority as excluded under a standard policy containing a standard War Exclusion Clause. 5. Hail insurance or reinsurance covering growing, drying or standing crops when written as such. 6. Flood when written as such; however, this exclusion shall not apply to flood when included in Difference in Conditions, Inland Marine and All Risk policies. 7. All armored car business except when written in excess of $500,000. 8. Credit, financial or insolvency guarantees. 9. Livestock insurance or reinsurance when written as such. 10. Third Party Bodily Injury and Property Damage Liability, Medical Payments, Workers' Compensation, Fidelity and Surety, whether written separately or as part of a Multiple Peril policy. However, nothing herein contained shall be construed as excluding liability for damage to property in an insured's care, custody or control or for which the insured may be liable. 11. Ocean Marine when written as such. 12. Aircraft, meaning direct damage to hulls insured under Aircraft Hull policies, but not to exclude aircraft hulls insured under regular Fire, Inland Marine and All Risk policies (other than Aircraft Hull policies). In no event shall any liability attach to the Reinsurer hereunder in respect of aircraft while in flight or taxiing. 13. Offshore drilling rigs. 14. Automobile risks insured under Automobile policies. 15. Boiler and Machinery when written as such. 16. Space and space related risks for the intention of ignition of the launch vehicle which includes taxiing within the launch site area and in flight. 17. Grain elevators. 18. Mechanical breakdowns when written as such. 19. Petrochemical risks and refineries. 20. Underground mining. 21. Inland Marine policies covering jewelers block and motor truck cargo. 22. Mortgage Impairment insurance. 23. 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 guarantee fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part of all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 24. Kidnap or Ransom. 25. Residual Value and Credit Insurance. 26. Crop insurance. 27. Burglary and Theft when written as such. 28. Strike insurance. 29. Product impairment, recall and tampering. 30. Data processing companies whose sole purpose is to provide data processing services to other companies which include media exposures defined as material on which data is to be or is already stored (i.e., disk, magnetic and paper tapes, drums, cores and programs). 31. Transmission and distribution lines. 32. Mobile home parks. 33. Onshore drilling rigs. 34. Course of Construction risks covering dams, bridges, tunnels, subways, construction work over water, or any project involving water, unless the aforementioned projects are incidental to the insured's total construction project. 35. Rolling stock owned or operated by a railroad, but this exclusion shall not apply to interests while contained in buildings owned or leased by an insured. 36. Risks excluded under the provisions of the "Total Insured Value Exclusion Clause" attached to and forming part of this Contract. 37. Extra contractual obligations (i.e., any punitive, exemplary, compensary or consequential damage paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under policy subject to this Contract). 38. Loss in excess of policy limits (i.e., any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such action). B. Notwithstanding the foregoing, any exclusions set forth in paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13, 16, 23, 37 and 38) shall be waived automatically when, in the opinion of the Company, the exposure excluded therein is incidental to the principal exposure on the risk in question. C. As regards business underwritten in the General E&S Division of the Company: 1. Exclusions 15, 18, 34 and 35 of paragraph A shall be waived. 2. Exclusion 36 (Total Insured Value) and Section B of Exclusion 1 (Pools, Associations) of paragraph A shall be waived except for risks with total insured values greater than $300,000,000 in the State of California. This exception contained in this paragraph only applies to risks in the State of California. 3. Exclusion 14 (Automobile) of paragraph A shall be waived as regards Automobile Floor Plans. D. The exclusions in this ArticleThis Contract shall follow in all respects the exclusions under the Company's External Third through Seventh Excess Catastrophe Reinsurance Contract, effective January 1, 19967, including any interpretations given the exclusions by the "Reinsurer" under that contract. Article V - Retention and Limit A. The Company shall retain and be liable for the first $2,500,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $10,000,000 as respects any one loss occurrence, nor shall it exceed $10,000,000 in all during the term of this Contract. B. There shall be no recovery under this Contract until the Company's gross loss as respects business subject to its 19967 property catastrophe program from any one loss occurrence exceeds $60,000,000. Article VI - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including premium adjustments remitted by the Company under the Company's Property Excess Per Risk Reinsurance Contract, effective January 1, 19967, any reinstatement premiums paid by the Company under the Company's Excess Catastrophe Reinsurance Contract, effective January 1, 1994, and External Third Through Seventh Excess Catastrophe Reinsurance Contract, effective January 1, 19967, regardless of whether the Company has an actual cash payment associated with the same loss occurrence, and losses retained by the Company under its 5.0% co-participation under the Excess Catastrophe Reinsurance Contract, effective January 1, 1994) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs anywhere in the world but limited in the United States of America and Canada to the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." For all "loss occurrences," the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event except for those "loss occurrences" referred to in subparagraphs 1 and 2 above where only one such period of 72 consecutive hours shall apply with respect to one event. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. Article VII - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article VIII - WarrantieSpecial Provisions A. As respects loss or damage or costs or expenses arising from asbestos or seepage and/or pollution and/or contamination, other than contamination from smoke damage, the maximum sublimit shall be $25,000 per risk, each loss except business classified as Railroad in which case the sublimit shall be $250,000 each risk, each loss. Nevertheless, this does not preclude payment of the cost of removal of debris of property damaged by a loss otherwise covered hereunder. B. The Company shall be the sole judge of what constitutes "one risk," except that in no event shall a building and its contents be considered more than one risk. Article IIX - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article X - Premium A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer $1,300,000 in four equal installments of $325,000 on January 1, April 1, July 1 and October 1 of 1997. B. In the event a loss becomes subject to this Contract, the Company shall pay the Reinsurer an additional premium of $500,000. Article XI - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XII - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XIII - Net Retained Lines (BRMA 32B) A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer''s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XIV - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XV - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$""Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XVI - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XVII - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd''s London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XVIII - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company''s ceded outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause,""evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non- -renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer''s share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer''s share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer''s share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non--renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer''s share of the Company''s ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XIX - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XX - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at Woodland Hills, California, unless otherwise mutually agreed. Article XXI - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer''s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXII - Agency Agreement Associated International Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXIII - Intermediary (BRMA 23A) E. W. Blanch W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company hereto by its duly authorized representative has executed this Contract as of the date undermentioned at: Woodland Hills, California,this _______ day of _______________________________ 199___. __________________________________________________ ___ Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company EX-10.68 5 R:\97RIL\11340.DOC External Third through Seventh Catastrophe Excess Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 External Third through Seventh Catastrophe Excess Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder Third Excess Catastrophe Reinsurance (With "No Claims Bonus") Reinsurers Participations Gerling Global Reinsurance Corporation, U. S. Branch 1.6600000% PMA Reinsurance Corporation 1.3300000 Renaissance Reinsurance Ltd. 22.4000000 Republic Western Insurance Company 3.5000000 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 4.0000000 Sphere Drake Management (for Sphere Drake Insurance Company, Ltd.) 5.0000000 Through Swire Blanch - Australia Reinsurance Australia Corporation Limited 11.5000000 Total 49.3900000% part of 100% share in the interests and liabilities of the "Reinsurer" Third Excess Catastrophe Reinsurance (Without "No Claims Bonus") Reinsurers Participations First Excess and Reinsurance Corporation 5.6600000% Insurance Corporation of Hannover, An Illinois Corporation 2.5000000 LaSalle Re Limited 10.0000000 Partner Re 7.6500000 Sydney Reinsurance Corporation 3.0000000 United Fire & Casualty Company .3000000 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 13.0000000 Through Swire Blanch Europe Societe Parisienne de Souscription (for La Reunion Francaise) 3.5000000 Total 45.6100000% part of 100% share in the interests and liabilities of the "Reinsurer" Fourth Excess Catastrophe Reinsurance (With "No Claims Bonus") Reinsurers Participations Folksamerica Reinsurance Company 1.5000000% Nationwide Mutual Insurance Company 2.1700000 Renaissance Reinsurance Ltd. 25.0000000 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 4.0000000 Sphere Drake Management (for Sphere Drake Insurance Company, Ltd.) 2.5000000 Total 35.1700000% part of 100% share in the interests and liabilities of the "Reinsurer" Fourth Excess Catastrophe Reinsurance (Without "No Claims Bonus") Reinsurers Participations LaSalle Re Limited 5.0000000% Liberty Mutual Insurance Company .7000000 Partner Re 13.0000000 United Fire & Casualty Company .3000000 Through Park International Limited Mid Ocean Reinsurance Company Ltd. 4.0000000 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 1.7500000 Through Swire Blanch Europe Cie Transcontinentale de Reassurance 2.0000000 Europa Re 1.5000000 EXKO Excess Ruckversicherungs-Kontor GmbH (for Capacity XL Cover) 2.0000000 Societe Parisienne de Souscription (for La Reunion Francaise) 3.5000000 Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s 26.0800000 Total 59.8300000% part of 100% share in the interests and liabilities of the "Reinsurer" Fifth Excess Catastrophe Reinsurance Reinsurers Participations Allmerica Re, A Division of The Hanover Insurance Company 1.0000000% AXA Reinsurance Company 1.2000000 Cat Limited 27.5000000 Everest Reinsurance Company 9.5000000 First Excess and Reinsurance Corporation 2.5000000 Liberty Mutual Insurance Company .3500000 Nationwide Mutual Insurance Company 1.0000000 Partner Re 7.5000000 Renaissance Reinsurance Ltd. 12.5000000 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 1.5000000 Sphere Drake Management (for Sphere Drake Insurance Company, Ltd.) 3.0000000 Through Park International Limited Mid Ocean Reinsurance Company Ltd. 4.0000000 Through Swire Blanch Europe Cie Transcontinentale de Reassurance 2.0000000 Munchener Ruckversicherungs-Gesellschaft 2.0000000 Singapore Reinsurance Corporation Limited .2500000 Societe Parisienne de Souscription (for La Reunion Francaise) 2.0000000 Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s 17.2000000 Total 95.0000000% part of 100% share in the interests and liabilities of the "Reinsurer" Sixth Excess Catastrophe Reinsurance Reinsurers Participations Cat Limited 26.5517241% First Excess and Reinsurance Corporation .3413793 Folksamerica Reinsurance Company .6897240 Gerling Global Reinsurance Corporation, U. S. Branch .3224138 Great Lakes American Reinsurance Company .9482759 Liberty Mutual Insurance Company .1422414 Nationwide Mutual Insurance Company .7586207 Partner Re 14.2241379 Patriot Re Corporation (for Certain Underwriting Members of Lloyd's) .5215517 Renaissance Reinsurance Ltd. 9.4827586 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 1.4224138 Sydney Reinsurance Corporation .9482759 United Fire & Casualty Company .1896552 Through Park International Limited Mid Ocean Reinsurance Company Ltd. 1.2931034 Through Swire Blanch - Australia Reinsurance Australia Corporation Limited 2.3706897 Through Swire Blanch Europe Cie Transcontinentale de Reassurance .9482759 The Copenhagen Reinsurance Company Ltd. 3.4051724 Europa Re .9482759 Munchener Ruckversicherungs-Gesellschaft 2.8448276 Sirius International Insurance Corporation .8620690 Societe Parisienne de Souscription (for La Reunion Francaise) 1.4224138 Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s 24.3620000 Total 95.0000000% part of 100% share in the interests and liabilities of the "Reinsurer" Seventh Excess Catastrophe Reinsurance Reinsurers Participations Liberty Mutual Insurance Company 1.6000000% Nationwide Mutual Insurance Company 2.5000000 Partner Re 15.0000000 Renaissance Reinsurance Ltd. 8.3500000 United Fire & Casualty Company .3000000 Through Park International Limited Mid Ocean Reinsurance Company Ltd. 10.0000000 Through Swire Blanch - Australia Reinsurance Australia Corporation Limited 2.0000000 Through Swire Blanch Europe Cie Transcontinentale de Reassurance 2.0000000 The Copenhagen Reinsurance Company Ltd. 4.0000000 Munchener Ruckversicherungs-Gesellschaft 5.0000000 Singapore Reinsurance Corporation Limited .2500000 Through Denis M. Clayton & Co. Ltd. Lloyd's Underwriters and Companies Per Signing Schedule(s 44.0000000 Total 95.0000000% part of 100% share in the interests and liabilities of the "Reinsurer" E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Classes of Business Reinsured 1 II Term 1 III Territory 2 IV Exclusions 2 V Retention and Limit 5 VI Other Reinsurance 5 VII Definitions 6 VIII Reinstatement 7 IX Loss Notices and Settlements 8 X Special Provisions 9 XI Salvage and Subrogation 9 XII Premium 9 XIII Offset (BRMA 36C) 10 XIV Access to Records (BRMA 1D) 10 XV Net Retained Lines (BRMA 32E) 10 XVI Errors and Omissions (BRMA 14F) 11 XVII Currency (BRMA 12A) 11 XVIII Taxes (BRMA 50C) 11 XIX Federal Excise Tax (BRMA 17A) 11 XX Unauthorized Reinsurers 12 XXI Insolvency 13 XXII Arbitration 14 XXIII Service of Suit (BRMA 49C) 15 XXIV Agency Agreement 15 XXV Intermediary (BRMA 23A) 15 Schedule A External Third through Seventh Catastrophe Excess Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Property business underwritten by Associated International Insurance Company, Woodland Hills, California, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract. Article II - Term A. This Contract shall become effective on January 1, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1997, both days inclusive. B. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article III - Territory As respects the External Third and Fourth Excess Catastrophe Reinsurance layers hereunder and subject to all other terms and conditions of this Contract, this Contract shall apply to the territorial limits of the Company's policies reinsured hereunder. As respects the External Fifth, Sixth and Seventh Excess Catastrophe Reinsurance layers hereunder and subject to all other terms and conditions of this Contract, this Contract shall apply to losses occurring anywhere within the State of California. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Loss or liability excluded under the provisions of the "Pools, Associations and Syndicates Exclusion Clause" attached to and forming part of this Contract. 2. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" and the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)" attached to and forming part of this Contract. 3. All reinsurance assumed, with the exception of intra- company reinsurance and specific insureds whose reinsurance is written through their own captive company and quoted by a non-related entity. 4. Risks of war, whether or not declared, invasion, civil war, insurrection, rebellion, revolution or confiscation by duly constituted governmental or civil authority as excluded under a standard policy containing a standard War Exclusion Clause. 5. Hail insurance or reinsurance covering growing, drying or standing crops when written as such. 6. Flood when written as such; however, this exclusion shall not apply to flood when included in Difference in Conditions, Inland Marine and All Risk policies. 7. All armored car business except when written in excess of $500,000. 8. Credit, financial or insolvency guarantees. 9. Livestock insurance or reinsurance when written as such. 10. Third Party Bodily Injury and Property Damage Liability, Medical Payments, Workers' Compensation, Fidelity and Surety, whether written separately or as part of a Multiple Peril policy. However, nothing herein contained shall be construed as excluding liability for damage to property in an insured's care, custody or control or for which the insured may be liable. 11. Ocean Marine when written as such. 12. Aircraft, meaning direct damage to hulls insured under Aircraft Hull policies, but not to exclude aircraft hulls insured under regular Fire, Inland Marine and All Risk policies (other than Aircraft Hull policies). In no event shall any liability attach to the Reinsurer hereunder in respect of aircraft while in flight or taxiing. 13. Offshore drilling rigs. 14. Automobile risks insured under Automobile policies. 15. Boiler and Machinery when written as such. 16. Space and space related risks for the intention of ignition of the launch vehicle which includes taxiing within the launch site area and in flight. 17. Grain elevators. 18. Mechanical breakdowns when written as such. 19. Petrochemical risks and refineries. 20. Underground mining. 21. Inland Marine policies covering jewelers block and motor truck cargo. 22. Mortgage Impairment insurance. 23. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 24 Kidnap and Ransom. 25. Residual Value and Credit insurance. 26. Crop insurance. 27. Burglary and Theft when written as such. 28. Strike insurance. 29. Product impairment, recall and tampering. 30. Data processing companies whose sole purpose is to provide data processing services to other companies which include media exposures defined as material on which data is to be or is already stored (i.e., disks, magnetic and paper tapes, drums, cores and programs). 31. Transmission and distribution lines. 32. Mobile home parks. 33. Onshore drilling rigs. 34. Course of Construction risks covering dams, bridges, tunnels, subways, construction work over water, or any project involving water, unless the aforementioned projects are incidental to the insured's total construction project. 35. Rolling stock owned or operated by a railroad, but this exclusion shall not apply to interests while contained in buildings owned or leased by an insured. 36. Risks excluded under the provisions of the "Total Insured Value Exclusion Clause" attached to and forming part of this Contract. 37. Extra contractual obligations (i.e., any punitive, exemplary, compensatory or consequential damages paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract). 38. Loss in excess of policy limits (i.e., any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action). B. Notwithstanding the foregoing, any exclusion set forth in paragraph A (except subparagraphs 2, 3, 4, 6, 8, 11, 12, 13, 16, 23, 37 and 38) shall be waived automatically when, in the opinion of the Company, the exposure excluded therein is incidental to the principal exposure on the risk in question. C. As regards business underwritten in the General E&S Division of the Company: 1. Exclusions 15, 18, 34 and 35 of paragraph A shall be waived. 2. Exclusion 36 (Total Insured Value) and Section B of Exclusion 1 (Pools, Associations) of paragraph A shall be waived except for risks with total insured values greater than $300,000,000 in the State of California. This exception contained in this paragraph only applies to risks in the State of California. 3. Exclusion 14 (Automobile) of paragraph A shall be waived as regards Automobile Floor Plans. Article V - Retention and Limit A. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain and be liable for the first amount of ultimate net loss, shown as "Company's Retention" for that excess layer in Schedule A attached hereto, arising out of each loss occurrence. The Reinsurer shall then be liable (subject to the provisions of paragraph B below), as respects each excess layer, for the amount by which such ultimate net loss exceeds the Company's applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects any one loss occurrence. B. No claim shall be made under any excess layer of reinsurance coverage provided by this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. "Risk" to be defined as all the values at one location unless otherwise stated in the Company's risk file but not less than all the values within four walls. For purposes of this Article, the Company shall be the sole judge of what constitutes one risk, except that in no event shall a building and its contents be considered more than one risk. Article VI - Other Reinsurance A. The Company shall be permitted to carry underlying excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. B. As regards DIC business, the Company shall purchase or be deemed to have purchased inuring excess per risk and/or pro rata facultative reinsurance to limit its ultimate net loss on any one risk, each loss (exclusive of extra contractual obligations) to $100,000 subject to the following occurrence limits by layer of inuring excess per risk reinsurance: Layer Limit Retention Occurrence Limit 1 2,400,000 100,000 7,500,000Per Occurrence 2 2,500,000 2,500,000 10,000,000 Per Occurrence 3 5,000,000 5,000,000 10,000,000 Per Occurrence C. As regards business underwritten in the General E&S division, the Company shall be permitted to purchase inuring coverage as follows: 1. West Coast earthquake incurred loss shall be ceded to the DIC Excess Per Risk noted in paragraph B above. 2. As regards all other incurred loss, $9,500,000 excess $500,000 per risk; subject to a per occurrence limit of $20,000,000. 3. The only exception to subparagraph 1 above is Course of Construction (COC) policies written in the General E&S division. The California earthquake portions of those policies are ceded 100% to the E&S treaty. Article VII - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including litigation expenses, interest on judgments and all other loss adjustment expenses, including a pro rata share of the salaries and expenses of the Company's field employees according to the time occupied adjusting the loss and expenses of the Company's officials incurred in connection with the loss, but excluding office expenses and salaries of the Company's officials and any normal overhead charges) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs anywhere in the world but limited in the United States of America and Canada to the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." For all "loss occurrences," the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event except for those "loss occurrences" referred to in subparagraphs 1 and 2 above where only one such period of 72 consecutive hours shall apply with respect to one event. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. C. "Net earned premium" as used herein is defined as the Company's gross earned premium on the classes of business subject to this Contract, less only the earned portion of premiums, if any, ceded by the Company for reinsurance which inures to the benefit of this Contract. Article VIII - Reinstatement A. In the event all or any portion of the reinsurance under any excess layer of reinsurance coverage provided by this Contract is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times 2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any loss under any excess layer hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that excess layer. If the earned reinsurance premium for any excess layer for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for that excess layer shall be based on the annual deposit premium for that excess layer and shall be readjusted when the earned reinsurance premium for that excess layer for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed either of the following: 1. The percentage, shown as "Coverage Percent" for that excess layer in Schedule A attached hereto, of the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or 2. The percentage, shown as "Coverage Percent" for that excess layer in Schedule A attached hereto, of the amount, shown as "Reinsurer's Annual Limit" for that excess layer in Schedule A attached hereto, in all during the term of this Contract. Article IX - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article X - Special Provisions As respects loss or damage or costs or expenses arising from asbestos or seepage and/or pollution and/or contamination, other than contamination from smoke damage, the maximum sublimit shall be $25,000 per risk, each loss, or so deemed. Nevertheless, this does not preclude payment of the cost of removal of debris of property damaged by a loss otherwise covered hereunder. Article XI - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XII - Premium A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following: 1. The amount, shown as "Annual Minimum Premium" for that excess layer in Schedule A attached hereto; or 2. An amount equal to the sum of the percentages shown as "DIC" and "AOP" percentages for that excess layer in Schedule A attached hereto, of the Company's net earned premium for the DIC business and AOP business respectively for the term of this Contract. B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of an amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, in two equal installments of an amount, shown as "Semiannual Deposit Premium" for that excess layer in Schedule A attached hereto, on January 1 and July 1 of 1997. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly. D. As respects the Third and/or Fourth Excess Catastrophe reinsurance layers hereunder, in the event that no claims arise under this Contract, certain reinsurers participating hereunder on the Third and/or Fourth Excess Catastrophe reinsurance layers shall pay the Company a no claims bonus equal to 20.0% of the adjusted premium under this Contract subject to the following: 1. The Company shall only be entitled to the no claims bonus if this Contract and the prior and subsequent renewals are loss free for a continuous period of three years. 2. When such no claims bonus is calculated, it shall be calculated on the premium for this Contract and for the prior and subsequent renewals. Payment of the no claims bonus by the reinsurers to the Company shall constitute a commutation of this Contract and such payment once effected shall constitute a full and final release of the reinsurers from all liability hereunder. 3. Should the Reinsurer decline to offer a renewal of this Contract at similar terms as expiring in relation to the exposure presented, the no claims bonus shall be calculated for the years actually reinsured subject to the above provisions. It is understood that these no claims bonus provisions shall only apply to certain reinsurers hereunder participating on the Third and/or Fourth Excess Catastrophe reinsurance layers. The figures listed under "With `No Claims Bonus'" in Schedule A attached to and forming part of this Contract shall apply to such reinsurers. The figures listed under "Without `No Claims Bonus'" in Schedule A attached to and forming part of this Contract shall apply to the remaining reinsurers on those layers. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVI - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XVII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XVIII - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XIX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XX - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada, the Reinsurer agrees to fund 115% of its share of the Company's ceded Canadian outstanding loss and loss adjustment expense reserves by: 1. A clean, irrevocable and unconditional letter of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a Canadian bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, for no more than 15/115ths of the total funding required; and/or 2. Cash advances for the remaining balance of the funding required; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. C. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1) or C(3), or in the case of C(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXI - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXII - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at Woodland Hills, California, unless otherwise mutually agreed. Article XXIII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXIV - Agency Agreement Associated International Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXV - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Woodland Hills, California,this _______ day of _______________________________ 199___. __________________________________________________ ___ Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company Schedule A External Third through Seventh Catastrophe Excess Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Hoboken, New Jersey Timberline Insurance Company Eugene, Oregon and any additional company established or acquired by Associated International Insurance Company, Calvert Insurance Company, Timberline Insurance Company or Gryphon Holdings, Inc., New York, New York, to be included hereunder Third Excess Fourth Excess Fifth Sixth Seventh Excess Excess Excess
With "No Without With "No Without Claims "No Claims Claims "No Claims Bonus" Bonus" Bonus" Bonus" Company's $17,500,0 $17,500,00 $25,000,00 $25,000,00 $40,000,00 $60,000,00 $118,000,0 Retention 00 0 0 0 0 0 00 Reinsurer's Per $7,500,00 $7,500,000 $15,000,00 $15,000,00 $20,000,00 $58,000,00 $20,000,00 Occurrence Limit 0 0 0 0 0 0 Reinsurer's $15,000,0 $15,000,00 $30,000,00 $30,000,00 $40,000,00 $116,000,0 $40,000,00 Annual Limit 00 0 0 0 0 00 0 Annual Minimum $1,230,00 $1,080,000 $1,830,000 $1,740,000 $1,760,000 $3,480,000 $880,000 Premium 0 Third Excess Fourth Excess Fifth Sixth Seventh Excess Excess Excess With "No Without With "No Without Claims "No Claims Claims "No Claims Bonus" Bonus" Bonus" Bonus" Rate-DIC/CA EQ 4.110% 3.609% 6.115% 5.813% 5.881% 11.628% 2.941% Business "DIC" Rate-General E&S .878% .878% 1.313% 1.313% 1.277% 2.492% .629% Business "AOP" Annual Deposit $1,537,50 $1,350,000 $2,287,500 $2,200,000 $2,200,000 $4,350,000 $1,100,000 Premium 0 Semiannual $786,750 $675,000 $1,143,750 $1,100,000 $1,100,000 $2,175,000 $550,000 Deposit Premium
The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in the Interests and Liabilities Agreement attached hereto. POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE Section A: Excluding: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. Section B: It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals, Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where The Total Insured Value over all interests of the risk in question is less than $300,000,000. (b) To interests traditionally underwritten as Inland Marine or stock and/or contents written on a blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than railroad schedules) and builder's risks on the classes of risks specified in this subsection (d) only. Where this clause attaches to Catastrophe Excesses, the following Section C is added: Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in: (1) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association AND (2) All "Fair Plan" business for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such "Coastal Pool" or "Fair Plan" to meet its liability. (ii) Any claim against such "Coastal Pool" or "Fair Plan" or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). TOTAL INSURED VALUE EXCLUSION CLAUSE It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments and Public Utilities (except Railroad Schedules), and Builders Risks on the above classes, where at the time of cession, the Total Insured Value over all interests exceeds $300,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Contract, if subsequent to cession being made, the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached; on condition that the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question. It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interests traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $300,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location. Notwithstanding anything contained herein to the contrary, it is the mutual intention of the parties in respect of Bridges and Tunnels to exclude such risks where the Total Insured Value over all interests exceeds $300,000,000. It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk. EX-10.69 6 R:\97RIL\11873.DOC Aggregate Excess of Loss Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Aggregate Excess of Loss Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York Reinsurer Participation Scandinavian Reinsurance Company, Ltd. 100.0% Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Business Reinsured 1 II Term 1 III Territory (BRMA 51A) 2 IV Exclusions 2 V Retention and Limit 3 VI Definitions 3 VII Other Reinsurance 5 VIII Loss Notices and Settlements 5 IX Salvage and Subrogation 6 X Reinsurance Premium 6 XI Late Payments 7 XII Experience Account 8 XIII Commutation 9 XIV Offset (BRMA 36C) 10 XV Access to Records (BRMA 1D) 10 XVI Net Retained Lines (BRMA 32B) 10 XVII Errors and Omissions (BRMA 14F) 11 XVIII Currency (BRMA 12A) 11 XIX Taxes (BRMA 50C) 11 XX Insolvency 11 XXI Arbitration 12 XXII Service of Suit (BRMA 49C) 13 XXIII Agency Agreement 14 XXIV Intermediary (BRMA 23A) 14 Aggregate Excess of Loss Reinsurance Contract Effective: January 1, 1997 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Business Reinsured A. By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company for the net excess liability which may accrue to the Company during each accident year (as hereinafter defined) under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof, issued or renewed on or after that date, for all business written by the Company (direct and assumed), subject to the terms, conditions and limitations hereinafter set forth. B. Losses arising under policies covered hereunder shall be allocated to an accident year according to the instructions for compiling the Company's Annual Statement as filed with the Company's state of domicile. Article II - Term A. This Contract shall become effective on January 1, 1997, with respect to losses occurring during accident years commencing on or after that date, and shall remain in force until December 31, 1999, both days inclusive. Notwithstanding the foregoing, in the event any state auditor determines this Contract is not in compliance with any rule or regulation pertaining to this reinsurance, this Contract may be rescinded by the Company with not less than 30 days prior notice to the Reinsurer by certified mail. B. Either party may terminate this Contract at the end of any accident year by giving the other party not less than 90 days prior notice by certified mail. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company (unless an assumed program has been specifically declared and accepted by the reinsurers of the Company's underlying per event reinsurance program), except inter-company reinsurance between any member companies of Gryphon Insurance Group, Inc. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not an equal or controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage -Reinsurance (U.S.A.)," the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)," the "Nuclear Incident Exclusion Clause - Liability - Reinsurance (U.S.A.)" and the "Nuclear Incident Exclusion Clause - Liability - Reinsurance (Canada)" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association, which is not underwritten or controlled by the Company. However, this exclusion shall not apply to Assigned Risk Plans or similar plans. 6. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. Article V - Retention and Limit A. No claim shall be made under this Contract for any accident year unless and until the Company shall have first incurred an amount of ultimate net loss on business covered during the accident year in excess of 55% of its net earned premium for the accident year. The Reinsurer shall then be liable for the amount by which the Company's ultimate net loss exceeds its retention, but the liability of the Reinsurer shall not exceed an amount of ultimate net loss equal to 300% of the reinsurance premium hereunder for any one accident year, nor shall it exceed an amount of ultimate net loss equal to 200% of the reinsurance premium hereunder for the term of this Contract as respects all loss subject to this Contract. B. Notwithstanding paragraph A above, in the event this Contract is commuted at the Company's option in accordance with Article XIII, the aggregate limit provided hereunder shall be reduced as follows: 1. If this Contract is terminated on December 31, 1997, then the aggregate limit shall be reduced to 150% of the reinsurance premium hereunder for the 12-month term of this Contract; 2. If this Contract is terminated on December 31, 1998, then the aggregate limit shall be reduced to 160% of the reinsurance premium hereunder for the 24-month term of this Contract. C. It is also agreed that should the sum of the incurred losses subject to this Contract in the first and second accident years exceed $22,500,000, the Company's retention in the third accident year shall be increased to 60% of the Company's net earned premium for the third accident year. D. As respects business subject to this Contract, in the event that the subject net earned premium volume for the Property Difference in Conditions book is below 15% of the total subject net premium volume, then the Company's retention shall be increased by 0.9% for every 1% that the Property Difference in Conditions percentage share is below 15%. E. With respect to business subject hereunder, the maximum policy limit (except statutory) with respect to any one coverage, any one policy shall be deemed not to exceed $5,000,000, with limits written in excess of this amount deemed reinsured elsewhere. Article VI - Definitions A. "Net excess liability" as used herein shall mean those amounts payable by the Company as defined in the ultimate net loss definition set forth in paragraph B below. B. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations, prejudgment interest if included as part of an award or judgment and any loss adjustment expense, as herein after defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Notwithstanding anything to the contrary contained in this Contract, in arriving at the ultimate net loss of the Company hereunder, property catastrophe losses shall be limited to $7,500,000 per event and in the aggregate for any one accident year but under no circumstances shall property catastrophe losses be more than $15,000,000 for the term of this Contract. For purposes hereof, "property catastrophe loss" shall be defined as net loss and allocated loss adjustment expense, including incurred but not reported losses, on business subject to this Contract arising from insured events identified and numbered as property catastrophe losses by the Property Claims Service, occurring during the term of this Contract. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall mean: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company under a policy ceded to this Contract in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company under a policy ceded to this Contract as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. Any loss in excess of policy limits or extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with an individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder D. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including 1) prejudgment interest, unless included as part of the award or judgment; 2) post-judgment interest; and 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; but not including office expenses or salaries of the Company's regular employees, except that allocated outside costs of the Company's or RA&MCO's salaried adjusters shall be included. Claim costs shall also be included which are incurred by RA&MCO and billed hourly to the Company in accordance with its management agreement. With respect to legal expenses and costs incurred in direct connection with declaratory judgment actions brought to resolve policy language coverage disputes between the Company and its insured, such expenses shall, for purposes of this Contract, not exceed an amount equal to the applicable limit of the policy or policies involved unless agreed to by the Reinsurer. E. "Accident year" as used herein shall mean the period from January 1, 1997 to December 31, 1997, both days inclusive, and each respective 12-month period thereafter that this Contract remains in force. F. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity. Article VII - Other Reinsurance A. Notwithstanding the provisions of paragraph E of Article V, the Company is permitted, but not required, to purchase other facultative and/or other treaty reinsurance on business subject to this Contract. Premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company' s available capacity shall be deducted in determining subject premium hereunder as provided in Article X. B. It is agreed by the Company that inuring reinsurance agreements in force at the inception of this Contract shall remain in force during the term of this Contract, or so deemed. Article VIII - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. C. Within 60 days after the end of each calendar quarter during or after the end of each accident year, the Company shall report to the Reinsurer its aggregate ultimate net loss paid for the accident year as of the end of the quarter. If the aggregate ultimate net loss paid exceeds an amount equal to the Company's retention hereunder for the accident year based on an estimate of the Company's net earned premium for the accident year, the Reinsurer shall pay its portion of such estimated excess (net of any prior payments for the accident year). However, any such payment by the Reinsurer shall be provisional, subject to adjustment when the Company's actual ultimate net loss and net earned premium for the accident year have been determined. Article IX - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article X - Reinsurance Premium A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer 7.0% of its net earned premium for each accident year covered under this Contract. B. As respects the first accident year, the Company shall pay the Reinsurer an annual minimum and deposit premium of $7,500,000, payable in equal semiannual installments of $3,750,000 at January 1 and July 1, 1997. As respects the second and third accident years, the annual minimum and deposit premium shall be mutually agreed between the Company and Reinsurer. C. Within 60 days after the end of each accident year, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with paragraph A, and if the premium so computed is greater than the previously paid minimum and deposit premium, the balance shall be remitted by the Company with its report. Article XI - Late Payments A. It is understood and agreed that the provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXIV (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate, as quoted in The Wall Street Journal on the first business day of the month for which the calculation is being made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 45 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due five business days following receipt by the applicable Subscribing Reinsurer of written notification that payment has been received from Subscribing Reinsurers constituting at least 662/3% of the interests and liabilities of all Subscribing Reinsurers participating under the applicable layer of this Contract, who are active as of the due date; it being understood that said date shall not be later than 75 days from the date of transmittal by the Intermediary of the initial billing for each such payment. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be deemed as five business days following receipt of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting 1) a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit; or 2) either party from contesting the validity of any payment, or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. As provided under Article VIII, it is understood and agreed that the Company shall furnish the Reinsurer with usual and customary claim information and nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from requesting additional information that it may deem necessary. F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer shall be deemed not to be active when it 1) ceases assuming new or renewal reinsurance business through the Intermediary; 2) is declared insolvent, or put in liquidation, conservatorship or rehabilitation by a competent regulatory authority or court; 3) is declared insolvent, or is the subject of an administrative order or enters provisional liquidation and/or liquidation; or 4) has a reduction in its statutory surplus or shareholders' funds of 50% or more from its statutory surplus or shareholders' funds as of the effective date of this Contract. G. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XII - Experience Account A. An "Experience Account" shall be maintained for each accident year covered under this Contract. The "Experience Account Balance" shall equal the sum of the "Experience Account" for the accident years covered under this Contract. The "Experience Account" for an individual accident year shall, at any point in time, be defined as: 1. 100% of the cumulative earned reinsurance premium paid to the Reinsurer hereunder for the accident year; less 2. The cumulative Reinsurer's Margin paid for the accident year as defined herein; less 3. 100% of cumulative ultimate net loss payments for the accident year made by the Reinsurer; plus 4. The cumulative Experience Account Investment Credit for the accident year since the inception of this Contract. B. The Experience Account Investment Credit shall be computed separately for each accident year and shall, for any accident year, equal the average daily balance of the Experience Account during that accident year (or portion thereof) multiplied by the interest credit rate (or pro rata portion thereof) applicable to the individual accident year, credited annually, in arrears. The cumulative Experience Account Investment Credit for any accident year shall equal the sum of the Experience Account Investment Credit for such account for each accident year since the inception of this Contract. C. The interest credit rate applicable to the Experience Account for an accident year covered under this Contract shall be equal to the one (1) year U.S. Treasury note rate as published in The Wall Street Journal on the first business day of such accident year. D. The "Reinsurer's Margin" for each accident year shall be an amount equal to 12.5% of the earned reinsurance premium for the accident year. Article XIII - Commutation A. Subject to the terms of this Article, the Company may, at its sole option, commute this Contract at any December 31, with 90 days prior written notice by the Company to the Reinsurer. B. If the Company elects to commute this Contract, the Reinsurer shall pay to the Company the following amounts within 60 business days of the date of Commutation: 1. Commuted Value of ceded unpaid ultimate net loss: a. If, at the time of Commutation, the ceded unpaid ultimate net loss, as defined herein, is less than or equal to the balance in the Experience Account, the Reinsurer agrees to pay all ceded unpaid ultimate net loss at the amount valued by the Company. b. If, at the time of Commutation, the ceded unpaid ultimate net loss is greater than the balance in the Experience Account, the ceded unpaid ultimate net loss shall be commuted at a present value amount to be mutually agreed. If the present value amount of the ceded unpaid ultimate net loss cannot be mutually agreed by the Company and the Reinsurer, then a mutually acceptable independent third party actuary shall be called upon to make an independent estimation of the present value amount of the ceded unpaid ultimate net loss (the cost of which shall be shared equally by the Company and Reinsurer). If the actuary's estimation is acceptable to both Reinsurer and Company, then this Contract shall be commuted at the value as estimated by the actuary. If the actuary's value is unacceptable to either the Company or the Reinsurer, or if the parties cannot agree on the selection of the actuary, then this Contract will not be commuted at that time. 2. Profit Sharing - Upon Commutation under subparagraph 1 above, the Reinsurer shall pay to the Company a Profit Sharing equal to the positive balance, if any, of the Experience Account after deducting the value of the commuted ceded unpaid ultimate net loss as per subparagraph 1 above. C. Payment of the ceded unpaid ultimate net loss and Profit Sharing, if any, by the Reinsurer as described above shall constitute a complete and final release of the Reinsurer in respect of any and all of the Reinsurer's obligations of any nature whatsoever to the Company under or related to this Contract. Article XIV - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XVI - Net Retained Lines (BRMA 32B) A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XVIII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered into the books of the Company. Article XIX - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XX - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXI - Arbitration A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the two arbitrators will jointly petition the American Arbitration Association to appoint the third arbitrator from the AAA's Panel of Reinsurance Arbitrators. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies, underwriters at Lloyd's of London, reinsurance intermediaries and attorneys actively or formerly engaged in practicing law in the areas of insurance or reinsurance. E. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The arbitration shall take place in Woodland Hills, California or, if unanimously agreed by the panel, any other mutually acceptable location. G. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this article. However, nothing shall impair the rights of such reinsurers to assert several rather than joint defenses or claims, nor shall this provision be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint. H. The panel shall make its decision considering custom and practice as promptly as possible following the termination of hearings. The decision of any two arbitrators, when rendered in writing shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction. The panel is empowered to grant such interim relief as it may deem appropriate. I. Each party shall bear the expense of its own arbitrator and shall jointly and equally with the other party bear the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorney's fees and interest to the extent permitted by law. Insofar as the arbitration panel chooses to look to substantive law, it shall consider the law of the State of California. Article XXII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXIII - Agency Agreement Gryphon Insurance Group, Inc. shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXIV - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: New York, New York,this ____ day of ______________ 199___. ________________________________________ Gryphon Insurance Group, Inc., on behalf of Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company EX-10.70 7 R:\96RIL\11766.DOC Per Event Reinsurance Contract ($250,000 xs $250,000) Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Per Event Reinsurance Contract ($250,000 xs $250,000) Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York Reinsurer Participation Scandinavian Reinsurance Company, Ltd. 100.0% Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Business Reinsured 1 II Term 1 III Territory (BRMA 51A) 2 IV Exclusions 2 V Retention and Limit 3 VI Definitions 3 VII Other Reinsurance 7 VIII Loss Settlements 7 IX Commutation 8 X Salvage and Subrogation 9 XI Reinsurance Premium 9 XII Experience Account 9 XIII Late Payments 10 XIV Offset (BRMA 36C) 12 XV Access to Records 12 XVI Liability of the Reinsurer 12 XVII Net Retained Lines 12 XVIII Errors and Omissions (BRMA 14F) 13 XIX Currency (BRMA 12A) 13 XX Taxes (BRMA 50B) 13 XXI Federal Excise Tax 13 XXII Unauthorized Reinsurers 13 XXIII Insolvency 14 XXIV Arbitration 15 XXV Service of Suit (BRMA 49C) 16 XXVI Agency Agreement 17 XXVII Intermediary (BRMA 23A) 17 Schedule A Per Event Reinsurance Contract ($250,000 xs $250,000) Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreements Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Business Reinsured By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company for the net excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof, or issued or renewed on or after that date, for all lines of business (direct and assumed), subject to the terms, conditions and limitations hereinafter set forth. Article II - Term A. This Contract shall become effective on October 1, 1996, with respect to occurrences arising out of loss events commencing on or after that date, and shall remain in force until December 31, 1996, both days inclusive. Notwithstanding the foregoing, in the event any state auditor determines this Contract is not in compliance with any rule or regulation pertaining to this reinsurance, this Contract may be rescinded by the Company with 30 days prior written notice to the Reinsurer by certified mail. B. Except as provided in paragraph C below, reinsurance hereunder on business in force on the effective date of expiration shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 36 months, plus odd time (not exceeding 42 months in all) as respects multiple year policies, nor 12 months plus odd time (not exceeding 18 months in all) as respects policies of one year policy terms or less, following the effective date of expiration. However, these limitations shall not apply to any Extended Reporting Period (hereinafter referred to as "ERP") or Extended Discovery Endorsement (hereinafter referred to as "EDE") provisions or policies classified by the Company as Project Specific Coverage. C. Notwithstanding the provisions of paragraph B above, the Company shall have the option of reassuming the unexpired liability of the Reinsurer hereunder on business in force on the effective date of expiration, in which event the Reinsurer shall not be liable for claims made or losses arising out of loss events commencing after that date. As respects policies providing an aggregate limit of liability which are in force on the effective date of expiration, the Reinsurer shall be liable for the entire aggregate loss under such policies if the inception date of the policy period falls on or before the effective date of expiration, as respects policies written on an occurrence basis, or if the first claim is made on or before the effective date of expiration as respects policies written on a claims made basis. D. If this Contract expires while a loss event covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss event had occurred prior to the expiration of this Contract, provided that no part of such loss event is claimed against any renewal or replacement of this Contract. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company (unless an assumed program has been specifically declared to this Contract and accepted by the Reinsurer), except inter-company reinsurance between any member companies of Gryphon Insurance Group, Inc. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not an equal or controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability - Reinsurance" and the "Nuclear Incident Exclusion Clause - Physical Damage" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association which is not underwritten or controlled by the Company. However, this exclusion shall not apply to Assigned Risk Plans or similar plans. 6. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. Article V - Retention and Limit A. As respects business subject to this Contract, the Company shall retain and be liable for the first $250,000 of ultimate net loss arising out of each loss event. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $250,000 as respects any one loss event, nor shall it exceed $2,500,000 as respects all loss events subject to this Contract. B. With respect to business subject hereunder, the maximum policy limit (except statutory) with respect to any one coverage, any one policy shall be deemed not to exceed $5,000,000 any one loss event, with limits in excess of this amount deemed reinsured elsewhere. Article VI - Definitions A. "Net excess liability" as used herein shall mean those amounts payable by the Company as defined in the ultimate net loss definition set forth in paragraph B below. B. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations, prejudgment interest if included as part of an award or judgment and any loss adjustment expense, as herein after defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall mean: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company under a policy ceded to this Contract in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company under a policy ceded to this Contract as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. Any loss in excess of policy limits or extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with an individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including 1) prejudgment interest, unless included as part of the award or judgment; 2) post-judgment interest; and 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; but not including office expenses or salaries of the Company's regular employees, except that allocated outside costs of the Company's or RA&MCO's salaried adjusters shall be included. Claim costs shall also be included which are incurred by RA&MCO and billed hourly to the Company in accordance with its management agreement. With respect to legal expenses and costs incurred in direct connection with declaratory judgment actions brought to resolve policy language coverage disputes between the Company and its insured, such expenses shall, for purposes of this Contract, not exceed an amount equal to the applicable limit of the policy or policies involved unless agreed to by the Reinsurer. E. The term "loss event" as used herein shall mean an accident, occurrence, claim made, loss discovered or any other circumstance that triggers coverage as provided, defined, or interpreted in the Company's original policies, however: 1. Where the Company's policy provides for an aggregate limit of liability, the term "loss event" shall mean all losses subject to that aggregate limit, each aggregate period. For purposes of this Contract, the date of loss for purposes of this reinsurance will be the inception date of each aggregate period, as respects policies written on an occurrence basis and the date the first claim is made as respects policies written on a claims made basis. Nevertheless, the Company may extract from any aggregate "loss event" a single loss so it may be combined with losses from other policies and submitted as a single "loss event." In the event the Company's losses arising out of a single "loss event" involve policies providing different types of coverage such as an occurrence and a claims made policy, all losses can be combined and submitted as a single "loss event" utilizing the occurrence date of loss for the purpose of reinsurance coverage. In the event the Company's losses arising out of a single "loss event" involve multiple claims made policies, all losses can be combined and submitted as a single "loss event" utilizing the date the first claim is made for the purpose of reinsurance coverage. 2. As respects policies written on a claims made basis, the date of loss shall be the date the claim is made under the original policy. As respects any extended reporting or discovery period provisions under a claims made policy subject hereto, it is understood and agreed that the following shall apply: a. Claims made against and/or reported to the Company during the extended reporting or discovery period shall be deemed to have occurred on the last full day of the applicable policy period; b. If the Company issues a separate policy and/or reinstates the aggregate limit provided under a policy, premium and losses during the period to which said separate policy and/or reinstated limit applies may, at the time of issuance and at the Company's option, be allocated to (i) the contract which is in effect at the effective date of said separate policy and/or at the beginning of the period to which the reinstated limit applies, or (ii) the contract which was in effect at the effective date of the original policy. If the Company elects (i), said losses shall be subject to a separate retention and limit (as specified in the Retention and Limit Article) from that of the original policy period. 3. As respects multiple year policies, whether issued with one limit or reinstatement of the limit, each 12- month period within a multiple year policy shall be considered a separate period as regards the Company's retention and the aggregate policy limit. However, as respects business classified by the Company as "Project Specific" coverages, the entire multiple year term shall be considered one period as regards the Company's retention and the aggregate policy limit. 4. As respects property losses subject hereto, all individual losses directly occasioned by any one disaster, occurrence or loss or series of disasters, occurrences or losses arising out of one occurrence which occurs anywhere in the world, but limited in the United States of America and Canada to the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss event" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same loss event, except that the term "loss event" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same loss event. However, the loss event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same loss event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to above) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss event." d. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's "loss event." Except for those "loss events" referred to in subparagraphs (a) and (b) above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one loss event. However, as respects those "loss events" referred to in subparagraphs (a) and (b) above, if the disaster, occurrence or loss occasioned by the occurrence is of greater duration than 72 consecutive hours, then the Company may divide that disaster, occurrence or loss into two or more "loss events," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss. It is understood that losses arising from a combination of two or more perils as a result of the same occurrence shall be considered as having arisen from one "loss event." Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single "loss event" shall encompass a time period greater than 168 consecutive hours. Notwithstanding the foregoing, it is understood that the Company shall be the sole judge of what constitutes a single "loss event." F. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity. Article VII - Other Reinsurance A. The Company is permitted, but not required, to purchase other facultative and/or other treaty reinsurance on business subject to this Contract. Premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity shall be deducted in determining subject premium hereunder as provided in Article XI. B. It is agreed by the Company that inuring reinsurance agreements in force at the inception of this Contract shall remain in force during the term of this Contract, or so deemed. Article VIII - Loss Settlements A. Wherever losses sustained by the Company appear, in the opinion of the Company, likely to result in claim hereunder, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate in the adjustment of the loss at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article IX - Commutation A. Subject to the terms of this Article, the Company may, at its sole option, commute this Contract at any December 31, with 90 days prior written notice by the Company to the Reinsurer. B. If the Company elects to commute this Contract, the Reinsurer shall pay to the Company the following amounts within 60 business days of the date of commutation: 1. Commuted value of ceded unpaid ultimate net loss: a. If, at the time of Commutation, the ceded unpaid ultimate net loss, as defined herein, is less than or equal to the balance in the Experience Account, the Reinsurer agrees to pay all ceded unpaid ultimate net loss at the amount valued by the Company. b. If, at the time of commutation, the ceded unpaid ultimate net loss is greater than the balance in the Experience Account, the ceded unpaid ultimate net loss shall be commuted at a present value amount to be mutually agreed. If the present value amount of the ceded unpaid ultimate net loss cannot be mutually agreed by the Company and the Reinsurer, then a mutually acceptable independent third party actuary shall be called upon to make an independent estimation of the present value amount of the ceded unpaid ultimate net loss (the cost of which shall be shared equally by the Company and Reinsurer). If the actuary's estimation is acceptable to both Reinsurer and Company, then this Contract shall be commuted at the value as estimated by the actuary. If the actuary's value is unacceptable to either the Company or the Reinsurer, or if the parties cannot agree on the selection of the actuary, then this Contract will not be commuted at that time. 2. Profit Sharing: Upon commutation under subparagraph 1 above, the Reinsurer shall pay to the Company a Profit Sharing equal to the positive balance, if any, of the Experience Account after deducting the value of the commuted ceded unpaid ultimate net loss as per subparagraph 1 above. C. Payment of the ceded unpaid ultimate net loss and Profit Sharing, if any, by the Reinsurer as described above shall constitute a complete and final release of the Reinsurer in respect of any and all of the Reinsurer's obligations of any nature whatsoever to the Company under or related to this Contract. Article X - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company, and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XI - Reinsurance Premium As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer $1,250,000 as promptly as possible after the inception of this Contract. Article XII - Experience Account A. An "Experience Account" shall be established and maintained by the Reinsurer, the balance of which, at any point in time, shall be defined as: 1. 100% of the cumulative earned reinsurance premium paid to the Reinsurer hereunder; less 2. The cumulative Reinsurer's Margin paid hereunder; less 3. 100% of cumulative ultimate net loss payments made by the Reinsurer hereunder; plus 4. The cumulative Experience Account Investment Credit since the inception of this Contract. B. The Experience Account Investment Credit shall equal the average daily balance of the Experience Account multiplied by the interest credit rate (or pro rata portion thereof) credited annually, in arrears. C. The interest credit rate applicable to the Experience Account shall be equal to the one-year U.S. Treasury note rate as published in The Wall Street Journal on the inception date of this Contract. D. The "Reinsurer's Margin" shall be an amount equal to 12.5% the earned reinsurance premium hereunder. Article XIII - Late Payments A. It is understood and agreed that the provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXVII (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate, as quoted in the Wall Street Journal on the first business day of the month for which the calculation is being made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 45 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due five business days following receipt by the applicable Subscribing Reinsurer of written notification that payment has been received from Subscribing Reinsurers constituting at least 662/3% of the interests and liabilities of all Subscribing Reinsurers participating under the applicable layer of this Contract, who are active as of the due date; it being understood that said date shall not be later than 75 days from the date of transmittal by the Intermediary of the initial billing for each such payment. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be deemed as five business days following receipt of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting 1) a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit; or 2) either party from contesting the validity of any payment, or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. As provided under Article VIII, it is understood and agreed that the Company shall furnish the Reinsurer with usual and customary claim information and nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from requesting additional information that it may deem necessary. F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer shall be deemed not to be active when it 1) ceases assuming new or renewal reinsurance business through the Intermediary; 2) is declared insolvent, or put in liquidation, conservatorship or rehabilitation by a competent regulatory authority or court; 3) is declared insolvent, or is the subject of an administrative order or enters provisional liquidation and/or liquidation; or 4) has a reduction in its statutory surplus or shareholders' funds of 50% or more from its statutory surplus or shareholders' funds as of the effective date of this Contract. G. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XIV - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XV - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XVI - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVII - Net Retained Lines A. This Contract applies only to that portion of any insurance or reinsurance (whether inter-company reinsurance and/or reinsurance assumed which has been declared to this Contract and accepted by the Reinsurer) the Company retains net for its own account, and in calculating the amount of any loss hereunder and also computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance or reinsurance the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may be due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVIII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XIX - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered into the books of the Company. Article XX - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XXI - Federal Excise Tax If the Reinsurer is subject to the Federal Excise Tax, the Reinsurer agrees to allow the Company to withhold the required amount for the purpose of paying the Tax. In the event of any return premium becoming due hereunder, the Reinsurer will deduct from the amount of the return premium the same percentage as it allowed, and the Company or its agent should take steps to recover the Tax from the U. S. Government. Article XXII - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. C. Notwithstanding the foregoing, the Company shall share in the funding of the aforementioned letters of credit in an amount not to exceed 25 basis points. Article XXIII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIV - Arbitration A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the two arbitrators will jointly petition the American Arbitration Association to appoint the third arbitrator from the AAA's Panel of Reinsurance Arbitrators. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies, underwriters at Lloyd's of London, reinsurance intermediaries and attorneys actively or formerly engaged in practicing law in the areas of insurance or reinsurance. E. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The arbitration shall take place in Woodland Hills, California or, if unanimously agreed by the panel, any other mutually acceptable location. G. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this article. However, nothing shall impair the rights of such reinsurers to assert several rather than joint defenses or claims, nor shall this provision be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint. H. The panel shall make its decision considering custom and practice as promptly as possible following the termination of hearings. The decision of any two arbitrators, when rendered in writing shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction. The panel is empowered to grant such interim relief as it may deem appropriate. I. Each party shall bear the expense of its own arbitrator and shall jointly and equally with the other party bear the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorney's fees and interest to the extent permitted by law. Insofar as the arbitration panel chooses to look to substantive law, it shall consider the law of the State of California. Article XXV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXVI - Agency Agreement Gryphon Insurance Group shall be deemed the agent of the reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVII - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: New York, New York,this ___ day of_______________ 199___. _________________________________________ Gryphon Insurance Group, Inc., on behalf of Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company Schedule A attached to the Per Event Reinsurance Contract ($250,000 xs $250,000) Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York A. Umbrella business produced by Jean Deal & Associates, Dallas, Texas for the Specialty Lines Division of Gryphon Insurance Group, Inc., Woodland Hills, California. B. DIC business produced by the Pacific Coast DIC Division of Gryphon Insurance Group, Inc., Woodland Hills, California. C. General Property E&S business produced by the General E&S Division of Gryphon Insurance Group, Inc., Woodland Hills, California. D. Animal Mortality business produced by American Equine Insurance Group, Rolling Meadows, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. E. Canadian business produced by KMS Insurance Services, Toronto, Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey. F. Midwest Garage program produced by Business Risk Services, Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. EX-10.71 8 R:\96R\11104.DOC "Working" Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 "Working" Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York Reinsurers Participations First Excess and Reinsurance Corporation 12.0% Folksamerica Reinsurance Company 12.5 Gerling Global Reinsurance Corporation, U. S. Branch 10.0 Great Lakes American Reinsurance Company 10.0 NAC Reinsurance Corporation 10.0 Swiss Reinsurance America Corporation 16.5 TIG Reinsurance Company 16.5 Through Denis M. Clayton & Co. Ltd. Certain Companies Per Signing Schedule(s) 12.5% Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Business Reinsured 1 II Term 2 III Territory (BRMA 51A) 2 IV Exclusions 3 V Retentions and Limits 3 VI Definitions 4 VII Other Reinsurance 8 VIII Loss Settlements 8 IX Salvage and Subrogation 9 X Reinsurance Premium 9 XI Late Payments 10 XII Profit Sharing 12 XIII Offset (BRMA 36C) 12 XIV Access to Records 13 XV Liability of the Reinsurer 13 XVI Net Retained Lines 13 XVII Errors and Omissions (BRMA 14F) 13 XVIII Currency (BRMA 12A) 14 XIX Taxes (BRMA 50B) 14 XX Federal Excise Tax 14 XXI Unauthorized Reinsurers 14 XXII Insolvency 15 XXIII Arbitration 16 XXIV Service of Suit (BRMA 49C) 17 XXV Agency Agreement 18 XXVI Intermediary (BRMA 23A) 18 Schedule A "Working" Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreements Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Business Reinsured A. By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company for the net excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof, or issued or renewed on or after that date, and classified by the Company as all lines of business (direct and assumed) as respects programs managed by the Company, subject to the terms, conditions and limitations hereinafter set forth. Programs set forth in Schedule A attached to and forming part of this Contract shall be excluded from coverage hereunder. The Company shall have the option of excluding additional programs from coverage hereunder in accordance with paragraph B below. B. The Company shall have the option to exclude any program from this Contract by submitting each such program in writing to the Reinsurer not more than 90 days after the inception of the program as respects those programs eligible for coverage hereunder. Casualty programs that generate $5,000,000 or less of estimated annualized subject earned premium during the first 12 months of the program will be deemed to have automatic coverage under the terms and conditions hereinafter set forth if not excluded from this Contract. All property programs and those casualty programs that generate greater than $5,000,000 of estimated annualized subject earned premium during the first 12 months of the program must be submitted to the lead reinsurer(s) hereunder for acceptance on behalf of the Reinsurer of coverage under the terms and conditions hereinafter set forth if declared to this Contract. The Company shall be the sole judge of what constitutes a "program." Article II - Term A. This Contract shall become effective on October 1, 1996, with respect to occurrences arising out of loss events commencing on or after that date, and shall remain in force until December 31, 1997, both days inclusive. Notwithstanding the foregoing, in the event negotiations for a renewal of this Contract are not completed by December 31, 1997, at the Company's option, this Contract shall be extended by addendum through March 31, 1998. B. Except as provided in paragraph C below, reinsurance hereunder on business in force on the effective date of expiration shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 36 months, plus odd time (not exceeding 42 months in all) as respects multiple year policies, nor 12 months plus odd time (not exceeding 18 months in all) as respects policies of one year policy terms or less, following the effective date of expiration. However, these limitations shall not apply to any Extended Reporting Period (hereinafter referred to as "ERP") or Extended Discovery Endorsement (hereinafter referred to as "EDE") provisions or policies classified by the Company as Project Specific Coverage. C. Notwithstanding the provisions of paragraph B above, the Company shall have the option of reassuming the unexpired liability of the Reinsurer hereunder on business in force on the effective date of expiration, in which event the Reinsurer shall not be liable for claims made or losses arising out of loss events commencing after that date. As respects policies providing an aggregate limit of liability which are in force on the effective date of expiration, the Reinsurer shall be liable for the entire aggregate loss under such policies if the inception date of the policy period falls on or before the effective date of expiration, as respects policies written on an occurrence basis, or if the first claim is made on or before the effective date of expiration as respects policies written on a claims made basis. D. If this Contract expires while a loss event covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss event had occurred prior to the expiration of this Contract, provided that no part of such loss event is claimed against any renewal or replacement of this Contract. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company (unless an assumed program has been specifically declared to this Contract and accepted by the Reinsurer), except inter-company reinsurance between any member companies of Gryphon Insurance Group, Inc. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not an equal or controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability - Reinsurance" and the "Nuclear Incident Exclusion Clause - Physical Damage" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association which is not underwritten or controlled by the Company. However, this exclusion shall not apply to Assigned Risk Plans or similar plans. 6. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. Article V - Retentions and Limits A. As respects business subject to this Contract, for each layer of reinsurance coverage provided by this Contract the Company shall retain and be liable for the first amount of ultimate net loss arising out of each loss event identified as "Company's Retention" for the excess layer in the schedule set forth below. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed the amount identified as "Reinsurer's Limit" for the excess layer in the schedule set forth below as respects any one loss event. Reinsurer's Limit Company's Retention First Excess Layer: $500,000 xs $500,000 Second Excess Layer: $9,000,000 xs $1,000,000 B. With respect to business subject hereunder, the maximum policy limit (except statutory) with respect to any one coverage, any one policy shall be deemed not to exceed $5,000,000 any one loss event, with limits in excess of this amount deemed reinsured elsewhere. Article VI - Definitions A. "Net excess liability" as used herein shall mean those amounts payable by the Company as defined in the ultimate net loss definition set forth in paragraph B below. B. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations, prejudgment interest if included as part of an award or judgment and any loss adjustment expense, as herein after defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall mean: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company under a policy ceded to this Contract in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company under a policy ceded to this Contract as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. Any loss in excess of policy limits or extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with an individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including 1) prejudgment interest, unless included as part of the award or judgment; 2) post-judgment interest; and 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; but not including office expenses or salaries of the Company's regular employees, except that allocated outside costs of the Company's or RA&MCO's salaried adjusters shall be included. Claim costs shall also be included which are incurred by RA&MCO and billed hourly to the Company in accordance with its management agreement. With respect to legal expenses and costs incurred in direct connection with declaratory judgment actions brought to resolve policy language coverage disputes between the Company and its insured, such expenses shall, for purposes of this Contract, not exceed an amount equal to the applicable limit of the policy or policies involved unless agreed to by the Reinsurer. E. The term "loss event" as used herein shall mean an accident, occurrence, claim made, loss discovered or any other circumstance that triggers coverage as provided, defined, or interpreted in the Company's original policies, however: 1. Where the Company's policy provides for an aggregate limit of liability, the term "loss event" shall mean all losses subject to that aggregate limit, each aggregate period. For purposes of this Contract, the date of loss for purposes of this reinsurance will be the inception date of each aggregate period, as respects policies written on an occurrence basis and the date the first claim is made as respects policies written on a claims made basis. Nevertheless, the Company may extract from any aggregate "loss event" a single loss so it may be combined with losses from other policies and submitted as a single "loss event." In the event the Company's losses arising out of a single "loss event" involve policies providing different types of coverage such as an occurrence and a claims made policy, all losses can be combined and submitted as a single "loss event" utilizing the occurrence date of loss for the purpose of reinsurance coverage. In the event the Company's losses arising out of a single "loss event" involve multiple claims made policies, all losses can be combined and submitted as a single "loss event" utilizing the date the first claim is made for the purpose of reinsurance coverage. 2. As respects policies written on a claims made basis, the date of loss shall be the date the claim is made under the original policy. As respects any extended reporting or discovery period provisions under a claims made policy subject hereto, it is understood and agreed that the following shall apply: a. Claims made against and/or reported to the Company during the extended reporting or discovery period shall be deemed to have occurred on the last full day of the applicable policy period; b. If the Company issues a separate policy and/or reinstates the aggregate limit provided under a policy, premium and losses during the period to which said separate policy and/or reinstated limit applies may, at the time of issuance and at the Company's option, be allocated to (i) the contract which is in effect at the effective date of said separate policy and/or at the beginning of the period to which the reinstated limit applies, or (ii) the contract which was in effect at the effective date of the original policy. If the Company elects (i), said losses shall be subject to a separate retention and limit (as specified in the Retention and Limit Article) from that of the original policy period. 3. As respects multiple year policies, whether issued with one limit or reinstatement of the limit, each 12- month period within a multiple year policy shall be considered a separate period as regards the Company's retention and the aggregate policy limit. However, as respects business classified by the Company as "Project Specific" coverages, the entire multiple year term shall be considered one period as regards the Company's retention and the aggregate policy limit. 4. As respects property losses subject hereto, all individual losses directly occasioned by any one disaster, occurrence or loss or series of disasters, occurrences or losses arising out of one occurrence which occurs anywhere in the world, but limited in the United States of America and Canada to the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss event" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same loss event, except that the term "loss event" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same loss event. However, the loss event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same loss event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to above) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss event." d. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's "loss event." Except for those "loss events" referred to in subparagraphs (a) and (b) above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one loss event. However, as respects those "loss events" referred to in subparagraphs (a) and (b) above, if the disaster, occurrence or loss occasioned by the occurrence is of greater duration than 72 consecutive hours, then the Company may divide that disaster, occurrence or loss into two or more "loss events," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss. It is understood that losses arising from a combination of two or more perils as a result of the same occurrence shall be considered as having arisen from one "loss event." Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single "loss event" shall encompass a time period greater than 168 consecutive hours. Notwithstanding the foregoing, it is understood that the Company shall be the sole judge of what constitutes a single "loss event." F. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity. G. "Losses incurred" as used herein for each excess layer shall mean ceded losses and loss adjustment expense paid as of the effective date of calculation for the excess layer, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, all as respects losses arising out of loss events commencing during the term of this Contract, plus: 1. As respects the first calculation of the profit sharing, an amount representing Incurred But Not Reported Losses (hereinafter called "IBNR") equal to 50.0% of the premiums earned hereunder as respects the First Excess Layer, and 60.0% of the premium earned hereunder as respects the Second Excess Layer; 2. As respects the first recalculation of the profit sharing, an amount representing IBNR equal to 35.0% of the premiums earned hereunder as respects the First Excess Layer, and 45.0% of the premium earned hereunder as respects the Second Excess Layer; 3. As respects the second recalculation of the profit sharing, an amount representing IBNR equal to 20.0% of the premiums earned hereunder as respects the First Excess Layer, and 30.0% of the premium earned hereunder as respects the Second Excess Layer; 4. As respects the third recalculation of the profit sharing, an amount representing IBNR equal to 0% of the premiums earned hereunder as respects the First Excess Layer, and 15.0% of the premium earned hereunder as respects the Second Excess Layer. IBNR shall not be included in any subsequent recalculations of the profit sharing. Article VII - Other Reinsurance Notwithstanding the provisions of paragraph B of Article V, the Company is permitted, but not required, to purchase other facultative and/or other treaty reinsurance on business subject to this Contract. Premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity shall be deducted in determining subject premium hereunder as provided in Article X. Article VIII - Loss Settlements A. Wherever a claim is reserved by the Company for an amount of ultimate net loss greater than 50% of the Company's retention hereunder as respects policy limits or statutory benefits applicable to the claim which are greater than the Company's retention, and/or whenever, in the opinion of the Company, a loss appears likely to result in claim hereunder, the Company shall notify the Reinsurer. Within 90 days after any claim is reported to the Reinsurer in accordance with the foregoing, the Company shall advise the Reinsurer whether or not, in the sole judgment of the Company, the claim is anticipated to exceed its retention hereunder. Further, as respects claims arising under Casualty business subject hereto, the Company shall notify the Reinsurer whenever a claim involves a fatality, amputation, spinal chord damage, brain damage, blindness, extensive burns or multiple fractures, regardless of liability, if the policy limits or statutory benefits applicable to the claim are greater than the Company's retention. The Company shall also notify the Reinsurer of any declaratory judgment expense relating directly to a specific claim brought against a policy reinsured under this Contract. The Reinsurer shall have the right to participate in the adjustment of the loss at its own expense. B. All loss settlements made by the Company, provided they are within the terms of the original policies (other than extra contractual obligations and loss in excess of policy limits) and the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all ultimate net loss amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. The Company may, however, give the Reinsurer written notice of its intention to pay any loss on a certain date and may require the Reinsurer to have its share of such loss in the possession of the Company by such date; provided that the Reinsurer shall have a period of five business days after receipt of such written notice from the Company to mail or otherwise dispatch its payment. Article IX - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company, and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article X - Reinsurance Premium A. As premium for each layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the following: 1. As respects the First Excess Layer of reinsurance provided by this Contract, the Company shall pay the Reinsurer 8.0% of the Company's net earned premium for the term of this Contract. 2. As respects the Second Excess Layer of reinsurance provided by this Contract, the Company shall pay the Reinsurer 3.0% of the Company's net earned premium for the term of this Contract. In the event this Contract expires on a "runoff" basis in accordance with the provisions of paragraph B of Article II, premium for the reinsurance provided under each excess layer of reinsurance coverage shall be the respective rate set forth in subparagraphs 1 and 2 above applied to the Company's net earned premium for each 12-month period within the runoff period, as respects business in force on the effective date of expiration. B. For each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer an annual deposit premium as follows, in five equal quarterly installments on October 1, 1996, January 1, April 1, July 1 and October 1, 1997: 1. As respects the First Excess Layer of reinsurance, $10,890,000 in five quarterly installments of $2,178,000. 2. As respects the Second Excess Layer of reinsurance, $4,085,340 in five quarterly installments of $817,068. It is understood that no deposit premium shall be payable during the runoff period, if any. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Premium for the runoff period, if any, shall be payable by the Company within 60 days after the end of each 12-month period within the runoff period. Article XI - Late Payments A. It is understood and agreed that the provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXVI (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate, as quoted in the Wall Street Journal on the first business day of the month for which the calculation is being made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 45 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due five business days following receipt by the applicable Subscribing Reinsurer of written notification that payment has been received from Subscribing Reinsurers constituting at least 662/3% of the interests and liabilities of all Subscribing Reinsurers participating under the applicable layer of this Contract, who are active as of the due date; it being understood that said date shall not be later than 75 days from the date of transmittal by the Intermediary of the initial billing for each such payment. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be deemed as five business days following receipt of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting 1) a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit; or 2) either party from contesting the validity of any payment, or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. As provided under Article IX, it is understood and agreed that the Company shall furnish the Reinsurer with usual and customary claim information and nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from requesting additional information that it may deem necessary. F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer shall be deemed not to be active when it 1) ceases assuming new or renewal reinsurance business through the Intermediary; 2) is declared insolvent, or put in liquidation, conservatorship or rehabilitation by a competent regulatory authority or court; 3) is declared insolvent, or is the subject of an administrative order or enters provisional liquidation and/or liquidation; or 4) has a reduction in its statutory surplus or shareholders' funds of 50% or more from its statutory surplus or shareholders' funds as of the effective date of this Contract. G. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XII - Profit Sharing A. Separately, as respects each excess layer of reinsurance coverage provided by this Contract, the Reinsurer shall pay the Company a Profit Sharing equal to 25.0% of the net profit, if any, accruing to the Reinsurer individually under each excess layer of reinsurance hereunder. The Reinsurer's net profit for each excess layer hereunder shall be calculated in accordance with the following formula, it being understood that a positive balance equals net profit and a negative balance equals net loss: 1. Earned reinsurance premium hereunder for the excess layer; less 2. Expenses incurred by the Reinsurer at 15.0% of premiums earned hereunder for the excess layer; less 3. Losses incurred hereunder for the excess layer. B. The Company shall calculate and report the Reinsurer's net profit for each excess layer within 60 days after 12 months following the date of expiration of this Contract, and within 60 days after the end of each 12-month period thereafter until all losses subject hereto have been finally settled. Each such calculation shall be based on cumulative transactions hereunder from the effective date of this Contract through the date of calculation. As respects the initial calculation referred to above, any profit sharing shown to be due the Company for one or both of the excess layers shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. As respects each recalculation, any additional profit sharing shown to be due the Company for one or both of the excess layers shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. Any return Profit Sharing shown to be due the Reinsurer shall be paid by the Company with its report. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVI - Net Retained Lines A. This Contract applies only to that portion of any insurance or reinsurance (whether inter-company reinsurance and/or reinsurance assumed which has been declared to this Contract and accepted by the Reinsurer) the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in the Contract), and in calculating the amount of any loss hereunder and also computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance or reinsurance the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may be due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XVIII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered into the books of the Company. Article XIX - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XX - Federal Excise Tax If the Reinsurer is subject to the Federal Excise Tax, the Reinsurer agrees to allow the Company to withhold the required amount for the purpose of paying the Tax. In the event of any return premium becoming due hereunder, the Reinsurer will deduct from the amount of the return premium the same percentage as it allowed, and the Company or its agent should take steps to recover the Tax from the U. S. Government. Article XXI - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIII - Arbitration A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the two arbitrators will jointly petition the American Arbitration Association to appoint the third arbitrator from the AAA's Panel of Reinsurance Arbitrators. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies, underwriters at Lloyd's of London, reinsurance intermediaries and attorneys actively or formerly engaged in practicing law in the areas of insurance or reinsurance. E. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The arbitration shall take place in Woodland Hills, California or, if unanimously agreed by the panel, any other mutually acceptable location. G. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this article. However, nothing shall impair the rights of such reinsurers to assert several rather than joint defenses or claims, nor shall this provision be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint. H. The panel shall make its decision considering custom and practice as promptly as possible following the termination of hearings. The decision of any two arbitrators, when rendered in writing shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction. The panel is empowered to grant such interim relief as it may deem appropriate. I. Each party shall bear the expense of its own arbitrator and shall jointly and equally with the other party bear the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorney's fees and interest to the extent permitted by law. Insofar as the arbitration panel chooses to look to substantive law, it shall consider the law of the State of California. Article XXIV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXV - Agency Agreement Gryphon Insurance Group, Inc. shall be deemed the agent of the reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVI - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: New York, New York,this ____ day of _____________ 199___. __________________________________________ Gryphon Insurance Group, Inc., on behalf of Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company Schedule A attached to the "Working" Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York A. Umbrella business produced by Jean Deal & Associates, Dallas, Texas for the Specialty Lines Division of Gryphon Insurance Group, Inc., Woodland Hills, California. B. DIC business produced by the Pacific Coast DIC Division of Gryphon Insurance Group, Inc., Woodland Hills, California. C. General Property E&S business produced by the General E&S Division of Gryphon Insurance Group, Inc., Woodland Hills, California. D. Animal Mortality business produced by American Equine Insurance Group, Rolling Meadows, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. E. Canadian business produced by KMS Insurance Services, Toronto, Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey. F. Midwest Garage program produced by Business Risk Services, Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. EX-10.72 9 R:\96RIL\11130.DOC Excess Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Excess Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York Reinsurers Participations Folksamerica Reinsurance Company 10.0% Gerling Global Reinsurance Corporation, U. S. Branch 10.0 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 15.0 Swiss Reinsurance America Corporation 17.5 TIG Reinsurance Company 15.0 Transatlantic Reinsurance Company 17.5 Winterthur Reinsurance Corporation of America 4.0 Through Denis M. Clayton & Co. Ltd. Certain Companies Per Signing Schedule(s) 11.0% Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Table of Contents Article Page I Business Reinsured 1 II Term 2 III Territory (BRMA 51A) 3 IV Exclusions 3 V Retention and Limit 3 VI Reinstatement 4 VII Definitions 4 VIII Other Reinsurance 8 IX Loss Settlements 8 X Salvage and Subrogation 9 XI Reinsurance Premium 9 XII Late Payments 10 XIII Offset (BRMA 36C) 12 XIV Access to Records 12 XV Liability of the Reinsurer 12 XVI Net Retained Lines 12 XVII Errors and Omissions (BRMA 14F) 13 XVIII Currency (BRMA 12A) 13 XIX Taxes (BRMA 50B) 13 XX Federal Excise Tax 13 XXI Unauthorized Reinsurers 14 XXII Insolvency 15 XXIII Arbitration 16 XXIV Service of Suit (BRMA 49C) 17 XXV Agency Agreement 17 XXVI Intermediary (BRMA 23A) 17 Schedule A Excess Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreements Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Business Reinsured A. By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company for the net excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof, or issued or renewed on or after that date, and classified by the Company as all lines of business (direct and assumed) as respects programs managed by the Company, subject to the terms, conditions and limitations hereinafter set forth. Programs set forth in Schedule A attached to and forming part of this Contract shall be excluded from coverage hereunder. The Company shall have the option of excluding additional programs from coverage hereunder in accordance with paragraph B below. B. The Company shall have the option to exclude any program from this Contract by submitting each such program in writing to the Reinsurer not more than 90 days after the inception of the program as respects those programs eligible for coverage hereunder. Casualty programs that generate $5,000,000 or less of estimated annualized subject earned premium during the first 12 months of the program will be deemed to have automatic coverage under the terms and conditions hereinafter set forth if not excluded from this Contract. All property programs and those casualty programs that generate greater than $5,000,000 of estimated annualized subject earned premium during the first 12 months of the program must be submitted to the lead reinsurer(s) hereunder for acceptance on behalf of the Reinsurer of coverage under the terms and conditions hereinafter set forth if declared to this Contract. The Company shall be the sole judge of what constitutes a "program." Article II - Term A. This Contract shall become effective on October 1, 1996, with respect to occurrences arising out of loss events commencing on or after that date, and shall remain in force until December 31, 1997, both days inclusive. Notwithstanding the foregoing, in the event negotiations for a renewal of this Contract are not completed by December 31, 1997, at the Company's option, this Contract shall be extended by addendum through March 31, 1998. B. Except as provided in paragraph C below, reinsurance hereunder on business in force on the effective date of expiration shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 36 months, plus odd time (not exceeding 42 months in all) as respects multiple year policies, nor 12 months plus odd time (not exceeding 18 months in all) as respects policies of one year policy terms or less, following the effective date of expiration. However, these limitations shall not apply to any Extended Reporting Period (hereinafter referred to as "ERP") or Extended Discovery Endorsement (hereinafter referred to as "EDE") provisions or policies classified by the Company as Project Specific Coverage. C. Notwithstanding the provisions of paragraph B above, the Company shall have the option of reassuming the unexpired liability of the Reinsurer hereunder on business in force on the effective date of expiration, in which event the Reinsurer shall not be liable for claims made or losses arising out of loss events commencing after that date. As respects policies providing an aggregate limit of liability which are in force on the effective date of expiration, the Reinsurer shall be liable for the entire aggregate loss under such policies if the inception date of the policy period falls on or before the effective date of expiration, as respects policies written on an occurrence basis, or if the first claim is made on or before the effective date of expiration as respects policies written on a claims made basis. D. If this Contract expires while a loss event covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss event had occurred prior to the expiration of this Contract, provided that no part of such loss event is claimed against any renewal or replacement of this Contract. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company (unless an assumed program has been specifically declared to this Contract and accepted by the Reinsurer), except inter-company reinsurance between any member companies of Gryphon Insurance Group, Inc. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not an equal or controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability - Reinsurance" and the "Nuclear Incident Exclusion Clause - Physical Damage" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association which is not underwritten or controlled by the Company. However, this exclusion shall not apply to Assigned Risk Plans or similar plans. 6. 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, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. Article V - Retention and Limit A. As respects business subject to this Contract, the Company shall retain and be liable for the first $10,000,000 of ultimate net loss arising out of each loss event. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $15,000,000 as respects any one loss event. B. With respect to business subject hereunder, the maximum policy limit (except statutory) with respect to any one coverage, any one policy shall be deemed not to exceed $5,000,000 any one loss event, with limits in excess of this amount deemed reinsured elsewhere. Article VI - Reinstatement A. In the event all or any portion of the reinsurance hereunder is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the loss event commences hereon. As respects each amount so reinstated, the Company shall pay the Reinsurer additional premium equal to the product of the following: 1. The percentage of the loss event limit reinstated (based on the loss paid by the Reinsurer); times 2. The earned reinsurance premium for the term of this Contract (exclusive of reinstatement premium and exclusive of the earned reinsurance premium for the runoff period, if any), it being understood and agreed that if the loss event commences during the runoff period, reinstatement premium shall be based on the earned reinsurance premium during the runoff period for business in force on the effective date of expiration of this Contract. B. Whenever the Company requests payment by the Reinsurer of any loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the term of this Contract or the runoff period, if applicable, has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer hereunder shall not exceed $15,000,000 as respects loss or losses arising out of any one loss event, nor shall it exceed $45,000,000 as respects all losses arising out of loss events subject to this Contract. Article VII - Definitions A. "Net excess liability" as used herein shall mean those amounts payable by the Company as defined in the ultimate net loss definition set forth in paragraph B below. B. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations, prejudgment interest if included as part of an award or judgment and any loss adjustment expense, as herein after defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. C. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall mean: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company under a policy ceded to this Contract in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company under a policy ceded to this Contract as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence for bad faith on the part of the Company in handling a claim under a policy subject to this Contract. Any loss in excess of policy limits or extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with an individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including 1) prejudgment interest, unless included as part of the award or judgment; 2) post-judgment interest; and 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; but not including office expenses or salaries of the Company's regular employees, except that allocated outside costs of the Company's or RA&MCO's salaried adjusters shall be included. Claim costs shall also be included which are incurred by RA&MCO and billed hourly to the Company in accordance with its management agreement. With respect to legal expenses and costs incurred in direct connection with declaratory judgment actions brought to resolve policy language coverage disputes between the Company and its insured, such expenses shall, for purposes of this Contract, not exceed an amount equal to the applicable limit of the policy or policies involved unless agreed to by the Reinsurer. E. The term "loss event" as used herein shall mean an accident, occurrence, claim made, loss discovered or any other circumstance that triggers coverage as provided, defined, or interpreted in the Company's original policies, however: 1. Where the Company's policy provides for an aggregate limit of liability, the term "loss event" shall mean all losses subject to that aggregate limit, each aggregate period. For purposes of this Contract, the date of loss for purposes of this reinsurance will be the inception date of each aggregate period, as respects policies written on an occurrence basis and the date the first claim is made as respects policies written on a claims made basis. Nevertheless, the Company may extract from any aggregate "loss event" a single loss so it may be combined with losses from other policies and submitted as a single "loss event." In the event the Company's losses arising out of a single "loss event" involve policies providing different types of coverage such as an occurrence and a claims made policy, all losses can be combined and submitted as a single "loss event" utilizing the occurrence date of loss for the purpose of reinsurance coverage. In the event the Company's losses arising out of a single "loss event" involve multiple claims made policies, all losses can be combined and submitted as a single "loss event" utilizing the date the first claim is made for the purpose of reinsurance coverage. 2. As respects policies written on a claims made basis, the date of loss shall be the date the claim is made under the original policy. As respects any extended reporting or discovery period provisions under a claims made policy subject hereto, it is understood and agreed that the following shall apply: a. Claims made against and/or reported to the Company during the extended reporting or discovery period shall be deemed to have occurred on the last full day of the applicable policy period; b. If the Company issues a separate policy and/or reinstates the aggregate limit provided under a policy, premium and losses during the period to which said separate policy and/or reinstated limit applies may, at the time of issuance and at the Company's option, be allocated to (i) the contract which is in effect at the effective date of said separate policy and/or at the beginning of the period to which the reinstated limit applies, or (ii) the contract which was in effect at the effective date of the original policy. If the Company elects (i), said losses shall be subject to a separate retention and limit (as specified in the Retention and Limit Article) from that of the original policy period. 3. As respects multiple year policies, whether issued with one limit or reinstatement of the limit, each 12- month period within a multiple year policy shall be considered a separate period as regards the Company's retention and the aggregate policy limit. However, as respects business classified by the Company as "Project Specific" coverages, the entire multiple year term shall be considered one period as regards the Company's retention and the aggregate policy limit. 4. As respects property losses subject hereto, all individual losses directly occasioned by any one disaster, occurrence or loss or series of disasters, occurrences or losses arising out of one occurrence which occurs anywhere in the world, but limited in the United States of America and Canada to the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss event" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same loss event, except that the term "loss event" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same loss event. However, the loss event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same loss event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to above) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss event." d. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's "loss event." Except for those "loss events" referred to in subparagraphs (a) and (b) above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one loss event. However, as respects those "loss events" referred to in subparagraphs (a) and (b) above, if the disaster, occurrence or loss occasioned by the occurrence is of greater duration than 72 consecutive hours, then the Company may divide that disaster, occurrence or loss into two or more "loss events," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss. It is understood that losses arising from a combination of two or more perils as a result of the same occurrence shall be considered as having arisen from one "loss event." Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single "loss event" shall encompass a time period greater than 168 consecutive hours. Notwithstanding the foregoing, it is understood that the Company shall be the sole judge of what constitutes a single "loss event." F. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or, increases the Company's available capacity. Article VIII - Other Reinsurance Notwithstanding the provisions of paragraph B of Article V, the Company is permitted, but not required, to purchase other facultative and/or other treaty reinsurance on business subject to this Contract. Premiums ceded by the Company for reinsurance which inures to the benefit of this Contract or increases the Company's available capacity shall be deducted in determining subject premium hereunder as provided in Article XI. Article IX - Loss Settlements A. Wherever a claim is reserved by the Company for an amount of ultimate net loss greater than 50% of the Company's retention hereunder as respects policy limits or statutory benefits applicable to the claim which are greater than the Company's retention, and/or whenever, in the opinion of the Company, a loss appears likely to result in claim hereunder, the Company shall notify the Reinsurer. Within 90 days after any claim is reported to the Reinsurer in accordance with the foregoing, the Company shall advise the Reinsurer whether or not, in the sole judgment of the Company, the claim is anticipated to exceed its retention hereunder. Further, as respects claims arising under Casualty business subject hereto, the Company shall notify the Reinsurer whenever a claim involves a fatality, amputation, spinal chord damage, brain damage, blindness, extensive burns or multiple fractures, regardless of liability, if the policy limits or statutory benefits applicable to the claim are greater than the Company's retention. The Company shall also notify the Reinsurer of any declaratory judgment expense relating directly to a specific claim brought against a policy reinsured under this Contract. The Reinsurer shall have the right to participate in the adjustment of the loss at its own expense. B. All loss settlements made by the Company, provided they are within the terms of the original policies (other than extra contractual obligations and loss in excess of policy limits) and the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all ultimate net loss amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. The Company may, however, give the Reinsurer written notice of its intention to pay any loss on a certain date and may require the Reinsurer to have its share of such loss in the possession of the Company by such date; provided that the Reinsurer shall have a period of five business days after receipt of such written notice from the Company to mail or otherwise dispatch its payment. Article X - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company, and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XI - Reinsurance Premium A. As premium for the reinsurance coverage provided hereunder, the Company shall pay the Reinsurer 1.03% of the Company's net earned premium for the term of this Contract, subject to a minimum of $1,120,000 In the event this Contract expires on a "runoff" basis in accordance with the provisions of paragraph B of Article II, premium for the reinsurance provided hereunder shall be 1.03% of the Company's net earned premium for each 12-month period within the runoff period, as respects business in force on the effective date of expiration. B. The Company shall pay the Reinsurer an annual deposit premium of $1,402,360 in five equal quarterly installments of $280,472 on October 1, 1996, January 1, April 1, July 1 and October 1, 1997. It is understood that no deposit premium shall be payable during the runoff period, if any. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly.. Premium for the runoff period, if any, shall be payable by the Company within 60 days after the end of each 12-month period within the runoff period. Article XII - Late Payments A. It is understood and agreed that the provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXVII (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate, as quoted in the Wall Street Journal on the first business day of the month for which the calculation is being made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 45 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due five business days following receipt by the applicable Subscribing Reinsurer of written notification that payment has been received from Subscribing Reinsurers constituting at least 662/3% of the interests and liabilities of all Subscribing Reinsurers participating under the applicable layer of this Contract, who are active as of the due date; it being understood that said date shall not be later than 75 days from the date of transmittal by the Intermediary of the initial billing for each such payment. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be deemed as five business days following receipt of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting 1) a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit; or 2) either party from contesting the validity of any payment, or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. As provided under Article IX, it is understood and agreed that the Company shall furnish the Reinsurer with usual and customary claim information and nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from requesting additional information that it may deem necessary. F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer shall be deemed not to be active when it 1) ceases assuming new or renewal reinsurance business through the Intermediary; 2) is declared insolvent, or put in liquidation, conservatorship or rehabilitation by a competent regulatory authority or court; 3) is declared insolvent, or is the subject of an administrative order or enters provisional liquidation and/or liquidation; or 4) has a reduction in its statutory surplus or shareholders' funds of 50% or more from its statutory surplus or shareholders' funds as of the effective date of this Contract. G. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVI - Net Retained Lines A. This Contract applies only to that portion of any insurance or reinsurance (whether inter-company reinsurance and/or reinsurance assumed which has been declared to this Contract and accepted by the Reinsurer) the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in the Contract), and in calculating the amount of any loss hereunder and also computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance or reinsurance the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may be due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract 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 such error or omission is rectified as soon as possible after discovery. Article XVIII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered into the books of the Company. Article XIX - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XX - Federal Excise Tax If the Reinsurer is subject to the Federal Excise Tax, the Reinsurer agrees to allow the Company to withhold the required amount for the purpose of paying the Tax. In the event of any return premium becoming due hereunder, the Reinsurer will deduct from the amount of the return premium the same percentage as it allowed, and the Company or its agent should take steps to recover the Tax from the U. S. Government. Article XXI - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, 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 conservation 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 that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIII - Arbitration A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the two arbitrators will jointly petition the American Arbitration Association to appoint the third arbitrator from the AAA's Panel of Reinsurance Arbitrators. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies, underwriters at Lloyd's of London, reinsurance intermediaries and attorneys actively or formerly engaged in practicing law in the areas of insurance or reinsurance. E. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The arbitration shall take place in Woodland Hills, California or, if unanimously agreed by the panel, any other mutually acceptable location. G. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this article. However, nothing shall impair the rights of such reinsurers to assert several rather than joint defenses or claims, nor shall this provision be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint. H. The panel shall make its decision considering custom and practice as promptly as possible following the termination of hearings. The decision of any two arbitrators, when rendered in writing shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction. The panel is empowered to grant such interim relief as it may deem appropriate. I. Each party shall bear the expense of its own arbitrator and shall jointly and equally with the other party bear the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorney's fees and interest to the extent permitted by law. Insofar as the arbitration panel chooses to look to substantive law, it shall consider the law of the State of California. Article XXIV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXV - Agency Agreement Gryphon Insurance Group, Inc. shall be deemed the agent of the reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVI - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: New York, New York,this ____ day of _____________ 199___. __________________________________________ Gryphon Insurance Group, Inc., on behalf of Associated International Insurance Company Calvert Insurance Company Timberline Insurance Company Schedule A attached to the Excess Per Event Reinsurance Contract Effective: October 1, 1996 issued to Associated International Insurance Company Woodland Hills, California Calvert Insurance Company Philadelphia, Pennsylvania Timberline Insurance Company Eugene, Oregon through the auspices of Gryphon Insurance Group, Inc. New York, New York A. Umbrella business produced by Jean Deal & Associates, Dallas, Texas for the Specialty Lines Division of Gryphon Insurance Group, Inc., Woodland Hills, California. B. DIC business produced by the Pacific Coast DIC Division of Gryphon Insurance Group, Inc., Woodland Hills, California. C. General Property E&S business produced by the General E&S Division of Gryphon Insurance Group, Inc., Woodland Hills, California. D. Animal Mortality business produced by American Equine Insurance Group, Rolling Meadows, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. E. Canadian business produced by KMS Insurance Services, Toronto, Canada for Gryphon Insurance Group, Inc., Hoboken, New Jersey. F. Midwest Garage program produced by Business Risk Services, Geneva, Illinois for Gryphon Insurance Group, Inc., Hoboken, New Jersey. EX-23.1 10 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Gryphon Holdings Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 333-12775, 33-96922, and 33-83630) on Form S-8 of Gryphon Holdings Inc. of our report dated February 14, 1997, relating to the consolidated balance sheets of Gryphon Holdings Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two year period then ended, and all related schedules as of and for the years ended December 31, 1996 and 1995, which report appears in the December 31, 1996 annual report on Form 10-K of Gryphon Holdings Inc. KPMG Peat Marwick LLP New York, New York March 26, 1997 EX-23.2 11 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-12775, 33-96922, and 33-83630) pertaining to the 1995 Non-Employee Director Stock Option Plan of Gryphon Holdings Inc., 401(k) and Profit Sharing Plan of Gryphon Holdings Inc., and the 1993 Stock Option Plan and Restricted Stock Plan of Gryphon Holdings Inc., respectively, of our report dated February 21, 1995, with respect to the 1994 consolidated financial statements and schedules of Gryphon Holdings Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP New York, New York March 19, 1997 EX-27 12
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 280164 0 0 0 0 0 280471 23398 14326 12415 526984 309259 68683 0 0 24625 0 0 81 95055 526984 87929 16453 1203 1059 57700 40967 0 6216 53 6163 0 0 0 6163 .93 .93 155911 53402 4298 11520 30784 171307 (4298)
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