-----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, NTtSuNNmevB5vLWnHQ5OS103psCAB0ByXMxW/IRlVoD8SL5we/L01zZJ4Gbsg571 YrlymZt/rHiJcNoT3SmK+Q== 0000950134-96-004224.txt : 19960814 0000950134-96-004224.hdr.sgml : 19960814 ACCESSION NUMBER: 0000950134-96-004224 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19960813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERISAFE INC CENTRAL INDEX KEY: 0001018979 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752069407 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-10099 FILM NUMBER: 96610967 BUSINESS ADDRESS: STREET 1: 5550 LBJ FREEWAY STREET 2: STE 901 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144487414 MAIL ADDRESS: STREET 1: 5550 LBJ FREEWAY STREET 2: STE 901 CITY: DALLAS STATE: TX ZIP: 75240 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERISAFE, INC. (Exact name of Registrant as specified in its charter) TEXAS 6331 75-2069407 (State of incorporation) (Primary Standard (I.R.S. Employer Industrial Classification Identification No.) Code Number)
--------------------- 2301 HIGHWAY 190 WEST DERIDDER, LOUISIANA 70634 318-463-9052 (Address and telephone number of Registrant's principal executive offices) --------------------- MARK R. ANDERSON PRESIDENT 2301 HIGHWAY 190 WEST DERIDDER, LOUISIANA 70634 318-463-9052 (Name, address and telephone number of agent for service) --------------------- Copies to: JAMES E. O'BANNON FREDERICK W. KANNER JONES, DAY, REAVIS & POGUE DEWEY BALLANTINE 2300 TRAMMELL CROW CENTER 1301 AVENUE OF THE AMERICAS 2001 ROSS AVENUE NEW YORK, NEW YORK 10019 DALLAS, TEXAS 75201 212-259-8000 214-220-3939
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE - -------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.01 per share........ 12,650,000 $15.00 $189,750,000 $65,432 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
(1) Includes 1,650,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(a). --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH * * SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO * * REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH * * STATE. * * * *************************************************************************** SUBJECT TO COMPLETION, DATED AUGUST 13, 1996 PROSPECTUS 11,000,000 SHARES LOGO AMERISAFE, INC. CLASS A COMMON STOCK
------------------ All of the shares of Class A Common Stock offered hereby (the "Offering") are being sold by AMERISAFE, Inc. ("AMERISAFE" or the "Company"). Prior to this Offering, there has not been a public market for the Class A Common Stock of the Company. It is currently estimated that the initial public offering price will be $15.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. Application has been made to have the Class A Common Stock listed on the New York Stock Exchange under the symbol "ASF." Each share of Class A Common Stock has one vote and each share of the Company's Class B Common Stock has ten votes on all matters that may be submitted to a vote or consent of the shareholders of the Company. ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================================== UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ---------------------------------------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ---------------------------------------------------------------------------------------------------------------------------------- Total(3).......................... $ $ $ ==================================================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering estimated at $ payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 1,650,000 additional shares of Class A Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for shares of Class A Common Stock offered hereby will be available for delivery on or about , 1996, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SMITH BARNEY INC. PIPER JAFFRAY INC. , 1996. 3 AMERISAFE, INC. sm THE MANAGED RESULTS COMPANY --------------------- NOTICE TO NORTH CAROLINA PURCHASERS: THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE MANAGED RESULTS COMPANYSM IS A SERVICE MARK OF THE COMPANY. AN APPLICATION HAS BEEN FILED TO REGISTER THIS MARK WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE; HOWEVER, NO ASSURANCE CAN BE GIVEN THAT SUCH APPLICATION WILL BE ACCEPTED. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus (i) assumes no exercise of the Underwriters' option to purchase up to 1,650,000 additional shares of Class A Common Stock to cover over-allotments, if any, and (ii) reflects a reorganization of the Company (the "Reorganization") to be effected immediately prior to the closing of this Offering. See "Recent Reorganization." Unless the context otherwise requires, references in this Prospectus to "AMERISAFE" or the "Company" refer to AMERISAFE, Inc. and its subsidiaries. THE COMPANY AMERISAFE provides managed care workers' compensation products and services primarily to employers in hazardous occupation industries. The Company offers its client-employers a fully integrated program designed to lower the overall costs of workers' compensation claims by: (i) implementing and applying workplace safety programs designed to prevent occupational injuries; (ii) providing immediate, efficient and appropriate managed medical care to injured workers; and (iii) using intensive personal claims management practices to guide and encourage injured workers through the recovery and rehabilitation process with the primary goal of returning the injured worker to work as promptly as practicable. From 1991 through 1995, the Company has increased its revenues from $20.3 million to $69.7 million, or a compound annual growth rate of 36.1%. In this same period, the Company's net income (before cumulative effect of accounting change) increased from $1.8 million to $9.3 million, or a compound annual growth rate of 50.8%. As of March 31, 1996, the Company was licensed to provide workers' compensation coverage and services in 25 states and the U.S. Virgin Islands and provided its products and services to approximately 2,900 employers in 16 states, primarily in the southeastern United States. The Company integrates proactive safety services with intensive claims management practices and quality managed care to produce "managed results." The Company's managed results approach focuses on creating and maintaining direct, personal relationships with employers, employees and health care providers in order to design and promote services which are intended to produce lower overall occupational injury costs. The Company designates service teams for each client in order to foster personal relationships, provide continuity of services and implement specific solutions for individual client workers' compensation needs. Since it began operations in 1986, the Company has focused on providing its managed results products and services to employers whose employees are engaged in hazardous occupations, primarily the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. Employers engaged in hazardous occupation industries pay substantially higher than average workers' compensation rates. For example, the Company's logging clients pay generally an amount equal to 20% to 50% of their payroll to obtain workers' compensation coverage for their employees, compared to employers of clerical workers who pay generally less than 1% of their payroll to obtain such coverage. The Company believes that the high severity injuries typically suffered by employees engaged in hazardous occupations and the resulting high cost typically incurred by employers in providing the mandatory workers' compensation coverage for such employees provide the greatest opportunity to lower costs by applying the Company's managed results approach. By focusing on developing and implementing client-specific workplace safety techniques and intensive claims management, the Company believes that substantial cost savings can be achieved when compared to the traditional workers' compensation approach to hazardous occupation industries. By reducing the overall cost of providing workers' compensation coverage to its employer-clients, the Company believes its managed results approach permits it to price its products and services competitively. As of March 31, 1996, more than two-thirds of AMERISAFE's client-employers were involved in hazardous occupation industries. The cost to employers of providing workers' compensation benefits in the United States totaled approximately $58 billion in 1994. From 1984 to 1990, workers' compensation costs increased an average of 13.3% per year and, from 1990 to 1992, workers' compensation costs increased an average of 6.3% per year. 3 5 The substantial growth in the workers' compensation market is primarily attributable to the increased costs of medical treatment and an increase in workers' compensation litigation, which affects both medical benefits and indemnity payments. The Company believes that successful containment of these expenses depends largely upon early intervention in the claims process and promptly enabling an injured employee to return to work. The Company also believes that traditional insurers have focused on high premium volume and generally maintain minimal staffing. As a result, the Company believes that the workers' compensation industry is generally characterized by limited safety services, inefficient claims adjustment processes and ineffective medical cost management. The Company's strategy is to utilize its managed results approach in an effort to prevent workplace injuries, and, when an injury does occur, to arrange for timely, high quality and cost-effective managed care. The key elements of the Company's strategy are to (i) focus on hazardous occupation employers, (ii) improve workplace safety to reduce workplace accidents, (iii) manage care through personal, direct contact, (iv) direct injured workers to appropriate health care providers, and (v) pursue growth both internally and through acquisitions. BENEFITS TO EXISTING SHAREHOLDERS The Company will use a portion of the net proceeds of the Offering to repay indebtedness under the Company's existing credit facility. This credit facility is secured by a pledge of the Company's outstanding Class B Common Stock held by Millard E. Morris, the Company's Chairman of the Board of Directors and Chief Executive Officer, and the stock of certain of the Company's subsidiaries. Upon this repayment, the credit facility will be cancelled and the pledge of such stock will be released. Further, in connection with a reorganization of the Company to be effected immediately prior to the completion of the Offering, the Company will distribute (i) all of the outstanding capital stock of Auto One Acceptance Corporation ("AOAC") to Mr. Morris and Mark R. Anderson, the Company's President, and (ii) shares of two of the Company's existing subsidiaries to Mr. Morris. Prior to such distribution, the Company will contribute to AOAC additional capital in the form of a note in the amount of $50 million. This note will be repaid with the proceeds of the Offering. See "Recent Reorganization" and "Use of Proceeds." RISK FACTORS Prospective purchasers of the Class A Common Stock should consider certain factors affecting the Company and an investment in the Class A Common Stock. See "Risk Factors." 4 6 THE OFFERING Class A Common Stock Offered by the Company(1)...... 11,000,000 shares Common Stock to be Outstanding after the Offering: Class A Common Stock(1)(2)........................ 11,000,000 shares Class B Common Stock(3)........................... 17,400,000 shares Total..................................... 28,400,000 shares Use of Proceeds by the Company...................... To repay existing indebtedness (including the indebtedness incurred in connection with the Reorganization), to increase capital and surplus and for other general corporate purposes. Proposed NYSE Symbol................................ ASF
- --------------- (1) Does not include an additional 1,650,000 shares of Class A Common Stock that may be sold pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Excludes (i) 600,000 shares of Class A Common Stock issuable pursuant to outstanding stock options having an exercise price of $12.00 per share granted under the AMERISAFE, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan"), and (ii) 6,000 shares of Class A Common Stock to be issued to non-employee directors upon completion of the Offering pursuant to the Stock Incentive Plan. See "Management -- Stock Incentive Plan" and "Management -- Director Compensation." (3) See "Description of Capital Stock -- Class A Common Stock and Class B Common Stock" regarding the conversion rights of the Class B Common Stock. 5 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- INCOME STATEMENT DATA: Revenues: Premiums earned.................................... $17,599 $28,640 $35,902 $40,461 $58,167 $10,918 $15,026 Service fee income................................. 578 800 987 2,468 4,110 582 1,671 Investment income.................................. 1,745 1,818 2,146 2,484 4,519 809 1,295 Fees and other from affiliates..................... 371 1,985 2,154 1,732 2,881 511 534 ------- ------- ------- ------- ------- ------- ------- Total revenues............................... 20,293 33,243 41,189 47,145 69,677 12,820 18,526 Expenses: Claim and claim settlement expenses................ 12,136 17,622 20,262 25,250 32,924 6,725 9,250 Commission and other underwriting expenses......... 4,577 5,561 7,555 8,507 13,524 2,428 3,512 General and administrative......................... 570 1,910 2,798 4,406 6,810 1,001 2,010 Interest........................................... 442 642 850 726 845 210 279 Depreciation and amortization...................... 4 93 240 703 1,006 169 332 ------- ------- ------- ------- ------- ------- ------- Total expenses............................... 17,729 25,828 31,705 39,592 55,109 10,533 15,383 ------- ------- ------- ------- ------- ------- ------- Income before federal income taxes................... 2,564 7,415 9,484 7,553 14,568 2,287 3,143 Federal income taxes................................. 778 2,375 2,768 2,414 5,234 645 909 ------- ------- ------- ------- ------- ------- ------- Net income before cumulative effect of change in accounting for income taxes........................ 1,786 5,040 6,716 5,139 9,334 1,642 2,234 Cumulative effect of change in accounting for income taxes.............................................. 334 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income................................... $ 2,120 $ 5,040 $ 6,716 $ 5,139 $ 9,334 $ 1,642 $ 2,234 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share............... $ 0.43 $ 0.10 ======= ======= Pro forma weighted average shares outstanding........ 21,666 21,666 Loss Ratio........................................... 69.0% 61.5% 56.4% 62.4% 56.6% 61.6% 61.6%
MARCH 31, 1996 --------------------------- ACTUAL AS ADJUSTED(1) -------- -------------- BALANCE SHEET DATA: Cash and investments.................................................................... $ 88,790 $168,240 Total assets............................................................................ 130,492 209,942 Notes payable........................................................................... 12,516 1,316 Stockholders' equity.................................................................... 34,381 124,731
- --------------- (1) Adjusted to give effect to (i) the Reorganization, (ii) the sale of 11,000,000 shares of Class A Common Stock in the Offering at an assumed public offering price of $15 per share less the estimated underwriting discounts and Offering expenses, and (iii) the application of the net proceeds of the Offering as described herein. See "Use of Proceeds" and "Recent Reorganization." 6 8 THE COMPANY The Company was incorporated as a Texas corporation in 1985 and is principally engaged through its subsidiaries in providing workers' compensation products and services. The Company's principal executive offices are located at 2301 Highway 190 West, DeRidder, Louisiana 70634 (telephone: 318-463-9052) and at 5550 LBJ Freeway, Suite 901, Dallas, Texas 75240 (telephone: 214-448-7414). The Company's principal operating subsidiary is American Interstate Insurance Company, a Louisiana corporation ("American Interstate"). See "Business." RISK FACTORS In addition to other information contained in this Prospectus, prospective investors should consider carefully the following factors in evaluating an investment in the shares of the Class A Common Stock offered hereby. GOVERNMENT REGULATION The Company is subject to substantial regulation by the governmental agencies in the states in which it operates, and will be subject to such regulation in any state in which the Company provides workers' compensation coverage and services in the future. These regulations are primarily intended to protect covered employees and policyholders rather than insurance companies or their shareholders. State regulatory agencies have broad administrative power with respect to all aspects of the Company's business, including premium rates, capital and surplus requirements, reserve requirements, transactions with affiliates, changes in control, investment criteria and policy forms. Under Louisiana law, an insurance company may not, without regulatory approval, pay to its shareholders within a 12-month period dividends or other distributions of cash or property the total fair market value of which exceeds the lesser of (i) ten percent of surplus as to policyholders at the end of the prior calendar year or (ii) the prior calendar year's net income (less any realized capital gains). This requirement would limit American Interstate's ability to make distributions to AMERISAFE in 1996 to approximately $2.7 million. There is no assurance that the Company will seek approval from state regulatory authorities to permit its insurance subsidiaries to pay dividends or make distributions or that, if sought, such approval will be obtained. This approval requirement may limit the amount of distributions which may be made by such subsidiaries and may decrease the amount of capital available to the Company for expansion opportunities and other purposes. Workers' compensation coverage is a creation of state law, is subject to change by the applicable state legislature and is influenced by the political process in each state. Several states have mandated that employers receive coverage only from funds operated by the state. New laws affecting the workers' compensation system in states where the Company presently operates or may operate in the future, including laws that require all employers to participate in state sponsored funds or that mandate premium reductions, could have a materially adverse effect on the demand for the Company's services and programs, as well as on the Company's business, financial condition or results of operations. From time to time, Congress has also considered federal regulation of the health insurance industry. In 1993, the Clinton administration proposed legislation that would have put into effect substantial changes in the health care industry. Such legislation has not been adopted. Any legislation relating to a comprehensive health care program could adversely affect the Company. See "Business -- Regulation." CONTROL BY A SINGLE SHAREHOLDER The Company's equity currently consists of Class A Common Stock and Class B Common Stock (collectively, the "Common Stock"), which vote together as a single class on all issues, except as otherwise required by law. Following the Offering, Millard E. Morris, the Chairman of the Board of Directors and Chief Executive Officer of the Company, will beneficially own 17,126,521 shares of the Company's Class B Common Stock, each share of which has ten times the voting power of a share of Class A Common Stock. As a result, Mr. Morris will control approximately 92.6% of the voting power of the Common Stock (91.8% if the 7 9 Underwriters' over-allotment option is exercised in full) and will control the outcome of all shareholder votes, including those relating to amending the Company's Amended and Restated Articles of Incorporation (the "Articles") or Restated Bylaws (the "Bylaws"), election of directors and certain mergers and other significant corporate transactions. This could have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Shareholders" and "Description of Capital Stock -- Class A Common Stock and Class B Common Stock." TRANSACTIONS WITH CONTROLLING SHAREHOLDER After the consummation of the Offering, the Company will have business relationships with certain entities controlled by Millard E. Morris, the principal shareholder, Chairman of the Board of Directors and Chief Executive Officer of the Company. Some of these entities will receive services (e.g., administrative services and aviation services) from the Company for a fee. The Company also subleases office space from one of these entities. In addition, the Company has entered into a Tax Sharing Agreement in connection with the Reorganization. See "Certain Transactions and Relationships" and "Recent Reorganization." HOLDING COMPANY STRUCTURE The Company is a holding company, the primary assets of which are the capital stock of its subsidiaries. Accordingly, the Company is dependent on the cash flow from its subsidiaries, received through dividends or other intercompany transfers of funds, to meet its obligations. Although the Company does not intend to pay dividends for the foreseeable future, the Company will be dependent on such sources to pay, if and when declared by the Company's Board of Directors, dividends on the Common Stock or any outstanding shares of the Company's preferred stock, $.01 par value per share ("Preferred Stock"). See "Dividend Policy." Dividends and other payments received from the Company's subsidiaries, together with any net proceeds from the Offering retained by the Company for general corporate purposes, are expected, for the foreseeable future, to be the Company's major source of liquidity. None of the Company's subsidiaries will be obligated to declare or pay dividends or make other capital distributions to the Company. In addition, the payment of dividends by the Company's subsidiaries may be restricted under applicable law. See "-- Government Regulation" above. Limitations on the ability of the Company's subsidiaries to make such payments could adversely impact the Company's liquidity. Under Louisiana law applicable to insurance holding companies, the Company's insurance subsidiaries may not enter into certain transactions, including certain reinsurance agreements, management agreements, service contracts and cost sharing arrangements, with members of their insurance holding company system unless they have notified the Commissioner of Insurance of their intention to enter into such a transaction at least 30 days in advance and the Commissioner of Insurance has not disapproved the transaction within such period. Among other things, such transactions are subject to the requirements that their terms be fair and reasonable, that charges or fees for services performed must be reasonable and that the interests of policyholders not be adversely affected. NEED FOR CAPITAL The Company may from time to time need additional capital and surplus to meet certain state regulatory requirements. In particular, the Company anticipates that its insurance subsidiaries will require capital to meet current statutory surplus needs and any additional funding requirements that may periodically arise. From time to time, the Company may be required to increase the capital and surplus of its insurance subsidiaries to remain in compliance with state regulatory requirements. The Company intends to use a portion of the net proceeds from this Offering for this purpose. The Company expects that additional capital will be required by regulatory authorities for the Company to further expand into additional states. If the Company is unable to generate sufficient capital, either internally or from outside sources, it could be required to reduce its growth or to delay or abandon plans to expand into additional states. Although the Company has met its capital needs in the past, there can be no assurance that capital will continue to be available when needed or, if available, will be on terms acceptable to the Company. Additionally, if such capital is not available, there can be no assurance that the Company will be able to maintain its current rating of "A" (Excellent) from A.M. Best 8 10 Company, Inc. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- A.M. Best Rating." The National Association of Insurance Commissioners ("NAIC") has adopted a system of assessing minimum capital adequacy, which system is applicable to the Company's insurance subsidiaries. This system, known as risk-based capital ("RBC"), is used to identify companies that merit further regulatory action by comparing adjusted surplus to the required surplus, which reflects the risk profile of the insurer. Insurers having less statutory surplus than that required by the RBC model formula are subject to regulatory action depending on the level of capital inadequacy. At December 31, 1995, the RBC ratios of the Company's insurance subsidiaries were in excess of statutory minimums. MANAGEMENT OF GROWTH; EXPANSION STRATEGY Since it began operations in 1986, the Company has experienced significant growth in its revenues, the number of its employees and the scope of its operations. This growth has and will require the Company to obtain additional capital. See "-- Need for Capital" above. This growth has also resulted in, and is expected to continue to create, new and increased responsibilities for management personnel, as well as additional demands on the Company's operating and financial systems. The Company's business and future growth will depend on the efforts of key management personnel and the Company's ability to attract and retain qualified management personnel. The Company's continued growth also will require it to recruit qualified persons, to enhance managerial systems for its operations, and to successfully integrate new employees and systems into its existing operations. If the Company is unable to continue to manage growth effectively, the Company's business, financial condition or results of operations could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategy -- Pursue Growth Opportunities." The Company intends to pursue growth opportunities through both greater market penetration in existing markets and expansion into new markets, targeting employers in industries and geographic areas in which the Company does not presently conduct business. In addition, the Company intends to pursue acquisitions of other workers' compensation insurers or books of indemnity business. To date, the Company has never acquired another workers' compensation insurer and is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. The Company will compete for acquisition and expansion opportunities with many entities that have substantially greater resources. In addition, acquisitions may involve difficulties in the retention of personnel, diversion of management's attention, unexpected legal liabilities and tax and accounting issues. There can be no assurance that the Company will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into its operations or expand into new markets. Once integrated, acquisitions may not achieve levels of revenues, profitability or productivity comparable to the existing business of the Company or otherwise perform as expected. The occurrence of any of these events could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Strategy." Future growth of the Company's operations depends, in part, on its ability to enter markets in additional states. To achieve this objective, the Company must obtain regulatory approval, win acceptance in the local market, adapt its procedures to each state's regulatory system (which differs materially from state to state) and expand its network of agents. The time required to obtain regulatory approval varies from state to state, and there can be no assurance that the Company will obtain such approval in each state it may seek to enter. See "Business -- Regulation." The Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating from A.M. Best Company, Inc., although there can be no assurances in this regard. See "Business -- A.M. Best Rating." 9 11 FOCUS ON HAZARDOUS OCCUPATION INDUSTRIES Since it began operations in 1986, the Company has focused on providing workers' compensation products and services to employers whose employees are engaged in hazardous occupations and, as a result, are susceptible to serious injuries. Such injuries typically result in substantial costs for both medical treatment and indemnity payments, as well as the costs of managing the delivery of care to injured employees. To limit its exposure, the Company has "excess of loss" reinsurance in effect with a number of reinsurance carriers. The failure of any such reinsurer to meet its obligations to the Company could have a materially adverse effect on the Company's business, financial condition or results of operations. See "-- Reliance on Reinsurance." RELIANCE ON REINSURANCE Due to the Company's exposure to significant claims resulting from injuries suffered by the employees of its clients, the Company has "excess of loss" reinsurance in effect with a number of reinsurance carriers. This reinsurance, in the aggregate, currently provides coverage for each claim occurrence up to $50,000,000 in excess of the Company's retention of $200,000. The Company presently intends to increase its retention level under these policies upon their expiration in July 1997. The Company regularly performs internal reviews of the financial strength of its reinsurers. However, if a reinsurer is unable to meet any of its obligations to the Company under the reinsurance agreements, whether due to the incurrence of multiple large claims by the Company's clients or otherwise, the Company would be responsible for the payment of all claims and claim settlement expenses which the Company has ceded to such reinsurer. Any such failure on the part of the Company's reinsurers could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Reinsurance." QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company establishes reserves to cover its estimated liability for claims and claim settlement expenses with respect to reported claims and claims incurred but not yet reported as of the end of each accounting period. The process of establishing reserves involves many factors and is inherently uncertain. The Company's results of operations may fluctuate on a quarterly basis due in part to the seasonal nature of the businesses conducted by its clients and also as a result of changes in the Company's reserve estimates, as well as other factors. CONCENTRATION IN LOGGING INDUSTRY Since it began operations in 1986, the Company has focused on providing its workers' compensation products and services to employers in the logging industry, primarily in the southeastern United States. In 1994, the Company began a program of providing its services to businesses in other hazardous occupation industries. For the year ended December 31, 1995 and the three months ended March 31, 1996, approximately 59.6% and 45.5%, respectively, of the Company's gross premiums earned were derived from its clients in the logging industry. Because premiums are, in general, determined as a percentage of its clients' payroll expense (or, in the case of its logging clients, the clients' production of wood products), premiums fluctuate depending upon the level of business activity of its clients. As a result, the Company's gross premiums earned are dependent upon economic conditions generally and, in particular, the demand for the wood products harvested by its logging clients. Further, due to the concentration of the Company's clients in the logging industry, the Company's gross premiums earned tend to be lower during periods of inclement weather when logging activity is reduced. See "-- Quarterly Fluctuations in Operating Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." RELIANCE ON INDEPENDENT AGENTS The Company markets a portion of its workers' compensation products and services through independent agents. For the year ended December 31, 1995 and the three months ended March 31, 1996, independent agents accounted for approximately 39.1% and 47.8%, respectively, of the Company's gross premiums earned. No independent agent accounted for 5.0% or more of the Company's gross premiums earned for either period. 10 12 These agents are not obligated to promote the Company's products and services and may sell competitors' insurance products. As a result, the Company's business depends in part on the marketing effort of these agents and on the Company's ability to continue to offer workers' compensation products and services that meet the requirements of these agents and their customers. In addition, as the Company expands into additional states and industries, it may elect to establish additional independent agents to market its products. Failure of these independent insurance agents to market successfully the Company's products and services could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Sales and Marketing." TAX-FREE REORGANIZATION Immediately prior to the completion of the Offering, the Company distributed the stock of certain subsidiary corporations to existing shareholders of the Company in transactions intended to qualify as tax-free distributions for federal income tax purposes under section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). Prior to such distributions, the Board of Directors of the Company received an opinion of counsel to the effect that such distributions should so qualify for federal income tax purposes. The opinion of counsel received by the Board of Directors of the Company is not binding on the Internal Revenue Service (the "IRS"), and there can be no assurance that the IRS will agree with the opinion. No ruling with respect to such distributions has been requested from the IRS, however, and there can be no assurance that the IRS will not take the position that such distributions do not qualify as tax-free. If the distributions were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gain on the distributions equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock. See "Recent Reorganization." DEPENDENCE ON KEY PERSONNEL The Company's success is largely dependent on the efforts of Millard E. Morris, its Chairman of the Board of Directors and Chief Executive Officer, and Mark R. Anderson, its President. The loss of the services of either of these individuals could have a materially adverse effect on the Company. Further, the employment agreement between the Company and Mr. Morris does not provide for him to devote full time to the business of the Company. See "Management -- Employment Agreements." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Class A Common Stock and there can be no assurance that an active trading market for the Class A Common Stock will develop or be sustained after the Offering. The initial public offering price of the Class A Common Stock will be determined through negotiations between the Company and representatives of the Underwriters, and may not be indicative of the market price. Additionally, the market price of the Class A Common Stock could be subject to significant fluctuations in response to period-to-period variations in operating results of the Company, changes in general conditions in the economy or the financial markets, developments in the health care or insurance industries or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance. See "Underwriting." COMPETITION The workers' compensation industry is highly competitive. The Company's competitors include, among others, insurance companies, specialized provider groups, in-house benefits administrators, state insurance pools and other significant providers of health care and insurance services. A number of the Company's current and potential competitors are significantly larger, with greater financial and operating resources than the Company and can offer their services nationwide. Additionally, the Company does not offer the full line of insurance products which is offered by some of its competitors. There can be no assurance that the Company will be able to compete effectively in the future. See "Business -- Competition." 11 13 SHARES ELIGIBLE FOR FUTURE SALE After completion of the Offering, the Company will have outstanding 11,000,000 shares of Class A Common Stock (12,650,000 shares if the Underwriters' over-allotment option is exercised in full) and 17,400,000 shares of Class B Common Stock. Of those shares, 11,000,000 shares of Class A Common Stock offered hereby (12,650,000 if the Underwriter's over-allotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"). All of the shares of Class B Common Stock were issued by the Company in private transactions prior to the Offering and are "restricted securities" as that term is defined in Rule 144 and are tradable subject to compliance with Rule 144. The Company and its existing shareholders, who upon completion of the Offering will own 17,400,000 shares of Class B Common Stock, have agreed not to dispose of any shares of Class A Common Stock or any securities convertible into or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan) for a period of 180 days from the date of this Prospectus, without the prior written consent of Smith Barney Inc., on behalf of the Underwriters. Sales of substantial amounts of Class A Common Stock or Class B Common Stock, or the perception that such sales could occur, could adversely affect market prices for the Class A Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. See "Shares Eligible for Future Sale." In addition, Messrs. Morris and Anderson are entitled to certain registration rights with respect to the shares of the Class A Common Stock. See "Description of Capital Stock -- Class A Common Stock and Class B Common Stock -- Registration Rights Agreement." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Class A Common Stock in the Offering will experience immediate and substantial dilution, approximately $10.61 per share, in the net tangible book value per share of Class A Common Stock and may incur additional dilution upon the exercise of outstanding stock options. See "Dilution" and "Management -- Stock Incentive Plan -- Awards." ANTI-TAKEOVER PROVISIONS The Board of Directors of the Company is authorized to issue up to 25,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders of the Company. The rights and preferences of any such Preferred Stock may be superior to those of the Class A Common Stock and may adversely affect the rights of the holders of the Class A Common Stock. The Company has no present intention to issue any shares of Preferred Stock. The voting structure of the Common Stock and other provisions of the Articles are intended to encourage a person interested in acquiring the Company to negotiate with, and to obtain the approval of, the Board of Directors of the Company in connection with any such transaction. However, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Moreover, the existence of these provisions may have a depressive effect on the market price of the Class A Common Stock. In addition, the Company is subject to the provisions of Louisiana law applicable to insurance holding companies that prohibit a merger or change in control of the Company without the approval of the Louisiana Department of Insurance. See "Description of Capital Stock -- Anti-Takeover Provisions." 12 14 USE OF PROCEEDS Assuming a public offering price of $15 per share, the net proceeds to the Company from the sale of the 11,000,000 shares of Class A Common Stock offered hereby, after deducting the estimated underwriting discounts and commissions and Offering expenses, are estimated to be approximately $152.5 million ($175.5 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from the Offering as follows: (i) $50.0 million to repay a note issued as a capital contribution to Auto One Acceptance Corporation in connection with the Reorganization (Immediately prior to the Reorganization AOAC was a wholly owned subsidiary of the Company; immediately following the Reorganization AOAC will be owned by Messrs. Morris and Anderson); (ii) $12.1 million to repay notes issued to a former shareholder and former subsidiaries in connection with the Reorganization; (iii) $10.0 million to repay in full indebtedness to Banc One Capital Partners II, Ltd., which matures in January 2002 and bears interest at a rate equal to the London Interbank Offered Rate plus 6.0% (11.5% at July 31, 1996); and (iv) $900,000 to repay in full indebtedness to certain individuals incurred by the Company in September 1995 in connection with the acquisition of Hammerman & Gainer, Inc., a subsidiary of the Company. Such indebtedness bears interest at 2.667% per annum and is repayable in four equal installments with the last such payment due in September 1999. The balance of the estimated net proceeds from the Offering (approximately $79.5 million, or $102.5 million if the Underwriters' over-allotment option is exercised in full) will be retained by the Company and used to increase its capital and surplus and for other general corporate purposes. Pending such use, the Company intends to invest such proceeds in investment-grade debt securities. For information relating to the Reorganization, see "Recent Reorganization" below. DIVIDEND POLICY The Company does not currently intend to pay cash dividends to its shareholders. Any determination to pay cash dividends in the future and their amounts, however, will be at the discretion of the Board of Directors and will depend upon the Company's earnings, financial condition, capital requirements, plans for expansion, contractual restrictions, restrictions imposed by applicable law and regulations and other factors deemed relevant by the Board of Directors. The principal source for cash from which to make dividend payments will be dividends and other distributions from the Company's subsidiaries. The Company has not paid any dividends to its shareholders in the past two years except for the distributions described below under "Recent Reorganization." See "Risk Factors -- Government Regulation" and "Management's Discussion and Analysis of Results of Operations -- Liquidity and Capital Resources." 13 15 RECENT REORGANIZATION Immediately prior to completion of the Offering, the Company effected certain transactions to separate certain non-workers' compensation related businesses from its workers' compensation businesses and otherwise facilitate the Offering (the "Reorganization"). The Reorganization principally consisted of the following steps: (i) The Company distributed all of the stock of certain corporations conducting insurance agency and other unrelated businesses (the "MorTem Corporations") and 51% of the capital stock of two other subsidiaries -- Southern Underwriters, Inc. ("SU"), and Morris, Temple & Trent Financial Services, Inc. ("MTTFS") -- to a former shareholder of the Company in exchange for all shares of Class B Common Stock then owned by such shareholder. In addition, the Company paid such shareholder $8.0 million and contributed additional capital to the MorTem Corporations in the amount of $4.1 million, in each case, in the form of notes, bearing interest at 8.0%. Such notes will be paid with the proceeds of the Offering. (ii) The Company distributed all of the capital stock of Auto One Acceptance Corporation ("AOAC") to Messrs. Morris and Anderson on a pro rata basis and the remaining 49% of the capital stock of SU and MTTFS to Mr. Morris. Prior to such distribution, the Company contributed to AOAC additional capital in the amount of $50 million, in the form of a note bearing interest at 8.0%. Such note will be paid with proceeds of the Offering. The Board of Directors of the Company, in reliance upon the advice of counsel to the Company, believes that the distributions of the stock of the MorTem Corporations, AOAC, SU and MTTFS (the "Distributed Subsidiaries") described in steps (i) and (ii) above (the "Distributions") should qualify as tax-free under section 355 of the Code. In general, if the Distributions so qualify as tax-free under section 355 of the Code, (i) the Company will not be taxed on any unrealized appreciation on the value of the stock of the Distributed Subsidiaries, and (ii) the shareholders receiving such Distributions will not be taxed on the value of the stock received. The Board of Directors of the Company received an opinion of Jones, Day, Reavis & Pogue, counsel to the Company, to the effect that for federal income tax purposes the Distributions should qualify as tax-free under section 355 of the Code. Such opinion of counsel was based upon and subject to certain assumptions, facts and representations provided by the Company and certain of the Company's shareholders. The Company is not aware of any present facts or circumstances which should make such assumptions, facts, representations and advice unobtainable or untrue. However, certain future events not within the control of the Company, including, for example, certain dispositions of stock of the Company or the Distributed Subsidiaries after the Distributions, could cause the Distributions not to qualify as tax-free. The opinion of counsel received by the Board of Directors of the Company has no binding effect on the IRS and there can be no assurance that the IRS will agree with the opinion. A ruling has not been sought from the IRS with respect to the federal income tax consequences of the Reorganization, and it is possible that the IRS may take the position that some or all of the Distributions do not qualify as tax-free, whether or not the assumptions, facts, representations and advice referred to above are received and are true at the time of the Reorganization, and such position may ultimately be upheld. If a Distribution were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gain on the Distribution equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock. The Company believes that any taxable gain recognized if the Distributions fail to qualify for tax-free treatment would be substantial and would have a materially adverse effect on the Company's business, financial condition or results of operations. Further, each Company shareholder receiving stock of a Distributed Subsidiary in a distribution not qualifying as tax-free would be treated as receiving a distribution, taxable as a dividend, in an amount equal to the fair market value of such stock on the date of distribution. The foregoing summary of the anticipated principal federal income tax consequences of the Reorganization under current law is for general information only and does not purport to cover all federal income tax consequences or any tax consequences that may arise under the tax laws of other jurisdictions. The Company has not requested, and its counsel will not be rendering, any opinion with respect to the tax consequences of the Reorganization under the laws of any state, local or foreign government. 14 16 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at March 31, 1996, as adjusted to reflect the transactions consummated in connection with the Reorganization (see "Recent Reorganization") and as further adjusted to reflect the sale of the 11,000,000 shares of Class A Common Stock offered hereby and the application of the net proceeds therefrom as described under "Use of Proceeds," assuming a public offering price of $15 per share for the Class A Common Stock and no exercise of the Underwriters' over-allotment option. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto, included elsewhere in this Prospectus.
MARCH 31, 1996 --------------------------- AS ADJUSTED ACTUAL FOR THE OFFERING ------- ---------------- (IN THOUSANDS) Notes payable........................................................ $12,516 $ 1,316 Stockholders' equity:(1) Preferred Stock, par value $.01 per share, 25,000,000 shares authorized: Series B -- Cumulative Convertible 8% Preferred Stock; 510.167 shares issued and outstanding; 0 shares issued and outstanding, as adjusted.................................................... -- -- Class A Common Stock, par value $.01 per share, 100,000,000 shares authorized; 0 shares issued and outstanding; 11,000,000 shares issued and outstanding, as adjusted............................. -- 110 Class B Common Stock, par value $.01 per share, 100,000,000 shares authorized; 11,884,647 shares issued and outstanding; 17,400,000 shares issued and outstanding, as adjusted...................... 119 174 Additional paid-in capital........................................... 1,362 152,340 Retained earnings (deficit).......................................... 32,627 (28,166) Unrealized gain on available-for-sale securities, net of taxes........................................................ 273 273 ------- -------- Total stockholders' equity.................................... 34,381 124,731 ------- -------- Total capitalization....................................... $46,897 $126,047 ======= ========
- --------------- (1) Reflects a 3,603.63-for-one common stock split, the reclassification of the Company's then existing common stock to Class B Common Stock, the authorization of the Class A Common Stock, a change in the par value of the Preferred Stock from $1.00 per share to $.01 per share, and an increase in the number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock to 100,000,000 shares, 100,000,000 shares and 25,000,000 shares, respectively, effected by an amendment to the Company's Articles on August 9, 1996. 15 17 DILUTION At March 31, 1996, the pro forma net tangible book value of the Company was a deficit of $27.7 million, or $(1.59) per share of Common Stock. Pro forma net tangible book value is determined by deducting from net tangible book value amounts to be paid in connection with the Reorganization from the proceeds of the Offering. Pro forma net tangible book value per share is determined by dividing the Company's net tangible book value (total tangible assets less total liabilities) by the total number of shares of Common Stock outstanding, giving effect to the conversion of all outstanding shares of the Company's Series B Cumulative Preferred Stock and the 3,603.63-for-one stock split both of which occurred subsequent to March 31, 1996. After giving effect to the sale of the 11,000,000 shares of Class A Common Stock offered hereby at an assumed public offering price of $15 per share and after deducting the estimated underwriting discounts and commissions and Offering expenses, the adjusted net tangible book value at March 31, 1996 would have been approximately $124.7 million, or $4.39 per share of the Company's Common Stock. This amount represents an immediate increase in net tangible book value of $5.98 per share to the existing shareholders and an immediate dilution in net tangible book value of $10.61 per share to new investors purchasing shares of Class A Common Stock in the Offering. The following table illustrates this dilution on a per share basis: Assumed public offering price per share of Class A Common Stock.... $15.00 Pro forma net tangible book value per share of Common Stock before the Offering(1)........................................ $(1.59) Increase per share of Common Stock attributable to new investors..................................................... 5.98 ------ Net tangible book value per share of Common Stock after the Offering......................................................... 4.39 ------ Dilution in net tangible book value per share of Class A Common Stock to new investors........................................... $10.61 ======
- --------------- (1) Adjusted to give effect to the Reorganization. The following table compares the number of shares of Common Stock acquired from the Company, the total consideration paid and the average consideration per share of Common Stock paid by (i) existing shareholders and (ii) new investors purchasing shares of Class A Common Stock in the Offering, based upon an assumed public offering price of $15 per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing shareholders....... 17,400,000 61.3% $ 1,481,000 0.9% $ 0.09 New investors............... 11,000,000 38.7 165,000,000 99.1 $ 15.00 ---------- ------ ------------ ------ Total............. 28,400,000 100.0% $166,481,000 100.0% ========== ====== ============ ======
The foregoing information assumes (i) no exercise of the Underwriters' over-allotment option and (ii) no exercise of outstanding stock options to purchase 600,000 shares of Class A Common Stock granted pursuant to the Stock Incentive Plan. Such stock options have an exercise price of $12.00 per share. To the extent that these stock options are exercised, there would be further dilution per share to new investors. See "Management -- Stock Incentive Plan." 16 18 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company as of and for each of the five fiscal years ended December 31, 1995, and as of and for the three months ended March 31, 1995 and 1996. The statements of income and balance sheet data for each of the three fiscal years ended December 31, 1995 have been derived from the Company's consolidated financial statements, which were audited by Ernst & Young LLP, independent certified public accountants. The statements of income and balance sheet data for the years ended December 31, 1991 and 1992 and for the three months ended March 31, 1995 and 1996 are unaudited, but include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results for the three months ended March 31, 1996 are not necessarily indicative of the results expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and the Notes thereto and other financial information included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: Premiums earned............................... $17,599 $28,640 $35,902 $40,461 $ 58,167 $10,918 $15,026 Service fee income............................ 578 800 987 2,468 4,110 582 1,671 Investment income............................. 1,745 1,818 2,146 2,484 4,519 809 1,295 Fees and other from affiliates................ 371 1,985 2,154 1,732 2,881 511 534 ------- ------- ------- ------- ------- ------- ------- Total revenues.......................... 20,293 33,243 41,189 47,145 69,677 12,820 18,526 Expenses: Claims and claim settlement expenses.......... 12,136 17,622 20,262 25,250 32,924 6,725 9,250 Commission and other underwriting expenses.... 4,577 5,561 7,555 8,507 13,524 2,428 3,512 General and administrative.................... 570 1,910 2,798 4,406 6,810 1,001 2,010 Interest...................................... 442 642 850 726 845 210 279 Depreciation and amortization................. 4 93 240 703 1,006 169 332 ------- ------- ------- ------- ------- ------- ------- Total expenses.......................... 17,729 25,828 31,705 39,592 55,109 10,533 15,383 ------- ------- ------- ------- ------- ------- ------- Income before federal income taxes.............. 2,564 7,415 9,484 7,553 14,568 2,287 3,143 Federal income taxes............................ 778 2,375 2,768 2,414 5,234 645 909 ------- ------- ------- ------- ------- ------- ------- Net income before cumulative effect of change in accounting.................................... 1,786 5,040 6,716 5,139 9,334 1,642 2,234 Cumulative effect of change in accounting for income taxes.................................. 334 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income.............................. $ 2,120 $ 5,040 $ 6,716 $ 5,139 $ 9,334 $ 1,642 $ 2,234 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share.......... $ 0.43 $ 0.10 ======= ======= Pro forma weighted average shares outstanding... 21,666 21,666 Loss Ratio...................................... 69.0% 61.5% 56.4% 62.4% 56.6% 61.6% 61.6%
DECEMBER 31, ---------------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and investments................................... $24,910 $35,249 $45,293 $56,260 $ 81,693 $88,790 Total assets........................................... 35,402 53,178 71,972 88,091 120,440 130,492 Reserves for claims and claim settlement expenses...... 19,884 26,038 34,421 40,939 55,427 59,571 Notes payable.......................................... 0 2,787 3,288 7,479 8,232 12,516 Stockholders' equity................................... 4,289 9,260 17,397 22,476 32,138 34,381
17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides managed care workers' compensation products and services designed to lower the overall costs to its employer-clients of providing workers' compensation benefits to their employees. Since it began operations in 1986, the Company has focused on providing its managed results services to employers whose employees are engaged in hazardous occupations, primarily in the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. The Company's revenues consist primarily of premiums earned from workers' compensation coverage, service fee income and investment income. Premiums earned during a period are the direct premiums earned by the Company on in-force policies, net of premiums ceded to reinsurers. Premiums earned primarily represent workers' compensation products, although the Company has historically provided other insurance products, including general liability and automobile coverage. Service fee income represents fees the Company earns for providing claims management and other services to self-insured businesses, other insurance companies, trade associations and governmental entities. Net investment income represents net earnings on the Company's investment portfolio, less investment expenses. Fees and other from affiliates represent various administrative and management services provided to affiliates for a fee. The Company's expenses consist primarily of claims and claim settlement expenses, commissions and other underwriting expenses and general and administrative expenses. Claims and claim settlement expenses include (i) payments and reserves for current and future medical care and rehabilitation costs, (ii) indemnity payments for lost wages and third-party claim settlement expenses such as independent medical examinations, surveillance costs and legal expenses, and (iii) staff and related expenses incurred to administer and settle claims. Certain claims and claim settlement expenses paid are offset by estimated recoveries from reinsurers under specific excess of loss reinsurance agreements. Commissions and other underwriting expenses consist of agencies' commissions, state premium taxes, fees and other expenses directly related to the production of premiums. General and administrative expenses include the costs of providing executive, administrative and support services. The following table identifies the markets in which the Company's premiums were earned and the percentage of the gross premiums earned in those markets to total gross premiums earned for the periods indicated.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- --------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Premiums earned: Workers' compensation: Logging related............. $39,026 89% $38,482 80% $39,828 60% $ 9,953 77% $ 7,901 46% Other industries............ 2,229 5 2,332 5 21,381 32 1,162 9 8,091 48 Other insurance products...... 2,740 6 7,448 15 5,623 8 1,807 14 998 6 ------- --- ------- --- ------- --- ------- --- ------- --- Gross premiums earned......... 43,995 100% 48,262 100% 66,832 100% 12,922 100% 16,990 100% === === === === === Ceded reinsurance............. (8,093) (7,801) (8,665) (2,004) (1,964) ------- ------- ------- ------- ------- Total premiums earned, net...... $35,902 $40,461 $58,167 $10,918 $15,026 ======= ======= ======= ======= =======
18 20 RESULTS OF OPERATIONS The following table sets forth income statement information expressed as a percentage of total revenues for the periods indicated.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- ---------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Revenues: Premiums earned.............................. 87.2% 85.8% 83.5% 85.2% 81.1% Service fee income........................... 2.4 5.2 5.9 4.5 9.0 Investment income............................ 5.2 5.3 6.5 6.3 7.0 Fees and other from affiliates............... 5.2 3.7 4.1 4.0 2.9 ----- ----- ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 100.0 100.0 Expenses: Claims and claim settlement expenses......... 49.2 53.6 47.3 52.5 49.9 Commissions and other underwriting expenses.................................. 18.3 18.0 19.4 18.9 19.0 General and administrative................... 6.8 9.4 9.8 7.9 10.8 Depreciation and amortization................ 0.6 1.5 1.4 1.3 1.8 Interest..................................... 2.1 1.5 1.2 1.6 1.5 ----- ----- ----- ----- ----- Total expenses................................. 77.0 84.0 79.1 82.2 83.0 ----- ----- ----- ----- ----- Income before federal income taxes............. 23.0 16.0 20.9 17.8 17.0 Federal income taxes........................... 6.7 5.1 7.5 5.0 4.9 ----- ----- ----- ----- ----- Net income..................................... 16.3% 10.9% 13.4% 12.8% 12.1% ===== ===== ===== ===== =====
Three Months Ended March 31, 1996 Compared To Three Months Ended March 31, 1995 Total Revenue. Total revenue increased from $12.8 million for the three months ended March 31, 1995 to $18.5 million for the three months ended March 31, 1996, an increase of approximately 44.5%. The increase was primarily due to the Company's expansion into other hazardous occupation industries. This increase was partially offset by a decrease in premiums earned in the logging industry which resulted primarily from a downturn in pulp and paper production due to reduced demand. Service fee income increased approximately $1.1 million in the 1996 period compared to the 1995 period. This increase was primarily due to the acquisition of Hammerman & Gainer, Inc. ("H&G") on September 1, 1995, which contributed $919,000 to service fee income in the three months ended March 31, 1996. Investment income increased by approximately $486,000 in the 1996 period compared to the 1995 period, primarily due to an increase in invested assets from $61.7 million at March 31, 1995 to $88.8 million at March 31, 1996. Fees and other from affiliates remained essentially unchanged. Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $6.7 million for the three months ended March 31, 1995 to $9.3 million for the three months ended March 31, 1996, an increase of approximately 38.8%. This increase was commensurate with the increase in premiums earned. The loss ratios for these three month periods were higher than the loss ratio for the year ended December 31, 1995 due to seasonality. Claims are more frequently incurred in the first three months of the year as a result of lower activity in the logging industry during which period workers have historically reported claims more frequently. See "-- Seasonality." Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $2.4 million for the three months ended March 31, 1995 to $3.5 million for the three months ended March 31, 1996, an increase of approximately 45.8%. This increase is commensurate with the increase in premiums earned. Commissions and other underwriting expenses as a percentage of premiums earned were 22.2% and 23.4% for the 1995 and 1996 periods, respectively. 19 21 Other Expenses. General and administrative expenses increased from $1.0 million for the three months ended March 31, 1995 to $2.0 million for the three months ended March 31, 1996, an increase of 100%. This increase was primarily due to the acquisition of H&G on September 1, 1995 which added approximately $888,000 in the three months ended March 31, 1996. Depreciation and amortization increased by approximately $163,000 in the 1996 period compared to the 1995 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense increased by approximately $69,000 in the 1996 period compared to the 1995 period due to increases in both total borrowings and the weighted average cost of funds. Year Ended December 31, 1995 Compared To Year Ended December 31, 1994 Total Revenue. Total revenue increased from $47.1 million for the year ended December 31, 1994 to $69.7 million for the year ended December 31, 1995, an increase of approximately 48.0%. This increase was primarily due to increased premiums earned resulting from the Company's expansion of its operations into other hazardous occupation industries. Service fee income increased approximately $1.6 million from 1994 to 1995 primarily as a result of the acquisition of H&G on September 1, 1995. Investment income increased approximately $2.0 million, or 81.9%, in 1995 as a result of an increase in invested assets. Invested assets, including cash, increased by approximately $25.4 million in the 1995 period compared to the 1994 period. Fees and other from affiliates increased by approximately $1.1 million in the 1995 period compared to the 1994 period, primarily as a result of a $1.0 million dividend which was received from an affiliated entity during 1995. There were no such dividends received in 1994 or 1993. The stock of this affiliate was distributed to a shareholder immediately prior to the Offering as part of the Reorganization. See "Recent Reorganization." Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $25.3 million for the year ended December 31, 1994 to $32.9 million for the year ended December 31, 1995, an increase of approximately 30.0%. However, the loss ratio (i.e., the ratio of claims and claim settlement expenses to premiums earned) decreased from 62.4% in 1994 to 56.6% in 1995. The improvement in the loss ratio resulted primarily from settling claims related to losses from prior periods for amounts less than originally estimated. Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $8.5 million for the year ended December 31, 1994 to $13.5 million for the year ended December 31, 1995, an increase of approximately 58.8%, primarily due to increases in premiums earned. Commissions and other underwriting expenses as a percentage of insurance premiums earned increased from 21.0% in 1994 to 23.3% in 1995 as the result of the Company's use of independent agents to produce workers' compensation premiums in industries outside the logging industry. Other Expenses. General and administrative expenses increased from $4.4 million for the year ended December 31, 1994 to $6.8 million for the year ended December 31, 1995, an increase of approximately 54.5%. This increase was primarily due to the acquisition of H&G on September 1, 1995 (which added approximately $1.1 million in 1995) and the build-up of staff and facilities. Depreciation and amortization increased by approximately $303,000 in the 1995 period compared to the 1994 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense increased $119,000, or 16.4%, during 1995 due to increases in both total borrowings and the weighted average cost of funds. Year Ended December 31, 1994 Compared To Year Ended December 31, 1993 Total Revenue. Total revenue increased from $41.2 million for the year ended December 31, 1993 to $47.1 million for the year ended December 31, 1994, an increase of approximately 14.3%. This increase was primarily due to increased premiums earned from other insurance products, primarily automobile coverage. Service fee income increased approximately $1.5 million in the 1994 period compared to the 1993 period, primarily from expansion of the range of services offered to include claim settlement services. Fees and other from affiliates decreased from $2.2 million to $1.7 million or as a percentage of revenue from 5.2% in 1993 to 3.7% in 1994. 20 22 Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $20.3 million for the year ended December 31, 1993 to $25.3 million for the year ended December 31, 1994, an increase of approximately 24.6%. Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $7.6 million for the year ended December 31, 1993 to $8.5 million for the year ended December 31, 1994, an increase of approximately 11.8%. The increase in commissions and other underwriting expenses was commensurate with the increase in premiums earned. Commissions and other underwriting expenses as a percentage of premiums earned was 21.0% for each of the years ended December 31, 1993 and 1994. Other Expenses. General and administrative expenses increased from $2.8 million for the year ended December 31, 1993 to $4.4 million for the year ended December 31, 1994, an increase of approximately 57.1%. This was primarily due to the expansion of the range of services offered to include claim settlement services. Depreciation and amortization increased by approximately $463,000 in the 1994 period compared to the 1993 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense decreased $124,000, or 14.6%, during 1994 because the Company refinanced its debt at a lower average interest rate. RESERVES FOR CLAIMS AND CLAIM SETTLEMENT EXPENSE The Company's consolidated financial statements include estimated reserves for unpaid claims and claim settlement expenses. The reserves for these expenses are estimated using individual case-basis valuations and statistical analyses and represent estimates of the ultimate gross and net costs of all unpaid claims and claim settlement expenses incurred through the balance sheet date of each period presented. Those estimates are subject to the effects of trends in claim severity and frequency. The Company's estimates are continually reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Adjustments, including increases and decreases, are included in current operations net of reinsurance, and in the estimate of reserves for insured events of prior periods. 21 23 The following table shows changes in historical claims and claim settlement expense reserves, net of reinsurance recoverables, for the Company from 1986 through 1995. The top line of the table indicates the estimated reserves for unpaid claims and claim settlement expenses recorded at each year end date. Each amount in the top line represents the estimated amount of claims and claim settlement expenses for the claims incurred in that year as well as future payments on claims occurring in prior years. The upper portion (net reserve re-estimated) shows the year-by-year development of the previously recorded reserves based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the actual claims on which the initial reserves were carried. Any adjustments to the carrying value of unpaid claims for a prior year will also be reflected in the adjustments for each subsequent year. For example, an adjustment in 1995 for 1993 loss reserves will be reflected in the re-estimated net reserve for 1993 and 1994. The net cumulative redundancy (deficiency) line represents the cumulative changes in estimates since the initial reserves were established. It is equal to the difference between the initial reserve and the latest re-estimated net reserve amount. The lower portion of the table (cumulative amount of reserve paid) presents the amounts paid as of the end of subsequent years on those claims for which reserves were carried as of the end of each specific year.
DECEMBER 31, ------------------------------------------------------------------------------------------------ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Reserve for Unpaid Claims and Claim Settlement Expenses, Net of Reinsurance Recoverables... $1,387 $ 4,491 $ 7,262 $10,318 $12,872 $14,741 $19,772 $24,882 $31,242 $43,304 Net Reserve Re-estimated as of: One Year Later................ 1,423 4,738 7,534 10,010 11,273 13,568 17,861 23,495 28,092 Two Years Later............... 1,363 4,915 7,961 9,712 11,844 13,820 16,984 21,805 Three Years Later............. 1,400 5,156 8,035 9,815 12,228 12,606 14,928 Four Years Later.............. 1,392 5,238 8,439 9,648 12,011 12,410 Five Years Later.............. 1,390 5,630 8,307 9,477 11,817 Six Years Later............... 1,389 5,609 8,403 9,453 Seven Years Later............. 1,388 5,616 8,365 Eight Years Later............. 1,387 5,521 Nine Years Later.............. 1,357 Net Cumulative Redundancy (Deficiency).................. $ 30 $(1,030) $(1,103) $ 865 $ 1,055 $ 2,331 $ 4,844 $ 3,077 $ 3,150 Cumulative Amount of Reserve Paid, Net of Reinsurance Recoveries, Through: One Year Later.............. $ 677 $ 2,927 $ 3,879 $ 5,664 $ 5,857 $ 6,961 $ 7,757 $11,095 $10,643 Two Years Later............. 1,142 3,481 6,308 7,760 9,234 9,833 11,290 14,729 Three Years Later........... 1,369 4,665 7,185 8,668 10,256 11,033 12,502 Four Years Later............ 1,390 4,989 7,726 8,889 10,919 11,570 Five Years Later............ 1,390 5,282 7,916 9,119 11,239 Six Years Later............. 1,389 5,395 8,078 9,201 Seven Years Later........... 1,388 5,432 8,147 Eight Years Later........... 1,387 5,455 Nine Years Later............ 1,357 Net Reserve at December 31...... $24,882 $31,242 $43,304 Reinsurance Recoverables........ 9,539 9,697 12,123 ------- ------- ------- Gross Reserve at December 31.... $34,421 $40,939 $55,427 ======= ======= ======= Net Re-estimated Reserve........ $21,805 $28,092 Re-estimated Reinsurance Recoverables.................. 10,614 10,197 ------- ------- Gross Re-estimated Reserve...... $32,419 $38,289 ======= ======= Gross Cumulative Redundancy..... $ 2,002 $ 2,650 ======= =======
The foregoing table indicates that reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1989 through 1994 were decreased from their original amounts. These decreases resulted primarily from settling claims related to losses prior to those dates for amounts less than originally estimated. Most of the favorable development has resulted from the Company's managed results approach and claims management process. 22 24 The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverables for 1993, 1994 and 1995:
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at beginning of year............................................ $ 19,772 $ 24,882 $ 31,242 Add: Provision for claims and claim settlement expenses for claims occurring in the current year, net of reinsurance.................................. 22,537 26,637 36,074 Decrease in estimated claims and claim settlement expenses for claims occurring in prior years, net of reinsurance.............................. (1,911) (1,387) (3,150) -------- -------- -------- Incurred claims and claim settlement expenses during the current year, net of reinsurance..... 20,262 25,250 32,924 Deduct claims and claim settlement expenses payments for claims, net of reinsurance, occurring during: Current year.................................... (7,395) (7,795) (10,219) Prior years..................................... (7,757) (11,095) (10,643) -------- -------- -------- (15,152) (18,890) (20,862) -------- -------- -------- Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at end of year............................................... 24,882 31,242 43,304 Recoverable ceded reserves for unpaid claims and claim settlement expenses.......................... 9,539 9,697 12,123 -------- -------- -------- Reserves for claims and claim settlement expenses.... $ 34,421 $ 40,939 $ 55,427 ======== ======== ========
The Company's reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1992, 1993 and 1994, were decreased in 1993, 1994 and 1995, by $1,911,000, $1,387,000 and $3,150,000, respectively, for claims that had occurred on or prior to those balance sheet dates. The decreases were due to settling case-basis liabilities related to claims in those periods for less than originally estimated. Most of the favorable development has resulted from the Company's managed results approach and claims management process. No return premiums are due as a result of prior-year effects. The Company continually attempts to improve its claims estimation process by refining its ability to analyze claims development and settlement patterns, claims payments and other information. However, there are uncertainties inherent in the claims estimation process and claims estimates have become increasingly subject to changes in social and legal trends that may expand the liability of insurers, establish new liabilities and interpret contracts to provide unanticipated coverage long after the related policies were written. In management's judgment, information currently available has been appropriately considered in estimating the Company's claims and claim settlement expense reserves. However, there can be no assurance that future events will not cause incurred claims to exceed estimated reserves. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the above reserve tables. Loss reserve development without the effects of reinsurance would not be significantly different than that presented above. LIQUIDITY AND CAPITAL RESOURCES The Company's operations historically have provided substantial positive cash flow. Net cash provided by operating activities was $10.2 million, $13.0 million and $29.1 million in 1993, 1994 and 1995, respectively, and $6.8 million and $5.6 million for the three months ended March 31, 1995 and 1996, respectively. Net cash 23 25 provided by operations primarily consists of premiums collected, investment income, service fee income and reinsurance recoverable balances collected, less claims and claim settlement expenses paid, premiums paid for reinsurance protection and operating expenses. Generally, premiums are collected months or years before claims are paid. Premiums are used first to pay current claims and expenses. The balance, if any, is invested in marketable securities to generate investment income. The Company follows an investment strategy which is based on many factors, including underwriting results and the Company's resulting tax position, fluctuations in interest rates and regulatory requirements. The majority of the Company's investment assets are in fixed maturity securities. The following table shows the quality composition of the Company's investment portfolio (percentages determined on the basis of amortized cost) by rating, as assigned by Standard & Poor's, Inc. or Moody's Investor's Services, Inc. at March 31, 1996.
S&P RATING/ PORTFOLIO MOODY'S RATING PERCENTAGE -------------- ---------- AAA/Aaa......................................... 91% AA/Aa........................................... 5% A/A............................................. 3% Less than A/A................................... 1%
The Company historically has held its investments in these securities to maturity. Management of the Company believes substantially all of the Company's investment assets are readily marketable. However, because of the Company's strategy of generally holding fixed maturity securities to maturity, the Company has classified the majority of these securities as held-to-maturity for financial accounting purposes. See Note 1 of the Notes to Consolidated Financial Statements. Management currently intends to classify a portion of fixed maturity securities purchased with the proceeds from the Offering as available-for-sale. Cash proceeds from the sales and maturities of fixed income securities in 1995 were $10.2 million compared to $12.1 million in 1994, and $4.4 million in 1993 and $7.2 for the three months ended March 31, 1996. Aggregate invested assets, including cash, were $56.3 million and $81.7 million at December 31, 1994 and 1995, respectively, and $88.8 million at March 31, 1996. The increases were primarily due to the investment of cash provided by operating activities. The Company's principal need for capital is to fund growth of its core managed results workers' compensation business. The Company is restricted by statute in the amount of net premiums it can write on the basis of certain leverage guidelines established by insurance regulators. Exceeding these factors limits a company's ability to generate premium income. A common measurement of leverage is the ratio of net premiums written to statutory surplus. American Interstate's leverage factors are within the maximum factors specified by the states in which it operates. However, private rating agencies generally have stricter leverage standards, and management believes the Company must stay well within these industry leverage guidelines to maintain its favorable ratings from these agencies. Additionally, beginning in 1994, the Company was required to calculate the Risk-Based Capital (RBC) ratio for each of its insurance subsidiaries, which measures the adequacy of statutory capital and surplus in relation to investment and insurance risks and other business factors. The RBC formula is used by state insurance regulators to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. The RBC ratio of each of the Company's insurance subsidiaries exceeds the minimum required ratio. The National Association of Insurance Commissioners has proposed a new Model Investment Law that, if adopted by the State of Louisiana (American Interstate's state of domicile), may affect the statutory carrying values of certain investments; however, the final outcome of that proposal is not certain, nor is it possible to predict what impact the proposal will have on the Company or whether the proposal will be adopted in the foreseeable future. The Company intends to use a portion of the net proceeds from the Offering to expand its insurance business into additional markets and, if necessary, to increase the capital and surplus of its insurance subsidiaries to remain in compliance with regulatory requirements. 24 26 The Company is a holding company and, accordingly, the primary source of the Company's liquidity will be from dividends and management fees paid by one of its subsidiaries, American Interstate. The Company provides management services to American Interstate in exchange for these management fees. Additionally, American Interstate and its insurance subsidiary are limited by statute in their ability to pay dividends and fees to the Company. See Note 8 of the Notes to Consolidated Financial Statements and "Risk Factors -- Holding Company Structure." Additionally, management currently expects to invest a portion of the Offering proceeds in marketable securities, using the income to provide liquidity. AMERISAFE has historically received fees from various affiliated entities for the costs of providing certain executive, administrative and support services to those affiliates. Fees received from affiliated entities were $2.2 million, $1.7 million and $2.9 million in 1993, 1994 and 1995, respectively, and $534,000 for the three months ended March 31, 1996. The Company expects to continue to provide a certain level of these services to certain of these affiliates and will enter into annually renewable agreements with such affiliates. However, management expects the level of fees and other revenues received from affiliates to decline following the Offering. See "Certain Transactions and Relationships -- Services Agreement," and "-- Aircraft Agreement." IMPACT OF INFLATION Inflation can have a significant impact on the Company because premium rates are established before the amount of claims and claim settlement expenses is known. The Company attempts to anticipate increases in inflation when establishing rates, subject to limitations imposed by competitive pricing. The Company also considers inflation when estimating liabilities for claims and claim settlement expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for claims and claim settlement expenses are management's estimates of the ultimate net cost of the underlying claims and expenses and are not discounted for the time value of money. In times of high inflation, the normally higher yields on investments may partially offset potentially higher claims and expenses. SEASONALITY The Company's operations are affected by general trends and business cycles affecting the logging industry. Generally, the Company experiences higher premium volume in the late summer and early fall when dryer weather allows the harvesting and processing of trees and higher claims volume in the winter and spring when inclement weather prevents the harvesting of trees and workers in the logging industry have historically reported claims more frequently. EFFECTS OF OFFERING AND RELATED TRANSACTIONS The Company will receive net proceeds of approximately $152.5 million from the Offering (approximately $175.5 million if the Underwriters' over-allotment option is exercised in full). Approximately $73.0 million will be used for the repayment of indebtedness, including the indebtedness incurred in connection with the Reorganization. See "Use of Proceeds" and "Recent Reorganization." 25 27 BUSINESS OVERVIEW AMERISAFE provides managed care workers' compensation products and services primarily to employers in hazardous occupation industries. The Company offers its client-employers a fully integrated program designed to lower the overall cost of workers' compensation claims by: (i) implementing and applying workplace safety programs designed to prevent occupational injuries, (ii) providing immediate, efficient and appropriate managed medical care to injured workers, and (iii) using intensive personal claims management practices to guide and encourage injured workers through the recovery and rehabilitation process with the primary goal of returning the injured worker to work as promptly as practicable. The Company integrates proactive safety services with intensive claims management practices and quality managed medical care to produce "managed results." The Company's managed results approach focuses on creating and maintaining direct personal relationships with employers, employees and health care providers in order to design and promote services which are intended to produce lower overall occupational injury costs. The Company designates service teams for each client in order to foster personal relationships, provide continuity of service and to implement specific solutions for individual client workers' compensation needs. Since it began operations in 1986, the Company has focused on providing its managed results products and services to employers whose employees are engaged in hazardous occupations, primarily the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. The Company believes that the high severity injuries typically suffered by employees engaged in hazardous occupations and the resulting high cost typically incurred by employers in providing the mandatory workers' compensation coverage for such employees provide the greatest opportunity to lower costs by applying the Company's managed results approach. By focusing on developing and implementing client-specific workplace safety techniques and intensive claims management, the Company believes that substantial cost savings can be achieved when compared to the traditional workers' compensation approach to hazardous occupation industries. By reducing the overall cost of providing workers' compensation coverage to its employer-clients, the Company believes its managed results approach permits it to price its products and services competitively. From 1991 through 1995, the Company has increased its revenues from $20.3 million to $69.7 million, or a compound annual growth rate of 36.1%. In this same period, the Company's net income (before cumulative effect of accounting change) increased from $1.8 million to $9.3 million, or a compound annual growth rate of 50.8%. As of March 31, 1996, the Company was licensed to provide workers' compensation coverage and services in 25 states and the U.S. Virgin Islands and provided its products and services to approximately 2,900 employers in 16 states, primarily in the southeastern United States. As of that date, more than two-thirds of AMERISAFE's employer-clients were involved in hazardous occupation industries. INDUSTRY Workers' compensation benefits are state-mandated and regulated programs, which generally require employers to provide medical benefits and wage replacement to employees injured at work, regardless of fault. Each individual state has a regulatory and adjudicatory system which quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment, and provides whether the injured employee or the employer has certain options in selecting health care providers. State laws generally require two types of benefits for injured employees: (i) medical benefits that include expenses related to diagnosis and treatment of the injury, as well as rehabilitation, if necessary, and (ii) indemnity payments that consist of temporary wage replacement, permanent disability payments or death benefits to surviving family members. The Company believes that medical benefits presently account for approximately half of all workers' compensation benefits paid, with the remainder paid for lost wages and death benefits. To fulfill this mandated financial obligation, virtually all employers are required either to purchase workers' compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a self-insured fund (an entity that allows employers to pool their liabilities for obtaining workers' 26 28 compensation coverage, but typically subjects each employer to joint and several liability for the entire fund), or, if permitted by their state, to self-insure. The cost to employers of providing workers' compensation benefits in the United States totaled approximately $58 billion in 1994. From 1984 to 1990, workers' compensation costs increased an average of 13.3% per year and, from 1990 to 1992, workers' compensation costs increased an average of 6.3% per year. The substantial growth in the workers' compensation market is primarily attributable to the increased costs of medical treatment and an increase in workers' compensation litigation, which affects both medical benefits and indemnity payments. The Company believes that successful containment of these expenses depends largely upon early intervention in the claims process and promptly enabling an injured employee to return to work. The Company also believes that, to date, traditional insurers have focused on high premium volume and generally maintain minimal staffing. As a result, the Company believes that the workers' compensation industry is generally characterized by limited safety services, inefficient claims adjustment processes and ineffective medical cost management. Employers engaged in hazardous occupation industries pay substantially higher than average workers' compensation rates. While these rates vary significantly across industries and from state to state and are dependent upon the individual employer's loss history, workers' compensation costs are typically a significant component of these hazardous occupation employers' overall operating expenses. For example, the Company's logging clients typically pay an amount equal to 20% to 50% of payroll to obtain workers' compensation benefits for their employees, compared to employers of clerical workers who generally pay an amount less than 1% of their payroll to obtain such benefits. This cost disparity results from the substantial expenses associated with high severity injuries occurring within hazardous occupation industries. The Company believes that the difficulties associated with controlling catastrophic injury costs have historically caused a number of insurance companies to withdraw from the higher-risk market segments. As a result, the Company believes that hazardous occupation industries offer a significant opportunity to workers' compensation providers. STRATEGY The Company's strategy is to utilize its managed results approach in an effort to prevent workplace injury, and, when an injury does occur, to arrange for timely, high quality and cost-effective managed care, thereby lowering the overall costs to its employer-clients of providing workers' compensation benefits to their employees. The Company's strategy includes the following principal elements: - Focus on Hazardous Occupation Employers. The Company targets those employers who, due to the nature of their businesses and the susceptibility of their employees to serious injury, pay substantially higher than average workers' compensation rates. Because the Company focuses its efforts on clients in selected industries, the Company believes that it has developed expertise in assessing not only the risks associated with those industries, but also the operating practices of individual employers. As a result, the Company believes it can more accurately determine the profit opportunity of providing its managed results services. The Company also believes that less competition exists in providing workers' compensation services to hazardous occupation employers because of the potential for severe injuries to their employees and due to the fact that many hazardous occupation employers operate in rural areas, a market not pursued by many traditional insurers. The Company believes that its commitment to working with its client-employers to implement a program designed to benefit both parties results in cost savings for its client-employers and the establishment of long-term relationships with them. - Improve Workplace Safety. The Company believes that implementing comprehensive safety services to reduce workplace accidents is the key element to effect significant reductions in workers' compensation costs for employers in hazardous occupation industries. The Company presently employs a staff of 29 safety professionals. Many of these individuals were previously employed in hazardous occupation industries and use their personal experience and expertise in these industries to assist employer-clients in designing safety and injury prevention programs and to assist in the Company's underwriting process. In most cases, before offering the Company's managed results 27 29 products and services to a potential new client, a Company safety professional will visit the potential client's place of business to assess the existing safety programs and workplace practices. In certain circumstances, the Company will agree to provide workers' compensation products and services only if the employer agrees to implement and maintain specific safety recommendations. Once an employer becomes a client, the Company continues to emphasize safety by periodic workplace visits, assisting the client in designing and implementing enhanced safety management programs, providing current safety-related information and conducting rigorous post-accident management. - Manage Care Through Personal, Direct Contact. The Company believes that its personal, direct contact approach reduces the overall cost of medical care, results in the injured worker returning to work more quickly and lessens the likelihood of litigation and fraudulent claims. The Company encourages its employer-clients to immediately notify the Company of a workplace injury. Following notification, a claims representative contacts the employer, the injured employee and/or the treating physician to determine the nature and severity of the injury. In the case of a serious injury, the employer's pre-designated claims representative will promptly visit the injured employee or the employee's family members to discuss the benefits provided and will visit the treating physician to discuss the proposed treatment plan. The Company's claims representative acts as a facilitator to assure that the injured employee receives an appropriate medical treatment plan and to encourage the use of Company-recommended health care providers and facilities. The Company limits the number of active cases handled by a single claims representative in order to permit the claims representative to better focus on the services best suited for the specific injured employee. - Direct Injured Workers to Appropriate Health Care Providers. The Company believes that directing injured workers to appropriate health care providers is a vital part of its workers' compensation managed care program. The Company believes that it is able to arrange for high quality, cost-effective health care services to injured workers due to its experience with managing claims involving severe injuries of the types most often suffered by its clients' employees and its relationships with health care providers within the regional and local markets it serves. Certain states permit the Company to require injured workers to utilize Company-recommended health care providers and facilities. Even in states in which the injured employee is permitted to choose a health care provider, the Company believes that it is generally successful in encouraging injured workers to use Company-recommended providers and facilities, allowing the Company to more effectively manage health care. - Pursue Growth Opportunities. The Company intends to grow internally and through acquisitions. Internal growth is expected to result from both greater penetration of existing markets and expansion into new markets through targeting employers in geographic areas and hazardous occupation industries that the Company does not presently serve. The Company currently provides products and services in 16 states and expects to target its expansion to additional states in which it is authorized to provide workers' compensation products and services. In addition, due to the fragmented nature of the workers' compensation market, the Company believes that there are a significant number of smaller, traditional workers' compensation insurers or books of indemnity business that the Company could acquire and convert to its managed results approach. The Company's proceeds from this Offering will provide substantial additional capital that will allow the Company to more rapidly expand its business. However, while there can be no assurances, the Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating from A.M. Best Company, Inc. See "-- A.M. Best Rating" below. OPERATIONS The Company's managed results approach employs an operating process designed to improve workplace safety and thereby reduce work-related injuries, and, when an injury does occur, to provide for prompt medical intervention, integrated claims management and effective medical care management. The Company's managed care approach directs injured workers to appropriate health care providers and facilities. The Company is divided into multidisciplinary geographic service teams which concentrate on providing managed workers' compensation services and products within assigned regions of the Company's market territory. These 28 30 teams actively enlist employers, employees and health care providers in the common goal of rapid return-to-work in as care-effective and cost-efficient a manner as possible. The components of the Company's managed results approach include: Improve Workplace Safety. Preventing work-related injuries is a key element of the Company's managed results approach. In most cases, before offering the Company's managed results products and services to a potential new client, a Company safety professional will visit the potential client's place of business to assess the existing safety programs and workplace practices. Company representatives also assess the employer's attitude toward workplace safety and toward creating, improving and maintaining a safe work environment. The safety professional will prepare a written report to assist the underwriter in evaluating the risk and pricing it appropriately. In certain circumstances, the Company will agree to provide workers' compensation products and services only if the employer agrees to implement and maintain specific safety recommendations. The Company employs 29 safety professionals throughout its market territory. Many of these individuals were previously employed in logging or other hazardous occupation industries and use their personal experience and expertise in these industries to better assess the safety risks associated with a client's operations. These individuals also use their knowledge of the specific hazards associated with these hazardous occupation industries to assist employers in designing safety and injury prevention programs and to provide information about the industries to assist in the Company's underwriting process. After identifying a client's specific safety risks, the Company's safety professionals work with the client to minimize these risks and reduce accidents through monitoring the client's safety programs. Each of the Company's safety professionals is required to pursue professional development programs leading to specific certifications or designations, and to participate in Company-sponsored periodic training in OSHA and DOT regulations and guidelines. The Company also publishes a periodic logging-specific safety and industry newsletter titled "The Timberleaf" which is distributed to more than 3,000 clients, potential clients, facilitators, mill managers and paper and lumber industry executives. Company safety professionals also participate in state forestry association sponsored logging safety councils, write safety articles published in industry periodicals, and work as members of the American Pulpwood Association's various safety committees. After accepting a client, the Company continues to emphasize workplace safety by making periodic, and sometimes unannounced, visits to the client-employer's workplace. All serious injuries are investigated by a Company representative to determine whether steps can be taken to avoid similar accidents. The Company monitors the activity of its safety professionals in order to assure that appropriate safety services are available to each client-employer. Prompt Medical Intervention. Managing a claim from the earliest possible time is critical in minimizing its ultimate cost. A 1994 industry study indicates that claims reported between 11 and 20 days after the date of injury cost an average of 29% more than claims reported 1 to 10 days after the date of injury, and that the difference escalated to an average of an additional 48% if the claim was reported more than 30 days after the injury occurred. To ensure early intervention in the claims process, the Company encourages immediate notification from the employer of all injuries and provides the employer with 24-hour toll-free assistance or direct contact with the Company's designated service representative. Promptly upon receiving notification of an injury, a claims representative contacts the employer, the injured employee and/or the treating physician to determine the nature and severity of the injury. The claims representative acts as a facilitator to assure that the injured employee receives an appropriate medical treatment plan and to encourage the use of Company-recommended health care providers and facilities. The Company believes that this personal, direct contact approach reduces the overall cost of medical care, results in the injured worker returning to work more quickly and lessens the likelihood of litigation and fraudulent claims. In cases involving a serious or complex injury, the Company provides comprehensive field case management to address both the ongoing medical needs of the injured employee as well as the economic and social issues facing the employee and the employee's family. These professionals establish ongoing communication with an injured employee, often at the initial treatment, help coordinate care with the attending physicians and the health care facilities, assist with paperwork and provide ongoing advice to both the injured 29 31 worker and the employee's family, with the goal of increasing satisfaction through prompt, responsive service and a demonstrated concern for the injured employee's well-being. Because the Company's managed results approach emphasizes direct, personal contact between the designated claims representative and the injured employee and his employer, the Company limits the number of active cases for which any single claims representative is responsible. With a lower case load, each claims representative can better focus on the injured employee and access the medical, rehabilitative and social services that are best suited for the specific individual. The Company's claims representatives are located in the geographic area in which their designated employer-clients are based. By locating its claims representatives in the field, the Company derives additional benefits from the fact that its representatives build professional relationships with local health care providers. When expanding into a new geographic market, the Company seeks to hire experienced claims representatives who have established professional contacts with local health care providers and who demonstrate the attitude and ability to enhance the Company's managed results approach. Direct Injured Workers to Appropriate Health Care Providers. The Company believes effective managed care depends largely upon the selection of appropriate health care providers and ongoing review to ensure that medical care is being delivered in a cost-effective manner. The Company seeks to select and develop relationships with health care providers in each of the regional and local markets in which the Company's employer-clients operate. Emphasis is placed on implementing the most expeditious and cost-effective managed care treatment programs for each employer rather than imposing a single standardized system on all employers and their employees. The Company has established relationships with local and regional health care providers and facilities ranging from individual physicians to fully integrated occupational health care networks. In certain circumstances, these relationships are evidenced by formal contracts; in many cases the arrangements are more informal. The Company believes that its personal approach to managed care depends upon selecting a well-qualified, local source of medical care, regardless of any affiliation with existing networks. When entering a market, the Company seeks to enter into strategic relationships with local and regional medical care providers. In selecting its medical care providers, the Company relies, in part, on the recommendations of its claims representatives who have developed professional relationships within their geographic areas. The Company also seeks input from the employers and other contacts in the market in which it intends to provide services. While cost factors are considered in selecting health care providers, the Company considers the ability of the health care provider to achieve a "quality outcome" -- defined as rapid, conclusive recovery and return to sustained, full capacity employment by the injured worker -- as the most important factor in the selection process. The Company's claims representatives maintain primary responsibility for managing the entire claim from occurrence through resolution and are given significant responsibility and authority to ensure the most effective, cost-efficient resolution of claims that will enable the employee to return to work as promptly as practicable. Each claims representative has the authority to retain at the Company's expense independent nurse case managers, independent medical examiners, vocational and rehabilitation specialists or other specialty providers of medical services necessary to achieve the quality outcome desired by the Company. In addition to retaining independent service providers required for a particular injured worker, the claims representative works to reinforce the Company's managed results approach by utilizing existing arrangements that have been established by the Company to meet the needs of employer-clients within a particular geographic market. The Company provides its claims representatives with cars or car allowances, personal computers, cellular phones, facsimile machines, pagers and a full range of additional administrative and technical support to assist them with the prompt, efficient resolution of employee claims. The Company generally requires pre-certification to determine the medical necessity and appropriateness of non-acute medical treatment before it is provided to an injured worker. The Company also conducts fee schedule and medical bill reviews to ensure that it has been billed appropriately for the approved services, to prevent over-utilization of medical services and to detect variances from agreed-upon fee schedules, unbundling of charges and unnecessary or unrelated charges. Because of the variance in regulatory schemes in 30 32 the states in which the Company provides managed care products and services, the Company also contracts with medical bill review specialists in certain of the markets in which it operates. Dispute and Litigation Management. Through early intervention and its personal claims management approach, the Company seeks to limit the number of disputes with injured workers. The Company's primary goal is rapid, conclusive recovery and return to sustained, full capacity employment by the injured worker. The personal presence of the Company's claims representative throughout this process permits an evaluation of the injured employee's psychological propensity to return to work, to retain counsel and litigate, or, as an alternative, to reasonably settle any disputes with the Company without litigation. The Company believes that the personal presence of the claims representative also enhances the Company's ability to guide the injured employee to the appropriate conclusion in a friendly, dignified, supportive manner and diminishes the injured employee's desire to seek larger settlement amounts than would be the case if the Company was perceived by the injured employee to be adversarial or hostile toward the employee's individual situation. The Company seeks to promptly settle valid claims; however, it aggressively defends against what it considers to be non-meritorious claims. As of March 31, 1996, the Company had closed approximately 98% of its pre-1995 reported claims and 86% of its 1995 reported claims, thereby substantially reducing the risk of future adverse claims development. Over the last several years, certain states have adopted regulations better enabling workers' compensation providers to actively investigate and pursue allegedly fraudulent claims. The Company believes that its claim representatives' physical presence, and direct face-to-face contact with its employer-clients and injured workers, better enables it to uncover fraudulent claims. PRODUCTS AND SERVICES Workers' Compensation Managed Care Products. The Company's products and rating plans encompass a continuum of options designed to fit the needs of its client-employers. The most basic product, accounting for approximately 97.0% of the Company's premiums in force at March 31, 1996, is a guaranteed cost contract, in which the premium is set in advance and changes only based upon changes in the client's operations or payroll. In return, the Company agrees to assume statutorily imposed obligations of the client-employer to provide workers' compensation benefits to its employees. The premium for these policies varies depending upon the type of work performed by each employee and the general business of the insured. An employer large enough to qualify, typically those paying more than $5,000 in annual premium, will have its premium based on its loss experience relative to its peers as determined over a three-year period. This loss experience is adjusted by the type of business and associated risks. A client who desires to assume a certain amount of financial risk may elect a deductible which makes the client responsible for the first portion of any claim. In exchange for the deductible election, the employer receives a premium reduction. The Company also offers several loss sensitive plans (retrospective rating plans and dividend plans) which determine the final premium paid for the current policy period based on the insured's losses during that same period. TPA and Claims Adjustment Services. The Company has historically provided both independent claims adjusting services and third party administration ("TPA") services in Louisiana and Texas. These services include independent adjusting in multiple lines of coverage. Additionally, the Company provides third-party administration services. Current plans involve the expansion of existing services as well as the delivery of workers' compensation and employee benefits, third-party administration, provider networks, medical case management, medical bill review, loss prevention programs, occupational health programs, risk management consulting, alternative dispute resolution and risk financing consulting. The Company presently offers its services on a negotiated fee-for-service basis. These services are typically rendered to self-insured businesses, other insurance companies, trade associations and governmental entities. Other Products. In addition to providing workers' compensation products and services, the Company presently offers certain of its workers' compensation clients general liability coverage. In addition, one of the Company's subsidiaries has traditionally provided automobile liability and property insurance coverage in two states. The Company also utilizes this subsidiary to file alternative workers' compensation rate structures in certain states in order to permit the Company to offer its workers' compensation products and services to a 31 33 broader range of potential clients. For the three months ended March 31, 1996, general liability and automobile coverage respectively accounted for 3.2% and 2.6% of the Company's gross premiums earned. In 1995, general liability and automobile coverage respectively accounted for 3.7% and 4.7% of the Company's gross premiums earned. CLIENTS Since it began operations in 1986, the Company has marketed its workers' compensation products and services to employers whose employees are engaged in hazardous occupations, and as a result, pay substantially higher than average workers' compensation rates. From 1986 through 1993, substantially all of the Company's clients were employers engaged in the logging industry. Beginning in 1994, the Company began to expand its client base by employers in other hazardous occupation industries, such as general contracting, trucking, and oil and gas. As a result of the Company's expansion efforts, gross premiums earned from these other industries increased from approximately $550,000 in 1994 to approximately $16.9 million in 1995, accounting for approximately 1.1% and 25.3% of the Company's earned premiums in 1994 and 1995, respectively. Gross premiums earned from these other industries for the period ended March 31, 1996 were approximately $6.3 million, accounting for approximately 36.9% of the Company's earned premiums. Because the Company focuses on potential clients in selected industries, it believes it has developed expertise in assessing not only the risks associated with those industries, but also the operating practices of individual employers. A substantial majority of the Company's safety professionals and claims representatives have educational backgrounds and/or prior work experience in safety-related fields or in the businesses in which the Company's clients operate. The Company believes that this knowledge of its clients' businesses provides it with the ability to better evaluate the profit opportunities of providing its managed results services. In addition, the Company's employees evaluate the employer's attitude toward maintaining and improving workplace safety as well as the employer's willingness to partner with the Company in its managed results approach to providing solutions to the employer's workers' compensation needs. The Company provided workers' compensation services and products to approximately 2,900 employers as of March 31, 1996. For the three months ended March 31, 1996, approximately 7.7% of the Company's gross premiums earned were derived from state residual market programs and clients assigned to the Company through assigned risk pools. See "-- Regulation -- Participation in State Residual Market Programs" below. The average client, excluding clients in assigned-risk pools, has an average annual premium of approximately $30,000. During the year ended December 31, 1995, the Company's ten largest clients accounted for approximately 5.1% of its premiums in force. Approximately 90.0% of the policies scheduled to expire in 1995 were renewed by the Company's clients, while approximately 84.0% of the policies scheduled to expire in 1994 were renewed by the Company's clients. SALES AND MARKETING As of March 31, 1996, the Company's workers' compensation products and services were sold both through 20 direct agents employed by the Company and 188 independent agents. Most of the Company's direct agents either have degrees in forestry or have worked extensively in the forestry industry. Similar to the Company's safety professionals and claims representatives, direct agents live in their assigned territories throughout the United States. The Company's direct agents receive competitive salaries, commissions and a bonus based on the profitability to the Company of their assigned client-employers. Although most of the Company's products and services are sold through direct agents, independent agents are also utilized in some areas, and are selected based upon their proven expertise in industries targeted by the Company. For the year ended December 31, 1995 and for the three months ended March 31, 1996, independent agents accounted for approximately 39.1% and 47.8%, respectively, of the Company's gross premiums earned. No independent agent accounted for more than 5.0% of the Company's gross premiums earned in either period. In Mississippi, the Company has a contract with an independent general agent who, in turn, has contractual arrangements with approximately 150 additional independent agents in that state. For the three months ended March 31, 1996, approximately 2.3% of the Company's earned premiums were generated by 32 34 independent agents retained by this general agent. Although the Company expects this contract to continue for the foreseeable future, the loss of this general agent contract would require the Company to enter into an arrangement with another general agent or enter into arrangements with individual independent agents in Mississippi. A.M. BEST RATING The Company is currently assigned a group letter rating of "A" (Excellent) from A.M. Best Company, Inc. ("A.M. Best"), the leading national insurance rating agency. The Company was awarded an "A-" rating in 1991, its first year of eligibility. The rating was raised to "A" in 1993. A.M. Best ratings are based on a comparative analysis of the financial condition and operating performance of insurance companies as determined by their publicly available reports and meetings with the entities' officers. A.M. Best's ratings are based on factors of concern to insureds and are not directed toward the protection of investors. Furthermore, A.M. Best ratings are not ratings of any of the Company's securities nor are such ratings a warranty of the Company's current or future ability to meet its contractual obligations. A.M. Best ratings include Secure Ratings, which consist of Superior (A++, A+), Excellent (A, A-) and Very Good (B++, B+). A.M. Best also provides Vulnerable Ratings, which range from Adequate (B, B-) to In Liquidation (F). The Company believes that its current A.M. Best rating provides it with a competitive advantage over certain competitors because certain potential clients will not purchase coverage from unrated or lower rated companies and certain independent insurance agencies will not place coverage with such companies. The Company presently intends to expand its business through internal growth and acquisitions. However, while there can be no assurances, the Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating. See "-- Strategy -- Pursue Growth Opportunities" above. REINSURANCE Through reinsurance, the Company is able to transfer certain of the financial risks of severe and catastrophic injury suffered by a client's employee. The Company's reinsurance program includes a number of reinsurance carriers, all of which have A.M. Best ratings of "A-" or better. The Company has in effect specific "excess of loss" reinsurance agreements under which it pays its reinsurers a percentage of gross premiums earned and whereby the reinsurers agree to assume their allocated portion of the risks relating to claims over $200,000 on a per occurrence basis up to their limit of liability. The Company carries multiple reinsurance agreements, each with a specific limit of liability that, in the aggregate, provide protection for each claims occurrence up to $50,000,000 in excess of the Company's retention of $200,000. As a result of the Company's increased capitalization following the Offering, the Company intends to increase its retention under these agreements upon their renewal in July 1997. Exclusions relative to the Company's managed workers' compensation products and services are generally limited to occupational disease exposures such as asbestosis, silicosis, brown lung and black lung. The Company reviews each prospective client-employer to assess the potential exposure to these types of excluded diseases before the Company's products and services are offered. INFORMATION TECHNOLOGY AND COMMUNICATIONS SYSTEMS The Company uses its proprietary and other management information systems as an integral part of its operations and makes a substantial ongoing investment in improving its systems. The Company believes that the services it provides to its clients and their employees are enhanced by integrating its information systems to utilize more effectively the information it obtains in its underwriting processes in conjunction with information regarding claims, billing and claims management. The Company's direct agents, safety professionals and claims representatives are provided with laptop computers and other communication equipment in order to more timely and efficiently complete the underwriting process, to facilitate communication and to report and monitor claims. For example, the Company's safety professionals have the ability to prepare survey reports on-site and immediately assist 33 35 potential clients with the design of workplace safety programs by providing examples of safety plans implemented by other employers in similar businesses. COMPETITION The market to provide managed care workers' compensation insurance and services is highly competitive. The Company's competitors include, among others, insurance companies, specialized provider groups, in-house benefits administrators, state insurance pools and other significant providers of health care and insurance services. A number of the Company's current and potential competitors are significantly larger, with greater financial and operating resources than those of the Company, and can offer their services nationwide. After a period of absence from the market, traditional national insurance companies have recently re-entered the workers' compensation insurance market, thereby increasing competition. Competitive factors in the workers' compensation insurance field include premium rates (in some states), levels of service, A.M. Best ratings, levels of capitalization, quality of managed care services, the ability to reduce loss ratios and the ability to reduce claims expense. The Company believes that its products and services are competitively priced. In addition, the Company believes its premium rates are typically lower than those for clients assigned to the state-sponsored risk pools, allowing the Company to provide a viable alternative for employers in such pools. The Company also believes that its level of service, its "A" (Excellent) A.M. Best rating and its ability to reduce claims are strong competitive factors that have enabled it to retain existing clients and attract new clients. Competitive factors relating to the Company's TPA products are primarily based upon pricing, service and reputation. REGULATION General. Managed health care programs are subject to various laws and regulations. Both the nature and degree of applicable government regulation vary greatly depending upon the specific activities involved. Generally parties that actually provide or arrange for the provision of managed care workers' compensation programs, assume financial risk related to the provision of those programs or undertake direct responsibility for making payment or payment decisions for those services are subject to a number of complex regulatory schemes that govern many aspects of their conduct and operations. The managed health care field is a rapidly expanding and changing industry; it is possible that the applicable regulatory frameworks will expand to have an even greater impact upon the conduct and operation of the Company's business. The Company's business is subject to state-by-state regulation of workers' compensation insurance and workers' compensation insurance management services. Under the workers' compensation system, employer insurance or self-funded coverage is governed by individual laws in each of the fifty states and by certain federal laws. Changes in individual state regulation of workers' compensation or managed health care may create a greater or lesser demand for some or all of the Company's services or may require the Company to develop new or modified services in order to meet the needs of the marketplace and compete effectively in that marketplace. Under Louisiana law, an insurance company may not, without regulatory approval, pay to its shareholders within a 12-month period dividends or other distributions of cash or property the total fair market value of which exceeds the lesser of (i) ten percent of surplus as to policyholders at the end of the prior calendar year or (ii) the prior calendar year's net income (less any realized capital gains). This requirement would limit American Interstate's ability to make distributions to AMERISAFE in 1996 to approximately $2.7 million. Premium Rate Restrictions. State regulations governing the workers' compensation system and insurance business in general impose restrictions and limitations on the Company's business operations that are not imposed on unregulated businesses. Among other matters, state laws regulate not only what workers' compensation benefits must be paid to injured workers, but also the premium rates that may be charged by the Company to insure employers for those liabilities. As a consequence, the Company's ability to pay insured workers' compensation claims out of the premium revenue generated from the Company's sale of such insurance is dependent on the level of premium rates permitted by state laws. In this regard it is significant 34 36 that the state regulatory agency that regulates workers' compensation benefits may not be the same agency that regulates workers' compensation insurance premium rates. Financial and Investment Restrictions. Insurance company operations also are subject to financial restrictions that are not imposed on other businesses. State laws require insurance companies to maintain minimum surplus balances and place limits on the amount of insurance a company may write based on the amount of the company's surplus. These limitations restrict the rate at which the Company's insurance operations can grow. The Company currently meets applicable state capital and surplus requirements. State laws also require insurance companies to establish reserves for payment of policyholder liabilities and impose restrictions on the kinds of assets in which insurance companies may invest. These restrictions may require the Company to invest its assets more conservatively than it would if it were not subject to the state law restrictions and may prevent the Company from obtaining as high a return on its assets as it might otherwise be able to realize. Insurance Regulatory Information System. The National Association of Insurance Commissioners ("NAIC") has developed a set of financial relationships or "tests" called the Insurance Regulatory Information System ("IRIS") that were designed for early identification of companies that may require special attention by insurance regulatory authorities. These tests were developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. Insurance companies submit data on an annual basis to the NAIC, which in turn analyzes the date using ratios covering twelve categories of financial data with defined "usual ranges" for each category. Falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In normal years, 15% of the companies included in the IRIS system are expected by the NAIC to be outside the usual range on four or more ratios. For the years 1991 through 1996, the Company's insurance subsidiaries were not outside the usual ranges for more than two ratios. Participation in State Guaranty Funds. Every state has established one or more insurance guaranty funds or associations which are charged by state law to pay claims of policyholders insured by a company that becomes insolvent. All insurance companies must participate in the guaranty associations in the states where they do business and are assessable for the associations' operating costs, including the cost of paying policyholder claims against an insolvent insurer. The Company's financial performance could be adversely affected by guaranty association assessments as a consequence of the insolvency of other insurers over which the Company has no control. Participation in State Residual Market Programs. Many of the states in which the Company is licensed, or intends to become licensed, to provide its managed workers' compensation products and services require that all licensed insurers participate in a program to provide workers' compensation insurance to those employers who have not or cannot procure coverage from a carrier on a negotiated basis. The level of required participation in such programs is generally determined by calculating the volume of the Company's voluntarily written business in that state as a percentage of all voluntarily written business in that state by all insurers. The resulting factor is the proportion of premium the Company must accept as a percentage of all of the premiums in policies residing in that state's residual market program. Companies generally have two methods of fulfilling their residual market obligations: (i) they may join a reinsurance pool in which the results of all policies provided through the pool are shared by the participating companies, or (ii) they may accept directly assigned policies for which they are obligated to provide all services and assume the underwriting results. Currently, the Company utilizes both methods, depending on management's evaluation of the most efficient method to adopt in each state. Generally, the Company believes that the direct-assignment method produces better results as the Company applies its managed results 35 37 approach to these involuntary client-employers. In 1995 and for the three months ended March 31, 1996, approximately 6.7% and 7.7% of the Company's gross premiums earned, respectively, were from direct assignment residual market obligations. Statutory Accounting and Solvency Regulation. State regulation of insurance company financial transactions and financial condition is based on statutory accounting principles ("SAP"). SAP differs in a number of ways from generally accepted accounting principles ("GAAP") which govern the financial reporting of most other businesses. In general, SAP financial reports are more conservative than GAAP financial reports. State insurance regulators closely monitor the financial condition of insurance companies reflected in SAP financial statements and can impose significant financial and operating restrictions on an insurance company that becomes financially impaired. Regulators generally have the power to impose restrictions or conditions on the following kinds of activities of a financially impaired insurance company: the transfer or disposition of assets; the withdrawal of funds from bank accounts; the extension of credit or making of loans; and the investment of funds. State Subsequent Injury Funds. A number of states operate trust funds that reimburse employers and carriers for excess workers' compensation benefits paid to employees when an employee is injured on the job and the injury to the physically disabled worker merges with, aggravates or accelerates a preexisting work-related impairment. The state-managed trust funds are funded through assessments against insurers and self-insurers providing workers' compensation coverage in a specific state. At March 31, 1996, the Company carried receivables on its books from state subsequent injury funds of less than $500,000. Possible Future Regulation. State legislatures and the federal government have considered and are considering a number of cost containment and health care reform proposals. The Company believes it may benefit from some proposals that favor the growth of managed care. However, no assurance can be given that the state or federal government will not adopt future health care reforms that would adversely affect the Company. In recent years the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that altered and, in many cases, increased state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on investment laws for insurers, modifications to holding company regulations, codification of statutory accounting practices, risk-based capital guidelines, interpretations of existing laws and the development of new laws. In addition, Congress and certain federal agencies are investigating the current condition of the insurance industry in the United States to determine whether to impose federal regulation. The Company cannot predict with certainty the effect any proposed or future legislation or NAIC initiatives may have on the conduct of the Company's business or the financial condition or results of operations of the Company. PROPERTIES The Company owns its 43,000 square foot executive offices in DeRidder, Louisiana and leases its executive offices in Dallas, Texas. The Company also leases space at other locations for its service offices and claims representative offices. See "Certain Transactions -- Executive Office Lease." EMPLOYEES The Company had 315 full-time employees at July 31, 1996. Of the Company's employees, approximately 50 perform administrative and financial functions and 265 serve on service and marketing teams providing its managed results services to its employer-clients. None of the Company's employees is subject to collective bargaining agreements. The Company believes that its employee relations are good. 36 38 LEGAL PROCEEDINGS In the ordinary course of administering its workers' compensation managed results program, the Company is routinely involved in the adjudication of claims resulting from workplace injuries. Except as described below, the Company is not involved in any legal or administrative claims that it believes are likely to have a materially adverse effect on the Company's business, financial condition or results of operations. The Company's federal income tax return with respect to its 1992 tax year is currently subject to an audit by the IRS. The principal issues with respect to which the IRS has proposed adjustments relate to (i) whether the Company should have included in income at the time of receipt certain deposits it received from its clients to secure the payment of premiums, and (ii) whether the Company's reserves for future claims were excessive. The aggregate amount of additional tax which would be owed by the Company if the proposed adjustments were sustained is approximately $3.3 million, plus accrued interest. Because the proposed adjustments relate to the timing of the receipt of income, they would not, if sustained, be expected to have an impact on the Company's results of operations, but would impact the Company's cash flow. The Company believes that it has meritorious defenses to the proposed adjustments and intends to contest them vigorously. The federal income tax returns filed by a subsidiary of the Company with respect to its 1990 and 1991 tax years are also presently subject to an audit by the IRS. During the years in question the corporation was not a subsidiary of the Company. The principal issue in this audit relates to the reasonableness of compensation paid by such corporation to Mr. Morris and another former officer-shareholder of the Company during such years. The IRS has proposed that a portion of the compensation paid to these individuals during such years is not deductible for federal income tax purposes, and that as a result the corporation owes additional tax in the amount of approximately $2.1 million, plus accrued interest. No penalties have been asserted by the IRS. The corporation believes that it has meritorious defenses to the proposed adjustments and is contesting them vigorously. In connection with the Reorganization, the MorTem Corporations have agreed to indemnify the Company and its affiliates for any liability they may have with respect to this tax audit. 37 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names of the directors and executive officers of the Company and their ages and positions are as follows:
NAME AGE POSITION - ----- --- ---------- Millard E. Morris....................... 51 Chairman of the Board of Directors and Chief Executive Officer Mark R. Anderson........................ 44 President, Chief Operating Officer and Director John R. Buck............................ 35 Vice President, Chief Financial Officer, Treasurer and Director Arthur L. Hunt.......................... 51 Vice President -- Risk Group and Director C. Allen Bradley, Jr. .................. 45 Vice President -- Risk Services Group and General Counsel Andre Comeaux, Jr. ..................... 35 Vice President -- Product Development Zonie A. Harris......................... 60 Vice President -- Claims Services Craig P. Leach.......................... 46 Vice President -- Business Development Daniel J. Jessee........................ 43 Director N. David Spence......................... 60 Director
Millard E. Morris has been Chairman of the Board, Chief Executive Officer, and principal shareholder of the Company since its inception in 1985. Mr. Morris began his insurance career in 1972, and has owned and managed many diverse financial services operations. He is currently the Chairman of the Board and principal shareholder of Auto One Acceptance Corporation, a Dallas based financial services company. Mr. Morris has a Bachelor of Business Administration in Accounting and a Master of Science in Economics, both from Baylor University, and is a Certified Public Accountant. Mr. Morris serves in the class of Directors whose terms expire at the Company's 1999 annual meeting of shareholders. Mark R. Anderson began his insurance career in 1979 and joined the Company in 1986 as Vice President, Chief Operating Officer and Director. He was elected President in 1996, and has served as President of American Interstate since 1987. Mr. Anderson has served on various legislative insurance advisory committees in Louisiana, and has served as a workers' compensation rate and reform consultant to several southern Insurance Commissioners. He holds a Bachelor of Science degree from Louisiana State University and a Master of Science degree in Business Administration from Boston University. Mr. Anderson serves in the class of directors whose terms expire at the Company's 1998 annual meeting of shareholders. John R. Buck has been Vice President and Chief Financial Officer of the Company since 1989 and a Director since 1994. He served in various accounting positions with Zale Corporation's Insurance Group from 1983 to 1988 and joined American Interstate as Controller in 1988. Mr. Buck has Bachelor of Science degrees in Accounting and Business Administration from Illinois State University, and became a Certified Public Accountant in 1985. Mr. Buck serves in the class of directors whose terms expire at the Company's 1997 annual meeting of shareholders. Arthur L. Hunt has served as Secretary of the Company since 1991, was elected Vice President -- Risk Group in August 1996, and has been a Director since 1994. Prior to joining the Company, Mr. Hunt served twenty years in the United States Army. He served as a Judge Advocate General officer and retired after attaining the rank of Colonel. Mr. Hunt has a Bachelor of Science degree in Psychology from Loyola University and a law degree from the Loyola University School of Law, Chicago. Mr. Hunt serves in the class of directors whose terms expire at the Company's 1997 annual meeting of shareholders. 38 40 C. Allen Bradley, Jr. was elected Vice President -- Risk Services Group and General Counsel in August 1996. He joined a subsidiary of the Company in 1994 as an executive officer, and prior to that time was engaged in the private practice of law. Mr. Bradley also served as a Louisiana State Representative from 1984 to 1992. He holds a Bachelor of Arts degree from Southeastern Louisiana University and a law degree from Louisiana State University. Andre Comeaux, Jr. has been Vice President -- Product Development since August 1996 and has been Industries Manager of American Interstate since April 1995. Mr. Comeaux began his career in the insurance industry in 1987 with AEtna Casualty & Surety Co., serving as an Engineering Consultant and Commercial Account Representative. In 1993, he joined American International Group as an Account Executive, Loss Control Services, and served in that capacity until he joined American Interstate. Mr. Comeaux holds a Bachelor of Science degree in Mechanical Engineering from the University of Southwestern Louisiana and is a Chartered Property Casualty Underwriter, a Certified Safety Professional and is licensed as a Professional Engineer by the state of California. He is recognized as a Qualified Field Safety Representative by the states of Texas and Arkansas and is recognized as an Associate in Loss Control Management by the Insurance Institute of America. Zonie A. Harris was elected Vice President -- Claims Services in August 1996. Since 1986 he has also served as Vice President, Claims for American Interstate. Mr. Harris has served with various affiliates of the Company and other insurance firms in claims management since 1972. Prior to his insurance career, Mr. Harris spent twenty years in the U.S. Air Force as a communications specialist. Craig P. Leach was elected Vice President -- Business Development in August 1996. He has served since 1994 as Senior Vice President of American Interstate, and has served in similar roles with affiliated firms since beginning his insurance career in 1980. Prior to 1980 Mr. Leach held various management positions with companies engaged in the paper and lumber industries. He holds both a Bachelor of Science degree and a Master of Science degree in Forestry from Louisiana State University. Mr. Leach currently serves on the board of directors of the Louisiana Forestry Association, and has served in an advisory capacity for the Southern Forest Insurance Coalition and various wood product companies throughout the country. Daniel J. Jessee has been a Director of the Company since August 1996. Since January 1995, Mr. Jessee has been Vice Chairman of Banc One Capital Corporation ("BOCC"), an investment banking firm and a subsidiary of Banc One Corporation. Prior to becoming Vice Chairman, he was a Managing Director of BOCC since August 1990. Mr. Jessee serves in the class of directors whose terms expire at the Company's 1999 annual meeting of shareholders. Mr. Jessee is also a director of RAC Financial Group, Inc. N. David Spence has been a Director of the Company since August 1996. Mr. Spence is a Senior Vice President and General Manager -- Paper Division of Boise Cascade Corporation ("BCC"). Mr. Spence joined BCC in 1969 and has served in various management positions since that time. Mr. Spence serves in the class of directors whose terms expire at the Company's 1998 annual meeting of shareholders. Mr. Spence is also a director of the American Forest & Paper Association and the Pacific Coast Association of Pulp & Paper Manufacturers. COMMITTEES The Bylaws provide that the Board of Directors may elect such directorate committees as it may from time to time determine. Two committees of the Board of Directors have been established: the Audit Committee and the Compensation Committee. The Audit Committee of the Board of Directors (the "Audit Committee") will review the professional services provided by the Company's independent accountants and the independence of such accountants from management of the Company. The Audit Committee will also review the scope of the audit coverage and annual financial statements of the Company and such other matters with respect to accounting, auditing practices and procedures of the Company as it may find appropriate or as may have been brought to its attention. The members of the Audit Committee are Messrs. Jessee and Spence. 39 41 The Compensation Committee of the Board of Directors (the "Compensation Committee") will review and approve executive salaries and administer bonus, stock option and incentive compensation plans of the Company. It will advise and consult with management regarding significant employee benefit policies and practices and significant compensation policies and practices of the Company. The members of the Compensation Committee are Messrs. Jessee and Spence. LIMITATION OF LIABILITY AND INDEMNIFICATION As authorized by the Texas Miscellaneous Corporation Laws (the "TMCL"), the Company's Articles provide that, to the full extent permitted by the TMCL or any other applicable laws as presently or hereafter in effect, no director of the Company shall be personally liable to the Company for an act or omission in his capacity as a director of the Company. The TMCL does not permit limitation of liability of any director (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of the director or an act or omission that involves intentional misconduct or a knowing violation of the law, (iii) a transaction from which the director received an improper personal benefit, or (iv) an act or omission for which liability of a director is expressly provided by an applicable statute. The principal effect of the limitation of liability provision is that a shareholder is unable to prosecute an action for monetary damages against a director of the Company unless the shareholder can demonstrate one of the specified bases of liability. Additionally, the Company's Articles and Bylaws provide that the Company shall indemnify all directors, officers, agents or employees of the Company to the fullest extent permitted by the Texas Business Corporation Act ("TBCA"). The TBCA establishes the standard which permits a corporation to provide indemnification, except when shareholder approval for the indemnification has been obtained. The TBCA provides that a director may be indemnified for liabilities and expenses in respect to actions brought against him by reason of his serving as a director if he conducted himself in good faith and reasonably believed that (i) in the case of conduct in his official capacity as a director, his conduct was in the Company's best interests, and (ii) in all other cases, that his conduct was at least not opposed to the best interests of the Company. Indemnification for criminal actions also requires the director to have no reason to believe his conduct was unlawful. In addition, if the director is found liable to the Company or on the basis that a personal benefit was improperly received by him, indemnification will be limited to expenses actually incurred and will not be available if the director is found liable for willful or intentional misconduct in the performance of his duty to the Company. The Company has entered into certain agreements ("Indemnification Agreements") with each of its directors and executive officers designed to give effect to the foregoing provisions of the Articles and Bylaws and to provide certain additional assurances against the possibility of uninsured liability. The effect of these provisions and the Indemnification Agreements will be to eliminate the right of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director except as described therein. The provisions of the Articles and Bylaws and the Indemnification Agreements will not alter the liability of directors of the Company under federal securities laws. 40 42 EXECUTIVE COMPENSATION The following table provides information concerning the annual and long-term compensation for services paid or accrued by the Company for the fiscal year ended December 31, 1995 to (i) the Company's chief executive officer and (ii) each other executive officer of the Company whose total annual salary and bonus exceeded $100,000, based on salary and bonuses earned during 1995 (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2) COMPENSATION - ------------------------------------------- -------- -------- --------------- ------------ Millard E. Morris.......................... $275,750 $750,000 -- $1,185(3) Chairman of the Board of Directors and Chief Executive Officer Mark R. Anderson........................... 150,000 265,000 -- 16,845(4) President and Chief Operating Officer Craig P. Leach............................. 122,248 92,139 -- 27,285(5) Vice President -- Business Development C. Allen Bradley, Jr....................... 120,000 50,000 -- 600(6) Vice President -- Risk Services Group and General Counsel John R. Buck............................... 85,000 35,000 -- 6,100(7) Vice President, Chief Financial Officer and Treasurer
- --------------- (1) Reflects bonus earned during the 1995 fiscal year. In all cases, the bonus has been or will be paid during the 1996 fiscal year. (2) None of the Named Officers received personal benefits, securities or property in excess of the lesser of $50,000 or 10% of such individual's reported salary and bonus. (3) Consists of Company contributions to the Company's 401(k) Plan (the "401(k) Plan"). (4) Consists of $1,185 of Company contributions to the 401(k) Plan and $15,660 in premiums on a life insurance policy for Mr. Anderson's benefit. (5) Consists of $1,185 of Company contributions to the 401(k) Plan and $26,100 in premiums on a life insurance policy for Mr. Leach's benefit. (6) Consists of Company contributions to the 401(k) Plan. (7) Consists of $880 of Company contributions to the 401(k) Plan and $5,220 in premiums on a life insurance policy for Mr. Buck's benefit. EMPLOYMENT AGREEMENTS In connection with the Offering, the Company entered into an employment agreement (the "Employment Agreement") with each of Messrs. Morris, Anderson, Buck, Leach and Bradley (each, an "Executive Officer") that expire on the third anniversary of the Offering. Pursuant to the Employment Agreements, Mr. Morris serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and is paid an annual base salary of $450,000, Mr. Anderson serves as President and Chief Operating Officer of the Company and is paid an annual base salary of $275,000, Mr. Buck serves as Vice President, Chief Financial Officer and Treasurer of the Company and is paid an annual base salary of $120,000, Mr. Leach serves as Vice President -- Business Development of the Company and receives an annual base salary of $125,000, and Mr. Bradley serves as Vice President -- Risk Services Group and General Counsel of the Company and 41 43 receives an annual base salary of $120,000. In addition to their annual base salaries, each of the Executive Officers is entitled to receive an annual bonus at the discretion of the Board of Directors. The Employment Agreements provide for salary adjustments at the discretion of the Board of Directors and further provide that the Executive Officers will be entitled to participate in Company-sponsored employee benefit plans or arrangements and other benefits generally available to employees of the Company. Each Employment Agreement provides that if the Executive Officer's employment is involuntarily terminated by the Company other than for "cause" (as defined in the Employment Agreement), the Executive Officer, subject to certain conditions, shall receive termination payments calculated in accordance with the Employment Agreement for a period of one year after the date of termination. Subject to certain exceptions, each Executive Officer's Employment Agreement prohibits him from competing with or working for a competitor of the Company or any of its subsidiaries for a period of one year after the termination of his employment with the Company, if his employment is involuntarily terminated by the Company other than for "cause". Upon the expiration of the initial three-year term and on each subsequent anniversary thereof, each Employment Agreement automatically renews for an additional one-year period unless earlier terminated by either party upon 90 day's notice given prior to the end of the initial term or any extension. Mr. Morris' Employment Agreement does not provide for him to devote his full time to the business and affairs of the Company. STOCK INCENTIVE PLAN General. The Board of Directors of the Company adopted the AMERISAFE, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan") on August 5, 1996, subject to approval by the shareholders of the Company. A majority of the holders of the Common Stock of the Company approved the Stock Incentive Plan on August 5, 1996. The purpose of the Stock Incentive Plan is to enable the Company to attract and retain directors, officers and other key employees and to provide them with appropriate incentives and rewards for superior performance. The Stock Incentive Plan is to be administered by the Compensation Committee. The Stock Incentive Plan affords the Compensation Committee the flexibility to respond to changes in the competitive and legal environments, thereby protecting and enhancing the Company's current and future ability to attract and retain officers and other key employees and consultants. The Stock Incentive Plan authorizes the granting of options to purchase shares of Class A Common Stock ("Option Rights"), stock appreciation rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The terms applicable to these various types of awards, including those terms that may be established by the Compensation Committee when making or administering particular awards, are set forth in detail in the Stock Incentive Plan. Summary of Stock Incentive Plan. Shares Available Under the Stock Incentive Plan. Subject to adjustment as provided in the Stock Incentive Plan, the number of shares of Class A Common Stock that may be issued or transferred, plus the number of shares of Class A Common Stock covered by outstanding awards granted under the Stock Incentive Plan, shall not in the aggregate exceed 3,000,000. Eligibility. Directors, officers and other salaried employees of the Company or its subsidiaries may be selected by the Compensation Committee to receive benefits under the Stock Incentive Plan. Under the Stock Incentive Plan, the Company's Board of Directors (the "Board") may also make grants and further provides that only the Board may award grants to members of the Compensation Committee. Option Rights. The Compensation Committee may grant Option Rights that entitle the optionee to purchase shares of Class A Common Stock. The option price is payable at the time of exercise (i) in cash or cash equivalents, (ii) by the transfer to the Company of shares of Class A Common Stock that are already owned by the optionee and have a value at the time of exercise equal to the option price, (iii) with any other legal consideration the Compensation Committee may deem appropriate, or (iv) by any combination of the foregoing methods of payment. Any grant may provide for deferred payment of the option price from the 42 44 proceeds of sale through a broker of some or all of the shares of Class A Common Stock to which the exercise relates. Option Rights granted under the Stock Incentive Plan may be Option Rights that are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Option Rights that are not intended to so qualify. At or after the date of grant of any nonqualified Option Rights, the Compensation Committee may provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis or may provide that dividend equivalents be credited against the option price. The Compensation Committee has the authority to specify at the time Option Rights are granted that shares of Class A Common Stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Stock Incentive Plan does not require any such holding period and would permit immediate sequential exchanges of shares of Class A Common Stock at the time of exercise of Option Rights. No Option Right may be exercised more than 10 years from the date of grant. Each grant must specify the conditions, including as and to the extent determined by the Compensation Committee, the period of continuous employment or continuous engagement of consulting services by the Company that are necessary before the Option Rights will become exercisable, and may provide for the earlier exercise of the Option Rights, including, without limitation, in the event of a change in control of the Company or other similar transaction or event. Successive grants may be made to the same optionee regardless of whether Option Rights previously granted to him or her remain unexercised. Appreciation Rights. Appreciation Rights granted under the Stock Incentive Plan may be either free-standing or granted in tandem with Option Rights. An Appreciation Right represents the right to receive from the Company the difference (the "Spread"), or a percentage thereof not in excess of 100 percent, between the base price per share of Class A Common Stock in the case of a free-standing Appreciation Right, or the option price of the related Option Right in the case of a tandem Appreciation Right, and the market value of the Class A Common Stock on the date of exercise of the Appreciation Right. Tandem Appreciation Rights may only be exercised at a time when the related Option Right is exercisable and the Spread is positive, and the exercise of a tandem Appreciation Right requires the surrender of the related Option Right for cancellation. A free-standing Appreciation Right must have a base price that is at least equal to the fair market value of a share of Class A Common Stock on the date of grant, must specify the conditions, including as and to the extent determined by the Compensation Committee, the period of continuous employment or continuous engagement of consulting services and may not be exercised more than 10 years from the date of grant. Any grant of Appreciation Rights may specify that the amount payable by the Company upon exercise may be paid in cash, shares of Class A Common Stock or combination thereof and the Compensation Committee may either reserve or grant to the recipient the right to elect among those alternatives. The Compensation Committee may provide with respect to any grant of Appreciation Rights for the payment of dividend equivalents thereon in cash or Class A Common Stock on a current, deferred or contingent basis. Restricted Shares. An award of Restricted Shares involves the immediate transfer by the Company to a participant of ownership of a specific number of shares of Class A Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other ownership rights in the shares of Class A Common Stock. The transfer may be made without additional consideration or for consideration in an amount that is less than the market value of the shares on the date of grant, as the Compensation Committee may determine. Restricted Shares may be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Compensation Committee. An example would be a provision that the Restricted Shares would be forfeited if the participant ceased to serve the Company as a director, officer or other salaried employee during a specified period of years. In order to enforce these forfeiture provisions, the transferability of Restricted Shares will be prohibited or restricted in a manner and to the extent prescribed by the Compensation Committee for the period during which the forfeiture provisions are to continue. The Compensation Committee may provide for a shorter period during which the forfeiture 43 45 provisions are to apply, including, without limitation, in the event of a change in control of the Company any or other similar transaction or event. Transferability. Unless the agreement evidencing such grant provides otherwise, no Option Right, or other "derivative security" within the meaning of Rule 16b-3 under the Exchange Act will be transferable by a participant except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, as that term is defined under the Code or the Employee Retirement Income Security Act of 1974, as amended. Option Rights may not be exercised during a participant's lifetime except by the participant or, in the event of his or her incapacity, by his or her guardian or legal representative acting in a fiduciary capacity on behalf of the participant under the state law and court supervision. Adjustments. The maximum number of shares of Class A Common Stock that may be issued or transferred under the Stock Incentive Plan, the number of shares covered by outstanding awards and the option prices per share applicable thereto, are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations, liquidations, issuances of rights or warranties, and similar transactions or events. In the event of any such transaction or event, the Compensation Committee may in its discretion provide in substitution for any or all outstanding awards under the Stock Incentive Plan such alternative consideration as it may in good faith determine to be equitable in the circumstances and may require the surrender of all awards so replaced. Administration. The Stock Incentive Plan is administered by the Compensation Committee. In connection with its administration of the Stock Incentive Plan, the Compensation Committee is authorized to interpret the Stock Incentive Plan and related agreements and other documents. The Compensation Committee may make grants to participants under any or a combination of all of the various categories of awards that are authorized under the Stock Incentive Plan and may provide for special terms for awards to participants who are foreign nationals, as the Compensation Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Amendments. The Stock Incentive Plan may be amended from time to time by the Compensation Committee, but without further approval by the shareholders of the Company no such amendment (unless expressly allowed pursuant to the adjustment provisions described above) may cause Rule 16b-3 under the Exchange Act to cease to be applicable to the Stock Incentive Plan. Federal Income Tax Consequences. The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Stock Incentive Plan based on federal income tax laws in effect on the date of this Prospectus. This summary is not intended to be exhaustive and does not describe state or local tax consequences. Nonqualified Option Rights. In general: (i) no income will be recognized by an optionee at the time a nonqualified Option Right is granted; (ii) at the time of exercise of a nonqualified Option Right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares of Class A Common Stock and the fair market value of such shares if they are nonrestricted on the date of exercise; and (iii) at the time of sale of shares acquired pursuant to the exercise of a nonqualified Option Right, any appreciation (or depreciation) in the value of such shares after the date of exercise will be treated as either short-term capital gain (or loss) depending on how long the shares of Class A Common Stock have been held. Incentive Stock Options. No income generally will be recognized by an optionee upon the grant or exercise of an incentive stock option. If shares of Class A Common Stock are issued to an optionee pursuant to the exercise of an incentive stock option and no disqualifying disposition of the shares is made by the optionee within two years after the date of grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as long-term capital gain and any loss sustained will be long-term capital loss. If shares of Class A Common Stock acquired upon the exercise of an incentive stock option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the 44 46 shares of Class A Common Stock at the time of exercise (or, if less, the amount realized on the disposition of the shares in a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period. Restricted Shares. A recipient of Restricted Shares generally will be subject to tax at ordinary income rates on the fair market value of the Restricted Shares reduced by any amount paid by the recipient at such time as the shares are no longer subject to a risk of forfeiture or restrictions on transfer for purposes of Section 83 of the Code. However, a recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of the shares (determined without regard to the risk of forfeiture or restrictions on transfer) over any purchase price paid for the shares. If a Section 83(b) election has not been made, any non-restricted dividends received with respect to Restricted Shares that are subject at that time to a risk of forfeiture or restrictions on transfer generally will be treated as compensation that is taxable as ordinary income to the recipient. Special Rules Applicable to Officers and Directors. In limited circumstances where the sale of shares of Class A Common Stock that are received as the result of a grant of an award could subject an officer or director to suit under Section 16(b) of the Exchange Act, the tax consequences to the officer or director may differ from the tax consequences described above. In these circumstances, unless a special election has been made, the principal difference usually will be to postpone valuation and taxation of the shares of Class A Common Stock received so long as the sale of shares of Class A Common Stock received could subject the officer or director to suit under Section 16(b) of the Exchange Act, but no longer than six months. Tax Consequences to the Company. To the extent that a participant recognized ordinary income in the circumstance described above, the Company or subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not subject to the annual compensation limitation set forth in Section 162(m) of the Code and is not "excess parachute payment" within the meaning of Section 280G of the Code. Awards. Option Rights with respect to a total of 600,000 shares of Class A Common Stock have been granted under the Stock Incentive Plan, including Option Rights granted to executive officers of the Company as set forth in the table below. The Option Rights are exercisable at a price equal to $12.00 per share and vest in equal increments on each of the first five anniversaries of the date of grant.
OPTION RIGHTS GRANTEE GRANTED --------- ------------- Mark R. Anderson...................................... 120,000 Craig P. Leach........................................ 160,000 John R. Buck.......................................... 80,000 Zonie A. Harris....................................... 60,000 Arthur L. Hunt........................................ 60,000 C. Allen Bradley, Jr.................................. 40,000 Andre Comeaux, Jr..................................... 20,000
In addition, an aggregate of 60,000 Option Rights have been granted to certain non-executive employees of the Company on the same terms as the grants to executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to August 1996, the Company did not have a Compensation Committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers of the Company were made by the Company's Board of Directors. After the Offering, compensation decisions will be made by the Compensation Committee, currently consisting of Messrs. Jessee and Spence. 45 47 DIRECTOR COMPENSATION Directors who are employees of the Company will not be paid any fees or additional compensation for service as members of the Board of Directors or any committee thereof. Each non-employee director will receive $3,500 for each meeting of the Board of Directors attended. Upon completion of the Offering, non-employee directors will also receive a grant of 3,000 Restricted Shares under the Stock Incentive Plan. Such grant will vest ratably over a three-year period with 1,000 shares vesting on the first anniversary of the date of grant and 1,000 shares vesting on each of the next two succeeding anniversaries. If a non-employee director's membership on the Board of Directors of the Company is terminated for any reason, the shares of restricted Class A Common Stock that have not yet vested as of the date of such termination will be forfeited. See "-- Stock Incentive Plan" above. All directors will be reimbursed for travel and other related expenses incurred in attending meetings of the Board of Directors or any committee thereof. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of July 31, 1996 by: (i) each of the Company's directors and Named Officers; (ii) all executive officers and directors of the Company as a group; and (iii) each person known by the Company to be the beneficial owner of more than five percent of the outstanding Common Stock. Except as otherwise noted, each of the holders listed below has sole voting power and investment power over the shares beneficially owned.
SHARES OF COMMON SHARES OF COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(1) OFFERING(1) NAME OF --------------------- --------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT ------------------------------------------- ---------- ------- ---------- ------- Millard E. Morris(2)....................... 17,126,521 98.4% 17,126,521 60.3% Mark R. Anderson........................... 273,479 1.6 273,479 1.0 John R. Buck............................... -- 0 -- 0 Arthur L. Hunt............................. -- 0 -- 0 Daniel J. Jessee........................... -- 0 -- 0 N. David Spence............................ -- 0 -- 0 Craig P. Leach............................. -- 0 -- 0 C. Allen Bradley, Jr. ..................... -- 0 -- 0 All Directors and Executive Officers as a Group (10 Persons)....................... 17,400,000 100.0% 17,400,000 61.3%
- --------------- (1) All shares of Common Stock beneficially owned by Messrs. Morris and Anderson are shares of Class B Common Stock, representing respectively 98.4% and 1.6% of the outstanding Class B Common Stock both before and after the Offering. Excludes 6,000 shares of Class A Common Stock to be issued to non-employee directors of the Company upon completion of the Offering pursuant to the Stock Incentive Plan. (2) Mr. Morris' business address is 5550 LBJ Freeway, Suite 901, Dallas, Texas 75240. 46 48 CERTAIN TRANSACTIONS AND RELATIONSHIPS REGISTRATION RIGHTS AGREEMENT In connection with the Offering, the Company granted certain registration rights to Messrs. Morris and Anderson. See "Description of Capital Stock -- Registration Rights." TAX ALLOCATION AGREEMENT The Company has entered into a Tax Allocation Agreement with the Distributed Subsidiaries to provide for (i) the allocation of payments of taxes for periods during which the Company (or any of its affiliates other than the Distributed Subsidiaries and the direct and indirect subsidiaries thereof) and any of the Distributed Subsidiaries or the direct or indirect subsidiaries thereof are included in the same consolidated group for federal income tax purposes, or the same consolidated, combined or unitary returns for state, local or foreign tax purposes, (ii) the allocation of responsibility for the filing of tax returns, the conducting of tax audits and the handling of tax controversies, and (iii) various related matters. SERVICES AGREEMENT In connection with the Reorganization, the Company and Auto One Acceptance Corporation ("AOAC"), which will be owned by Messrs. Morris and Anderson following the Reorganization, entered into a services agreement (the "Services Agreement"), pursuant to which the Company will continue to provide various services to AOAC, including payroll, human resources, legal, internal audit, benefits administration and similar administrative and management services that the Company has historically provided to AOAC. For such services, AOAC will pay the Company a fee of $40,000 per month. The Services Agreement is terminable by either the Company or AOAC on 90 days prior notice, provided however, that neither party may terminate the Services Agreement prior to the first anniversary date of the Offering. As a result of the Company's affiliation with AOAC, the terms of the Services Agreement were not, and the terms of any future amendments to the Services Agreement may not be, the result of arm's-length negotiation. EXECUTIVE OFFICE LEASE The Company subleases its 2,500 square foot executive offices in Dallas, Texas from AOAC. Under the terms of the sublease, the Company will pay to AOAC lease payment of $3,700 per month. The sublease may be terminated by either party upon 90 days' written notice. AIRCRAFT AGREEMENT The Company and AOAC have entered into an aircraft agreement (the "Aircraft Agreement") pursuant to which AOAC may use the aircraft owned by the Company for travel by AOAC's senior management in the course of AOAC's businesses. AOAC will be charged a fee for the use of such aircraft at a rate of $5,000 per month plus an additional amount based on the number of nautical miles traveled. The Aircraft Agreement has an initial term of one year and may be terminated thereafter by either party on 90 days' written notice. TRANSACTIONS WITH BANC ONE CORPORATION Daniel J. Jessee, a director of the Company, is a member of the investment committee of Banc One Capital Partners II, Ltd., the lender under the Company's existing credit agreement. Banc One Capital Corporation, a subsidiary of Banc One Corporation and of which Mr. Jessee is Vice Chairman, received a fee of $125,000 from the Company for its services in the arrangement and placement of this credit agreement. Borrowings under this credit agreement will be repaid in full with a portion of the proceeds of this Offering. See "Use of Proceeds." 47 49 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common Stock, par value $.01 per share, 100,000,000 shares of Class B Common Stock, par value $.01 per share, and 25,000,000 shares of Preferred Stock, par value $.01 per share. As of the date of this Prospectus and without giving effect to the shares of Class A Common Stock to be sold in the Offering, there were no shares of Class A Common Stock, 17,400,000 shares of Class B Common Stock and no shares of Preferred Stock issued and outstanding. All outstanding shares of Class B Common Stock are, and the shares of Class A Common Stock offered hereby will be, upon payment thereof, fully paid and nonassessable. The Class A Common Stock and the Class B Common Stock are referred to in this Prospectus collectively as the "Common Stock." CLASS A COMMON STOCK AND CLASS B COMMON STOCK Voting Rights. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except as otherwise required by law, the holders of the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters that may be submitted to a vote or consent of the shareholders, including the election of directors. The Common Stock does not have any cumulative voting rights. Accordingly, immediately after the Offering, Mr. Morris will retain effective control of the Company through holding approximately 92.6% of the combined voting power of the outstanding Common Stock (91.8% if the Underwriters' over-allotment option is exercised in full). Conversion. Class A Common Stock has no conversion rights. Each share of Class B Common Stock will be convertible at any time, at the option of and without cost to the shareholder, into one share of Class A Common Stock upon surrender to the Company's transfer agent of the certificate or certificates evidencing the Class B Common Stock to be converted, together with a written notice of the election of such shareholder to convert such shares into Class A Common Stock. Shares of Class B Common Stock will also be automatically converted into shares of Class A Common Stock upon the transfer of such shares of Class B Common Stock, except as a result of (i) a transfer to a record holder's spouse, (ii) a transfer to any lineal descendant of any grandparent of a record holder, including adopted children and any such descendant's spouse, (iii) a transfer by will or by the laws of descent and distribution, or (iv) a transfer to a voting trust or other trust (including a distribution from such trust to the trust beneficiaries), to a corporation, partnership or other entity controlled by the beneficial owner of such shares, or to the individual beneficial owner of such shares or to any such entity that will become controlled by the beneficial owner of such shares immediately after the transfer or series of transfers within any ten (10) day period. Once shares of Class B Common Stock are converted into shares of Class A Common Stock, such shares may not be converted back into Class B Common Stock. Dividends and Liquidation Rights. The holders of Class A Common Stock and Class B Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine, subject to any preferential dividend rights of outstanding Preferred Stock, if any. Upon liquidation and dissolution of the Company, the holders of Class A Common Stock and Class B Common Stock are entitled to receive all assets available for distribution to shareholders, subject to any preferential amounts payable to holders of Preferred Stock, if any. Other Rights. The holders of Class A Common Stock and Class B Common Stock are not entitled to preemptive or subscription rights, and there are no redemption or sinking fund provisions applicable to such Common Stock. PREFERRED STOCK Under the Articles, the Company has authority to issue 25,000,000 shares of Preferred Stock. As of the date of this Prospectus, no shares of Preferred Stock are outstanding and the Company has no present intention to issue any shares of Preferred Stock. 48 50 Preferred Stock may be issued, from time to time in one or more series, and the Board of Directors, without further approval of the shareholders, is authorized to fix the dividend rights and terms, redemption rights and terms, liquidation preferences, conversion rights, voting rights and sinking fund provisions applicable to each such series of Preferred Stock. If the Company issues a series of Preferred Stock in the future that has voting rights or preference over the Common Stock with respect to the payment of dividends and upon the Company's liquidation, dissolution or winding up, the rights of the holders of the Common Stock offered hereby may be adversely affected. The issuance of shares of Preferred Stock could be utilized, under certain circumstances, in an attempt to prevent an acquisition of the Company. REGISTRATION RIGHTS The Company and Millard E. Morris, the Company's Chairman of the Board and Chief Executive Officer and Mark R. Anderson, the Company's President, have entered into a Registration Rights Agreement which expires on June 30, 2007. Under this Registration Rights Agreement, beginning after June 30, 1997, Mr. Morris has the right to request the Company to effect four registrations of Class A Common Stock, subject to the right of the other shareholders to be included in such registrations and other conditions and limitations, provided that the number of shares of Class A Common Stock to be included in each such registration is not less than 1,000,000. The Registration Rights Agreement also grants secondary offering rights ("piggy back" rights) to Messrs. Morris and Anderson and, in certain cases, their transferees, subject to certain conditions and limitations, in connection with any registration of Class A Common Stock by the Company, which rights may be exercised beginning after June 30, 1997. As of the date of this Prospectus, an aggregate of 17,400,000 shares of Class A Common Stock are subject to the registration rights described above, assuming full conversion by Messrs. Morris and Anderson of their Class B Common Stock into Class A Common Stock. In all such registrations, the Company is required under the Registration Rights Agreement to bear the expenses of registration. While Messrs. Morris and Anderson have certain priority rights in such registrations, the Company has retained the right to grant registration rights to other persons, including its officers and directors. ANTI-TAKEOVER PROVISIONS The Articles contain provisions which provide for a classified board of directors consisting of three classes with directors serving staggered three-year terms. Therefore, only one-third of the directors are subject to election by the shareholders each year. The Articles also include provisions eliminating the personal liability of the Company's directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the TBCA. The Articles and Bylaws include provisions indemnifying the Company's directors and officers to the full extent permitted by the TBCA, including under certain circumstances in which indemnification is otherwise discretionary. See "Management -- Limitation of Liability and Indemnification." The Articles and Bylaws contain a number of provisions relating to corporate governance and to the rights of shareholders. These provisions include (i) a requirement that special meetings of shareholders may be called only by the Chairman, the President, the Board of Directors or upon the request of shareholders owning 50% or more of the shares entitled to vote at the meeting, (ii) the authority of the Board of Directors to issue series of Preferred Stock with such voting rights and other powers as the Board of Directors may determine, and (iii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at shareholder meetings. The provisions of the TBCA and the Articles and Bylaws discussed above would make more difficult or discourage a proxy contest or the acquisition of control by a holder of a substantial block of the Company's stock or the removal of the incumbent Board of Directors. Such provisions could also have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. In addition, since these provisions are designed to discourage accumulations of large blocks of the Company's stock by purchasers whose objective is to have such stock repurchased by the Company at a premium, such provisions could tend to reduce the temporary fluctuations in the market price of the Class A Common Stock which are 49 51 caused by such accumulations. Accordingly, shareholders could be deprived of certain opportunities to sell their stock at a temporarily higher market price. The Company is also subject to certain provisions of Louisiana law applicable to insurance holding companies. Those laws prohibit the merger or acquisition of control of a domestic insurer or any person controlling a domestic insurer without the prior approval of the proposed transaction by the Louisiana Department of Insurance. TRANSFER AGENT AND REGISTRAR Harris Trust and Savings Bank is the transfer agent and registrar for the Class A Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 11,000,000 shares of Class A Common Stock (assuming the Underwriters' over-allotment option is not exercised) and 17,400,000 shares of Class B Common Stock. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock and must be converted to effect any public sale of such stock. Of these outstanding shares, the 11,000,000 shares of Class A Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as that term is defined in the Securities Act), which will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The 17,400,000 outstanding shares of Class B Common Stock are "restricted" securities within the meaning of Rule 144 and may not be resold in a public distribution (before or upon conversion into Class A Common Stock) except in compliance with the registration requirements of the Securities Act or pursuant to Rule 144. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years from the later of the date such restricted shares were acquired from the Company and (if applicable) the date they were acquired from an affiliate, but less than three years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Class A Common Stock (approximately 110,000 shares immediately after the Offering) or (ii) the average weekly trading volume in the public market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other restrictions, but without regard to the two-year holding period. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years from the later of the date such restricted shares were acquired from the Company and (if applicable) the date they were acquired from an affiliate is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. As defined in Rule 144, an "affiliate" of an issuer is a person who directly, or indirectly through the use of one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Rule 144A under the Securities Act as currently in effect permits the immediate sale by current holders of restricted shares of all or a portion of their shares to certain qualified institutional buyers described in Rule 144A, subject to certain conditions. The Company and Messrs. Morris and Anderson, the Company's current shareholders, who in the aggregate hold beneficially 17,400,000 shares of Class B Common Stock, have agreed that they will not offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of Class A Common Stock of the Company or any securities convertible into or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan), for a period of 180 days from the date of this Prospectus without the prior written consent of Smith Barney Inc. 50 52 Under the Stock Incentive Plan, 3,000,000 shares of Class A Common Stock are reserved for issuance thereunder, including 6,000 shares of Class A Common Stock to be granted to non-employee directors. Options to purchase 600,000 shares of Class A Common Stock at an exercise price of $12.00 per share have been granted. See "Management -- Stock Incentive Plan" and "Management -- Director Compensation." Prior to this Offering, there has been no public market for the Class A Common Stock, and no predictions can be made as to the effect, if any, that sales of shares or the availability of shares for sale will have on the prevailing market price of the Class A Common Stock. Sales of substantial amounts of Class A Common Stock in the public market could have an adverse effect on prevailing market prices. 51 53 UNDERWRITING Upon the terms and conditions stated in the Underwriting Agreement, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, the shares of Class A Common Stock which equal the number of shares set forth opposite the name of such Underwriter:
NUMBER NAME OF UNDERWRITER OF SHARES -------------------- ---------- Smith Barney Inc ........................................................ Piper Jaffray Inc. ...................................................... ---------- Total.......................................................... 11,000,000 ==========
The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and Piper Jaffray Inc. are acting as the Representatives, have advised the Company that they propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives. The Underwriters do not intend to confirm sales of the Class A Common Stock offered hereby to accounts over which they exercise discretionary authority. The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 1,650,000 additional shares of Class A Common Stock at the price to the public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering of the shares hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth next to such Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company and its existing shareholders have agreed not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of Class A Common Stock of the Company or any securities convertible into or exercisable or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan), except to the Underwriters pursuant to the Underwriting Agreement, for a period of 180 days after the date of this Prospectus, without the prior written consent of Smith Barney Inc. 52 54 Prior to the Offering, there has been no public market for the Class A Common Stock. Consequently, the public offering price for the shares offered hereby was determined by negotiations between the Company and the Representatives. Among the factors considered in determining the public offering price were the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, its past and present operations, its past and present revenues and earnings, and the trend of such revenues and earnings, the prospects for growth of the Company's revenues and earnings, the present state of the Company's development, the general condition of the securities market at the time of the Offering and the market prices and earnings of similar securities of comparable companies at the time of the Offering, the current state of the economy in the United States and the current level of economic activity in the industry in which the Company competes and in related or comparable industries. LEGAL MATTERS The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Jones, Day, Reavis & Pogue, Dallas, Texas. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Dewey Ballantine, New York, New York. EXPERTS The consolidated financial statements of AMERISAFE, Inc. and subsidiaries at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the shares of Class A Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof. Statements made in this Prospectus as to the contents of any contract or any other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement herein shall be deemed qualified in its entirety by such reference. Copies of such materials may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, New York, New York 10048. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission and that is located at http://www.sec.gov. 53 55 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets at December 31, 1994 and 1995 and at March 31, 1996 (unaudited)......................................................................... F-3 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996 (unaudited)...................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)......................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 56 REPORT OF INDEPENDENT AUDITORS The Board of Directors AMERISAFE, Inc. We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMERISAFE, Inc. and subsidiaries at December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company effected a reorganization on , 1996, resulting in a change in the reporting entity. Dallas, Texas , 1996 The foregoing report is in the form that will be signed upon completion of transactions described in the first paragraph of Note 1 to the consolidated financial statements. ERNST & YOUNG LLP Dallas, Texas August 9, 1996 F-2 57 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA STOCKHOLDERS' EQUITY DECEMBER 31, (NOTE 8) ------------------- MARCH 31, MARCH 31 1994 1995 1996 1996 ------- -------- --------- ------------- (UNAUDITED) ASSETS Investments: Investments held-to-maturity -- fixed maturities at amortized cost (fair value: 1994 -- $48,324; 1995 -- $66,840; 1996 -- $69,647)................................................. $49,618 $ 65,052 $ 69,267 Investments available-for-sale, at fair value: Equity securities (cost: 1994 -- $1,317; 1995 -- $2,748; 1996 -- $3,626)................................................ 1,253 3,076 4,010 Fixed maturities (cost: 1994 -- $125; 1995 -- $3,291; 1996 -- $2,996)................................................ 125 3,363 3,028 ------- -------- -------- Total investments............................................ 50,996 71,491 76,305 Cash and cash equivalents............................................ 5,264 10,202 12,485 Receivable for securities sold or matured............................ 312 868 -- Recoverable from reinsurers.......................................... 10,941 13,360 14,351 Recoverable from state funds......................................... 405 401 414 Agents balances in course of collection.............................. 8,815 9,654 9,187 Accrued interest receivable.......................................... 811 1,105 1,030 Notes receivable from shareholders and affiliates.................... 2,176 2,387 3,302 Real estate, furniture and equipment, net............................ 4,269 5,906 7,053 Deferred federal income taxes........................................ 2,303 1,891 2,051 Other assets......................................................... 1,799 3,175 4,314 ------- -------- -------- Total assets................................................. $88,091 $120,440 $130,492 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for claims and claim settlement expenses.................. $40,939 $ 55,427 $ 59,571 Unearned premiums.................................................. 4,229 3,581 3,287 Funds held under reinsurance treaties.............................. 164 166 469 Reinsurance premiums payable....................................... 113 1,426 1,534 Amounts held for others............................................ 5,923 10,299 10,426 Accounts payable and accrued liabilities........................... 3,391 7,290 7,787 Notes payable...................................................... 7,479 8,232 12,516 Notes payable to shareholders and affiliates....................... 3,377 1,881 521 ------- -------- -------- Total liabilities............................................ 65,615 88,302 96,111 Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $0.01 par value, 25,000,000 shares authorized: Series B -- cumulative convertible 8% preferred stock, issued and outstanding shares -- 510.167.................................. -- -- -- $ -- Class A common stock, $0.01 par value, Authorized shares -- 100,000,000 Issued and outstanding shares -- None............................ -- -- -- -- Class B common stock, $0.01 par value: Authorized shares -- 100,000,000 Issued and outstanding shares -- 11,884,647...................... 119 119 119 174 Additional paid-in capital......................................... 1,362 1,362 1,362 -- Retained earnings (deficit)........................................ 21,059 30,393 32,627 (28,166) Unrealized gain (loss) on securities available-for-sale, net of taxes............................................................ (64) 264 273 273 ------- -------- -------- -------- Total stockholders' equity (deficit)......................... 22,476 32,138 34,381 $ (27,719) ======== ------- -------- -------- Total liabilities and stockholders' equity................... $88,091 $120,440 $130,492 ======= ======== ========
See notes to consolidated financial statements. F-3 58 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Premiums earned............................ $35,902 $40,461 $58,167 $10,918 $15,026 Service fee income......................... 987 2,468 4,110 582 1,671 Investment income.......................... 2,146 2,484 4,519 809 1,295 Fees and other from affiliates............. 2,154 1,732 2,881 511 534 ------- ------- ------- ------- ------- Total revenues..................... 41,189 47,145 69,677 12,820 18,526 Expenses: Claims and claim settlement expenses....... 20,262 25,250 32,924 6,725 9,250 Commissions and other underwriting expenses................................ 7,555 8,507 13,524 2,428 3,512 General and administrative................. 2,798 4,406 6,810 1,001 2,010 Interest................................... 850 726 845 210 279 Depreciation and amortization.............. 240 703 1,006 169 332 ------- ------- ------- ------- ------- Total expenses..................... 31,705 39,592 55,109 10,533 15,383 ------- ------- ------- ------- ------- Income before federal income taxes........... 9,484 7,553 14,568 2,287 3,143 Federal income taxes......................... 2,768 2,414 5,234 645 909 ------- ------- ------- ------- ------- Net income................................... $ 6,716 $ 5,139 $ 9,334 $ 1,642 $ 2,234 ======= ======= ======= ======= ======= Pro forma net income per share............... $ 0.43 $ 0.10 ======= ======= Pro forma weighted average shares outstanding................................ 21,666 21,666 ======= =======
See notes to consolidated financial statements. F-4 59 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES PREFERRED COMMON PAID-IN RETAINED AVAILABLE- STOCK STOCK CAPITAL EARNINGS FOR-SALE TOTAL --------- ------ ---------- -------- ---------- ------- Balance at January 1, 1993........... $ -- $119 $ (118) $ 9,204 $ 55 $ 9,260 Net income......................... -- -- -- 6,716 -- 6,716 Change in unrealized gain/loss on securities available-for-sale... -- -- -- -- (59) (59) Issuance of redeemable cumulative preferred stock................. -- -- 1,480 -- -- 1,480 ---- ---- ------ ------- ---- ------- Balance at December 31, 1993......... -- 119 1,362 15,920 (4) 17,397 Net income......................... -- -- -- 5,139 -- 5,139 Change in unrealized gain/loss on securities available-for-sale... -- -- -- -- (60) (60) ---- ---- ------ ------- ---- ------- Balance at December 31, 1994......... -- 119 1,362 21,059 (64) 22,476 Net income......................... -- -- -- 9,334 -- 9,334 Change in unrealized gain/loss on securities available-for-sale, net of deferred income taxes.... -- -- -- -- 328 328 ---- ---- ------ ------- ---- ------- Balance at December 31, 1995......... -- 119 1,362 30,393 264 32,138 Net income (unaudited)............. -- -- -- 2,234 -- 2,234 Change in unrealized gain/loss on securities available-for-sale, net of deferred income taxes (unaudited)..................... -- -- -- -- 9 9 ---- ---- ------ ------- ---- ------- Balance at March 31, 1996 (unaudited)........................ $ -- $119 $1,362 $ 32,627 $273 $34,381 ==== ==== ====== ======= ==== =======
See notes to consolidated financial statements. F-5 60 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- -------- (UNAUDITED) OPERATING ACTIVITIES: Net income.................................................... $ 6,716 $ 5,139 $ 9,334 $ 1,642 $ 2,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 240 703 1,006 169 332 Deferred income tax (benefit) expense..................... (772) (121) 203 (128) (161) Investment (gains) losses, net............................ (176) 18 (133) 12 (30) Changes in operating assets and liabilities: Accounts receivable and recoverables.................... (3,278) (565) (200) 2,463 467 Reserves for unpaid claims.............................. 8,383 6,518 14,489 2,260 4,144 Unearned premiums....................................... 1,580 2,638 (648) (1,230) (294) Reinsurance balances.................................... (2,607) (2,491) (1,103) (966) (580) Amounts held for others................................. 512 1,565 4,376 1,471 127 Accounts payable and accrued liabilities................ (468) 111 3,846 (817) 376 Other, net.............................................. 100 (560) (2,021) 1,950 (982) -------- -------- -------- ------- -------- Net cash provided by operating activities....................... 10,230 12,955 29,149 6,826 5,633 INVESTING ACTIVITIES: Purchases of investments held-to-maturity..................... (13,937) (29,770) (28,820) (3,370) (10,182) Proceeds from maturity of investments held-to-maturity........ 2,158 11,713 8,386 939 5,388 Purchases of investments available-for-sale................... (645) (561) (1,777) -- (878) Sales and maturities of investments available-for-sale........ 2,284 384 1,805 125 1,774 Net decrease in other invested assets......................... 897 -- -- -- -- Purchase of subsidiary, net of cash acquired.................. -- -- (218) -- -- Purchases of real estate, furniture and equipment............. (1,702) (1,347) (2,460) (486) (1,454) Decrease (increase) in loans to stockholders and affiliates... 1,470 (2,871) (211) (592) (922) Decrease in interest-bearing deposits in banks................ -- 265 -- -- -- -------- -------- -------- ------- -------- Net cash used in investing activities........................... (9,475) (22,187) (23,295) (3,384) (6,274) FINANCING ACTIVITIES: Net proceeds from (repayments of) revolving and short-term notes payable............................................... -- 4,100 (800) (829) 3,907 Proceeds from notes payable................................... 1,140 265 1,475 43 395 Principal payments on notes payable and capital lease obligations................................................. (638) (175) (1,122) (16) (18) Net proceeds from (repayment of) loans from shareholders and affiliates.................................................. (528) (1,328) (469) 44 (1,360) -------- -------- -------- ------- -------- Net cash (used in) provided by financing activities............. (26) 2,862 (916) (758) 2,924 -------- -------- -------- ------- -------- Increase (decrease) in cash and cash equivalents................ 729 (6,370) 4,938 2,684 2,283 Cash and cash equivalents at beginning of period................ 10,905 11,634 5,264 5,264 10,202 -------- -------- -------- ------- -------- Cash and cash equivalents at end of period...................... $ 11,634 $ 5,264 $ 10,202 $ 7,948 $ 12,485 ======== ======== ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................... $ 833 $ 743 $ 845 $ 280 $ 180 Income taxes paid........................................... $ 1,926 $ 2,570 $ 4,644 $ 1,094 $ 1,500 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Other assets acquired with the issuance of notes payable.... $ -- $ -- $ 1,200 $ -- $ -- Dividend from affiliate for note payable.................... $ -- $ -- $ 1,027 $ -- $ -- Debt converted to redeemable cumulative preferred stock..... $ 1,480 $ -- $ -- $ -- $ --
See notes to consolidated financial statements. F-6 61 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reorganization AMERISAFE, Inc. (formerly Gulf Universal Holdings, Inc.) (AMERISAFE) was reorganized on , 1996, resulting in a change in the reporting entity. Prior to this reorganization the subsidiaries were American Interstate Insurance Company and subsidiaries (American Interstate), Auto One Acceptance Corporation and subsidiaries (Auto One), Gulf Universal Insurance, Ltd. (LTD), Mor-Tem Systems, Inc. and subsidiaries (Mor-Tem), Systems Operations, Inc. (d.b.a. Engineered Mechanical Services) (EMS) and Gulf Air, Inc. In connection with this reorganization, the common stock of certain insurance agency subsidiaries of Mor-Tem and EMS, and cash were exchanged for the Class B Common Stock of AMERISAFE held by a minority shareholder. The Company realized a gain from discontinued operations of approximately $ on , 1996, in connection with the split-off of these subsidiaries. The net assets and operations of these subsidiaries are not separately disclosed in the accompanying financial statements as they are not material. Following the split-off of the insurance agency subsidiaries of Mor-Tem and EMS the Company distributed the common stock of Auto One and LTD to the remaining shareholders on a pro rata basis. The distribution of Auto One and LTD was accounted for as a reorganization of commonly controlled entities and was accounted for in a manner similar to a "pooling of interests" (see Note 4). Accordingly, the historical consolidated financial statements of AMERISAFE have been recast to include, at historical cost, only the individual companies which were not spun off to the shareholders for all periods presented. The effect of this change in the reporting entity was a decrease in net income of $5,465,000 in 1993, $2,930,000 in 1994, $1,160,000 in 1995 and $198,000 in the three months ended March 31, 1996, respectively, and an increase in net income of $987,000 in the three months ended March 31, 1995. The effect of the change in the reporting entity on pro forma net income per share was a decrease of $0.05 in 1995 and $0.01 in the three months ended March 31, 1996. On August 9, 1996, AMERISAFE's Board of Directors approved a change in the Company's capital structure for a 3,603.63-for-one stock split, the reclassification of the Company's common stock to Class B Common Stock, the authorization of the Class A Common Stock, a change in the par value of the Preferred Stock from $1.00 per share to $.01 per share, and an increase in the number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock to 100,000,000 shares, 100,000,000 shares and 25,000,000 shares, respectively, effected by amendment to the Company's articles of incorporation. The accompanying consolidated financial statements reflect the above changes to the Company's capital structure for all periods presented. The characteristics of the Class B Common Stock are identical to those of Class A Common Stock, except that each holder of the Class B Common Stock is entitled to ten votes for each share held. Basis of Presentation The consolidated financial statements include the accounts of AMERISAFE and its wholly-owned subsidiaries: American Interstate, Mor-Tem Risk Management, Inc., Hammerman & Gainer, Inc. (H&G) and Gulf Air, Inc., collectively referred to as the "Company." American Interstate is a property/casualty insurance company domiciled in the state of Louisiana and conducts business primarily in the southeastern United States. American Interstate writes primarily workers' compensation and general liability coverage for the logging industry. It expanded its workers' compensation business beyond the logging industry beginning in 1994, but that industry group still accounts for approximately 60% of the Company's 1995 premiums earned. Assets and revenues of American Interstate represent approximately 93% and 90%, respectively, of the 1995 consolidated amounts. F-7 62 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Mor-Tem Risk Management, Inc. is domiciled in the state of Louisiana and provides safety engineering and claims settlement services. On September 1, 1995, the Company acquired H&G, a claims settlement company, for $1,500,000 (including notes payable of $1,200,000). The assets and liabilities of H&G at September 1, 1995, have been recorded at their estimated fair values which, except for certain intangible assets, were not significantly different from their net carrying values. The unamortized balance of $1,035,000 of intangible assets arising from this acquisition is included in other assets at December 31, 1995 and is being amortized on a straight-line basis generally over a 15 year life. Risk management and claims settlement related assets and revenues represent approximately 2% and 5%, respectively, of the 1995 consolidated amounts. Principles of Consolidation All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Investments The Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement No. 115), for its investments effective January 1, 1994. Pursuant to Statement No. 115, the Company determines the appropriate classification of investments in debt and equity securities at the time of purchase. If the Company has the intent and ability at the time of purchase to hold debt securities until maturity, they are classified as investments held-to-maturity and carried at amortized cost (unless a permanent impairment in value exists). At the date of adoption of the new accounting standard, and at the end of 1994, the Company had classified substantially all of its debt securities as held-to-maturity. Debt securities for which management does not have the ability or intent to hold until maturity are classified as available-for-sale and carried at market value; temporary changes in market value are recognized in stockholders' equity as unrealized gains or losses, net of deferred income tax. The Company has no securities acquired for trading purposes. Equity and certain other securities are considered available-for-sale and are carried at market value. Temporary changes in the market value are reported in stockholders' equity as unrealized gains or losses on securities available-for-sale, net of deferred income tax. This method of reporting is consistent with the manner in which investments in equity securities were reported prior to adoption of Statement No. 115. No future income tax benefit was recorded for the unrealized loss applicable to equity securities at December 31, 1993 and 1994, as the amounts were not material. The discount or premium on debt securities is amortized using the interest method. Anticipated prepayments are not considered when determining the amortization of premiums or discounts as the unamortized amounts are not material. Real Estate, Furniture and Equipment The Company's office building, furniture, and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the respective assets, generally 39 years for the building, and three to seven years for furniture and equipment. F-8 63 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Premium Revenue Insurance premiums on workers' compensation and general liability coverages are based on actual payroll costs or production during the policy term and are generally billed monthly in arrears; accordingly, there are no significant unearned premiums on these lines of business except assigned risk workers' compensation policies. However, the Company requires a deposit of 5% to 25% of the estimated annual premium at the inception of the policy; such deposits are included in amounts held for others. All other insurance premiums are reflected in earnings over periods covered by the policies. Unearned premiums on these policies are computed on a daily pro rata basis. Reserves for Claims and Claim Settlement Expenses Reserves for claims and claim settlement expenses represent the estimated ultimate net cost of all reported and unreported claims incurred through the respective balance sheet dates. The Company does not discount claims and claim settlement expense reserves. The reserves for unpaid claims and claim settlement expenses are estimated using individual case-basis valuations, statistical analyses, and estimates based upon experience for unreported claims and claim settlement expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for claims and claim settlement expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Salvage and subrogation recoverables are estimated using the "case-basis" method for large recoverables and historical statistics for smaller recoverables. Such amounts deducted from the liability for claims and claim settlement expenses were $237,000 and $250,000 at December 31, 1994 and 1995, respectively, and $275,000 at March 31, 1996 (unaudited). Federal Income Taxes AMERISAFE, its subsidiaries and the former subsidiaries of AMERISAFE have historically filed a consolidated federal income tax return. The consolidated tax liability is allocated among the participants in accordance with the ratio of each participant's taxable income to the consolidated taxable income of the group. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has not established a valuation allowance for the deferred income tax asset at December 31, 1994 and 1995 or at March 31, 1996 as management has concluded the entire deferred income tax asset will be realized. Pro Forma Net Income per Share Pro forma net income per share was computed based on the weighted average number of common and common equivalent shares outstanding. The weighted average shares outstanding for each period include common equivalent shares attributable to convertible preferred stock (5,515,353 shares), outstanding stock options (120,000 shares) using the treasury stock method, incremental shares from the expected issuance of Class A Common Stock (6,000 shares) and pro forma shares for the number of shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE to be paid F-9 64 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from the proceeds of the Company's initial public offering of its Class A Common Stock (4,140,000 shares) (See Note 8). Incremental shares resulting from the issuance of convertible preferred stock and stock options issued prior to the Company's initial public offering have been included in the weighted average shares outstanding for all periods for which net income per share is presented. All Class A common share and per share data have been restated to adjust for the 3,603.626-for-one stock split of the Company's Common Stock. Reinsurance Reinsurance premiums, claims, and claim settlement expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees and non-employee directors with an exercise price equal to the fair value at grant date. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123), as if the Company had accounted for its stock options under the fair value method of Statement No. 123. The Company will make the pro forma disclosures required by Statement No. 123 when stock options are granted. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. 2. INVESTMENTS The Company believes its investments do not pose unusual credit risk and are widely diversified. In excess of 95% of the Company's investments in debt securities at December 31, 1995 have investment agency ratings of AA or higher. The remaining debt securities are investment grade or better. A summary of net investment income is as follows (in thousands):
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, -------------------------- -------------- 1993 1994 1995 1995 1996 ------ ------ ------ ---- ------ (UNAUDITED) Fixed maturities............................ $1,510 $2,171 $3,199 $698 $1,059 Equity securities........................... 279 74 193 3 16 Other....................................... 373 255 1,150 112 230 ------ ------ ------ ---- ------ Total investment income..................... 2,162 2,500 4,542 813 1,305 Less investment expenses.................... 16 16 23 4 10 ------ ------ ------ ---- ------ Net investment income....................... $2,146 $2,484 $4,519 $809 $1,295 ====== ====== ====== ==== ======
F-10 65 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The cost or amortized cost and fair values of investments in debt securities held-to-maturity at December 31, 1994 and 1995 and March 31, 1996, are summarized as follows (in thousands):
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- DECEMBER 31, 1994 U.S. Treasury securities and obligations of U.S. Government agencies.................. $17,760 $ 7 $ 359 $17,408 Corporate securities........................ 2,119 10 48 2,081 Obligations of states and political subdivisions.............................. 29,739 127 1,031 28,835 ------- ------ ------ ------- Totals...................................... $49,618 $ 144 $1,438 $48,324 ======= ====== ====== ======= DECEMBER 31, 1995 U.S. Treasury securities and obligations of U.S. Government agencies.................. $28,530 $ 721 $ 4 $29,247 Corporate securities........................ 2,768 44 -- 2,812 Obligations of states and political subdivisions.............................. 33,754 1,037 10 34,781 ------- ------ ------ ------- Totals...................................... $65,052 $1,802 $ 14 $66,840 ======= ====== ====== ======= MARCH 31, 1996 (UNAUDITED) U.S. Treasury securities and obligations of U.S. Government agencies.................. $35,196 $ 198 $ 439 $34,955 Corporate securities........................ 3,484 12 91 3,405 Obligations of states and political subdivisions.............................. 30,587 755 55 31,287 ------- ------ ------ ------- Totals...................................... $69,267 $ 965 $ 585 $69,647 ======= ====== ====== =======
Unrealized gains and losses on investments in securities available-for-sale are reported directly in stockholders' equity (net of deferred income taxes) and do not affect operations. The gross unrealized gains and losses on, and the cost and fair value of, those investments at December 31, 1994 and 1995 and March 31, 1996 are summarized as follows (in thousands):
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------ DECEMBER 31, 1994 Common stocks................................ $ 1,317 $ -- $ 64 $1,253 Debt securities.............................. 125 -- -- 125 ------- ---- --- ------ Totals....................................... $ 1,442 $ -- $ 64 $1,378 ======= ==== === ====== DECEMBER 31, 1995 U.S. Treasury securities and obligations of U.S. Government agencies................... $ 3,191 $ 72 $ 3 $3,260 Other debt securities........................ 100 3 -- 103 ------- ---- --- ------ Total debt securities...................... 3,291 75 3 3,363 Common stocks (primarily mutual funds)....... 2,748 342 14 3,076 ------- ---- --- ------ Totals....................................... $ 6,039 $417 $ 17 $6,439 ======= ==== === ======
F-11 66 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------ ---- --- ------ MARCH 31, 1996 (UNAUDITED) U.S. Treasury securities and obligations of U.S. Government agencies................... $ 2,896 $ 32 $ -- $2,928 Other debt securities........................ 100 -- -- 100 ------- ---- ---- ------ Total debt securities...................... 2,996 32 -- 3,028 Common stocks (primarily mutual funds)....... 3,626 426 42 4,010 ------- ---- ---- ------ Totals....................................... $ 6,622 $458 $ 42 $7,038 ======= ==== ==== ======
A summary of the cost or amortized cost and fair value of investments in debt securities by contractual maturity at December 31, 1995 is as follows (in thousands):
HELD-TO-MATURITY AVAILABLE-FOR-SALE ----------------------- -------------------- COST OR COST OR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ---------- ---------- ------ Maturity In 1996.................................... $ 8,912 $ 8,948 $1,196 $1,210 In 1997 through 2001....................... 29,244 30,017 2,095 2,153 In 2002 through 2006....................... 24,022 24,866 -- -- After 2006................................. 2,874 3,009 -- -- ------- -------- ------ ------ $65,052 $ 66,840 $3,291 $3,363 ======= ======== ====== ======
The actual maturities of the debt securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1995, there were $365,000 of short-term investments (included in cash and cash equivalents) and $3,316,000 of held-to-maturity investments on deposit, as required, with regulatory agencies of states in which the Company does business. Proceeds from sales or maturities of available-for-sale securities during 1993, 1994 and 1995 were approximately $2,284,000, $384,000 and $1,805,000, respectively, and $125,000 and $1,774,000 for the three months ended March 31, 1995 and 1996, respectively. Gross gains of $147,000, $26,000 and $174,000 and gross losses of $38,000, $4,000 and $1,000 were realized on these securities during 1993, 1994 and 1995, respectively. No gains or losses were realized on the sale or maturity of available-for-sale securities during the three months ended March 31, 1995 and 1996. Realized gains and losses are determined on the basis of the cost of the specific security sold. During 1995, Silver Oak Casualty, Inc. (Silver Oak), a subsidiary of American Interstate, disposed of two held-to-maturity debt securities prior to their stated maturities to satisfy its liquidity needs. As a result, on the basis of the likelihood that other sales may occur in the future, all of Silver Oak's debt securities, with an aggregate amortized cost of approximately $3,300,000 and an unrealized loss of approximately $25,000, were transferred to the available-for-sale portfolio. American Interstate sold a held-to-maturity debt security during 1995 prior to its stated maturity. The security, which had a carrying value of $300,000, was sold at a loss of $8,000. The sale was the result of a downgrade in the investment rating of the security by Standard and Poor's rating agency and is considered an isolated event. The Company's management intends to hold the remaining held-to-maturity portfolio until maturity. F-12 67 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. REINSURANCE The Company cedes reinsurance to various unaffiliated reinsurers under excess-of-loss policies. Those reinsurance arrangements allow management to control exposure to potential losses arising from larger risks and provide additional capacity for growth. Generally, the Company retains $200,000 per occurrence. The effect of reinsurance on premiums written and earned in 1993, 1994 and 1995 was as follows (in thousands):
NET DIRECT CEDED PREMIUMS ------- ------- -------- 1993 Premiums Written............................................. $45,660 $(8,189) $37,471 Earned.............................................. 43,995 (8,093) 35,902 1994 Premiums Written............................................. $50,900 $(8,033) $42,867 Earned.............................................. 48,262 (7,801) 40,461 1995 Premiums Written............................................. $66,184 $(8,336) $57,848 Earned.............................................. 66,832 (8,665) 58,167
Claims and claim settlement expenses were reduced by reinsurance recoveries of $5,462,000, $3,906,000 and $5,398,000 in 1993, 1994 and 1995, respectively, and $760,000 and $1,320,000 for the three months ended March 31, 1995 and 1996, respectively. Amounts recoverable from reinsurers consist of the following (in thousands):
DECEMBER 31, ------------------ MARCH 31, 1994 1995 1996 ------- ------- ----------- (UNAUDITED) Recoverable ceded reserves for unpaid claims and claims settlement expenses: Case basis........................................... $ 8,321 $ 9,780 $10,522 Incurred but not reported............................ 1,376 2,343 2,756 ------- ------- ------- 9,697 12,123 13,278 Paid claims recoverable................................ 915 1,237 1,073 Ceded unearned premiums................................ 329 -- -- ------- ------- ------- Total.................................................. $10,941 $13,360 $14,351 ======= ======= =======
The five largest unsecured reinsurance recoverables associated with unaffiliated reinsurers at December 31, 1995, are shown below (in thousands). The A.M. Best rating for the reinsurer is shown parenthetically. General Reinsurance Corporation (A++)....................................... $2,710 Insurance Corporation of Hannover (A-)...................................... 1,256 Reliance Insurance Company (A-)............................................. 2,897 Skandia America Reinsurance Corporation (A-)................................ 2,655 TIG Reinsurance Company (A)................................................. 1,045
Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses F-13 68 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. 4. FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. The Company's deferred income tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ---------------- MARCH 31, 1994 1995 1996 ------ ------ ----------- (UNAUDITED) Deferred income tax assets: Discounting of unpaid claims.......................... $2,291 $2,350 $ 2,500 20% reduction of unearned premiums.................... 269 245 225 Other................................................. 149 202 202 ------ ------ ------- 2,709 2,797 2,927 Deferred income tax liabilities: Commissions on deposit premiums....................... (82) (155) (155) Deferred policy acquisition costs..................... (153) (108) (131) Unrealized gain on securities available-for-sale...... -- (161) (161) Conversion of acquired subsidiary from cash to accrual basis of accounting................................ -- (193) (193) Other................................................. (171) (289) (236) ------ ------ ------- (406) (906) (876) ------ ------ ------- Net deferred federal income tax asset................... $2,303 $1,891 $ 2,051 ====== ====== =======
The components of consolidated federal income tax expense are as follows (in thousands):
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------- --------------- 1993 1994 1995 1995 1996 ------ ------ ------ ----- ------ (UNAUDITED) Current.................................... $3,540 $2,535 $4,822 $ 773 $1,070 Deferred................................... (772) (121) 412 (128) (161) ------ ------ ------ ----- ------ Total...................................... $2,768 $2,414 $5,234 $ 645 $ 909 ====== ====== ====== ===== ======
F-14 69 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Federal income tax expense is different from the amount computed by applying the U.S. federal income tax statutory rate of 34% to income before federal income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31, THREE MONTHS -------------------------- ENDED 1993 1994 1995 MARCH 31, ------ ------ ------ 1996 ------------ (UNAUDITED) Income tax computed at federal statutory tax rate........................................ $3,225 $2,568 $4,953 $1,069 Tax exempt interest, net...................... (297) (404) (478) (119) Dividends received deduction.................. (17) (22) (399) (4) Change in accrual for prior taxes............. -- -- 700 -- Other......................................... (143) 272 458 (37) ------ ------ ------ ------ $2,768 $2,414 $5,234 $ 909 ====== ====== ====== ======
In connection with the reorganization (see Note 1), the Company distributed the stock of certain subsidiaries to shareholders of the Company in a transaction intended to qualify as tax-free distributions for federal income tax purposes under section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). Prior to such distributions, the Board of Directors of the Company received an opinion from its legal counsel to the effect that such distributions should so qualify for federal income tax purposes. No ruling with respect to such distributions was obtained from the IRS; however, and there can be no assurance that the IRS will not take a position that such distributions do not qualify as tax-free. If the distributions were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gains on the distributions of the subsidiaries stock equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock, at the transaction date. The Company is in the process of resolving various issues with respect to examinations by the Internal Revenue Service (IRS) of AMERISAFE's 1992 consolidated income tax return and of the 1990 and 1991 tax returns of a subsidiary that was merged into AMERISAFE. The IRS has assessed the Company an aggregate of approximately $5.4 million for alleged tax deficiencies as a result of these examinations, approximately $3.3 million of which relate to temporary differences. The Company has filed a written protest of the alleged deficiencies related to the examination of its 1992 consolidated tax return. Management believes the alleged deficiencies are without merit and intends to vigorously defend its position on these matters and litigate them if necessary. In addition, the Company has entered into an agreement with certain of its former subsidiaries that were split-off in connection with the reorganization (see Note 1) whereby it will be indemnified for any liability that might result from the 1990 and 1991 examinations. Management does not believe the resolution of these matters will have a material effect on the financial position or results of operations of the Company. The resolution of the temporary differences related to the 1992 examination may result in an increase in deferred tax benefit and a significant cash payment of income taxes by the Company if it does not prevail in its protest. F-15 70 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. NOTES PAYABLE Notes payable consist of the following (in thousands):
DECEMBER 31, ------------------ MARCH 31, 1994 1995 1996 ------- ------- ----------- (UNAUDITED) Notes payable: Revolving credit loan payable to bank; originally due June 1995 extended through January 31, 1996, interest payable at prime (generally 8.09% and 8.89% in 1994 and 1995, respectively); secured by stock of Auto One and Mor-Tem.................................................. $ 6,000 $ 5,200 $ -- Capital equipment leases, bearing interest at approximately 8.6%..................................................... 207 141 123 Note payable to bank; principal and interest payments in monthly installments through November 2, 1998; interest at prime rate; secured by aircraft....................... 1,007 893 -- Note payable to bank; principal and interest in monthly installments through March 1, 2001; interest at 8.125%; secured by furniture and fixtures........................ -- -- 385 Note payable to bank; interest only until January 31, 1999, after which principal and interest will be paid in monthly installments through January 2, 2002; interest at LIBOR plus 6%; secured by stock of AMERISAFE, Auto One, and Mor-Tem.............................................. -- -- 10,000 Notes payable to financial institutions; principal and interest in monthly installments through 1998; various interest rates; secured by Company automobiles........... 265 798 808 Notes payable to former owners of acquired subsidiary, due in annual installments through August 1, 1999, interest payable at 2.667%........................................ -- 1,200 1,200 ------- ------- ------- Total notes payable................................. 7,479 8,232 12,516 Notes payable to shareholders and affiliates: Note payable to Auto One, interest payable at 8.0%.......... 2,200 1,203 -- Notes payable to LTD, interest payable at 6.5% and 8.0%..... 1,027 -- -- Notes payable to stockholders; due on demand; interest payable at 9.0%.......................................... 150 150 -- Other borrowings from affiliates............................ -- 528 521 ------- ------- ------- Total notes payable to shareholders and affiliates........................................ 3,377 1,881 521 ------- ------- ------- Total notes payable and notes payable to shareholders and affiliates.................................................. $10,856 $10,113 $13,037 ======= ======= =======
The future maturities of the Company's outstanding notes payable at December 31, 1995, without regards to the matter discussed in the following paragraph, are summarized as follows (in thousands): 1996............................................. $ 8,266 1997............................................. 515 1998............................................. 1,032 1999............................................. 300 ------- $10,113 =======
Subsequent to December 31, 1995, the Company replaced its existing revolving credit facility due January 31, 1996 with a new credit facility. The new facility bears an interest rate of LIBOR plus 6%, expires F-16 71 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) no earlier than January 1999, and contains covenants restricting the payment of dividends and requiring the Company, Auto One and American Interstate to maintain certain financial ratios. The Company retired the $893,000 debt secured by aircraft with the proceeds from this new credit facility. Management currently expects to use a portion of the proceeds from a planned initial public offering of the Company's Class A Common Stock (see Note 13) to repay the $10,000,000 note payable to bank and other indebtedness. The repayment of debt is expected to result in prepayment penalties and other fees of approximately $300,000 in the fourth quarter of 1996. Supplemental pro forma net income per share reflecting (i) the issuance of a sufficient number of shares of Class A Common Stock to repay debt outstanding at March 31, 1996 and (ii) the elimination of interest expense related to those borrowings was $0.43 and $0.11 for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. 6. CLAIMS AND CLAIM SETTLEMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverables, for 1993, 1994 and 1995 and the three months ended March 31, 1996 (in thousands):
YEAR ENDED DECEMBER 31, THREE MONTHS -------------------------------- ENDED 1993 1994 1995 MARCH 31, -------- -------- -------- 1996 ------------ (UNAUDITED) Reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at beginning of period........... $ 19,772 $ 24,882 $ 31,242 $ 43,304 Add: Provision for claims and claim settlement expenses for claims occurring in the current period, net of reinsurance.................. 22,537 26,637 36,074 9,519 Decrease in estimated claims and claim settlement expenses for claims occurring in prior periods, net of reinsurance........... (1,911) (1,387) (3,150) (269) -------- -------- -------- ------- Incurred claims and claim settlement expenses, net of reinsurance............................. 20,262 25,250 32,924 9,250 Deduct claims and claim settlement expense payments for claims, net of reinsurance, occurring during: Current period................................. (7,395) (7,795) (10,219) (749) Prior periods.................................. (7,757) (11,095) (10,643) (5,512) -------- -------- -------- ------- (15,152) (18,890) (20,862) (6,261) -------- -------- -------- ------- Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at end of period...................................... 24,882 31,242 43,304 46,293 Recoverable ceded reserves for unpaid claims and claims settlement expenses..................... 9,539 9,697 12,123 13,278 -------- -------- -------- ------- Reserves for claims and claim settlement expenses at end of period............................... $ 34,421 $ 40,939 $ 55,427 $ 59,571 ======== ======== ======== =======
The Company's reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1992, 1993, 1994, and 1995, were decreased in 1993, 1994, 1995, and the three months ended March 31, 1996 (unaudited) by $1,911,000, $1,387,000, $3,150,000, and $269,000, respectively, for claims that had occurred prior to those balance sheet dates. The decreases were due to settling case-basis F-17 72 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) liabilities related to claims in those periods for less than originally estimated. Most of the favorable development has resulted from the Company's managed results approach and claims management process. No return premiums are due as a result of prior-year effects. The anticipated effect of inflation is considered when estimating liabilities for claims and claim settlement expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. 7. REAL ESTATE, FURNITURE AND EQUIPMENT Real estate, furniture and equipment consists of the following (in thousands):
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------ ------ ----------- (UNAUDITED) Land and office building.............................. $1,202 $1,772 $ 2,587 Furniture and equipment............................... 1,730 2,745 3,245 Automobiles........................................... 321 1,176 1,315 Aircraft.............................................. 1,824 1,824 1,824 ------ ------ ------ 5,077 7,517 8,971 Accumulated depreciation.............................. 808 1,611 1,918 ------ ------ ------ Real estate, furniture and equipment, net............. $4,269 $5,906 $ 7,053 ====== ====== ======
8. STOCKHOLDERS' EQUITY, REGULATORY REQUIREMENTS AND RESTRICTIONS American Interstate and its insurance subsidiary are required to periodically submit financial statements prepared in accordance with statutory accounting practices to insurance regulatory authorities. Accounting practices used to prepare these statutory-basis financial statements differ from generally accepted accounting principles. American Interstate's statutory capital and surplus, determined using statutory accounting practices, as of December 31, 1994 and 1995, was approximately $20,006,000 and $26,715,000, respectively; its insurance subsidiary's statutory capital and surplus was approximately $3,108,000 and $3,270,000 at December 31, 1994 and 1995, respectively. American Interstate's statutory net income was approximately $5,177,000, $4,676,000, and $7,888,000 for the years ended December 31, 1993, 1994, and 1995, respectively; its insurance subsidiary reported net losses of approximately $156,000 and $563,000 for the years ended December 31, 1993 and 1994, respectively, and net income of approximately $88,000 for the year ended December 31, 1995. Under Louisiana insurance regulations, American Interstate and its insurance subsidiary are each required to maintain minimum capital and surplus of $3 million at December 31, 1995. Pursuant to routine regulatory requirements, American Interstate cannot pay dividends in excess of the lesser of 10% of statutory surplus, or statutory net income, less realized capital gains, for the preceding 12-month period without prior approval of the Louisiana Commissioner of Insurance. American Interstate cannot pay dividends in 1996 in excess of approximately $2.7 million without prior regulatory approval. The redeemable cumulative preferred stock pays dividends at a rate of 8% per annum (applied to the stated value of $1,480,000), is nonvoting, and is redeemable at any time at the option of the Company. The preferred stock was issued in satisfaction of notes payable (bearing interest at 9% to 11%) to a shareholder. Each share of preferred stock is convertible into three shares of Class B common stock (10,810.88 shares after F-18 73 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) giving effect to the stock split) at the option of the preferred shareholder. The liquidation preference is equal to stated value plus all dividends in arrears and totaled $1,598,400 at December 31, 1994, $1,716,800 at December 31, 1995, and $1,746,400 at March 31, 1996. At December 31, 1995 and March 31, 1996, cumulative dividends of $236,800 and $266,400, respectively, were in arrears. Subsequent to March 31, 1996, the preferred stockholder exercised the option to convert the preferred stock into common stock. The Board of Directors adopted a stock incentive plan on August 5, 1996, subject to approval by the shareholders of the Company (the Stock Incentive Plan). The Stock Incentive Plan provides for the grant of restricted Class A Common Stock and options on Class A Common Stock to officers, non-employee directors and other individuals providing critical services to the Company. The term of each stock option issued under the Stock Incentive Plan is ten years and options generally vest evenly over a period of five years. Restricted stock issued under the Stock Incentive Plan generally vests evenly over a period of three years. Stock options for 600,000 shares at an exercise price of $12 per share were granted under the Stock Incentive Plan; none of these options have been exercised. The aggregate number of shares reserved for issuance under the Stock Incentive Plan is 3,000,000. Property/casualty insurance companies are subject to certain Risk-Based Capital (RBC) requirements specified by the National Association of Insurance Commissioners (NAIC). Under those requirements, the amount of capital and surplus maintained by a property/casualty insurance company is to be determined based on the various risk factors related to it. At December 31, 1994 and 1995 and March 31, 1996, American Interstate and its insurance subsidiary exceed the minimum RBC requirements. Unaudited pro forma stockholders' equity at March 31, 1996 as set forth in the accompanying balance sheet reflects the assumed conversion of preferred stock and the payment of debts originated in connection with the reorganization of AMERISAFE which are expected to be paid from the proceeds of a planned initial public offering of the Company's Class A common stock. See Note 1. 9. RELATED PARTY TRANSACTIONS Fees and other from affiliates includes fees from various affiliated entities for the costs of providing certain executive, administrative and support services to those affiliates. Fees and other from affiliates includes a dividend received by AMERISAFE from a former subsidiary of approximately $1,027,000 in 1995. During 1993, substantially all of the Company's net premiums written were produced by MT & Co. and Southern Underwriters, Inc., two agencies under common control. In January 1994, AMERISAFE transferred to American Interstate a portion of the agency operations of these affiliated agencies. The transfer had no effect on stockholders' equity but established American Interstate as a direct writer of its core logging industry related business. At December 31, 1994 and 1995, approximately $607,000 and $795,000, respectively, were included in agents balances in course of collection which were due from related parties. 10. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) benefit program which is available to all employees. The Company matches up to 1% of employee contributions limited to 4% of employee compensation for participating employees. Employees vest immediately in their contributions and become 100% vested in employer contributions to the plan after five years. Contributions during 1993, 1994 and 1995 and the three months ended March 31, 1996 were not material. F-19 74 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company manages interest rate risk on pension-type claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company remains primarily liable to the claimants. Significant carriers and the face amounts of the annuities at December 31, 1995, are as follows (in thousands): Confederation Life.......................................................... $ 936 Transamerica Occidental..................................................... 323 Others...................................................................... 1,098 ------ $2,357 ======
The Company continuously monitors the financial condition of all carriers. On August 11, 1994, Confederation Life's Canadian parent was placed into receivership by Canadian insurance regulators. Management has monitored the rehabilitation of Confederation Life since that date and, on the basis of published reports, believes no loss will be incurred by the Company as a result of the receivership of Confederation Life's Canadian parent. Accordingly, no loss accrual is recorded in the accompanying consolidated financial statements. Confederation Life is current in its annuity obligations at December 31, 1995 and March 31, 1996. The increase in the number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. The Company recognizes those assessments when notified by the State. Assessments paid by the Company were approximately $353,000, $442,000 and $477,000 in 1993, 1994 and 1995, respectively, and $-0- for the three months ended March 31, 1996. The Company has entered into employment agreements with certain executives in connection with a planned initial public offering of the Company's Class A Common Stock (see Note 13). These agreements have initial terms of three years and require aggregate annual salary payments of approximately $1,285,000. 12. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating "fair value" disclosures for financial instruments in the accompanying 1995 and 1996 consolidated financial statements and notes thereto: Cash and Cash Equivalents The carrying amounts reported in the accompanying 1995 and 1996 consolidated balance sheet for these financial instruments approximate their fair values. Investment Securities The fair values disclosed in Note 2 for fixed maturity securities and equity securities are based on market values prescribed by the Securities Valuation Office of the NAIC (which approximates quoted market prices) or quoted market prices, where available. F-20 75 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes Payable The carrying value of notes payable (excluding capital lease obligations) disclosed in Note 5 approximates the estimated fair value of the obligations as the interest rates on substantially all the debt are comparable to rates which the Company believes it presently would be charged on comparable borrowings. Other Assets and Liabilities The carrying amounts of recoverables from state funds and from reinsurers, funds on deposit with reinsurers, notes receivable from shareholders and affiliates, funds held under reinsurance treaties and amounts held for others approximate those assets' and liabilities' carrying values because of the actual or expected short-term maturity of those instruments. 13. SUBSEQUENT EVENT On August 5, 1996, the Board of Directors authorized the registration of up to 16,000,000 shares of the Company's Class A Common Stock to be offered in a planned initial public offering of such stock. 14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS)
1995 ---------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- Revenue................................................ $12,820 $14,715 $21,462 $20,680 ======= ======= ======= ======= Claims and claims settlement expenses.................. $ 6,725 $ 6,820 $10,926 $ 8,453 ======= ======= ======= ======= Net income............................................. $ 1,642 $ 1,776 $ 2,593 $ 3,323 ======= ======= ======= =======
1994 ---------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- Revenue................................................ $10,226 $10,580 $13,751 $12,588 ======= ======= ======= ======= Claims and claims settlement expenses.................. $ 6,032 $ 5,566 $ 8,654 $ 4,998 ======= ======= ======= ======= Net income............................................. $ 703 $ 1,178 $ 436 $ 2,822 ======= ======= ======= =======
F-21 76 ================================================================================ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR ANY OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER IN ANY STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 The Company............................ 7 Risk Factors........................... 7 Use of Proceeds........................ 13 Dividend Policy........................ 13 Recent Reorganization.................. 14 Capitalization......................... 15 Dilution............................... 16 Selected Consolidated Financial Data... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 18 Business............................... 26 Management............................. 38 Principal Shareholders................. 46 Certain Transactions and Relationships........................ 47 Description of Capital Stock........... 48 Shares Eligible for Future Sale........ 50 Underwriting........................... 52 Legal Matters.......................... 53 Experts................................ 53 Additional Information................. 53 Index to Consolidated Financial Statements ......................... F-1
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 11,000,000 SHARES AMERISAFE, INC. CLASS A COMMON STOCK [LOGO] ------------ PROSPECTUS , 1996 ------------ SMITH BARNEY INC. PIPER JAFFRAY INC. ================================================================================ 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an estimate of those expenses to be incurred by the Company in connection with the issuance and distribution of the securities being registered. Securities and Exchange Commission Fee..................................... $65,432 NASD Fee................................................................... New York Stock Exchange Listing Fee........................................ Printing Expenses.......................................................... Legal Fees and Expenses.................................................... Accounting Fees and Expenses............................................... Transfer Agent Fees........................................................ Blue Sky Fees and Expenses................................................. Miscellaneous.............................................................. ------- Total............................................................ $ * =======
- --------------- * To be completed by amendment. All these expenses, except the Securities and Exchange Commission registration fee, the New York Stock Exchange listing fee and the NASD registration fee, represent estimates only. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Articles 2.02A(16) and 2.02-1 of the Texas Business Corporation Act (the "TBCA") permit a corporation to indemnify a person who was or is a director, officer, employee or agent of a corporation or who serves at the corporation's request as a director, officer, venturer, partner, proprietor, trustee, employee or agent of another corporation, partnership, sole proprietorship, employee benefit plan, trust, joint venture, or other enterprise (an "outside enterprise"), who was, is or is threatened to be named a defendant in a legal proceeding by virtue of such person's position in the corporation or in an outside enterprise, but only if the person conducted himself in good faith and reasonably believed, in the case of conduct in the person's official capacity, that the conduct was in the corporation's best interest or, in the case of all other conduct, that the conduct was not opposed to the corporation's best interest, and, in the case of a criminal proceeding, the person had no reasonable cause to believe the conduct was unlawful. A person may be indemnified within the above limitations against judgments, penalties, fines, settlements and reasonable expenses actually incurred. Generally, an officer, director, agent or employee of a corporation or a person who serves at the corporation's request as an officer, director, agent or employee of an outside enterprise may not be indemnified against judgments, fines and settlements incurred in a proceeding in which the person is found liable to the corporation or is found to have improperly received a personal benefit and may not be indemnified for expenses unless, and only to the extent that, in view of all the circumstances, the person is fairly and reasonably entitled to indemnification for such expenses. A corporation must indemnify a director, officer, employee or agent against reasonable expenses incurred in connection with a proceeding in which the person is a party because of the person's corporate position, if the person was successful, on the merits or otherwise, in the defense of the proceeding. Under certain circumstances, a corporation may also advance expenses to such person. Article 2.02-1 of the TBCA permits a corporation to purchase and maintain insurance or to make other arrangements on behalf of any of the foregoing persons against any liability asserted against and incurred by the person in such capacity, or arising out of the person's status as such a person, whether or not the corporation would have the powers to indemnify the person against the liability under applicable law. The Company's Articles of Incorporation, as amended (the "Articles"), provide that the Company's directors will have no personal liability to the Company or its shareholders for monetary damages for an act or II-1 78 omission in their capacities as directors. This provision has no effect on director liability for (i) a breach of the director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith that constitute a breach of duty of a director or involving intentional misconduct or knowing violations of law, (iii) approval of any transaction from which a director derives an improper personal benefit, or (iv) an act or omission for which the liability of a director is expressly provided by an applicable statute. In addition, the Company's Articles provide that any additional liability permitted to be eliminated by subsequent legislation will automatically be eliminated without further shareholder vote, unless additional shareholder approval is required by such legislation. Article VI of the Company's Bylaws (the "Bylaws") also provides that the Company will indemnify its directors, officers, employees and agents to the fullest extent permitted by the TBCA. As described above, this means that the Company is generally required to indemnify its directors, officers, employees, and agents against all judgments, fines, settlements, legal fees, and other expenses incurred in connection with pending or threatened legal proceedings because of the person's position with the Company or another entity that the person serves at the Company's request, subject to certain conditions, generally described above, and to advance funds to enable them to defend against such proceedings. The Company has entered into certain agreements (the "Indemnification Agreements") with each of its directors and executive officers (each, an "Indemnitee") designed to give effect to the foregoing provisions of the Articles and Bylaws. The Indemnification Agreements are intended to provide certain additional assurances against the possibility of uninsured liability primarily because the Indemnification Agreements (i) specify the extent to which the Indemnitees shall be entitled to receive benefits not expressly set forth in the TBCA and (ii) include a number of procedural provisions designed to provide certainty in administration of the rights to indemnity. Pursuant to the Indemnification Agreements, among other things, an Indemnitee will be entitled to indemnification as provided by the TBCA. The right to receive indemnification is not available under the Indemnification Agreements in connection with any claim against the Indemnitee (i) for which payment is actually made to the Indemnitee under a valid and collectible insurance policy or (ii) as to which the Indemnitee shall have been adjudged to be liable for willful or intentional misconduct in the performance of his duty to the Company, unless ordered by the court in which the claim was brought in accordance with applicable law. The Underwriting Agreement entered into by the Company and the Underwriters in connection with this Offering provides that the Underwriters will indemnify the directors and officers of the Company against certain liabilities relating to information furnished by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On December 31, 1993, the Company issued 3,229.34 shares of the Company's common stock in exchange for all of the issued and outstanding common stock of Mor-Tem Systems, Inc. ("Mor-Tem") owned by Messrs. Morris, Anderson and another Mor-Tem shareholder. On the same date, the Company issued 510.167 shares of the Company's Series B Cumulative Preferred Stock (the "Series B Stock") to Mr. Morris in exchange for the cancellation of the Company's promissory notes payable to Mr. Morris with outstanding principal balances totalling $1,480,000. On July 29, 1996, Mr. Morris converted the Series B Stock into 1530.50 shares of the Company's common stock. The above transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. a. Exhibits: 1.1* -- Form of Underwriting Agreement 2.1* -- Form of Distribution Agreement between the Company and existing and former shareholders 2.2* -- Form of Distribution Agreement between the Company and Millard E. Morris
II-2 79 3.1 -- Amended and Restated Articles of Incorporation of the Company 3.2 -- Amended and Restated Bylaws of the Company 4.1* -- Form of Class A Common Stock Certificate 5.1* -- Opinion of Jones, Day, Reavis & Pogue 10.1 -- Form of Registration Rights Agreement among the Company, Millard E. Morris and Mark R. Anderson 10.2* -- Form of Stock Incentive Plan 10.3* -- Form of Indemnification Agreement 10.4* -- Form of Employment Agreement with certain executive officers of the Company 10.5* -- Form of Tax Sharing Agreement 10.6* -- Form of Services Agreement between the Company and Auto One Acceptance Corporation 10.7+ -- First Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.8+ -- Second Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.9+ -- Third Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.10+ -- First Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.11+ -- Second Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.12+ -- First Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.13+ -- Second Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 11.1 -- Statement of Computation of Earnings Per Share 21.1 -- Subsidiaries of the Company 23.1 -- Consent of Ernst & Young LLP 23.2* -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) 24.1 -- Powers of Attorney 27.1 -- Financial Data Schedule
- --------------- * To be filed by amendment. + Filed with confidential portions omitted and filed separately. b. Financial Statement Schedules: Report of Ernst & Young LLP on Financial Statement Schedules I. Summary of Investments -- Other Than Investments In Related Parties II. Condensed Financial Information of Registrant III. Supplementary Insurance Information IV. Reinsurance VI. Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. II-3 80 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 81 SIGNATURES Pursuant to the requirement of the Securities Act, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on August 12, 1996. AMERISAFE, INC. By: /s/ MILLARD E. MORRIS ------------------------------------ Millard E. Morris Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on August 12, 1996.
SIGNATURES TITLE - --------------------------------------------- ---------------------------------------------- /s/ MILLARD E. MORRIS Chairman of the Board of Directors and Chief - --------------------------------------------- Executive Officer (principal executive Millard E. Morris officer) /s/ MARK R. ANDERSON President, Chief Operating Officer and - --------------------------------------------- Director Mark R. Anderson /s/ ARTHUR L. HUNT Vice President and Director - --------------------------------------------- Arthur L. Hunt /s/ JOHN R. BUCK Vice President, Chief Financial Officer, - --------------------------------------------- Treasurer and Director (Principal Financial John R. Buck and Accounting Officer) DANIEL J. JESSEE* Director - --------------------------------------------- Daniel J. Jessee N. DAVID SPENCE* Director - --------------------------------------------- N. David Spence
* The undersigned, by signing his name hereto, does sign and execute this Registration Statement as of this 12th day of August, 1996, pursuant to the Powers of Attorney executed on behalf of the above-named officers and directors and contemporaneously filed herewith with the Securities and Exchange Commission. By: /s/ MILLARD E. MORRIS ------------------------------------ Millard E. Morris Attorney-in-Fact II-5 82 REPORT OF INDEPENDENT AUDITORS The Board of Directors AMERISAFE, Inc. We have audited the consolidated financial statements of AMERISAFE, Inc. and subsidiaries as of December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated , 1996 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, 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 effected a reorganization on , 1996, resulting in a change in the reporting entity. Dallas, Texas , 1996 The foregoing report is in the form that will be signed upon completion of transactions described in the first paragraph of Note 1 to the consolidated financial statements. ERNST & YOUNG LLP Dallas, Texas August 9, 1996 S-1 83 AMERISAFE, INC. AND SUBSIDIARIES SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D -------- -------- -------- ------------- AMOUNT AT WHICH FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET ------------------- -------- -------- ------------- Fixed Maturity Securities, available for sale: Bonds: U.S. Treasury obligations and U.S. Government agency obligations........................................ $ 3,191 $ 3,260 $ 3,260 Other corporate bonds................................ 100 103 103 ------- ------- ------- Total........................................... 3,291 3,363 3,363 ------- ------- ------- Equity Securities, available for sale: Common stocks........................................... 2,748 3,076 3,076 ------- ------- ------- Fixed Maturity Securities, held to maturity: Bonds: U.S. Treasury obligations and U.S. Government agency obligations........................................ 28,530 29,247 28,530 States, municipalities, and political subdivisions... 33,754 34,781 33,754 All other corporate bonds............................ 2,768 2,812 2,768 ------- ------- ------- Total........................................... 65,052 $66,840 65,052 ======= ------- ------- Total investments............................... $71,091 $71,491 ======= =======
S-2 84 AMERISAFE, INC. (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1995 1994 ------- ------- Assets: Cash and cash equivalents.............................................. $ 150 $ 129 Investments in subsidiaries*........................................... 37,100 27,368 Notes receivable from subsidiaries and affiliates...................... 2,981 3,524 Furniture and equipment................................................ 1,371 1,889 Deferred federal income taxes.......................................... 202 149 Other.................................................................. 124 79 ------- ------- Total assets............................................................. $41,928 $33,138 ======= ======= Liabilities and Stockholders' Equity: Liabilities: Accrued expenses and other liabilities.............................. $ 805 $ 813 Notes payable....................................................... 7,632 6,472 Notes payable to subsidiaries and affiliates........................ 1,353 3,377 ------- ------- Total liabilities...................................................... 9,790 10,662 Stockholders' equity: Preferred stock, $0.01 par value, 25,000,000 shares authorized: Series B -- cumulative convertible 8% preferred stock, issued and outstanding shares -- 510.167.............................................. -- -- Class A common stock, $0.01 par value, Authorized shares -- 100,000,000 Issued and outstanding shares -- None............................. -- -- Class B common stock, $0.01 par value: Authorized shares -- 100,000,000 Issued and outstanding shares -- 11,884,647....................... 119 119 Additional paid-in capital.......................................... 1,362 1,362 Unrealized gain (loss) on securities available-for-sale, net of taxes.............................................................. 264 (64) Retained earnings................................................... 30,393 21,059 ------- ------- Total stockholders' equity............................................. 32,138 22,476 ------- ------- Total liabilities and stockholders' equity............................... $41,928 $33,138 ======= =======
- --------------- * Eliminated in consolidation The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of AMERISAFE, Inc. and subsidiaries. S-3 85 AMERISAFE, INC. (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 ------ ------ ------ Revenues: Fees and other from affiliates................................. $5,832 $4,227 $4,169 Investment income.............................................. 88 44 -- ------ ------ ------ 5,920 4,271 4,169 Expenses: General and administrative..................................... 2,996 2,407 1,794 Depreciation................................................... 312 163 130 Interest....................................................... 843 668 835 ------ ------ ------ 4,151 3,238 2,759 ------ ------ ------ Income before federal income taxes............................... 1,769 1,033 1,410 Federal income tax expense....................................... 340 395 489 Equity in undistributed earnings of subsidiaries................. 7,905 4,501 5,795 ------ ------ ------ Net income....................................................... $9,334 $5,139 $6,716 ====== ====== ======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of AMERISAFE, Inc. and subsidiaries. S-4 86 AMERISAFE, INC. (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------- ------- ------ Net cash provided by operating activities...................... $ 1,637 $ 560 $1,706 Investing activities: Purchase of furniture and equipment.......................... 206 (359) (84) Loans to subsidiaries and affiliates......................... (41) (3,238) (764) Repayment of loans to subsidiaries and affiliates............ 583 -- -- ------- ------- ------ Net cash provided by (used in) investing activities............ 748 (3,597) (848) Financing activities: Net proceeds from (repayment of) revolving notes payable..... (800) 4,100 -- Proceeds from (repayment of) notes payable................... 460 204 (620) Proceeds from (repayment of) notes payable from affiliates... (2,024) (1,328) 26 ------- ------- ------ Net cash (used in) provided by financing activities............ (2,364) 2,976 (594) Increase (decrease) in cash and cash equivalents............... 21 (61) 264 Cash and cash equivalents at beginning of year................. 129 190 (74) ------- ------- ------ Cash and cash equivalents at end of year....................... $ 150 $ 129 $ 190 ======= ======= ======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of AMERISAFE, Inc. and subsidiaries. S-5 87 AMERISAFE, INC. AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ----------------- -------- ------------ DEFERRED FUTURE POLICY POLICY BENEFITS, LOSSES, OTHER ACQUISITION CLAIMS, AND LOSS UNEARNED POLICYHOLDER COSTS* EXPENSES* PREMIUMS* FUNDS -------- ----------------- -------- ------------ (IN THOUSANDS) December 31, 1995........................... $316 $55,427 $3,581 $ -- ==== ======= ====== ====== December 31, 1994........................... $444 $40,939 $4,229 $ -- ==== ======= ====== ====== December 31, 1993........................... $213 $34,421 $1,591 $ -- ==== ======= ====== ======
- --------------- * Balances consist entirely of property/casualty insurance.
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K -------- ---------- ---------- ------------ --------- --------- BENEFITS, AMORTIZATION CLAIMS, OF DEFERRED NET LOSSES AND POLICY OTHER PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS REVENUE* INCOME* EXPENSES* COSTS* EXPENSES* WRITTEN* -------- ---------- ---------- ------------ --------- --------- (IN THOUSANDS) 1995.................... $58,167 $4,519 $ 32,924 $245 $21,940 $57,848 ======= ======== ======== ========= ======= ======== 1994.................... $40,461 $2,484 $ 25,250 $230 $14,112 $42,867 ======= ======== ======== ========= ======= ======== 1993.................... $35,902 $2,146 $ 20,262 $212 $11,231 $37,471 ======= ======== ======== ========= ======= ========
- --------------- * Balances consist entirely of property/casualty insurance. S-6 88 AMERISAFE, INC. AND SUBSIDIARIES SCHEDULE IV -- REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------------ -------- -------- -------- -------- -------- ASSUMED % OF CEDED TO FROM AMOUNT GROSS OTHER OTHER NET ASSUMED TO AMOUNT* COMPANIES* COMPANIES* AMOUNT* NET -------- -------- -------- -------- -------- (IN THOUSANDS) Year Ended December 31, 1995.............. $66,832 $8,665 $ -- $58,167 0% ======= ====== ==== ======= == Year Ended December 31, 1994.............. $48,262 $7,801 $ -- $40,461 0% ======= ====== ==== ======= == Year Ended December 31, 1993.............. $43,995 $8,093 $ -- $35,902 0% ======= ====== ==== ======= ==
- --------------- * Balances consist entirely of property/casualty insurance. S-7 89 AMERISAFE, INC. AND SUBSIDIARIES SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
DECEMBER 31 ------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------- --------------- ------------------- ---------- -------- DISCOUNT, DEFERRED POLICY RESERVES FOR UNPAID IF ANY, AFFILIATION WITH ACQUISITION CLAIMS AND CLAIM DEDUCTED IN UNEARNED REGISTRANT COSTS ADJUSTMENT EXPENSES COLUMN C** PREMIUMS --------------- ------------------- -------------- -------- (IN THOUSANDS) Registrant and consolidated subsidiaries 1995.............................. $ 316 $55,427 $ -- $3,581 ==== ======= ====== ====== 1994.............................. $ 444 $40,939 $ -- $4,229 ==== ======= ====== ====== 1993.............................. $ 213 $34,421 $ -- $1,591 ==== ======= ====== ======
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------------------- COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K -------- ---------- -------------------------- ------------ ---------- --------- CLAIMS AND CLAIM ADJUSTMENT EXPENSES AMORTIZATION PAID INCURRED RELATED TO OF DEFERRED CLAIMS AND NET -------------------------- POLICY CLAIM EARNED INVESTMENT (1) (2) ACQUISITION ADJUSTMENT PREMIUMS PREMIUMS INCOME CURRENT YEAR PRIOR YEAR COSTS EXPENSES WRITTEN -------- ---------- ------------ ---------- ------------ ---------- --------- (IN THOUSANDS) 1995............. $58,167 $4,519 $ 36,074 $ (3,150) $245 $ 20,862 $57,848 ======= ======== ========= ======== ========= ======== ======== 1994............. $40,461 $2,484 $ 26,637 $ (1,387) $230 $ 18,890 $42,867 ======= ======== ========= ======== ========= ======== ======== 1993............. $35,902 $2,146 $ 22,537 $ (1,911) $212 $ 15,152 $37,471 ======= ======== ========= ======== ========= ======== ========
S-8 90 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ---------- ------------- ------------ 1.1* -- Form of Underwriting Agreement 2.1* -- Form of Distribution Agreement between the Company and existing and former shareholders 2.2* -- Form of Distribution Agreement between the Company and Millard E. Morris 3.1 -- Amended and Restated Articles of Incorporation of the Company 3.2 -- Amended and Restated Bylaws of the Company 4.1* -- Form of Class A Common Stock Certificate 5.1* -- Opinion of Jones, Day, Reavis & Pogue 10.1 -- Form of Registration Rights Agreement among the Company, Millard E. Morris and Mark R. Anderson 10.2* -- Form of Stock Incentive Plan 10.3* -- Form of Indemnification Agreement 10.4* -- Form of Employment Agreement with certain executive officers of the Company 10.5* -- Form of Tax Sharing Agreement 10.6* -- Form of Services Agreement between the Company and Auto One Acceptance Corporation 10.7+ -- First Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.8+ -- Second Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.9+ -- Third Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.10+ -- First Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.11+ -- Second Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.12+ -- First Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.13+ -- Second Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 11.1 -- Statement of Computation of Earnings Per Share 21.1 -- Subsidiaries of the Company 23.1 -- Consent of Ernst & Young LLP 23.2* -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) 24.1 -- Powers of Attorney 27.1 -- Financial Data Schedule
- --------------- * To be filed by amendment. + Filed with confidential portions omitted and filed separately. EX-3.1 2 AMENDED & RESTATED ARTICLES OF INCORPORATION 1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GULF UNIVERSAL HOLDINGS, INC. ARTICLE ONE Gulf Universal Holdings, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, adopts these amended and restated articles of incorporation, which accurately copy the articles of incorporation, all amendments in effect to date and all amendments implemented hereby. The articles of incorporation, as amended and restated by these amended and restated articles of incorporation, are set forth below and, other than previous amendments and the amendments implemented hereby, contain no other changes in any provisions. The original articles of incorporation were filed by the Secretary of State of the State of Texas on October 28, 1985. ARTICLE TWO The articles of incorporation of the corporation are amended by the amended and restated articles of incorporation as follows: (a) The name of the corporation is changed to AMERISAFE, Inc. (b) The authorized capital stock of the corporation is increased, the issued and outstanding common stock of the corporation is reclassified, a new class of common stock is created and the par value of the preferred stock is changed. (c) The location of the registered office and the identity of the registered agent are changed. (d) A classified board of directors is created. (e) Provisions for the calling of special meetings of shareholders, indemnification of directors and officers and the elimination of directors' monetary liability to shareholders are added. (f) Article 12 is deleted. ARTICLE THREE Each such amendment made by these amended and restated articles of incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act. These amended and restated articles of incorporation and each amendment made by these amended and restated articles of incorporation were duly adopted by the shareholders of the corporation on August 5, 1996. ARTICLE FOUR The number of shares of the corporation outstanding at the time of the adoption was 6,092.84 shares of Common Stock and 3,700,000 shares of Series A Cumulative Preferred Stock; and the number of shares entitled to vote on the restated articles as so amended was 6,092.84 shares of Common Stock and 3,700,000 shares of Series A Cumulative Preferred Stock; the number of shares voted for such restated articles as so amended was 5,161.47 shares of Common Stock and 3,700,000 shares of Series A Cumulative Preferred 1 2 Stock; and no shares of Common Stock or Series A Cumulative Preferred Stock were voted against such restated articles as so amended. ARTICLE FIVE The manner in which any exchange, reclassification or cancellation of issued shares provided for in the amendment shall be effected as follows: Upon the filing of these Amended and Restated Articles of Incorporation with the Office of the Secretary of State of the State of Texas, (i) each then issued and outstanding share of common stock, no par value, of the Corporation (the "Existing Common Stock") shall be reclassified, automatically and without any action on the part of the respective holders thereof, into 3,603.62603 shares of Class B Common Stock, par value $.01 per share, of the Corporation (the "Class B Common Stock") and (ii) the par value of each issued and outstanding share of Series A Cumulative Preferred Stock, par value $1.00 per share, of the Corporation (the "Existing Preferred Stock") shall be reduced, automatically and without any action on the part of the holder thereof, to $.01 per share (the "Preferred Stock"). Upon the surrender of certificates representing the Existing Common Stock or the Existing Preferred Stock by a registered holder thereof, in properly endorsed form for exchange, or upon receipt of evidence reasonably satisfactory to the Corporation of the loss, theft or destruction of such certificates (together with an indemnity bond, if deemed necessary by the Corporation), the Corporation shall accept the surrendered certificates, and shall issue to the holder thereof, certificates in such denominations as such holder may request (i) in the case of surrendered shares of Existing Common Stock, certificates representing Class B Common Stock in an aggregate amount equal to 3,603.6203 multiplied by the number of shares of Existing Common Stock surrendered, rounded to the nearest hundredth, and (ii) in the case of surrendered shares of Existing Preferred Stock, certificates representing Preferred Stock on a share-for-share basis. To the extent holders of Existing Common Stock or Existing Preferred Stock shall not present their shares for exchange in the manner specified above, such failure to act shall in no circumstance affect their status as holders of Class B Common Stock or Preferred Stock, as applicable, except that (i) each certificate representing shares of Existing Common Stock shall be deemed to represent the pro rata equivalent number of shares of Class B Common Stock as herein provided for, and (ii) each certificate representing shares of Existing Preferred Stock shall be deemed to represent an equal number of shares of Preferred Stock. ARTICLE SIX The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: Upon the filing of these Amended and Restated Articles of Incorporation with the Secretary of State of the State of Texas, the stated capital of the Corporation shall be increased from $1,510.97 to $212,355.92 to reflect the reclassification of the issued and outstanding shares of Existing Common Stock into shares of Class B Common Stock. 2 3 ARTICLE SEVEN The articles of incorporation and all amendments and supplements thereto are superseded by the following amended and restated articles of incorporation, which accurately copy the entire text thereof as further amended as set forth above: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF AMERISAFE, INC. ARTICLE I NAME The name of the Corporation is AMERISAFE, Inc. ARTICLE II DURATION The period of the Corporation's duration is perpetual. ARTICLE III PURPOSE The purpose for which the Corporation is organized is to conduct any and all lawful business for which a corporation may be organized under the Texas Business Corporation Act. ARTICLE IV CAPITALIZATION Section 1. Authorized Capital Stock. The total number of shares of all classes of capital stock that the Corporation shall have authority to issue is 225,000,000 shares, consisting of (a) 100,000,000 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), (b) 100,000,000 shares of Class B Common Stock, par value $.01 per share ("Class B Common Stock" and, together with Class A Common Stock, "Common Stock"), and (c) 25,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred Stock"), of which 3,700,000 shares are designated as Series A Cumulative Preferred Stock. Except as otherwise required by law or expressly provided for herein, the rights, powers and preferences of the shares of Common Stock and the qualifications, limitations or restrictions thereof, shall be in all respects identical. Section 2. Reclassification. Upon the filing of these Amended and Restated Articles of Incorporation with the Office of the Secretary of State of the State of Texas, (i) each then issued and outstanding share of common stock, no par value, of the Corporation ("Existing Common Stock") shall be reclassified, automatically and without any action on the part of the respective holders thereof, into 3,603.62603 shares of Class B Common Stock (as hereinafter defined) and (ii) the par value of each then issued and outstanding share of preferred stock, par value $1.00 per share, of the Corporation shall be decreased, automatically and without any action on the part of the holder thereof, to $.01 per share. 3 4 Section 3. Common Stock. The relative rights, powers, preferences, qualifications, limitations and restrictions of the Class A Common Stock and Class B Common Stock shall be as follows: (a) Voting Rights. Each share of Class A Common Stock shall be entitled to one vote, and each share of Class B Common Stock shall be entitled to ten votes, on all matters submitted to a vote of the shareholders. Except as otherwise provided herein or by law, all actions submitted to a vote of the shareholders of the Corporation shall be voted on by the holders of the Class A Common Stock and Class B Common Stock voting together as a single class. (b) Conversion. The Class A Common Stock has no conversion rights. Each share of Class B Common Stock is convertible at any time, and from time to time, at the option of and without cost to the holder thereof, into one fully paid and nonassessable share of Class A Common Stock; provided however, that shares of Class B Common Stock may only be converted into Class A Common Stock after the delivery to the Corporation of a Conversion Notice (as hereinafter defined); and provided further, however, that shares of Class B Common Stock shall be automatically converted, without any action on the part of the holder thereof into shares of Class A Common Stock upon the transfer of such shares of Class B Common Stock except as a result of (i) a transfer to any lineal descendant of any grandparent of a record holder of such shares of Class B Common Stock (a "Class B Holder"), including adopted children and any such descendant's spouse, (ii) a transfer by will or by the laws of descent and distribution, or (iii) a transfer to a voting trust or other trust (including a distribution from such trust to the trust beneficiaries), to a corporation, partnership or other entity controlled by the beneficial owner of such shares, or to the individual beneficial owner of such shares or to any such entity that will become controlled by the beneficial owner of such shares immediately after the transfer or series of transfers within any ten (10) day period. If any Class B Holder desires to convert any of such shares into shares of Class A Common Stock, such Class B Holder shall present and surrender the certificate or certificates representing such shares during usual business hours at any office or agency of the Corporation maintained for the transfer of Class B Common Stock and shall deliver a written notice ("Conversion Notice") of the election of such Class B Holder to convert the shares represented by such certificate or any portion thereof as specified in the Conversion Notice. The Conversion Notice shall state the name or names (with addresses) in which the certificate or certificates representing shares of Class A Common Stock issuable on such conversion shall be registered. If so required by the Corporation, any certificate representing shares of Class B Common Stock surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder of such shares or his authorized representative. Each conversion of shares of Class B Common Stock shall be deemed to have been effected on the date (the "Conversion Date") on which the certificate or certificates representing such shares shall have been surrendered and such notice and any required instruments of transfer shall have been received as aforesaid. The person or persons in whose name or names any certificate or certificates representing shares of Class A Common Stock are issuable upon such conversion shall be, for the purpose of receiving dividends and for all other corporate purposes whatsoever, deemed to have become the holder or holders of record of the shares of Class A Common Stock represented thereby on the Conversion Date. As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver at such office or agency, to or upon the written order of the holder thereof, certificates for the number of shares of Class A Common Stock issuable upon such conversion. Subject to the provisions of this subsection (b) of this Section 3, in the event any certificate representing shares of Class B Common Stock shall be surrendered for conversion of a part only of the shares represented thereby, the Corporation shall deliver at such office or agency, to or upon the written order of the holder thereof, a certificate or certificates for the number of shares of Class B Common Stock represented by such surrendered certificate which are not being converted. The issuance of certificates representing shares of Class A Common Stock issuable upon the conversion of shares of 4 5 Class B Common Stock by the registered holder thereof shall be made without charge to the converting holder for any tax imposed on the Corporation in respect of the issue thereof. The Corporation shall not, however, be required to pay any tax which may be payable with respect to any transfer involved in the issue and delivery of any certificate in a name other than that of the registered holder of the shares being converted, and the Corporation shall not be required to issue or deliver any such certificate unless and until the person requesting the issue thereof shall have paid to the Corporation the amount of such tax or has established to the satisfaction of the Corporation that such tax has been paid. Upon any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant hereto, no adjustment with respect to dividends shall be made; only those dividends shall be payable on the shares so converted as may be declared and are payable to holders of record of shares of Class B Common Stock on a date prior to the Conversion Date with respect to the shares so converted; and only those dividends shall be payable on shares of Class A Common Stock issued upon such conversion as may be declared and are payable to holders of record of shares of Class A Common Stock on or after such Conversion Date. In case of any consolidation or merger of the Corporation as a result of which the holders of Class A Common Stock shall be entitled to receive cash, stock, other securities or other property with respect to or in exchange for Class A Common Stock or in case of any sale or conveyance of all or substantially all of the property or business of the Corporation as an entirety, each holder of any share of Class B Common Stock shall have the right thereafter, so long as the conversion right hereunder shall exist, to convert such share into the kind and amount of cash, shares of stock, and other securities and properties as are receivable upon such consolidation, merger, sale or conveyance by each holder of one share of Class A Common Stock and shall have no other conversion rights with regard to such share. The provisions of this paragraph shall similarly apply to successive consolidations, mergers, sales or conveyances. Shares of Class B Common Stock converted into Class A Common Stock as provided in this Section 3(b) shall not be reissued, and all such shares shall be cancelled, retired and eliminated from the shares which the Corporation shall be authorized to issue. The President or any Vice-President and the Secretary or any Assistant Secretary of the Corporation are hereby authorized and directed on behalf of the Corporation to file such documents from time to time as may be necessary to reduce the authorized number of shares of Class B Common Stock accordingly. Such number of shares of Class A Common Stock as may from time to time be required for such purpose shall be reserved for issuance upon conversion of outstanding shares of Class B Common Stock and for issuance upon exercise of options, if any. (c) Dividends and Liquidation Rights. When, as and if dividends are declared by the Board of Directors of the Corporation (the "Board of Directors"), whether payable in cash, in property or in securities of the Corporation, after dividends have been declared and set aside for payment or paid on any series of Preferred Stock having a preference over the Common Stock with respect to payment of such dividends, the holders of the Class A Common Stock and Class B Common Stock shall be entitled to share equally, share for share, in such dividends, except that if dividends are declared which are payable in shares of Class A Common Stock or Class B Common Stock, dividends shall be declared which are payable at the same rate on both classes of Common Stock and such dividends shall be payable only in shares of Class A Common Stock to holders of the Class A Common Stock and shall be payable only in shares of Class B Common Stock to holders of Class B Common Stock. Upon the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, after there have been paid or set apart for the holder of any series of Preferred Stock having a preference over the Common Stock with respect to distributions upon liquidation the full amount to which they are entitled, the holders of Common 5 6 Stock are entitled to receive and to share equally in all assets of the Corporation available for distribution to shareholders. Section 4. Preferred Stock. (a) General. Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any such series and to determine the designations, preferences, limitations and relative rights, including voting rights, of all shares of such series. The authority of the Board of Directors with respect to each such series will include, without limiting the generality of the foregoing, the determination of any or all of the following: (i) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (ii) the voting powers, if any, and whether such voting powers are full or limited in such series; (iii) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (iv) whether dividends, if any, will be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (v) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (vi) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation or other entity, and the price or prices or the rates of exchange applicable thereto; (vii) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation or other entity; (viii) the provisions, if any, of a sinking fund applicable to such series; and (ix) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations or restrictions thereof. (b) Series A Cumulative Preferred Stock. (i) The Series A Cumulative Preferred Stock is a series of Preferred Stock and shall have the following rights, characteristics, privileges and preferences: (A) The Series A Cumulative Preferred Stock shall be comprised of Three Million Seven Hundred Thousand (3,700,000) shares; 6 7 (B) The Series A Cumulative Preferred Stock shall pay dividends at the rate of six percent (6%) per annum and such shall be payable upon the terms and conditions enumerated in Section 4(b)(ii) of this Article IV; (C) The Series A Cumulative Preferred Stock shall pay cumulative dividends; (D) The Series A Cumulative Preferred Stock shall be redeemable at any time by the Corporation at the election of the Corporation, by and through the action of its Board of Directors; (E) The Series A Cumulative Preferred Stock shall be redeemable at the price of One and no/100 Dollars ($1.00) per share plus all dividends then in arrears; (F) The Series A Cumulative Preferred Stock shall be non-voting; (G) The Series A Cumulative Preferred Stock shall be non-convertible; (H) The holder of Series A Cumulative Preferred Stock shall be entitled, upon the involuntary or the voluntary liquidation of the Corporation, to One and no/100 Dollars ($1.00) per share plus all dividends then in arrears, which shall be payable upon the terms and conditions enumerated in Section 4(b)(iii) of this Article IV; and (I) The certificates evidencing the Series A Cumulative Preferred Stock shall bear a legend of investment restrictions satisfactory to counsel for the Corporation and consistent with the buyers' investment representations. (ii) The holders of Series A Cumulative Preferred Stock shall be entitled to receive on the dates and for the periods hereafter specified by the Board of Directors, dividends in cash, payable when, if and as declared by the Board of Directors out of any funds legally available therefor from the date upon which such shares shall have been originally issued. Such dividends, if any, shall be cumulative from the date of issue, so that no dividend (other than a dividend payable in Common Stock of the Corporation) or other distribution shall be paid or declared or made on, and no amounts shall be applied to the purchase or redemption of, the Common Stock or any other class of stock ranking junior to the Series A Cumulative Preferred Stock as to dividends unless full cumulative dividends for all past dividend periods shall have been paid or declared and set apart for payment, and full dividends for the current dividend period shall have been or simultaneously therewith shall be paid or declared and set apart for payment, on outstanding Series A Cumulative Preferred Stock. Accumulations of dividends shall not bear interest. (iii) In the event of any dissolution, liquidation or winding up of the Corporation, whether voluntarily or involuntarily, the holders of Series A Cumulative Preferred Stock shall be entitled to receive in cash out of the assets of the Corporation, whether capital or surplus or otherwise, before any distribution of the assets shall be made to the holders of Common Stock or of any other class of stock ranking junior to the Series A Cumulative Preferred Stock as to assets, the amount determined by the Board of Directors, pursuant to the authority granted in Section 4(a) of this Article IV, to be payable on the shares of Series A Cumulative Preferred Stock in the event of voluntary or 7 8 involuntary dissolution, liquidation or winding up, as the case may be, together, in all cases, with unpaid accumulated dividends, if any, whether such dividends are earned, declared or otherwise, to the date fixed for such payment. If the assets shall not be sufficient to pay in full the amounts so determined to be payable on all shares of the Preferred Stock in the event of such voluntary or involuntary dissolution, liquidation or winding up, as the case may be, then the assets available for payment shall be distributed ratably among the holders of the Preferred Stock of all series in accordance with the amounts so determined to be payable on the shares of each series in the event of voluntary of involuntary dissolution, liquidation or winding up, as the case may be, in proportion to the full preferential amounts together with any and all dividend arrearages to which they are respectively entitled. After payment to the holders of the Series A Cumulative Preferred Stock of the full preferential amounts provided for herein, the holders of Series A Cumulative Preferred Stock will have no other rights or claims to any of the remaining assets of the Corporation either upon distribution of such assets or upon dissolution, liquidation or winding up. The sale of all or substantially all of the property of the Corporation to, or the merger, consolidation or reorganization of the Corporation into or with, any other corporation, or the purchase or redemption by the Corporation of any shares of its Preferred Stock or its Common Stock or any other class of its stock shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (iv) So long as full cumulative dividends on all outstanding shares of Series A Cumulative Preferred Stock for all dividend periods ending on or prior to the date fixed for redemption shall have been paid or declared and set apart for payment and subject to any requirements of applicable law, the Corporation may at the option of the Board of Directors of the Corporation, redeem the whole or any part of the shares of Series A Cumulative Preferred Stock determined by it to be redeemable pursuant to the authority granted in Section 4(a) of this Article IV, and without redeeming the shares of any other series of Preferred Stock on the terms and conditions and at the redemption price so determined for the Series A Cumulative Preferred Stock, plus the amount of unpaid accumulated dividends, if any, to the date of such redemption. All such redemptions of Series A Cumulative Preferred Stock shall be effected in accordance with the procedure for redemptions set forth in the Texas Business Corporation Act in effect at the times of such redemptions. Shares of Series A Cumulative Preferred Stock which are redeemed or otherwise cancelled shall be restored to the status of authorized but unissued shares without designation. On or before the date fixed for redemption, the Corporation may provide for payment of a sum sufficient to redeem the shares called for redemption either (A) by setting aside the sum, separate from its other funds, in trust for the benefit of the holders of the shares to be redeemed, or (B) by depositing such sum in a bank or trust company as a trust fund, with irrevocable instructions and authority to the bank or trust company to give or complete the notice of redemption and to pay, on or after the date fixed for redemption, the redemption price on surrender of certificates evidencing the shares of Series A Cumulative Preferred Stock called for redemption. From and after the date fixed for redemption, (1) the shares shall be deemed to be redeemed, (2) dividends thereon shall cease to accumulate, (3) such setting aside or deposit shall be deemed to constitute full payment of the shares, (4) the shares shall no longer be deemed to be outstanding, (5) the holders thereof shall cease to be shareholders with respect to such shares, and (6) the holders thereof shall have no rights with respect thereto, except the right to receive their proportionate shares of the fund set aside pursuant hereto or deposited upon surrender of their respective certificates, and any right to convert such shares which may exist. Any interest accrued on funds set aside pursuant hereto or deposited shall belong to the Corporation. If the holders of shares do not, within six (6) years after such deposit, claim any amount so deposited for redemption thereof, the bank or trust company shall upon 8 9 demand pay over to the Corporation the balance of the funds so deposited, and the bank or trust company shall thereupon be relieved of all responsibility to such holders. (v) Voting Powers. Except as provided by law or as set forth herein, the holders of Series A Cumulative Preferred Stock shall not have any right to vote for any purpose or on any matter whatsoever, all such voting power being vested exclusively in the shares of Common Stock of the Corporation. Holders of Series A Cumulative Preferred Stock shall not be entitled to receive notice of any meeting of shareholders of the Corporation at which they are not entitled to vote. The holders of shares of any and all Series A Cumulative Preferred Stock outstanding on the record date for any such meeting of the shareholders shall be entitled to vote, as a single class, upon any proposed amendment to these Articles of Incorporation, if such amendment would (A) increase or decrease the aggregate number of authorized shares of Series A Cumulative Preferred Stock, (B) increase or decrease the par value of shares of Series A Cumulative Preferred Stock, (C) effect an exchange, reclassification or cancellation of all or part of the shares of Series A Cumulative Preferred Stock, (D) effect an exchange, or create a right of exchange, of all or any part of the shares of another class into shares of Series A Cumulative Preferred Stock, (E) change the designations, preferences, limitations or relative rights of the Series A Cumulative Preferred Stock at the time outstanding in those respects in which the shares thereof vary from shares of other series of Preferred Stock at the time outstanding, (F) change the shares of Series A Cumulative Preferred Stock into the same or a different number of shares, either with or without par value, of the same class or another class or classes, (G) create a new class of Preferred Stock having rights and preferences equal, prior or superior to the shares of the Series A Cumulative Preferred Stock or increase the rights and preferences of any class having rights and preferences later or inferior to the shares of the Series A Cumulative Preferred Stock in such a manner as to become equal, prior or superior to the shares of the Series A Cumulative Preferred Stock or (H) cancel or otherwise affect accumulated but undeclared dividends on the shares of Series A Cumulative Preferred Stock, and no such proposed amendment shall be deemed to have been adopted and approved without the affirmative vote of holders of that number of shares of Series A Cumulative Preferred Stock then outstanding which shall be required pursuant to the provisions of the Texas Business Corporation Act in effect at the time of such vote. ARTICLE V COMMENCEMENT OF BUSINESS The Corporation will not commence business until it has received consideration for the issuance of its shares of the value of $1,000.00, consisting of money, labor done or property actually received. ARTICLE VI REGISTERED OFFICE The street address of the Corporation's registered office is as follows: 350 N. St. Paul, Suite 2900 Dallas, Texas 75201 9 10 ARTICLE VII REGISTERED AGENT The name of the Corporation's registered agent at the Corporation's registered office is C T Corporation System. ARTICLE VIII DIRECTORS The names of the current Directors of the Corporation are: Millard E. Morris Mark R. Anderson Arthur L. Hunt Jack R. Buck The address of each of the Directors is 2301 Highway 190 West, DeRidder, Louisiana 70634. ARTICLE IX DENIAL OF PRE-EMPTIVE RIGHTS No shareholder shall have any pre-emptive right to purchase shares of the Corporation. ARTICLE X NON-CUMULATIVE VOTING Cumulative voting is expressly prohibited. ARTICLE XI BYLAWS The power to amend or repeal the Bylaws or to adopt new Bylaws shall be vested in either the shareholders or the Board of Directors of the Corporation, subject to the shareholders providing in amending, repealing or adopting a particular Bylaw that it may not be amended or repealed by the Board of Directors of the Corporation. ARTICLE XII ELECTION OF DIRECTORS 12.1 Number, Election and Terms of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional Directors, the number of the Directors of the Corporation shall be fixed from time to time by or pursuant to the Bylaws of the Corporation. The Directors, other than those who may be elected by the holders of Preferred Stock, shall be classified with respect to the time for which they severally hold office into three classes, as nearly their equal in number as possible. At each annual meeting of the shareholders of the Corporation, the successors of the class of Directors whose term expires at that meeting shall be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. 10 11 12.2 Shareholder Nomination of Director Candidates and Introduction of Business. Advance notice of shareholder nominations for the election of Directors and advance notice of business to be brought by shareholders before an annual meeting shall be given in the manner provided in the Bylaws of the Corporation. 12.3 Decrease in Number of Directors. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of an incumbent Director. 12.4 No Requirement of Written Ballot. The election of the Directors may be conducted in any form adopted by the Board of Directors, and need not be by written ballot. In the event, however, that a majority of the shareholders vote to require written ballots, written ballots shall be used. ARTICLE XIII SPECIAL MEETINGS OF SHAREHOLDERS Special meetings of the shareholders, unless otherwise prescribed by statute, may be called by the Chairman of the Board, President or the Board of Directors or by the holders of at least 50% of all shares entitled to vote at the meeting. ARTICLE XIV INDEMNIFICATION Each person who is or was a Director or officer of the Corporation, or each such person who is or was serving at the request of the Board of Directors or an officer of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust or other enterprise or employee benefit plan (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Corporation to the fullest extent that a corporation is required or permitted to grant indemnification to such person under the Texas Business Corporation Act and the Texas Miscellaneous Corporation Act as the same exist or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article XIV to the extent provided by applicable laws. Any amendment or repeal of this Article XIV shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. ARTICLE XV NO MONETARY LIABILITY OF DIRECTORS TO SHAREHOLDERS To the full extent permitted by the Texas Business Corporation Act or any other applicable laws presently or hereafter in effect, no Director of the Corporation shall be personally liable to the Corporation or its shareholders for or with respect to any acts or omissions in the performance of his or her duties as a Director of the Corporation. Any repeal or modification of this Article XV shall not adversely affect any right or protection of a Director of the Corporation existing immediately prior to such repeal or modification. 11 12 ARTICLE XVI AMENDMENT The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in these Articles of Incorporation, and any other provisions authorized by the laws of the State of Texas at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon shareholders, Directors or any other persons whomsoever by and pursuant to these Articles of Incorporation in their present form or as hereafter amended are granted subject to the right reserved in this Article XVI; provided, however, that any amendment or repeal of Article XIV or Article XV of these Articles of Incorporation shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. Gulf Universal Holdings, Inc. By: /s/ MARK R. ANDERSON ------------------------------------ Mark R. Anderson, President August 5, 1996 12 EX-3.2 3 AMENDED & RESTATED BY-LAWS OF THE REGISTRANT 1 ================================================================================ AMENDED AND RESTATED BYLAWS OF AMERISAFE, INC. ================================================================================ 2 Table of Contents
Page ---- ARTICLE I --------- OFFICES Section 1.1 Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II ---------- MEETINGS OF SHAREHOLDERS Section 2.1 Time and Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.2 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.4 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.5 Quorum; Withdrawal of Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.6 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.7 Method of Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.8 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III ----------- DIRECTORS Section 3.1 Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.2 Number; Election; Qualification; Term; Removal . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.3 Vacancies; Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.4 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.5 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.6 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.7 Quorum; Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.8 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.9 Presumption of Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.10 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.11 Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.12 Committee Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.13 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV ---------- NOTICES Section 4.1 Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE V --------- OFFICERS Section 5.1 Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.2 Term; Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.3 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.4 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.5 Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3 ARTICLE VI ---------- INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6.1 Indemnification . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . 10 ARTICLE VII ----------- CERTIFICATES REPRESENTING SHARES Section 7.1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 7.2 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.4 Registered Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.5 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.6 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VIII ------------ GENERAL PROVISIONS Section 8.1 Distributions and Share Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8.2 Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8.3 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8.4 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8.6 Telephone and Similar Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 8.7 Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ii 4 AMENDED AND RESTATED BYLAWS OF AMERISAFE, INC. ARTICLE I OFFICES Section 1.1 Offices: The Corporation may have offices at such places, within or without the State of Texas, as the Board of Directors may from time to time determine, or as the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1 Time and Place of Meetings: All meetings of the shareholders shall be held at such time and place, within or without the State of Texas, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2 Annual Meetings: Annual meetings of shareholders shall be held on such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At the annual meeting, the shareholders entitled to vote thereat shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. Section 2.3 Special Meetings: Special meetings of the shareholders, unless otherwise prescribed by statute or provided by the Articles of Incorporation, may be called by the Chairman of the Board, President or the Board of Directors or by the holders of at least 50% of all shares entitled to vote at the meeting. Business conducted at any special meeting shall be confined to the purpose or purposes described in the notice thereof. Section 2.4 Notice: Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 calendar days (20 calendar days in the case of a meeting to approve a plan of merger or 5 exchange) nor more than 60 calendar days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary or the officer or other person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his or its address as it appears on the share transfer records of the Corporation, with postage thereon prepaid. Section 2.5 Quorum; Withdrawal of Quorum: A quorum shall be present at a meeting of shareholders if the holder or holders of a majority of the shares entitled to vote are present in person, represented by a duly authorized representative in the case of a corporation or other legal entity or represented by proxy, unless otherwise provided in the Articles of Incorporation. Unless otherwise provided in the Articles of Incorporation, once a quorum is present at a duly constituted meeting of shareholders, the shareholders present or represented at the meeting may conduct such business as may be properly brought before the meeting until it is adjourned, and the subsequent withdrawal from the meeting of any shareholder present or represented shall not affect the presence of a quorum at the meeting. Unless otherwise provided in the Articles of Incorporation, the shareholders entitled to vote and present or represented at a meeting of shareholders at which a quorum is not present may adjourn the meeting until such time and to such place as may be determined by a vote of the holders of a majority of the shares represented at that meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be conducted which might have been conducted at the meeting as originally notified. Section 2.6 Voting: With respect to any matter, other than the election of directors or a matter for which the affirmative vote of the holders of a specified portion of the shares is required by statute, the affirmative vote of the holders of a majority of the shares entitled to vote on that matter and represented at a meeting of shareholders at which a quorum is present shall be the act of the shareholders, unless otherwise provided in the Articles of Incorporation. Unless otherwise provided in the Articles of Incorporation, directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. Section 2.7 Method of Voting: Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the Articles of Incorporation 2 6 provide for more or less than one vote per share or limit or deny voting rights to the holders of the shares of any class or series or as otherwise provided by statute. A shareholder may vote in person, by duly authorized representative in the case of a corporation or other legal entity or by proxy executed in writing by the shareholder or by his or its duly authorized attorney-in-fact. Each proxy shall be filed with the Secretary of the Corporation prior to the time of the meeting. Section 2.8 Procedure: (a) The Chairman of the Board of Directors, or such other officer of the Corporation designated by the Board of Directors, will call meetings of the shareholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board of Directors prior to the meeting, the presiding officer of the meeting of the shareholders will also determine the order of business and have the authority in his or her sole discretion to regulate the conduct of any such meeting, including without limitation by imposing restrictions on the persons (other than shareholders of the Corporation or their duly appointed proxies) who may attend any such shareholders' meeting, by ascertaining whether any shareholder or his proxy may be excluded from any meeting of the shareholders based upon any determination by the presiding officer, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by determining the circumstances in which any person may make a statement or ask questions at any meeting of the shareholders. (b) At an annual meeting of the shareholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors in accordance with Section 2.4, (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Board of Directors, or (iii) otherwise properly requested to be brought before the meeting by a shareholder in accordance with Section 2.8(c). (c) For business, including nominations of directors, to be properly requested by a shareholder for consideration at an annual meeting, the shareholder must (i) be a shareholder of the Corporation of record at the time of the giving of the notice for such annual meeting provided for in these Bylaws, (ii) be entitled to vote at such meeting, and (iii) have given timely notice thereof in writing to the Secretary. To be 3 7 timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 calendar days prior to the annual meeting; provided, however, that in the event public announcement of the date of the annual meeting is not made at least 75 calendar days prior to the date of the annual meeting, notice by the shareholder to be timely must be so received not later than the close of business on the 10th calendar day following the day on which public announcement is first made of the date of the annual meeting. A shareholder's notice to the Secretary must set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a description in reasonable detail of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the Corporation that are owned beneficially and of record by the shareholder proposing such business and by the beneficial owner, if any, on whose behalf the proposal is made, and (iv) any material interest of such shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made in such business. Notwithstanding the foregoing provisions of this Section 2.8(c), a shareholder must also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this Section 2.8(c). For purposes of this Section 2.8(c), "public announcement" means disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act or furnished to shareholders. Nothing in this Section 2.8(c) will be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. (d) At a special meeting of shareholders, only such business may be conducted or considered as is properly brought before the meeting. To be properly brought before a special meeting, business must be specified in the notice of the meeting (or any supplement thereto) given in accordance with Section 2.4. (e) The determination of whether any business sought to be brought before any annual or special meeting of the shareholders is properly brought before such meeting in accordance with this 4 8 Section 2.8 will be made by the presiding officer of such meeting. If the presiding officer determines that any business is not properly brought before such meeting, he or she will so declare to the meeting and any such business will not be conducted or considered. ARTICLE III DIRECTORS Section 3.1 Responsibilities: The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, its Board of Directors. Section 3.2 Number; Election; Qualification; Term; Removal: The Board of Directors shall consist of one or more members. The number of directors shall be fixed from time to time by the Board of Directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of an incumbent director. The directors shall be elected at the annual meeting of the shareholders, as provided in this Section 3.2, except as otherwise provided in Section 3.3. The directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as determined by the Board of Directors, one class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1997, another class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1998, and another class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1999, with members of each class to hold office until their successors are elected and qualified. At each annual meeting of the shareholders of the Corporation, the successors to the class of directors whose term expires at that meeting shall be elected by the holders of shares entitled to vote in the election of directors to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Unless removed in accordance with the Articles of Incorporation or this Section 3.2, each director elected shall hold office for the term for which he is elected and until his successor shall have been elected and qualified. Directors need not be residents of the State of Texas or shareholders of the Corporation. At any meeting of shareholders called expressly for that purpose, any director or the entire Board of Directors may be removed, for cause 5 9 only, by the affirmative vote of the holder or holders of two-thirds of the shares then entitled to vote at an election of directors. Section 3.3 Vacancies; Increases: Any vacancy occurring in the Board of Directors (by death, resignation, removal or otherwise) may be filled by election at an annual or special meeting of shareholders called for that purpose, by the affirmative vote of a majority of the remaining directors then in office, though less than a quorum, or by a sole remaining director. Each director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose or by the Board of Directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided, however, that the Board of Directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Section 3.4 Place of Meetings: Meetings of the Board of Directors, regular or special, may be held either within or without the State of Texas. Section 3.5 Regular Meetings: Regular meetings of the Board of Directors may be held at such time and at such place as shall from time to time be determined by the Board of Directors. Regular meetings of the Board of Directors may be held without notice. Section 3.6 Special Meetings: Special meetings of the Board of Directors may be called by the Chairman of the Board or by the President of the Corporation and shall be called by the Secretary on the written request of not less than a majority of the directors then in office. Written notice specifying the time and place of special meetings shall be given to each director at least one day before the date of the meeting. Such notice may, but need not, specify the purpose or purposes of the meeting. Section 3.7 Quorum; Majority Vote: At all meetings of the Board of Directors, a majority of the number of the directors fixed in the manner provided in these Bylaws shall constitute a quorum for the transaction of business unless a greater number is specifically required by statute or provided in the Articles of Incorporation or these Bylaws. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise specifically required by statute or provided in the Articles of Incorporation or these Bylaws, in which case the express provision shall 6 10 control. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.8 Procedure: At meetings of the Board of Directors, business shall be transacted in such order as the Board of Directors may determine from time to time. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, a chairman shall be chosen by the Board of Directors from among the Directors present. The Secretary of the Corporation shall act as the secretary of the meetings of the Board of Directors unless the Board of Directors appoints another person to act as secretary of the meeting. The Board of Directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. Section 3.9 Presumption of Assent: A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. Section 3.10 Compensation: The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, paid to Directors for attendance at regular or special meetings of the Board of Directors, any committee thereof or for any other services to the Corporation; provided, however, that nothing contained in these Bylaws shall be construed to preclude any Director from serving the Corporation in any other capacity or receiving compensation therefor. Section 3.11 Committees: The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members one or more other committees, each of which shall be comprised of one or more members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Board of Directors, replace absent or disqualified members, at any meeting of that committee. Any such committee, to the extent 7 11 provided in such resolution or in the Articles of Incorporation or these Bylaws, shall have and may exercise all of the authority of the Board of Directors, except as otherwise provided by statute. The designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 3.12 Committee Procedures: Except as may be otherwise provided in a resolution or resolutions duly adopted by the Board of Directors, a majority of the members of a committee shall constitute a quorum and a majority vote of the members at a meeting at which a quorum is present shall be the act of the committee. A committee shall keep minutes of its proceedings, and shall report its proceedings to the Board of Directors when required or when requested by a Director to do so. Section 3.13 Action Without Meeting: Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at a meeting of the Board of Directors or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board of Directors or committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting. ARTICLE IV NOTICES Section 4.1 Method: Whenever by statute, the Articles of Incorporation, these Bylaws or otherwise, notice is required to be given to a Director or shareholder, and no provision is made as to how the notice shall be given, it shall not be construed to be personal notice, but any such notice may be given: (a) in writing, by mail, postage prepaid, addressed to the Director or shareholder at the last address known by the Corporation for such Director or shareholder at the address appearing on the share transfer records of the Corporation, or (b) in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is deposited in the United States mail. Section 4.2 Waiver: Whenever by statute, the Articles of Incorporation or these Bylaws, any notice is required to be given to a Director or shareholder, a waiver thereof in writing, signed by the person or persons entitled to such notice, or in the case of a corporation or other legal entity by its duly authorized 8 12 representative, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a Director, committee member or shareholder at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE V OFFICERS Section 5.1 Number: The officers of the Corporation shall consist of a President and a Secretary, each of whom shall be elected by the Board of Directors. The Board of Directors may also elect a Chairman of the Board, a Chief Executive Officer, a Treasurer, a General Counsel, a Controller and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and Assistant Controllers and such other officers as it deems necessary or appropriate. Any two or more offices may be held by the same person. Section 5.2 Term; Vacancies: An officer of the Corporation shall hold office until his successor is elected and qualified, until his death or until he shall resign or shall have been removed in accordance with these Bylaws. Any officer elected by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 5.3 Removal: Any officer elected by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee benefit plan. Section 5.4 Compensation: The compensation of all officers and agents of the Corporation who are also directors of the Corporation shall be fixed by the Board of Directors or a committee thereof. The Board of Directors may delegate the power to fix the compensation of all other officers and agents of the Corporation to an officer of the Corporation. 9 13 Section 5.5 Duties: The officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices, or as may be specified from time to time by resolution of the Board of Directors regardless of whether such authority and duties are customarily incident to such office. ARTICLE VI INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6.1 Indemnification: Each person who is or was a Director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust or other enterprise or employee benefit plan (including the heirs, executors, administrators or estate of such person) shall be indemnified by the Corporation to the fullest extent that a corporation is required or permitted to grant indemnification to such person under the Texas Business Corporation Act and the Texas Miscellaneous Corporation Act, as the same exist or may hereafter be amended. Reasonable expenses incurred by a Director or officer of the Corporation who was, is or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation, in advance of the final disposition of the proceeding, to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. The right to indemnification under this Article VI shall be a contract right. In the event of the death of any person having a right of indemnification under this Article VI, such right will inure to the benefit of his or her heirs, executors, administrators and personal representatives. The rights under this Article VI will not be exclusive of any other right which any person may have or hereinafter acquire under any statute, bylaw, resolution of shareholders or Directors, agreement or otherwise. ARTICLE VII CERTIFICATES REPRESENTING SHARES Section 7.1 Certificates: Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board, the Chief Executive Officer, the President or a Vice President and also by the Secretary or an Assistant 10 14 Secretary or the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and each such certificate may be sealed with the seal of the Corporation or a facsimile thereof. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. Section 7.2 Lost, Stolen or Destroyed Certificates: The Board of Directors may direct a new certificate or certificates representing shares of stock be issued in place of a certificate or certificates representing shares of stock theretofore issued by the Corporation and alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares of stock that was or were lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim or expense resulting from a claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. Section 7.3 Transfer of Shares: Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.4 Registered Shareholders: The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to 11 15 recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law. Section 7.5 Regulations: The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of stock of the Corporation. Section 7.6 Legends: The Board of Directors shall have the power and authority to provide that the certificates representing shares of stock of the Corporation bear such legends as the Board of Directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE VIII GENERAL PROVISIONS Section 8.1 Distributions and Share Dividends: Subject to statute and any provision of the Articles of Incorporation, distributions (in the form of cash or property) or share dividends may be declared by the Board of Directors at any regular or special meeting. Section 8.2 Checks: All checks, demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 8.3 Fiscal Year: The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors; provided, however, that if such fiscal year is not fixed by the Board of Directors and the Board of Directors does not defer determination of the fiscal year, the fiscal year shall be the calendar year. Section 8.4 Seal: The Board of Directors may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. Section 8.5 Resignation: Any Director, committee member or officer may resign by so stating at any meeting of the Board of Directors or by giving written notice to the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Such resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 12 16 Section 8.6 Telephone and Similar Meetings: Unless otherwise restricted by the Articles of Incorporation, members of the Board of Directors or members of any committee of the Board of Directors may participate in and hold a meeting of the Board of Directors or committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.7 Amendment of Bylaws: Unless otherwise provided in the Texas Business Corporation Act or the Articles of Incorporation, these Bylaws may be altered, amended or repealed, or new bylaws may be adopted, by the shareholders or the Board of Directors, subject to the shareholders providing in amending, repealing or adopting a particular Bylaw that it may not be amended or repealed by the Board of Directors. 13 EX-10.1 4 FORM OF REGISTRATION RIGHTS AGREEMENT 1 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of _____________, 1996 (the "Agreement"), among AMERISAFE, Inc., a Texas corporation (the "Company"), Millard E. Morris ("Morris") and Mark R. Anderson ("Anderson") (Morris and Anderson being hereinafter referred to collectively as the "Holders"). 1. Effectiveness of Agreement. On the date of this Agreement, (a) Morris is the record and beneficial owner of 17,126,521 shares of Class B Common Stock, par value $.01 per share, of the Company (the "Class B Common Stock") and (b) Anderson is the record and beneficial owner of 273,479 shares of Class B Common Stock. Pursuant to the terms of the Company's Amended and Restated Articles of Incorporation (the "Restated Articles"), each share of Class B Common Stock will be automatically converted, without any action on the part of the Holder, into shares of Class A Common Stock, par value $.01 per share, of the Company (the "Class A Common Stock") upon the transfer of such shares of Class B Common Stock by the Holder, except as otherwise provided in the Restated Articles. The Company has filed with the Commission the Company's registration statement on Form S-1, Registration No. 333-_____, with respect to the registration of the offering and sale of up to 12,650,000 shares of Class A Common Stock in an initial public offering. This Agreement shall become effective upon the consummation of the Company's initial public offering in which shares of Class A Common Stock are sold. 2. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Affiliate: With respect to any Person, any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. "Control" shall mean the power to cause the election of a majority of the members of the board of directors or other governing body of any Person. Class A Common Stock: As defined in Section 1. Class B Common Stock: As defined in Section 1. Commission: The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. Company: As defined in the introductory paragraph of this Agreement. Demand Holder: As defined in Section 3.1. Exchange Act: The Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such similar federal statute. Holders: As defined in the introductory paragraph of this Agreement. Person: An individual, corporation, partnership or other legal entity. Registrable Securities: (a) Any shares of Class A Common Stock owned by the Holders and their successors and assigns or any other securities of the Company convertible into shares of Class A Common Stock, (b) any shares of Class A Common Stock owned by Persons to whom the Company shall hereafter grant registration rights, consistent with this 2 Agreement, and (c) any securities issued or issuable with respect to any of the securities referred to in clauses (a) and (b) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been sold or otherwise transferred in accordance with such registration statement, (ii) they shall have been sold or otherwise transferred pursuant to Rule 144 (or any successor rule) under the Securities Act, (iii) they shall have been otherwise transferred, new certificates representing such Registrable Securities not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification under the Securities Act or any similar state law then in force, (iv) they shall have been transferred to any Person, which, after such transfer, holds fewer than 500,000 Registrable Securities, or (v) they shall have ceased to be outstanding. Registration Expenses: All expenses incident to the Company's performance of or compliance with Section 3, including, without limitation, all registration, filing and National Association of Securities Dealers fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, telecommunications, messenger, mailing and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, premiums and other costs of policies of insurance against liabilities arising out of the public offering of the Registrable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, provided that, in any case, where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, but shall include all out- of-pocket expenses of the Company incident to its performance of or compliance with Section 2 (including, but not limited to, fees and disbursements of outside counsel or independent public accountants retained by the Company in order to perform its obligations under Section 2), unless such expenses would have been incurred by the Company in the ordinary course of its business or which the Company would have incurred in any event. Securities Act: The Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar federal statute. 3. Registration under Securities Act, Etc. 3.1 Registration on Request. (a) At any time after June 30, 1997, upon the written request of Morris (the "Demand Holder") that the Company effect the registration under the Securities Act of all or part of the Registrable Securities then owned by the Demand Holder, specifying the intended method of disposition thereof and whether or not such requested registration is to be an underwritten offering, the Company will use its reasonable best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register by the Demand Holder, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered; provided that no such request shall be for the registration of less than 1,000,000 of the Registrable Securities unless at the time of such request the Demand Holder owns less than 1,000,000 shares of Registrable Securities in which case such request shall be for all of the Registrable Securities owned by the Demand Holder; provided, further, that in the event that four -2- 3 registrations requested pursuant to this Section 3.1 shall already have been effected or deemed to have been effected, the Company will not be required to effect any additional requested registration. The Company shall have the absolute right to terminate any registration of less than 1,000,000 Registrable Securities initiated pursuant to this Section 3.1 unless such registration relates to all Registrable Securities held by the Demand Holder. (b) Registration of Other Securities. Whenever the Company shall effect a registration pursuant to this Section 3.1 in connection with an underwritten offering, no securities other than the Demand Holder's Registrable Securities and, in the Company's discretion, securities of the Company to be sold for the account of the Company shall be included among the securities covered by such registration if the managing underwriter of such offering shall have advised the Company that the inclusion of such other securities would adversely affect such offering. (c) Registration Statement Form. Registrations under this Section 3.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and (ii) as shall permit the disposition of the Demand Holder's Registrable Securities in accordance with the intended method or methods of disposition specified in the Demand Holder's request for such registration. (d) Expenses. The Company will pay all Registration Expenses in connection with any registration requested pursuant to this Section 3.1. The underwriting discounts and commissions if any, in connection with each registration requested under this Section 3.1 shall be allocated among all Persons on whose behalf securities of the Company are included in such registration, on the basis of the respective amounts of the securities then being registered on their behalf. If the Company terminates a registration pursuant to the last sentence of Section 3.1(a), but the Demand Holder pays all of the Registration Expenses incurred in connection with such registration prior to the date of such termination and any Registration Expenses incurred in connection with the Company's withdrawing such registration statement, the Demand Holder shall have the right to make an additional written request for registration pursuant to and in accordance with this Section 3.1. (e) Effective Registration Statement. A registration requested pursuant to this Section 3.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, or (ii) if after such registration statement has become effective, the Registrable Securities to be registered fail to be sold because (A) of any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, or (B) the conditions to closing (other than closing conditions to be met by the Demand Holder) specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied. (f) Selection of Underwriters. If a requested registration pursuant to this Section 3.1 involves an underwritten offering, the underwriter or underwriters thereof shall be selected by the Demand Holder with the consent of the Company (which consent shall not be unreasonably withheld). (g) Priority in Requested Registrations. If a requested registration pursuant to this Section 3.1 involves an underwritten offering, and the managing underwriter shall advise the Company that, in its judgment, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Demand Holder, the Company will include in such registration to the extent of the number which the Company is so advised can be sold in such offering (i) first, the Registrable Securities held by the Demand Holder requested to be included in such registration, (ii) second, if all of the Demand Holder's Registrable Securities requested to be registered have been included, securities of the Company to be sold for the Company's account, and (iii) third, if all of the securities sought to be registered under the preceding clauses (i) and (ii) have been included, all other Registrable Securities of the Company requested to be included in such registration pro rata on the basis of the number of such Registrable Securities so requested to be included in the registration or otherwise in accordance with any written agreement to which the Company is a party. -3- 4 (h) Intervals. The Company shall not be required to effect a registration pursuant to this Section 3.1 earlier than twelve months after the effective date of a prior registration effected under this Section 3.1. (i) Deferral of Registration. If, in the good faith judgment of the Company, a registration at the time and on the terms requested would interfere with any financing, acquisition, corporate reorganization or other material transaction involving the Company that had been contemplated prior to the notice by the Demand Holder requesting registration, the Company will not be required to commence using its reasonable best efforts to effect a registration pursuant to this Section 3.1 until the later of (i) 180 days after the date of such written notice or if earlier, 60 days after the abandonment or completion of such financing or other transaction, and (ii) the termination of any "black-out" period required by the underwriters, if any, in connection with such financing or other transaction. If, while a registration request is pending pursuant to this Section 3.1, the Company determines in the good faith judgment of its legal advisors that the filing of a registration statement would require the disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, the Company will not be required to commence using its reasonable best efforts to effect a registration pursuant to this Section 3.1 until the earlier of (i) the date upon which such material information is disclosed to the public or ceases to be material, or (ii) 135 days after the Company makes such good faith determination. (j) Inclusion of Financial Statements. The Company will not be obligated to file any registration statement pursuant to this Section 3.1 at any time if the Company would be required to include financial statements audited as of any date other than the end of its fiscal year. 3.2 Incidental Registration. (a) Right to Include Registrable Securities. If, at any time after June 30, 1997, the Company proposes to register any of its common stock or options, warrants, rights or other securities convertible or exercisable into or exchangeable for its common stock under the Securities Act (other than pursuant to Section 3.1), whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 3.2. Upon the written request of any such holder made within 30 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that if, at any time after giving written notice of its intention to register any such securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its option, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 3.2 shall be deemed to have been effected pursuant to Section 3.1 or shall relieve the Company of its obligation to effect any registration upon request under Section 3.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 3.2. The underwriting discounts and commissions, if any, in connection with each registration requested under this Section 3.2 shall be allocated among all Persons on whose behalf securities of the Company are included in such registration, on the basis of the respective amounts of the securities then being registered on their behalf. (b) Priority in Incidental Registrations. If (i) a registration pursuant to this Section 3.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of nationally recognized standing under underwriting terms appropriate for such a transaction, and (ii) the -4- 5 managing underwriter of such underwritten offering shall inform the Company of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering, then the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in (or during the time of) such offering, first, all securities proposed by the Company to be sold for its own account, second, such Registrable Securities of the Holders requested to be included in such registration pro rata on the basis of the number of shares of such securities so proposed to be sold and so requested to be included, and third, all other Registrable Securities of the Company requested to be included in such registration pro rata on the basis of the number of shares of such securities so proposed to be sold and so requested to be included. (c) Other Registration Rights. The Company retains the right to grant registration rights to other holders of the Company's securities, including its officers and directors, subject to the rights of the Holders hereunder and otherwise consistent with the provisions of this Agreement. (d) Effect on Company Financing. The Company will not be required to effect any registration of Registrable Securities under this Section 3.2 if, in the reasonable judgment of its managing underwriter or underwriters, inclusion of any Registrable Securities in the Company's registration statement at that time would adversely affect the Company's own financing. (e) Other Exclusions. The Company will not be required to effect any registration of Registrable Securities under this Section 3.2 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, rights or subscription offers, dividend reinvestment plans or stock option or other employee benefit plans. 3.3 Registration Procedures. If and whenever the Company is required to use its reasonable best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3.1 and 3.2, the Company will as expeditiously as possible: (a) prepare and file with the Commission the appropriate registration statement to effect such registration and thereafter use its best efforts to cause such registration statement to become effective; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until the earlier of such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement or the expiration of 90 days after such registration statement becomes effective; (c) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (including, if requested, all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act) and such other documents, as such seller may reasonably request; (d) use reasonable efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions in the United States as each seller thereof shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable -5- 6 to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (d) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (e) furnish to each seller of Registrable Securities a signed counterpart, addressed to such seller (and the underwriters, if any) of (i) an opinion of counsel for the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), and (ii) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, such matters as are customarily covered in accountants' letters delivered to the underwriters in underwritten public offerings and such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller, or the underwriters, if any, may reasonably request; (f) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then if effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and promptly prepare and furnish to each such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (g) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (h) use reasonable efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the Registrable Securities is then listed. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. -6- 7 Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that upon receipt of any notice from the Company of the happening of any event of the kind described in clause (f) of this Section 3.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by clause (f) of this Section 3.3 and, if so directed by the Company, will deliver to the Company all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the 90-day period referred to in clause (b) of this Section 3.3 shall be extended by a number of days equal to the number of days during the period from and including the giving of notice pursuant to clause (f) of this Section 3.3 to and including the date when each seller of any Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by clause (f) of this Section 3.3. 3.4 Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering by the Demand Holder of Registrable Securities pursuant to a registration requested under Section 3.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Demand Holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 3.5. The Demand Holder of Registrable Securities to be distributed by such underwriters shall be a party to such underwriting agreement and may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Demand Holder of Registrable Securities. The Demand Holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding the Demand Holder, the Demand Holder's Registrable Securities and the Demand Holder's intended method of distribution and any other representation required by law. (b) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 3.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities as provided in Section 3.2 and subject to the provisions of Section 3.2(b), arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder with the securities to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. (c) Holdback Agreements. Each holder of Registrable Securities agrees that, if so required by the managing underwriter, it will not effect any public sale or distribution of any equity securities of the Company, during the seven days prior to and the 90 days after any underwritten registration pursuant to Section 3.1 or 3.2 has become effective. 3.5 Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, in the case of any registration statement filed pursuant to Section 3.1 or 3.2, indemnify and hold harmless the seller of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other -7- 8 Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, from and against any losses, claims, damages or liabilities (whether or not resulting from third-party claims and including interest and penalties), joint or several, to which such seller or holder or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such seller, such holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding or in asserting any of their respective rights under this Section 3.5; provided that the Company shall not be liable in any such case to the extent that any such loss, claim damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation thereof; provided, further, that the Company shall not be liable to any Person who participates as an underwriter, in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 3.2, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in clause (a) of this Section 3.5) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of such registration or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 3.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 3.5, except to the extent that the indemnifying -8- 9 party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding provisions of this Section 3.5 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. (e) Indemnification Payments. The indemnification required by this Section 3.5 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 3.8 Adjustments Affecting Registrable Securities. Upon the occurrence of any combination, subdivision or recapitalization which affects the Registrable Securities, the minimum number of Registrable Securities that the Holders may request to be registered pursuant to Section 3.1, and the number of shares of Registrable Securities a Person must hold in order for such securities to continue to be deemed Registrable Securities under clause (iv) in the definition of Registrable Securities in Section 2, shall automatically be adjusted to appropriately reflect such combination, subdivision or recapitalization and to preserve the original rights and obligations of the parties hereto under this Agreement. The Company will not effect or permit or occur any combination or subdivision of shares or any other recapitalization which would otherwise adversely affect the ability of any of the undersigned holders of Registrable Securities to initiate or include such Registrable Securities in any registration of its securities contemplated by Section 3 or the marketability of such Registrable Securities under any such registration. 4. Rule 144: If the Company shall have filed a registration statement pursuant to the requirements of Section 12 of the Exchange Act or a registration statement pursuant to the requirements of the Securities Act, the Company will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time or (b) any similar rule or regulation hereafter adopted by the Commission. 5. Amendments and Waivers. This Agreement may be amended and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of record of two-thirds or more of the shares (by number of shares) of the Registrable Securities held by the Holders. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder -9- 10 or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. All notices, requests, demands and other communications made in connection with this Agreement shall be in writing and shall be (a) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, (b) transmitted by hand delivery or overnight courier, or (c) transmitted by telecopy and, in each case, addressed (i) if to the Company, to AMERISAFE, Inc. 1807 Highway 190 West, DeRidder, Louisiana 70634, Telecopy: (318) 463-7298, ATTN: Secretary, (ii) if to a holder of Registrable Securities, at the address on the Company's records, or (iii), in each case, at such other address as may be specified in writing to the other parties hereto. 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of Registrable Securities, subject to the provisions respecting the minimum numbers or percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. 9. Term. This Agreement shall expire on June 30, 2007. 10. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 11. Specific Performance. The parties hereto recognize and agree that money damages may be insufficient to compensate the holders of any Registrable Securities for breaches by the Company of the terms hereof and, consequently, that the equitable remedy of specific performance of the terms hereof will be available in the event of any such breach. 12. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Texas, without giving effect to the choice of law principles thereof. 13. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. -10- 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. AMERISAFE, Inc. By: ----------------------------- Name: ----------------------- Title: ----------------------- ----------------------------------- Millard E. Morris ----------------------------------- Mark R. Anderson -11- EX-10.7 5 FIRST CASUALTY EXCESS REINSURANCE AGREEMENT 1 FIRST CASUALTY EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies covering Casualty Business in force, written or renewed during the term of this Agreement by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, irrespective of the number and kinds of Policies Involved, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $200,000 each and every Loss Occurrence, subject to a limit of liability to the Reinsurer of $300,000 each and every Loss Occurrence. ARTICLE 3 COMMENCEMENT AND TERMINATION This Agreement shall become effective at 12:01 am., Central Standard Time, July 1,1995, and shall remain in full force and effect until terminated as provided in the following paragraph. Either the Company or the Reinsurer shall have the right to terminate this Agreement as of July 1, 1997, or any July 1 thereafter, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested. Notwithstanding the July 1,1997 anniversary, the Company will have the ability to alter the limit and retention of this Agreement, effective July 1, 1996. Such action will require a revision to ARTICLE 7 - PREMIUM. Further, the Reinsurer will have the option to terminate this Agreement with 90 days' notice prior to July 1, 1996 for any of the following reasons: A. The sale, merger, or acquisition of the Company by or with any other party or the sale or change in controlling interest of the Company so as to produce a loss in control over conduct of the business by the current owners and/or management, except any change of control or ownership within any insurance holding company system which effects no change in the ultimate controlling party; B. A reduction of the paid-in capital of the Company for any reason whatsoever; C. The appointment of a receiver, administrator, trustee, or conservator for the Company or the commencement of any liquidation, rearrangement, or bankruptcy proceeding against the Company; 2 D. Should the Company at any time reinsure its minimum or net retention on any class of business to which this Agreement applies, except as provided for in this Agreement; E. The reinsurance loss ratio exceeds 110% as of March 1, 1996. The loss ratio will be based on reinsurance premium paid and reinsurance losses incurred as of March 1, 1996. Upon termination of this Agreement, the entire liability of the Reinsurer for losses occurring subsequent to termination of this Agreement shall cease concurrently with the termination date of this Agreement. Notwithstanding the above, the Company has the option to terminate this Agreement on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months from the date of termination plus odd time, not to exceed 15 months. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 Warranties It is warranted for the purpose of this Agreement that as respects Third Party Liability, the maximum limit issued by the Company any one Policy is $1,000,000 combined single limit (1973 Occurrence Form) or so deemed; or alteratively, $1,000,000 per occurrence/$3,000,000 general annual aggregate (1986 Occurrence Form), or so deemed. It is understood as respects the new ISO Commercial General Liability Policy, effective January 1, 1986, that the General Annual Aggregate Limit section, other than products and completed operations, shall be protected hereunder on an each Loss Occurrence basis. ARTICLE 6 EXCLUSIONS This Agreement does not cover: A. As respects all business: 1. Aggregate Excess Insurance. 2. a. Atomic Energy and Nuclear Risks--all operations and projects as per Nuclear Incident Exclusion Clauses - Liability - Reinsurance, Nos. 08-31.1 (U.S.A.) and 08-32.1 (Canada) in respect of all business other than Workers' Compensation and Employers' Liability. -2- 3 b. Atomic Energy and Nuclear Risks--all operations and projects in respect of Workers' Compensation and Employers' Liability business. 3. Contamination, Seepage and Pollution, as per the attached clause. 4. Riot and civil commotion. 5. Reinsurance assumed, except: a. Agency reinsurance (per risk or portfolio) is not excluded. b. Reinsurance of an occasional individual risk or Policy is not excluded, provided the Company is not operating as a professional reinsurer. c. Reinsurance on risks where all servicing, including claims handling, is done by the Company. 6. Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. 7. 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, howsoever 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. 8. Aggregate Workers' Compensation. 9. Policies issued as excess coverage over other insurance or over a self-insured retention except on risks where all servicing, including claims handling, is done by the Company. 10. War as excluded by the Standard War Exclusion Clause. 11. Risks with known asbestosis, black lung or brown lung exposures. Also, risks with silicosis exposures unless such exposure emanates from an incidental part of the Insureds operations. For the purposes of this exclusion, the term "incidental" shall mean less than 10% of any employees of an insured's time is engaged in functions involving a silicosis exposure. 12. Federal employees. 13. Financial Guarantee and Insolvency. B. As respects business other than Workers' Compensation and Employers' Liability: 1. Advertisers Liability--monoline. 2. Airports--all operations. 3. Amusement parks, carnivals and rides. 4. Amusement devices--manufacturing liability. -3- 4 5. Anhydrous ammonia--distributing. 6. Animal shows and circuses. 7. Antifreeze products liability. 8. Asylums. 9. Automobile racing of any kind. 10. Automobile racing spectator liability. 11. Automobile third party liability. 12. Aviation and aircraft products and operations. 13. Burglar alarm contractors and manufacturers. 14. Chemical manufacturing, unless incidental to the insured's overall operations. 15. Construction, repair or maintenance of bridges, conduits, electric power lines, dams or reservoirs, jetties or breakwaters, oil or gas pipelines, railroads, ships or boats, subways and tunnels. 16. Demolition--marine. 17. Dike or revetment construction. 18. Drilling or redrilling of oil or gas wells. 19. Explosives of any kind or nature. 20. Fire alarm--products liability. 21. Fire protection systems--all operations. 22. Grain elevators. 23. Halfway or awareness houses. 24. Homes or schools for the mentally retarded. 25. Marine or offshore operations. 26. Motorcycle distributors. 27. Oil or gas--all classifications. 28. Oil or gas lease operators--all classifications. 29. Ore dock operations. 30. Products recall liability. -4- 5 31. Professional Indemnity and/or Errors and Omissions: architects, engineers, accountants, EDP firms, real estate or insurance agents, surveyors, travel agents, and all other miscellaneous. 32. Professional Liability: blood banks, hospitals, clinics, lawyers, physicians, surgeons, dentists and nurses. 33. Railroads--all classifications. 34. Riding academies. 35. School boards liability. 36. Scuba equipment rental. 37. Scuba equipment manufacturing or distribution. 38. Scuba schools or instructors. 39. Ship building--all classifications. 40. Ski lifts, tows--including ski rental or sales. 41. Steel tanks or pressure vessel manufacturing. 42. Stevedoring and/or longshoremen--all operations. 43. Structural steel manufacturer or importer. 44. Toy manufacturing. 45. Ocean Marine and all forms of legal liability arising out of the operation or navigation of ships or vessels except for the operation of small pleasure craft under 28 feet in length. 46. Warehousemen's legal liability. 47. D & O (except for condominium D & O). 48. Day care centers. 49. Electric or gas utilities--all operations including blackouts and brownouts. 50. Equipment rental. 51. Fire legal liability coverage exceeding limits of $500,000 per insured. 52. Mining including underground mining, surface mining and quarrying. 53. Municipalities. 54. Pharmaceutical manufacturers. -5- 6 55. Products Liability coverage relating to the production, manufacture, distribution, or sale of any of the following: a. Aircraft and instrumentation therefor, including any component parts of airframes and engines, and any other on-board parts or accessories that directly affect the safety, flying characteristics or communication capability of aircraft; b. Cosmetics, hair or skin preparations; c. Drugs, medicines and pharmaceutical products except by retail drugstores or drug departments of supermarket and discount stores; d. Explosives or fireworks; e. Agricultural business, including but not limited to pesticides, herbicides, fertilizers; f. Animal feed. 56. Liquor Law Liability, except for Host Liquor Liability endorsements to General Liability Policies and Liquor Law Liability under endorsements attached to General Liability Policies. 57. Hotels or motels over seven stories in height unless fire restrictive construction and equipped with smoke detectors in all rooms and public hallways. Such reinsurance as would have been afforded but for the foregoing exclusions will apply to Policies issued to insureds regularly engaged in other occupations or activities where the prohibited operation is only incidental to the general conduct of the insured's business, or to Policies issued under an Assigned Risk Plan, or similar mandatory plan (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded). Errors and omissions notwithstanding, if without the knowledge and contrary to the instructions of its supervisory underwriting personnel, the Company is bound on a risk specifically excluded hereunder, or by an existing insured extending its operations (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded), such reinsurance as would have been afforded but for the exclusion shall apply for a period of 30 days following receipt by said underwriting personnel of knowledge thereof. ARTICLE 7 PREMIUM A. As respects Casualty Business classified by the Company as Logging and General Liability: 1. The Company will pay the Reinsurer a deposit premium of $XXXX* for the Agreement Year commencing at July 1, 1995, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. 2. Within 60 days following the end of each Agreement Year, the Company will calculate a premium at a rate of XXXX%(*) multiplied by the Company's Gross Net Earned Premium Income as respects such business. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A.1. above, the Company will immediately pay the - ---------------------------------- (*) Confidential treatment has been requested. -6- 7 Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. 3. The minimum and deposit premium for subsequent Agreement Years will be based on the same percentage used to develop the minimum and deposit premium for the Agreement Year that commenced at July 1, 1995. 4. Should the Company elect to terminate this Agreement on a run-off basis, the Company will pay the Reinsurer a premium of XXXX%* against the unearned premium on Policies in force at the time of cancellation. B. As respects all other Casualty Business: 1. Within 45 days following the end of each calendar quarter, the Company will calculate and pay to the Reinsurer a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income as respects such business. 2. Should the Company elect to terminate this Agreement on a run-off basis, the Company will pay the Reinsurer a premium of XXXX%* against the unearned premium on Policies in force at the time of cancellation. ARTICLE 8 FINAL PROFIT COMMISSION The Company will have the option to calculate a final profit commission, for each two (2) consecutive Agreement Year periods or lesser period should this Agreement be cancelled on a cut off basis, equal to 100% of the net profit in accordance with the following formula, with provisional adjustments beginning 12 months after the end of the second Agreement Year (July 1, 1998) and annually thereafter. The net profit for each two Agreement Year period shall be calculated in accordance with the following formula: A. Reinsurance premium paid for the period; less B. Reinsurer's paid losses on losses occurring during the period; less C. Reinsurer's margin at XXXX%(*) of the original reinsurance premium; equals D. Company's net profit. Payment to the Company of the final profit commission calculation will result in a full and final commutation of all known and unknown losses and shall constitute a complete and final release of the Reinsurer and the Company in respect of any and all liabilities on business covered under this Agreement during the Agreement period commuted. All prior final profit commission adjustment periods incepting prior to or during the term of this Agreement must be commuted in consecutive order, with the first period, for purposes of this Agreement, being July 1, 1989 to July 1, 1990. - ---------------------------------- (*) Confidential treatment has been requested. -7- 8 Should the Company elect to terminate this Agreement on a run-off basis prior to the end of a two Agreement Year period, the run-off period will be considered as part of the last full Agreement Year period and together constitute a two Agreement Year period for purposes of adjustment. Should the Company elect to terminate this Agreement on a run-off basis at the end of a two Agreement Year period, the run-off period will be combined with the prior two Agreement Year period for purposes of adjustment. ARTICLE 9 REPORTS Within 60 days following the end of each Agreement Year, the Company will furnish the Reinsurer with the following information: A. Gross Net Earned Premium Income of the Company for the Agreement Year. B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 10 DEFINITIONS A. The term "Casualty Business" as used in this Agreement shall mean all insurances and reinsurances written by the Company and classified by the Company as casualty. B. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include 90% of any Extra Contractual Obligation award (and expense) as defined in the EXTRA CONTRACTUAL OBLIGATIONS ARTICLE, 90% of any Excess of Policy Limits award as defined in the EXCESS OF POLICY LIMITS ARTICLE, expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. C. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less the earned premium income (if any) paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. -8- 9 D. The term "Policy" as used in this Agreement shall mean any binder, policy or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. E. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or accident or loss or series of disasters or casualties or accidents or losses arising out of or caused by one event, except that: As respects an occupational or other disease or cumulative trauma suffered by an employee for which the employer is liable, such occupational or other disease or cumulative trauma shall be deemed a Loss Occurrence within the meaning hereof. If the Company shall, within the term of this Agreement, sustain more than one loss arising from an occupational or other disease or cumulative trauma of one specific kind or class suffered by more than one employee of one insured, such losses shall be deemed to have arisen from one Loss Occurrence. A loss as respects each employee affected by an occupational or other disease or cumulative trauma shall be deemed to have been sustained by the Company at the date when compensable disability of the employee commenced and not any other date. As respects Products Personal Injury and Products Property Damage Liability Insurance, it is understood that injuries to all persons and all damage to property of others occurring during a Policy period and proceeding from or traceable to the same causative agency shall be deemed to have arisen out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy period. For the purposes of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy period. The word "injuries" as used in this paragraph includes but is not limited to infection, contagion, poisoning or contamination. F. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1. Any period following termination of this Agreement in which the Reinsurer remains liable for losses arising out of Policies in force at the date of termination will be considered as part of the concluding Agreement Year. ARTICLE 11 INTERLOCKING The parties to this Agreement recognize that a Loss Occurrence, as defined herein, may involve multiple Policies, and by reason of run-off termination with this Agreement covering in-force Policies and other reinsurances assuming liability on new and renewal Policies, a portion of the Loss Occurrence may be ascribed to this Agreement and to other reinsurances covering on substantially the same basis. In such event, the Company's retention and the Reinsurer's limit of liability for the Loss Occurrence shall be proportionate, with the amount of Ultimate Net Loss to be retained by the Company under this Agreement being reduced to that percentage which the Company's settled losses attaching to this Agreement bear to the total of all the Company's settled losses contributing to the same Loss Occurrence. The Reinsurer's liability shall be arrived at in the same manner. ARTICLE 12 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being -9- 10 understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for the purpose of this Agreement. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 14 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an Outstanding Cash Advance as an alternative method of funding. ARTICLE 15 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1% from the amount of the return and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 16 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer, such advices to include any claim for which the reserve is 50% or more of the Company's -10- 11 retention and, irrespective of the reserve or of any question of liability or coverage, any claim falling within the following categories: A. Fatalities B. Bodily injuries involving: 1. brain injuries resulting in impairment of physical functions, 2. spinal injuries resulting in partial or total paralysis of upper or lower extremities, 3. amputations or permanent loss of use of upper or lower extremities, 4. severe burn cases, 5. all other injuries likely to result in a permanent disability rating of 50% or more. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. ARTICLE 17 EXCESS OF POLICY LIMITS In the event the Ultimate Net Loss includes an amount in excess of the Company's Policy limit, such amount, as provided for in the definition of Ultimate Net Loss, in excess of the Company's Policy limit shall be added to the amount of the Company's Policy limit, and the sum thereof shall be covered hereunder, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. ARTICLE 18 EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Company, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement, where the loss includes any Extra Contractual Obligations as provided in the definition of Ultimate Net Loss. "Extra Contractual Obligations" are defined as those liabilities not covered -11- 12 under any other provision of this Agreement and which arise from handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original Loss Occurrence. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE 19 DELAY, OMISSION OR ERROR Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE 20 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. ARTICLE 21 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 22 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A., will apply to this Agreement. ARTICLE 23 INSOLVENCY In the event of the insolvency of the Company the attached Insolvency Clause No. 21-01 will apply. -12- 13 ARTICLE 24 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -13- 14 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1,1995 This Agreement obligates the Reinsurer for _____% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS -------------------------------------------------------------------- Reliance Reinsurance Corporation 20.00% Reliance Insurance Company St. Paul Re Management Corporation 25.00% St. Paul Fire and Marine Insurance Company Skandia America Reinsurance Corporation 25.00% TIG Reinsurance Company 20.00% Transatlantic Reinsurance Company 10.00% ------- Total 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -14- 15 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of , 1995. RELIANCE INSURANCE COMPANY (THROUGH RELIANCE REINSURANCE CORP.) By ------------------------------------- (signature) ------------------------------------ (name) ------------------------------------ (title) -15- 16 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. ST. PAUL FIRE AND MARINE INSURANCE COMPANY By ------------------------------------- (signature) ------------------------------------ (name) ------------------------------------ (title) St. Paul Re Management Corporation Reinsurance Managers -16- 17 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. SKANDIA AMERICA REINSURANCE CORPORATION Wilmington, Delaware By By ------------------------------------ ------------------------------------ (signature) ------------------------------------ ------------------------------------ (name) (name) ------------------------------------ ------------------------------------ (title) (title) -17- 18 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Stamford, Connecticut, this day of , 1995. TIG REINSURANCE COMPANY Stamford, Connecticut By ------------------------------------ (signature) ------------------------------------ (name) ------------------------------------ (title) -18- 19 ARTICLE 25 PARTICIPATION: FIRST CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 10.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. TRANSATLANTIC REINSURANCE COMPANY New York, New York By ------------------------------------ (signature) ------------------------------------ (name) ------------------------------------ (title) -19- 20 and in DeRidder, Louisiana, this day of , 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------ (signature) ------------------------------------ (name) ------------------------------------ (title) FIRST CASUALTY EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -20- 21 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 22 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief first aid, to expenses incurred with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 23 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 24 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of 25 or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 26 SEEPAGE AND POLLUTION CLAUSE As respects Policies classified by the Company as Commercial General Liability, this Agreement does not cover Liability arising out of the actual alleged or threatened discharge, dispersal, release or escape of pollutants: 1. At or from any premise owned, rented or occupied by the insured; 2. At or from any site or location used by the insured for the handling, storage, disposal, processing or treatment of waste; 3. Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by the insured or by any person or organization for whom the insured may be legally responsible. 4. At or from any site or location on which the insured or any contractors or subcontractors working directly or indirectly on behalf of the insured are performing operations: a. If the pollutants are brought on or to the site or location in connection with such operations; or b. If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants; including any loss, cost, or expense arising out of any governmental directive or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. The term "pollutants" as used herein shall mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, including materials to be recycled, reconditioned or reclaimed. However, this exclusion shall not apply to Bodily Injury or Property Damage Liability caused by heat, smoke, or fumes from a hostile fire. As used herein, the term "hostile fire" shall mean a fire which becomes uncontrollable or breaks out from where it was intended to be. 27 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses 28 plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 29 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 30 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 31 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.8 6 SECOND CASUALTY EXCESS REINSURANCE AGREEMENT 1 SECOND CASUALTY EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies covering Casualty Business in force, written or renewed during the term of this Agreement by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, irrespective of the number and kinds of Policies involved, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $500,000 each and every Loss Occurrence, subject to a limit of liability to the Reinsurer of $1,500,000 each and every Loss Occurrence. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreement(s) will not be deducted when establishing Ultimate Net Loss for purposes of this Article. ARTICLE 3 COMMENCEMENT AND TERMINATION This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect until terminated as provided in the following paragraph. Either the Company or the Reinsurer shall have the right to terminate this Agreement as of July 1, 1997, or any July 1 thereafter, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested. Notwithstanding the July 1, 1997 anniversary, the Reinsurer will have the option to terminate this Agreement with 90 days' notice prior to July 1, 1996 for any of the following reasons: A. The sale, merger, or acquisition of the Company by or with any other party or the sale or change in controlling interest of the Company so as to produce a loss in control over conduct of the business by the current owners and/or management, except any change of control or ownership within any insurance holding company system which effects no change in the ultimate controlling party; B. A reduction of the paid-in capital of the Company for any reason whatsoever; 2 C. The appointment of a receiver, administrator, trustee, or conservator for the Company or the commencement of any liquidation, rearrangement, or bankruptcy proceeding against the Company; D. Should the Company at any time reinsure its minimum or net retention on any class of business to which this Agreement applies, except as provided for in this Agreement; E. The reinsurance loss ratio exceeds 110% as of March 1, 1996. The loss ratio will be based on reinsurance premium paid and reinsurance losses incurred as of March 1, 1996. Upon termination of this Agreement, the entire liability of the Reinsurer for losses occurring subsequent to termination of this Agreement shall cease concurrently with the termination date of this Agreement. Notwithstanding the above, the Company has the option to terminate this Agreement on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months from the date of termination plus odd time, not to exceed 15 months. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 WARRANTIES It is warranted for the purpose of this Agreement that as respects Third Party Liability, the maximum limit issued by the Company any one Policy is $1,000,000 combined single limit (1973 Occurrence Form) or so deemed; or alteratively, $1,000,000 per occurrence/$3,000,000 general annual aggregate (1986 Occurrence Form), or so deemed. It is understood as respects the new ISO Commercial General Liability Policy, effective January 1, 1986, that the General Annual Aggregate Limit section, other than products and completed operations, shall be protected hereunder on an each Loss Occurrence basis. ARTICLE 6 EXCLUSIONS This Agreement does not cover: A. As respects all business: 1. Aggregate Excess Insurance. 2. a. Atomic Energy and Nuclear Risks--all operations and projects as per Nuclear Incident Exclusion Clauses - Liability - Reinsurance, Nos. 08-31.1 (U.S.A.) and -2- 3 08-32.1 (Canada) in respect of all business other than Workers' Compensation and Employers' Liability. b. Atomic Energy and Nuclear Risks--all operations and projects in respect of Workers' Compensation and Employers' Liability business. 3. Contamination, Seepage and Pollution, as per the attached clause. 4. Riot and civil commotion. 5. Reinsurance assumed, except: a. Agency reinsurance (per risk or portfolio) is not excluded. b. Reinsurance of an occasional individual risk or Policy is not excluded, provided the Company is not operating as a professional reinsurer. c. Reinsurance on risks where all servicing, including claims handling, is done by the Company. 6. Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. 7. 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, howsoever 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. 8. Aggregate Workers' Compensation. 9. Policies issued as excess coverage over other insurance or over a self-insured retention except on risks where all servicing, including claims handling, is done by the Company. 10. War as excluded by the Standard War Exclusion Clause. 11. Risks with known asbestosis, black lung and brown lung exposures. Also, risks with silicosis exposures unless such exposure emanates from an incidental part of the insureds operations. For the purposes of this exclusion, the term "incidental" shall mean less than 10% of any employees of an insured's time is engaged in functions involving a silicosis exposure. 12. Federal employees. 13. Financial Guarantee and Insolvency. B. As respects business other than Workers' Compensation and Employers' Liability: 1. Advertisers Liability--monoline. 2. Airports--all operations. -3- 4 3. Amusement parks, carnivals and rides. 4. Amusement devices--manufacturing liability. 5. Anhydrous ammonia--distributing. 6. Animal shows and circuses. 7. Antifreeze products liability. 8. Asylums. 9. Automobile racing of any kind. 10. Automobile racing spectator liability. 11. Automobile third party liability. 12. Aviation and aircraft products and operations. 13. Burglar alarm contractors and manufacturers. 14. Chemical manufacturing, unless incidental to the insured's overall operations. 15. Construction, repair or maintenance of bridges, conduits, electric power lines, dams or reservoirs, jetties or breakwaters, oil or gas pipelines, railroads, ships or boats, subways and tunnels. 16. Demolition--marine. 17. Dike or revetment construction. 18. Drilling or redrilling of oil or gas wells. 19. Explosives of any kind or nature. 20. Fire alarm--products liability. 21. Fire protection systems--all operations. 22. Grain elevators. 23. Halfway or awareness houses. 24. Homes or schools for the mentally retarded. 25. Marine or offshore operations. 26. Motorcycle distributors. 27. Oil or gas--all classifications. 28. Oil or gas lease operators--all classifications. -4- 5 29. Ore dock operations. 30. Products recall liability. 31. Professional Indemnity and/or Errors and Omissions: architects, engineers, accountants, EDP firms, real estate or insurance agents, surveyors, travel agents, and all other miscellaneous. 32. Professional Liability: blood banks, hospitals, clinics, lawyers, physicians, surgeons, dentists and nurses. 33. Railroads--all classifications. 34. Riding academies. 35. School boards liability. 36. Scuba equipment rental. 37. Scuba equipment manufacturing or distribution. 38. Scuba schools or instructors. 39. Ship building--all classifications. 40. Ski lifts, tows--including ski rental or sales. 41. Steel tanks or pressure vessel manufacturing. 42. Stevedoring and/or longshoremen--all operations. 43. Structural steel manufacturer or importer. 44. Toy manufacturing. 45. Ocean Marine and all forms of legal liability arising out of the operation or navigation of ships or vessels except for the operation of small pleasure craft under 28 feet in length. 46. Warehousemen's legal liability. 47. D & O (except for condominium D & O). 48. Day care centers. 49. Electric or gas utilities--all operations including blackouts and brownouts. 50. Equipment rental. 51. Fire legal liability coverage exceeding limits of $500,000 per insured. 52. Mining including underground mining, surface mining and quarrying. 53. Municipalities. -5- 6 54. Pharmaceutical manufacturers. 55. Products Liability coverage relating to the production, manufacture, distribution, or sale of any of the following: a. Aircraft and instrumentation therefor, including any component parts of airframes and engines, and any other on-board parts or accessories that directly affect the safety, flying characteristics or communication capability of aircraft; b. Cosmetics, hair or skin preparations; c. Drugs, medicines and pharmaceutical products except by retail drugstores or drug departments of supermarket and discount stores; d. Explosives or fireworks; e. Agricultural business, including but not limited to pesticides, herbicides, fertilizers; f. Animal feed. 56. Liquor Law Liability, except for Host Liquor Liability endorsements to General Liability Policies and Liquor Law Liability under endorsements attached to General Liability Policies. 57. Hotels or motels over seven stories in height unless fire restrictive construction and equipped with smoke detectors in all rooms and public hallways. Such reinsurance as would have been afforded but for the foregoing exclusions will apply to Policies issued to insureds regularly engaged in other occupations or activities where the prohibited operation is only incidental to the general conduct of the insured's business, or to Policies issued under an Assigned Risk Plan, or similar mandatory plan (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded). Errors and omissions notwithstanding, if without the knowledge and contrary to the instructions of its supervisory underwriting personnel, the Company is bound on a risk specifically excluded hereunder, or by an existing insured extending its operations (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded), such reinsurance as would have been afforded but for the exclusion shall apply for a period of 30 days following receipt by said underwriting personnel of knowledge thereof. ARTICLE 7 PREMIUM A. As respects Casualty Business classified by the Company as Logging and General Liability: 1. The Company will pay the Reinsurer a deposit premium of $XXXX* for the Agreement Year commencing at July 1, 1995, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. __________________________________ * Confidential treatment has been requested. -6- 7 2. Within 60 days following the end of each Agreement Year, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income as respects such business. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A.1. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. 3. The minimum and deposit premium for subsequent Agreement Years will be based on the same percentage used to develop the minimum and deposit premium for the Agreement Year that commenced at July 1, 1995. 4. Should the Company elect to terminate this Agreement on a run-off basis, the Company will pay the Reinsurer a premium of XXXX%* against the unearned premium on Policies in force at the time of cancellation. B. As respects all other Casualty Business: 1. Within 45 days following the end of each calendar quarter, the Company will calculate and pay to the Reinsurer a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income as respects such business. 2. Should the Company elect to terminate this Agreement on a run-off basis, the Company will pay the Reinsurer a premium of XXXX%* against the unearned premium on Policies in force at the time of cancellation. ARTICLE 8 REPORTS Within 60 days following the end of each Agreement Year, the Company will furnish the Reinsurer with the following information: A. Gross Net Earned Premium Income of the Company for the Agreement Year. B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 9 DEFINITIONS A. The term "Casualty Business" as used in this Agreement shall mean all insurances and reinsurances written by the Company and classified by the Company as casualty. B. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include 90% of any Extra Contractual Obligation award (and expense) as defined in the EXTRA CONTRACTUAL OBLIGATIONS ARTICLE, 90% of any Excess of Policy Limits award as defined in the EXCESS __________________________________ * Confidential treatment has been requested. -7- 8 OF POLICY LIMITS ARTICLE, expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. C. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less the earned premium income (if any) paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. D. The term "Policy" as used in this Agreement shall mean any binder, policy or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. E. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or accident or loss or series of disasters or casualties or accidents or losses arising out of or caused by one event, except that: As respects an occupational or other disease or cumulative trauma suffered by an employee for which the employer is liable, such occupational or other disease or cumulative trauma shall be deemed a Loss Occurrence within the meaning hereof. If the Company shall, within the term of this Agreement, sustain more than one loss arising from an occupational or other disease or cumulative trauma of one specific kind or class suffered by more than one employee of one insured, such losses shall be deemed to have arisen from one Loss Occurrence. A loss as respects each employee affected by an occupational or other disease or cumulative trauma shall be deemed to have been sustained by the Company at the date when compensable disability of the employee commenced and not any other date. As respects Products Personal Injury and Products Property Damage Liability Insurance, it is understood that injuries to all persons and all damage to property of others occurring during a Policy period and proceeding from or traceable to the same causative agency shall be deemed to have arisen out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy period. For the purposes of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy period. The word "injuries" as used in this paragraph includes but is not limited to infection, contagion, poisoning or contamination. F. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1. Any period following termination of this Agreement in which the Reinsurer remains liable for losses arising out of Policies in force at the date of termination will be considered as part of the concluding Agreement Year. -8- 9 ARTICLE 10 INTERLOCKING The parties to this Agreement recognize that a Loss Occurrence, as defined herein, may involve multiple Policies, and by reason of run-off termination with this Agreement covering in-force Policies and other reinsurances assuming liability on new and renewal Policies, a portion of the Loss Occurrence may be ascribed to this Agreement and to other reinsurances covering on substantially the same basis. In such event, the Company's retention and the Reinsurer's limit of liability for the Loss Occurrence shall be proportionate, with the amount of Ultimate Net Loss to be retained by the Company under this Agreement being reduced to that percentage which the Company's settled losses attaching to this Agreement bear to the total of all the Company's settled losses contributing to the same Loss Occurrence. The Reinsurer's liability shall be arrived at in the same manner. ARTICLE 11 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for the purpose of this Agreement. ARTICLE 12 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 13 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an Outstanding Cash Advance as an alterative method of funding. -9- 10 ARTICLE 14 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1% from the amount of the return and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 15 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer, such advices to include any claim for which the reserve is 50% or more of the Company's retention and, irrespective of the reserve or of any question of liability or coverage, any claim falling within the following categories: A. Fatalities B. Bodily injuries involving: 1. brain injuries resulting in impairment of physical functions, 2. spinal injuries resulting in partial or total paralysis of upper or lower extremities, 3. amputations or permanent loss of use of upper or lower extremities, 4. severe burn cases, 5. all other injuries likely to result in a permanent disability rating of 50% or more. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. -10- 11 ARTICLE 16 EXCESS OF POLICY LIMITS In the event the Ultimate Net Loss includes an amount in excess of the Company's Policy limit, such amount, as provided for in the definition of Ultimate Net Loss, in excess of the Company's Policy limit shall be added to the amount of the Company's Policy limit, and the sum thereof shall be covered hereunder, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. ARTICLE 17 EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Company, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement, where the loss includes any Extra Contractual Obligations as provided in the definition of Ultimate Net Loss. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original Loss Occurrence. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE 18 DELAY, OMISSION OR ERROR Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. -11- 12 ARTICLE 19 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. ARTICLE 20 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 21 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A., will apply to this Agreement. ARTICLE 22 INSOLVENCY In the event of the insolvency of the Company the attached Insolvency Clause No. 21-01 will apply. ARTICLE 23 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -12- 13 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for _______% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: PARTICIPATING REINSURERS - -------------------------------------------------------------------------------- Reliance Reinsurance Corporation Reliance Insurance Company 20.00% St. Paul Re Management Corporation St. Paul Fire and Marine Insurance Company 25.00% Skandia America Reinsurance Corporation 25.00% TIG Reinsurance Company 20.00% Transatlantic Reinsurance Company 10.00% ------- Total 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -13- 14 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this ________ day of _____________________, 1995. RELIANCE INSURANCE COMPANY (THROUGH RELIANCE REINSURANCE CORP.) By ----------------------------------- (signature) ------------------------------------- (name) ------------------------------------- (title) -14- 15 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this _________day of ____________________________, 1995. ST. PAUL FIRE AND MARINE INSURANCE COMPANY By --------------------------------------- (signature) --------------------------------------- (name) --------------------------------------- (title) St. Paul Re Management Corporation Reinsurance Managers -15- 16 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this _________day of_____________________________, 1995. SKANDIA AMERICA REINSURANCE CORPORATION Wilmington, Delaware By: By: ----------------------------------- ----------------------------------- (signature) (signature) ----------------------------------- ----------------------------------- (name) (name) ----------------------------------- ----------------------------------- (title) (title) -16- 17 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Stamford, Connecticut, this _________day of_________________________, 1995. TIG REINSURANCE COMPANY Stamford, Connecticut By -------------------------------------- (signature) -------------------------------------- (name) -------------------------------------- (title) -17- 18 ARTICLE 24 PARTICIPATION: SECOND CASUALTY EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 10.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this __________day of____________________________, 1995. TRANSATLANTIC REINSURANCE COMPANY New York, New York By -------------------------------------- (signature) -------------------------------------- (name) -------------------------------------- (title) -18- 19 and in De Ridder, Louisiana, this ________day of________________________, 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CAUSALTY, INC. By -------------------------------------- (signature) -------------------------------------- (name) -------------------------------------- (title) SECOND CASUALTY EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -19- 20 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 21 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief to expenses first aid, incurred with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, arises out of the death or destruction bodily furnishing by an injury or property damage insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 22 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 23 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located 24 consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 25 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 26 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 27 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 28 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.9 7 THIRD CASUALTY EXCESS REINSURANCE AGREEMENT 1 THIRD CASUALTY EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies covering Casualty Business in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER A. The Reinsurer will be liable in respect of each and every Loss Occurrence, irrespective of the number and kinds of Policies involved, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $2,000,000 each and every Loss Occurrence, subject to a limit of liability to the Reinsurer of $3,000,000 each and every Loss Occurrence. B. Coverage under the terms of this Agreement is extended to include losses reported to Reinsurers during the period of July 1, 1995 to June 30, 1997 on losses which occurred during the period of May 1, 1986 to June 30, 1995. However, this section shall only apply to losses reported to Reinsurers after the expiration of the reporting period specified in the Agreements in force beginning and subsequent to May 1, 1986. Notwithstanding the terms and conditions of the original Agreement, any losses recoverable under this Section B. shall be subject to all the applicable terms and conditions of this Agreement. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreement(s) will not be deducted when establishing Ultimate Net Loss for purposes of this Article. Recoveries from the Company's Per Claimant Excess Reinsurance Agreement(s) will be deducted when establishing Ultimate Net Loss for purposes of this Article. ARTICLE 3 COMMENCEMENT AND TERMINATION This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect until terminated as provided in the following paragraph. Either the Company or the Reinsurer shall have the right to terminate this Agreement as of July 1, 1997, or any July 1 thereafter, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested. 2 Notwithstanding the July 1, 1997 anniversary, the Reinsurer will have the option to terminate this Agreement with 90 days' prior notice to July 1, 1996 for any of the following reasons: A. The sale, merger, or acquisition of the Company by or with any other party or the sale or change in controlling interest of the Company so as to produce a loss in control over conduct of the business by the current owners and/or management, except any change of control or ownership within any insurance holding company system which effects no change in the ultimate controlling party; B. A reduction of the paid-in capital of the Company for any reason whatsoever; C. The appointment of a receiver, administrator, trustee, or conservator for the Company or the commencement of any liquidation, rearrangement, or bankruptcy proceeding against the Company; D. Should the Company at any time reinsure its minimum or net retention on any class of business to which this Agreement applies, except as provided for in this Agreement; E. The reinsurance loss ratio exceeds 110% as of March 1, 1996. The loss ratio will be based on insurance premium paid and reinsurance losses incurred as of March 1, 1996. Upon termination of this Agreement, the entire liability of the Reinsurer for losses occurring subsequent to termination of this Agreement shall cease concurrently with the termination date of this Agreement. Notwithstanding the above, the Company has the option to terminate this Agreement on a run-off basis, in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months, plus odd time, not to exceed 15 months. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 WARRANTIES It is warranted for the purpose of this Agreement that: A. As respects Third Party Liability coverage, the maximum limit issued by the Company any one Policy is $1,000,000 combined single limit (1973 Occurrence Form) or so deemed; or alternatively, $1,000,000 per occurrence/$3,000,000 general annual aggregate (1986 Occurrence Form), or so deemed. It is understood as respects the new ISO Commercial General Liability Policy, effective January 1, 1986, that the General Annual Aggregate limit section shall be protected hereunder on an each Loss Occurrence basis. B. As respects statutory Workers' Compensation, the Company will maintain Per Claimant Excess Reinsurance coverage of $3,000,000 excess $2,000,000, with an annual aggregate recovery limit of $20,000,000 for each Agreement Year and $5,000,000 excess $5,000,000 with an annual aggregate recovery limit of $20,000,000 for each Agreement Year during the Agreement period, or so deemed. -2- 3 ARTICLE 6 EXCLUSIONS This Agreement does not cover: A. As respects all business: 1. Aggregate Excess Insurance. 2. a. Atomic Energy and Nuclear Risks--all operations and projects as per Nuclear Incident Exclusion Clauses - Liability - Reinsurance, Nos. 08-31.1 (U.S.A.) and 08-32.1 (Canada) in respect of all business other than Workers' Compensation and Employers' Liability. b. Atomic Energy and Nuclear Risks--all operations and projects in respect of Workers' Compensation and Employers' Liability business. 3. Contamination, Seepage and Pollution, as per the attached clause. 4. Riot and civil commotion. 5. Reinsurance assumed, except: a. Agency reinsurance (per risk or portfolio) is not excluded. b. Reinsurance of an occasional individual risk or Policy is not excluded, provided the Company is not operating as a professional reinsurer. c. Reinsurance on risks where all servicing, including claims handling, is done by the Company. 6. Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. 7. 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, howsoever 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. 8. Aggregate Workers' Compensation. 9. Policies issued as excess coverage over other insurance or over a self-insured retention except on risks where all servicing, including claims handling, is done by the Company. 10. War as excluded by the Standard War Exclusion Clause. 11. Risks with known asbestosis, black lung or brown lung exposures. Also, risks with silicosis exposures unless such exposure emanates from an incidental part of the insureds operations. -3- 4 For the purposes of this exclusion, the term "incidental" shall mean less than 10% of any employees of an insured's time is engaged in functions involving a silicosis exposure. 12. Federal employees. 13. Financial Guarantee and Insolvency. B. As respects business other than Workers' Compensation and Employers' Liability: 1. Advertisers Liability--monoline. 2. Airports--all operations. 3. Amusement parks, carnivals and rides. 4. Amusement devices--manufacturing liability. 5. Anhydrous ammonia--distributing. 6. Animal shows and circuses. 7. Antifreeze products liability. 8. Asylums. 9. Automobile racing of any kind. 10. Automobile racing spectator liability. 11. Automobile third party liability. 12. Aviation and aircraft products and operations. 13. Burglar alarm contractors and manufacturers. 14. Chemical manufacturing, unless incidental to the insured's overall operations. 15. Construction, repair or maintenance of bridges, conduits, electric power lines, dams or reservoirs, jetties or breakwaters, oil or gas pipelines, railroads, ships or boats, subways and tunnels. 16. Demolition--marine. 17. Dike or revetment construction. 18. Drilling or redrilling of oil or gas wells. 19. Explosives of any kind or nature. 20. Fire alarm--products liability. 21. Fire protection systems--all operations. 22. Grain elevators. -4- 5 23. Halfway or awareness houses. 24. Homes or schools for the mentally retarded. 25. Marine or offshore operations. 26. Motorcycle distributors. 27. Oil or gas--all classifications. 28. Oil or gas lease operators--all classifications. 29. Ore dock operations. 30. Products recall liability. 31. Professional Indemnity and/or Errors and Omissions: architects, engineers, accountants, EDP firms, real estate or insurance agents, surveyors, travel agents, and all other miscellaneous. 32. Professional Liability: blood banks, hospitals, clinics, lawyers, physicians, surgeons, dentists and nurses. 33. Railroads--all classifications. 34. Riding academies. 35. School boards liability. 36. Scuba equipment rental. 37. Scuba equipment manufacturing or distribution. 38. Scuba schools or instructors. 39. Ship building--all classifications. 40. Ski lifts, tows--including ski rental or sales. 41. Steel tanks or pressure vessel manufacturing. 42. Stevedoring and/or longshoremen--all operations. 43. Structural steel manufacturer or importer. 44. Toy manufacturing. 45. Ocean Marine and all forms of legal liability arising out of the operation or navigation of ships or vessels except for the operation of small pleasure craft under 28 feet in length. 46. Warehousemen's legal liability. 47. D & O (except for condominium D & O). 48. Day care centers. -5- 6 49. Electric or gas utilities--all operations including blackouts and brownouts. 50. Equipment rental. 51. Fire legal liability coverage exceeding limits of $500,000 per insured. 52. Mining including underground mining, surface mining and quarrying. 53. Municipalities. 54. Pharmaceutical manufacturers. 55. Products Liability coverage relating to the production, manufacture, distribution, or sale of any of the following: a. Aircraft and instrumentation therefor, including any component parts of airframes and engines, and any other on-board parts or accessories that directly affect the safety, flying characteristics or communication capability of aircraft; b. Cosmetics, hair or skin preparations; c. Drugs, medicines and pharmaceutical products except by retail drugstores or drug departments of supermarket and discount stores; d. Explosives or fireworks; e. Agricultural business, including but not limited to pesticides, herbicides, fertilizers; f. Animal feed. 56. Liquor Law Liability, except for Host Liquor Liability endorsements to General Liability Policies and Liquor Law Liability under endorsements attached to General Liability Policies. 57. Hotels or motels over seven stories in height unless fire restrictive construction and equipped with smoke detectors in all rooms and public hallways. Such reinsurance as would have been afforded but for the foregoing exclusions will apply to Policies issued to insureds regularly engaged in other occupations or activities where the prohibited operation is only incidental to the general conduct of the insured's business, or to Policies issued under an Assigned Risk Plan, or similar mandatory plan (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded). Errors and omissions notwithstanding, if without the knowledge and contrary to the instructions of its supervisory underwriting personnel, the Company is bound on a risk specifically excluded hereunder, or by an existing insured extending its operations (other than Exclusion Nos. A.2. (a. and b.), A.3., A.7., A.10., A.13. and B.45., which are absolutely excluded), such reinsurance as would have been afforded but for the exclusion shall apply for a period of 30 days following receipt by said underwriting personnel of knowledge thereof. -6- 7 ARTICLE 7 PREMIUM A. The Company will pay the Reinsurer a deposit premium of $XXXX* for the Agreement Year commencing at July 1, 1995, payable quarterly in advance in the amount of $XXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. B. Within 60 days following the end of each Agreement Year, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXX*. C. The minimum and deposit premium for subsequent Agreement Years will be based on the same percentage used to develop the minimum and deposit premium for the Agreement year that commenced at July 1, 1995. D. Should the Company elect to terminate this Agreement on a run-off basis, the Company will pay the Reinsurer a premium of XXXX* against the unearned premium on Policies in force at the time of cancellation. ARTICLE 8 REINSTATEMENT As respects General Liability business, loss payments under this Agreement will reduce the limit of coverage afforded by the amounts paid, but the limit of coverage will be reinstated from the time of the occurrence of the loss and for each amount so reinstated the Company agrees to pay an additional premium calculated at pro rata of the Reinsurer's premium for the Agreement Year that the loss occurred, being pro rata only as to the fraction of the face value of this Agreement (i.e., the fraction of $3,000,000) reinstated. Nevertheless, the Reinsurer's liability as respects General Liability business hereunder shall never exceed $3,000,000 in respect of any one Loss Occurrence and, subject to the limit in respect of any one Loss Occurrence, shall be further limited to $6,000,000 as respects each Agreement Year during the Agreement period by reason of any and all claims arising hereunder. ARTICLE 9 REPORTS Within 60 days following the end of each Agreement Year, the Company will furnish the Reinsurer with the following information: A. Gross Net Earned Premium Income of the Company for the Agreement Year; B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. __________________________________ * Confidential treatment has been requested. -7- 8 ARTICLE 10 DEFINITIONS A. The term "Casualty Business" as used in this Agreement shall mean all insurances and reinsurances written by the Company and classified by the Company as casualty. B. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include 90% of any Extra Contractual Obligation award (and expense) as defined in the EXTRA CONTRACTUAL OBLIGATION ARTICLE, 90% of any Excess of Policy Limits award as defined in the EXCESS OF POLICY LIMITS ARTICLE, expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. C. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less the earned premium income (if any) paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. D. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. E. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or accident or loss or series of disasters or casualties or accidents or losses arising out of or caused by one event, except that: As respects an occupational or other disease or cumulative trauma suffered by an employee for which the employer is liable, such occupational or other disease or cumulative trauma shall be deemed a Loss Occurrence within the meaning hereof. If the Company shall, within the term of this Agreement, sustain more than one loss arising from an occupational or other disease or cumulative trauma of one specific kind or class suffered by more than one employee of one insured, such losses shall be deemed to have arisen from one Loss Occurrence. A loss as respects each employee affected by an occupational or other disease or cumulative trauma shall be deemed to have been sustained by the Company at the date when compensable disability of the employee commenced and not any other date. As respects Products Personal Injury and Products Property Damage Liability Insurance, it is understood that injuries to all persons and all damage to property of others occurring during a Policy period and proceeding from or traceable to the same causative agency shall be deemed to have arisen out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date -8- 9 of the Policy period. For the purposes of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy period. The word "injuries" as used in this paragraph includes but is not limited to infection, contagion, poisoning or contamination. F. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1. Any period following termination of this Agreement in which the Reinsurer remains liable for losses arising out of Policies in force at the date of termination will be considered as part of the concluding Agreement Year. ARTICLE 11 INTERLOCKING The parties to this Agreement recognize that a Loss Occurrence, as defined herein, may involve multiple Policies, and by reason of run-off termination with this Agreement covering in-force Policies and other reinsurances assuming liability on new and renewal Policies, a portion of the Loss Occurrence may be ascribed to this Agreement and to other reinsurances covering on substantially the same basis. In such event, the Company's retention and the Reinsurer's limit of liability for the Loss Occurrence shall be proportionate, with the amount of Ultimate Net Loss to be retained by the Company under this Agreement being reduced to that percentage which the Company's settled losses attaching to this Agreement bear to the total of all the Company's settled losses contributing to the same Loss Occurrence. The Reinsurer's liability shall be arrived at in the same manner. ARTICLE 12 COMMUTATION It is understood that at any time following the termination of this Agreement, the Company and the Reinsurer can mutually agree to commute any or all reinsurance incurred losses. Should both parties agree to commutation, the Company shall submit a statement listing amounts paid, and reserved, in respect of all reinsurance incurred losses. This statement shall form the basis of a final agreed value for all such losses for all reinsurers. The amounts of reserves contained therein shall be determined by employing one of the following alternatives: A. A calculation based on the following criteria: 1. In respect of all "index linked" indemnity benefits, annuity values shall be calculated based upon applicable statutes. 2. In respect of all unindexed indemnity benefits, annuity values shall be calculated based upon an annual discount rate of 5%. 3. In respect of all future medical costs, an annuity calculation shall be based upon the Company's evaluation of long term medical care and rehabilitation requirements, using an annual discount rate of 0%, and an annual escalation rate of 2%. 4. Where applicable, impaired life expectancy, survivors life expectancy, as well as remarriage probability shall be reflected in the calculation by employing tables required by applicable statutes. -9- 10 B. The Company may determine the agreed value by purchasing (or obtaining a quotation for) an annuity from an annuity carrier who is "A+" Class VIII or better rated by A.M. Best. This statement, duly signed by the Company, shall then be deemed to be the full and final statement of all known and unknown losses and the Reinsurer shall promptly pay the Company any amounts that may be shown to be due. Notwithstanding the above, such statement (whether involving payment of claims under this Agreement or not) shall constitute a complete release of liability of the Reinsurers in respect of the term of this Agreement in respect of all known and unknown losses. This Commutation Clause shall survive the termination of this Agreement. ARTICLE 13 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for the purpose of this Agreement. ARTICLE 14 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 15 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an outstanding cash advance or funds held in trust as an alternative method of funding. ARTICLE 16 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. -10- 11 Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1% from the amount of the return and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 17 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. ARTICLE 18 EXCESS OF POLICY LIMITS In the event the Ultimate Net Loss includes an amount in excess of the Company's Policy limit, such amount, as provided for in the definition of Ultimate Net Loss, in excess of the Company's Policy limit shall be added to the amount of the Company's Policy limit, and the sum thereof shall be covered hereunder, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. ARTICLE 19 EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Company, subject to the Reinsurer's limit of liability appearing in the COVER ARTICLE of this Agreement, where the loss includes any Extra Contractual Obligations as provided in the -11- 12 definition of Ultimate Net Loss. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original Loss Occurrence. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE 20 DELAY, OMISSION OR ERROR Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE 21 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. ARTICLE 22 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 23 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A., will apply to this Agreement. ARTICLE 24 INSOLVENCY In the event of the insolvency of the Company the attached Insolvency Clause No. 21-01 will apply. -12- 13 ARTICLE 25 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -13- 14 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for _______% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: PARTICIPATING REINSURERS - -------------------------------------------------------------------------------- Reliance Reinsurance Corporation Reliance Insurance Company 20.00% St. Paul Re Management Corporation St. Paul Fire and Marine Insurance Company 25.00% Skandia America Reinsurance Corporation 25.00% TIG Reinsurance Company 20.00% Transatlantic Reinsurance Company 10.00% ------- Total 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -14- 15 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of , 1995. RELIANCE INSURANCE COMPANY (THROUGH RELIANCE REINSURANCE CORP.) By ----------------------------------- (signature) ------------------------------------- (name) ------------------------------------- (title) -14- 16 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. ST. PAUL FIRE AND MARINE INSURANCE COMPANY By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) St. Paul Re Management Corporation Reinsurance Managers -14- 17 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. SKANDIA AMERICA REINSURANCE CORPORATION Wilmington, Delaware By By ----------------------------------- ---------------------------------- (signature) (signature) ----------------------------------- ---------------------------------- (name) (name) ----------------------------------- ---------------------------------- (title) (title) -14- 18 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Stamford, Connecticut, this day of , 1995. TIG REINSURANCE COMPANY Stamford, Connecticut By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) -14- 19 ARTICLE 26 PARTICIPATION: THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 10.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In New York, New York, this day of , 1995. TRANSATLANTIC REINSURANCE COMPANY New York, New York By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) -14- 20 and in De Ridder, Louisiana, this day of ,1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -15- 21 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or with respect destruction bodily injury or property damage to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 22 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief to expenses incurred first aid, with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 23 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 24 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of 25 or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 26 SEEPAGE AND POLLUTION CLAUSE As respects Policies classified by the Company as Commercial General Liability, this Agreement does not cover Liability arising out of the actual alleged or threatened discharge, dispersal, release or escape of pollutants: 1. At or from any premise owned, rented or occupied by the insured; 2. At or from any site or location used by the insured for the handling, storage, disposal, processing or treatment of waste; 3. Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by the insured or by any person or organization for whom the insured may be legally responsible. 4. At or from any site or location on which the insured or any contractors or subcontractors working directly or indirectly on behalf of the insured are performing operations: a. If the pollutants are brought on or to the site or location in connection with such operations; or b. If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants; including any loss, cost, or expense arising out of any governmental directive or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. The term "pollutants" as used herein shall mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, including materials to be recycled, reconditioned or reclaimed. However, this exclusion shall not apply to Bodily Injury or Property Damage Liability caused by heat, smoke, or fumes from a hostile fire. As used herein, the term "hostile fire" shall mean a fire which becomes uncontrollable or breaks out from where it was intended to be. 27 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses 28 plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 29 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 30 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 31 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.10 8 FIRST WORKERS' COMPENSATION PER OCCURENCE 1 FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies classified by the Company as statutory Workers' Compensation business including Longshore and Harbor Workers' Compensation Act in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, irrespective of the number of Policies involved, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $5,000,000 each and every Loss Occurrence, subject to a limit of liability to the Reinsurer of $15,000,000 each and every Loss Occurrence. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreement(s) will not be deducted when establishing Ultimate Net Loss for purposes of this Agreement. Recoveries from the Company's Per Claimant Excess Reinsurance Agreement(s) will be deducted when establishing Ultimate Net Loss for purposes of this Agreement. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. ARTICLE 3 TERM This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect for 24 months, expiring 12:01 a.m., Central Standard Time, July 1, 1997. Notwithstanding the July 1, 1997 expiration date, the Company or the Reinsurer shall have the option to terminate this Agreement as of July 1, 1996, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested, for either of the following reasons: A. The Reinsurer's ability to underwrite the subject business is materially reduced; B. There is a material change in the Company's underwriting policy. 2 Upon expiration or termination of this Agreement, the Reinsurer's liability will cease for all losses occurring subsequent to the date of expiration or termination. Notwithstanding the above, the Company has the option to have this Agreement expire or terminate on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months, plus odd time, not to exceed 15 months in all from the date of expiration or termination of this Agreement. Terms for this run-off coverage are to be agreed at the time of expiration or termination of this Agreement. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 WARRANTY It is warranted for the purpose of this Agreement that as respects statutory Workers' Compensation, the maximum amount applicable to the Ultimate Net Loss shall be $5,000,000 any one claimant. ARTICLE 6 EXCLUSIONS This Agreement does not cover: A. Employers' Liability B. Occupational Disease unless arising from a single event of not more than 48 hours' duration and which also involves traumatic injury or death, as specified in the definition of Loss Occurrence. C. Cumulative Trauma. D. Extra Contractual Obligations E. Jones Act. F. Nuclear Accidents. G. Insolvency Funds, Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. H. Assumed Reinsurance, except: 1. Agency Reinsurance until natural expiration of policies -2- 3 2. Reinsurance on an occasional individual risk where all underwriting and servicing, including claims handling, is done by the Company. I. War. J. Professional Sports Teams. K. Commercial Airlines (airline personnel only). ARTICLE 7 PREMIUM A. The Company will pay the Reinsurer a deposit premium of $XXXX* for the first Agreement Year during the Agreement period, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996 and April 1, 1996. B. Within 60 days following the expiration of the first Agreement Year during the Agreement period, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. C. The minimum and deposit premium for the subsequent Agreement Year will be based on the same percentage used to develop the minimum and deposit premium for the first Agreement Year. ARTICLE 8 REINSTATEMENT Loss payments under this Agreement will reduce the limit of coverage afforded by the amounts paid, but the limit of coverage will be reinstated from the time of the occurrence of the loss and for each amount so reinstated the Company agrees to pay an additional premium calculated at pro rata of the Reinsures premium for the Agreement Year that the loss occurred, being pro rata only as to the fraction of the face value of this Agreement (i.e., the fraction of $15,000,000) reinstated. Nevertheless, the Reinsurer's liability hereunder shall never exceed $15,000,000 in respect of any one Loss Occurrence and, subject to the limit in respect of any one Loss Occurrence, shall be further limited to $30,000,000 as respects each Agreement Year during the Agreement period by reason of any and all claims arising hereunder. ARTICLE 9 REPORTS Within 60 days following the expiration of each Agreement Year during the Agreement period, the Company will furnish the Reinsurer with the following information: __________________________________ * Confidential treatment has been requested. -3- 4 A. Gross Net Earned Premium Income of the Company for each Agreement Year during the Agreement period; B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 10 DEFINITIONS A. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. B. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or accident or loss or series of disasters or casualties or accidents or losses arising out of or caused by one event, except that: As respects an occupational or other disease suffered by an employee for which the employer is liable, such occupational or other disease shall not be covered under this Agreement unless as a result of an event of not exceeding 48 hours' duration, and which also involves traumatic injury or death. For purposes of this Agreement, a 48 hour event will be deemed as one loss occurrence. C. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1 during the Agreement period. D. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less returns and cancellations and less the earned premium income (if any) paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. E. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. -4- 5 ARTICLE 11 COMMUTATION It is understood that at any time following the expiration of the Agreement period, but in no case later than June 30, 2002, the Company shall submit a statement listing amounts paid, and reserved, in respect of all reinsurance incurred losses. This statement shall form the basis of a final agreed value for all such losses for all reinsurers. The amounts of reserves contained therein shall be determined by employing one of the following alternatives: A. A calculation based on the following criteria: 1. In respect of all "index linked" indemnity benefits, annuity values shall be calculated based upon applicable statutes. 2. In respect of all unindexed indemnity benefits annuity values shall be calculated based upon an annual discount rate of 5%. 3. In respect of all future medical costs, an annuity calculation shall be based upon the Company's evaluation of long term medical care and rehabilitation requirements, using an annual discount rate of 0%, and an annual escalation rate of 2%. 4. Where applicable, impaired life expectancy, survivors life expectancy, as well as remarriage probability shall be reflected in the calculation by employing tables required by applicable statutes. B. The Company may determine the agreed value by purchasing (or obtaining a quotation for) an annuity from an annuity carrier who is "A+" Class VIII or better rated by A.M. Best. This statement, duly signed by the Company, shall then be deemed to be the full and final statement of all known and unknown losses and the Reinsurer shall promptly pay the Company any amounts that may be shown to be due. Notwithstanding the above, such statement (whether involving payment of claims under this Agreement or not) shall constitute a complete release of liability of the Reinsurers in respect of the term of this Agreement in respect of all known and unknown losses. Notwithstanding the above, the Company and Reinsurer by mutual agreement, can delay the commutation of any named loss or losses beyond June 30, 2002. Under such circumstances, and prior to June 30, 2002, the Company will advise the Reinsurer of losses that should not be subject to commutation at June 30, 2002. The Reinsurer will continue to carry an appropriate reserve on its books and/or pay any recoveries under this Agreement until such time as an agreement to commute is reached or until the loss or losses are paid and settled. This Commutation Clause shall survive the expiration or termination of this Agreement. ARTICLE 12 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that the amount of the Reinsurer's liability hereunder in respect of any loss or losses shall -5- 6 not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for Purposes of this Agreement. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 14 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an outstanding cash advance or funds held in trust as an alternative method of funding. ARTICLE 15 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1% from the amount of the return and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 16 INTERLOCKING The parties to this Agreement recognize that a Loss Occurrence, as defined herein, may involve multiple Policies, and, by reason of this Agreement expiring or terminating on a run-off basis as respects in-force Policies and other reinsurances assuming liability on new and renewal Policies, a portion of the Loss Occurrence may be ascribed to this Agreement and to other reinsurances covering on substantially the same basis. In such event, the Company's retention and the Reinsurer's limit of liability for the Loss Occurrence shall be proportionate, with the amount of Ultimate Net Loss to be retained by the Company under this Agreement being -6- 7 reduced to that percentage which the Company's settled losses attaching to this Agreement bear to the total of all the Company's settled losses contributing to the same Loss Occurrence. The Reinsurer's liability shall be arrived at in the same manner. ARTICLE 17 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001 for the first Agreement Year and June 30, 2002 for the second Agreement Year during the term of this Agreement. ARTICLE 18 DELAY, OMISSION OR ERROR Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Nevertheless, this Article shall not apply with respect to losses arising out of occurrences reported to the Reinsurer beyond the period required to afford coverage in accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE. ARTICLE 19 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. -7- 8 ARTICLE 20 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 21 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A., will apply to this Agreement. ARTICLE 22 INSOLVENCY In the event of the insolvency of the Company the attached Insolvency Clause No. 21-01 will apply. ARTICLE 23 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -8- 9 ARTICLE 24 PARTICIPATION: FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for _______% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: PARTICIPATING REINSURERS - -------------------------------------------------------------------------------- CIGNA Re Corporation Indemnity Insurance Company of North America 25.00% IOA Re Lincoln National Life Insurance Company 20.00% Northwestern National Life Insurance Company 25.00% Reinsurance Management Services, Inc. ------ Federal Insurance Company 30.00% Total 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -9- 10 ARTICLE 24 PARTICIPATION: FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this ______ day of ______________________, 1995. CIGNA RE CORPORATION for and on behalf of INDEMNITY INSURANCE COMPANY OF NORTH AMERICA By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) -9- 11 ARTICLE 24 PARTICIPATION: FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this ______ day of ______________________, 1995. IOA RE INC. for and on behalf of LINCOLN NATIONAL LIFE INSURANCE COMPANY Fort Wayne, Indiana By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) -9- 12 ARTICLE 24 PARTICIPATION: FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Minneapolis, Minnesota, this ______ day of ______________________, 1995. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY Minneapolis, Minnesota By By ----------------------------------- ----------------------------------- (signature) (signature) ----------------------------------- ----------------------------------- (Name) (Name) ----------------------------------- ----------------------------------- (title) (title) -9- 13 ARTICLE 24 PARTICIPATION: FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1895 This Agreement obligates the Reinsurer for 30.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Wayne, New Jersey, this ______ day of ______________________, 1995. REINSURANCE MANAGEMENT SERVICES, INC. for and on behalf of FEDERAL INSURANCE COMPANY Indianapolis, Indiana By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) -9- 14 and in De Ridder, Louisiana, this ______ day of ______________________, 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) FIRST WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 15 and in De Ridder, Louisiana, this ______ day of ______________________, 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ----------------------------------- (signature) ----------------------------------- (name) ----------------------------------- (title) FIRST WORKER'S COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 16 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction with respect bodily injury or property damage to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 17 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief to expenses incurred first aid, with respect to bodily injury, sickness, disease or death resulting from the bodily injury hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 18 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 19 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of 20 or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 21 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses 22 plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 23 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 24 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 25 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.11 9 SECOND WORKERS' COMPENSATION PER OCCURENCE 1 SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies classified by the Company as statutory Workers' Compensation business including Longshore and Harbor Workers' Compensation Act in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, irrespective of the number of Policies involved, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $20,000,000 each and every Loss Occurrence, subject to a limit of liability to the Reinsurer of $30,000,000 each and every Loss Occurrence. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreement(s) and Workers' Compensation Per Occurrence Excess Reinsurance Agreement(s) will not be deducted when establishing Ultimate Net Loss for purposes of this Agreement. Recoveries from the Company's Per Claimant Excess Reinsurance Agreement(s) will be deducted when establishing Ultimate Net Loss for purposes of this Agreement. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. ARTICLE 3 TERM This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect for 24 months, expiring 12:01 a.m., Central Standard Time, July 1, 1997. Notwithstanding the July 1, 1997 expiration date, the Company or the Reinsurer shall have the option to terminate this Agreement as of July 1, 1996, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested, for either of the following reasons: A. The Reinsurer's ability to underwrite the subject business is materially reduced; B. There is a material change in the Company's underwriting policy. 2 Upon expiration or termination of this Agreement, the Reinsurer's liability will cease for all losses occurring subsequent to the date of expiration or termination. Notwithstanding the above, the Company has the option to have this Agreement expire or terminate on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months, plus odd time, not to exceed 15 months in all from the date of expiration or termination of this Agreement. Terms for this run-off coverage are to be agreed at the time of expiration or termination of this Agreement. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 WARRANTY It is warranted for the purpose of this Agreement that as respects statutory Workers' Compensation, the maximum amount applicable to the Ultimate Net Loss shall be $5,000,000 any one claimant. ARTICLE 6 EXCLUSIONS This Agreement does not cover: A. Employers' Liability B. Occupational Disease unless arising from a single event of not more than 48 hours' duration and which also involves traumatic injury or death, as specified in the definition of Loss Occurrence. C. Cumulative Trauma. D. Extra Contractual Obligations E. Jones Act. F. Nuclear Accidents. G. Insolvency Funds, Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. H. Assumed Reinsurance, except: 1. Agency Reinsurance until natural expiration of policies -2- 3 2. Reinsurance on an occasional individual risk where all underwriting and servicing, including claims handling, is done by the Company. I. War. J. Professional Sports Teams. K. Commercial Airlines (airline personnel only). ARTICLE 7 PREMIUM A. The Company will pay the Reinsurer a deposit premium of $XXXX* for the first Agreement Year during the Agreement period, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. B. Within 60 days following the expiration of the first Agreement Year during the Agreement period, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. C. The minimum and deposit premium for the subsequent Agreement Year will be based on the same percentage used to develop the minimum and deposit premium for the first Agreement Year. ARTICLE 8 REINSTATEMENT Loss payments under this Agreement will reduce the limit of coverage afforded by the amounts paid, but the limit of coverage will be reinstated from the time of the occurrence of the loss and for each amount so reinstated the Company agrees to pay an additional premium calculated at pro rata of the Reinsurer's premium for the Agreement Year that the loss occurred, being pro rata only as to the fraction of the face value of this Agreement (i.e., the fraction of $30,000,000) reinstated. Nevertheless, the Reinsurer's liability hereunder shall never exceed $30,000,000 in respect of any one Loss Occurrence and, subject to the limit in respect of any one Loss Occurrence, shall be further limited to $60,000,000 as respects each Agreement Year during the Agreement period by reason of any and all claims arising hereunder. ARTICLE 9 REPORTS Within 60 days following the expiration of each Agreement Year during the Agreement period, the Company will furnish the Reinsurer with the following information: - ---------------------------------- * Confidential treatment has been requested. -3- 4 A. Gross Net Earned Premium Income of the Company for each Agreement Year during the Agreement period; B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 10 DEFINITIONS A. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. B. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or accident or loss or series of disasters or casualties or accidents or losses arising out of or caused by one event, except that: As respects an occupational or other disease suffered by an employee for which the employer is liable, such occupational or other disease shall not be covered under this Agreement unless as a result of an event of not exceeding 48 hours' duration, and which also involves traumatic injury or death. For purposes of this Agreement, a 48 hour event will be deemed as one loss occurrence. C. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1 during the Agreement period. D. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less returns and cancellations and less the earned premium income (if any) paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. E. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. -4- 5 ARTICLE 11 COMMUTATION It is understood that at any time following the expiration of the Agreement period, but in no case later than June 30, 2002, the Company shall submit a statement listing amounts paid, and reserved, in respect of all reinsurance incurred losses. This statement shall form the basis of a final agreed value for all such losses for all reinsurers. The amounts of reserves contained therein shall be determined by employing one of the following alternatives: A. A calculation based on the following criteria: 1. In respect of all "index linked" indemnity benefits, annuity values shall be calculated based upon applicable statutes. 2. In respect of all unindexed indemnity benefits annuity values shall be calculated based upon an annual discount rate of 5%. 3. In respect of all future medical costs, an annuity calculation shall be based upon the Company's evaluation of long term medical care and rehabilitation requirements, using an annual discount rate of 0%, and an annual escalation rate of 2%. 4. Where applicable, impaired life expectancy, survivors life expectancy, as well as remarriage probability shall be reflected in the calculation by employing tables required by applicable statutes. B. The Company may determine the agreed value by purchasing (or obtaining a quotation for) an annuity from an annuity carrier who is "A+" Class VIII or better rated by A.M. Best. This statement, duly signed by the Company, shall then be deemed to be the full and final statement of all known and unknown losses and the Reinsurer shall promptly pay the Company any amounts that may be shown to be due. Notwithstanding the above, such statement (whether involving payment of claims under this Agreement or not) shall constitute a complete release of liability of the Reinsurers in respect of the term of this Agreement in respect of all known and unknown losses. Notwithstanding the above, the Company and Reinsurer by mutual agreement, can delay the commutation of any named loss or losses beyond June 30, 2002. Under such circumstances, and prior to June 30, 2002, the Company will advise the Reinsurer of losses that should not be subject to commutation at June 30, 2002. The Reinsurer will continue to carry an appropriate reserve on its books and/or pay any recoveries under this Agreement until such time as an agreement to commute is reached or until the loss or losses are paid and settled. This Commutation Clause shall survive the expiration or termination of this Agreement. ARTICLE 12 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that the amount of the Reinsurer's liability hereunder in respect of any loss or losses shall -5- 6 not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for purposes of this Agreement. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 14 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an outstanding cash advance or funds held in trust as an alternative method of funding. ARTICLE 15 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1% from the amount of the return and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 16 INTERLOCKING The parties to this Agreement recognize that a Loss Occurrence, as defined herein, may involve multiple Policies, and, by reason of this Agreement expiring or terminating on a run-off basis as respects in-force Policies and other reinsurances assuming liability on new and renewal Policies, a portion of the Loss Occurrence may be ascribed to this Agreement and to other reinsurances covering on substantially the same basis. In such event, the Company's retention and the Reinsurer's limit of liability for the Loss Occurrence shall be proportionate, with the amount of Ultimate Net Loss to be retained by the Company under this Agreement being reduced to that percentage which the Company's settled losses attaching to this Agreement bear to the total of -6- 7 all the Company's settled losses contributing to the same Loss Occurrence. The Reinsurer's liability shall be arrived at in the same manner. ARTICLE 17 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the term of this Agreement. ARTICLE 18 DELAY, OMISSION OR ERROR Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Nevertheless, this Article shall not apply with respect to losses arising out of occurrences reported to the Reinsurer beyond the period required to afford coverage in accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE. ARTICLE 19 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. -7- 8 ARTICLE 20 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 21 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A., will apply to this Agreement. ARTICLE 22 INSOLVENCY In the event of the insolvency of the Company the attached Insolvency Clause No. 21-01 will apply. ARTICLE 23 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -8- 9 ARTICLE 24 PARTICIPATION: SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for ____________% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS ------------------------------------------------------------------------- CIGNA Re Corporation Indemnity Insurance Company of North America 25.00% IOA Re Lincoln National Life Insurance Company 20.00% Northwestern National Life Insurance Company 25.00% Reinsurance Management Services, Inc. Federal Insurance Company 30.00% ------- Total 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -9- 10 ARTICLE 24 PARTICIPATION: SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of ,1995. CIGNA RE CORPORATION for and on behalf of INDEMNITY INSURANCE COMPANY OF NORTH AMERICA By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -9- 11 ARTICLE 24 PARTICIPATION: SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of ,1995. IOA RE INC. for and on behalf of LINCOLN NATIONAL LIFE INSURANCE COMPANY Fort Wayne, Indiana By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -9- 12 ARTICLE 24 PARTICIPATION: SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Minneapolis, Minnesota, this day of , 1995. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY Minneapolis, Minnesota By By ----------------------------------- --------------------------------------- (signature) (signature) ----------------------------------- --------------------------------------- (name) (name) ----------------------------------- --------------------------------------- (title) (title) -9- 13 ARTICLE 24 PARTICIPATION: SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 30.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Wayne, New Jersey, this day of , 1995. REINSURANCE MANAGEMENT SERVICES, INC. for and on behalf of: FEDERAL INSURANCE COMPANY Indianapolis, Indiana By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -9- 14 and in De Ridder, Louisiana, this day of , 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 15 and in De Ridder, Louisiana, this day of , 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) SECOND WORKERS' COMPENSATION PER OCCURRENCE EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 16 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 17 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief first aid, to expenses incurred with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 18 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 19 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of 20 or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 21 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 22 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 23 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 24 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.12 10 FIRST PER CLAIMANT WORKERS' COMPENSATION 1 FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC. both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies classified by the Company as statutory Workers' Compensation business including Longshore and Harbor Workers' Compensation Act in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, each and every person, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $2,000,000 each and every Loss Occurrence, each and every person, subject to a limit of liability to the Reinsurer of $3,000,000 each and every Loss Occurrence, each and every person and further subject to an annual aggregate recovery limit of liability to the Reinsurer of $20,000,000 for each Agreement Year during the Agreement period for any and all losses under this Agreement. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreements will not be deducted when establishing Ultimate Net Loss for purposes of this Agreement. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. ARTICLE 3 TERM This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect for 24 months, expiring 12:01 a.m., Central Standard Time, July 1, 1997. Notwithstanding the July 1, 1997 expiration date, the Company or the Reinsurer shall have the option to terminate this Agreement as of July 1, 1996, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested, for either of the following reasons: A. The Reinsurer's ability to underwrite the subject business is materially reduced; B. There is a material change in the Company's underwriting policy. 2 Upon expiration or termination of this Agreement, the Reinsurer's liability will cease for all losses occurring subsequent to the date of expiration or termination. Notwithstanding the above, the Company has the option to have this Agreement expire or terminate on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months, plus odd time, not to exceed 15 months in all from the date of the expiration or termination of this Agreement. Terms for this run-off coverage to be agreed at the time of expiration or termination of this Agreement. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 EXCLUSIONS This Agreement does not cover: A. Employers' Liability B. Occupational Disease unless arising from a single event of not more than 48 hours' duration and which also involves traumatic injury or death, as specified in the definition of Loss Occurrence. C. Cumulative Trauma. D. Extra Contractual Obligations E. Jones Act. F. Nuclear Accidents. G. Insolvency Funds, Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. H. Assumed Reinsurance, except: 1. Agency Reinsurance until natural expiration of policies 2. Reinsurance on an occasional individual risk where all underwriting and servicing, including claims handling, is done by the Company. I. War. J. Professional Sports Teams. K. Commercial Airlines (airline personnel only). -2- 3 ARTICLE 6 PREMIUM A. The Company will pay the Reinsurer a deposit premium of $XXXX* for the first Agreement Year during the Agreement period, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. B. Within 60 days following the expiration of the first Agreement Year during the Agreement period, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. C. The minimum and deposit premium for the subsequent Agreement Year will be based on the same percentage used to develop the minimum and deposit premium for the first Agreement Year. ARTICLE 7 REPORTS Within 60 days following the expiration of each Agreement Year during the Agreement period, the Company will furnish the Reinsurer with: A. Gross Net Earned Premium Income of the Company for each Agreement Year during the Agreement period. B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 8 DEFINITIONS A. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. - ---------------------------------- * Confidential treatment has been requested. -3- 4 For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. B. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or loss or series of disasters or casualties or losses arising out of or caused by one event, except that: As respects an occupational or other disease suffered by an employee for which the employer is liable, such occupational or other disease shall not be covered under this Agreement unless as a result of an event of not exceeding 48 hours' duration, and which also involves traumatic injury or death. For purposes of this Agreement, a 48 hour event will be deemed as one loss occurrence. C. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1 during the Agreement period. D. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less earned premium income paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. E. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of insurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. ARTICLE 9 COMMUTATION It is understood that at any time following the expiration of the Agreement period, but in no case later than June 30, 2002, the Company shall submit a statement listing amounts paid, and reserved, in respect of all reinsurance incurred losses. This statement shall form the basis of a final agreed value for all such losses for all reinsurers. The amounts of reserves contained therein shall be determined by employing one of the following alternatives: A. A calculation based on the following criteria: 1. In respect of all "index linked" indemnity benefits, annuity values shall be calculated based upon applicable statutes. 2. In respect of all unindexed indemnity benefits annuity values shall be calculated based upon an annual discount rate of 5%. 3. In respect of all future medical costs, an annuity calculation shall be based upon the Company's evaluation of long term medical care and rehabilitation requirements, using an annual discount rate of 0%, and an annual escalation rate of 2%. 4. Where applicable, impaired life expectancy, survivors life expectancy, as well as remarriage probability shall be reflected in the calculation by employing tables required by applicable statutes. B. The Company may determine the agreed value by purchasing (or obtaining a quotation for) an annuity from an annuity carrier who is "A+" Class VIII or better rated by A.M. Best. -4- 5 This statement, duly signed by the Company, shall then be deemed to be the full and final statement of all known and unknown losses and the Reinsurer shall promptly pay the Company any amounts that may be shown to be due. Notwithstanding the above, such statement (whether involving payment of claims under this Agreement or not) shall constitute a complete release of liability of the Reinsurers in respect of the term of this Agreement in respect of all known and unknown losses. Notwithstanding the above, the Company and Reinsurer by mutual agreement, can delay the commutation of any named loss or losses beyond June 30, 2002. Under such circumstances, and prior to June 30, 2002, the Company will advise the Reinsurer of losses that should not be subject to commutation at June 30, 2002. The Reinsurer will continue to carry an appropriate reserve on its books and/or pay any recoveries under this Agreement until such time as an agreement to commute is reached or until the loss or losses are paid and settled. This Commutation Clause shall survive the expiration or termination of this Agreement. ARTICLE 10 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have become due from them whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for purposes of this Agreement. ARTICLE 11 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 12 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an outstanding cash advance or funds held in trust as an alternative method of funding. -5- 6 ARTICLE 13 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct 1% from the amount of the return, and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 14 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer, and of all subsequent developments on these claims which may materially affect the position of the Reinsurer, such advices to include any claim where the reserve is 50% or more of the Company's retention and, irrespective of the reserve or of any question of liability or coverage, any claim falling within the following categories: A. Fatalities B. Bodily injuries involving: 1. brain injuries resulting in impairment of physical functions, 2. spinal injuries resulting in partial or total paralysis of upper or lower extremities, 3. amputations or permanent loss of use of upper or lower extremities, 4. severe burn cases, 5. all other injuries likely to result in a permanent disability rating of 50% or more. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. -6- 7 ARTICLE 15 DELAY, OMISSION OR ERROR Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, providing such delay, omission or error is rectified upon discovery. Nevertheless, this Article shall not apply with respect to loss reports rendered to the Reinsurer beyond the period required to afford coverage in accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE. ARTICLE 16 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder or claims in connection herewith. ARTICLE 17 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 18 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this Agreement. ARTICLE 19 INSOLVENCY In the event of the insolvency of the Company, the attached Insolvency Clause No. 21-01 1/1/86 will apply. ARTICLE 20 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications, including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the -7- 8 Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -8- 9 ARTICLE 21 PARTICIPATION: FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for _______% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: PARTICIPATING REINSURERS ------------------------------------------------------- CIGNA Re Corporation Indemnity Insurance Company of North America 25.00% IOA Re Continental Casualty Company 20.00% Northwestern National Life Insurance Company 25.00% Reinsurance Management Services, Inc. Federal Insurance Company 30.00% ------- Total 100.00% Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -9- 10 ARTICLE 21 PARTICIPATION: FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of , 1995. CIGNA RE CORPORATION for and on behalf of INDEMNITY INSURANCE COMPANY OF NORTH AMERICA By ------------------------------------------ (signature) ------------------------------------------ (name) ------------------------------------------ (title) -9- 11 ARTICLE 21 PARTICIPATION: FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this day of , 1995. IOA RE INC. for and on behalf of CONTINENTAL CASUALTY COMPANY Chicago, Illinois By ------------------------------------------ (signature) ------------------------------------------ (name) ------------------------------------------ (title) -9- 12 ARTICLE 21 PARTICIPATION: FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Minneapolis, Minnesota, this day of , 1995. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY Minneapolis, Minnesota By By --------------------------------- ------------------------------------ (signature) (signature) --------------------------------- ------------------------------------ (name) (name) --------------------------------- ------------------------------------ (title) (title) -9- 13 ARTICLE 21 PARTICIPATION: FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 30.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Wayne, New Jersey, this day of , 1995. REINSURANCE MANAGEMENT SERVICES, INC. for and on behalf of: FEDERAL INSURANCE COMPANY Indianapolis, Indiana By ------------------------------------------ (signature) ------------------------------------------ (name) ------------------------------------------ (title) -9- 14 and in De Ridder, Louisiana, this day of , 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------ (signature) ------------------------------------------ (name) ------------------------------------------ (title) FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 15 and in De Ridder, Louisiana, this day of , 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------ (signature) ------------------------------------------ (name) ------------------------------------------ (title) FIRST PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -10- 16 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or -11- 17 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief first aid, to expenses incurred with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. -12- 18 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- -13- 19 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of 20 or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. -2- 21 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses 22 plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. -2- 23 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 24 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 25 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10.13 11 SECOND PER CLAIMANT WORKERS' COMPENSATION 1 SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT This Agreement is made and entered into by and between AMERICAN INTERSTATE INSURANCE COMPANY, and SILVER OAK CASUALTY, INC., both of De Ridder, Louisiana (hereinafter together called the "Company") and the Reinsurer specifically identified on the signature page of this Agreement (hereinafter called the "Reinsurer"). ARTICLE 1 BUSINESS REINSURED This Agreement is to indemnify the Company in respect of the net excess liability as a result of any loss or losses which may occur during the term of this Agreement under any Policies classified by the Company as statutory Workers' Compensation business including Longshore and Harbor Workers' Compensation Act in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 COVER The Reinsurer will be liable in respect of each and every Loss Occurrence, each and every person, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $5,000,000 each and every Loss Occurrence, each and every person, subject to a limit of liability to the Reinsurer of $5,000,000 each and every Loss Occurrence, each and every person and further subject to an annual aggregate recovery limit of liability to the Reinsurer of $20,000,000 for each Agreement Year during the Agreement period for any and all losses under this Agreement. Recoveries from the Company's underlying Casualty Excess Reinsurance Agreement(s) and underlying Per Person Excess Reinsurance Agreement(s) will not be deducted when establishing Ultimate Net Loss for purposes of this Agreement. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. ARTICLE 3 TERM This Agreement shall become effective at 12:01 a.m., Central Standard Time, July 1, 1995, and shall remain in full force and effect for 24 months, expiring 12:01 am., Central Standard Time, July 1, 1997. Notwithstanding the July 1, 1997 expiration date, the Company or the Reinsurer shall have the option to terminate this Agreement as of July 1, 1996, by giving 90 days' prior notice in writing via either Certified or Registered Mail, return receipt requested, for either of the following reasons: A. The Reinsurer's ability to underwrite the subject business is materially reduced; B. There is a material change in the Company's underwriting policy. 2 Upon expiration or termination of this Agreement, the Reinsurer's liability will cease for all losses occurring subsequent to the date of expiration or termination. Notwithstanding the above, the Company has the option to have this Agreement expire or terminate on a run-off basis in which case the Reinsurer will continue to cover all Policies coming within the scope of this Agreement, including those written or renewed during the period of notice, until the natural expiration or anniversary of such Policies, whichever occurs first, but in no event longer than 12 months, plus odd time, not to exceed 15 months in all from the date of the expiration or termination of this Agreement. Terms for this run-off coverage to be agreed at the time of expiration or termination of this Agreement. ARTICLE 4 TERRITORY This Agreement applies to losses arising out of Policies written in the United States of America, its territories and possessions, Puerto Rico and Canada, wherever occurring. ARTICLE 5 EXCLUSIONS This Agreement does not cover: A. Employers' Liability B. Occupational Disease unless arising from a single event of not more than 48 hours' duration and which also involves traumatic injury or death, as specified in the definition of Loss Occurrence. C. Cumulative Trauma. D. Extra Contractual Obligations E. Jones Act. F. Nuclear Accidents. G. Insolvency Funds, Pools, Associations and Syndicates, except losses from Assigned Risk Plans or similar plans are not excluded. H. Assumed Reinsurance, except: 1. Agency Reinsurance until natural expiration of policies 2. Reinsurance on an occasional individual risk where all underwriting and servicing, including claims handling, is done by the Company. I. War. J. Professional Sports Teams. K. Commercial Airlines (airline personnel only). -2- 3 ARTICLE 6 PREMIUM A. The Company will pay the Reinsurer a deposit premium of $XXXX* for the first Agreement Year during the Agreement period, payable quarterly in advance in the amount of $XXXX* on July 1, 1995, October 1, 1995, January 1, 1996, and April 1, 1996. B. Within 60 days following the expiration of the first Agreement Year during the Agreement period, the Company will calculate a premium at a rate of XXXX%* multiplied by the Company's Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with Paragraph A. above, the Company will immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium, the Reinsurer will immediately pay the Company the difference subject to a minimum premium of $XXXX*. C. The minimum and deposit premium for the subsequent Agreement Year will be based on the same percentage used to develop the minimum and deposit premium for the first Agreement Year. ARTICLE 7 REPORTS Within 60 days following the expiration of each Agreement Year during the Agreement period, the Company will furnish the Reinsurer with: A. Gross Net Earned Premium Income of the Company for the Agreement Year during the Agreement period. B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 8 DEFINITIONS A. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual loss paid by the Company or for which the Company becomes liable to pay, such loss to include expenses of litigation and interest, and all other loss expense of the Company including subrogation, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances which inure to the benefit of this Agreement (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. - ---------------------------------- * Confidential treatment has been requested. -3- 4 For purposes of this definition, the phrase "becomes liable to pay" shall mean the existence of a judgment which the Company does not intend to appeal, or a release has been obtained by the Company, or the Company has accepted a proof of loss. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained. B. The term "Loss Occurrence" as used in this Agreement shall mean any one disaster or casualty or loss or series of disasters or casualties or losses arising out of or caused by one event, except that: As respects an occupational or other disease suffered by an employee for which the employer is liable, such occupational or other disease shall not be covered under this Agreement unless as a result of an event of not exceeding 48 hours' duration, and which also involves traumatic injury or death. For purposes of this Agreement, a 48 hour event will be deemed as one loss occurrence. C. The term "Agreement Year" as used in this Agreement shall mean the 12 consecutive months commencing with each July 1 during the Agreement period. D. The term "Gross Net Earned Premium Income" as used in this Agreement shall mean gross earned premium income on business the subject of this Agreement less earned premium income paid for reinsurances, recoveries under which would inure to the benefit of this Agreement. E. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of insurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. ARTICLE 9 Commutation It is understood that at anytime following the expiration of the Agreement period, but in no case later than June 30, 2002, the Company shall submit a statement listing amounts paid, and reserved, in respect of all reinsurance incurred losses. This statement shall form the basis of a final agreed value for all such losses for all reinsurers. The amounts of reserves contained therein shall be determined by employing one of the following alternatives: A. A calculation based on the following criteria: 1. In respect of all "index linked" indemnity benefits, annuity values shall be calculated based upon applicable statutes. 2. In respect of all unindexed indemnity benefits annuity values shall be calculated based upon an annual discount rate of 5%. 3. In respect of all future medical costs, an annuity calculation shall be based upon the Company's evaluation of long term medical care and rehabilitation requirements, using an annual discount rate of 0%, and an annual escalation rate of 2%. 4. Where applicable, impaired life expectancy, survivors life expectancy, as well as remarriage probability shall be reflected in the calculation by employing tables required by applicable statutes. B. The Company may determine the agreed value by purchasing (or obtaining a quotation for) an annuity from an annuity carrier who is "A+" Class VIII or better rated by A.M. Best. -4- 5 This statement, duly signed by the Company, shall then be deemed to be the full and final statement of all known and unknown losses and the Reinsurer shall promptly pay the Company any amounts that may be shown to be due. Notwithstanding the above, such statement (whether involving payment of claims under this Agreement or not) shall constitute a complete release of liability of the Reinsurers in respect of the term of this Agreement in respect of all known and unknown losses. Notwithstanding the above, the Company and Reinsurer by mutual agreement, can delay the commutation of any named loss or losses beyond June 30, 2002. Under such circumstances, and prior to June 30, 2002, the Company will advise the Reinsurer of losses that should not be subject to commutation at June 30, 2002. The Reinsurer will continue to carry an appropriate reserve on its books and/or pay any recoveries under this Agreement until such time as an agreement to commute is reached or until the loss or losses are paid and settled. This Commutation Clause shall survive the expiration or termination of this Agreement. ARTICLE 10 NET RETAINED LINES This Agreement applies only to that portion of any insurances or reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurances or reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that 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 reinsurers, whether specific or general, any amounts which may have become due from them whether such inability arises from the insolvency of such other reinsurers or otherwise. However, it is understood that the Company may carry quota share or excess of loss reinsurance on its net retained liability and such quota share or excess of loss reinsurance will be disregarded for purposes of this Agreement. ARTICLE 11 CURRENCY The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 12 LOSS FUNDING With respect to losses, funding will be in accordance with the attached Loss Funding Clause No. 13-01.2. However, if the above method of funding is unacceptable to the regulatory body of the jurisdiction where the Company is domiciled, the Reinsurer will furnish an outstanding cash advance or funds held in trust as an alternative method of funding. -5- 6 ARTICLE 13 TAXES The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct 1% from the amount of the return, and the Company or its agent should take steps to recover the Tax from the U.S. Government. ARTICLE 14 NOTICE OF LOSS AND LOSS SETTLEMENTS The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer and of all subsequent developments on these claims which may materially affect the position of the Reinsurer. The Reinsurer agrees to abide by the loss settlements of the Company, provided that retroactive extension of Policy terms or coverages made voluntarily by the Company and not in response to court decisions (whether such court decision is against the Company or other companies affording the same or similar coverages) will not be covered under this Agreement. When so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and the Company will cooperate in every respect in the defense of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. This Agreement will not cover losses reported to the Reinsurer after June 30, 2001, for the first Agreement Year and June 30, 2002, for the second Agreement Year during the Agreement period. ARTICLE 15 DELAY, OMISSION OR ERROR Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, providing such delay, omission or error is rectified upon discovery. Nevertheless, this Article shall not apply with respect to loss reports rendered to the Reinsurer beyond the period required to afford coverage in accordance with the NOTICE OF LOSS AND LOSS SETTLEMENTS ARTICLE. -6- 7 ARTICLE 16 INSPECTION The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representative, all books, records and papers of the Company in connection with any reinsurance hereunder or claims in connection herewith. ARTICLE 17 ARBITRATION Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Dallas, Texas in accordance with the attached Arbitration Clause No. 22-01.1. ARTICLE 18 SERVICE OF SUIT The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this Agreement. ARTICLE 19 INSOLVENCY In the event of the insolvency of the Company, the attached Insolvency Clause No. 21-01 1/1/86 will apply. ARTICLE 20 INTERMEDIARY Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications, including notices, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements relating thereto shall be transmitted to the Reinsurer or the Company through Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington 98101. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -7- 8 ARTICLE 21 PARTICIPATION: SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for __________% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representative, have executed this Agreement as of the following dates: PARTICIPATING REINSURERS ------------------------------------------------------- CIGNA Re Corporation Indemnity Insurance Company of North America 25.00% IOA Re Continental Casualty Company 20.00% Northwestern National Life Insurance Company 25.00% Reinsurance Management Services, Inc. Federal Insurance Company 30.00% ------ Total 100.00% Upon completion of Reinsurers' signing, fully executed signature pages will be forwarded to you for the completion of your file. -8- 9 ARTICLE 21 PARTICIPATION: SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this ______ day of ______________________, 1995. CIGNA RE CORPORATION For and on behalf of INDEMNITY INSURANCE COMPANY OF NORTH AMERICA By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -8- 10 ARTICLE 21 PARTICIPATION: SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 20.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Philadelphia, Pennsylvania, this ______ day of ______________________, 1995. IOA RE INC. For and on behalf of CONTINENTAL CASUALTY COMPANY Chicago, Illinois By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -8- 11 ARTICLE 21 PARTICIPATION: SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 25.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Agreement as of the following dates: In Minneapolis, Minnesota, this ______ day of ______________________, 1995. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY Minneapolis, Minnesota By By ------------------------------ ------------------------------------------- (signature) (signature) ------------------------------ ------------------------------------------- (name) (name) ------------------------------ ------------------------------------------- (title) (title) -8- 12 ARTICLE 21 PARTICIPATION: SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT EFFECTIVE: July 1, 1995 This Agreement obligates the Reinsurer for 30.00% of the interests and liabilities set forth under this Agreement. The participation of the Reinsurer in the interests and liabilities of this Agreement shall be separate and apart from the participations of other reinsurers and shall not be joint with those of other reinsurers, and the Reinsurer shall in no event participate in the interests and liabilities of other reinsurers. IN WITNESS WHEREOF, the parties hereto, by their authorized representative, have executed this Agreement as of the following dates: In Wayne, New Jersey, this ______ day of ______________________, 1995. REINSURANCE MANAGEMENT SERVICES, INC. For and on behalf of FEDERAL INSURANCE COMPANY Indianapolis, Indiana By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) -8- 13 and in De Ridder, Louisiana, this ______ day of ______________________, 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -9- 14 and in De Ridder, Louisiana, this ______ day of ______________________, 1995. AMERICAN INTERSTATE INSURANCE COMPANY For and on behalf of AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. By ------------------------------------------- (signature) ------------------------------------------- (name) ------------------------------------------- (title) SECOND PER CLAIMANT WORKERS' COMPENSATION EXCESS REINSURANCE AGREEMENT issued to AMERICAN INTERSTATE INSURANCE COMPANY SILVER OAK CASUALTY, INC. -9- 15 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Wherever the word "Reassured" appears in this clause, it shall be deemed to read "Reassured," "Reinsured," "Company," or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following the approval of the Limited Exclusion provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or 16 (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief first aid, to expenses incurred with respect to bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or sued for (1) separating the isotopes of uranium of plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or devices is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or destruction "property damage" includes all forms of radioactive contamination of property. includes all forms of radioactive contamination of property. 17 V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - -------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. - -------------------------------------------------------------------------------- 18 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely. Personal Liability. Farmers Liability. Storekeepers Liability. which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision of: BROAD EXCLUSION PROVISION. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; 19 (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. 20 LOSS FUNDING This clause is only applicable to those Reinsurers who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves. As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to them. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Reinsurer and acceptable to the appropriate insurance authorities, in an amount equal to the Reinsurer's proportion of the loss reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The Company, or its successors in interest, undertakes to use and apply any amounts which it may draw upon such Credit pursuant to the terms of the Agreement under which the Letter of Credit is held, and for the following purposes only: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any liability for loss reinsured by this Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. (c) In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. It is understood and agreed that this procedure will be implemented only in exceptional circumstances and that, if it is implemented, the Company will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Company will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurer. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses 21 plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. "State" shall be understood to mean the state, province or Federal authority having jurisdiction over the Company's loss reserves. 22 ARBITRATION CLAUSE As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearing unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. NOTE: --Wherever used herein, the term "Company" shall be understood to mean "Reinsured," "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. 23 SERVICE OF SUIT This Clause applies only to a reinsurer domiciled outside the United States of America or should the Company be authorized to do business in the State of New York, a reinsurer unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Reinsurer's right 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 of any state in the United States. It is further agreed that service of process in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 and that in any suit instituted against the Reinsurer upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates 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 Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. 24 INSOLVENCY CLAUSE In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company, 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 when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and when 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. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. When 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 Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed, the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this reinsurance Agreement any sums which are due to the Reinsurer by the Company under this reinsurance Agreement and which are payable at a fixed or stated date as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. NOTE: --Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract," "Agreement," "Policy" or whatever other term is used to designate the attached reinsurance document. EX-11.1 12 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
Year Three Months Ended Ended December 31, March 31, 1995 1996 --------------------------- PRIMARY: Net income ............................................ $ 9,334,000 $ 2,234,000 ============ ============ Shares as adjusted: Weighted average common shares outstanding ......... 11,884,647 11,884,647 Assumed conversion of Series B cumulative convertible preferred stock ...................... 5,515,353 5,515,353 Incremental shares from outstanding stock options as determined under the treasury stock method ..................................... 120,000 120,000 Incremental shares from issuance of Class A Common Stock ..................................... 6,000 6,000 Pro forma shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE, Inc. ............ 4,140,000 4,140,000 ------------ ------------ Shares as adjusted .................................... 21,666,000 21,666,000 ============ ============ Pro forma net income per share ........................ $ 0.43 $ 0.10 ============ ============ FULLY DILUTED: Net income ............................................ $ 9,334,000 $ 2,234,000 ============ ============ Shares as adjusted: Weighted average common shares outstanding ......... 11,884,647 11,884,647 Assumed conversion of Series B cumulative convertible preferred stock ...................... 5,515,353 5,515,353 Incremental shares from outstanding stock options as determined under the treasury stock method ..................................... 120,000 120,000 Incremental shares from issuance of Class A Common Stock ..................................... 6,000 6,000 Pro forma shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE, Inc. ............ 4,140,000 4,140,000 ------------ ------------ Shares as adjusted .................................... 21,666,000 21,666,000 ============ ============ Pro forma net income per share ........................ $ 0.43 $ 0.10 ============ ============
EX-21.1 13 SUBSIDIARIES OF THE COMPANY 1 SUBSIDIARIES OF AMERISAFE, INC. American Interstate Insurance Company (Louisiana) Silver Oak Casualty, Inc. (Louisiana) American Interstate Risk Services, Incorporated (Louisiana) Mor-Tem Risk Management Services, Inc. (trade name Gulf Claims, Inc.) (Louisiana) Hammerman & Gainer, Inc. (Texas) Gulf Air, Inc. (Delaware) EX-23.1 14 CONSENT OF ERNST & YOUNG, L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data," and to the use of our reports dated ______________________, 1996, in the Registration Statement (Form S-1, No. 333-00000) and related Prospectus of AMERISAFE, Inc. for the registration of 12,650,000 shares of its common stock. ERNST & YOUNG LLP Dallas, Texas _______________, 1996 The foregoing consent is in the form that will be signed upon the completion of the reorganization described in Note 1 to the financial statements. ERNST & YOUNG LLP Dallas, Texas August 9, 1996 EX-24.1 15 POWERS OF ATTORNEY 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of AMERISAFE, Inc., a Texas corporation (the "Corporation"), hereby constitutes and appoints James E. O'Bannon and Christine A. Hathaway the true and lawful attorney-in-fact, with full power of substitution and resubstitution, for the Corporation to sign on the Corporation's behalf a Registration Statement on Form S-1 (and any abbreviated registration statement relating thereto permitted pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the Securities Act)), for the purpose of registering under the Securities Act, up to 16,000,000 shares of Class A Common Stock, par value $.01 per share, of the Corporation, and to sign any or all amendments and any or all post-effective amendments to such Registration Statement (and any such abbreviated registration statement), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, thereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. AMERISAFE, INC. By: /s/ MILLARD E. MORRIS ----------------------------------- Millard E. Morris Chairman of the Board, President and Chief Executive Officer Dated: August 9, 1996 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby constitutes and appoints Millard E. Morris, Mark R. Anderson, John R. Buck, Arthur L. Hunt, James E. O'Bannon and Christine A. Hathaway the true attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf, as a director or officer, or both, as the case may be, of AMERISAFE, Inc., a Texas corporation (the "Corporation"), a Registration Statement on Form S-1 (and any abbreviated registration statement relating thereto permitted pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the Securities Act)), for the purpose of registering under the Securities Act, up to 16,000,000 shares of Class A Common Stock, par value $.01 per share, of the Corporation, and to sign any or all amendments and any or all post-effective amendments to such Registration Statement (and any such abbreviated registration statement), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. /s/ MILLARD E. MORRIS /s/ JOHN R. BUCK - ----------------------------------- ----------------------------------- Millard E. Morris John R. Buck /s/ MARK R. ANDERSON /s/ DANIEL J. JESSEE - ----------------------------------- ----------------------------------- Mark R. Anderson Daniel J. Jessee /s/ ARTHUR L. HUNT /s/ N. DAVID SPENCE - ----------------------------------- ----------------------------------- Arthur L. Hunt N. David Spence Dated: August 9, 1996 EX-27.1 16 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES F-3 THROUGH F-5 OF THE COMPANY'S S-1 FILED ON AUGUST 12, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 3,363 3,028 65,052 69,267 66,840 69,647 3,076 4,010 0 0 0 0 71,491 76,305 10,202 12,485 1,237 1,073 316 383 120,440 130,492 55,427 59,571 3,581 3,287 0 0 10,299 10,426 10,113 13,037 119 119 0 0 1 1 32,018 34,261 32,138 34,381 58,167 15,026 4,519 1,295 176 30 6,991 2,205 32,924 9,250 245 67 13,279 3,445 14,568 3,143 5,234 909 9,334 2,234 0 0 0 0 0 0 9,334 2,234 0.43 0.10 0.43 0.10 31,242 43,304 36,074 9,519 (3,150) (269) 10,219 749 10,643 5,512 43,304 46,293 (3,150) (269)
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