-----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, Co6nBugIW4rMjDU6dNJOu/YE7UB/tFOu2NJB0NBttzdxO1XXLJWF5JiWW2bAfERs tUkypS789NgKxhZOk0m5SA== 0000950150-98-000618.txt : 19980421 0000950150-98-000618.hdr.sgml : 19980421 ACCESSION NUMBER: 0000950150-98-000618 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 19980420 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL PACIFIC INSURANCE GROUP INC CENTRAL INDEX KEY: 0001059803 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 680311660 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-50511 FILM NUMBER: 98597419 BUSINESS ADDRESS: STREET 1: PO BOX 292220 CITY: SACRAMENTO STATE: CA ZIP: 59829-2220 BUSINESS PHONE: 9166303800 MAIL ADDRESS: STREET 1: PO BOX 292220 CITY: SACRAMENTO STATE: CA ZIP: 59829-2220 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FINANCIAL PACIFIC INSURANCE GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6331 68-0311660 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
3850 ATHERTON ROAD ROCKLIN, CA 95765 (916) 630-5000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ROBERT C. GOODELL PRESIDENT AND CHIEF EXECUTIVE OFFICER FINANCIAL PACIFIC INSURANCE GROUP, INC. 3850 ATHERTON ROAD ROCKLIN, CALIFORNIA 95765 (916) 630-5000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JANIS B. SALIN, ESQ. MICHAEL J. CONNELL, ESQ. RIORDAN & MCKINZIE MORRISON & FOERSTER LLP 300 SOUTH GRAND AVENUE, 29TH FLOOR 555 W. FIFTH STREET, SUITE 3500 LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90013 (213) 629-4824 (213) 892-5200
APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: as soon as practicable after 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 the 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 ================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE - --------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001 per share.................................. 2,875,000 $11.00 $31,625,000 $9,330 ===========================================================================================================================
(1) Includes 375,000 shares to cover the Underwriters' over-allotment option, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. 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 APRIL , 1998 PROSPECTUS 2,500,000 SHARES (FINANCIAL PACIFIC LOGO) COMMON STOCK Of the shares of Common Stock offered hereby, 2,000,000 shares are being sold by the Company and 500,000 shares are being sold by the Selling Stockholders. The Company will not receive any proceeds from the sale of the shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Company's Common Stock. It is currently estimated that the initial public offering price will be between $9 and $11 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "FPAC". SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROCEEDS TO THE PRICE TO UNDERWRITING PROCEEDS TO THE SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2) - -------------------------------------------------------------------------------------------------------------------------- Per Share............. $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------- Total(3).............. $ $ $ $ ==========================================================================================================================
(1) See "Underwriting" for indemnification and other compensation arrangements with the Underwriters. (2) Before deducting expenses estimated at $ , which will be paid by the Company. (3) The Company has granted the Underwriters a 45-day option to purchase up to an aggregate of 375,000 additional shares to cover over-allotments, if any. If the option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to the Company will be $ , $ and $ , respectively. ------------------------ The shares of Common Stock are offered by the several Underwriters subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of EVEREN Securities, Inc. or through the facilities of the Depository Trust Company, New York, New York on or about June , 1998. ------------------------ [EVEREN LOGO] June , 1998 3 (MAP OF UNITED STATES SHOWING STATES IN WHICH THE COMPANY IS LICENSED AND HAS LICENSE APPLICATIONS PENDING GOES HERE) Although the Company is licensed in all the states indicated, in 1997, 100% of its direct premiums written were produced in California. ------------------------ The Company intends to distribute to the holders of its shares of Common Stock annual reports containing consolidated financial statements audited by an independent certified public accounting firm and quarterly reports containing unaudited condensed consolidated financial information for the first three quarters of each year. ------------------------ State insurance holding company statutes applicable to the Company generally prohibit any person from acquiring control of the Company, and thus, indirect control of its insurance subsidiary, without the prior approval of the appropriate insurance regulators. Generally, any person who acquires beneficial ownership of ten percent (10%) or more of the outstanding voting stock of the Company would be presumed to have acquired such control unless appropriate insurance regulators, upon application, determine otherwise. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise indicates, the "Company" or "Financial Pacific" refers to Financial Pacific Insurance Group, Inc. (the "Group") and its consolidated subsidiaries including the Group's wholly owned insurance subsidiary, Financial Pacific Insurance Company ("FPIC"). Unless indicated otherwise, the information contained in this Prospectus (i) is presented in conformity with generally accepted accounting principles ("GAAP"); (ii) assumes the Underwriters' over-allotment option is not exercised; (iii) reflects a 394.375 for 1 stock split effected on April 14, 1998; (iv) assumes the conversion of all the outstanding shares of Series A Convertible Preferred Stock ("Series A Stock") into an aggregate of 1,735,251 shares of Common Stock of the Company (the "Common Stock"); and (v) assumes the exercise of all of the outstanding Warrants, except those issued to the Underwriters, into an aggregate of 747,216 shares of Common Stock. Certain insurance terms used herein are defined in the "Glossary of Selected Insurance Terms." This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors including those set forth under "Risk Factors" and elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Financial Pacific is a regional, custom-underwriting insurance company. The Company provides superior service to small and medium-sized commercial customers within specified niche markets which are typically overlooked by large insurance companies. During 1997, the Company derived direct premiums written from artisan contractors (40%), commercial property owners (5%), light industrial businesses (5%), a variety of other businesses (25%) and special programs (25%). The special programs were designed for refuse haulers, farm labor contractors, bowling centers and restaurants. For these programs, the Company has developed underwriting expertise and focused marketing materials and applies rate deviations or coverage extensions. The Company writes the vast majority of its business in rural markets in California. FPIC is currently rated A-(excellent) by A.M. Best Company ("A.M. Best"). Direct premiums written grew at a compound annual rate of 38% from $15.1 million in 1994, to $39.5 million in 1997. Net income increased at a compound annual rate of 44% from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio, which is a measure of underwriting profitability, was 92% in 1997, well below the industry average of 102%. Much of the Company's growth and profitability is attributable to its retention of renewal policies. Renewal retention rates were 81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively. The Company markets insurance through 212 independent insurance agents, as of March 31, 1998. The Company believes its relationship with its agents allows it to provide ongoing and attentive service to its targeted customer base. The Company's strategy is to focus on writing policies that typically generate between $1,100 to $5,000 in annual premiums. Management believes this market has been overlooked by many of the larger insurance companies as a result of lower annual premiums per policy, and in some cases, the remote locations of the policyholders and the agents. During 1997, approximately 58% of the Company's direct premiums written was for Commercial Multi-Peril Liability ("CMP") coverages, 17% was for Commercial Automobile Liability coverages, 11% was for Commercial Property coverages, 6% was for Commercial Automobile Physical Damage coverages, and the remainder was for Inland Marine, Surety and Fidelity. The Company is also engaged, through its wholly owned insurance agency, Financial Pacific Insurance Agency ("FPIA"), in the mail order distribution of license and permit surety bonds in 36 states on behalf of Markel Corporation. These bonds are low limit surety commitments pledged to a regulatory agency as a condition of obtaining and maintaining a business license. The Company has been able to maintain a high level of service and fast turnaround time by using its proprietary integrated tracking software ("QuoteTracker(TM)") which enables management to track each policy 3 5 from initial application through renewal, along with tracking the performance of individual agents and employees. The system provides data on a real-time basis and allows for greater visibility of processing time and underwriting performance. The Company is raising capital through this Offering to allow for continued growth of its business and to repay its long-term debt. Insurance regulators and rating services presently recommend that the Company's ratio of annual net premiums written to surplus as regards policyholders not exceed 3 to 1. The Company's ratio at December 31, 1997 was 1.89 to 1. The Company's long term growth strategies, while continuing to emphasize small to medium-sized businesses as its primary target market, are to: - RETAIN MORE DIRECT PREMIUMS WRITTEN. Due to its limited capital, the Company has historically ceded as much as 43% of its annual direct premiums written to reinsurers. As a result of increased capital from this Offering, the Company will be able to retain a greater portion of premium income. - EXPAND EXISTING BUSINESS. The Company intends to pursue further growth in California by selectively appointing new agents and by attracting a larger percentage of business from each of its existing agents through cross-selling of its existing lines of business. - DEVELOP NEW PROGRAMS. The Company will continue to focus on developing new specialty insurance programs for carefully selected market segments in which the Company has identified niche opportunities. Such programs will replicate those successfully established in prior periods including those developed for refuse haulers, restaurants and bowling centers. - EXPAND SURETY BUSINESS. The Company began writing surety business in 1995 to complement CMP. This line of business provides payment or performance guarantees for construction contracts or other obligations. The Company wrote nearly $1.2 million in profitable surety premium with one staff underwriter in 1997. The Company plans to emphasize surety as a line of business by increasing its marketing efforts and adding to its staff. - EXPAND GEOGRAPHICALLY. The Company intends to expand its specialty insurance business into other states. Beginning with the states adjoining California, the Company will select and appoint agents in rural areas of those states to sell its products. Its marketing efforts will focus on the insurance programs in which the Company has developed an expertise in underwriting. The Company is licensed currently to do business in Arizona, California, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah and has license applications pending in eight additional states. The Company is a Delaware corporation formed in 1993, whose offices are located at 3850 Atherton Road, Rocklin, California 95765; telephone (916) 630-5000; www.financialpacific.com. THE OFFERING Common Stock offered hereby: By the Company........... 2,000,000 shares By the Selling Stockholders............... 500,000 shares Common Stock to be outstanding after the Offering................. 4,970,422 shares(1) Use of proceeds............ To contribute additional capital to FPIC which will allow it to retain a greater portion of direct premiums written currently being ceded to reinsurers; to permit greater underwriting volume of its insurance products; to repay senior debt and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol..................... FPAC 4 6 - --------------- (1) Excludes 82,819 shares of Common Stock reserved for issuance upon exercise of options outstanding as of March 31, 1998 pursuant to grants to officers and employees of the Company. Includes 747,216 shares of Common Stock to be issued upon exercise of Warrants to purchase Common Stock and 1,735,251 shares of Common Stock to be issued upon the conversion of the Series A Stock concurrently with the closing of the Offering. See Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA(1)
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1993(2) 1994 1995 1996 1997 ------- ------- -------- -------- --------- (In thousands, except per share data and ratios) INCOME STATEMENT DATA: Revenues: Direct premiums written............... $ 6,094 $15,072 $ 24,695 $ 31,927 $ 39,512 Premiums ceded........................ (2,345) (5,782) (10,653) (13,674) (12,576) ------- ------- -------- -------- --------- Net premiums written........... 3,749 9,290 14,042 18,253 26,936 ------- ------- -------- -------- --------- Net premiums earned............ 2,380 6,701 12,060 14,987 22,854 Commissions........................... 159 213 105 628 709 Investment income, net of expenses.... 523 750 1,028 1,449 1,720 Net realized gains (losses) on sales of investments...................... 68 (246) 466 52 (46) Other income, net..................... (107) 502 578 547 800 ------- ------- -------- -------- --------- Total revenues...................... 3,023 7,920 14,237 17,663 26,037 Expenses: Losses and loss adjustment expenses... (273) 2,944 6,325 9,750 12,748 Policy acquisition costs.............. 610 1,493 3,957 4,785 7,440 Contingent ceding commission.......... -- (422) (1,246) (3,222) (1,511) General operating costs............... 731 2,297 1,712 1,929 2,443 Agency expenses....................... 136 253 145 688 721 Interest expense...................... 21 113 128 693 617 ------- ------- -------- -------- --------- Total expenses...................... 1,225 6,678 11,021 14,623 22,458 ------- ------- -------- -------- --------- Income before taxes................... 1,798 1,242 3,216 3,040 3,579 ------- ------- -------- -------- --------- Income tax provision........... 588 465 1,066 1,037 1,237 ------- ------- -------- -------- --------- Net income..................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 ======= ======= ======== ======== ========= EARNINGS PER SHARE(3): Basic............................... $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 Diluted............................. $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 Weighted average diluted shares..... 988 1,956 2,292 2,901 2,962 GAAP RATIOS(4): Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% Expense ratio....................... 56.1 52.0 36.6 23.3 36.3 ------- ------- -------- -------- --------- Combined ratio...................... 49.1% 95.9% 89.0% 88.4% 92.1% ======= ======= ======== ======== ========= STATUTORY RATIOS(4): Combined ratio...................... 35.6% 95.4% 89.4% 90.6% 92.3% ======= ======= ======== ======== ========= Industry combined ratio(5).......... 112.2% 110.1% 110.5% 111.0% 101.8% OTHER DATA: Underwriting profit(6).............. $ 1,312 $ 389 $ 1,585 $ 1,745 $ 1,734 Surplus as regards policyholders.... 5,890 5,773 12,387 13,788 14,262
5 7
AS OF DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(7) -------- --------------- (In thousands, except per share data and ratios) BALANCE SHEET AND OTHER DATA: Total cash and investments.................................. $30,609 $46,809 Total assets................................................ 65,893 82,093 Unpaid losses and loss adjustment expenses.................. 19,592 19,592 Total debt(8)............................................... 4,985 -- Stockholders' equity........................................ 13,398 35,018 Book value per common share(3).............................. $ 5.74 $ 7.03 Surplus as regards policyholders............................ $14,262 $30,462 Ratio of net premiums written to surplus as regards policyholders............................................. 1.9x 0.9x
- --------------- (1) Other than the statutory combined ratios, surplus as regards policyholders and ratio of net premiums written to surplus as regards policyholders, which are presented in accordance with statutory accounting principles ("SAP"), all data is presented in accordance with GAAP. See "Glossary of Selected Insurance Terms." (2) Effective November 12, 1993, the Group completed the acquisition of FPIC and FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993. Because management of the Group had effective control of FPIC and FPIA as of May 26, 1993, the acquisition has been accounted for as of that date. Accordingly, the 1993 consolidated financial statements include results of operations for the period of May 26, 1993 through December 31, 1993. (3) All periods adjusted to reflect a 394.375 for 1 stock split effective April 14, 1998. (4) During 1993, in conjunction with the acquisition, management determined that the Company's IBNR reserves were redundant and recorded a reserve reduction of $2.4 million. (5) Source: "Best's Insurance Reports Property/Casualty United States, 1997 Edition." The 1997 ratio is based on A.M. Best's estimate contained in January 1998, "Review Preview -- Property/Casualty." A comparison of a company's combined ratio with the industry combined ratio does not necessarily indicate that a company has performed well or poorly as compared with its peers. (6) Underwriting profit represents the difference between premiums earned and underwriting expenses. (7) Gives effect to the sale of 2,000,000 shares in the Offering and the transactions contemplated under "Use of Proceeds." (8) Effective December 28, 1995, the Company issued $5 million in Senior Notes due January 1, 2001 (the "Senior Notes"). The Senior Notes were issued in conjunction with warrants for the purchase of 593,691 shares of the Company's Common Stock at the price of $5.61 per share (the "Senior Note Warrants"). The proceeds from the issuance of the Senior Notes were contributed to FPIC's capital. 6 8 RISK FACTORS In addition to the other information in this Prospectus, the following information should be considered carefully by potential purchasers in evaluating the Company, its business and the shares of Common Stock offered hereby. Certain statements included in this Prospectus, including, without limitation, statements containing the words "believes", "anticipates", "intends", "expects", "will" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the important factors set forth below and elsewhere in this Prospectus. Given these uncertainties, potential purchasers of the Common Stock offered hereby are cautioned not to place undue reliance on such forward-looking statements. NATURE OF THE COMPANY'S BUSINESS All of the Company's direct premiums written (which are the Company's largest source of revenue) are attributable to property/casualty insurance, which is cyclical in nature and has historically been characterized by periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates ("Soft Market"), followed by periods of capital shortages resulting in a lack of insurance availability, relatively low levels of competition, more selective underwriting of risks and relatively high premium rates ("Hard Market"). A Soft Market has existed for several years with premiums decreasing and competition remaining at high levels. Historically, the unpredictability and competitive nature of the property/ casualty insurance industry have contributed to significant quarter-to-quarter and year-to-year fluctuations in underwriting results and net income. Many of the factors which have resulted in the current Soft Market in the property/casualty insurance industry continue and the Company cannot predict if, or when, the market conditions for the property/casualty insurance industry, including the product lines sold by the Company will improve. The Company's profitability is affected by many factors, including not only rate competition, but also severity and frequency of claims, fluctuations in interest rates that affect investment returns, regulation, court decisions, natural disasters, the legislative climate, and general economic conditions and trends, such as inflationary pressures that may affect the adequacy of reserves, all of which are substantially beyond the control of the Company. One of the distinguishing features of the property/casualty industry is that prices are set before costs are known because premium rates for individual policies are determined before losses for such policies are reported. Changes in statutory and case law can dramatically affect the liability associated with known risks after the insurance contract is in place. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property/casualty insurers such as the Company to increase prices in response to declines in profitability. In addition, during periods of high interest rates, some property/ casualty insurers may be willing to absorb underwriting losses in order to generate funds for investment, thereby prolonging low premium rates which are not adequate to cover underwriting losses and expenses. As a result of these factors, the Company may experience significantly lower premiums in the future. Most insurance underwriting decisions are based on assumptions about events that will occur over a period of future years and are generally based on actuarial projections and historical data reflecting the collective experience of large groups of insureds. The actuarial projections may not accurately predict the aggregate obligations of any given insurer. Because the Company's experience represents an insignificant portion of the industry's experience, actuarial assumptions based on aggregate industry data may not be reflective of actual obligations to be incurred. With respect to underwriting experience (decisions concerning the issuance of its policies), the Company relies heavily on its own underwriting experience. GEOGRAPHIC AND PRODUCT LINE CONCENTRATION Virtually all of the Company's direct premiums written to date have been attributed to policies written in California. During the years ended December 31, 1995, 1996 and 1997, 95% to 100% of direct premiums written by the Company were derived from policies issued to insureds located in northern and central 7 9 California, where it is estimated that only 30% of California's population currently resides. The Company's revenues and profitability are therefore subject to prevailing economic, regulatory, demographic and other conditions in California. The Company is presently evaluating expansion into other states where management believes there are favorable insurance climates. The Company is currently licensed to transact property/ casualty insurance business in California and ten other states (Arizona, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah). The Company has license applications pending in eight additional states (Arkansas, Colorado, Iowa, Kansas, Minnesota, New Mexico, Washington and Wisconsin). Management believes it will likely receive at least three of these state licenses before the end of 1998. The Company may need additional funds to finance any such expansion and there can be no assurance that such funds will be available. Even if the Company obtains the funds necessary to expand, there can be no assurance that the Company will be able to overcome competition and/or regulatory barriers or that any such expansion, if completed, will be successful. See "Business -- Competition" and "-- Regulation." REINSURANCE CONSIDERATIONS The Company depends upon its ability to reinsure certain risks insured by the Company. The amount, availability and cost of reinsurance are subject to prevailing market conditions beyond the control of the Company, and they affect the Company's ability to write additional premiums and its profitability. If the Company were unable to secure reinsurance at competitive prices and terms, the Company's results of operations could be adversely impacted. The maintenance of reinsurance does not affect the Company's direct liability to its policyholders on the business it writes. Although the Company's reinsurance is currently maintained with several reinsurers rated A (excellent) or better by A.M. Best, one of the Company's reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on the Company. See "Business -- Reinsurance." RELIANCE ON INDEPENDENT INSURANCE AGENTS The failure or inability of independent insurance agents to market the Company's insurance programs successfully could have a material adverse effect on the Company's business, financial condition and results of operations. The Company principally markets its insurance programs through 212 independent insurance agents as of March 31, 1998. The agents are not obligated to promote the Company's products and many sell or promote competitors' insurance products in addition to the Company's products. Independent insurance agents produced 100% of the Company's direct premiums written during 1997. In 1997, 81% of the Company's business was produced by its top 90 agents. No agent accounted for more than 4% of the Company's direct premiums written in 1997. As a result, the Company's business depends in part on the marketing efforts of these agents and on the Company's ability to offer insurance programs and services that meet the requirements of the agents and customers of these agents. See "Business -- Marketing." ADEQUACY OF LOSS RESERVES The Company is required to maintain adequate reserves to cover its estimated ultimate liability for losses and loss adjustment expenses ("LAE") with respect to reported, and to Incurred But Not Reported ("IBNR"), claims as of the end of each accounting period. These reserves are estimates of what the Company expects the ultimate settlement and administration of claims will cost, and are based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. There is no method for precisely estimating the ultimate liability. In recent years, a number of courts have issued decisions expanding civil liability. Such decisions have resulted in higher damage awards to injured parties. In many cases, such decisions have also resulted in liability and increased losses to property/casualty insurers. In addition, the Company relies on policy language, developed by the Company and by others, to exclude or limit coverage. If such language is held by a court to be invalid or unenforceable it could materially adversely affect the Company's financial position. This possibility of expansion of insurers' liability either through new concepts of liability or a refusal to accept restrictive policy language has added to the inherent uncertainty of reserving for losses. Although management believes that adequate provision has been made for loss reserves, the establishment of appropriate reserves is an inherently 8 10 uncertain process, and there can be no assurance that ultimate losses will not exceed the Company's loss reserves and have a material adverse effect on the Company's results of operations and financial condition. If the Company's reserves should be inadequate, the Company will be required to increase reserves with a corresponding increase in losses and LAE incurred and reduction in the Company's net income and stockholders' equity in the period in which the deficiency is identified. See "Business -- Reserves." RISKS RELATED TO EXPANSION STRATEGY Since 1993, the Company has experienced significant growth in its revenues, policyholders and scope of operations. This growth has required and will continue to require the Company to obtain additional capital, primarily to fund FPIC. The Company intends to use a significant portion of the net proceeds from this Offering to increase the surplus as regards policyholders of FPIC. If the Company is unable to generate sufficient capital, either internally or from outside sources, it could be required to slow its growth. The Company intends to pursue further growth opportunities through greater penetration in existing markets and expansion into new jurisdictions (see "Business -- Growth Strategy"). As the Company expands, it will be underwriting policies for insureds in industries and geographic areas less familiar to the Company. In addition, the Company may rely to a greater extent on third party providers for assistance in adjusting claims and various administrative matters in its new markets. The Company's 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 further growth will depend on the efforts of key management personnel and on the Company's ability to attract and retain qualified persons, to enhance managerial systems for its operations, and to integrate successfully 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 and results of operations could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy." COMPETITION The property/casualty insurance industry is highly competitive. The Company competes with other property/casualty insurers both in the recruitment and retention of qualified independent agents to sell its products. Success in recruiting and retaining independent agents willing to sell the Company's products or services is dependent upon the commission rates, services, and the ability of the insurer to provide products that meet the needs of the agent and the agent's customers. In selling its insurance products, the Company competes with other insurers through independent agents (including insurers represented by the independent agents who represent the Company), with insurers having their own agency organizations and with direct sellers of insurance products. There are numerous companies competing for business in the geographic areas in which the Company operates. No single company dominates the marketplace, but many of the Company's competitors have more established national reputations and substantially greater financial resources and market share than the Company. The Company pays its agents a base commission of 15% with additional commission for meeting increasing volume levels. Should other insurers begin paying higher commissions than the Company, this would present a competitive disadvantage in attracting and retaining high-quality agents. While recognizing the significance of the rate of commission, the Company believes its efforts to serve the agents and their customers by providing superior service in underwriting and claims processing will allow it to continue to compete with other insurers. See "Business -- Competition." IMPORTANCE OF AN A.M. BEST RATING A.M. Best, an independent insurance rating agency, assigned FPIC a B++ (very good) rating in 1994. In 1996, A.M. Best upgraded FPIC's rating to A- (excellent). An A- rating is assigned to companies which have a balance, in A.M. Best's opinion, of excellent financial strength, operating performance and market profile when compared to the standards established by A.M. Best and have a good ability to meet their 9 11 ongoing obligations to policyholders. A- is A.M. Best's fourth highest rating classification out of 15 ratings. While the Company does not expect any reduction in its A.M. Best rating, there can be no assurance that the Company will continue to be rated A-. Any significant decline in the Company's future ratings could have a material impact on its relationship with clients, and thus, a material adverse effect on the Company. A.M. Best rates firms both on quality and on size. The size categories range from I, which represents surplus as regards policyholders of less than $1 million, to XV, which represents surplus as regards policyholders of greater than $2 billion. Prior to the Offering, FPIC was financial size V, representing surplus as regards policyholders between $10 million and $25 million. Following this Offering, it is expected that FPIC will be category VI, representing surplus as regards policyholders between $25 million and $50 million. When considering whether to accept a Financial Pacific policy, customers often review both the rating and the financial size category. While many customers and potential customers view an A- rating as sufficient, there are others that require financial category sizes of VII and greater. There can be no assurance that customers will continue to accept FPIC's rating and financial category regardless of the Offering. See "Business -- Ratings." LIMITS ON WRITING INSURANCE The California Department of Insurance ("DOI") and insurance regulators in all other states in which the Company is licensed, presently recommend that the Company's annual net premiums written not exceed three times (300%) its surplus as regards policyholders. As of December 31, 1997, the Company's annual net premiums written to surplus as regards policyholders was 1.89 to 1. This limitation could restrict the Company's future growth and profitability unless the Company is able to increase its surplus as regards policyholders or modify its reinsurance arrangements to cede more of its premiums. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Business -- Regulation -- Limits on Writing Business" and "-- Surplus as Regards Policyholders." RELIANCE ON KEY PERSONNEL The Company depends, and will continue to depend, on the services of Robert C. Goodell, the Company's Chairman, President and Chief Executive Officer, as well as the other members of the senior management team. The Company has entered into an employment agreement with Mr. Goodell for a one-year term. This agreement will automatically renew at the end of such term and each anniversary thereof for a successive one-year term unless terminated in accordance with such agreement. See "Management -- Employment Agreements." The loss of Mr. Goodell or any of the other senior managers could have a material adverse effect on the business of the Company. The Company is the sole beneficiary of a key man life insurance policy in the amount of $3.0 million which it maintains on Mr. Goodell. REGULATIONS, PENDING LEGISLATION AND CASE LAW The Company and FPIC, as a California domiciled insurer, are subject to extensive regulation by the DOI and the California Commissioner of Insurance ("Commissioner"). The Company is also subject to extensive regulation by the insurance regulatory agencies of Arizona, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah. The Company will also become subject to regulation in each jurisdiction in which it becomes licensed to transact business. Such regulation is primarily for the protection of policyholders rather than stockholders and could limit the Company's ability to react to changes in its marketplace or take advantage of new opportunities in a timely manner. Changes in such regulation could materially and adversely affect the Company's operations and financial condition. The nature and extent of such regulation varies from jurisdiction to jurisdiction, but typically involves: (i) standards of solvency and minimum amounts of capital and surplus which must be maintained; (ii) limits on types and amounts of investments; (iii) restrictions on the size of risks which may be insured by a single company; (iv) licensing of insurers and their agents; (v) required deposits of securities for the benefit of policyholders; (vi) approval of policy forms; (vii) establishment of statutory reporting practices and the form and content of statutory financial statements; (viii) establishment of methods for setting statutory loss and expense reserves; 10 12 (ix) review, and in some instances, prior approval of premium rates; (x) limits on transactions among insurers and affiliates; (xi) approval of all proposed changes of control; (xii) approval of dividends; (xiii) setting and collecting guarantee fund assessments; and (xiv) required filing of annual and other reports with respect to the financial condition and operation of insurers. In addition, state regulatory examiners perform periodic financial and underwriting examinations of insurers. In recent years, the insurance regulatory framework has been subject to increased scrutiny by the National Association of Insurance Commissioners (the "NAIC"), state legislatures, state insurance regulators and the United States Congress. The NAIC is a voluntary organization of state regulators. Its principal mission is to encourage uniformity in state regulation of insurance through the drafting of model laws and the continuing refinement of insurance accounting practices and reporting procedures. None of the NAIC's pronouncements has any legal effect unless enacted by individual states. The NAIC recently approved codification of statutory accounting practices that change the definition of what constitutes prescribed statutory accounting practices and will result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements. The codification becomes effective in 1999. The Company is unable to predict how codification will affect FPIC's statutory financial statements or how insurance rating agencies will interpret or react to any such changes. No assurance can be given that future legislative or regulatory changes resulting from such activities will not adversely affect the Company. See "Business -- Regulation." Currently, approximately 40% of the Company's business is related to artisan contractors. Accordingly, the law relating to construction defect liability can substantially affect the Company's business. Any changes in such laws, rules and regulations, including any attempt to find more fault with a contractor or subcontractor for problems with a project they worked on, could materially and adversely affect the operations of the Company. For example, in July of 1995, the California Supreme Court rendered its opinion on Montrose Chemical Corporation vs. Admiral Insurance Company (the "Montrose Decision"). In that decision, the Supreme Court ruled that in the case of a continuous and progressively deteriorating loss, such as pollution liability (or construction defect liability), an insurance company has a definitive duty to defend the policyholder until all uncertainty related to the severity and cause of the loss is extinguished. Therefore, multiple periods of coverage are triggered and often with multiple insurance companies. The Montrose Decision was in stark contrast to prior decisions wherein, only the carrier insuring the business when a loss first manifested itself was obligated to defend and/or provide indemnity relief. As a result of the Montrose Decision, the Company experienced a significant increase in construction defect liability cases, to which it would not have been subject under the old law. Once the new law was understood, the Company adjusted its underwriting guidelines to mitigate the risk. Management believes that the significant improvement in the results for accident years 1995 and following are attributed to changes in the Company's underwriting guidelines. The Company also relies on policy language, developed by the Company and by others, to exclude or limit coverage. If such language is held by a court to be invalid or unenforceable it could materially adversely affect the Company's financial position. The Company is unaware of any additional or amended legislation which is pending or contemplated concerning construction defect liability or other laws which, if adopted, could materially and adversely impact the Company's operations. See "Business -- Regulation" and "-- Reserves." HOLDING COMPANY STRUCTURE AND RESTRICTIONS ON DIVIDENDS As a holding company with no significant business operations of its own, the Group relies on dividends from its subsidiaries, which are domiciled in California, as the principal source of cash to meet its obligations, including the payment of principal and interest on its debt obligations and the payment of dividends to stockholders. California law places significant restrictions on the ability of FPIC to pay dividends to the Group. In particular, all dividends from FPIC require prior notice to the DOI. All "extraordinary" dividends must be approved in advance by the DOI. A dividend is deemed "extraordinary" if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of (i) FPIC's statutory net income (excluding unrealized capital gains) for the preceding calendar year or (ii) 10% of surplus as regards policyholders as of the preceding December 31st. Additionally, unless approved in advance by the 11 13 DOI, no dividend may be paid by FPIC except from unassigned funds or earned surplus. The DOI may disallow the payment of any dividend if, in the DOI's opinion, the payment would in any way violate the California Insurance Code (the "Code") or be hazardous to policyholders, creditors or the public. Based on these limitations and statutory results, as of December 31, 1997, the maximum dividend that could be paid by FPIC to the Group in 1998, without obtaining prior regulatory approval from the DOI, would be $1,426,000. A dividend in the amount of $300,000 was declared and paid on January 1, 1998 to fund the debt service on the Group's Senior Notes. There can be no assurance that dividends will be declared by the Group in the future or that any required approval for payment of dividends by FPIC will be obtained from the applicable state insurance departments. See "Dividend Policy," "Business -- Regulation" and "-- Regulation of Dividends and Other Payments from Insurance Subsidiaries." Income from FPIA is not subject to dividend restrictions; however, the income generated by FPIA has been de minimis in the past and is expected to be de minimis for several years. See "Business -- Financial Pacific Insurance Agency." RELIANCE ON TECHNOLOGY The Company relies heavily on computers in all aspects of its business including rating, issuing and billing policies. In the event of a disaster which results in the loss of some or all of the Company's computer hardware and/or software, the Company would incur significant recovery expense. While the Company purchases insurance against such an event, there can be no assurance that the Company would be fully compensated for the costs incurred in recovering to full operations, and as such, an event of this nature could materially adversely affect the Company's short-term operating results. CONTROL OF COMPANY After the completion of this Offering, Robert C. Goodell and the existing investors will still own approximately 48% of the Company's outstanding Common Stock. Mr. Goodell and the existing investors will have power to influence the Company, to select the Board of Directors and to approve any action requiring stockholder approval, including adopting amendments to the Company's Certificate of Incorporation and approving or disapproving mergers or sales of all the assets of the Company. As long as Mr. Goodell and the other original stockholders maintain their ownership of the Company's Common Stock, third parties will have a difficult time obtaining control of the Company through purchases of the Common Stock in the open market. "See Principal and Selling Stockholders," "Certain Transactions" and "Description of Capital Stock." POTENTIAL ANTI-TAKEOVER EFFECT OF REGULATION AND CERTAIN CHARTER PROVISIONS Under the terms of California law governing insurance holding companies, any person or entity desiring to acquire 10% or more of the Company's outstanding voting securities is required to obtain prior approval of the DOI. In addition, certain other factors may have the effect of deterring, delaying, or preventing a change in control of the Company without further action by the stockholders; may discourage bids for the Common Stock at a premium over the market price of the Common Stock; and may adversely affect the market price of, and the voting and other rights of the holders of, Common Stock. These factors include the absence of cumulative voting and the ability of the Company's directors to issue "blank check" preferred stock and provisions of Delaware law. See "Business -- Regulation -- Insurance Regulation Concerning Change or Acquisition of Control" and "Description of Capital Stock." ABSENCE OF PRIOR PUBLIC MARKET Prior to this Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or continue after this Offering. The initial public offering price has been determined by negotiations between the Company and the representative of the Underwriters and may not be indicative of the market price for the Common Stock after this Offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The market price of the 12 14 Common Stock could be subject to significant fluctuations in response to variations in quarterly and yearly operating results, general trends in the Company's industry, the overall performance of the stock market and other factors. See "Underwriting." USE OF PROCEEDS Of the net proceeds to the Company from this Offering, estimated to be $17.9 million (or approximately $21.4 million if the Underwriters' over-allotment option is exercised in full), $16.2 million will be contributed by the Company to the capital of FPIC, thereby increasing its capacity to write additional premiums and retain a greater percentage of direct premiums written which has historically been ceded to reinsurers. Simultaneously with this Offering, all of the outstanding Senior Note Warrants will be exercised and the aggregate exercise price of $3.3 million will be offset against the $5 million outstanding principal balance of the Senior Notes. The balance of the Senior Notes, $1.7 million, will be paid with a portion of the proceeds from this Offering. The Senior Notes bear interest at an annual rate of 12% and mature on January 1, 2001. The remainder of the estimated net proceeds, if any, is expected to be utilized by the Company for general corporate purposes including expansion of its business. The portion of the proceeds contributed to FPIC will initially be invested in short-term, investment grade, interest-bearing securities pending orderly reinvestment in accordance with the Company's investment policies. See "Business -- Regulation -- Limits on Writing Business" and "Business -- Investments." The Company will not receive any proceeds from the sale of the shares by the Selling Stockholders. DIVIDEND POLICY The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future, but instead intends to retain its earnings in order to fund the continued development and growth of the Company's business. All dividends from FPIC require prior notice to the DOI. All "extraordinary" dividends must be approved in advance by the DOI. A dividend is deemed "extraordinary" if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of: (i) FPIC's statutory net income (excluding unrealized capital gains) for the preceding calendar year or (ii) 10% of surplus as regards policyholders as of the preceding December 31st. Additionally, unless approved in advance by the DOI, no dividend may be paid by FPIC except from unassigned funds or earned surplus. The DOI may disallow the payment of any dividend if, in the DOI's opinion, the payment would in any way violate the Code or be hazardous to policyholders, creditors or the public. See "Business -- Regulation of Dividends and Other Payments from Insurance Subsidiaries." For further discussion of these restrictions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Business -- Regulation" and Notes to Consolidated Financial Statements. 13 15 DILUTION At December 31, 1997, the outstanding shares of Common Stock had a pro forma net tangible book value per share of $5.74. Assuming the 2,000,000 shares of Common Stock offered by the Company hereby had been sold at December 31, 1997 and without reflecting the effect of operations subsequent to that date, the net tangible book value per share for all outstanding shares of Common Stock (after deducting estimated offering expenses, including underwriting discount) would have been $7.03. This represents an immediate increase in net tangible book value of $1.29 per share to existing stockholders and an immediate dilution of $2.97 per share to new investors, as illustrated in the following table: Estimated public offering price per share................... $10.00 ------ Pro forma net tangible book value per share before offering............................................... 5.74 Increase per share attributable to new investors.......... 1.29 ------ Pro forma net tangible book value per share after offering.................................................. 7.03 ------ Immediate dilution to new investors......................... 2.97 ------
If the Underwriters exercise in full their right to purchase an additional 375,000 shares of Common Stock to cover over-allotments, the net tangible book value after the Offering would be $7.18 per share of Common Stock, which would result in a dilution to public investors of $2.82 per share. The following table sets forth on a pro forma basis as of December 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid, and the average price per share paid by the existing stockholders and by purchasers of the shares of Common Stock offered hereby (giving effect to the conversion of Series A Stock outstanding as of December 31, 1997 into 1,735,251 shares of Common Stock, the exercise of Warrants to purchase 747,216 shares of Common Stock and the sale of 2,000,000 shares by the Company at an initial public offering price of $10.00 per share, before deducting the underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ---------- ------- ------------- Existing Stockholders........ 2,968,450 59.7% 8,670,451 30.2% $ 2.92 New Public Investors......... 2,000,000 40.3% 20,000,000 69.8% $10.00 --------- ----- ---------- ----- Total.............. 4,968,450 100.0% 28,670,451 100.0% ========= ===== ========== =====
The information set forth above does not give effect to the potential exercise of options to purchase an aggregate of 31,550 shares of Common Stock as of December 31, 1997 at exercise prices ranging from $2.54 to $4.82 per share to certain of the Company's officers, employees and former employees. Some of these options can be exercised immediately. Purchasers of shares of Common Stock offered hereby will incur additional dilution to the extent outstanding stock options are exercised. See "Management." 14 16 CAPITALIZATION The following table sets forth the consolidated short-term debt and capitalization of the Company as of December 31, 1997, and as adjusted to reflect the restatement of the Company's Certificate of Incorporation to increase the authorized number of shares of Preferred Stock and Common Stock, effective April 14, 1998, a 394.375 for 1 split of the Common Stock effective on April 14, 1998, the sale by the Company of 2,000,000 shares of Common Stock to the public at an assumed initial offering price of $10.00 per share, and the application of the net proceeds of $17.9 million therefrom. See "Use of Proceeds."
AS OF DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED ----------- ----------- Short-term debt............................................. $ -- $ -- =========== =========== Long-term debt.............................................. $ 4,984,561 $ -- ----------- ----------- Stockholders' equity: Preferred stock, $.001 par value, authorized 5,000 shares (2,000,000 as adjusted); issued and outstanding 4,400 shares (no shares as adjusted)......................... 5 -- Common stock, $.001 par value, authorized 10,000 shares (7,500,000 as adjusted); issued and outstanding 485,983 shares (4,968,450 shares as adjusted)(1)............... 486 4,968 Additional paid-in capital................................ 4,949,510 26,565,033 Net unrealized loss on available for sale securities, net of deferred federal income taxes....................... (33,521) (33,521) Retained earnings......................................... 8,481,658 8,481,658 ----------- ----------- Total stockholders' equity........................ 13,398,138 35,018,138 =========== =========== Total capitalization.............................. $18,382,699 $35,018,138 =========== ===========
- --------------- (1) Excludes 31,550 shares of Common Stock reserved for issuance upon exercise of options outstanding as of December 31, 1997 pursuant to grants to various officers, employees and former employees of the Company. See "Management -- 1993 Stock Incentive Plan." The as adjusted amount includes 1,735,251 shares of Common Stock to be issued upon conversion of the Series A Stock and 747,216 shares of Common Stock to be issued upon exercise of all outstanding Warrants. 15 17 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial data of the Company as of and for each of the years in the five-year period ended December 31, 1997. All information is presented in accordance with GAAP, except for the statutory property/casualty ratios and surplus as regards policyholders, which are presented in accordance with SAP. The financial data is derived from the consolidated financial statements and accounting records of the Company. The consolidated financial statements as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 and the report thereon are included elsewhere in the Prospectus and have been audited by KPMG Peat Marwick, LLP, independent certified public accountants. The industry combined ratio data presented under "Statutory Ratios" is unaudited. The selected consolidated financial data set forth below is qualified by reference to, and should be read in conjunction with, the consolidated financial statements of the Company and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------- ------- -------- -------- --------- (In thousands, except per share data and ratios) INCOME STATEMENT DATA: Revenues: Direct premiums written............... 6,094 15,072 $ 24,695 $ 31,927 $ 39,512 Premiums ceded........................ (2,345) (5,782) (10,653) (13,674) (12,576) ------- ------- -------- -------- --------- Net premiums written........... 3,749 9,290 14,042 18,253 26,936 ------- ------- -------- -------- --------- Net premiums earned............ 2,380 6,701 12,060 14,987 22,854 Commissions........................... 159 213 105 628 709 Investment income, net of expenses.... 523 750 1,028 1,449 1,720 Net realized gains (losses) on sales of investments...................... 68 (246) 466 52 (46) Other income, net..................... (107) 502 578 547 800 ------- ------- -------- -------- --------- Total revenues...................... 3,023 7,920 14,237 17,663 26,037 Expenses: Losses and loss adjustment expenses... (273) 2,944 6,325 9,750 12,748 Policy acquisition costs.............. 610 1,493 3,957 4,785 7,440 Contingent ceding commission.......... -- (422) (1,246) (3,222) (1,511) General operating costs............... 731 2,297 1,712 1,929 2,443 Agency expenses....................... 136 253 145 688 721 Interest expense...................... 21 113 128 693 617 ------- ------- -------- -------- --------- Total expenses...................... 1,225 6,678 11,021 14,623 22,458 ------- ------- -------- -------- --------- Income before taxes................... 1,798 1,242 3,216 3,040 3,579 ------- ------- -------- -------- --------- Income tax provision........... 588 465 1,066 1,037 1,237 ------- ------- -------- -------- --------- Net income..................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 ======= ======= ======== ======== ========= EARNINGS PER SHARE(2): Basic............................... $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 Diluted............................. $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 Weighted average diluted shares..... 988 1,956 2,292 2,901 2,962 GAAP RATIOS(3): Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% Expense ratio....................... 56.1 52.0 36.6 23.3 36.3 ------- ------- -------- -------- --------- Combined ratio...................... 49.1% 95.9% 89.0% 88.4% 92.1% ======= ======= ======== ======== ========= STATUTORY RATIOS(3): Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% Expense ratio....................... 42.6 51.5 37.0 25.5 36.5 ------- ------- -------- -------- --------- Combined ratio...................... 35.6% 95.4% 89.4% 90.6% 92.3% ======= ======= ======== ======== ========= Industry combined ratio(4).......... 112.2% 110.1% 110.5% 111.0% 101.8%
16 18
AS OF DECEMBER 31, --------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (In thousands, except per share data) BALANCE SHEET DATA: Total cash and investments............... $12,245 $12,935 $22,689 $24,046 $29,977 Total assets............................. 24,839 31,308 47,339 54,684 65,893 Unpaid losses and loss adjustment expenses............................... 7,125 10,141 12,225 13,944 19,592 Total debt(5)............................ 1,633 1,225 5,901 5,479 4,985 Stockholders' equity..................... 5,410 6,908 9,142 10,615 13,398 OTHER DATA: Book value per common share(2)........... $ 2.79 $ 3.07 $ 4.33 $ 4.82 $ 5.74 Surplus as regards policyholders(5)...... $ 5,890 $ 5,773 $12,387 $13,788 $14,262 Underwriting profit(6)................... 1,312 389 1,585 1,745 1,734
- --------------- (1) Effective November 12, 1993, the Group completed the acquisition of FPIC and FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993. Because management of the Group had effective control of FPIC and FPIA as of May 26, 1993, the acquisition has been accounted for as of that date. Accordingly, the 1993 consolidated financial statements include results of operations for the period of May 26, 1993 through December 31, 1993. (2) All periods adjusted to reflect a 394.375 for 1 stock split effective April 14, 1998. (3) During 1993, in conjunction with the acquisition, management determined that the Company's IBNR reserves were redundant and recorded a reserve reduction of $2.4 million. (4) Source: "Best's Insurance Reports Property/Casualty United States, 1997 Edition." The 1997 ratio is based on A.M. Best's estimate contained in the January 1998, "Review Preview -- Property/Casualty." A comparison of a company's combined ratio with the industry combined ratio does not necessarily indicate that a company has performed well or poorly as compared with its peers. (5) Effective December 28, 1995, the Company issued $5 million in Senior Notes. The Senior Notes were issued in conjunction with the Senior Note Warrants. The proceeds from the issuance of the Senior Notes were contributed to FPIC's capital. (6) Underwriting profit represents the difference between premiums earned and underwriting expenses. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Group is a Delaware holding company formed in 1993 for the purpose of acquiring 100% of the outstanding shares of M.L. Oates Insurance Company ("Oates"), a Sacramento-based property/casualty insurance company domiciled in California, and its affiliated agency. The name of the insurance company was changed to Financial Pacific Insurance Company following the acquisition in 1993. FPIC underwrites primarily CMP policies through its office in Rocklin, California, which is approximately 20 miles northeast of Sacramento. FPIC also underwrites commercial automobile insurance as a companion coverage to its CMP business, and surety bonds. The Group also owns FPIA, an insurance agency acquired in 1993 and renamed in 1995 that specializes in the direct mail distribution of license and permit surety bonds in 36 states on behalf of Markel Corporation. The Company markets commercial property/casualty insurance through 212 independent insurance agents, as of March 31, 1998, located primarily throughout northern and central California. The Company believes its relationship with these agents allows it to provide ongoing and attentive service to its targeted customer base -- small to medium-sized commercial establishments. Management believes this market has been overlooked by many of the larger insurance companies as a result of the lower premiums per policy and, in some cases, the remote locations of its clients and the agents. The following table sets forth the Company's direct premiums written, net premiums earned and losses and LAE ratios by line of business and combined ratios since 1993.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------- ------- ------- ------- ------- ($'s in 000's) DIRECT PREMIUMS WRITTEN: CMP-Property............................ $1,190 $ 1,570 $ 2,668 $ 3,728 $ 4,490 CMP-Liability........................... 6,270 9,435 14,167 17,767 22,766 Commercial Auto Liability............... 1,037 2,678 4,982 6,414 6,825 Commercial Auto Physical Damage......... 387 683 1,182 1,748 2,244 Inland Marine........................... 398 645 1,142 1,536 1,884 Surety.................................. 133 47 500 589 1,129 Fidelity................................ 4 14 54 145 174 ------ ------- ------- ------- ------- Total........................... $9,419 $15,072 $24,695 $31,927 $39,512 ====== ======= ======= ======= =======
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------- ------ ------- ------- ------- ($'s in 000's) NET PREMIUMS EARNED: CMP-Property............................. $ 201 $ 298 $ 548 $ 882 $ 1,134 CMP-Liability............................ 2,444 4,652 7,579 8,862 14,872 Commercial Auto Liability................ 453 1,037 2,973 3,126 4,919 Commercial Auto Physical Damage.......... 233 462 948 892 768 Inland Marine............................ 43 136 275 379 486 Surety................................... 128 108 115 353 517 Fidelity................................. 2 8 21 94 158 ------ ------ ------- ------- ------- Total............................ $3,504 $6,701 $12,459 $14,588 $22,854 ====== ====== ======= ======= =======
18 20
YEAR ENDED DECEMBER 31, ------------------------------------------- 1993(1)(2) 1994 1995 1996 1997 ---------- ---- ---- ---- ----- LOSS AND LAE RATIOS: CMP-Property..................................... 21.4% 43.0% 70.8% 38.5% 107.1% CMP-Liability.................................... (10.4) 46.8 45.8 59.1 50.4 Commercial Auto Liability........................ 21.0 43.8 62.1 97.2 66.2 Commercial Auto Physical Damage.................. 18.5 32.3 72.0 82.1 54.7 Inland Marine.................................... 48.8 33.1 50.9 25.1 53.5 Surety........................................... (2.3) (7.4) 2.6 19.5 14.5 Fidelity......................................... --(3) 0.0 0.0 0.0 19.0 ----- ---- ---- ---- ----- Total.................................... (7.0%) 43.9% 52.4% 65.1% 55.8% ===== ==== ==== ==== ===== STATUTORY COMBINED RATIOS: Loss Ratio(4)...................................... (7.0%) 43.9% 52.4% 65.1% 55.8% Expense Ratio...................................... 42.6 51.5 37.0 25.5 36.5 ----- ---- ---- ---- ----- Combined Ratios.......................... 35.6% 95.4% 89.4% 90.6% 92.3% ===== ==== ==== ==== =====
- --------------- (1) Although the Group assumed control of FPIC's operations effective May 26, 1993, for comparison purposes the above table reflects underwriting results for the year ended December 31, 1993. (2) During 1993, in conjunction with the acquisition, management determined that the Company's IBNR reserves were redundant and recorded a reserve reduction of $2.4 million. (3) Not meaningful based on immateriality of fidelity earned premium of $2,000 in 1993. (4) The increase in the loss ratio from 52.4% in 1995 to 65.1% in 1996 resulted primarily from the effects of the Montrose Decision in July 1995. As a result of the Montrose Decision, the Company retroactively incurred construction defect claims for which, prior to this decision, there would have been no liability. The Company has subsequently revised its underwriting practices in response to the Montrose Decision. See "Risk Factors -- Regulation, Pending Legislation and Case Law." Because insurance companies derive revenues (and incur losses) from investing activities as well as underwriting activities, an underwriting loss in a period does not necessarily preclude profitability for that period. A combined ratio of under 100% indicates an underwriting profit. A combined ratio in excess of 100% indicates an underwriting loss. Persistent underwriting losses reduce profitability and, when coupled with investment losses in any period, result in negative earnings which reduce the insurer's capital and therefore its ability to underwrite further business. RESULTS OF OPERATIONS Year ended December 31, 1996 versus December 31, 1997 Direct premiums written. Direct premiums written for the years ended December 31, 1996 and 1997 were $31.9 million and $39.5 million, respectively, representing an increase of 24%. Direct premiums written increased by the attraction of a larger percentage of business from each of the Company's existing agents, appointment of new agents and continued expansion of specialty program business (i.e., bowling centers, refuse haulers, farm labor contractors and restaurants). During 1997, total production from agents appointed as of December 31, 1996 increased by approximately 20%. The number of appointed independent agents also increased by approximately 15% from 198 as of December 31, 1996 to 227 as of December 31, 1997. The specialty program business direct premiums written increased from $6.2 million in 1996 to $8.0 million in 1997. Premiums ceded. Premiums ceded for the years ended December 31, 1996 and 1997 were $13.7 million and $12.6 million, respectively, representing a decrease of 8%. Premiums ceded as a percentage of direct premiums written decreased from 42.8% in 1996 to 31.8% in 1997, as FPIC changed its reinsurance structure to increase its retention. As discussed further in "Business -- Reinsurance," effective July 1, 1996, FPIC 19 21 increased its retention on property lines of business from $300,000 to $600,000 and effective January 1, 1997, FPIC increased its retention on casualty lines of business from $100,000 to $250,000. FPIC increased its retention in order to retain more of its underwriting income and reduce the underwriting income ceded to reinsurers. Net premiums earned. Net premiums earned for the years ended December 31, 1996 and 1997 were $15.0 million and $22.9 million, respectively, representing an increase of 52%. The increase in net premiums earned is reflective of the growth in direct premiums written and reduction in premiums ceded. Commissions. Commissions earned for the years ended December 31, 1996 and 1997 were $628,000 and $709,000, respectively, representing an increase of 13%. The increase reflects the continued growth of FPIA premium production. Investment income. Investment income for the years ended December 31, 1996 and 1997 was $1.4 million and $1.7 million, respectively, representing an increase of 19%. The increase in investment income is consistent with the 16% increase in the average invested assets balance from $23.4 million in 1996 to $27.0 million in 1997. The growth in invested assets reflects the investment of cash flows generated by operations. The weighted average investment yield also increased from 6.2% for 1996 to 6.4% for 1997. Net realized gains (losses) on sales of investments. Net realized gains (losses) on sales of investments were a $52,000 net realized gain and a ($46,000) net realized loss for the years ended December 31, 1996 and 1997, respectively. Other income (expense). Other income (expense) for the years ended December 31, 1996 and 1997 was $547,000 and $801,000, respectively. Other income (expense) consists primarily of policyholder service fees related to the direct bill installment payment plan. The increase in other income (expense) is due primarily to the increase in direct premiums written as approximately 80% of the policies issued are on the direct bill installment pay plan. The increase was also impacted by the $80,000 write-off in 1996 of the note receivable related to the sale in 1994 of the Company's direct book of business to an existing agent. The write-off reflected a higher than expected runoff of the sold business. Losses and loss adjustment expenses. Losses and LAE decreased as a percentage of net premiums earned from 65.1% in 1996 to 55.8% in 1997. The decreased loss ratio is due in part to a reduced "Montrose effect" as compared to 1996. The net impact to the Company was the creation of a retroactive liability for construction defect claims previously denied. The "Montrose effect" relates to the Montrose Decision and is discussed in detail at "Risk Factors -- Regulations, Pending Legislation and Case Law" and "Business -- Reserves." The reduced loss ratio is also attributed in part to the formation in 1997 of in-house legal defense capability and the subsequent assignment of all new legal defense work, as well as reassignment of open files previously handled by external attorneys. Policy acquisition costs. Policy acquisition costs increased as a percentage of net premiums earned from 31.9% in 1996 to 32.6% in 1997. The increase is due primarily to the bonus commission earned by agents which increased from $431,000 in 1996 to $639,000 in 1997. Agents earn a bonus commission ranging from 1.5% to 4.0% based on their annual production volume. Contingent ceding commission. Contingent ceding commission decreased from $3.2 million or 23.6% of premiums ceded in 1996 to $1.5 million or 12.0% of premiums ceded in 1997. The decline in contingent ceding commission is related to unfavorable loss development on the swing-rated reinsurance treaties as well as increases in the provisional ceding commission rates on the property and casualty reinsurance contracts effective January 1, 1997. General operating costs. General operating costs decreased as a percentage of net premiums earned from 12.9% in 1996 to 10.7% in 1997. The decrease is attributed to the 52% increase in net premiums earned exceeding the 27% increase in general operating expenses from 1996 to 1997, respectively. During 1997 the Company incurred approximately $300,000 in non-recurring costs primarily related to software/system recovery expenses and relocation of the Company headquarters. 20 22 Agency expenses. Agency expenses for the years ended December 31, 1996 and 1997 were $688,000 and $721,000, respectively, representing a 5% increase. The increase is consistent with the growth in commissions over the same period. Interest expense. Interest expense decreased from $692,000 to $617,000 for the years ended December 31, 1996 and 1997, respectively. The decrease in interest expense related to reductions in the outstanding debt due to the prepayment of the original seller financing debt in May 1996 and the payoff of the $500,000 bank line of credit in April 1997. Income before federal income taxes. Income before federal income tax increased by 18% from $3.0 million in 1996 to $3.6 million in 1997. Net income. Net income increased from $2.0 million, or $0.69 per diluted share, for the year ended December 31, 1996 to $2.3 million, or $0.79 per diluted share, for the year ended December 31, 1997, representing an increase of 17%. Year ended December 31, 1995 versus December 31, 1996 Direct premiums written. Direct premiums written for the years ended December 31, 1995 and 1996 were $24.7 million and $31.9 million, respectively, representing a 29% increase. Direct premiums written increased due to the attraction of a larger percentage of business from each of the Company's agents, appointment of new agents and expansion of the specialty program business. During 1996, the total production increased by approximately 25% for agents who were appointed as of December 31, 1995. The number of appointed agents also increased by approximately 13% from 176 as of December 31, 1995 to 198 as of December 31, 1996. Additionally, the Company continued to diversify its geographic and portfolio risk by expanding its operating territory and adding specialty program business such as refuse haulers, farm labor contractors, bowling centers and restaurants. The specialty programs accounted for direct premiums written of $4.7 million in 1995 and $6.2 million in 1996. Premiums ceded. Premiums ceded for the years ended December 31, 1995 and 1996 were $10.7 million and $13.7 million, respectively, representing an increase of 28%. Premiums ceded as a percentage of direct premiums written decreased from 43.1% in 1995 to 42.8% in 1996 as FPIC changed its reinsurance structure to increase its retention. As discussed further in "Business -- Reinsurance," effective July 1, 1996, FPIC increased its retention on property lines of business from $300,000 to $600,000 to retain more of its underwriting income and reduce the underwriting income ceded to reinsurers. Net premiums earned. Net premiums earned for the years ended December 31, 1995 and 1996 were $12.1 million and $15.0 million, respectively, representing an increase of 24%. Commissions. Commissions earned for the years ended December 31, 1995 and 1996 were $105,000 and $628,000, respectively. The increase reflects expanded production of surety premiums by FPIA during 1996. FPIA commenced operations during 1995. Investment income. Investment income for the years ended December 31, 1995 and 1996 was $1.0 million and $1.4 million, respectively, representing a 41% increase. The increase in investment income is due primarily to the investment of the proceeds from the $5.0 million Senior Notes issuance which occurred on December 28, 1995. Additionally, invested assets increased from $22.7 million at December 31, 1995 to $24.0 million at December 31, 1996 due to the investment of cash flow generated by operations. The average investment yield decreased from 6.6% (adjusted to reflect $5 million in investments purchased on December 29, 1995) in 1995 to 6.2% in 1996 due to declining interest rates. Net realized gains on sales of investments. Net realized gains on sales of investments were $466,000 in 1995, as compared to $52,000 in 1996. The increased realized gains in 1995 resulted from a reclassification of the investment portfolio from held to maturity to available for sale and the related sale of certain securities to take advantage of favorable market conditions. Other income (expense). There was no material change in the amount of other income from 1995 to 1996. 21 23 Losses and loss adjustment expenses. Losses and loss adjustment expenses increased as a percentage of net premiums earned from 52.4% in 1995 to 65.1% in 1996. The increased loss ratio is due to the "Montrose effect". The net impact to the Company was the creation of a retroactive liability for construction defect claims previously denied. The "Montrose effect" relates to the Montrose Decision which is discussed in detail at "Risk Factors -- Regulations, Pending Legislation and Case Law" and "Business -- Reserves." Policy acquisition costs. There was no material change in the relationship of policy acquisition costs to net premiums earned between 1995 and 1996. Contingent ceding commission. Contingent ceding commission increased from $1.2 million or 11.7% of premiums ceded in 1995 to $3.2 million or 23.6% of premiums ceded in 1996. The increase in contingent ceding commission is due to favorable loss development on the swing-rated reinsurance treaties. General operating costs. General operating costs decreased as a percentage of net premiums earned from 14.2% in 1995 to 12.9% in 1996. The decrease is attributed to the 24% increase in net premiums earned exceeding the 13% increase in general operating costs and expenses from 1995 to 1996. Agency expenses. Agency expenses for the years ended December 31, 1995 and 1996 were $145,000 and $688,000, respectively. The increase is consistent with the growth in commissions over the same period. Interest expense. Interest expense increased from $128,000 to $692,000 for the years ended December 31, 1995 and 1996, respectively. The increase in interest expense is due to the issuance of $5.0 million of Senior Notes effective December 28, 1995 and is offset in part by the prepayment of the original seller financing in May 1996. Income before federal income tax. Income before federal income tax decreased by 5% from $3.2 million in 1995 to $3.0 million in 1996. Net income. Net income decreased from $2.1 million, or $0.94 per diluted share for the year ended December 31, 1995, to $2.0 million, or $0.69 per diluted share, for the year ended December 31, 1996, representing a decrease of 27%. The Senior Note Warrants issued on December 28, 1995 increased the dilution of earnings per share in 1996 but had little effect in 1995. LIQUIDITY AND CAPITAL RESOURCES Operations The Company receives substantial cash from premiums, and to a lesser extent, reinsurance recoverables, investment income and other income. The principal cash outflows are for the payment of claims, premiums paid to reinsurers, LAE, policy acquisition costs, operating costs and taxes. Substantially all of the Company's revenue is received by, and expenses are incurred on behalf of, FPIC. Net cash provided by operations was $2.5 million for the year ended December 31, 1996 and $6.6 million for the year ended December 31, 1997. Amounts due from reinsurers increased 54% from $4.0 million to $6.2 million as of December 31, 1996 and 1997, respectively. Such increase was primarily due to the increase in covered losses and LAE. See Notes to Consolidated Financial Statements. Because the Company collects cash now for liabilities that may not require payment for a number of years, an increase in the Company's direct premiums written will result in an increase in its cash and investment portfolio. Since acquiring the Company in 1993, the Company's investment portfolio has increased substantially. The increase was ratable with the increase in the Company's direct premiums written. Investing Net funds used in investing activities of the Company were $2.5 million for the year ended December 31, 1996 and $6.0 million for the year ended December 31, 1997. The comparative increase from December 31, 1996 to December 31, 1997 was attributable to the investment of cash provided by operating activities. The Company maintains a sufficient level of cash and liquid short-term investments to meet anticipated obligations, including claim payments. As of December 31, 1997, the Company had cash and short-term 22 24 investments of approximately $0.6 million. The Company's remaining investment portfolio on such date consisted of $30.0 million of fixed maturity securities, which could provide additional liquidity and cash for operations. All of the Company's investments are investment grade, short and intermediate-term fixed income securities. See "Business -- Investments." Capital Expenditures During 1996 and 1997, the Company purchased approximately $400,000 and $700,000, respectively, in capital equipment. The capital expenditures consisted primarily of computer and office equipment acquired in conjunction with the upgrade and standardization of the Company's computer and office equipment and the move to its new headquarters in Rocklin, California. No significant future capital expenditures are currently planned. Financing Net funds used in financing activities of the Company were $0.4 million for the year ended December 31, 1996 and $0.5 million for the year ended December 31, 1997. The Company has a bank line of credit agreement which provides for a $530,000 credit facility bearing interest (payable monthly) on outstanding balances at an annual rate of prime plus 1.00%. As of December 31, 1997, $500,000 of this credit facility was available. The bank line of credit matures on July 1, 1998 and the Company has not determined whether it will renew this agreement. The Company believes its cash resources are adequate to meet its operating requirements. Reinsurance FPIC has quota share reinsurance, excess of loss reinsurance and semi-automatic facultative reinsurance contracts, under which certain types of policies are automatically reinsured to a predetermined amount. Due to these reinsurance agreements, the maximum exposure to the Company is $600,000 on any one property claim and $250,000 on any one liability claim. The reinsurance contracts renew annually. FPIC's reinsurers are rated "A-" or better by A.M. Best. See "Business -- Reinsurance." Dividend Restrictions Dividends paid by a California domiciled insurance company are subject to limitations imposed by the Code. Under the Code, cash dividends may be paid by an insurance company only from statutory earnings. In addition, a California domiciled insurer may not pay an "extraordinary" dividend to its stockholders without prior approval of the DOI. An extraordinary dividend or distribution is defined as a dividend or distribution of cash or other property whose fair market value, together with other dividends and distributions made within the preceding 12 months, exceeds the greater of 10% of earned surplus as regards policyholders as of December 31 of the preceding year or statutory net income (excluding unrealized capital gains) for the immediately preceding calendar year. As of January 1, 1998, the maximum dividend payable by FPIC without approval of the DOI is $1,426,000. A dividend in the amount of $300,000 was declared and paid on January 1, 1998 to fund the debt service on the Senior Notes. See "Business -- Regulation -- Regulation of Dividends and Other Payments From Insurance Subsidiaries." Impact of Inflation The Company's operations, like those of other property/casualty insurers, are susceptible to the effects of inflation, as premiums are established before the ultimate amounts of losses and LAE are known. Management considers the potential effects of inflation when setting premiums. Nonetheless, such premiums may not fully compensate for the effects of inflation. 23 25 In addition, inflation may adversely affect the rate of return on the Company's investment portfolio, as well as its portfolio market value. New Accounting Standards Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information," were issued in June 1997 and are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income, which includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. SFAS No. 131 establishes standards for disclosures related to business operating segments. The Company is currently evaluating the impact that these statements will have on the consolidated financial statements. PRIMARY DIFFERENCES BETWEEN GAAP AND SAP The financial statements contained herein have been prepared in conformity with GAAP, as opposed to SAP, which is prescribed for insurance companies by insurance regulatory authorities. SAP differs from GAAP principally in the following respects: (a) premium income is taken into operations over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred; (b) deferred income taxes are not recognized; (c) certain assets such as agents' balances over 90 days due and prepared expenses are nonadmitted assets; (d) policyholder dividends are accrued when declared; (e) the cash flow statement is not consistent with classifications and the presentation under GAAP; (f) bonds are recorded at amortized cost, regardless of trading activities; and (g) loss and loss adjustment expense reserves and unearned premium reserves are stated net of reinsurance. YEAR 2000 COMPLIANCE The Company's systems are compliant with Year 2000 requirements with the exception of the claims accounting system, which the Company plans to replace before the end of 1999. 24 26 BUSINESS GENERAL The Company is a regional, custom-underwriting insurance company. The Company provides superior service to small and medium-sized commercial customers within specified niche markets which are typically overlooked by large insurance companies. During 1997, the Company derived direct premiums written from artisan contractors (40%), commercial property owners (5%), light industrial businesses (5%), a variety of other businesses (25%) and special programs (25%). The special programs were designed for refuse haulers, farm labor contractors, bowling centers and restaurants. For these programs, the Company has developed underwriting expertise and focused marketing materials and applies rate deviations or coverage extensions. The Company writes the vast majority of its business in rural markets in California. FPIC is currently rated A-(excellent) by A.M. Best. Direct premiums written grew at a compound annual rate of 38% from $15.1 million in 1994, to $39.5 million in 1997. Net income increased at a compound annual rate of 44% from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio, which is a measure of underwriting profitability, was 92% in 1997, well below the industry average of 102%. Much of the Company's growth and profitability is attributable to its retention of renewal policies. Renewal retention rates were 81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively. The Company markets insurance through 212 independent insurance agents, as of March 31, 1998. The Company believes its relationship with its agents allows it to provide ongoing and attentive service to its targeted customer base. The Company's strategy is to focus on writing policies that typically generate between $1,100 to $5,000 in annual premiums. Management believes this market has been overlooked by many of the larger insurance companies as a result of lower annual premiums per policy, and in some cases, the remote locations of the policyholders and the agents. During 1997, approximately 58% of the Company's direct premiums written was for CMP-Liability coverages, 17% was for Commercial Automobile Liability coverages, 11% was for Commercial Property coverages, 6% was for Commercial Automobile Physical Damage coverages, and the remainder was for Inland Marine, Surety and Fidelity. The Company is also engaged, through its wholly owned insurance agency, FPIA, in the mail order distribution of license and permit surety bonds in 36 states on behalf of Markel Corporation. These bonds are low limit surety commitments pledged to a regulatory agency as a condition of obtaining and maintaining a business license. There are two general categories of commercial property/casualty insurance: custom underwritten policies and business owner policies ("BOPs"). The Company focuses exclusively on custom underwritten accounts, typically with an annual premium less than $25,000 (the Company's average premium per account is $4,500). While price is an important part in the purchase of any insurance policy, it is not necessarily the basis of competition for custom underwritten policies. The Company believes that by carefully underwriting individual risks, it is able to select the best risks. Most national insurance companies focus on larger custom underwritten property/casualty policies or BOPs. As a result, the Company does not directly compete with most national insurers. A BOP is a low price business insurance policy that provides broad coverages. BOPs are marketed to businesses with little differentiation from location to location, such as mini-marts and dry cleaners. BOPs' key point of differentiation is price. Management believes it obtains better risk selection and pricing by avoiding BOPs and focusing on custom underwritten property/casualty policies. The Company operates primarily in the agrarian valleys and coastal regions of California which tend to be less litigious than Southern California and the San Francisco Bay area. The Company will continue to focus on the rural regions of California, and other states, as it expands. In line with this small town strategy, the Company appoints small to mid-sized agents. The Company carefully selects its agents and closely monitors their flow of business and profitability primarily through the use of its proprietary QuoteTracker(TM) software. The Company believes that, as a specialty regional company, it provides more value to small to mid-sized insurance agents than it provides to large agents or national brokerages. Consequently, the Company believes 25 27 it has an important role in most of its agents' offices. The value of its agency relations is a key advantage for the Company. The Company strives to provide competitive base pay and attractive bonus opportunities. More than two-thirds of the Company's employees participate in objectively measured bonus plans that provide bonus opportunities of up to 50% of their annual salary. This and other employee-focused benefits make for extremely low employee turnover. Low turnover is a significant advantage both in terms of cost savings and in providing consistent relationships with the independent agents. BUSINESS STRATEGY Management attributes its success to date to the following business philosophies/strategies: (i) concentrating in its niche market segments, developing specialty insurance programs, carefully selecting its geography and avoiding market segments which the Company believes would be unprofitable; (ii) maintaining strong relationships with independent insurance agents by providing prompt underwriting decisions, competitive rates and coverages and competitive commissions; (iii) controlling losses by vigorously defending claims which the Company believes to be fraudulent, overstated or without merit; (iv) maintaining control of, and emphasizing the importance, of underwriting every risk; and (v) attracting and retaining a highly talented management team and staff. GROWTH STRATEGY The Company's long term growth strategies, while continuing to emphasize small to medium-sized businesses as its primary target markets, are to: Retain More Direct Premiums Written. The Company has historically ceded a large portion of its direct premiums written to reinsurers. This was necessary due to the relatively small surplus as regards policyholders the Company had maintained. The capital infusion provided by this Offering will allow the Company to retain more of its direct premiums written. As an example, immediately following this Offering, the Company plans to convert its expensive property quota share reinsurance contract into a less costly excess of loss reinsurance program. See "-- Reinsurance." Expand Existing Business. According to A.M. Best, the Company's market share in California for CMP insurance has increased each of the last five years. Management attributes the Company's growth to its strong relations with its independent agents, its ability to identify and launch insurance programs for specialty niches of the commercial market and its underwriting expertise. The Company intends to pursue further growth in California by selectively appointing new agents and by attracting a larger percentage of business from each of its existing agents. Develop New Programs. The Company will continue to research and develop new specialty insurance programs for small to mid-sized businesses. The Company attempts to identify business segments that are not being adequately served by the insurance market. By focusing on businesses that are not directly targeted by existing insurance programs, the Company is able to avoid competing solely on price. The Company is also negotiating with other insurers to offer products they developed through the Company's agents. This will enable the Company to enhance further its value to the agency force and earn a return on the products while avoiding the cost of developing the programs. Expand Surety Business. The Company began writing surety in 1995 to complement CMP. This business provides payment or performance guarantees on construction contracts or other obligations. In 1997, the Company wrote nearly $1.2 million in profitable surety premium using one staff underwriter. The Company plans to emphasize surety as a line of business by increasing its marketing efforts and adding to its staff. Though the market is highly competitive, the Company believes it can attract profitable surety business by focusing on providing a high level of service. Expand Geographically. The Company intends to expand its specialty insurance business into other states. Beginning with the states adjoining California, the Company will select and appoint agents in rural areas of those states to sell its products. The Company does not intend to open branch offices. Its marketing 26 28 efforts will focus on the insurance programs in which the Company has developed an expertise in underwriting. The Company is licensed currently to do business in Arizona, California, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah and has license applications pending in eight additional states. INDUSTRY OVERVIEW According to A.M. Best, in 1996, the property/casualty insurance industry wrote over $270 billion of insurance premiums. The industry remains fragmented with approximately 3,000 insurance companies and 400 insurance groups licensed to transact property/casualty insurance business in the U.S. Last year, the ten largest companies accounted for less than a 43% national market share. California is the largest individual state market for insurance in the U.S., and its market characteristics are similar to the national market. California insurance premiums totaled $32.8 billion in 1996, and the ten largest companies captured only a 45% market share. MARKETING One of the Company's key competitive advantages is its excellent agency relations. The Company targets independent agents in small, rural central and northern California towns with existing books of commercial property casualty business. These agents are generally ignored by the larger companies because they cannot meet stiff production goals (usually $500,000 or more per year) or rigid account minimums (typically $25,000). The Company believes that smaller agents tend to be more loyal to an insurance company and their customers tend to be more loyal to their insurance agent. While the Company is most heavily represented in Fresno, Sacramento, Bakersfield and Santa Barbara, it is represented in approximately 100 communities across the state by 212 agents, as of March 31, 1998. The Company's four field marketing representatives visit each of the Company's agents at least once per month. The purpose of these visits is to communicate to the agents the Company's preference for specific classes of business, to identify and resolve problems and to maintain awareness of the Company's activities. The marketing representatives also review pending quotes with the agents and, on occasion, conduct brief inspections of risks submitted to the Company. The field marketing representatives do not have underwriting authority. The Company actively manages its agency force by closely monitoring the quality of submissions, hit/decline ratios, renewal retention and profitability. Semi-annually, the Company reviews its agents for application count, win ratio, average premiums per account, production and subjective factors primarily through the use of its proprietary QuoteTracker(TM) software. Over the past three years, this review has resulted in the termination of approximately 5% of the agents and placement of another 10% on rehabilitation. Over time, the Company believes that this process allows it to retain the best agents. The Company provides its agents with limited binding authority. Binding authority is extended to its agents for a few artisan contractors classes for general liability only. The Company believes that underwriting is the responsibility of the Company, and it tightly controls risk selection and pricing. Most agents want binding authority, primarily because it takes companies so long to quote a risk. The Company believes its exceptional service overcomes this concern, and consequently most agents readily accept their limited binding authority. The Company pays a 15% commission on new business and 15% on renewal business. From time to time, the Company may offer a higher commission on special programs or accounts above a certain size. These promotions usually involve paying the agent an additional 5% commission for a limited period of time. During 1997, commission payments under these promotions totaled $250,000 or 4% of commission expense. The Company also pays additional commissions to its agents based on volume. To qualify for additional commission an agent must produce at least $250,000 of written premium during the preceding year. In 1997, additional commissions based on volume totaled $639,000 or 9.0% of commission expense. In 1997, the Company implemented an incentive program to reward agents for retaining their business with the Company. 27 29 At the end of each year, agents who maintain better than 90% of their renewals will receive an additional 2% commission. The Company believes its commission schedules are competitive. By providing a market for difficult risks, by rewarding agent loyalty through incentive commissions and by maintaining consistency in the marketplace, the Company's agents place a significant value on an FPIC appointment. The Company believes that these efforts lead to high renewal retention ratios and more profitable renewal business. CUSTOMERS The Company's ultimate customers are small to mid-sized businesses. The Company reaches these customers through 212 independent insurance agents, as of March 31, 1998, who are appointed to represent the Company. The average customer pays approximately $4,500 per year for its insurance policy. During 1997, the Company derived direct premiums written from artisan contractors (40%), commercial property owners (5%), light industrial businesses (5%), a variety of other businesses (25%) and special programs (25%). The special programs were designed for refuse haulers, farm labor contractors, bowling centers and restaurants. For these programs, the Company has developed underwriting expertise and focused marketing materials and applies rate deviations or coverage extensions. The Company is currently developing other specialty niche programs. Most customers choose to pay for their policies over nine months following a 25% down payment. The Company developed a payment plan to respond to the cash flow needs of small businesses and to respond to competitive pressures. LINES OF BUSINESS The Company writes an insurance policy which always, except for surety bonds, includes Commercial Multiple Peril-Liability ("CMP-Liability") and generally one or more additional lines of business. The lines of business are described below: CMP-Liability -- Insures businesses against third party bodily injury and property damage claims caused by or allegedly caused by acts or omissions of the insured. This coverage part also includes a duty to defend the insured against lawsuits filed alleging bodily injury, property damage or advertising injury caused by acts or omissions of the insured. CMP-Property -- First party insurance coverage for businesses for real and personal property, as well as ancillary coverages such as loss of income and loss of use. The insurance protects insureds against economic loss for damage or loss of use of their property as a result of a specified cause of loss. Commercial Auto Liability -- Similar to a personal auto insurance policy, this third party coverage protects businesses against third party bodily injury and property damage claims caused by or allegedly caused by drivers operating an insured's vehicle. Commercial Auto Physical Damage -- First party insurance coverage for businesses against loss or damage to one of its vehicles. The coverage pays to fix or replace damaged vehicles. Inland Marine -- First party business coverage for personal property and equipment which is generally mobile in nature. The coverage pays to fix or replace the mobile property. Surety -- The Company guarantees that one party, the principal, will perform pursuant to a contract for a second party, the obligee. If the principal fails to perform, the Company is obligated to complete the contract. Fidelity -- First party coverage for businesses against loss of money, securities and property due to burglary, theft, robbery and employee dishonesty. FINANCIAL PACIFIC INSURANCE AGENCY Prior to the acquisition of FPIC, FPIA employed agents who served as the direct sales force for Oates and also placed workers' compensation policies with other insurance companies. Immediately following the 28 30 acquisition, the direct sales strategy was abandoned due to the Company's expansion of independent agency appointments. In 1995, FPIA became a general agent for Markel American Insurance Company and Markel Insurance Company (unaffiliated members of Markel Corporation, a Glen Allen, Virginia-based specialty property/casualty insurance group). As such, FPIA produces license and permit surety bonds in 36 states. A license bond is a low limit (typically $10,000 to $15,000) surety commitment pledged to an obligee (regulatory agency) as a condition of obtaining and maintaining a business license. According to the Surety Association of America, the nationwide market for license bonds is $300 million with a loss ratio of 15%. There are more than 1,000 different types of license bonds throughout the United States. The typical license bond is underwritten with an application, financial statement and credit report. In 1997, FPIA generated $1,256,000 in direct premiums written, of which $716,000 was commission income to the Company. FPIA's net income for the year ended December 31, 1997 was $5,000. The Company solicits customers for license and permit surety bonds through the mail. The Company believes its direct mail distribution strategy will begin to reap substantial returns as its renewal business grows and when FPIC becomes the issuing insurance company for the license and permit bonds. Once FPIC becomes licensed in all of the states in which FPIA operates, FPIC can become the issuing insurance company for FPIA. UNDERWRITING The Company places a high degree of emphasis on underwriting and pricing discipline. More than 50% of the Company's employees work in underwriting roles, and the average underwriter has 16.6 years of experience. The underwriting department has 13 underwriters, along with support staff. The Company uses Insurance Services Offices ("ISO") underwriting rates, rules and guidelines. However, most of the Company's current rates are determined utilizing 1988 ISO loss costs, which are 35% higher, on average, than loss cost assumptions utilized in current ISO rates for the classes and territories that the Company writes. While the rates have remained the same since the Company's inception, the pricing strategy has become more conservative. The use of schedule rating credits, which are used to reduce the price of insurance for individual policies, has been substantially restricted. The limits of liability for each of the types of policies written by the Company are tailored to the needs of the insured. Approximately 90% of the CMP liability policies sold by the Company are for limits of $1,000,000. Limits are available under existing treaties with reinsurance companies up to $11,000,000. Subject to the judgment of the underwriting department, property insurance is also available under certain existing treaties with reinsurance companies up to a limit of $10,000,000. Additional insurance is available for each line of insurance provided that a facultative arrangement is obtained from an appropriate reinsurer. See "-- Reinsurance." Since price is a competitive factor in the sale of property/casualty insurance, the underwriting department attempts to ensure that prices quoted by the Company are competitive or that its product is sufficiently differentiated from less expensive alternatives. Each full-time employee of the underwriting department has the opportunity to earn an incentive bonus for meeting objective standards for service, production and quality. Management believes this plan makes the Company's underwriters and underwriting technicians the highest paid in the area. Because an underwriting job with the Company is highly desirable, turnover in the underwriting department is extremely low. The Company also writes surety bonds through its agents. In 1996, its first full year of operations, the surety department wrote $589,000 of nearly loss-free surety business. In 1997, the Company wrote $1,129,000 in surety premium. The Company's surety customers are primarily small contractors with infrequent bond needs. These accounts require a high level of attention that many other sureties are not willing to provide. 29 31 For a five-year comparison of the Company's combined ratio and the average for the property/casualty industry, see "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." REINSURANCE Due to capital constraints, the Company has historically ceded large amounts of its premium to reinsurers. In 1996 and 1997, on a direct basis, the Company earned $3.9 million and $3.4 million, respectively, of underwriting income. After ceding the reinsurer's portion of the premium and losses, the net underwriting income for the Company was approximately $1.7 in each of 1996 and 1997. The reinsurers received $2.2 million and $1.6 million of the Company's underwriting income in 1996 and 1997, respectively. The results from the last two years are not necessarily indicative of results in the future and the ultimate development of business ceded to the reinsurers could deviate, perhaps substantially, from such results. However, the Company believes that as a result of this Offering, it will decrease amounts ceded to reinsurers and retain a greater share of the corresponding risks. As a consequence, the Company believes it will also retain some portion of the underwriting profit, if any, related to the premiums that are no longer ceded. See "Use of Proceeds." The Company maintains reinsurance on its property, casualty, and surety businesses. On its property business, the Company has a 30% quota share on the first $2 million of any risk with a syndicate of reinsurers, resulting in a maximum company exposure of $600,000 related to any one occurrence. In excess of $2 million, the Company has an $8 million per risk semi-automatic facultative reinsurance arrangement with General Reinsurance Corporation. On the casualty business, the Company maintains a $750,000 excess of $250,000 treaty with a syndicate of reinsurers led by Gerling Global Reinsurance Company. The Company's maximum exposure on any one casualty risk is $250,000. In excess of $1 million, the Company has a semi-automatic facultative agreement with American Reinsurance Company which provides $10 million of coverage in excess of $1 million. For the Company's surety bond product line, the Company maintains a variable quota share reinsurance arrangement with General Reinsurance Company which provides various levels of participation depending on the size of a bond. The Company's current reinsurance structure has been in place since January 1, 1997 with the exception of the surety reinsurance contract which incepted in July 1995 and the $10 million excess $1 million casualty semi-automatic facultative agreement which incepted on January 1, 1998. Prior to January 1, 1997, the Company maintained a $400,000 excess $100,000 and $500,000 excess $500,000 casualty treaties and a $4 million excess $1 million casualty semi-automatic facultative agreement. The Company purchases Extra Contractual Obligations and Excess Policy Limits ("ECO/XPO") coverage through the London market. This coverage reinsures the Company's exposure for any punitive, exemplary, compensatory, or consequential damages in excess of policy limits because of alleged or actual bad faith or negligence on the Company's part in rejecting a settlement within policy limits, discharging its duty to defend or prepare the defense in the trial of an action against a policyholder of the Company, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or otherwise handling a claim under a policy subject to this reinsurance. Prior to July 1, 1996, $1 million of this coverage was included in the Company's $1 million excess of $1 million reinsurance treaty. However, when the Company restructured its reinsurance treaty effective July 1, 1996, it began purchasing this coverage separately in the London markets, as it was more cost effective to do so. The Company currently purchases $2 million of ECO/XPO coverage through this facility. The reinsurance programs renew on an annual basis. Reinsurance coverages are placed both directly by the Company and through professional intermediaries. The Company's 1997 reinsurance costs for liability coverage were reduced from 1996 levels due to favorable results achieved and the retention by the Company of larger portions of the risk. Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, under SAP, it is the practice of insurers to treat reinsured risks as risks of the reinsurer since the primary insurer is indemnified by the reinsurers for ceded losses and LAE unless the reinsurer is unable to meet the 30 32 obligations it assumed under the reinsurance agreements. The collectability of reinsurance is subject to the solvency of the reinsurers. All of the Company's reinsurance is currently placed with A- or better rated reinsurers. See "-- Ratings." In accordance with customary industry practice, the Company maintains no reserves for reinsured liabilities. In 1997, FPIC ceded $12.6 million in written premium to 17 reinsurers and reinsurer syndicates. Premiums ceded to the five largest reinsurers were: $2.9 million, Gerling Global Reinsurance; $1.7 million, Sorema North America Reinsurance; $1.3 million, St. Paul Re, Inc.; $1.3 million, Constitution Reinsurance; and $1.2 million, Winterthur Reinsurance Corporation of America. The Company reviews information concerning the Company's reinsurers, including ratings published by A.M. Best and other similar organizations. The Company is not aware of any financial difficulties being experienced by any of its reinsurers. The Company is selective in its choice of reinsurers and considers numerous factors, the most important of which is the financial stability of the reinsurer. At January 1, 1998, reinsurance arrangements were in place with one foreign and 11 domestic reinsurers. Following this Offering, the Company may convert its costly property quota share reinsurance contract to an excess of loss contract. It may also convert its surety quota share contract to an excess of loss contract. See "Use of Proceeds." CLAIMS The claims department pays claims and establishes losses and LAE reserves. In connection therewith, it resolves questions concerning policy coverage and manages reinsurance recoveries with the accounting department. Claims in litigation are defended by a staff of attorneys employed by the Company under the direction of its Vice President and General Counsel. In order to reduce the cost of defending its policyholders, the Company began hiring attorneys in late 1996 to build in-house defense capabilities. The Company has hired five experienced insurance defense attorneys, all of whom have at least seven years of experience. As of March 31, 1998, 82% of the Company's insurance defense files were being adjusted by staff attorneys. By managing the majority of the cases with staff attorneys, the Company believes it will save a substantial amount of LAE. The Company's claims department is staffed by five claims examiners with an average of 18 years of claim adjustment experience. The claims examiners' caseloads average approximately 125 claims per examiner. Due to the combination of experience and manageable caseloads, the Company's claims personnel are effective in managing claims through frequent contact with claimants. The Company believes that a distinguishing factor between its claims department and other insurance companies' claims departments is that its claims examiners are incentivized to close claim files, all of the adjusters and attorneys are seasoned professionals and they are closely supervised by the Vice President of Claims and the Vice President and General Counsel. Senior management reviews and approves all reserves in excess of $30,000. The Company recently established a special investigation unit which is used to investigate cases which are suspected to be fraudulent. RESERVES Loss reserves are estimates at a given point in time, based on facts and circumstances then known, of the amount the insurer anticipates it will have to pay claimants plus investigation and litigation costs. The ultimate liability in each case may differ from such estimates. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it frequently becomes necessary to refine and adjust the estimates of liability. The Company's reserving process, following industry practices, is based on the assumption that past experiences, adjusted for the effect of current developments and likely trends, is appropriate for predicting future events. The process also assumes that the legal climate regarding the claims process and legal liability 31 33 theories remain constant. Any other assumptions employed by the Company or its actuaries are not readily quantifiable and are subject to revision as circumstances change. Reserves are initially set to take into account both a possible payment for the loss involved and the anticipated LAE. Adjustments to initial reserves are made periodically pursuant to the continuing investigation and evaluation by the claims department. Reserves for other claims, such as property damage by fire or other causes, are established and revised on a case-by-case basis pursuant to which a reserve amount is assigned to each claim when reported, based primarily upon an investigation of the circumstances surrounding each claim, consideration of the liability and the damages, and the insurance policy provisions relating to the claim. The Company also establishes IBNR reserves utilizing its historical experience. The IBNR reserve is established to provide for future case reserves and loss payments on claims which have been incurred but not yet reported to the Company. A significant portion of the Company's total loss reserve is the IBNR reserve. However, IBNR reserves, by definition, are not established for specific cases. In calculating IBNR reserves, the Company estimates the ultimate liability for losses and LAE by using both individual estimates for reported claims and generally accepted actuarial reserving techniques. IBNR reserve adjustments also are made to take into account changes in the volume of business written, claims frequency and severity, the mix of business, claims processing and other items that can be expected to affect the Company's liability for losses over time. IBNR reserves are periodically adjusted to correct historical deficiencies or redundancies in the reserves on a case-by-case basis. On a quarterly basis, the Company's independent actuary reviews the Company's loss data and recommends IBNR reserves. Inflation is implicitly provided for in the reserving function through analysis of cost trends and reviews of historical results. Reserves are closely monitored and are recomputed periodically using new information on reported claims and a variety of statistical techniques. The Company does not discount loss reserves. The following table sets forth a reconciliation of beginning and ending losses and LAE reserves for each of the periods shown. Activity in the liability for unpaid losses and LAE is summarized as follows:
1995 1996 1997 ----------- ----------- ----------- Balance of unpaid losses and loss adjustment expense reserves, beginning of year......... $10,140,556 $12,224,880 $13,944,397 Less reinsurance recoverables............... 4,902,732 4,560,681 4,007,047 ----------- ----------- ----------- Net balance at beginning of year.............. 5,237,824 7,664,199 9,937,350 ----------- ----------- ----------- Incurred losses and loss adjustment expenses: Provision for insured events of the current year..................................... 6,490,825 7,394,848 10,991,179 Increase (decrease) in provision for insured events of prior years.................... (165,766) 2,355,565 1,756,992 ----------- ----------- ----------- Total incurred losses and loss adjustment expenses.................................... 6,325,059 9,750,413 12,748,171 ----------- ----------- ----------- Payments: Losses and loss adjustment expenses attributable to insured events of the current year............................. 1,975,694 2,413,980 3,370,671 Losses and loss adjustment expenses attributable to insured events of prior years.................................... 1,922,990 5,063,282 5,907,717 ----------- ----------- ----------- Total payments................................ 3,898,684 7,477,262 9,278,388 ----------- ----------- ----------- Net balance at December 31.................... 7,664,199 9,937,350 13,407,133 Plus reinsurance recoverables............... 4,560,681 4,007,047 6,184,927 ----------- ----------- ----------- Balance of unpaid losses and loss adjustment expense reserves, at December 31............................ $12,224,880 $13,944,397 $19,592,060 =========== =========== ===========
32 34 The following table sets forth the development of net reserves for unpaid losses and LAE from 1989 (the first full year of operations) through 1997. In evaluating the following information, it should be noted that each amount includes the effects of all changes in amounts for prior years. For example, the amount of redundancy related to losses settled in 1997 but incurred in 1989 is included in the cumulative redundance amount of each of the years for 1989 to 1996. The table does not present injury or policy-year development data. Conditions and trends that have affected development of the reserves in the past may not necessarily occur in the future. Accordingly, the data in the table may not be indicative of future redundancies or deficiencies.
DECEMBER 31, ------------------------------------------------------------------------------------ 1989 1990 1991 1992 1993 1994 1995 1996 1997 ------ ------ ------ ------- ------- ------- ------- ------- ------- ($'s in 000's) Liability for losses and LAE(1).................. $1,243 $3,119 $7,189 $ 6,964 $ 4,533 $ 5,238 $ 7,665 $ 9,938 $13,407 Paid (cumulative) as of:(2) One year later.......... 391 1,148 1,550 1,676 1,503 1,923 5,063 5,908 -- Two years later......... 967 2,307 3,038 2,883 2,537 4,574 8,903 Three years later....... 1,351 2,728 3,734 3,366 3,243 6,648 Four years later........ 1,594 3,012 4,074 3,601 3,897 Five years later........ 1,845 3,096 4,322 3,829 Six years later......... 1,883 3,308 4,512 Seven years later....... 1,976 3,487 Eight years later....... 2,002 Liability re-estimated as of:(3) One year later.......... 1,217 3,696 4,098 2,606 2,279 3,150 5,169 5,786 -- Two years later......... 1,141 1,731 1,717 1,059 1,011 2,409 2,927 Three years later....... 774 832 723 527 795 1,747 Four years later........ 398 445 347 397 738 Five years later........ 291 280 302 738 Six years later......... 169 224 336 Seven years later....... 22 251 Eight years later....... 42 REDUNDANCY (DEFICIENCY):........... $ (801) $ (619) $2,341 $ 2,397 $ (102) $(3,157) $(4,165) $(1,756) -- Redundancy (deficiency) as % of initial reserve(4),(5),(6)...... (64.4)% (19.8)% 32.6% 34.4% (2.3)% (60.3)% (50.2)% (17.7)% -- Gross liability for losses and loss adjustment expenses................ 10,060 7,125 10,141 12,225 13,945 19,592 Ceded liability for losses and loss adjustment expenses................ (3,096) (2,592) (4,903) (4,560) (4,007) (6,185) ------ ------ ------ ------- ------- ------- ------- ------- ------- Net liability for losses and loss adjustment expenses................ 6,964 4,533 5,238 7,665 9,938 13,407 Gross liability re-estimated............ 1,066 1,160 3,382 4,543 8,119 Ceded liability re-estimated............ (328) (422) (1,635) (1,616) (2,333) ------ ------ ------ ------- ------- ------- ------- ------- Net liability re-estimated............ 738 738 1,747 2,927 5,786 Gross reserve redundancy.............. 8,994 5,965 6,759 7,682 5,826
- --------------- (1) Sets forth the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years; represents the estimated amount of losses and LAE for claims arising in the current and all prior years that are unpaid at the balance sheet date, including IBNR. (2) Cumulative losses and LAE payments made in succeeding years for losses incurred prior to the balance sheet date. (3) Re-estimated amount of the previously recorded liability based on experience for each succeeding year, increased or decreased as payments are made and more information becomes known about the severity of remaining unpaid claims. (4) Shows the cumulative redundancy or deficiency at December 31, 1997 of the reserve estimate shown on the top line of the corresponding column. A redundancy in reserves means that reserves established in 33 35 prior years exceeded actual losses and LAE or were reevaluated at less than the originally reserved amount. A deficiency in reserves means that the reserves established in prior years were less than actual losses and LAE or were reevaluated at more than the originally reserved amount. (5) Prior to 1994, fluctuation in the net reserve redundancy was attributable to a $2.4 million reserve reduction in 1993 and a $2.4 million reserve increase in 1991. In 1991, the Company posted an IBNR reserve of approximately $2.4 million. The result was a net incurred losses and LAE ratio of 165%. During 1993, in conjunction with the acquisition, management determined that the Company's IBNR reserves were redundant and recorded a reserve reduction of $2.4 million. As a result, the redundancy trend in 1992 and 1993 ended. (6) The reserve deficiency noted in 1994 to 1996 resulted primarily from the effects of the Montrose Decision in July 1995. The impact to the Company was the creation of retroactive liability for construction defect claims previously denied. The Company has subsequently revised its underwriting practices in response to the Montrose Decision. See "Risk Factors -- Regulations, Pending Legislation and Case Law." Reserve variances have been affected by continued growth in premium volume and increases in IBNR, particularly in the CMP liability line between 1993 and 1994. The reserves for IBNR losses and the LAE anticipated changes in costs related to each prior year's claims. At the same time, the insurance industry was experiencing inflation in the ultimate resolution values of personal injury claims. The inflation of personal injury claim values has been principally attributed to rapidly increasing medical treatment costs, increasing jury awards for pain and suffering and increased loss adjustment and related litigation costs. In addition to the adjusted IBNR, specific measures undertaken include monitoring the actual paid medical, vigorous defense of claims deemed to be nuisance suits, and ongoing monitoring of pain and suffering awards and related LAE and litigation expenses. Adjustments are made in IBNR reserves on a periodic basis to account for documented cost increases, and similar adjustments are made to case reserves based on individual claim reviews and audits. Actual reserve development due to IBNR claims and underreported claims is continually monitored and adjustments to reserves are made consistent with this actual experience. During the loss adjustment period, additional facts regarding individual claims may become known. As the Company becomes aware of additional facts, it may become necessary to refine and adjust liability estimates. Accordingly, the ultimate liability may be less than or greater than the revised estimates. INVESTMENTS Substantially all investments are held by FPIC and are subject to regulation by the DOI. Investments are made under the direction of the Company's Chief Executive Officer and Chief Financial Officer pursuant to written guidelines approved by the Board of Directors. The written guidelines establish specific criteria for quality, marketability, holding size and maturity for each type of investment. Furthermore, the criteria are set to meet the Company's anticipated liquidity needs and tax positions. The Company's investment portfolio is managed with the intent to provide growth and safety of surplus as regards policyholders in order to facilitate increased premium writings over the long-term while maintaining the ability to service current insurance operations. 34 36 The following table shows the composition of the Company's investment portfolio by type of security as of December 31, 1995, 1996 and 1997.
DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ($'s in 000's) BY TYPE OF SECURITY: United States government and agencies......................... $ 6,449 28.4% $ 9,870 41.1% $15,628 52.1% States, municipalities and political subdivisions........... 1,289 5.7% 268 1.1% 71 0.2% Corporate.......................... 14,951 65.9% 13,708 57.0% 14,065 46.9% Certificates of deposit............ -- 0.0% 200 0.8% 213 0.8% ------- ----- ------- ----- ------- ----- Total investments........ $22,689 100.0% $24,046 100.0% $29,977 100.0% ======= ===== ======= ===== ======= =====
Fixed maturity investments are valued in the above table at market value. The amortized cost of fixed maturities was $22,604,000, $24,764,000 and $30,028,000 at December 31, 1995, 1996 and 1997, respectively. Fixed maturity investments held by the Company generally have an investment quality rating of "A" or better by independent rating agencies. The following table shows the composition of the Company's fixed maturity investments (at amortized cost), by rating as of December 31, 1995, 1996 and 1997.
DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ($'s in 000's) BY RATING(1): U.S. Treasury and U.S. Agency Bonds............................ $ 6,449 28.4% $ 9,870 41.0% $15,628 52.1% AAA to A........................... 15,023 66.2% 12,259 51.0% 11,515 38.4% BBB................................ 1,217 5.4% 1,717 7.2% 2,621 8.8% Certificates of Deposit............ -- 0.0% 200 0.8% 213 0.7% ------- ----- ------- ----- ------- ----- Total Investments........ $22,689 100.0% $24,046 100.0% $29,977 100.0% ======= ===== ======= ===== ======= =====
- --------------- (1) Represents the lower of the ratings assigned by Moody's Investor's Services, Inc. or Standard and Poor's Corporation. The amortized cost of fixed maturity investments exceeded the market value by approximately $51,000 at December 31, 1997. At the same date, the Company held callable fixed maturities with an aggregate market value of $13.2 million. The amortized cost of fixed maturities as of December 31, 1995, 1996 and 1997 is shown by contractual maturity below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Management projects the anticipated weighted average maturity of the fixed maturities to be 6.7 years. Management attempts to generally match its property/casualty assets and liabilities. The maturity of claim and benefit liabilities of property/casualty insurance companies can only be estimated by using actuarial methods. Although a single figure for weighted average maturity of liabilities is not available, the Company's actuaries continually review historical data on claims maturation. In light of the review, management structures its fixed income portfolio 35 37 accordingly. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ($'s in 000's) BY MATURITY: One year and under................. $ 77 0.3% $ 1,830 7.6% $ 1,152 3.8% Over one year through five years... 6,364 28.1% 8,287 34.5% 9,954 33.2% Over five years through ten years............................ 9,330 41.1% 8,662 36.0% 14,681 49.0% Over ten years..................... 6,918 30.5% 5,267 21.9% 4,190 14.0% ------- ----- ------- ----- ------- ----- Total Investments........ $22,689 100.0% $24,046 100.0% $29,977 100.0% ======= ===== ======= ===== ======= =====
Investment results of the Company for the periods indicated are shown in the following table.
YEAR ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- ($'s in 000's) Invested assets(1).................................... $17,812 $23,368 $27,012 Investment income(2).................................. $ 1,029 $ 1,449 $ 1,720 Average yield(3)...................................... 5.8% 6.2% 6.4% Net realized gain (losses)............................ $ 466 $ 52 $ (46)
- --------------- (1) Average of the aggregate invested amounts at the beginning and end of the period. (2) Investment income is net of investment expenses and does not include realized or unrealized investment gains or losses or provision for income taxes. (3) The 1995 average yield was impacted by the $5 million capital infusion from the sale of the Senior Notes which funded the purchase of $5 million in investments on December 28, 1995. COMPETITION The property/casualty insurance industry is highly competitive. The Company competes with other property/casualty insurers both in the recruitment and retention of qualified independent agents to sell its products. Success in recruiting and retaining independent agents willing to sell the Company's products or services is dependent upon the commission rates, services and the ability of the insurer to provide products that meet the needs of the agent and the agent's customers. In selling its insurance products, the Company competes with other insurers through independent agents (including insurers represented by the independent agents who represent the Company), with insurers having their own agency organizations and with direct sellers of insurance products. There are numerous companies competing for business in the geographic areas in which the Company operates. No single company dominates the marketplace, but many of the Company's competitors have more established national reputations and substantially greater financial resources and market share than the Company. The Company pays its agents a base commission of 15% with additional commission for meeting increasing volume levels. Should other insurers begin paying higher commissions than the Company, this would present a competitive disadvantage in attracting and retaining high-quality agents. While recognizing the significance of the rate of commission, the Company believes its efforts to serve the agents and their customers by providing superior service in underwriting and claims processing will allow it to continue to compete with other insurers. Twice per year, the Company surveys its agents to understand the nature of the competitive environment. The agents indicate that the Company competes with many companies, but few consistently. According to its agents, FPIC's most consistent competitor is Allied Group. Agents were asked which companies they viewed as FPIC's main competitors. 36 38 The following table summarizes the results of the last agent survey, conducted in August 1997:
COMPETITORS % of Agents(1) - ----------- -------------- Allied Group................................................ 17% Golden Eagle Insurance Company.............................. 10% Maryland Casualty Insurance Company......................... 10% Valley Insurance Company.................................... 7% CNA......................................................... 5% Fireman's Fund Insurance Company............................ 5% 10 Other Companies.......................................... 27%
- --------------- (1) Represents the percentage of survey respondents indicating that these companies compete with FPIC. RATINGS The oldest and most widely quoted insurance financial rating firm is Best's Insurance Reports, published by the firm of A.M. Best. Based on 1993 and prior results, FPIC was assigned an initial rating in April 1994 of B++ (Very Good) by A.M. Best. An A.M. Best rating is assigned after an extensive quantitative and qualitative evaluation of a company's financial condition and operating performance. An A.M. Best rating represents the current and independent opinion of a company's financial strength and ability to meet obligations to policyholders. Such ratings do not relate to the protection of investors or indicate expected investment results, and therefore do not address the quality of the insurer's securities or the advisability of an investment in such securities. In March 1996, A.M. Best upgraded FPIC's rating to A- (excellent) and in 1997 the A- rating was re-affirmed. A.M. Best rates firms both on quality and on size. The size categories range from I, which represents surplus as regards policyholders of less than $1 million, to XV, which represents surplus as regards policyholders of greater than $2 billion. Prior to the Offering, FPIC was financial size V, representing surplus as regards policyholders between $10 million and $25 million. Following this Offering, it is expected that FPIC will be category VI, representing surplus as regards policyholders between $25 million and $50 million. When considering whether to accept an FPIC policy, customers often review both the rating and the financial category size. While many customers view an A rating as sufficient, there are others that require financial category sizes of VII and greater. There can be no assurance that customers will continue to accept FPIC's rating and financial category size regardless of the Offering. A.M. Best provides ratings based on an insurer's annual financial reports and survey information for several years of operations. A.M. Best rates over 2,300 property/casualty insurers each year. For years prior to the 1994, FPIC was not assigned a letter rating by A.M. Best due to what A.M. Best described as "insufficient experience," A.M. Best requires five full years of operating activity before assigning a rating. Ratings above B+ are B++ (Very Good), A- and A (excellent), A+ and A++ (Superior). Ratings below B+ are B, B-, C++, C+, C, C-, D, E, F and NA (not issued). REGULATION National Association of Insurance Commissioners In order to enhance the regulation of insurer solvency, the NAIC adopted a formula and model law to implement risk-based capital ("RBC") requirements for property/casualty insurance companies designed to assess the minimum capital requirements for the protection of policyholder obligations. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as a level of surplus to RBC falls. The first level, the Company Action Level (as defined by the NAIC), requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized 37 39 Control Level (as defined by the NAIC) gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 100% of the RBC amount. The fourth action level is the Mandatory Control Level (as defined by the NAIC) which requires the relevant insurance commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. Based on the foregoing formulae, as of December 31, 1997, FPIC's ratio of total adjusted surplus to Authorized Control Level RBC was 340%. The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 12 industry ratios and specifies "usual values" for each ratio. Departure from the usual values on more than four of the ratios may lead to increased regulatory oversight. Based on its 1997 statutory financial statement, FPIC was within the usual range for eight of the 12 IRIS tests. FPIC was not within the usual range of ratios for Change in Net Writings and Surplus Aid to Surplus due to growth in net written premium and contingent ceding commission related to favorable loss experience on the swing-rated reinsurance treaties. A swing-rated reinsurance treaty allows the ceding company to share in the profitability of its reinsurance program by receiving a portion of a reinsurance contract's profits. During 1997, net written premium increased by 48% which exceeded the upper limit of the NAIC usual range of 33%. Additionally during 1997 FPIC recorded $1.5 million in contingent ceding commission related to the swing-rated reinsurance treaties. Unusual values were also noted for IRIS ratios for the Two-Year Reserve Development to Surplus and Estimated Current Reserve Deficiency to Surplus. These ratios were both impacted by the results of the Montrose Decision and the resultant retroactive liability. See "Risk Factors -- Regulations, Pending Legislation and Case Law" and "-- Reserves." General The Company is principally regulated by the DOI and the Commissioner. California and various other states have established supervisory agencies with broad authority to regulate, among other things, licenses to transact business, premium rates for certain coverages, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy and insurer solvency. California, like many jurisdictions, also regulates investment activities on the basis of quality, distribution and other quantitative criteria. The Company's insurance operations and accounts are subject to examination upon request by California insurance regulators. The Company is also subject to examination by all other states in which it is licensed to do business. California has also enacted legislation which regulates insurance holding company systems, including acquisitions, dividends, the use of surplus, the terms of affiliate transactions and other related matters. The last DOI examination of the Company was for the three years ended December 31, 1994. The California insurance holding company law also requires the Group to register with the DOI and file certain reports containing information concerning its capital structure, ownership, financial conditions and general business operations. Recently, the insurance industry has been subject to increased scrutiny. A number of state legislatures have considered or enacted legislative proposals that alter and, in many cases, increase the authority of state agencies to regulate insurance companies and holding company systems. In addition, legislation has been introduced in several of the past sessions of Congress which, if enacted, could result in the federal government assuming some role in the regulation of the insurance industry. Several committees of Congress have made inquiries and conducted hearings as part of a broad study of the regulation of United States insurance companies. In partial response to Congress' initiatives, the NAIC and insurance regulators are re-examining existing laws and regulations and their application to insurance companies. In particular, this re-examination has focused on insurance company investment and solvency issues and, in some instances, has resulted in new guidelines. The NAIC has formed groups to study and formulate regulatory proposals on such diverse issues as 38 40 the use of surplus debentures, accounting for reinsurance transactions and the adoption of RBC rules. In addition, in connection with its accreditation of states and as part of its program to monitor the solvency of insurance companies, the NAIC requires states to adopt model NAIC laws and regulations on specific topics, such as holding company regulations and the definition of extraordinary dividends. California is accredited by the NAIC. Accordingly, California has followed regulatory rule-making that makes the form of its insurance regulation generally consistent with the model NAIC laws. It is not possible to predict the future impact of changing state and federal regulations on the Company's operations. California and most other states have insurance laws requiring that property/casualty rate schedules, policy or coverage forms, and other information be filed with the states' regulatory authority. In many cases, such rates and/or policy forms must be approved prior to use. There can be no assurance that state or federal regulatory requirements will not become more stringent in the future and have an adverse effect on the operations of the Company's insurance subsidiary or on stockholder values. Insurance companies are required to file detailed annual reports with the state insurance regulator in each of the states in which they do business and their business and accounts are subject to examination by such agencies at any time. The Company files these reports with the DOI, the NAIC and in all other states in which it is licensed to do business. In addition, insurance regulators occasionally examine the insurer's financial condition, adherence to statutory accounting principles, and compliance with insurance department rules and regulations. In the event of a default on FPIC's liabilities or the insolvency, liquidation or other reorganization of FPIC, the rights of the creditors and stockholders of FPIC to proceed against the assets of FPIC, would be governed by state insurance laws relating to liquidation and rehabilitation. Therefore, if FPIC were to be liquidated or the subject of rehabilitation proceedings, such liquidation or rehabilitation proceedings would be conducted by the Commissioner as the receiver with respect to all FPIC's assets and business. Under the Code, all creditors of FPIC, including policyholders, would be entitled to payment in full from such assets before the Group, as a stockholder, would be entitled to receive any distribution thereof. Insurance Regulation Concerning Change or Acquisition of Control The Code contains provisions to the effect that the acquisition or change of "control" of a domestic insurer or of any person (e.g. parent or holding company) that controls a domestic insurer cannot be consummated without the prior approval of the Commissioner. In general, a presumption of "control" arises from the ownership, control, possession with the power to vote or possession of proxies with respect to 10% or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company must generally file with the Commissioner a statement relating to the acquisition of control containing certain information required by statute and published regulations and provide a copy of such statement to the domestic insurer. In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control of a non-domestic insurance company admitted in the state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic admitted insurer if certain conditions exist such as undue market concentration. Any future transactions involving the acquisition of 10% or more of the Company's Common Stock by any one person or affiliated group would also currently require approval by the Commissioner and, should the Company expand its operations to other states, would require the pre-acquisition notification in those states which have adopted pre-acquisition notification provisions. Such requirements may deter, delay or prevent certain transactions affecting the ownership of the Company's Common Stock. 39 41 Limits on Writing Business The Commissioner has extremely broad power to evaluate insurance companies on a case-by-case basis, without specific regard to published rules or standards. That is, if the Commissioner deems an insurer to be in a potentially hazardous condition detrimental to the interests of the public, the Commissioner has the authority to issue orders to a particular company, restrict a company's writings, or place it under supervision or into receivership. Management of the Company is aware that the Commissioner is always concerned with companies being overly leveraged by writing large volumes of premium even though they may possess limited surplus as regards policyholders. Regulation of Dividends and Other Payments from Insurance Subsidiaries The Company is a legal entity separate and distinct from its subsidiaries. As a holding company with no other significant business operations, its primary sources of cash to meet its obligations, including principal and interest payments with respect to indebtedness, or to be able to make stockholder distributions, are dividends and other statutory permitted payments from FPIC. The payment of dividends to the Company by FPIC is subject to limitations imposed by the Code which provides that cash dividends may be paid by FPIC only from retained earnings and surplus as regards policyholders. In addition, an insurer subject to the insurance holding company law may not pay an "extraordinary" dividend to its stockholders without the prior approval of the Commissioner of Insurance. An extraordinary dividend or distribution includes any dividend or distribution of cash or other property, the fair market value of which, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of such insurer's surplus as regards policyholders as of the preceding December 31, or (ii) 100% of the insurer's statutory net income (excluding unrealized capital gains) for the preceding year. FPIC presently pays the Company to service the interest payments on the Company's $5 million Senior Notes. For the 12 months ended December 31, 1997, these interest payments totaled $600,000. The authority of the Commissioner and government regulators in a number of other states is such that, if insurance regulators determine that payment of a dividend or any other payments to an affiliate would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors, the regulators may disapprove, prohibit, or mandate return of such payments that would otherwise be permitted without prior approval. If the ability of FPIC to pay dividends or make other payments to the Company is materially restricted by regulatory requirements, it could affect the Company's ability to pay dividends to stockholders and/or service debt. No assurance can be given that California (or other states in which the Company is licensed or may someday be licensed) will not adopt statutory provisions more restrictive than those currently applicable. The Company presently has no plans to pay dividends to its stockholders. See "Dividend Policy." Surplus as Regards Policyholders As a California admitted insurer, FPIC is subject to the primary jurisdiction of the insurance regulations of California. As the Company expands its operations, it will also be subject to the regulators of each state in which it does business. Such regulators have the authority, in connection with continued licensing (or where not yet doing business, in the granting of licensing), to limit or prohibit writing new business within their jurisdiction when, in the state's judgment, the insurance subsidiary is not maintaining adequate capital and surplus as regards policyholders. Surplus as regards policyholders is the excess of all assets over all liabilities under SAP. This amount is regarded as a measure of financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. At December 31, 1997, the Company's surplus as regards policyholders under SAP was $14,262,000. See "Risk Factors -- Regulations, Pending Legislation and Case Law." 40 42 Investment Regulations The Company is subject to state laws and regulations that require diversification of its investment portfolio. Such regulations could cause non-conforming investments to be treated as non-admitted assets for purposes of measuring surplus as regards policyholders and, in some instances, could require divestiture. As of December 31, 1997, the Company's investments complied with such laws and regulations in all material respects. The NAIC has proposed the development of a model investment code ("Model Code") which would provide uniform regulation of insurance company investments in those states that adopt the Model Code. Although insurance industry and regulatory groups have been working on the development of the Model Code for several years, it is unclear at this time what the final provisions will be. The Company believes that FPIC could comply with the existing proposals without adverse consequences. Membership in Solvency Funds and Associations FPIC, like other insurers, is required to participate in insolvency funds and associations in each state in which FPIC is licensed, and may be subject to assessments from time to time to cover unpaid policyholder claims of insolvent insurers participating in the same lines of business as the Company. The maximum assessment authorized by law in California in any one year has varied between 1% and 2% of annual premiums written in California. Most of these payments are recoverable through future policy surcharges and premium tax reductions. No material assessments have been made on FPIC. Shared Markets As a condition of receiving a license to do business in California and most other states, a property-casualty insurance company is required to participate in mandatory property-casualty shared market mechanisms or pooling arrangements which provide various insurance coverages to individuals and other entities that otherwise are unable to purchase such coverage voluntarily through private insurers. These shared market mechanisms are structured differently depending on the state in which they are established and the particular type of insurance provided through the mechanism. Included within the shared market mechanisms are structures generally referred to as assigned risk plans, reinsurance facilities, limited liability pools and property shared markets or "fair plans." The Company's participation in such shared market mechanisms is generally in amounts related to the amount of the Company's direct premiums written for the types of coverage. The cost of mandatory participation in such shared market mechanisms has not had a materially adverse effect on the Company's operations, liquidity and capital resources in the past. For the past three years, the Company incurred no costs to participate in these mechanism. The amount of future losses or assessments from the commercial lines shared market mechanisms and pooling arrangements cannot be predicted with certainty. Federal Legislative Proposals For the past several years, Congress and certain federal agencies have been investigating the current condition of the insurance industry (encompassing both life and property-casualty insurance) in the United States to determine whether such form of federal role in the regulation of insurance companies would be appropriate. Congress has conducted several hearings and issued reports relating in general to the solvency of insurers as well as the effectiveness of state regulation. Over the past several years Congress has investigated whether it should establish an independent federal agency to regulate the financial condition of federally-certified life and property-casualty insurers and reinsurers in the United States. Among several proposals considered in Congress, which may be introduced in the future, was a bill which would allow insurers and reinsurers to elect voluntarily to obtain a certificate of solvency from this federal agency or to conduct regulation. Additionally, such insurers and reinsurers would also remain subject to state regulation. At least one congressional initiative has been introduced in Congress to modify or repeal the McCarran-Ferguson Act (which provides a limited exemption to the "business of insurance" from federal antitrust laws, to the extent it is subject to state regulation). Additionally, judicial decisions narrowing the definition of "business of insurance" for McCarran-Ferguson Act purposes may limit the ability of insurance companies in general to share information with respect to rate setting, underwriting and claims management practices in general. It is 41 43 not possible to predict whether or in what form this proposed legislation will be enacted or the potential effects thereof on the Company and its competitors. It is not possible to predict the outcome of any of the foregoing legislative, administrative or congressional activities nor the potential effects thereof on the Company. EMPLOYEES As of December 31, 1997, the Company had 92 full-time and 23 part-time employees. The Company is not a party to any collective bargaining agreement. The Company believes relations with its employees are good. PROPERTIES The Company leases a 25,000 square foot office building as its headquarters in Rocklin, California. Currently all but three employees work at the Rocklin location. It is anticipated that the existing premises will be suitable for at least several years. The Company owns a vacant 2.91 acre lot adjacent to the Company's headquarters for future expansion. LEGAL PROCEEDINGS Except for ordinary, routine litigation incidental to the Company's business, there are no pending legal proceedings to which the Company is a party. The nature of the Company's business subjects it to claims or litigation relating to policies of insurance it has issued. Management believes that the Company is not a party to any pending legal proceedings which are likely to have a material adverse effect on its business, financial conditions or results of operations. 42 44 MANAGEMENT The following table provides information regarding the executive officers and directors of the Company. Biographical information for each of the individuals set forth in the table is presented below:
NAME AGE TITLE ---- --- ----- Robert C. Goodell..... 43 Chairman of the Board, President, Chief Executive Officer, Director Robert T. Kingsley.... 32 Executive Vice President, Chief Operating Officer, Treasurer, Secretary Artur A. Terner....... 31 Vice President and Chief Financial Officer Timothy N. Blaede..... 37 Vice President of Information Services John R. Hollingshead........ 45 Vice President and General Counsel Edward J. Paoletti.... 52 Vice President of Underwriting Wallace G. Rascher.... 67 Vice President of Sales and Marketing Charles E. Wardlaw.... 56 Vice President of Claims Stephen E. Adamson.... 41 Director Patrick C. Haden...... 45 Director Michael J. Morrissey........... 50 Director Richard G. Pfeiffer... 53 Director
Mr. Goodell has served as President and Chief Executive Officer and a Director of the Company since June 1993 when he and the current stockholders acquired the Company. From 1992 to 1993, Mr. Goodell provided management consulting services at CAST Management Consultants, Inc. From 1984 to 1992, Mr. Goodell served as Executive Vice President and Chief Financial Officer of Amwest Insurance Group, Inc. From 1983 to 1984, he served as Vice President Financial Systems at California Federal Savings and Loan. From 1980 to 1983, he served as a Manager-Management Consulting for Peat, Marwick, Mitchell & Co. Between 1977 and 1980, Mr. Goodell held positions as Controller/Treasurer of Insurance Subsidiaries of Teledyne, Inc. Mr. Kingsley, Executive Vice President and Chief Operating Officer, joined the Company in August 1993, prior to the acquisition of the Company. Mr. Kingsley worked for Xerox Corporation as a Financial Analyst from 1992 to 1993 following the completion of his MBA. From 1987 to 1991, Mr. Kingsley was Assistant Treasurer for Amwest Surety Insurance Company. From 1985 to 1987, Mr. Kingsley served as Senior Insurance Analyst with the Surety Bond Branch of the U.S. Treasury Department. Mr. Terner joined the Company in 1994 as Controller, succeeding to his current position of Vice President and Chief Financial Officer in 1997. Mr. Terner was employed from 1989 to 1994 in various positions of increasing responsibility culminating in the position of Supervising Senior Accountant at KPMG Peat Marwick concentrating primarily in the financial institution practice. Mr. Blaede joined the Company as Vice President of Information Services in January 1997. Prior to joining the Company, he was Manager of Special Projects at ISI Systems, Inc. From 1995 to 1996, he worked as Senior Project Manager for Innovative Computer Systems. During the period from 1983 to 1995, Mr. Blaede served in positions of increasing responsibility at ISI Systems, Inc. culminating in the post of Manager, Custom Development. Mr. Hollingshead joined the Company in November 1996 as its senior in-house defense counsel and was promoted to Vice President and General Council in 1997. From 1995 to 1996, he was Managing Attorney for Marlin & Saltzman, a San Francisco Bay Area insurance defense firm which provided litigation services exclusively for Atlantic Mutual Insurance Co. From 1982 to 1995, Mr. Hollingshead was an attorney with Capps, Staples et al, in Walnut Creek, California. Mr. Paoletti became Vice President of Underwriting in 1996. From 1982 to 1996 he was Vice President/ Branch Manager in the Sacramento office for CIGNA Corporation. From 1978 to 1982, Mr. Paoletti was employed by CG/Aetna Insurance as Casualty Supervisor in Orange County, California and Underwriting Manager in Portland, Oregon. Previously, he was Personal and Commercial Lines Underwriter at Ohio 43 45 Casualty Insurance from 1976 to 1978 and Casualty Underwriter for Safeco Insurance based in Fountain Valley, California from 1974 to 1976. Mr. Rascher joined Financial Pacific in 1992 as Vice President of Sales and Marketing. From 1991 to 1992, he was Field Auditor at DJ Insurance Services, where he provided workers' compensation and general liability audits to insurance company clients. From 1989 to 1991, Mr. Rascher was Branch Manager/Regional Business Manager in Fresno, California for Sequoia Insurance Company. From 1970 to 1989, Mr. Rascher served in positions of increasing responsibility with California Insurance Group, including Manager of the Sacramento Branch Office, Vice President of Marketing and Sales, and various underwriting positions. Mr. Wardlaw joined the Company in November 1997 as its Vice President of Claims. From 1985 to 1997, Mr. Wardlaw was the owner of an independent property/casualty claims adjusting firm in Sacramento, California. From 1972 to 1985, Mr. Wardlaw held various claims positions with United Pacific/Reliance Insurance Company including manager of the Sacramento service center branch. In 1971, Mr. Wardlaw began his career with Safeco Insurance Company. Mr. Adamson became a member of the Board in 1993. Mr. Adamson is a managing member of Celerity Partners, a private equity firm specializing in leveraged buyouts. Prior to forming Celerity Partners in 1995, Mr. Adamson was a managing director of W.E. Myers & Co., a merchant banking firm. Mr. Adamson serves as Chairman of the Board of Dynamic Circuits, Inc. and is a director of several private companies. Mr. Haden became a member of the Board in 1993. Since 1987, Mr. Haden has been a general partner of Riordan, Lewis & Haden ("RLH"), a Los Angeles based partnership which invests in management buy-out and venture capital transactions. Mr. Haden also serves as a director of Tetra Tech, Inc., Data Processing Resources Corporation, PIA Merchandising Services, Inc. and several private companies. Mr. Morrissey became a member of the Board in 1993. Since 1983, Mr. Morrissey has been the Chairman and Chief Executive Officer of Firemark Group, a merchant banking firm specializing in insurance related investments. Mr. Morrissey also serves as a director of Pembridge, Inc. and New Cap Re Holdings, Limited. Mr. Pfeiffer became a member of the Board in 1995. Mr. Pfeiffer has worked for St. Paul Fire and Marine Insurance Company in various capacities since 1971. He is currently a Vice President working on St. Paul's worldwide insurance operations. The directors were each elected in accordance with the Stockholders Agreement dated September 7, 1993, as amended (the "Stockholders Agreement"), which requires that each stockholder will vote for the election of directors, such that the following persons are elected to the Board: (i) one nominee designated by FinPac Partners ("FinPac"), (ii) one nominee designated by St. Paul Fire and Marine Insurance Company ("St. Paul"), (iii) one nominee designated by Firemark Global Insurance Fund, L.P. ("Firemark"), (iv) the Chief Executive Officer; and (v) one nominee designated by the above four nominees. The Stockholders Agreement will terminate upon the conclusion of this Offering. See "Principal and Selling Stockholders" and "Certain Transactions." The Audit Committee of the Board of Directors consists of Messrs. Adamson, Haden, Morrissey and Pfeiffer. The Audit Committee meets privately once per year with the Company's independent auditor and actuary. Directors of the Company who are not employed by the Company or any subsidiary receive a fee of $5,000 per quarter. Directors are also entitled to reimbursement for reasonable out-of-pocket expenses related to travel for Board meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has formed a Compensation Committee of its Board of Directors which consists of Messrs. Haden and Adamson. Mr. Haden is the nominee of RLH, the general partner of FinPac, to the Board, and Mr. Adamson is the nominee of FinPac, St. Paul, Firemark and the Chief Executive Officer to the Board. 44 46 See "Certain Transactions" for information regarding the interests of RLH in certain transactions and arrangements involving the Company. The Compensation Committee evaluates executive performance in relationship to individual efforts and contributions to corporate earnings and makes recommendations for raises and merit bonuses. The Compensation Committee is also responsible for administration of the Company's 1993 Stock Incentive Plan. Neither Mr. Haden nor Mr. Adamson was at any time during the year ended December 31, 1997, or at any other time, an officer or employee of the Company. No member of the Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board or Compensation Committee. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the compensation earned by (i) the Company's Chief Executive Officer; (ii) the other four most highly compensated executive officers at the end of 1997; and (iii) a former executive officer who would have been one of the other four most highly compensated executive officers if he remained employed with the Company (the "Named Executive Officers") for services rendered in all capacities to the Company for each of the fiscal years in the three year period ended December 31, 1997. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------ SECURITIES ALL NAME AND FISCAL UNDERLYING OTHER PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1) ------------------ ------ -------- -------- ------------ --------------- Robert C. Goodell.................. 1997 $244,043 $ 76,795 -- $ 2,684 President, Chief Executive Officer 1996 $219,734 $ 25,000 -- $ 2,079 and Chairman of the Board 1995 $175,676 $118,148 -- $ 1,402 Robert T. Kingsley................. 1997 $135,580 $ 38,475 -- $ 2,642 Executive Vice President and 1996 $117,517 $ 39,250 15,776 $ 2,152 Chief Operating Officer 1995 $ 89,464 $ 50,000 1,972 $ 1,580 Wallace G. Rascher................. 1997 $103,778 $ 34,200 -- $ 3,379 Vice President -- Sales and Marketing 1996 $ 91,508 $ 25,000 5,916 $ 2,745 1995 $ 84,488 $ 45,000 1,972 $ 2,203 Edward J. Paoletti................. 1997 $108,516 $ 38,475 -- $ 2,288 Vice President -- Underwriting 1996 $ 78,366 $ 55,000 9,860 $ 216 1995 -- -- -- -- Timothy N. Blaede.................. 1997 $ 87,461 $ 51,813 9,859 $ 94 Vice President -- 1996 -- -- -- -- Information Services 1995 -- -- -- -- John R. Aye........................ 1997 $112,228 $ -- -- $55,788 Vice President -- Claims(2) 1996 $100,260 $ 25,000 5,913 $ 1,788 1995 $ 87,162 $ 50,000 1,972 $ 1,122
- --------------- (1) Consists of excess premiums paid by the Company for group term life insurance, contributions by the Company to the executive's 401(k) benefit plan and, when applicable, value of personal use of automobiles and severance benefits. (2) Effective December 15, 1997, Mr. Aye no longer served as an officer of the Company. He received $53,500 in severance benefits in 1997. 45 47 The following table sets forth information concerning options granted to the Named Executive Officers of the Company during the 1997 fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF RATES OF STOCK SECURITIES PERCENT OF PRICE APPRECIATION UNDERLYING TOTAL OPTIONS FOR OPTION TERMS OPTIONS GRANTED TO EXERCISE ($)(2) GRANTED EMPLOYEES IN PRICE EXPIRATION -------------------- NAME (#)(1) FISCAL YEAR (%) ($/SHARE) DATE 5% 10% ---- ------------- --------------- --------- ---------- -------- --------- Timothy N. Blaede....... 9,860 100% $4.82 2/12/07 $77,401 $123,250
- --------------- (1) Option vests ratably over the succeeding five anniversary dates. (2) The potential realizable value columns of the table illustrate values that might be realized upon exercise of the option immediately prior to its expiration, assuming the Common Stock appreciates at the compounded annual rates specified over the term of the option. These numbers do not take into account provisions of the option providing termination of the option following termination of employment or nontransferability of the option and do not make any provision for tax associated with exercise. Because actual gains will depend upon, among other things, future performance of the Common Stock, there can be no assurance that the amounts reflected in this table will be achieved. The following table sets forth information concerning the number of options owned by the Named Executive Officers and the value of any in-the-money unexercised stock options as of December 31, 1997. No options were exercised by the Named Executive Officers during fiscal 1997. AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT AT DECEMBER 31, DECEMBER 31, 1997(#) 1997($)(1)(2) ------------------- --------------- SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ---- --------------- ----------- ------------------- --------------- Robert C. Goodell............. -- -- 0/0 $0/$0 Robert T. Kingsley............ -- -- 11,832/7,888 $23,309/$12,148 Wallace G. Rascher............ -- -- 5,916/3,944 $14,198/$6,074 Edward J. Paoletti............ -- -- 1,972/7,888 $2,781/$11,122 Timothy N. Blaede............. -- -- 0/9,860 $0/$9,071 John R. Aye................... -- -- 5,916/3,944 $14,198/$6,074
- --------------- (1) Because there is no established public trading market for Common Stock, the Board of Directors of the Company must, under certain circumstances, determine the fair market value of the Common Stock. The Company believes that the fair market value of the Common Stock was $5.74 per share as of December 31, 1997. (2) Values for "in-the-money" outstanding options represent the positive spread between the respective exercise prices of the outstanding options and the fair market value of the underlying Common Stock of $5.74 per share as described in Note 1. EMPLOYMENT AGREEMENTS The Company has an employment agreement with Robert C. Goodell, pursuant to which Mr. Goodell holds the position of Chief Executive Officer and Director, for a one-year term. This agreement will renew automatically at the end of such term and each anniversary thereafter for another one-year term unless 46 48 terminated in accordance with such agreement. Mr. Goodell is paid a salary of $250,000 per annum subject to increase as agreed to by Mr. Goodell and the Board. He is also eligible to receive a bonus of up to 50% of his annual base salary, as determined by the Board of Directors. The agreement also provides for an automobile allowance not to exceed $900 per month and standard benefits under any Company employee benefits plan and any additional benefits that are approved by the Board. Upon termination of employment due to disability or by the Company (with or without cause), Mr. Goodell will receive a severance payment equal to the monthly portion of his annual base salary for the first 12 months after termination of employment regardless of any amounts earned by him from other employment during such period. During this 12 month period, Mr. Goodell will be entitled to all standard employee benefits. Also, upon such termination or upon termination due to death, Mr. Goodell will receive the unpaid portion of his annual base salary and the prorated portion of his bonus. If Mr. Goodell voluntarily terminates his employment, he is entitled only to the unpaid portion of his annual base salary. During his employment and at all times thereafter, Mr. Goodell will be subject to disclosure restrictions regarding confidential information of the Company. For 36 months after his termination, Mr. Goodell also may not solicit any employees of the Company to become employed by Mr. Goodell or his subsequent employer. In February 1997, the Company entered into an employment agreement with Robert T. Kingsley pursuant to which Mr. Kingsley became Executive Vice President and Chief Operating Officer of the Company. The agreement provides for an unspecified annual salary. Upon termination of his employment by the Company or by mutual agreement with the Company, Mr. Kingsley will receive a severance of six months his annual base salary. This severance payment will not be offset by any amounts earned by him from any other employment during such six month period. Mr. Kingsley will not receive a severance payment upon termination as a result of his death or resignation. The Company entered into employment agreements with Messrs. Rascher, Blaede, Terner, Wardlaw and Hollingshead with terms identical to those of Mr. Kingsley's contract. All of these contracts, including Mr. Kingsley's, are terminable upon 30 days written notice by the Company. In February 1996, the Company entered into an employment agreement with Edward J. Paoletti, pursuant to which Mr. Paoletti became Vice President of Underwriting. The agreement calls for an annual salary of $100,000 and a bonus equal to 50% of his base salary based on achievement targets regarding production, quality and service goals for the underwriting department. If the Company terminates Mr. Paoletti's employment for any reason, it will pay severance equal to 36 weeks of his annual salary. He will receive no other benefits other than those provided by COBRA during such severance period. RESTRICTED STOCK AGREEMENT The Company entered into a Restricted Stock Agreement dated September 7, 1993 with Mr. Goodell in which the Company has the right to repurchase for cancellation up to 268,819 shares of Common Stock (the "Initial Shares") held by Mr. Goodell upon the occurrence of certain events at a purchase price of $0.00394 per share. On such date, Mr. Goodell must pay the Company $2.54 per Initial Share which has become an Exempt Share (as defined below) or sell to the Company a portion of his Initial Shares at fair market value equal to $682,284. These events include: Mr. Goodell's termination, a change in control of the Company and December 31, 1998. A "change in control" includes a merger or consolidation of the Company into another company, the sale of all or substantially all of the assets of the Company or a sale of all or substantially all of the capital stock of the Company. From 1994 to 1998, a portion of the Initial Shares become exempt from repurchase (the "Exempt Shares") upon the Company meeting certain net income thresholds. These net income targets will be adjusted if the Company consummates a public offering in which the Series A Stock is converted into Common Stock. Further, upon a "change in control" of the Company, all Initial Shares will become Exempt Shares. As of December 31, 1997, 209,021 Initial Shares had become Exempt Shares. 47 49 In addition, if Mr. Goodell terminates his employment for any reason on or before December 31, 1998, the Company may repurchase all shares of Common Stock (including Exempt Shares) held by Mr. Goodell (including shares held by trusts established for the benefit of Mr. Goodell or his spouse) except for Initial Shares, at a price equal to "book value" per share. The "book value" per share will be the initial price paid for such shares plus the net income of the Company determined in accordance with GAAP, calculated from the date of the agreement to the end of the fiscal quarter immediately preceding the fiscal quarter in which Mr. Goodell is terminated. The Company may purchase Initial Shares at $0.00394 per share. If the Company fails to repurchase all of Mr. Goodell's shares upon such termination, the other stockholders of the Company may repurchase his shares at the same price offered to the Company. In the event of the death of Mr. Goodell, his estate has the right to cause the Company to repurchase any shares not repurchased in the manner described above at the price the shares were first offered to the Company, provided that, the estate may not the cause a repurchase to exceed the amount of proceeds from any key man life insurance covering Mr. Goodell. 1993 STOCK INCENTIVE PLAN The Company's 1993 Stock Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors on September 7, 1993. The Company has reserved 109,242 shares for issuance under the Incentive Plan. As of March 31, 1998, 1,972 shares had been issued upon exercise of options granted under the Incentive Plan, options for 82,819 shares were outstanding and 24,629 shares remained available for future grant. Shares of Common Stock subject to outstanding options, which expire or terminate prior to exercise, will be available for future issuance under the Incentive Plan. Under the Incentive Plan, employees and consultants may be awarded any form of Company securities (an "Award"), including without limitation, options to purchase shares of Common Stock, shares of Common Stock, warrants, phantom stock, stock appreciation rights, restricted shares, stock units or a combination thereof. These individuals may also receive cash bonuses under the Incentive Plan. Options may be incentive stock options designed to satisfy Section 422 of the Internal Revenue Code or nonstatutory stock options not designed to meet such requirements. The Incentive Plan is administered by the Compensation Committee. The Compensation Committee has the complete discretion to determine which eligible individuals are to receive Awards; determine the Award type; determine the number of shares subject to an Award, vesting requirements and other features and conditions of such Awards; interpret the Incentive Plan; and make all other decisions relating to the operation of the Incentive Plan. Upon a change in control, the Compensation Committee may accelerate the receipt of benefits pursuant to an Award. A change in control includes a merger or consolidation of the Company, the dissolution or liquidation of the Company, a sale of all or substantially all of the assets of the Company and acquisition of a specified percentage of the combined voting power of the Company's outstanding stock. The Board may amend or terminate the Incentive Plan at any time. Amendments may be subject to stockholder approval to the extent required by applicable laws. In any event, the Incentive Plan will terminate on September 7, 2003, unless sooner terminated by the Board. 401(K) PLAN The Company sponsors a contributory 401(k) Plan. All full-time employees of the Company 21 years of age or older who have completed one year of service are eligible for participation in the Plan. Currently, the Company matches 100% of the employee's pre-tax contribution up to $2,000 and matched 100% of each employee's contribution up to $1,000 and $1,500 in 1995 and 1996, respectively, to the Plan. The total amount matched for 1995, 1996 and 1997 was $20,565, $61,435, and $87,980, respectively. 48 50 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of April 1, 1998 and as adjusted to reflect the sale of Common Stock offered hereby, by: (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; (iii) each of the Named Executive Officers; (iv) each Selling Stockholder; and (v) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
BENEFICIAL SHARES OWNERSHIP NUMBER OF BENEFICIALLY PRIOR TO SHARES TO OWNED AFTER OFFERING BE SOLD OFFERING(1) ---------------------- IN THE ---------------------- SHARES PERCENTAGE OFFERING SHARES PERCENTAGE --------- ---------- --------- --------- ---------- Robert C. Goodell(2)................... 381,265 12.7% 381,265 7.7% Robert T. Kingsley(3).................. 15,776 * 15,776 * Wallace G. Rascher(4).................. 7,888 * 7,888 * Edward J. Paoletti(5).................. 3,944 * 3,944 * Timothy N. Blaede(6)................... 1,972 * 1,972 * Riordan, Lewis & Haden(7).............. 771,712 25.7% 166,667 605,045 12.2% Patrick C. Haden(7).................... 771,712 25.7% 605,045 12.2% Firemark Advisors, Inc.(8)............. 771,712 25.7% 166,667 605,045 12.2% Michael J. Morrissey(8)................ 771,712 25.7% 605,045 12.2% St. Paul Fire & Marine Insurance Company(9)........................... 771,712 25.7% 166,666 605,046 12.2% Richard G. Pfeiffer(9)................. -- -- -- -- Celerity Partners, L.P.(10)............ 59,367 2.0% 59,367 1.2% Stephen E. Adamson(11)................. 110,542 1.7% 51,175 1.0% Robert S. Goodell...................... 39,438 1.3% 39,438 * W.E. Myers(12)......................... 40,940 1.4% 40,940 * Brian Sanderson(13).................... 10,235 * 10,235 * David Rogers(14)....................... 70,894 2.4% 70,894 1.4% All Directors and Executive Officers as a Group (12 persons)................. 2,074,669 68.9% 1,741,335 35.0%
- --------------- * Less than 1% (1) Assumes no exercise of the Underwriters' over-allotment option. (2) Includes 321,211 shares held jointly by Robert C. and Suzanne M. Goodell as of April 1, 1998. The address of such persons is c/o Financial Pacific Insurance Group, Inc., 3850 Atherton Road, Rocklin, California 95765. (3) Consists of 15,776 shares issuable upon exercise of options which are exercisable as of, or will be exercisable within 60 days of, April 1, 1998. (4) Consists of 7,888 shares issuable upon exercise of options which are exercisable as of, or will be exercisable within 60 days of, April 1, 1998. (5) Consists of 3,944 shares issuable upon exercise of options which are exercisable as of, or will be exercisable within 60 days of, April 1, 1998. (6) Consists of 1,972 shares issuable upon exercise of options which are exercisable as of, or will be exercisable within 60 days of, April 1, 1998. (7) Shares are owned by FinPac Partners, L.P., the general partner of which is RLH. Mr. Haden, a Director of the Company, may be deemed to share voting and investment power with respect to all such shares as 49 51 a general partner of RLH. Mr. Haden does not own any shares directly. The address of such persons is 300 S. Grand Avenue, 29th Floor , Los Angeles, California 90071 (8) Shares are owned by Firemark. Mr. Morrissey, a Director of the Company, may be deemed to have voting and investment power with respect to all such shares as the Chairman and Chief Executive Officer of Firemark. Mr. Morrissey does not own any shares directly. The address of such persons is 67 Park Place, Morristown, New Jersey 07960. (9) The address of such persons is 385 Washington Street, MC 516A, St. Paul, Minnesota 55102. Mr. Pfeiffer has disclaimed beneficial ownership of the shares owned by St. Paul. (10) Consists of 59,367 shares issuable upon exercise of warrants which are exercisable as of April 1, 1998. (11) Consists of 59,367 shares held by Celerity Partners, L.P. Mr. Adamson, a Director of the Company, may be deemed to have voting and investment power with respect to all such shares as the managing member of Celerity Partners. Mr. Adamson also owns 51,175 shares directly, that are issuable upon exercise of warrants which are exercisable as of April 1, 1998. (12) Consists of 40,940 shares issuable upon exercise of warrants which are exercisable as of April 1, 1998. (13) Consists of 10,235 shares issuable upon exercise of warrants which are exercisable as of April 1, 1998. (14) Consists of 51,175 shares issuable upon exercise of warrants which are exercisable as of April 1, 1998. CERTAIN TRANSACTIONS On December 28, 1995, the Company entered into a Note and Warrant Purchase Agreement (the "Agreement") with Firemark, FinPac, St. Paul, and Celerity FinPac, LLC ("Celerity"). Pursuant to the Agreement, the Company issued and sold: (i) $5,000,000 aggregate principal amount of its 12% Senior Notes due January 1, 2001 (the "Senior Notes") and (ii) Common Stock Purchase Warrants for the purchase of up to 593,691 shares of the Company's Common Stock (the "Senior Note Warrants"), as follows: Firemark, FinPac and St. Paul each acquired a Senior Note in the principal amount of $1,500,000 and Senior Note Warrants to acquire 178,108 shares of Common Stock, and Celerity acquired a Senior Note in the principal amount of $500,000 and Senior Note Warrants to acquire 59,367 shares of Common Stock. In accordance with the terms of the Senior Notes, the Company has paid interest at the rate of 12% per annum thereon on July 1, 1996, January 1 and July 1, 1997, and January 1, 1998 to Firemark, FinPac, St. Paul and Celerity. The Company intends to prepay the Senior Notes with a portion of the proceeds from this Offering. See "Use of Proceeds." The Senior Note Warrants may be exercised at any time prior to January 1, 2004, and have an exercise price of $5.61 per share. However, such Senior Note Warrants must be exercised in connection with an underwritten public offering of the Company's Common Stock in which the gross proceeds to be received by the Company equal or exceed $10,000,000 and the public offering price of the Common Stock is not less than $12.69 per share (as adjusted for stock splits, dividends or other recapitalization transactions). Holders of the Senior Note Warrants are entitled to certain registration rights. See "Description of Capital Stock -- Registration Rights." Patrick C. Haden, a Director of the Company, is a general partner of RLH, the general partner of FinPac. Mr. Haden is also of counsel to Riordan & McKinzie, the Company's legal counsel. Michael J. Morrissey, a Director of the Company, is the Chairman and Chief Executive Officer of Firemark Advisors, Inc. ("Advisors"), the general partner of Firemark. In June 1997, the Company contracted with Advisors to render financial advisory services. Advisors was paid a fee of $50,000 plus expenses of $13,099 for its services. Since 1995, St. Paul, through its reinsurance affiliate, St. Paul Re Inc., has participated on the Company's property quota share and casualty excess of loss reinsurance treaties. St. Paul has a 7.5% participation on the property quota share reinsurance treaty and a 15% participation on the casualty excess of loss reinsurance treaty. St. Paul is subject to the same terms and conditions as all other reinsurance treaty participants. During 1997, the Company ceded $1,269,000 of written premium to St. Paul. At December 31, 1997, the Company had a reinsurance recoverable under its reinsurance treaties of $1,336,000 due from St. 50 52 Paul which consists of paid and unpaid losses and loss adjustment expenses and unearned premiums, net of amounts payable by the Company to St. Paul. During 1997, Mr. Goodell sold 15,187 shares of Common Stock to each of FinPac, St. Paul and Firemark at a price of $9.88 per share. The total proceeds to Mr. Goodell were $450,000. The Company has entered into indemnification agreements with its directors and executive officers for the indemnification of and advancement of expenses to such persons to the full extent permitted by law. The Company also intends to execute such agreements with its future directors and executive officers. The Company believes that the foregoing transactions were in its best interest and were made on terms no less favorable to the Company than could have been obtained for unaffiliated third parties. All future transactions between the Company and any of its officers, directors or principal stockholders will be approved by a majority of the independent and disinterested members of the Board of Directors, will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties and will be in connection with bona fide business purposes of the Company. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 7,500,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. The following is a description of the authorized capital stock of the Company as of April 15, 1998. At such date, there were seven holders of record of the Common Stock and three holders of record of the Series A Stock. COMMON STOCK As of April 15, 1998, there were 487,955 shares of Common Stock and 4,400 shares of Series A Stock outstanding. There will be 4,970,422 shares of Common Stock outstanding (assuming conversion of all shares of Series A Stock into 1,735,521 shares of Common Stock, the full exercise of all outstanding Warrants into 747,216 shares of Common Stock and no exercise after April 1, 1998, of outstanding options) after giving effect to the sale of shares of Common Stock to the public offered hereby. Holders of Common Stock are entitled to one vote per share and have no cumulative voting rights. In general, action to be taken by a vote of the stockholders of the Company requires the affirmative vote of at least a majority of the votes cast by the holders of Common Stock entitled to vote, except that the election of directors requires a plurality of the votes cast at an election. Consequently, the holder or holders of record of more than 50% of the outstanding shares of Common Stock can elect all of the Company's directors. Subject to any preferences that may be applicable to subsequently issued shares of Preferred Stock, if and when issued, the holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor, and upon liquidation, winding up and/or dissolution of the Company are entitled, after payment of liabilities and preferences of outstanding Preferred Stock, if any stock, to share ratably in assets available for distribution. The holders of Common Stock have no preemptive rights, cumulative voting rights, or rights to convert shares of Common Stock into any other securities and are not subject to future calls or assessments by the Company. All outstanding shares of Common Stock of the Company are fully paid and nonassessable. Prior to the date of this Registration Statement, there has been no established public trading market for the Common Stock. The Company has applied for listing of the Common Stock on the Nasdaq National Market. See "Risk Factors -- Lack of Prior Public Market for Common Stock." PREFERRED STOCK Upon the consummation of the Offering, the Company will have no outstanding preferred stock, but the Board of Directors, without further action by the holders of the Common Stock, is authorized to fix the dividend rights and terms, conversion or exchange rights, voting rights, redemption rights and terms, 51 53 liquidation preferences, sinking fund and any other designations, powers, rights, preferences, privileges, qualifications, limitations and restrictions applicable to each series of preferred stock. The issuance of preferred stock could adversely affect the voting power and other rights of the holders of Common Stock. The authority possessed by the Board of Directors to issue preferred stock could potentially be used to discourage attempts by others to obtain control of the Company through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly to successfully complete. The Board of Directors may issue preferred stock with voting, dividend or liquidation and conversion right that could adversely affect the rights of the holders of Common Stock. There are no agreements or understandings for the issuance of preferred stock, and the Board of Directors has no present intention to issue any preferred stock. As of April 15, 1998, the Board of Directors has designated one series of preferred stock, Series A Stock, comprised of 5,000 shares of the Preferred Stock, 4,400 of which were outstanding. Each share of Series A Stock has a stated value of $1,000. Upon the consummation of the Offering, each share of Series A Stock will, pursuant to the terms of the Company's Restated Certificate of Incorporation, convert into 394.375 shares of Common Stock. WARRANTS As of April 1, 1998, the Company has outstanding Warrants providing for the purchase of an aggregate of 747,216 shares of Common Stock (the "Warrants"). The exercise price of the Warrants range from $2.54 to $5.61 per share, and the Warrants expire on dates ranging from September 7, 2003 to January 1, 2004. Warrants to purchase shares of Common Stock will be exercised in connection with this Offering. Under the Warrants, the holder may elect to exercise its Warrant by payment of the exercise price or on a cashless basis. The holders of the Senior Note Warrants will exercise their Warrants by canceling indebtedness under the Senior Notes in the amount of the exercise price. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. 52 54 REGISTRATION RIGHTS At April 15, 1998, assuming conversion of all shares of Series A Stock into 1,725,251 shares of Common Stock and the full exercise of the Warrants into 747,216 shares of Common Stock, holders of approximately 2,970,422 shares of Common Stock are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the Stockholders Agreement, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. All of these registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration. These rights to cause the Company to register such shares shall terminate once such shares may be sold in accordance with Rule 144(k) under the Securities Act. TRANSFER AGENT AND REGISTRAR will be the transfer agent and registrar for the shares of Common Stock. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102 of the DGCL authorizes a Delaware corporation to include a provision in its Certificate of Incorporation limiting or eliminating the personal liability of its directors to the corporation and its stockholders for monetary damages for breach of the directors' fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by such provision, directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Although Section 102 of the DGCL does not change a director's duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Company's Certificate of Incorporation and Bylaws include provisions which limit or eliminate the personal liability of its directors to the fullest extent permitted by Section 102 of the DGCL. Consequently, a director of officer will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for (i) any breach of the director's duty of loyalty to the Company or its stockholders; (ii) acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law; (iii) unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; and (iv) any transaction from which the director derived an improper personal benefit. The Company Certificate of Incorporation and Bylaws also provide, in effect, that, to the fullest extent and under the circumstances permitted by Section 145 of the DGCL, the Company will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation or enterprise. The inclusion of these indemnification provisions in the Company's Certificate of Incorporation and Bylaws is intended to enable the Company to attract qualified persons to serve as directors and officers who might otherwise be reluctant to do so. The Company may, in its discretion, similarly indemnify its employees and agents. Depending upon the character of the proceeding, the Company may indemnify its directors and officers against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding if the person indemnified acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no cause to believe his or her conduct was unlawful. To the extent that a director or officer of the Company has been successful in the defense of any action, suit or proceeding referred to above, under the DGCL, the Company would have the obligation to indemnify him or her against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. 53 55 In addition, the limited liability provisions in the Certificate of Incorporation and the indemnification provisions in the Certificate of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty (including breaches resulting from grossly negligent conduct) and may have the effect of reducing the likelihood of derivative litigation against directors and officers, even through such an action, if successful, might otherwise have benefited the Company and its stockholders. Furthermore, a stockholder's investment in the Company may be adversely affected to the extent the Company pays the costs of settlement and damage awards against directors and officers of the Company pursuant to the indemnification provisions in the Company's Bylaws. The limited liability provisions in the Certificate of Incorporation will not limit the liability of directors under federal securities laws. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 4,970,422 shares of Common Stock outstanding (assuming conversion of all shares of Series A Stock into 1,735,221 shares of Common Stock, the full exercise of all outstanding Warrants into 747,216 shares of Common Stock and no exercise after April 1, 1998 of outstanding options). All 2,500,000 shares sold pursuant to this Offering will be freely tradable without restriction or further registration under the Securities Act, unless held by an "affiliate" of the Company (as that terms is defined below). Any such affiliate would be subject to the resale limitation of Rule 144 adopted under the Securities Act. The remaining shares of outstanding Common Stock are "restricted securities" (the "Restricted Shares") within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of a registration under the Securities Act unless an exemption from registration is available, including an exemption contained in Rule 144. In general, under Rule 144 as currently in effect, any person (or person who shares are aggregate for purpose for Rule 144) who has beneficially owned restricted securities, as that term is defined in Rule 144, for at least one year (including, in the case of a nonaffiliated holder, any period of ownership of preceding nonaffiliate holders) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale, provided that certain public information about the Company, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least two years is entitled to sell such shares under Rule 144 (k) without regard to any of the volume limitations described above. Certain of the Restricted Shares are presently eligible for sale under Rule 144 (k). The holders of the Restricted Shares have agreed not to sell, or otherwise dispose of, any shares of Common Stock or other equity securities of the Company for a period of 180 days after the date of this Prospectus (other than shares sold pursuant to this Prospectus) without the prior written consent of the Representative. No predictions can be made of the effect, if any, that future sales of shares of Common Stock, and grants of options to acquire shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market prices of the Common Stock. See "Principal and Selling Stockholders," "Description of Capital Stock" and "Underwriting." 54 56 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom EVEREN Securities, Inc. is acting as representative (the "Representative"), have severally agreed to purchase from the Company and the Selling Stockholders, and the Company and the Selling Stockholders have agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite each Underwriter's name below:
NUMBER OF UNDERWRITERS SHARES ------------ --------- EVEREN Securities, Inc...................................... Total............................................. 2,500,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligation is such that they are committed to purchase and pay for all the shares of Common Stock if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such selected dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After this Offering, the price to the public, concession, allowance and reallowance may be changed by the representatives of the Underwriters. The Company has granted the Underwriters an option, exercisable during the 45-day period after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 2,500,000 purchased by the Underwriters of the Company. To the extent that the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares of Common Stock in approximately the same proportions as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this Offering. At the close of this Offering, the Company has agreed to pay the Representative a non-accountable expense allowance of one percent of the total offering proceeds, which will include proceeds from the Underwriters' exercise of the over-allotment option to the extent exercised. The Representative's expenses in excess of the non-accountable expense allowance will be borne by the Underwriters. The Company has agreed to issue to the Representative warrants (the "Representative's Warrants") to purchase up to 143,750 shares of Common Stock, at an exercise price per share equal to 110% of the initial public offering price per share. The Representative's Warrants are exercisable for a period of four years, commencing one year from the effective date (the "Effective Date") of the Registration Statement of which this Prospectus is a part and expire five years from the Effective Date. The Representative's Warrants are not transferable prior to the expiration of one year from the Effective Date other than to officers or partners of the Underwriters and members of the selling group and their officers and partners. The holders of the Representative's Warrants will have no voting, dividend or other shareholders' rights until the Warrants are 55 57 exercised. The Company has granted the Representative certain demand and piggy-back registration rights related to the Representative's Warrants, which are applicable during the period that the Representative's Warrants are exercisable and expire five years from the Effective Date. The Representative has informed the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. The Company has agreed not to issue, and all the Company's officers and directors, the Selling Stockholders, and all of the other stockholders, who in the aggregate hold 100% of the shares of the Common Stock of the Company outstanding immediately prior to the completion of this Offering, have agreed not to sell, or otherwise dispose of, any shares of Common Stock or other equity securities of the Company for a period of 180 days after the date of this Prospectus (other than shares sold pursuant to this Prospectus) without the prior written consent of the Representative. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this Offering, there has been no trading market for the Common Stock. Consequently, the initial public offering price was negotiated among the Company, the Selling Stockholders and the Representative. Among the factors considered in such negotiations were the history of and the prospects for the Company and the industry in which it competes; an assessment of the Company's management; the past earnings of the Company and the trend and future prospects of such earnings; the present state of the Company's development; the general conditions of the securities markets at the time of the Offering; and the market prices of publicly traded common stocks of comparable companies in recent periods. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this Offering at or above the initial public offering price. The initial public offering price set forth on the cover page of this Prospectus should not be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. No assurances can be given that Common Stock can be resold at or above the initial public offering price. LEGAL MATTERS The validity of the shares offered hereby will be passed upon for the Company by Riordan & McKinzie, a Professional Corporation, Los Angeles, California and for the Underwriters by Morrison & Foerster LLP, Los Angeles, California. Certain principals and employees of Riordan & McKinzie are limited partners of a partnership which is a limited partner of FinPac Partners, a California limited partnership and one of the Company's principal stockholders. Certain insurance regulatory matters will be passed upon by LeBoeuf, Lamb, Greene & MacRae L.L.P., San Francisco, California. See "Principal and Selling Stockholders" and "Certain Transactions." EXPERTS The financial statements and schedules of Financial Pacific Insurance Group, Inc. as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 56 58 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement (which term shall include all amendments, exhibits and schedules thereto) on Form S-1 under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, to which Registration Statement reference is hereby made. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to are complete in all material respects. However, with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. The Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, at prescribed rates. The Commission maintains a website that contains reports, proxy and information statements and other information regarding issuers who file electronically with the Commission. The Commission's address on the worldwide web is: http://www.sec.gov. 57 59 GLOSSARY OF SELECTED INSURANCE TERMS Cede....................... To transfer to another insurer by way of reinsurance all or a part of the liability or expenses of insurance written by an insurer. CMP -- Liability Insurance.................. Insurance for business operations that provides protection for a business against liability for bodily injury or property damage of a third party. CMP -- Property Insurance.................. Insurance that indemnifies a person with an insurable interest in tangible property for his/her loss related to damage to or loss of use of his/her subject property. This is intended as indemnity for the insured-owner as compared to CMP -- liability insurance which is intended to provide the insured with coverage for bodily injury and property damage to others. Combined ratio............. The sum of the expense ratio and the loss ratio, determined in accordance with SAP. A combined ratio under 100% indicates an underwriting profit and a combined ratio over 100% indicates an underwriting loss. The extent by which the combined ratio deviates from 100% indicates the relative underwriting profit or loss from the business operation of issuing policies of insurance. The combined ratio does not reflect investment income, federal income taxes or other non-underwriting income or expense, all of which are included in determining net income. Commercial lines........... Insurance policies written by the Company for business operations, as opposed to personal coverages, that provide commercial general liability insurance (protection for a business operation against general liability for bodily injury and/or property damage), CMP or property insurance (protection against business property damage from fire, lightning, windstorm and certain other perils), and crime insurance (protection purchased by businesses to insure against losses caused by crimes). Direct premiums written.... Total premiums for insurance sold to insureds, as opposed to, and not including, premiums received for reinsuring risks written by other insurance companies. Excess of loss reinsurance................ Reinsurance which indemnifies the reinsured against all or a specified portion of losses on reinsured policies in excess of a specified dollar amount or "retention." Expense ratio.............. Under SAP, the ratio (expressed as a percentage) of underwriting expenses to net premiums written. Under GAAP, the ratio (expressed as a percentage) of underwriting expenses to premiums earned. Facultative reinsurance.... Individual risks offered by an insurer for acceptance or rejection by a reinsurer. Both parties are free to act in their own best interests. The reinsurer is liable only for losses which exceed the insurer's retention level. Premiums vary with loss expectation. General agent.............. Agents granted broad authority by an insurance company it represents to underwrite, bind, cancel, and collect money on the company's behalf. Gross premiums written..... Total premiums written by an insurer during a specified period of time, before ceding any portion of such insurance risks to reinsurers. Hard Market................ An insurance market in which the demand for insurance exceeds the readily available supply and premiums are relatively high. 58 60 Incurred but Not Reported ("IBNR") Reserves...... Reserves for estimated losses which have been incurred by insureds but not yet reported to the insurer. Incurred losses............ The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for claims that have occurred but have not yet been reported to the insurer. Industry combined ratio.... An average combined ratio for the property/casualty insurance industry as compiled by the A.M. Best which is a broad measure of the property/casualty insurance industry's performance for a particular period. The industry combined ratio measures the overall performance of all property/casualty insurance companies and for all lines of business. The industry combined ratio is useful only in assessing general trends within the industry and should not be used to evaluate the performance of the Company relative to other companies underwriting similar lines of business. Loss adjustment expenses ("LAE")................ The insurer's cost of investigating and settling claims, including legal fees, other fees and related expenses of administering the claims adjustment process. Loss ratio................. Under both SAP and GAAP, the ratio (expressed as a percentage) of incurred losses and LAE to premiums earned. Loss reserves.............. Liabilities established by insurers to reflect the estimated cost of claim payments that the insurer will ultimately be required to pay on all reported and unreported losses which are unpaid at the end of a fiscal period on an undiscounted basis with respect to insurance it has written. Reserves are established for losses and LAE. Net premiums earned........ The amount of net premiums written recognized as income during a given period. Net premiums written....... The amount of direct (gross) premiums written of an insurer plus assumed reinsurance premiums, less ceded reinsurance premiums. Policy acquisition costs... The direct expenses associated with the production of business including agents' or brokers' commissions, premium taxes, marketing and certain underwriting expenses. Premiums earned............ The portion of premiums written that is recognized for accounting purposes (GAAP and SAP) as income during a period. Also known as earned premiums. Quota share reinsurance.... Reinsurance in which the reinsured shares a proportion of the original premiums and losses under the reinsurance policy. Also known as pro rata reinsurance. Reinsurance................ The acceptance by one or more insurers, called reinsurers, of all or a portion of the risk underwritten by another insurer which has usually directly written the coverage. However, the legal rights of the insured generally are not affected by the reinsurance transaction and the insurance company issuing the insurance policy remains liable to the insured for payment of full policy benefits. 59 61 Semi-automatic facultative reinsurance.............. Individuals risks written within the guidelines of a reinsurance treaty are automatically ceded to and accepted by the reinsurer. The reinsurer may reject any reinsurance bound by notifying the Company within a specified notice period. The liability of the reinsurer with respect to any rejected submission shall continue until the Company is able to cancel the policy. Soft Market................ An insurance market in which the supply of insurance exceeds the current demand and premiums are relatively low. Statutory accounting principles (SAP)........... Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance related statutes or regulatory authorities, generally reflecting a liquidating, rather than a going concern, concept of accounting. The principal differences between SAP and GAAP, are: (a) under SAP, certain assets are eliminated from the balance sheet; (b) under SAP, policy acquisition costs are expensed as incurred, while under GAAP, they are deferred and amortized over the term of the policies; (c) under SAP, no provision is made for deferred income taxes; and (d) under SAP, certain reserves are recognized which are not recognized under GAAP. All financial data set forth in this Prospectus is presented in accordance with GAAP unless specifically otherwise stated. Surplus as regards policyholders............ The excess of all assets over all liabilities under SAP. Underwriting............... The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will issue all or part of the coverage being requested and what the applicable premiums will be. Underwriting also includes an ongoing review of existing policies and their pricing. Underwriting expenses...... The aggregate of losses, loss adjustment expenses, policy acquisition costs, contingent ceding commissions and general operating costs. Underwriting profit (loss)..................... The difference between net premiums earned and underwriting expenses. Unearned premiums.......... The pro rata portion of a premium representing the unexpired term of policies in force as of a certain date. 60 62 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS -- FINANCIAL PACIFIC INSURANCE GROUP, INC. (AUDITED) Independent Auditors' Report -- KPMG Peat Marwick LLP..... 62 Consolidated Balance Sheets of Financial Pacific Insurance Group, Inc. and Subsidiaries -- December 31, 1996 and 1997................................................... 63 Consolidated Statements of Operations of Financial Pacific Insurance Group, Inc. and Subsidiaries -- Years Ended December 31, 1995, 1996 and 1997....................... 64 Consolidated Statements of Stockholders' Equity of Financial Pacific Insurance Group, Inc. and Subsidiaries -- Years Ended December 31, 1995, 1996 and 1997................................................... 65 Consolidated Statements of Cash Flows of Financial Pacific Insurance Group, Inc. and Subsidiaries -- Years Ended December 31, 1995, 1996 and 1997....................... 66 Notes to Consolidated Financial Statements of Financial Pacific Insurance Group, Inc. and Subsidiaries......... 67
61 63 INDEPENDENT AUDITORS' REPORT The Board of Directors Financial Pacific Insurance Group, Inc.: We have audited the accompanying consolidated balance sheets of Financial Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 financial position of Financial Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the information set forth under the captions "Income Statement Data" and "Balance Sheet Data" in the selected consolidated financial data as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997, appearing on pages 16 and 17, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG Peat Marwick LLP Sacramento, California January 30, 1998, except as to Note 16, which is as of April 14, 1998 62 64 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ----------- ----------- ASSETS Fixed maturities available for sale, at market value (cost $24,764,235 in 1996 and $30,027,603 in 1997).............. $24,045,597 $29,976,813 Cash and cash equivalents................................... 497,388 632,495 Accrued investment income................................... 304,605 426,013 Receivables: Premiums receivable, net of allowance for doubtful accounts of $40,000 in 1996 and 1997............................... 13,016,982 14,631,026 Income taxes receivable................................... 210,099 7,933 Notes receivable.......................................... 47,859 6,691 ----------- ----------- Total receivables................................. 13,274,940 14,645,650 Prepaid reinsurance premiums................................ 7,922,096 6,828,703 Reinsurance recoverable on unpaid losses and loss adjustment expenses.................................................. 4,007,047 6,184,927 Deferred policy acquisition costs........................... 3,778,170 5,356,697 Fixed assets, net........................................... 525,208 885,841 Other assets................................................ 329,440 956,004 ----------- ----------- Total assets...................................... $54,684,491 $65,893,143 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses................ $13,944,397 $19,592,060 Unearned premiums......................................... 18,979,533 21,967,648 Deferred income taxes..................................... 1,431,342 1,619,483 Reinsurance payable, net.................................. 1,914,378 1,472,807 Notes payable, net........................................ 5,479,414 4,984,561 Other liabilities......................................... 2,320,072 2,858,446 ----------- ----------- Total liabilities................................. $44,069,136 $52,495,005 ----------- ----------- Stockholders' equity: Series A convertible preferred stock, $.001 par value; 2,000,000 shares authorized; 4,400 shares, issued and outstanding at 1996 and 1997, respectively............. 5 5 Common stock, $.001 par value; 7,500,000 shares authorized; 485,983 shares issued and outstanding...... 486 486 Additional paid-in capital................................ 4,949,510 4,949,510 Retained earnings......................................... 6,139,655 8,481,658 Net unrealized loss on available for sale securities, net of deferred income tax benefit of $244,337 in 1996 and $17,269 in 1997........................................ (474,301) (33,521) ----------- ----------- Total stockholders' equity........................ 10,615,355 13,398,138 ----------- ----------- Total liabilities and stockholders' equity........ $54,684,491 $65,893,143 =========== ===========
See accompanying notes to consolidated financial statements. 63 65 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ------------ ------------ ------------ Revenues: Direct premiums written........................ $ 24,694,947 $ 31,926,872 $ 39,511,737 Premiums ceded................................. (10,653,344) (13,673,996) (12,576,059) ------------ ------------ ------------ Net premiums written...................... 14,041,603 18,252,876 26,935,678 Increase in unearned premiums.................... (1,981,731) (3,265,911) (4,081,508) ------------ ------------ ------------ Net premiums earned....................... 12,059,872 14,986,965 22,854,170 Commissions...................................... 104,985 627,690 709,057 Investment income, net of expenses............... 1,028,524 1,449,406 1,719,877 Net realized gains (losses) on sales of investments.................................... 465,695 52,171 (46,194) Other income, net................................ 578,292 547,117 800,697 ------------ ------------ ------------ Total revenues................................. 14,237,368 17,663,349 26,037,607 Expenses: Losses and loss adjustment expenses.............. 6,325,059 9,750,413 12,748,171 Policy acquisition costs......................... 3,956,595 4,785,460 7,439,612 Contingent ceding commission..................... (1,245,755) (3,222,420) (1,511,253) General operating costs.......................... 1,711,641 1,929,348 2,443,576 Agency Expenses.................................. 145,720 688,188 721,187 Interest expense................................. 128,603 691,957 617,042 ------------ ------------ ------------ Total expenses................................. 11,021,863 14,622,946 22,458,335 ------------ ------------ ------------ Income before taxes.............................. 3,215,505 3,040,403 3,579,272 Income tax provision: Current........................................ 428,908 22,051 1,276,196 Deferred....................................... 637,093 1,015,066 (38,927) ------------ ------------ ------------ Total income tax provision................ 1,066,001 1,037,117 1,237,269 ------------ ------------ ------------ Net income................................ $ 2,149,504 $ 2,003,286 $ 2,342,003 ============ ============ ============ Earnings per share: Basic.......................................... $ 4.42 $ 4.12 $ 4.82 ============ ============ ============ Diluted........................................ $ 0.94 $ 0.69 $ 0.79 ============ ============ ============
See accompanying notes to consolidated financial statements. 64 66 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
UNREALIZED GAIN (LOSS) NUMBER ON OF NUMBER OF ADDITIONAL AVAILABLE PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED FOR SALE SHARES STOCK SHARES STOCK CAPITAL EARNINGS SECURITIES TOTAL --------- --------- --------- ------ ---------- ---------- ----------- ----------- Balances at December 31, 1994........................... 4,400 $5 485,983 $486 $4,949,510 $1,986,865 $ (28,532) $ 6,908,334 Net income..................... -- -- -- -- -- 2,149,504 -- 2,149,504 Change in unrealized gain (loss) on available for sale securities, net of deferred income taxes of $43,552...... -- -- -- -- -- -- 84,540 84,540 ----- -- ------- ---- ---------- ---------- --------- ----------- Balances at December 31, 1995......................... 4,400 $5 485,983 $486 $4,949,510 $4,136,369 $ 56,008 $ 9,142,378 Net income..................... -- -- -- -- -- 2,003,286 -- 2,003,286 Change in unrealized gain (loss) on available for sale securities, net of deferred income taxes of $273,191..... -- -- -- -- -- -- (530,309) (530,309) ----- -- ------- ---- ---------- ---------- --------- ----------- Balances at December 31, 1996......................... 4,400 $5 485,983 $486 $4,949,510 $6,139,655 $(474,301) $10,615,355 Net income..................... -- -- -- -- -- 2,342,003 -- 2,342,003 Change in unrealized gain (loss) on available for sale securities, net of deferred income taxes of $227,067..... -- -- -- -- -- -- 440,780 440,780 ----- -- ------- ---- ---------- ---------- --------- ----------- Balances at December 31, 1997......................... 4,400 $5 485,983 $486 $4,949,510 $8,481,658 $ (33,521) $13,398,138 ===== == ======= ==== ========== ========== ========= ===========
See accompanying notes to consolidated financial statements. 65 67 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 2,149,504 $ 2,003,286 $ 2,342,003 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 104,480 260,138 319,029 Net realized (gains) losses on sales of investments.... (465,695) (52,171) 46,194 Net realized losses on sales of fixed assets........... 2,285 6,141 15,574 Write-off of note receivable........................... -- 80,000 33,252 Deferred income taxes.................................. 637,093 1,015,066 (38,927) Increase in premiums receivable, net................... (3,045,663) (3,390,280) (1,614,044) Increase in accrued investment income.................. (38,205) (40,987) (121,408) (Increase) decrease in income taxes receivable......... (84,160) (228,136) 202,166 (Increase) decrease in prepaid reinsurance premiums.... (2,579,263) (1,655,441) 1,093,393 (Increase) decrease in reinsurance recoverable on unpaid losses and loss adjustment expenses........... 553,614 342,071 (2,177,880) Increase in deferred policy acquisition costs.......... (801,026) (1,147,059) (1,578,527) Decrease (increase) in other assets.................... 24,476 (81,437) (621,417) Increase in unpaid losses and loss adjustment expenses............................................. 1,872,761 1,931,080 5,647,663 Increase in unearned premiums.......................... 4,560,994 4,921,352 2,988,115 Increase (decrease) in reinsurance payable, net........ 1,458,042 (2,032,914) (441,571) Increase in other liabilities.......................... 769,277 614,541 538,378 ------------ ----------- ------------ Net cash provided by operating activities......... 5,118,514 2,545,250 6,631,993 ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed maturities available for sale........... (34,281,021) (7,595,264) (15,090,116) Proceeds from sales of fixed maturities available for sale................................................... 25,055,423 4,868,420 5,870,015 Proceeds from maturities of fixed maturities available for sale................................................... 7,408 572,817 3,896,031 Purchase of equity securities available for sale.......... -- -- (118,832) Proceeds from sales of equity securities available for sale................................................... 47,177 -- 56,365 Proceeds from sales of short-term investments............. 935 -- -- Proceeds from principal repayment on note receivable...... 27,662 3,952 7,916 Purchase of fixed assets, net............................. (337,492) (372,178) (618,265) ------------ ----------- ------------ Net cash used in investing activities............. (9,479,908) (2,522,253) (5,996,886) ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable................... 5,000,000 500,000 -- Principal repayment on notes payable...................... (315,000) (945,000) (500,000) ------------ ----------- ------------ Net cash provided by (used in) financing activities...................................... 4,685,000 (445,000) (500,000) ------------ ----------- ------------ Net increase (decrease) in cash and cash equivalents..................................... 323,606 (422,003) 135,107 Cash and cash equivalents, beginning of year................ 595,785 919,391 497,388 ------------ ----------- ------------ Cash and cash equivalents, end of year...................... $ 919,391 $ 497,388 $ 632,495 ============ =========== ============ SUPPLEMENTAL DISCLOSURES: Cash paid for income taxes during the year.................. $ 513,067 $ 250,187 $ 1,074,030 ============ =========== ============ Cash paid for interest expense during the year.............. $ 116,351 $ 381,922 $ 611,583 ============ =========== ============
See accompanying notes to consolidated financial statements 66 68 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background Financial Pacific Insurance Group, Inc. (the "Group") was formed on May 26, 1993 to acquire all of the common stock of Financial Pacific Insurance Company ("FPIC") and Financial Pacific Insurance Agency ("FPIA"). The Group, FPIC and FPIA are collectively referred to as "the Company". The Group is primarily owned by Robert C. Goodell, the current President and Chief Executive Officer, and three other investor groups. The Company deals principally in commercial property, casualty and surety lines of insurance. The majority of the Company's business is written for small to medium sized businesses in California's Central Valley. The Company's business is primarily written with artisan contractors, commercial property owners, light industrial risks, and several special programs by a network of independent agents. Basis of Presentation The consolidated financial statements include the accounts of the Group, FPIC, and the FPIA. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents Cash includes currency on hand with financial institutions. Cash equivalents represent short-term, highly-liquid investments, readily convertible to known amounts of cash and near maturity such that there is insignificant risk of changes in value because of changes in interest rates. Cash equivalents are carried at cost, which approximates market. Investments The Company accounts for investments in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Under FAS 115, the Company classifies its fixed maturity securities as available for sale. Unrealized holding gains and losses, net of deferred income taxes, on available for sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Realized investment gains and losses are reported based upon specific identification of the investments sold. Equity securities are classified as available for sale and carried at market value. Unrealized investment gains and losses, resulting from carrying equity securities at market value, are recorded net of applicable deferred income taxes directly in stockholders' equity. Declines in the value of investments, which are determined to be other than temporary, are charged to realized losses. Securities are reported at market values based principally on prices obtained from security exchanges. Deferred Policy Acquisition Costs Acquisition costs, consisting of commissions, premium taxes and certain marketing, policy issuance and underwriting costs, related to the production of new and renewal business, are deferred and amortized ratably over the terms of the policies. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value. The determination of estimated realizable value, gives effect to the premium to be earned, losses and loss adjustment expenses, investment income to be earned, and certain other costs expected to be incurred as the premium is earned. Amortization of deferred policy acquisition costs amounted to $3,683,926, $4,785,460 and $7,439,613 in 1995, 1996 and 1997, respectively. 67 69 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Federal Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and reflected in the consolidated financial statements in the period of enactment. Reinsurance Reinsurance recoverables (including amounts related to losses incurred but not reported) and prepaid reinsurance premiums are reported as assets. Estimated reinsurance recoverables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. Reinsurance premiums and commissions are recorded based on management's best estimate of the ultimate amounts to be incurred. Losses and Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates, based on experience and industry data, for unreported losses and loss adjustment expenses. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for the Company. The long-tailed nature of liability claims exacerbates that uncertainty. Management has selected target losses and loss adjustment expense ratios that it believes are reasonable and reflective of anticipated ultimate experience. The ultimate costs of claims are dependent upon future events, the outcomes of which are affected by many factors. Company claim reserving procedures and settlement philosophy, current and perceived social conditions, economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Company operations and management philosophy also may cause actual developments to vary from the past. In addition, the Company relies on policy language, developed by the Company and by others, to exclude or limit coverage. If such language is held by a court to be invalid or unenforceable, it could materially adversely affect the Company's financial position. This possibility of expansion of insurers' liability either through new concepts of liability or a refusal to accept restrictive policy language has added to the inherent uncertainty of reserving for losses. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle the liability may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Stock-Based Employee Compensation Effective December 31, 1996, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Management has elected to continue use of the accounting methods prescribed by Accounting Principles Board Opinion No. 25 and to expand its disclosure of stock-based compensation as permitted by FAS 123. Accordingly, no related compensation cost has been recognized. Revenue Recognition Insurance premiums are earned ratably over the terms of the policies. Unearned premiums are computed on a daily pro-rata basis. Agency commission and related fees for the direct mail surety program are recognized based on the policy issue date. Revenue related to service fees is earned as billed. 68 70 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standards Statement of Financial Accounting Standards No. 130 ("FAS No. 130"), "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131 ("FAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information," were issued in June 1997 and are effective for fiscal years beginning after December 15, 1997. FAS No. 130 establishes standards for the reporting and display of comprehensive income, which includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. FAS No. 131 establishes standards for disclosures related to business operating segments. The Company is currently evaluating the impact that these statements will have on the consolidated financial statements. Earnings per Share Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings per Share." NOTE 2 INVESTMENTS The amortized cost and estimated market values of fixed maturities available for sale at December 31, 1996 and 1997 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ----------- ---------- ---------- ------------ 1996: U.S. government and agencies............... $ 9,976,614 $ 6,173 $113,239 $ 9,869,548 Obligations of states and political subdivision.............................. 262,587 5,906 -- 268,493 Corporate securities....................... 14,325,034 -- 617,478 13,707,556 Certificates of deposit.................... 200,000 -- -- 200,000 ----------- ------- -------- ----------- Total fixed maturities........... $24,764,235 $12,079 $730,717 $24,045,597 =========== ======= ======== =========== 1997: U.S. government and agencies............... $15,619,552 $31,245 $ 22,234 $15,628,563 Obligations of states and political subdivisions............................. 65,524 5,093 -- 70,617 Corporate securities....................... 14,129,816 37,415 102,309 14,064,922 Certificates of deposit.................... 212,711 -- -- 212,711 ----------- ------- -------- ----------- Total fixed maturities........... $30,027,603 $73,753 $124,543 $29,976,813 =========== ======= ======== ===========
The amortized cost and estimated market value of fixed maturities at December 31, 1997 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 69 71 NOTE 2 INVESTMENTS (CONTINUED)
AMORTIZED ESTIMATED COST MARKET VALUE ----------- ------------ Maturity distribution of fixed maturities available for sale: Due in one year or less..................................... $ 1,151,399 $ 1,151,609 Due after one year through five years....................... 9,976,255 9,953,837 Due after five years through ten years...................... 14,723,380 14,681,344 Due after ten years......................................... 4,176,569 4,190,023 ----------- ----------- Total fixed maturities............................ $30,027,603 $29,976,813 =========== ===========
Proceeds from the sale of investments in fixed maturities available for sale were $25,055,423, $4,868,420 and $5,870,015 for the years ended December 31, 1995, 1996 and 1997, respectively. Summary of investment income, net of expenses:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- ---------- ---------- Investment income, net of expenses of $6,604, $13,481 and $14,944 in 1995, 1996 and 1997, respectively Fixed maturities............................. $1,000,235 $1,421,463 $1,681,025 Equity securities............................ 460 -- 42 Other investments............................ 27,829 27,943 38,810 ---------- ---------- ---------- Investment income, net of expenses........ $1,028,524 $1,449,406 $1,719,877 ========== ========== ========== Realized gains (losses) on sales of investments: Fixed maturities available for sale: Gains..................................... 592,097 $ 63,114 $ 22,222 Losses.................................... (125,204) (10,943) (5,949) ---------- ---------- ---------- Total................................ 466,893 52,171 16,273 ---------- ---------- ---------- Equity securities available for sale: Gains..................................... -- -- 3,684 Losses.................................... (2,133) -- (66,151) ---------- ---------- ---------- Total................................ (2,133) -- (62,467) ---------- ---------- ---------- Other investments: Gains..................................... 935 -- -- Losses.................................... -- -- -- ---------- ---------- ---------- Total..................................... 935 -- -- ---------- ---------- ---------- Net realized gains (losses) on sales of investments..................... $ 465,695 $ 52,171 ($ 46,194) ========== ========== ==========
Investments with the following issuers exceeded 10% of total stockholders equity at December 31, 1997:
ISSUER ESTIMATED MARKET VALUE ------ ---------------------- Federal Home Loan Mortgage Corporation...................... $3,507,500 ========== Federal National Mortgage Association....................... $7,494,531 ==========
The Company has securities on deposit with state regulatory agencies of approximately $1,761,000 as of December 31, 1997 and 1996. The deposits approximate market value. 70 72 NOTE 3 INCOME TAXES The income tax expense reflected in the accompanying consolidated statements of operations varied from amounts computed at the statutory rate of 35% in 1995, 1996 and 1997 on income before income taxes for the following reasons:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- ---------- ---------- Computed "expected" tax expense at statutory rate...... $1,125,427 $1,064,141 $1,252,745 Adjust graduated tax rate.............................. (32,155) (30,404) (35,792) Increase (decrease) in income taxes resulting from: Tax-exempt interest income........................... (31,860) (13,635) 2,442 Other, net........................................... 4,589 17,015 17,874 ---------- ---------- ---------- Total income tax provision................... $1,066,001 $1,037,117 $1,237,269 ========== ========== ==========
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997, respectively, are presented below:
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Deferred Tax Assets: Loss and loss adjustment expense reserves................... $ 551,955 $ 709,150 Unearned premiums........................................... 548,343 769,025 Unrealized loss on securities available for sale............ 244,337 17,269 Allowance for doubtful accounts............................. 13,600 13,600 ----------- ----------- Total gross deferred tax assets................... $ 1,358,235 $ 1,509,044 =========== =========== Deferred Tax Liabilities: Policy acquisition costs.................................... ($1,284,578) ($1,821,277) Contingent ceding commission................................ (1,409,488) (1,178,787) Other....................................................... (95,511) (128,463) ----------- ----------- Total gross deferred tax liabilities.............. (2,789,577) (3,128,527) ----------- ----------- Net deferred tax liabilities...................... ($1,431,342) ($1,619,483) =========== ===========
Management believes it is more likely than not the deferred tax assets will reverse during periods in which the Company generates net taxable income or may recover taxes paid in prior years. Accordingly, a valuation allowance has not been recorded. NOTE 4 REINSURANCE The Company cedes insurance to reinsurers under various contracts that cover individual risks or entire classes of business. Although the ceding of insurance does not discharge the Company from its primary liability, the insurance company that assumes the coverage assumes the related risk, and it is the practice of insurers to treat reinsured risks, to the extent of the reinsurance ceded, as though they were risks for which the original insurer is not liable. At December 31, 1996 and 1997, all property and casualty policies written by the Company are reinsured with reinsurers rated as A or A minus by A.M. Best. The Company has both a quota share agreement and a semi-automatic facultative excess of loss agreement on property and two excess of loss agreements for casualty. On its property business, the Company has a 30% quota share on the first $2 million of any risk, resulting in a maximum company exposure of $600,000 related to any one occurrence. Excess of $2 million, the Company has a semi-automatic-facultative agreement which provides $8 million of coverage excess of $2 million. On the casualty business, the Company presently maintains a $750,000 excess of $250,000 treaty with a syndicate of reinsurers. Prior to January 1, 1997, the Company maintained $400,000 excess of $100,000 71 73 NOTE 4 REINSURANCE (CONTINUED) and $500,000 excess of $500,000 casualty treaties. Excess of $1 million, the Company has a semi-automatic-facultative agreement which provides $10 million of coverage excess of $1 million. For the Company's surety line of business, the Company maintains a variable quota share reinsurance arrangement which provides various levels of participation depending on the size of the bond. The Company also maintains Extra Contractual Obligation/Loss in Excess of Policy Limits (ECO/XPO) coverage through the London markets. The Company currently purchases $2 million worth of ECO/XPO coverage through this facility. The property quota share and casualty excess of loss reinsurance treaties include commission adjustment provisions. The Company records such adjustments based upon estimates of cumulative experience under the contracts at each reporting period. Reinsurance activity as reported in the accompanying consolidated financial statements is as follows:
DIRECT REINSURANCE NET ACTIVITY BUSINESS CEDED OR BALANCE ----------- ----------- ------------ 1995: Premiums written.................................... $24,694,947 $10,653,344 $14,041,603 Premiums earned..................................... 20,533,128 8,473,256 12,059,872 Losses and loss adjustment expenses incurred........ 7,977,514 1,652,455 6,325,059 =========== =========== =========== Unpaid losses and loss adjustment expenses.......... $12,224,880 $ 4,560,681 $ 7,664,199 =========== =========== =========== Unearned premiums................................... $13,659,006 $ 5,867,480 $ 7,791,526 =========== =========== =========== 1996: Premiums written.................................... $31,926,872 $13,673,996 $18,252,876 Premiums earned..................................... 26,606,345 11,619,380 14,986,965 Losses and loss adjustment expenses incurred........ 11,131,863 1,381,450 9,750,413 =========== =========== =========== Unpaid losses and loss adjustment expenses.......... $13,944,397 $ 4,007,047 $ 9,937,350 =========== =========== =========== Unearned premiums................................... $18,979,533 $ 7,922,096 $11,057,437 =========== =========== =========== 1997: Premiums written.................................... $39,511,737 $12,576,059 $26,935,678 Premiums earned..................................... 36,523,622 13,669,452 22,854,170 Losses and loss adjustment expenses incurred........ 17,844,735 5,096,564 12,748,171 =========== =========== =========== Unpaid losses and loss adjustment expenses.......... $19,592,060 $ 6,184,927 $13,407,133 =========== =========== =========== Unearned premiums................................... $21,967,648 $ 6,828,703 $15,138,945 =========== =========== ===========
72 74 NOTE 5 LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
1995 1996 1997 ----------- ----------- ----------- Balance at beginning of period.............. $10,140,556 $12,224,880 $13,944,397 Less reinsurance recoverables............. 4,902,732 4,560,681 4,007,047 ----------- ----------- ----------- Net balance at beginning of period.......... 5,237,824 7,664,199 9,937,350 ----------- ----------- ----------- Incurred related to: Current year.............................. 6,490,825 7,394,848 10,991,179 Prior years............................... (165,766) 2,355,565 1,756,992 ----------- ----------- ----------- Total incurred.............................. 6,325,059 9,750,413 12,748,171 ----------- ----------- ----------- Paid related to: Current year.............................. 1,975,694 2,413,980 3,370,671 Prior years............................... 1,922,990 5,063,282 5,907,717 ----------- ----------- ----------- Total paid.................................. 3,898,684 7,477,262 9,278,388 ----------- ----------- ----------- Net balance at December 31.................. 7,664,199 9,937,350 13,407,133 Plus reinsurance recoverables............. 4,560,681 4,007,047 6,184,927 ----------- ----------- ----------- Balance at December 31................. $12,224,880 $13,944,397 $19,592,060 =========== =========== ===========
During 1996 and 1997, the provision for losses and loss adjustment expenses increased due to unfavorable reserve development primarily in the liability lines of business. The unfavorable development is attributed in part to the changes in the legal interpretation of manifestation of loss. Currently, approximately 40% of the Company's business is related to artisan contractors. Accordingly, the law relating to construction defect liability can substantially affect the Company's business. In July of 1995, the California Supreme Court rendered its opinion on Admiral Insurance Company vs. Montrose Chemical Corporation (the "Montrose Decision"). In that decision, the Supreme Court ruled that in the case of a continuous and progressively deteriorating loss, such as pollution liability (or construction defect liability), an insurance company has a definitive duty to defend the policyholder until all uncertainty related to the severity and cause of the loss is extinguished. As a result of the Montrose Decision, the Company experienced a significant increase in construction defect liability cases, to which it would not have been subject under the old law. The liability for unpaid losses and loss adjustment expenses is stated net of anticipated salvage and subrogation recoverable of $746,000 and $913,000 at December 31, 1996 and 1997, respectively. NOTE 6 NOTES PAYABLE, NET At December 31, 1996 and 1997, the Group owed $5,000,000 under unsecured Senior Notes payable to certain stockholders of the Company. The Notes accrue 12% interest compounded annually. Interest payments are due semi-annually and the Notes are due on January 1, 2001. The Notes were issued with Common Stock Purchase Warrants which entitle the holders to purchase up to 593,691 shares of the Group's Common Stock. The Common Stock Warrants are discussed further at Note 8. The Group is subject to certain restrictions described in the note agreement. The Group had outstanding borrowings of $500,000 and $0 under a $530,000 bank line of credit at December 31, 1996 and 1997, respectively. The line is unsecured, matures July 1, 1998, and bears interest (payable monthly) at an annual rate of 1 percent over the bank's base rate. The effective annual interest rate was 9.25% and 8.5% during the years ended December 31, 1996 and 1997, respectively. The notes payable are presented net of deferred debt issue costs. Deferred debt issue costs are amortized over the term of the note. Unamortized debt issue costs totaled $20,586 and $15,439 at December 31, 1996 and 1997, respectively. 73 75 NOTE 7 SERIES A CONVERTIBLE PREFERRED STOCK The Group issued Series A convertible preferred stock ("Series A Stock") pursuant to a Convertible Preferred Stock Purchase Agreement, dated September 7, 1993 (the "Series A Stock Agreement"). Each share of Series A Stock is convertible, at the option of the holder thereof, into 394.375 shares of Common Stock, subject to certain adjustments described in the Series A Stock Agreement. The holders of Series A Stock have voting rights and powers equal to the voting rights and powers of such Common Stock. Each share of Series A Stock is automatically converted into shares of Common Stock immediately upon the effective date of a registration statement filed by the Company pursuant to the Securities Act of 1933, as amended, in connection with a firm commitment, underwritten public offering with an offering price of not less than $5.00 per share and with gross proceeds equal to or exceeding $10 million. In the event of any liquidation, dissolution or winding up of the Group, the holders of the Series A Stock are entitled to receive, prior and in preference to any distribution of any assets of the Group to the holders of Common Stock, the amount of $1.00 per share plus any declared but unpaid dividends. At any time after September 7, 2000, the Group is entitled to redeem all or any portion of the outstanding shares of Series A Stock for $1.00 per share plus any declared but unpaid dividends. NOTE 8 COMMON STOCK WARRANTS On September 7, 1993, the Group issued Common Stock Purchase Warrants ("the Warrants"). The Warrants entitle the holders to purchase 153,525 shares of the Group's Common Stock, at any time prior to September 7, 2003, at the price of $2.54 per share, subject to certain adjustments described in the Warrants. On December 28, 1995, the Group issued Common Stock Purchase Warrants (the "Senior Note Warrants") in conjunction with the issuance of the Senior Notes payable as discussed at Note 6. The Senior Note Warrants entitle the holders to purchase 593,691 shares of the Group's Common Stock, at any time prior to January 1, 2004, at the price of $5.61 per share, subject to certain restrictions described in the Senior Note Warrants. The Company believes the Warrants and the Senior Note Warrants were issued at fair market value. NOTE 9 SALE OF DIRECT BOOK OF BUSINESS Prior to August 1994, approximately 10% of FPIC policies were sold directly to policyholders. On August 1, 1994, FPIC sold its direct book of business to an existing agent, resulting in a gain of $205,000. FPIC received a twenty percent down payment during August 1994, with the remainder payable monthly over sixty months. The monthly payments are based on the agent's retention of the book of business. During 1996 and 1997, respectively, the Company charged-off to other income $80,000 and $33,252 of the note receivable due to the agent's declining book of business. The unsecured note receivable balance is $47,859 and $6,691 at December 31, 1996 and 1997, respectively. NOTE 10 STOCK INCENTIVE PLAN During 1993, the Group adopted a Stock Incentive Plan, pursuant to which up to 109,242 shares of Common Stock of the Group may be issued at the discretion of the Board of Directors or a committee thereof. Awards may include, without limitation, stock bonuses, restricted stock, stock options, reload options, stock purchase warrants, other rights to acquire stock, securities convertible or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares. Officers, employees, consultants, and advisors to the Company or any of its subsidiaries are eligible for awards under the plan. To date, all awards have been in the form of stock options issued with exercise prices at the estimated fair market value as of the issue date. 74 76 NOTE 10 STOCK INCENTIVE PLAN (CONTINUED) The Company applies APB Opinion 25 and related Interpretations in accounting for the stock incentive plan. Accordingly, no compensation cost has been recognized in the accompanying consolidated financial statements. Had compensation costs been determined consistent with FAS 123, the Company's net income would have been adjusted to the pro forma amounts as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- ---------- ---------- As reported............................ $2,149,504 $2,003,286 $2,342,003 Pro forma.............................. $2,143,485 $1,983,453 $2,327,768 Pro forma Basic Earnings per share..... $ 4.41 $ 4.08 $ 4.79 Pro forma Diluted Earnings per share... $ 0.94 $ 0.68 $ 0.79
The following is a summary of the transactions under the stock incentive plan for the years ended December 31, 1995, 1996 and 1997, respectively:
1995 1996 1997 ------------------ ------------------ ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- -------- -------- Outstanding at beginning of year...... 27,608 $2.81 25,636 $3.02 69,016 $3.02 Granted............................. 7,888 $3.15 43,380 $4.25 9,860 $4.82 Forfeited........................... (9,860) $2.54 -- -- (9,860) $3.30 ------- ------- -------- Outstanding at end of year............ 25,636 $3.02 69,016 $3.80 69,016 $4.01 ======= ======= ======== Options exercisable at year end....... 9,860 19,719 31,550 ======= ======= ======== Weighted average fair value of options granted during the year............. $ 3.15 $ 4.25 $ 4.82 ======= ======= ========
All of the stock options have a ten year term. Options issued and not yet exercisable at December 31, 1997 vest over periods ranging from one to five years. At December 31, 1997, 40,226 shares were available for future grants. The following is a summary of options outstanding at December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ----------------------- WEIGHTED AVERAGE REMAINING WEIGHTED NUMBER WEIGHTED NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE OUTSTANDING AT LIFE EXERCISE AT EXERCISE RANGE OF EXERCISE PRICES 12/31/97 (IN YEARS) PRICE 12/31/97 PRICE - ------------------------ -------------- ----------- -------- ----------- -------- $2.54 to 3.15..................... 15,776 6.5 $2.84 15,775 $2.84 $4.20 to 4.33..................... 43,380 8.3 4.25 15,775 4.28 $4.82............................. 9,860 9.1 4.82 -- -- ------ --- ----- ------ ----- $2.54 to 4.82..................... 69,016 8.0 $4.01 31,550 $3.56 ====== === ===== ====== =====
The fair value of each option grant was estimated using the Minimum Value Method. Minimum value is determined by calculating the difference between the current stock price and the present value of the exercise price with the following assumptions for 1995, 1996 and 1997, respectively: risk free interest rates of 5.4%, 6.2% and 5.7%, expected lives of 5 years and no expected dividends. NOTE 11 401(k) PLAN The Company sponsors a contributory 401(k) plan. All employees of the Company who have completed one year of service are eligible for participation in the plan. The Company matches 100% of the employee's 75 77 NOTE 11 401(k) PLAN (CONTINUED) pre-tax contribution up to $1,000, $1,500 and $2,000 in 1995, 1996 and 1997, respectively. In 1995, 1996 and 1997, the Company contributed $20,565, $61,435 and $87,980, respectively, to the plan. NOTE 12 STATUTORY REGULATIONS AND ACCOUNTING All dividends from FPIC require prior notice to the California Department of Insurance ("DOI"). All "extraordinary" dividends must be approved in advance by the DOI. A dividend is deemed "extraordinary" if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of (i) FPIC's statutory net income (excluding unrealized capital gains) for the preceding calendar year or (ii) 10% of surplus as regards policyholders as of the preceding December 31st. Additionally, unless approved in advance by the DOI, no dividend may be paid by FPIC except from unassigned funds or earned surplus. The DOI may disallow the payment of any dividend if, in the DOI's opinion, the payment would in any way violate the Code or be hazardous to policyholders, creditors or the public. During 1998, the maximum dividend that may be paid by FPIC without approval of the DOI is $1,426,180. During the years ended December 31, 1995, 1996 and 1997, FPIC paid dividends of $402,000, $630,000 and $900,000, respectively, with the approval of the DOI. Statutory accounting principles vary in some respects from generally accepted accounting principles, the more significant of these differences being: (a) the cost related to policy acquisition and commission costs are expensed when incurred, rather than capitalized and amortized over the coverage period; (b) federal income taxes are recorded when payable and deferred income taxes are not provided; (c) assets must be included in the statutory statements of admitted assets, liabilities and changes in capital and surplus at "admitted asset value" and "non-admitted assets" are excluded through a charge against surplus. The minimum statutory capital and surplus required by the California Insurance Code is $2,600,000. As of December 31, 1996 and 1997, respectively, FPIC had statutory capital and surplus of $13,788,332 and $14,261,802. FPIC's statutory net income for the years ended December 31, 1995, 1996 and 1997 was $2,095,205, $2,123,815 and $1,213,293, respectively. In December 1993, the National Association of Insurance Commissioners ("NAIC") adopted a model law which establishes certain minimum Risk Based Capital ("RBC") requirements for property/casualty insurance companies. The RBC calculation serves as a benchmark for the regulation of insurance companies by state insurance regulatory authorities. The calculation specifies various formulas and rating factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. The Company's capital as of December 31, 1996 and 1997 meets the minimum RBC requirements, and management expects capital to continue to meet the amount required. The NAIC recently approved newly codified accounting practices that will change the definition of what constitutes prescribed statutory accounting practices and may result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements commencing in 1999. The Company has not determined how the newly codified statutory accounting practices will affect its insurance subsidiary's statutory financial statements or how insurance rating agencies will interpret or react to any such changes. No assurance can be given that future legislative or regulatory changes resulting from such activities will not adversely affect the Company. 76 78 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS 107"), requires disclosures of fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1996 and 1997. FAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
1996 1997 -------------------------- -------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- Financial assets Cash and cash equivalents............ $ 497,388 $ 497,000 $ 632,495 $ 632,000 Premiums receivable.................. 13,016,982 13,017,000 14,631,026 14,631,000 Investment securities................ 24,045,597 24,046,000 29,976,813 29,977,000 Accrued interest receivable.......... 304,605 305,000 426,013 426,000 Financial liabilities Notes payable........................ 5,479,414 5,500,000 4,984,561 5,000,000
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash, premiums receivable and accrued interest receivable: The carrying amounts approximate fair value because of the short maturity of those instruments. Investment securities: The fair values of debt securities and equity investments are based on quoted market prices at the reporting date for those or similar investments. Notes payable: The fair value of the Group's notes payable is estimated based upon discounting expected cash flows at rates currently offered to the Group for debt of the same remaining maturities and security. NOTE 14 COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company occupied office space and leased equipment and vehicles under various operating leases that have remaining noncancellable lease terms in excess of one year. A summary of minimum future non-cancelable lease commitments at December 31, 1997 follows:
YEARS ENDED DECEMBER 31 - ----------------------- 1998............................................. $ 511,697 1999............................................. 454,615 2000............................................. 360,016 2001............................................. 313,594 2002............................................. 313,594 Thereafter....................................... 1,124,375 ---------- Total minimum payments................. $3,077,891 ==========
Rental expense of approximately $382,796, $494,587 and $541,736 for the years ended December 31, 1995, 1996 and 1997, respectively, has been charged to operations in the accompanying consolidated statements of operations. The Company is also the subject of certain claims arising in the ordinary course of its operations. The Company believes that the ultimate resolution of such matters will not materially impact its financial condition. 77 79 NOTE 15 EARNINGS PER SHARE Reconciliations of the outstanding shares used in the basic and fully diluted earnings per share calculations, are presented below:
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ---------- ---------- ---------- Income (Numerator): Income available to Common Stockholders for Basic and Diluted earnings per share................................ $2,149,504 $2,003,286 $2,342,003 ---------- ---------- ---------- Weighted Average Shares (Denominator): Basic Shares................................................ 485,983 485,983 485,983 Effect of dilutive securities Stock Options............................................. 7,380 13,158 37,115 Warrants.................................................. 63,612 666,454 703,273 Convertible Preferred stock............................... 1,735,250 1,735,250 1,735,250 ---------- ---------- ---------- Diluted Shares.............................................. 2,292,225 2,900,845 2,961,621 ========== ========== ========== Per Share Amounts: Basic Earnings per Share.................................... $ 4.42 $ 4.12 $ 4.82 Diluted Earnings per Share.................................. $ 0.94 $ 0.69 $ 0.79
For the years ended December 31, 1995 and 1996, the Company had 593,691 warrants which could potentially dilute Basic EPS in the future but were not included in Diluted EPS because their effect was antidilutive. NOTE 16 SUBSEQUENT EVENT On April 14, 1998, the Company declared a 394.375-to-1 stock split effected in the form of a dividend to stockholders of record on April 14, 1998. All data with respect to equity classification, earnings per share and share information, including price per share, where applicable, in the consolidated financial statements and notes thereto have been retroactively adjusted to reflect the split. 78 80 ====================================================== NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATES SUBSEQUENT TO THE DATE HEREOF. ------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 13 Dividend Policy....................... 13 Dilution.............................. 14 Capitalization........................ 15 Selected Consolidated Financial Data................................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Business.............................. 25 Management............................ 43 Principal and Selling Stockholders.... 49 Certain Transactions.................. 50 Description of Capital Stock.......... 51 Shares Eligible for Future Sale....... 54 Underwriting.......................... 55 Legal Matters......................... 56 Experts............................... 56 Additional Information................ 57 Glossary of Selected Insurance Terms............................... 58 Index to Consolidated Financial Statements.......................... 61
====================================================== ====================================================== 2,500,000 SHARES [FINANCIAL PACIFIC LOGO] COMMON STOCK ------------------------------ PROSPECTUS ------------------------------ [EVEREN LOGO] June , 1998 ====================================================== 81 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fees and the Nasdaq Stock Market listing fee. SEC Registration fee........................................ $9,330 NASD fee.................................................... $ Nasdaq National Market listing fee.......................... $ Printing and engraving expenses............................. $ Legal fees and expenses..................................... $ Accounting fees and expenses................................ $ Blue sky fees and expenses.................................. $ Transfer agent fees......................................... $ Miscellaneous fees and expenses............................. $ Total............................................. $
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VI, Section 1, of the Registrant's Bylaws provides for mandatory indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Amended and Restated Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the Amended and Restated Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or state or federal environmental laws. The Registrant has entered or will enter into Indemnification Agreements with its officers and directors that provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since April 1995, the Company has issued and sold the following unregistered securities. 1. On December 28, 1995, Registrant issued Warrants to purchase up to 593,691 shares of its Common Stock and $5,000,000 aggregate principal amount of 12% Senior Notes due January 1, 2001 to a Group of four investors for an aggregate purchase price of $5,000,000. II-1 82 2. Within the past three years, from time to time, the Registrant has granted to employees, directors and consultants options to purchase an aggregate of approximately 80,847 shares of Common Stock pursuant to stock option agreements and the Registrant's stock option plans. 3. The Company has agreed to issue to the representative of the Underwriters ("Representative") warrants (the "Representative's Warrants") to purchase up to 143,750 shares of Common Stock, at an exercise price per share equal to 110% of the initial public offering price per share. The Representative's Warrants are exercisable for a period of four years, commencing one year from the effective date (the "Effective Date") of the Registration Statement and expire five years from the Effective Date. The Representative's Warrants are not transferable prior to the expiration of one year from the Effective Date other than to officers or partners of the Underwriters and members of the selling group and their officers and partners. The holders of the Representative's Warrants will have no voting, dividend or other shareholders' rights until the Warrants are exercised. The Company has granted the Representative certain demand and piggy-back registration rights related to the Representative's Warrants, which are applicable during the period that the Representative's Warrants are exercisable and expire five years from the Effective Date. The sales and issuances described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof, as transactions by an issuer not involving any public offering, or in reliance upon the exemption from registration provide by Rule 701 promulgated under the Securities Act. In addition, the recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following Exhibits are attached hereto and incorporated herein by reference.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ------------------------------------------------------------ 1.1* Underwriting Agreement between EVEREN Securities, Inc. and the Registrant. 3.1 Restated Certificate of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1 Specimen Common Stock certificate. 4.2+ Stockholders Agreement, dated September 7, 1993, between the Registrant and the investors named therein. 4.3 Amendment Number One to the Stockholders Agreement, dated December 28, 1995, between the Registrant and the investors named therein. 5.1* Opinion of Riordan & McKinzie, a Professional Law Corporation. 10.1 1993 Stock Incentive Plan. 10.2 Form of Stock Option Agreement. 10.3** Employment Agreement between the Registrant and Robert C. Goodell dated February 6, 1996, as amended. 10.4** Employment Agreement between the Registrant and Robert T. Kingsley dated February 13, 1997. 10.5** Employment Agreement between the Registrant and Edward J. Paoletti dated November 14, 1997. 10.6** Employment Agreement between the Registrant and Wallace G. Rascher dated February 14, 1997. 10.7** Employment Agreement between the Registrant and Timothy N. Blaede dated February 14, 1997. 10.8** Employment Agreement between the Registrant and John R. Hollingshead dated November 14, 1997.
II-2 83
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ------------------------------------------------------------ 10.9** Employment Agreement between the Registrant and Artur A. Terner dated February 14, 1997. 10.10** Employment Agreement between the Registrant and Charles E. Wardlaw dated January 1, 1998. 10.11+** Restricted Stock Agreement between the Registrant and Robert C. Goodell dated September 7, 1993. 10.12 Note and Warrant Purchase Agreement dated December 28, 1995 among the Registrant and the purchasers listed therein. 10.13 Form of 12% Senior Note due 2001. 10.14 Form of Warrant issued by the Registrant dated December 28, 1995. 10.15 Form of Warrant issued by the Registrant dated September 7, 1993. 10.16 Financial Pacific Insurance Company Property Quota Share Reinsurance Contract originally effective July 1, 1993. 10.17 Financial Pacific Insurance Company Contingent Excess of Loss Reinsurance Contract originally effective July 1, 1996. 10.18 Financial Pacific Insurance Company Contingent Excess of Loss Reinsurance Contrast originally effective January 1, 1997. 10.19 Financial Pacific Insurance Company Semi-Automatic Casualty Facultative Reinsurance Contract originally effective July 1, 1996. 10.20 Financial Pacific Insurance Company (M.L. Oates Insurance Company) Property Quota Share Reinsurance Contract originally effective July 1, 1993. 10.21 Financial Pacific Insurance Company First Excess Casualty Reinsurance Contract originally effective January 1, 1997. 10.22 Producer Agreement between American Underwriting Managers Agency, Inc. and Financial Pacific Insurance Agency, Inc. ("FPIA") effective October 1, 1995. 10.23 Claims Management Agreement between FPIA and American Underwriting Managers dated November 28, 1995 10.24 Agreement between Financial Pacific Insurance Company ("FPIC") and General Reinsurance Corporation (No. 118). 10.25 Agreement between FPIC and General Reinsurance Corporation (No. AFF-6243440) 10.26 Agreement between FPIC and General Reinsurance Corporation (No. 8090). 10.27 Quota Share Reinsurance Agreement between FPIC and American Re-insurance dated October 23, 1997. 10.28 Net Lease Agreement between FPIC and Stanford Ranch I, LLC dated June 11, 1996. 10.29 Promissory Note dated September 15, 1997 issued by the Registrant to U.S. Bank 10.30 Stock Purchase Agreement dated February 24, 1997 between Robert C. Goodell and the purchasers listed therein. 10.31 Form of Indemnification Agreement between the Registrant and each director of the Registrant. 11.1 Computation of Net Income Per Share. 21.1 Subsidiaries of the Registrant. 23.1* Consent of KPMG Peat Marwick LLP, Independent Accountants. 23.2* Consent of Riordan & McKinzie (contained in Exhibit 5.1). 23.3* Consent of LeBoeuf, Lamb, Greene & Macrae. 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Confidential treatment requested. + The Schedules to this Exhibit have not been filed with the Commission because the Registrant believes that such Schedules do not contain information that is material to an investment decision. The Registrant hereby agrees to furnish supplementally a copy of the omitted schedules to the Commission upon request. II-3 84 (B) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act maybe permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, 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 being registered hereunder, 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 of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final jurisdiction of such issue. The 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 Registrant 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 Registrant 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 85 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Rocklin, State of California, on this 17th day of April, 1998. FINANCIAL PACIFIC INSURANCE GROUP, INC. By /s/ ROBERT C. GOODELL ------------------------------------- Robert C. Goodell President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert C. Goodell, Robert T. Kingsley and Artur A. Terner, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registrant Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following person in the capacities and on the dates indicated. /s/ ROBERT C. GOODELL President and Chief Executive April 17, 1998 - --------------------------------------------------- Officer and Director Robert C. Goodell (Principal Executive Officer) /s/ ARTUR A. TERNER Chief Financial Officer April 17, 1998 - --------------------------------------------------- (Principal Financial and Artur A. Terner Accounting Officer) /s/ RICHARD G. PFEIFFER Director April 17, 1998 - --------------------------------------------------- Richard G. Pfeiffer /s/ PATRICK C. HADEN Director April 17, 1998 - --------------------------------------------------- Patrick C. Haden /s/ MICHAEL J. MORRISSEY Director April 17, 1998 - --------------------------------------------------- Michael J. Morrissey /s/ STEPHEN E. ADAMSON Director April 17, 1998 - --------------------------------------------------- Stephen E. Adamson
II-5 86 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders Financial Pacific Insurance Group, Inc. The audits referred to in our report dated January 30, 1998, except as to Note 16, which is as of April 14, 1998, included the related financial statement schedules as of December 31, 1997, and for each of the years in the three-year period ended December 31, 1997, included in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the Prospectus. KPMG Peat Marwick LLP Los Angeles, California April 17, 1998 S-1 87 SCHEDULE I FINANCIAL PACIFIC INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES YEAR ENDED DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D - --------------------------------------------------- -------- ------------ ---------------- AMOUNT AS SHOWN ON BALANCE TYPE OF INVESTMENT COST VALUE SHEET - --------------------------------------------------- -------- ------------ ---------------- (Dollars in thousands) Fixed Maturities: Bonds: United States Government and Government Agencies and Authorities.................... $15,619 $ 15,628 $15,628 States, municipalities and political subdivisions................................ 66 71 71 Foreign governments........................... -- -- -- Public utilities.............................. -- -- -- Convertibles and bonds with warrants attached.................................... -- -- -- All other corporate bonds..................... 14,130 14,065 14,065 ------- ------------ ------- Total bonds.............................. 29,815 29,764 29,764 Certificates of deposit....................... 213 213 213 Redeemable preferred stock.................... -- -- -- ------- ------------ ------- Total fixed maturities................... 30,028 29,977 29,977 ------- ------------ ------- Equity Securities: Common stock: Public utilities.............................. -- -- -- Banks, trust and insurance companies.......... -- -- -- Industrial, miscellaneous and all other....... -- -- -- Non-redeemable preferred stock................... -- -- -- ------- ------------ ------- Total equity securities.................. -- -- -- ------- ------------ ------- Mortgage loans on real estate...................... -- xxxxxxxxxxxx -- Real estate........................................ -- xxxxxxxxxxxx -- Policy loans....................................... -- xxxxxxxxxxxx -- Other long-term investments........................ -- xxxxxxxxxxxx -- Short-term money-market investments................ -- xxxxxxxxxxxx -- ------- ------------ ------- Total investments........................ $30,028 xxxxxxxxxxxx $29,977 ======= ============ =======
S-2 88 SCHEDULE II.1 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
YEAR ENDED DECEMBER 31, ------------------------ 1996 1997 -------- -------- Investment in subsidiaries.................................. $16,309 $18,655 Cash and cash equivalents................................... 3 5 Other assets................................................ 277 487 ------- ------- Total assets...................................... $16,589 $19,147 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes payable, net........................................ $ 5,479 $ 4,985 Interest payable.......................................... 304 300 Due to affiliates......................................... 190 464 ------- ------- Total liabilities................................. 5,973 5,749 ======= ======= Stockholders' Equity Series A convertible preferred stock, $.001 par value; 5,000 shares authorized; 4,400 shares issued and outstanding at 1996 and 1997, respectively............. -- -- Common stock, $.001 par value; 3,000,000 shares authorized; 485,983 issued and outstanding at 1996 and 1997, respectively..................................... -- -- Additional paid-in capital................................ 4,950 4,950 Retained earnings......................................... 6,140 8,482 Net unrealized loss on available for sale securities, net of deferred income tax benefit of $244,337 in 1996 and $17,269 in 1997........................................ (474) (34) ------- ------- Total stockholders' equity........................ 10,616 13,398 ------- ------- Total liabilities and stockholders' equity........ $16,589 $19,147 ======= =======
See accompanying notes to financial statements. S-3 89 SCHEDULE II.2 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Revenues: Equity in income of subsidiaries.......................... $2,204 $2,462 $2,804 Net investment income..................................... 4 2 2 ------ ------ ------ Total revenues.................................... 2,208 2,464 2,806 Expenses: General and administrative................................ 5 5 4 Interest espense.......................................... 128 692 617 Due diligence expense..................................... -- -- 81 ------ ------ ------ 133 697 702 Income before federal indome tax benefit.......... 2,075 1,767 2,104 Provision for federal income tax benefit.................... 75 236 238 ------ ------ ------ $2,150 $2,003 $2,342 ====== ====== ======
See accompanying notes to financial statements. S-4 90 SCHEDULE II.3 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
1995 1996 1997 ------- ------- ------- A2YEAR ENDED DECEMBER 31, Cash flows from operating activities: Net income................................................ $ 2,150 $ 2,003 $ 2,342 Less equity in income of subsidiaries..................... (1,804) (1,832) (1,904) ------- ------- ------- Net loss from operations............................... 346 171 438 Amortization........................................... 15 32 8 Adjustments: Increase in other assets (164) (104) (214) Increase (decrease) in federal income taxes payable (3) 3 Increase (decrease) in interest payable.............. 15 289 (4) Increase in intercompany payable..................... 118 43 274 ------- ------- ------- Net cash provided (used).......................... 327 434 502 Cash flows from investing activities: Proceeds from sale of fixed maturities available for sale................................................... 5 Purchase of fixed maturities available for sale........... (55) ------- ------- ------- Net cash provided by investing activities.............. Cash flows from financing activities: Proceeds form issuance of note payable.................... 5,000 500 Capital contribution...................................... (5,000) Principal repayment on note payable....................... (315) (945) (500) ------- ------- ------- Net cash provided (used) by financing activities....... (315) (445) (500) Net increase (decrease) in cash and cash equivalents... 12 (11) 2 Cash and cash equivalents, beginning of year........... 1 14 3 ------- ------- ------- Cash and cash equivalents, end of year................. $ 13 $ 3 $ 5 ======= ======= =======
See accompanying notes to financial statements. S-5 91 SCHEDULE II.4 FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed financial statements include the accounts of Financial Pacific Insurance Group, Inc. (the "Parent Company"). The Parent Company's wholly-owned subsidiaries, Financial Pacific Insurance Company ("Insurance Company") and Financial Pacific Insurance Agency and Financial Pacific Technologies, Inc. are not presented as consolidated entities on these condensed financial statements. 2. MATERIAL CONTINGENCIES The Parent Company is the subject of certain claims arising in the ordinary course of its operations. The Parent Company believes that the ultimate resolution of such matters will not materially affect its financial condition. 3. NOTES PAYABLE, NET At December 31, 1995 and 1996, the Parent Company owed $5,000,000 under an unsecured senior note payable to certain stockholders and directors of the Parent Company. The note payable accrues 12% interest compounded annually and is payable semi-annually. The note is due on January 1, 2001. The note was issued with a Common Stock Warrant Purchase agreement which entitles the holders the option to purchase up to 1,505.4 shares of the Group's common stock. The Group is subject to certain restrictions described in the note agreement. At December 31, 1995, the Parent Company owed $945,000 under a secured promissory note issued in conjunction with the Acquisition of the Insurance Company and Agency. Effective February 1, 1995, the note was amended to extend the maturity to November 12, 1998 with interest to accrue at 10% compounded annually and payable quarterly. Principal payments of $315,000 are due annually on the anniversary date of the promissory note, November 12, 1993. The promissory note is secured by the common stock of the Insurance Company. The note was issued with a stock option agreement which grants the holder an option to purchase from the Parent Company common stock equal to 5% of the Insurance Company's outstanding common stock each year during the term of promissory note, on the anniversary of the promissory note, in exchange for the cancellation by the holder of the principal payment then due under the promissory note. Effective May 1, 1996, the Parent Company paid off the balance due under this note and obtained a general release from the former owner. At December 31, 1996, the Parent Company owed $500,000 under a $530,000 bank line of credit. The line of credit is unsecured, matures April 1, 1997, and bears interest (payable monthly) at an annual rate of 1 percent over the bank's base rate. The effective annual interest through December 31, 1996 was 9.25%. The bank also granted a $30,000 irrevocable letter of credit covered by this line of credit. The notes payable are presented net of deferred debt issue costs. Deferred debt issue costs are amortized over the term of the note. Unamortized debt issue costs totaled $20.586 and $44,340 at December 31, 1996 and 1995, respectively. NOTE 4. DIVIDENDS FROM SUBSIDIARIES Financial Pacific Insurance Company, a consolidated subsidiary of the Parent Company paid dividends to its parent of $402,000, $630,000, and $900,000 in 1995, 1996, and 1997 respectively. S-6 92 SCHEDULE III FINANCIAL PACIFIC INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G - ------------------------------------------ ----------- -------------- -------- ---------- -------- ---------- FUTURE POLICY OTHER DEFERRED BENEFITS, POLICY POLICY LOSSES, CLAIMS CLAIMS AND NET NET ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COST EXPENSES PREMIUM PAYABLE REVENUE INCOME - ------------------------------------------ ----------- -------------- -------- ---------- -------- ---------- (Dollars in thousands) 1997 -- Property & Casualty Insurance..... $5,357 $19,592 21,968 -- $22,854 $ 1,720 ====== ======= ======= == ======= ======= 1996 -- Property & Casualty Insurance..... $3,778 $13,944 $18,980 -- $14,987 $ 1,449 ====== ======= ======= == ======= ======= 1995 -- Property & Casualty Insurance..... $2,495 $12,225 $13,659 -- $12,060 $ 1,029 ====== ======= ======= == ======= ======= COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K - ------------------------------------------ -------------- ------------ --------- -------- BENEFITS, AMORTIZATION CLAIMS, LOSSES OF DEFERRED AND POLICY OTHER NET SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT EXPENSES COSTS EXPENSES WRITTEN - ------------------------------------------ -------------- ------------ --------- -------- (Dollars in thousands) 1997 -- Property & Casualty Insurance..... $12,748 $ 7,440 $ 1,655 $26,936 ======= ======= ======= ======= 1996 -- Property & Casualty Insurance..... $ 9,750 $ 4,785 $ 1,443 $18,253 ======= ======= ======= ======= 1995 -- Property & Casualty Insurance..... $ 6,325 $ 3,684 $ 1,447 $14,042 ======= ======= ======= =======
S-7 93 SCHEDULE IV FINANCIAL PACIFIC INSURANCE GROUP, INC. REINSURANCE YEAR ENDED DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------- -------- --------- ---------- -------- ---------- PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET -------- --------- ---------- -------- ---------- (Dollars in thousands) Life insurance in force.............. $ -- $ -- $ -- $ -- --% ------- ------- ------- ------- --- Premiums: Life insurance..................... -- -- -- -- -- Accident and health insurance...... -- -- -- -- -- Property and liability insurance... 39,512 12,576 -- 26,936 0.0 Title insurance.................... -- -- -- -- -- ------- ------- ------- ------- --- Total Premiums............. $39,512 $12,576 -- $26,936 0.0% ======= ======= ======= ======= ===
S-8 94 SCHEDULE IV FINANCIAL PACIFIC INSURANCE GROUP, INC. REINSURANCE YEAR ENDED DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------- -------- --------- ---------- -------- ---------- PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET -------- --------- ---------- -------- ---------- (Dollars in thousands) Life insurance in force.............. $ -- $ -- $ -- $ -- --% ------- ------- ------- ------- --- Premiums: Life insurance..................... -- -- -- -- -- Accident and health insurance...... -- -- -- -- -- Property and liability insurance... 31,927 13,674 -- 18,253 0.0 Title insurance.................... -- -- -- -- -- ------- ------- ------- ------- --- Total Premiums............. $31,927 $13,674 $ -- $18,253 0.0% ======= ======= ======= ======= ===
S-9 95 SCHEDULE IV FINANCIAL PACIFIC INSURANCE GROUP, INC. REINSURANCE YEAR ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------- -------- --------- ---------- -------- ---------- PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET -------- --------- ---------- -------- ---------- (Dollars in thousands) Life insurance in force.............. $ -- $ -- $ -- $ -- --% ------- ------- ------- ------- --- Premiums: Life insurance..................... -- -- -- -- -- Accident and health insurance...... -- -- -- -- -- Property and liability insurance... 24,695 10,653 -- 14,042 0.0 Title insurance.................... -- -- -- -- -- ------- ------- ------- ------- --- Total Premiums............. $24,695 $10,653 $ -- $14,042 0.0% ======= ======= ======= ======= ===
S-10 96 SCHEDULE V FINANCIAL PACIFIC INSURANCE GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------- ------------ ------------ ------------- ---------- DEDUCTIONS -- ADDITIONS -- FROM PREMIUM BALANCE AT CHARGED TO BALANCE TO BALANCE AT BEGINNING OF COSTS AND ALLOWANCE END OF PERIOD EXPENSES ACCOUNT PERIOD ------------ ------------ ------------- ---------- (Dollars in thousands) 1997: Allowance for doubtful accounts............. $40 $30 $30 $40 === === === === 1996: Allowance for doubtful accounts............. $40 $31 $31 $40 === === === === 1995: Allowance for doubtful accounts............. $20 $56 $36 $40 === === === ===
S-11 97 SCHEDULE VI FINANCIAL PACIFIC INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H - ------------------------- ------------ ------------ --------- -------- -------- ---------- ------------------ NET CLAIMS AND CLAIMS ADJUSTMENT RESERVES FOR EXPENSES INCURRED UNPAID DISCOUNT, RELATED TO DEFERRED CLAIMS & IF ANY, ------------------ POLICY CLAIM DEDUCTED NET NET (1) (2) AFFILIATION WITH ACQUISITIONS ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUM INCOME YEAR YEAR - ------------------------- ------------ ------------ --------- -------- -------- ---------- -------- ------- 1997: Financial Pacific Insurance Company...... $5,357 $19,592 $-- $21,968 $22,854 $1,720 $10,991 $1,757 ====== ======= == ======= ======= ====== ======= ====== 1996: Financial Pacific Insurance Company...... $3,778 $13,944 $-- $18,980 $14,987 $1,449 $ 7,183 $2,356 ====== ======= == ======= ======= ====== ======= ====== 1995: Financial Pacific Insurance Company...... $2,495 $12,225 $-- $13,659 $12,060 $1,029 $ 6,702 $ (166) ====== ======= == ======= ======= ====== ======= ====== COLUMN A COLUMN I COLUMN J COLUMN K - ------------------------- ------------ ---------- -------- AMORTIZATION PAID NET OF DEFERRED CLAIMS AND POLICY CLAIM NET AFFILIATION WITH ACQUISITION ADJUSTMENT PREMIUMS REGISTRANT COST EXPENSES WRITTEN - ------------------------- ------------ ---------- -------- 1997: Financial Pacific Insurance Company...... $7,440 $9,278 $26,936 ====== ====== ======= 1996: Financial Pacific Insurance Company...... $4,785 $7,477 $18,253 ====== ====== ======= 1995: Financial Pacific Insurance Company...... $3,684 $3,899 $14,042 ====== ====== =======
S-12 98 EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE - ------- ----------------------- ------------- 1.1* Underwriting Agreement between EVEREN Securities, Inc. and the Registrant. ............................................ 3.1 Restated Certificate of Incorporation of the Registrant. ... 3.2 Bylaws of the Registrant. .................................. 4.1 Specimen Common Stock certificate. ......................... 4.2+ Stockholders Agreement, dated September 7, 1993, between the Registrant and the investors named therein. ................ 4.3 Amendment Number One to the Stockholders Agreement, dated December 28, 1995, between the Registrant and the investors named therein. ............................................. 5.1* Opinion of Riordan & McKinzie, a Professional Law Corporation. ............................................... 10.1 1993 Stock Incentive Plan. ................................. 10.2 Form of Stock Option Agreement. ............................ 10.3** Employment Agreement between the Registrant and Robert C. Goodell dated February 6, 1996, as amended. ................ 10.4** Employment Agreement between the Registrant and Robert T. Kingsley dated February 13, 1997. .......................... 10.5** Employment Agreement between the Registrant and Edward J. Paoletti dated November 14, 1997. .......................... 10.6** Employment Agreement between the Registrant and Wallace G. Rascher dated February 14, 1997. ........................... 10.7** Employment Agreement between the Registrant and Timothy N. Blaede dated February 14, 1997. ............................ 10.8** Employment Agreement between the Registrant and John R. Hollingshead dated November 14, 1997. ...................... 10.9** Employment Agreement between the Registrant and Artur A. Terner dated February 14, 1997. ............................ 10.10** Employment Agreement between the Registrant and Charles E. Wardlaw dated January 1, 1998. ............................. 10.11+** Restricted Stock Agreement between the Registrant and Robert C. Goodell dated September 7, 1993. ........................ 10.12 Note and Warrant Purchase Agreement dated December 28, 1995 among the Registrant and the purchasers listed therein. .... 10.13 Form of 12% Senior Note due 2001. .......................... 10.14 Form of Warrant issued by the Registrant dated December 28, 1995. ...................................................... 10.15 Form of Warrant issued by the Registrant dated September 7, 1993. ...................................................... 10.16 Financial Pacific Insurance Company Property Quota Share Reinsurance Contract originally effective July 1, 1993. .... 10.17 Financial Pacific Insurance Company Contingent Excess of Loss Reinsurance Contract originally effective July 1, 1996. ......................................................
99
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE - ------- ----------------------- ------------- 10.18 Financial Pacific Insurance Company Contingent Excess of Loss Reinsurance Contract originally effective January 1, 1997. ...................................................... 10.19 Financial Pacific Insurance Company Semi-Automatic Casualty Facultative Reinsurance Contract originally effective July 1, 1996. ................................................... 10.20 Financial Pacific Insurance Company (M.L. Oates Insurance Company) Property Quota Share Reinsurance Contract originally effective July 1, 1993. ......................... 10.21 Financial Pacific Insurance Company First Excess Casualty Reinsurance Contract originally effective January 1, 1997. ...................................................... 10.22 Producer Agreement between American Underwriting Managers Agency, Inc. and Financial Pacific Insurance Agency, Inc. ("FPIA") effective October 1, 1995. ........................ 10.23 Claims Management Agreement between FPIA and American Underwriting Managers dated November 28, 1995 .............. 10.24 Agreement between Financial Pacific Insurance Company ("FPIC") and General Reinsurance Corporation (No. 118). .... 10.25 Agreement between FPIC and General Reinsurance Corporation (No. AFF-6243440) .......................................... 10.26 Agreement between FPIC and General Reinsurance Corporation (No. 8090). ................................................ 10.27 Quota Share Reinsurance Agreement between FPIC and American Re-insurance dated October 23, 1997. ....................... 10.28 Net Lease Agreement between FPIC and Stanford Ranch I, LLC dated June 11, 1996. ....................................... 10.29 Promissory Note dated September 15, 1997 issued by the Registrant to U.S. Bank .................................... 10.30 Stock Purchase Agreement dated February 24, 1997 between Robert C. Goodell and the purchasers listed therein. ....... 10.31 Form of Indemnification Agreement between the Registrant and each director of the Registrant. ........................... 11.1 Computation of Net Income Per Share. ....................... 21.1 Subsidiaries of the Registrant. ............................ 23.1* Consent of KPMG Peat Marwick LLP, Independent Accountants. ............................................... 23.2* Consent of Riordan & McKinzie (contained in Exhibit 5.1).... 23.3* Consent of LeBoeuf, Lamb, Greene & Macrae L.L.P. ........... 24.1 Power of Attorney (see page II-5). ......................... 27.1 Financial Data Schedule. ...................................
- --------------- * To be filed by amendment. ** Confidential treatment requested. + The Schedules to this Exhibit have not been filed with the Commission because the Registrant believes that such Schedules do not contain information that is material to an investment decision. The Registrant hereby agrees to furnish supplementally a copy of the omitted schedules to the Commission upon request. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF FINANCIAL PACIFIC INSURANCE GROUP, INC. (Pursuant to Section 245 of the Delaware General Corporation Law) FINANCIAL PACIFIC INSURANCE GROUP, INC., a corporation incorporated under the General Corporation Law of Delaware (the "Corporation"), hereby amends and restates its Certificate of Incorporation (as originally filed by the Secretary of State on May 26, 1993) so that the same shall read, in its entirety, as follows: ARTICLE I The name of the Corporation is Financial Pacific Insurance Group, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is 32 Lockerman Square, Suite L-100, City of Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware, as amended from time to time. ARTICLE IV Section 4.1 Authorized Capital. (a) The total number of shares of all classes of capital stock with which the Corporation shall have authority to issue is 9,500,000 shares, consisting of 2,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred Stock"), and 7,500,000 shares of Common Stock, par value $.001 per share (the "Common Stock"). (b) The number of authorized shares of any class or classes of capital stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the capital stock of the Corporation entitled to vote on all matters to be voted on by the stockholders of the Corporation. 2 Section 4.2 Preferred Stock. (a) The Board of Directors of this Corporation is authorized to determine the number of series into which shares of Preferred Stock may be divided and the designation of any such series; and except with respect to the Series A Preferred Stock, which is described below, the Board of Directors is authorized to determine the rights, preferences, privileges and restrictions granted or to be imposed upon the Preferred Stock or any series thereof or any holders thereof, to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly-unissued series of Preferred Stock or the holders thereof, to fix the number of shares constituting any series prior to the issuance of shares of that series, and to increase or decrease, within the limits stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issuance of shares of that series. Upon such designation, the Secretary of the Corporation shall cause a Certificate of Designation setting forth a copy of such resolution and the number of shares of the Preferred Stock as to which the resolution applied to be executed, acknowledged, filed and recorded in accordance with Section 103 of the General Corporation Law of the State of Delaware. (b) The Corporation is authorized to issue 5,000 shares of the Series A Preferred Stock. The rights, preferences, privileges and restrictions of such series of Preferred Stock and the Common Stock, as well as the holders of such stock, are set forth below in this Article IV. (c) Designation. The series of Preferred Stock having the rights, preferences, privileges and restrictions set forth below shall be designated and known as the "Series A Preferred Stock" (hereinafter referred to as the "Series A Stock"). (d) Number of Shares of Series. The number of shares constituting all of the Series A Stock shall be 5,000. (e) Dividends. (i) The holders of Series A Stock shall not be entitled to receive dividends unless and until expressly declared by the Board of Directors of the Corporation with respect to the Series A Stock, or to otherwise participate in any manner in the earnings of the Corporation; provided, however, that in the event the Corporation pays a dividend or makes any other distribution, whether in cash, property or otherwise, including, without limitation, any rights, options or warrants to acquire securities or other securities, pro rata to the holders of its Series A Stock, then the record holders of the Common Stock outstanding on the applicable record date of such dividend or other distribution shall be entitled to 2. 3 receive dividends or such other distributions, out of funds legally available therefor, in an amount per share of Common Stock equal to the dividend or other distribution receivable had the holders of the Series A Stock converted their Series A Stock into Common Stock immediately prior to the record date for such dividend or other distribution pursuant to the terms of this Certificate, whether or not such Series A Stock was at such time convertible. (ii) No provision of this Certificate shall be deemed to limit or otherwise restrict or qualify the right of the Corporation to declare, pay or set apart for payment on any of its capital stock (whether outstanding on the date hereof or issued in the future) any dividends, whether in cash, property or otherwise, or to otherwise make any distribution in respect of or purchase, redeem or otherwise acquire any such capital stock, subject only to the right of the holders of Common Stock, pursuant to Section 4.2(e)(i) hereof, to receive certain dividends and other distributions payable in respect of the Series A Stock. (f) Liquidation Preference. (i) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A Stock shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of Common Stock, the amount of $1,000 per share plus any declared but unpaid dividends. (ii) After distribution to the holders of the Series A Stock of the preferential amount set forth in subparagraph (i) above, and after distribution to the holders of any other class or series of shares entitled to a liquidation preference over the Common Stock of the full preferential amount to which such holders may be entitled, the remaining assets of the Corporation legally available for distribution to the holders of Common Stock shall be distributed among the holders of the Common Stock. (iii) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, shall not be deemed a liquidation, dissolution or winding up within the meaning of this Section 4.2(f); provided, that the Corporation shall give advance notice of any such event to the holders of the Series A Stock not less than 20 days prior to the effective date thereof, such notice to be given in the manner required by Section 251 of the Delaware General Corporation Law. 3. 4 (g) Redemption. (i) At any time after September 7, 2000, the Corporation shall be entitled to redeem, out of funds legally available therefor, all or any portion of the outstanding shares of Series A Stock held by each holder of Series A Stock. On the date of redemption (the "Redemption Date") the redemption shall be made by payment in cash of a sum per share of Series A Stock equal to the liquidation preference set forth in Section 4.2(f)(i) hereof (the "Redemption Price"). (ii) At least 30 days but no more than 60 days prior to the Redemption Date, written notice (the "Redemption Notice") shall be mailed, first class postage prepaid, by the Corporation to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of the Series A Stock, at the address last shown on the records of the Corporation for such holder, notifying such holder of the redemption which is to be effected, specifying the percentage of shares which is to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon each such holder to surrender to the Corporation, in the manner and at the place designated, a certificate or certificates representing the number of shares to be redeemed (calculated by multiplying the specified percentage of shares to be redeemed by the total number of shares of Series A Stock held by such holder as of the Redemption Date). Except as provided in Section 4.2(g)(iii), on or after the Redemption Date, each holder of Series A Stock shall surrender to the Corporation the certificate or certificates representing the specified percentage of shares of Series A Stock owned by it as of the Redemption Date, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) From and after 5:00 p.m., Los Angeles time, on the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares which have been redeemed (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the Corporation elects to redeem less than all of the Series A Stock, the Corporation will redeem shares ratably among the holders of such shares to be redeemed. The shares not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter the Corporation may elect to redeem all 4. 5 or any portion of the remaining shares of Series A Stock upon the terms and subject to the conditions of this Section 4.2(g). (iv) On or prior to a given Redemption Date, the Corporation shall deposit the Redemption Price of all shares to be redeemed on such Redemption Date with a bank or trust company having aggregate capital and surplus in excess of $100,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust company to pay the Redemption Price for such shares to their respective holders on or after the Redemption Date upon receipt of notification from the Corporation that such holder has surrendered its share certificate to the Corporation pursuant to Section 4.2(g)(ii) above. The balance of any moneys deposited by the Corporation pursuant to this Section 4.2(g)(iv) remaining unclaimed at the expiration of six months following the Redemption Date shall thereafter be returned to the Corporation upon its request expressed in a resolution of its Board of Directors. Nothing contained herein shall prevent the holder of shares of Series A Stock from converting to Common Stock all or any shares of Series A Stock to which the Redemption Notice applies in accordance with the provisions of Section 4.2(i) hereof prior to 5:00 p.m., Los Angeles time, on the Redemption Date. (h) Voting Rights. Except as otherwise expressly provided in Section 4.2(j) hereof or as required by law, the holder of each share of Series A Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A Stock could then be converted and shall have voting rights and powers equal to the voting rights and powers of such Common Stock (except as otherwise expressly provided herein or as required by law, voting together with the Common Stock as a single class) and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation in the same manner and at the same time as holders of Common Stock. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series A Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (i) Conversion. The holders of the Series A Stock shall have conversion rights as follows: (i) Right to Convert. Each share of Series A Stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) $1,000 by (ii) the Conversion Price determined as hereinafter provided in effect on said date. 5. 6 The Conversion Price shall, as of the date hereof, be $2.5356576 per share, and shall be subject to adjustment as hereinafter provided. (ii) Automatic Conversion. Each share of Series A Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price immediately upon the effective date of a registration statement filed pursuant to the Securities Act of 1933, as amended (other than a registration relating solely to a transaction under Rule 145 under such Act or any successor thereto, or to an employee benefit plan of the Corporation), in connection with the sale of the Corporation's Common Stock in a firm commitment, underwritten public offering with gross proceeds to be received by the Corporation which equal or exceed $10,000,000 and a public offering price of the Common Stock of not less than $12.68 per share, as of the date hereof, as adjusted pursuant to Section 4.2(i)(iv) (an "Initial Public Offering"). (iii) Mechanics of Conversion. Before any holder of Series A Stock shall be entitled to convert the same into shares of Common Stock, the holder shall surrender the certificate or certificates thereof, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which it shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Series A Stock to be converted, except that in the case of an automatic conversion pursuant to Section 4.2(i)(ii) hereof, such conversion shall be deemed to have been made immediately prior to the effective date of the offering referred to in Section 4.2(i)(ii) and shall be deemed to have been made whether or not certificates for the Series A Stock shall have been surrendered. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iv) Adjustments to Conversion Price. (A) Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares by way of stock split, stock dividend or similar event, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares 6. 7 by way of reverse stock split or similar event, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (B) Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Series A Stock shall receive such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore receivable upon the conversion of the Series A Stock had such reorganization, reclassification, consolidation, merger or sale not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Series A Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion of the Series A Stock. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the holder of Series A Stock at the last address thereof appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive. (C) Issuance of Certain Additional Shares. If the Corporation shall sell or issue to any person any shares of Common Stock or any options, warrants or rights entitling any person to subscribe for, purchase or convert, or exchange shares of Common Stock (other than (i) sales or issuance to officers or employees of, or consultants or advisors to, the Corporation pursuant to any stock incentive plan or arrangement approved by the Corporation's Board of Directors and (ii) shares issued upon conversion of the Series A Stock) at a price per share of Common Stock, or having an exercise price per share of Common Stock, as the case may be, that is less than the Current Market Value (as hereinafter defined) of Common Stock on the date of issuance (such shares being referred to as the "Below Market Shares"), the Conversion Price shall be adjusted on and after the date of such sale and issuance by multiplying the Conversion Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock that the aggregate purchase price or exercise price of such Below Market Shares would purchase at the Current Market Value, and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of Below Market Shares. The adjustment to the Conversion Price set forth above shall be made successively whenever a sale or issuance of Below Market Shares occurs; provided, however, that, if any such options, warrants or rights 7. 8 expire without the issuance of shares of Common Stock, then the Conversion Price shall again be adjusted to equal the Conversion Price in effect had such issuance of Below Market Shares not occurred. (v) Definitions. As used herein, the following terms shall have the following meanings: "Current Market Value" per share of Common Stock means (i) if an Initial Public Offering of the Common Stock has taken place, the price at the close of the market on the first day of trading of such Common Stock following the effectiveness of a registration statement for the Common Stock and (ii) if no Initial Public Offering has taken place, the Fair Market Value of the Common Stock based upon the Fair Market Value of 100% of the Corporation if sold as a going concern and without regard to any discount for the lack of liquidity or on the basis that the relevant shares of Common Stock do not constitute a majority or controlling interest in the Corporation and assuming the exercise of all warrants, convertible securities, options or other rights to subscribe for or purchase any additional shares of Common Stock or securities convertible or exchangeable into Common Stock. "Fair Market Value" shall mean the value obtainable upon a sale in an arm's length transaction to an unaffiliated third party under usual and normal circumstances, with neither the buyer nor the seller under any compulsion to act, with equity to both, as determined by the Board in good faith; provided, however, that if the holders of 75% of the outstanding shares of Series A Stock (the "Disputing Holders") shall dispute the Fair Market Value as determined by the Board, the Disputing Holders may undertake to have the Corporation retain an Independent Expert. The determination of Fair Market Value by the Independent Expert shall be final, binding and conclusive on the Corporation and the Disputing Holders. All costs and expenses of the Independent Expert shall be borne by the Disputing Holders, unless the determination of Fair Market Value by the Independent Expert is more than 5% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be shared equally by the Disputing Holders, on the one hand, and the Corporation, on the other hand, or more than 10% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be borne solely by the Corporation. "Independent Expert" shall mean an investment banking firm reasonably agreeable to the Corporation and the Disputing Holders, who does not (and whose affiliates do not) have a financial interest in the Corporation or any of its stockholders. (vi) Certificates as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4.2(i), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and cause independent public accountants selected by the Corporation to verify such 8. 9 computation and prepare and furnish to each holder of Series A Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Stock, furnish or cause to be furnished to such holder a like certificate prepared by the Corporation setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Stock. (vii) Notice of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any security or right convertible into or entitling the holder thereof to receive Additional Shares of Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Stock at least 15 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (viii) Issue Taxes. The Corporation shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (ix) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval. 9. 10 (x) Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of Series A Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (xi) Notices. Any notice required hereunder to be given to the holders of shares of Series A Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. (j) Restrictions and Limitations. So long as at least 25% of the originally issued shares of Series A Stock are outstanding, the Corporation shall not modify its Certificate of Incorporation or Bylaws so as to amend or change any of the rights, preferences, privileges of or limitations on the Series A Stock without the consent of a majority of the votes entitled to be cast by the holders of the Series A Stock. Section 4.3 Common Stock. (a) Liquidation or Dissolution. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, holders of Common Stock shall receive a pro rata distribution of any remaining assets after payment or provision for liabilities and the liquidation preference on Preferred Stock, if any. (b) Voting Rights. The holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation." ARTICLE V Upon filing of this Restated Certificate of Incorporation, and without any further action on the part of the holders thereof, each issued and outstanding share of Common Stock shall be converted into 394.375 shares of Common Stock. ARTICLE VI The Corporation is to have perpetual existence. 10. 11 ARTICLE VII In furtherance and not in limitation of the powers conferred by statute: A. The Board of Directors of the Corporation is expressly authorized to adopt, amend, alter or repeal the bylaws of the Corporation; B. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide; and C. The books of the Corporation may be kept at such place within or without the State of Delaware as the bylaws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. ARTICLE VIII A. The Corporation shall indemnify each of the Corporation's directors and officers in each and every situation where, under Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), the Corporation is permitted or empowered to make such indemnification. The Corporation may, in the sole discretion of the Board of Directors of the Corporation, indemnify any other person who may be indemnified pursuant to Section 145 to the extent the Board of Directors deems advisable, as permitted by Section 145. The Corporation shall promptly make or cause to be made any determination required to be made pursuant to Section 145. B. No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty or loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is subsequently amended to further eliminate or limit the liability of a director, then a director of the Corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. For purposes of this Article VIII, "fiduciary duty as a director" shall include any fiduciary duty arising out of serving at the Corporation's request as a director of another corporation, partnership, joint venture or other enterprise, and "personal liability to the Corporation or its stockholders" shall include any liability to such other corporation, partnership, joint venture, trust or other enterprise, and any liability to the Corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. 11. 12 ARTICLE IX The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. This Restated Certificate of Incorporation has been duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of Delaware, as amended. IN WITNESS WHEREOF, the undersigned have executed this Restated Certificate of Incorporation this 14th day of April, 1998. /s/ ROBERT C. GOODELL ------------------------------------- Robert C. Goodell, President and Chief Executive Officer /s/ ROBERT T. KINGSLEY ------------------------------------- Robert T. Kingsley Secretary 12. EX-3.2 3 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.2 BYLAWS OF FINANCIAL PACIFIC INSURANCE GROUP, INC. A Delaware Corporation As adopted May 28, 1993 2 TABLE OF CONTENTS ARTICLE I OFFICES...................................................................................1 Section 1. Registered Office............................................................1 Section 2. Other Offices................................................................1 Section 3. Books........................................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS....................................................................1 Section 1. Place of Meetings............................................................1 Section 2. Annual Meetings..............................................................1 Section 3. Special Meetings.............................................................1 Section 4. Notification of Business to be Transacted at Meeting.........................2 Section 5. Notice; Waiver of Notice.....................................................2 Section 6. Quorum; Adjournment..........................................................2 Section 7. Voting.......................................................................2 Section 8. Stockholder Action by Written Consent Without a Meeting......................3 Section 9. List of Stockholders Entitled to Vote........................................3 Section 10. Stock Ledger.................................................................3 Section 11. Inspectors of Election.......................................................3 Section 12. Organization.................................................................3 Section 13. Order of Business............................................................4 ARTICLE III DIRECTORS...................................................................................4 Section 1. Powers.......................................................................4 Section 2. Number and Election of Directors.............................................4 Section 3. Vacancies....................................................................4 Section 4. Time and Place of Meetings...................................................4 Section 5. Annual Meeting...............................................................4 Section 6. Regular Meetings.............................................................5 Section 7. Special Meetings.............................................................5 Section 8. Quorum; Vote Required for Action; Adjournment................................5 Section 9. Action by Written Consent....................................................5 Section 10. Telephone Meetings...........................................................6 Section 11. Committees...................................................................6 Section 12. Compensation.................................................................6 Section 13. Interested Directors.........................................................6 ARTICLE IV OFFICERS....................................................................................7 Section 1. Officers.....................................................................7 Section 2. Appointment of Officers......................................................7 Section 3. Subordinate Officers.........................................................7 Section 4. Removal and Resignation of Officers..........................................7 Section 5. Vacancies in Offices.........................................................7
i 3 Section 6. Chairman of the Board........................................................7 Section 7. Vice Chairman of the Board...................................................7 Section 8. Chief Executive Officer......................................................8 Section 9. President....................................................................8 Section 10. Vice President...............................................................8 Section 11. Secretary....................................................................8 Section 12. Chief Financial Officer......................................................9 ARTICLE V STOCK.......................................................................................9 Section 1. Form of Certificates.........................................................9 Section 2. Signatures...................................................................9 Section 3. Lost Certificates............................................................9 Section 4. Transfers....................................................................9 Section 5. Record Holders...............................................................9 ARTICLE VI INDEMNIFICATION............................................................................10 Section 1. Right to Indemnification....................................................10 Section 2. Right of Indemnitee to Brim Suit............................................10 Section 3. Non-Exclusivity of Rights...................................................11 Section 4. Insurance...................................................................11 Section 5. Indemnification of Employees or Agents of the Corporation...................11 Section 6. Indemnification Contracts...................................................11 Section 7. Effect of Amendment.........................................................11 ARTICLE VII GENERAL PROVISIONS.........................................................................12 Section 1. Dividends...................................................................12 Section 2. Disbursements...............................................................12 Section 3. Fiscal Year.................................................................12 Section 4. Corporate Seal..............................................................12 Section 5. Record Date.................................................................12 Section 6. Voting of Stock Owned by the Corporation....................................12 Section 7. Construction and Definitions................................................12 Section 8. Amendments..................................................................12
ii 4 BYLAWS OF FINANCIAL PACIFIC INSURANCE GROUP, INC., a Delaware corporation ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation in the State of Delaware shall be in the City of Dover, County of Kent. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Section 3. Books. The books of the Corporation may be kept within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of stockholders for the election of directors shall be held at such place either within or without the State of Delaware as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. Annual meetings of stockholders shall be held at a time and date designated by the Board of Directors for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chief Executive Officer and shall be called by the Chief Executive Officer or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of a stockholder or stockholders owning stock of the Corporation possessing ten percent (10%) of the voting power possessed by all of the then outstanding capital stock of any 5 class of the Corporation entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notification of Business to be Transacted at Meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder entitled to vote at the meeting. Section 5. Notice; Waiver of Notice. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 6. Quorum; Adjournment. Except as otherwise required by law, or provided by the Certificate of Incorporation or these Bylaws, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of enough votes to leave less than a quorum, if any action taken is approved by at least a majority of the required quorum to conduct that meeting. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Section 7. Voting. Except as otherwise required by law, or provided by the Certificate of Incorporation or these Bylaws, any question brought before any meeting of stockholders at which a quorum is present shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. Unless otherwise provided in the Certificate of Incorporation, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy, but no proxy shall be voted on or after three (3) years from its date, unless such proxy provides for a longer period. Elections of directors need 2 6 not be by ballot unless the Chairman of the meeting so directs or unless a stockholder demands election by ballot at the meeting and before the voting begins. Section 8. Stockholder Action by Written Consent Without a Meeting. Except as otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 9. List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 10. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 9 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 11. Inspectors of Election. In advance of any meeting of stockholders, the Board of Directors may appoint one or more persons (who shall not be candidates for office) as inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not so appointed, or if an appointed inspector fails to appear or fails or refuses to act at a meeting, the Chairman of any meeting of stockholders may, and on the request of any stockholder or his proxy shall, appoint an inspector or inspectors of election at the meeting. The duties of such inspector(s) shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. In the event of any dispute between or among the inspectors, the determination of the majority of the inspectors shall be binding. Section 12. Organization. At each meeting of stockholders the Chairman of the Board of Directors, if one shall have been elected, (or in his absence or if one shall not have been elected, 3 7 the President) shall act as Chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the Chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. Section 13. Order of Business. The order and manner of transacting business at all meetings of stockholders shall be determined by the Chairman of the meeting. ARTICLE III DIRECTORS Section 1. Powers. Except as otherwise required by law or provided by the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 2. Number and Election of Directors. Subject to any limitations in the Certificate of Incorporation, the authorized number of directors of the Corporation shall be not less than one (1) nor more than four (4). The exact number of Directors within these limits shall be fixed from time to time by resolution of the Board of Directors of the Corporation. The number of Directors shall be so variable until changed by an amendment to this Section 2 of Article III of these Bylaws adopted by the affirmative vote of a majority of the entire Board of Directors or by the stockholders at the annual meeting. The number of Directors presently authorized is one (1). Directors shall be elected at each annual meeting of stockholders to replace directors whose terms then expire, and each director elected shall hold office until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Any director may resign at any time effective upon giving written notice to the Corporation, unless the notice specifies a later time for such resignation to become effective. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor prior to such effective time to take office when such resignation becomes effective. Directors need not be stockholders. Section 3. Vacancies. Subject to the limitations in the Certificate of Incorporation, vacancies in the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Each director so selected shall hold office for the remainder of the full term of office of the former director which such director replaces and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent directors. Section 4. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors. Section 5. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable 4 8 after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place, either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware at such date and time as the Board of Directors may from time to time determine and, if so determined by the Board of Directors, notices thereof need not be given. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, the Secretary or by any director. Notice of the date, time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at the director's address as it is shown on the records of the Corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. The notice need not specify the purpose of the meeting. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 8. Quorum; Vote Required for Action; Adjournment. Except as otherwise required by law, or provided in the Certificate of Incorporation or these Bylaws, a majority of the directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors and the affirmative vote of not less than a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. 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. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum to conduct that meeting. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. Section 9. Action by Written Consent. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. 5 9 Section 10. Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee, as the case may be, by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 10 shall constitute presence in person at such meeting. Section 11. Committees. The Board of Directors may, by resolution passed unanimously by the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of the committee. In the event of absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the committee member or members present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Any committee, to the extent allowed by law and as provided in the resolution establishing such committee, shall have and may exercise all the power and authority of the Board of Directors in the management of the business and affairs of the Corporation, but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of a or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep regular minutes of its meetings and report to the Board of Directors when required. Section 12. Compensation. The directors may be paid such compensation for their services as the Board of Directors shall from time to time determine. Section 13. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or the committee thereof which authorizes the contract or transaction, or solely because his of their votes are counted for such purpose if: (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a 6 10 committee thereof. or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS Section 1. Officers. The officers of the Corporation shall be a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, one or more Assistant Financial Officers and Treasurers, one or more Assistant Secretaries and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article IV. Section 2. Appointment of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article IV, shall be appointed by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. Section 3. Subordinate Officers. The Board of Directors may appoint, and may empower the Chief Executive Officer or President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation of Officers. Subject to the rights of an officer under any contract, any officer may be removed at any time, with or without cause, by the Board of Directors or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights of the Corporation under any contract to which the officer is a party. Section 5. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. Section 6. Chairman of the Board. The Chairman of the Board, if such an officer is elected, shall, if present, preside at meetings of the stockholders and of the Board of Directors. He shall, in addition, perform such other functions (if any) as may be prescribed by the Bylaws or the Board of Directors. Section 7. Vice Chairman of the Board. The Vice Chairman of the Board, if such an officer is elected, shall, in the absence or disability of the Chairman of the Board, perform all 7 11 duties of the Chairman of the Board and when so acting shall have all the powers of and be subject to all of the restrictions upon the Chairman of the Board. The Vice Chairman of the Board shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 8. Chief Executive Officer. The Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. He shall exercise the duties usually vested in the chief executive officer of a corporation and perform such other powers and duties as may be assigned to him from time to time by the Board of Directors or prescribed by the Bylaws. In the absence of the Chairman of the Board and any Vice Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the stockholders and of the Board of Directors. Section 9. President. The President of the Corporation shall, subject to the control of the Board of Directors and the Chief Executive Officer of the Corporation, if there be such an officer, have general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws or the Chief Executive Officer of the Corporation. In the absence of the Chairman of the Board, Vice Chairman of the Board and Chief Executive Officer, the President shall preside at all meetings of the Board of Directors and stockholders. Section 10. Vice President. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, and the President, or the Chairman of the Board. Section 11. Secretary. The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of Directors, and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at Directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and a summary of the proceedings. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep or cause to be kept the seal of the Corporation if one be adopted, in safe custody, and shall have 8 12 such powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 12. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation. The Chief Financial Officer shall also have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE V STOCK Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation (i) by the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President and (ii) by the Chief Financial Officer or the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Section 2. Signatures. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have 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. Section 3. Lost Certificates. The Corporation may issue a new certificate to be issued in place of any certificate theretofore issued by the Corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. The Corporation may, in the discretion of the Board of Directors and as a condition precedent to the issuance of such new certificate, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond (or other security) sufficient to indemnify it against any claim that may be made against the Corporation (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws or in any agreement with the stockholder making the transfer. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. Section 5. Record Holders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the record holder of shares to receive dividends, and 9 13 to vote as such record holder, and to hold liable for calls and assessments a person registered on its books as the record holder of shares, and shall not be bound to 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 required by law. ARTICLE VI INDEMNIFICATION Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists 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 such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 2 of this Article VI with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article VI or otherwise (hereinafter an "undertaking"). Section 2. Right of Indemnitee to Bring Suit. If a claim under Section 1 of this Article VI is not paid in full by the Corporation within forty-five (45) days after a written claim has been received by the Corporation, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or part in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to 10 14 indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Article VI or otherwise shall be on the Corporation. Section 3. Non-Exclusivity of Rights. The rights of indemnification and to the advancement of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 5. Indemnification of Employees or Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VI with respect to the indemnification and advancement of expenses of directors or officers of the Corporation. Section 6. Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determinates, greater than, those provided for in this Article VI. Section 7. Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. 11 15 ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Subject to limitations contained in the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, securities of the Corporation or other property. Section 2. Disbursements. All checks or 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 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 4. Corporate Seal. The Corporation shall have a corporate seal in such form as shall be prescribed by the Board of Directors. Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Stockholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as otherwise provided by agreement or by applicable law. Section 6. Voting of Stock Owned by the Corporation. The Chairman of the Board, the Chief Executive Officer, the President and any other officer of the Corporation authorized by the Board of Directors shall have power, on behalf of the Corporation, to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. Section 7. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of the State of Delaware shall govern the construction of these Bylaws. Section 8. Amendments. Subject to the General Corporation Law of the State of Delaware, the Certificate of Incorporation and these Bylaws, the Board of Directors may by the affirmative vote of a majority of the entire Board of Directors amend or repeal these Bylaws, or adopt other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Corporation. Unless otherwise restricted by the Certificate of Incorporation, these 12 16 Bylaws may be altered, amended or repealed, and new Bylaws may be adopted, at any annual meeting of the stockholders (or at any special meeting thereof duly called for that at purpose) by a majority of the combined voting power of the then outstanding shares of capital stock of all classes and series of the Corporation entitled to vote generally in the election of directors, voting as a single class, provided that, in the notice of any such special meeting, notice of such purpose shall be given. 13 17 CERTIFICATE OF INCORPORATOR I, the undersigned, do hereby certify: 1. That I am the sole incorporator of FINANCIAL PACIFIC INSURANCE GROUP, INC., a Delaware corporation; and 2. That the foregoing bylaws, comprising 13 pages, constitute the bylaws of said corporation as duly adopted by action of the Incorporator of the Corporation duly taken on May 28, 1993. IN WITNESS WHEREOF, I have hereunto subscribed my name this 28th day of May, 1993. /s/ NANCY J. DEWHIRST ------------------------------------------ Nancy J. Dewhirst 18 INTEROFFICE MEMORANDUM FINANCIAL PACIFIC INSURANCE COMPANY TO: File FROM: Annmarie Schremp DATE: August 23, 1995 RE: Articles of Incorporation and Bylaws - -------------------------------------------------------------------------------- As a matter of corporate record, I certify that the attached copies of the Restated Articles of Incorporation and the Restated Bylaws of Financial Pacific Insurance Company, both executed on December 3, 1993, are the most current version of these documents. There have been no changes to either document. /s/ ANN SCHREMP 8/23/95 - -------------------------------- ------------------------------------ Ann Schremp Date Corporate Secretary Attachments 19 CERTIFICATION OF BYLAWS The undersigned, Robert C. Goodell, does hereby certify that: 1. He is the duly elected, qualified and acting President and Chief Executive Officer of Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"). 2. The Bylaws of the Corporation consisting of 13 pages attached hereto are the full, true and correct Bylaws of the Corporation duly adopted by the Corporation; and 3. The attached Bylaws were in effect on May 28, 1993 and have not been amended, repealed or modified in any manner and are on the date hereof still in full force and effect. Dated: December 23, 1995 /s/ ROBERT C. GOODELL ------------------------------------- Robert C. Goodell EX-4.1 4 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE MAY 26, 1993 NUMBER SHARES 40 FINANCIAL PACIFIC INSURANCE GROUP INC. 10,000,000 SHARES COMMON STOCK 4,000,000 SHARES SERIES A CONVERTIBLE PREFERRED STOCK $.001 PAR VALUE EACH $.001 PAR VALUE EACH THIS CERTIFIES THAT: _________________________________________ IS THE REGISTERED HOLDER OF ______________________________________ Shares of the Common Stock of FINANCIAL PACIFIC INSURANCE GROUP, INC. HEREINAFTER DESIGNATED "THE CORPORATION", TRANSFERABLE ON THE SHARE REGISTER OF THE CORPORATION UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR ASSIGNED. This certificate and the shares represented hereby shall be held subject to all of the provisions of the Certificate of Incorporation and the By-laws of said Corporation, a copy of each of which is on file at the office of the Corporation, and made a part hereof as fully as though the provisions of said Certificate of Incorporation and By-laws were imprinted in full on this certificate, to all of which the holder of this certificate, by acceptance hereof, asserts and agrees to be bound. Any stockholder may obtain from the principal office of the Corporation, upon request and without charge, a statement of the number of shares constituting each class or series of stock and the designation thereof; and a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights and the By-laws. WITNESS THE SEAL OF THE CORPORATION AND THE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. DATED: - ------------------------------- ------------------------------- SECRETARY PRESIDENT 2 NO. ____ CERTIFICATE FOR _______ SHARES OF COMMON STOCK ISSUED TO ___________________ DATED _________________ - -------------------------------------------------------------------------------- For Value Received, _____ hereby sell, assign and transfer unto ________________________________________________________________________________ _________________________________________________________________________ Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________________________ Attorney to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises. Dated ___________________________ 19_____ In presence of ---------------------------------------- - ------------------------------------- NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. - -------------------------------------------------------------------------------- EX-4.3 5 AMENDMENT NUMBER ONE TO THE STOCKHOLDERS AGREEMENT 1 EXHIBIT 4.3 AMENDMENT TO STOCKHOLDERS AGREEMENT This Amendment to Stockholders Agreement ("Amendment") is entered into as of December 28, 1995 among the parties whose signatures appear below for the purpose of amending that certain Stockholders Agreement dated as of September 7, 1993 among such parties (the "Original Agreement"). The parties hereto hereby agree as follows: 1. Amendment. The lead-in to Section 8 of the Original Agreement is amended in entirety to read as follows: "8. Termination of this Agreement. Other than with respect to the registration rights set forth in Section 6 of this Agreement which shall terminate solely in accordance with subparagraph (n) of such Section 6, this Agreement shall terminate upon the earliest to occur of:" 2. Entire Agreement. Except to the extent expressly provided in this Amendment, the terms and conditions of the Original Agreement shall remain in full force and effect. This Amendment constitutes and contains the entire agreement of the parties hereto and supersedes any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral, respecting the subject matter hereof. 3. Counterparts. This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: /s/ ROBERT C. GOODELL ------------------------------------ Robert C. Goodell, President FINPAC PARTNERS, a California limited partnership By: /s/ PATRICK C. HADEN ------------------------------------ Patrick C. Haden, General Partner ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: /s/ B. A. BACKBERG ------------------------------------ B. A. Backberg Vice President & Corporate Secretary THE FIREMARK GLOBAL INSURANCE FUND, L.P., a Delaware limited partnership By: Firemark Advisors, Inc., General Partner By: /s/ [SIG] ------------------------------------ WELLS FARGO BANK, N.A., TRUSTEE FOR LATHAM & WATKINS FOR THE BENEFIT OF DAVID B. ROGERS By:. [SIG] ------------------------------------ /s/ ROBERT C. GOODELL ---------------------------------------- Robert C. Goodell /s/ SUZANNE M. GOODELL ---------------------------------------- Suzanne M. Goodell NORTH AMERICAN TRUST, AS TRUSTEE FOR LATHAM & WATKINS FOR THE BENEFIT OF DAVID B. ROGERS By: /s/ LOYE L. REDDING ------------------------------------ 2 CERTIFICATE OF SECRETARY I DO HEREBY CERTIFY that I am the duly elected and acting Secretary for North American Trust Company, San Diego, California, a California Corporation, and that the following is a true and correct copy of a resolution adopted by the Board of Directors held on the 8th day of October, 1993: "WHEREAS", Section 5.5 of the By-Laws of the Corporation provide that the Board of Directors may authorize any Officer or Officers to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; NOW, THEREFORE, BE IT HEREBY RESOLVED, that any Vice President, or any two other Officers, of this Corporation are authorized and empowered to make delivery of and to execute all assignments, transfers, powers of attorney, and other instruments necessary or proper to consummate the sale or exchange of any stocks, bonds and/or securities of every kind standing in the name of this Corporation, as trustee, custodian, or in any fiduciary character whatsoever; and to deposit under any deposit or protective agreement or reorganization plan any and all securities standing in the name of this Corporation, as trustee, custodian, or in any fiduciary character whatsoever and to execute all papers or instruments or writing necessary or proper to accompany such deposits and/or withdrawal of any or all securities so deposited and/or the acceptance of any cash and/or securities in payment, exchange or substitution of any securities owned or held by the Corporation in any fiduciary character whatsoever; and I further certify that the foregoing resolution is presently in full force and effect and has not been revoked or rescinded as of the date hereof." IN WITNESS WHEREOF, I hereby affix my signature. Dated: December 31, 1995 /s/ [SIG] - --------------------------------------- Secretary 3 CERTIFICATE OF INCUMBENCY I, Amy Romaker, Secretary of North American Trust Company, a California Corporation, hereby certify that by Resolution, duly adopted by the Board of Directors of this Corporation, the Officers named upon this certificate have been duly elected or appointed by the President as approved in the By-laws, are now acting and are qualified to sign on behalf of this Corporation, that the specimen signature appearing opposite the name and title of each such officer is the genuine signature of such Officer and that said Resolution or appointment is in full force and effect. Vault Entry/Fiduciary Deposit Transactions/Safety Deposit/Securities
Name Title Signature - ---- ----- --------- DAVID R. MORRIS Chief Financial Officer /s/ DAVID R. MORRIS AMY J. ROMAKER Vice President /s/ AMY J. ROMAKER SANDRA L. SHERMAN Vice President /s/ SANDRA L. SHERMAN DANIEL AGUILAR Asst. Vice President /s/ DANIEL AGUILAR MELANIE MERCIER Asst. Vice President /s/ MELANIE MERCIER LOYE L. REDDING Asst. Vice President /s/ LOYE L. REDDING RANDALL R. REED Asst. Vice President /s/ RANDALL R. REED CARLA B. ALLEN Trust Officer /s/ CARLA B. ALLEN TERESA BURDICK Trust Officer /s/ TERESA BURDICK DIANE L. DEWINTER Trust Officer /s/ DIANE L. DEWINTER KATHRYN SCHNETZER Trust Officer /s/ KATHRYN SCHNETZER DENISE RUDERMAN Trust Officer /s/ DENISE RUDERMAN KATHY BARKER Internal Control Supervisor /s/ KATHY BARKER ADALEAH BRUNETTO Operations Supervisor /s/ ADALEAH BRUNETTO
IN WITNESS WHEREOF, I have subscribed my name this 31st day of December, 1995. /s/ AMY ROMAKER ---------------------------------------- Secretary EX-10.1 6 1993 STOCK INCENTIVE PLAN 1 Exhibit 10.1 STOCK INCENTIVE PLAN 1. Purpose of Plan. The purpose of this Plan is to enable the Corporation and its subsidiaries to attract, retain and motivate their employees and certain other eligible individuals by providing incentives related to equity interests. 2. Persons Eligible Under Plan. Any person who is an officer or employee of or consultant or advisor to the Corporation or any of its subsidiaries (an "Eligible Person") shall be eligible for the grant of an Award under this Plan, provided that in the case of a consultant or advisor, such person (directly or through an entity with which he or she is associated) renders or has rendered bona fide services of a nature similar to those services that may be rendered by employees. 3. Stock Subject to Plan. The maximum number of shares of Common Stock of the Corporation (the "Common Shares") that may be issued under this Plan is 277,417 subject to adjustment as provided in Section 7 hereof. Common Shares subject to Award that expire or for any reason are terminated and are not issued, shall again be available for subsequent Awards under the Plan. 4. Administration of Plan. (a) The Committee. This Plan shall be administered by a committee (the "Committee") of the Board of Directors of the Corporation (the "Board") consisting of two or more directors, each of whom is a "disinterested person", as such term is defined in Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). (b) Powers of the Committee. Subject to the express provisions of this Plan, the Committee shall be authorized and empowered to do all things necessary or desirable in connection with the administration of this Plan, including, without limitation, the following: (i) adopt, amend and rescind rules, regulations and procedures relating to this Plan and its administration or the Awards granted under this Plan; (ii) determine which persons meet the requirements of Section 2 hereof for eligibility under this Plan and to which such persons, if any, Awards will be granted under this Plan; (iii) grant Awards to persons determined to be Eligible Persons and determine the terms and conditions of such Awards, including but 2 not limited to the number of Common Shares issuable pursuant thereto, the times (not more than ten years after the initial Award) at which and conditions upon which Awards become exercisable or vest or shall expire or terminate, the fair market value of the Common Shares or Awards from time to time and/or the manner in which it will be determined, and (subject to applicable law) the consideration, if any, to be paid upon receipt, exercise or vesting of Awards; (iv) determine whether, and the extent to which, adjustments are required pursuant to Section 7 hereof; (v) interpret and construe this Plan and the terms and conditions of any Award granted hereunder, whether before or after the date set forth in Section 6; and (vi) determine the circumstances under which, consistent with the provisions of Section 8, any outstanding Award may be amended. (c) Specific Committee Responsibility and Discretion Regarding Awards. Subject to the express provisions of this Plan, the Committee shall determine all of the terms and conditions of each Award granted under this Plan, which terms and conditions may include provisions that: (i) permit the recipient of such Award, including but not limited to any recipient who is a director or officer of the Corporation, to pay the purchase price of the Common Shares or other securities issuable pursuant to such Award, or any applicable tax withholding obligation upon such issuance or in respect of such Award or Shares, in whole or in part, by any one or more of the following: (A) the delivery of previously owned shares of capital stock of the Corporation (including shares acquired as or pursuant to Awards) or other property, (B) a reduction in the amount of Common Shares or other property otherwise issuable pursuant to such Award, or (C) the delivery of a promissory note, the terms and conditions of which shall be determined by the Committee; (ii) accelerate the receipt of benefits pursuant to such Award upon the occurrence of specified events, including, without limitation, a change of control of the Corporation, an acquisition of a specified percentage 2. 3 of the voting power of the Corporation, the dissolution or liquidation of the Corporation, a sale of substantially all of the property and assets of the Corporation or an event of the type described in Section 7 hereof, or in other circumstances or upon the occurrence of other events as deemed appropriate by the Committee; (iii) qualify such Award as an Incentive Stock Option; (iv) extend the exercisability or term of any or all outstanding Awards, change the price of any or all outstanding Awards or otherwise change previously imposed terms and conditions, in the specified events described in clause (ii) above or in other circumstances or upon the occurrence of other events as deemed appropriate by the Committee, in each case subject to Section 8; (v) authorize the conversion, succession or substitution of outstanding Awards upon the occurrence of an event of the type described in Section 7, or in other circumstances or upon the occurrence of other events as deemed appropriate by the Committee; and/or (vi) provide for automatic grants of Awards or successive Awards. (d) Binding Determinations. Any action taken by, or inaction of, the Corporation, the Board or the Committee relating or pursuant to this Plan shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. No member of the Board or officer of the Corporation shall be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. (e) Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the Board and the Committee may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer or agent of the Corporation shall be liable for any such action or determination taken or make or omitted in good faith. (f) Delegation. The Committee may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Corporation. 5. Awards. (a) Types of Awards. The Committee, on behalf of the Corporation, is authorized under this Plan to enter into any type of arrangement with an 3. 4 Eligible Person that is not inconsistent with the provisions of this Plan and that by its terms, involves or might involve the issuance of (i) Common Shares, (ii) an option, warrant, convertible security, stock appreciation right or similar right with an exercise or conversion privilege at a fixed or variable price related to the Common Shares or other equity securities of the Corporation and/or the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any similar security with a value derived from the value of the Common Shares or other equity securities of the Corporation. The authorization of any such arrangement (including any benefits described in Section 5(d)) is referred to herein as the "grant" of an "Award." The Committee may authorize any officer (other than the particular recipient) to execute any or all agreements memorializing any grant of an Award by the Committee under this Plan. All Awards shall be evidenced by a writing executed on behalf of the Corporation and, if required by the Committee, by the recipient of the Award. (b) Form of Awards. Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares, and an Award may consist of one such security or benefit, or two or more of them in any combination or alternative. (c) Price; Consideration. Common Shares may be issued pursuant to an Award for any lawful consideration as determined by the Committee, including, without limitation, services rendered by the recipient of such Award, but shall not be issued for less than the minimum lawful consideration. (d) Cash Awards; Loans. The Committee shall have the express authority to create, add or include a cash payment or benefit under this Plan, whether in lieu of, in addition to or as an Award or as a component of another type of Award, and to make or authorize loans to finance, or to otherwise accommodate the financing of, the acquisition or exercise of an Award. (e) Transfer Restrictions. If Section 16 of the Exchange Act is or becomes applicable to the Corporation and its directors and officers, any Award that constitutes a derivative security (as defined in Rule 16a-1(c) under the Exchange Act) and that is granted to or held by a person subject to Section 16 of the Exchange Act shall be subject to the restrictions on exercisability and on transfer set forth in or pursuant to Rule 16b-3, which restrictions are incorporated herein by this reference. (f) Tax Withholding. Upon any exercise, vesting or payment of any Award, the Corporation shall have the right at its option to (i) require the Eligible Person (or his or her personal representative or beneficiary, as the case may be) to provide 4. 5 for payment of the amount of any taxes which the Corporation or any subsidiary may be required to withhold with respect to such transaction or (ii) deduct from any amount payable in cash the amount of any taxes which the Corporation or any subsidiary may be required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then fair market value, to satisfy such withholding obligation. 6. Term of Plan. No award shall be granted under this Plan after September_____, 2003. Although Common Shares and/or cash may be issued after that date pursuant to Awards granted prior to such date, no Common Shares or cash shall be otherwise issued under this Plan after such date. Notwithstanding the foregoing, any Award granted prior to such date may be amended after such date in any manner that would have been permitted prior to such date, except that no such amendment except for an adjustment under Section 7 shall increase the number of shares to, comprising or referenced in such Award. 7. Adjustments. If (a) the outstanding securities of the class then subject to this Plan (the "outstanding shares")(1) are increased, decreased, exchanged or converted as a result of a stock split, reverse stock split, stock dividend, or the like or (2) are exchanged for or converted into cash, property or a different number or kind of securities (or if cash, property or securities are distributed in respect of the outstanding shares) as a result of a reorganization, merger, consolidation, recapitalization, restructuring or reclassification, or (b) substantially all of the property and assets of the Corporation are sold, or (c) the holders of the outstanding shares receive an extraordinary distribution in cash, property or securities, then, unless the terms of such transaction shall otherwise provide, the Committee shall make equitable, appropriate and proportionate adjustments in (x) the number and type of shares or other securities or cash or other property that may be acquired pursuant to Incentive Stock Options and other Awards previously granted under this Plan, and (y) the maximum number and type of shares or other securities that may be issued pursuant to Incentive Stock Options and other Awards thereafter granted under this Plan, and (z) such other terms as necessarily are affected by such event. 8. Amendment and Termination of Plan and Awards. The Board may amend or terminate this Plan at any time and in any manner. No amendment or termination of the Plan or change in or affecting any outstanding Award shall deprive the recipient, without the consent of such recipient, of any of his or her material rights or benefits under or with respect to the Award. Adjustments contemplated by Section 7 shall not be deemed to constitute a change requiring such consent. 5. 6 9. Effective Date of Plan. This Plan shall be effective as of September 7, 1993; provided, however, that no Common Shares may be issued under this Plan until it has been approved by the holders of at least a majority of the voting power of the Corporation. 10. Legal Issues. (a) Compliance and Choice of Law; Severability. This Plan, the granting and vesting of Awards under this Plan and the issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. This Plan, the Awards, all documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan (subject to Section 10(b)) shall continue in effect. (b) Plan Construction. It is the intent of the Corporation that this Plan and Awards hereunder satisfy and be interpreted in a manner that in the case of recipients who are or may be subject to Section 16 of the Exchange Act ("Section 16 Persons") satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such Section 16 Persons in the circumstances, such provision shall be deemed void. (c) Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Shares, under any other plan or authority. 6. EX-10.2 7 FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.2 STOCK OPTION AGREEMENT THIS AGREEMENT, dated as of ______________, 1998 is by and between Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), and _________________________ (the "Employee"). W I T N E S S E T H WHEREAS, pursuant to its Stock Incentive Plan (the "Plan"), the Corporation has granted to the Employee effective as of the date hereof (the "Award Date") a non-qualified stock option to purchase all or any part of ____ authorized but unissued or treasury shares of Common Stock of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 2. Grant of Option. This Agreement evidences the Corporation's grant to the Employee of the right and option to purchase, on the terms and conditions set forth herein and in the Plan, all or any part of an aggregate of ___ shares of Common Stock at the price of $2,265.00 per share (the "Option"), exercisable from time to time, subject to the provisions of this Agreement and the Plan, prior to the close of business on the tenth anniversary of the Award Date (the "Expiration Date"). 3. Exercisability of Option. Subject to the provisions of Sections 6 and 7, the Option shall become exercisable in two equal annual installments of ___ shares on the second and third anniversaries of the Award Date. Said installment shall be cumulative and, following the third anniversary, the Option may be exercised in whole or in part, from time to time, until its expiration or earlier termination. To the extent the Employee does not in any period purchase all or any part of the shares to which the Employee is entitled, the Employee has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. 4. Method of Exercise of Option. The Option shall be exercisable by the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment made: (a) in cash or by check payable to the order of the Corporation; (b) by exchange of Common Stock of the Corporation, then having been owned by the Employee for at least six months, having a then fair market value (as determined by the Committee) equal to such purchase price; 2 (c) to the extent permitted by the Committee, by reduction in the number of shares of Common Stock deliverable upon exercise by that number of shares which have a then fair market value (as determined by the Committee) equal to such purchase price; or (d) in any combination of the consideration permitted by the foregoing subsections; Subject to such further limitations, rules and procedures as the Committee may from time to time establish as any non-cash payment. 5. Employment. Nothing contained herein or in the Plan shall confer upon the Employee any right with respect to the continuation of employment by the Corporation or any subsidiary or interfere in any way with the right of the Corporation or of any subsidiary at any time to terminate such employment. 6. Effect of Termination of Employment or Death; Change in Subsidiary Status. The Option and all other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Employee ceases to be employed by either the Corporation or any subsidiary, except that: (a) if the Employee terminates by reason of permanent and total disability (as determined by the Committee), Employee may at any time within a period of one year after such termination exercise the Option to the extent the Option was exercisable at the date of such termination; (b) if the Employee dies while in the employ of Corporation or any subsidiary, or within one year after a termination described in subsection (a) of this Section 6, or within three months after a termination described in subsection (c) of this Section 6, then the Option may be exercised within a period of one year after the Employee's date of death by the Employee's beneficiary to the extent the Option was exercisable on the date of the Employee's death (or such earlier termination); (c) if the Employee terminates for any other reason, Employee may at any time within a period of three months after such termination exercise the Option to the extent the Option was exercisable at the date of such termination; provided, however, that in no event may the Option be exercised by anyone under this Section or otherwise after the Expiration Date. If employee is employed by an entity which ceases in be a subsidiary, such event shall be deemed for purposes of this Section 6 to be a termination of Employee's employment described in subsection (c). Absence from work caused by military service or authorized sick leave shall not be considered as a termination of employment for purposes of this Section. 2 3 7. TERMINATION OF OPTION UNDER CERTAIN EVENTS. Notwithstanding the provisions of Section 3 hereof, upon (i) the dissolution, liquidation or sale of all or substantially all of the business, properties and assets of the Corporation, (ii) any reorganization, merger or consolidation in which the Corporation does not survive (iii) any reorganization, merger, consolidation or exchange of securities in which the Corporation does survive and any of the Corporation's stockholders have the opportunity to receive cash, securities of another corporation and/or other property in exchange for their shares of capital stock of the Corporation, or (iv) any acquisition of beneficial ownership of more than 50% of the Corporation's then outstanding shares of capital stock (each of the events described is clauses (i), (ii), (iii) and (iv) is referred to herein individually as an "Extraordinary Event"), the Option shall terminate. In such event, the Employee shall have the right until 10 days before the effective date of the Extraordinary Event to exercise, in whole or in part, the Option, to the extent that the Option would be vested and exercisable two years after the effective date of the Extraordinary Event. 8. NON-TRANSFERABILITY OF OPTION. During the Employee's lifetime, this Option and any other rights hereunder may be exercised only by the Employee of the Employee's duly appointed guardian or legal representative. This Option and such rights shall not be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of in any way (whether by operation of law or otherwise); provided, however, that nothing in this Section 8 shall prevent transfers by will or by the applicable laws of descent and distribution or pursuant to a "qualified domestic relations order" as defined by the Internal Revenue Code or 1986, as amended. 9. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal office, to the attention of the Corporate Secretary and the Employee at the address given beneath the Employee's signature hereto, or at such other address as either party may hereafter designate in writing to the other. 10. EMPLOYEE NOT A STOCKHOLDER. Neither the Employee nor any other person entitled to exercise the Option shall have any of the rights or privileges a stockholder of the Corporation as to any shares of Common Stock not actually issued and delivered prior to delivery of the exercise price and satisfaction of all other conditions precedent to the due exercise of the Option and delivery of shares. 11. EFFECT OF AWARD AGREEMENT. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Corporation except to the extent the Committee determines otherwise. 12. LAWS APPLICABLE TO CONSTRUCTION. The Option has been granted, executed and delivered as of the day and year first above written, and the interpretation, performance and enforcement of the Option and this Agreement shall be governed by the laws of the State of California. 13. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that the Option is being acquired by the Employee in good faith for the Employee's own personal account, for investment purposes only, and not with a view to the 3 4 distribution, resale or other disposition thereof. The Employee agrees that the Employee will exercise the Option with any then present intent to sell or otherwise dispose of all or any part of the Common Stock acquired thereby. The Employee acknowledges that the Corporation may issue Common Stock upon the exercise of the Option without registering such Common Stock under the Securities Act of 1933, as amended (the "Act"), on the basis of certain alternative exemptions from such registration requirement. Accordingly, the Employee agrees that the Employee's exercise of the Option may be conditioned upon the Employee's delivery to the Corporation of an investment certificate including such representations and undertakings as the Corporation may reasonably require in order to assure the availability of such exemptions, including a representation that the Employee is acquiring the Common Stock for investment and not with a present intention of selling or otherwise disposing thereof and an agreement by the Employee that the share certificate evidencing the Common Stock may bear a legend indicating such non-registration under the Act and the resulting restrictions on transfer. 14. PLAN. The Option and all rights of Employee thereunder are subject to, and the Employee agrees to be bound by, all of the terms and conditions of the provisions of the Plan, incorporated herein by this reference. The Employee acknowledges receipt of a copy of the Plan, which is made a part hereof by this reference, and agrees to be bound by the terms thereof. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights in the Employee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Committee so conferred by the appropriate action of the Committee under the Plan after the date hereof. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Employee has hereunto set Employee's hand. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ___________________________ Robert C. Goodell President and Chief Executive Officer EMPLOYEE ___________________________ 4 EX-10.3 8 EMPLOYMENT AGRMT REGISTRANT & ROBERT GOODELL 1 EXHIBIT 10.3 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated February 6, 1996, is made and entered into among Financial Pacific insurance Groups, Inc., a Delaware corporation. Financial Pacific Insurance Company, a California corporation, and Financial Pacific Insurance Agency, a California corporation (Financial Pacific Insurance Group, Financial Pacific Insurance Company and Financial Pacific Insurance Agency are hereinafter referred to collectively as "Companies" and singularly as "Company"), and Robert C. Goodell ("Executive"). RECITALS: A. Each of the Companies desires to employ the Executive as its Chief Executive Officer. B. The Executive desires to commit himself to serve the Companies on the terms herein provided. NOW THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below the parties hereto agree as follows: 1. Employment. (a) Subject to the provisions of Section 6, including Section 6(d) which permits the Companies to terminate the Executive for any reason at any time, the Companies shall employ the Executive and the Executive shall enter the employ of the Companies, for the period set forth in this Section 1 unless sooner terminated in accordance with the provisions of this Agreement, in the positions (or comparable positions) set forth in Section 2 and upon the other terms and conditions herein provided. The initial term of employment under this Agreement (the "Initial Term") shall be for the period beginning on the date of this Agreement and ending on February 6, 1997, unless earlier terminated as provided in Section 6. (b) At the expiration of the Initial Term and each anniversary thereafter, the term of this Agreement shall automatically be extended for an additional year ("Extension Term") unless any party shall have given written notice to the other part at least 90 days prior to the end of the Initial Term or the Extension Term, as the case may be, that it does not desire to extend the term of this Agreement. If the Executive's employment term under this Agreement is extended from an Extension Term, it shall thereafter or during any Extension Term be terminable (other than upon expiration) only as provided in Section 6. References herein to the "Term of Employment" of this Agreement shall refer to both such Initial Term and any Extension Term. 2. Position and Duties. (a) During the Term of Employment, the Executive shall serve in the following positions: (i) the Chief Executive Officer of each of the Companies and shall have such duties, functions, responsibilities and authority as are consistent with the Executive's position as the senior executive officer in charge of the general management, business and affairs with the Companies, and (ii) a Director of the Board of Directors of the Companies (collectively, "Boards," singularly, "Board"); provided, however, the Executive shall have no right to serve on the Boards and the stockholders of each Company shall retain all rights to remove Executive from its Board at any time in accordance with the Company's bylaws. 2 (b) During the Term of Employment, the Executive shall be a full-time employee of the Companies and shall devote substantially all of his business time and attention to the performance of his duties to the Companies. 3. Employment contract Dated September 7, 1993 Superseded. This Agreement supersedes the employment agreement made and entered into among M.L. Oates Insurance Company, Property Managers Insurance Services and the Executive. 4. Place of Performance. In connection with his employment during the Term of Employment, the Executive shall be based at the principal executive offices of the Companies located in Sacramento, California. Notwithstanding the foregoing, Executive shall undertake normal business travel on behalf of the Companies, the reasonable expenses of which shall be paid by the Companies. 5. Compensation and Related Matters. (a) Annual Base Salary. The Executive shall receive a base salary ("Annual Base Salary") at a rate of $225,000 per annum for the Initial Term, and thereafter at a rate to be negotiated between the Executive and the Boards, but in no event less than $225,000 per annum. The Annual Base Salary shall be payable in accordance with the Company's normal payment practices but, in no event, shall such Annual Base Salary be payable less frequently than monthly. (b) Benefits. During the term of Employment, the Executive shall be entitled to: (i) reimbursement by the Companies of lease payments (at a maximum of $800 per month) and maintenance, fuels, insurance and other incidental expenses of a domestic luxury car: (ii) participate in or receive benefits under any employee benefit plan or other arrangement including, but not limited to, any medical, dental, retirement, disability, life insurance, sick leave and vacation plans or arrangements made available by the Companies to any of their employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans or arrangements; and (iii) other benefits to be negotiated between the Boards and the Executive. (c) Bonus Compensation. In the absolute discretion of the Boards, the Executive may receive a bonus in an amount up to 50% of his Annual Salary ("Bonus Compensation"). (d) Other Business Expenses. The Companies shall promptly reimburse the Executive for all reasonable travel and other business expenses incurred by the Executive in the performance of his duties under this Agreement. (e) Vacation and Sick Time. The Executive shall be entitled to four weeks vacation each calendar year during the Term of his Employment. The Executive shall be entitled to receive two weeks sick leave each calendar year during the term of his employment. 6. Termination. The Executive's employment hereunder may be terminated by the Companies or the Executive, as applicable, under the following circumstances: 2 3 (a) Death. The Executive's employment hereunder shall terminate upon his death. In the case of the Executive's death, the Companies shall pay to the Executive's beneficiaries or estate, as appropriate, (i) promptly after the Executive's death, the unpaid Annual Basic Salary to which he is entitled pursuant to subsection 5(a) through the date of his termination, and (ii) as soon as practicable after the close of the Companies' fiscal year in which the Executive's death occurs, a prorated portion of any unpaid Bonus Compensation determined by the Boards. This subsection 6(a) shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to the Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for the Executive's benefit. (b) Disability. (i) If the Companies determine in good faith that the Executive has incurred a Disability (as defined below) during the Term of Employment, the Companies may give the Executive written notice of their intention to terminate the Executive's employment. In such event, the Executive's employment with the Companies shall terminate effective on the 30th day after receipt of such notice by the Executive, provided that within the 30 days after such receipt, the Executive shall not have returned to full-time performance of his duties. The Executive shall continue to receive his Annual Base Salary and benefits until the date of termination. In the case of the Executive's Disability, the Companies shall pay to the Executive (a) promptly after the Executive's termination, the unpaid Annual Base Salary to which he is entitled pursuant to subsection 5(a) through the Executive's termination, and (b) as soon as practicable after the close of the fiscal year in which the Executive's termination occurs, a prorated portion of any unpaid Bonus Compensation determined by the Boards. In addition, the Companies shall pay the Executive severance benefits as set forth in Section 7. This subjection 6(b) shall not limit the entitlement of the Executive, his estate, or beneficiaries to any disability or other benefits then available to the Executive under any disability insurance or other benefit plan or policy which is maintained by the Companies for the Executive's benefit. (ii) For the purpose of this section "Disability" shall mean the Executive's failure to perform his duties to the Companies on a full-time basis for a total of 12 consecutive weeks or any 16 weeks during any 12-month period as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Companies and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (c) By the Companies. The Companies may terminate the Executive's employment hereunder for any reason (with or without cause) upon 30 days written notice. In the event the Companies terminate the Executive's employment, the Companies shall pay to the Executive (i) promptly after the Executive's termination, the unpaid Annual Base Salary to which he is entitled pursuant to subsection 5(a) through the Executive's termination, and (ii) as soon as practicable after the close of the fiscal year in which the Executive's termination occurs, a prorated portion of any unpaid Bonus Compensation determined by the Boards. In addition, the Companies shall pay the Executive severance benefits as set forth in Section 7. (d) Resignation. The Executive may resign his employment upon 30 days written notice to the Companies. In the case of the Executive's resignation, the Companies shall promptly pay to the Executive (or his representative) the unpaid Annual Base Salary to which he is entitled pursuant to subsection 5(a) through the date the Executive is terminated. The Executive shall be entitled to no other compensation. (e) Mutual Agreement. The Executive's employment may be terminated by mutual agreement of the Executive and the Companies at any time. 3 4 7. Severance Benefits. (a) Termination. If the Executive's employment shall be terminated pursuant to Section 6(b) or 6(c) or if, pursuant to Section 1(b), the Companies shall have given written notice to the Executive that they do not desire to extend the term of this Agreement, the Companies shall pay the Executive severance compensation which shall consist of monthly payment in an amount equal to the Annual Base Salary, provided monthly, which payments shall commence on or after the first day of the first full calendar month following such termination and shall continue until the expiration of the last day of the 12th full calendar month after the termination date (the "Severance Period"). In addition, the Companies shall continue to provide the Executive and his dependents with all medical and dental benefits provided pursuant to Section 5(b)(ii) and (without duplication and to the extent applicable) Section 5(d) for the duration of the Severance Period. (b) Survival. The expiration or termination of the Term of Employment shall not impair the rights or obligations of any party hereto which shall have accrued hereunder prior to such expiration. (c) Mitigation of Damages. In the event of any termination of the Executive's employment by the Companies or the Executive, the Executive shall not be required to seek other employment to mitigate damages, and any income earned by the Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this Agreement. 8. Resignation Agreement and General Release. The Executive has provided the Companies with copies of the Resignation Agreement and General Release between the Executive, Amwest Surety Insurance Company, Amwest Insurance Group, Inc., Far West Insurance Company and their affiliates, officers, executives, managers, employees, partners and agents dated June 2, 1993 which may limit the businesses which Financial Pacific and the Executive may undertake. 9. Confidential Information; Nonsolicitation. (a) During the Term of Employment and at all times thereafter, the Executive agrees to hold in confidence and not disclose to any person or entity or use for his own benefit, any and all information regarding the business systems or strategies, advertising or promotions plans or programs, or merchandising methods of the Companies or plans or proposals for development of market areas or other business development or expansion concepts, ideas or strategies of the Companies, or any financial, manufacturing or marketing data, technique, process, formula, developmental or experimental work, work in process, business methods, trade secrets (including, without limitation, any customer list or lists of suppliers), or any other secret or confidential information relating to the business plans, products, services, customers, sales or business affairs of the Companies or its affiliates. Upon termination of employment, the Executive shall deliver to the Companies all documents, records, notebooks, work papers, and all similar repositories containing any of the foregoing information, whether prepared by the Executive, the Companies or anyone else. Without limiting the generality of the foregoing, the Executive shall not disclose the customer list of the Companies or any list of suppliers of the Companies, nor will be advise or aid anyone in doing business with customers of the Companies or suppliers to the Companies or in replicating the business methods or systems of the Companies. (b) For a period ending 36 months after termination of employment, Executive shall not solicit any employees of the Companies to become employed by Executive or by any subsequent employer of Executive. 4 5 10. Disputes. (a) Any dispute or controversy arising under, out of, in connection with or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association, and judgment upon the award may be entered into any court having jurisdiction thereof. (b) If any legal or any arbitration or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. 11. Indemnification. (a) Financial Pacific Insurance Company and Financial Pacific Insurance Agency shall execute an indemnity agreement in the form attached as Exhibit A. (b) Financial Pacific Insurance Group shall execute an indemnity agreement in the form attached as Exhibit B. 12. Binding on Successors. This Agreement shall be binding upon and inure to the benefit of the Companies, the Executive and their respective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable. 13. Governing Law. This Agreement is being made and executed and is intended to be performed in the State of California and shall be governed, construes, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. 14. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. Notices. Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: If to Financial Pacific Insurance Group: Robert C. Goodell Financial Pacific Insurance Group 8583 Elder Creek Road Suite 100 Sacramento, CA 95828 5 6 With copies to: FinPac Partners c/o Riordan, Lewis & Hadon California Plaza, 29th Floor 300 South Grand Avenue Los Angeles, California 90071 Attn.: Patrick C. Haden If to Financial Pacific Insurance Company: Robert C. Goodell Financial Pacific Insurance Company 8583 Elder Creek Road Suite 100 Sacramento, CA 95828 With copies to: FinPac Partners c/o Riordan, Lewis & Hadon California Plaza, 29th Floor 300 South Grand Avenue Los Angeles, California 90071 Attn.: Patrick C. Haden If to Financial Pacific Insurance Agency: Robert C. Goodell Financial Pacific Insurance Agency 8583 Elder Creek Road Suite 100 Sacramento, CA 95828 With copies to: FinPac Partners c/o Riordan, Lewis & Hadon California Plaza, 29th Floor 300 South Grand Avenue Los Angeles, California 90071 Attn.: Patrick C. Haden If to the Executive: ** or at any other address any party shall have specified by notice in writing to the other parties. 16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 17. ENTIRE AGREEMENT. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of the Executive by the Companies and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative or other legal proceeding to vary the terms of this Agreement. 6 7 18. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, approved by the Boards and signed by the Executive and the Companies. By an instrument in writing similarly executed, the Executive of the Companies may waive compliance by the other party or parties with any provision of this Agreement that such other party was or is obligated to comply with or perform; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy or power hereunder shall preclude any other further exercise of any other right, remedy or power provided herein or by law or in equity. 19. No Effect on Other Contractual Rights. Notwithstanding Section 7, the provisions Agreement, and any other payment provided for hereunder, shall not reduce any amounts otherwise payable to the Executive under any other agreement between the Executive and the Companies, or in any way diminish the Executive's right under any employee benefit plan, program or arrangement of the Companies to which he may be entitled as an employee of the Companies. 20. No Inconsistent Action. The parties hereto shall not voluntarily undertake or fail to undertake any action or course of action inconsistent with the provisions or essential intent of this Agreement. Furthermore, it is the intent of the parties hereto to act in a fair and reasonable manner with respect to the interpretation and application of the provisions of this Agreement. 21. Medical Exam. During each year of the Term of Employment, Executive shall obtain a physical examination at the expense of the Companies and cause the examining physician to provide a detailed written report of such examination, which report Executive shall provide to the Board not later than March 31 of each year. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. EXECUTIVE /s/ ROBERT C. GOODELL ------------------------------ ROBERT C. GOODELL 8538 Elder Creek Road Suite 100 Sacramento, CA 95828 FINANCIAL PACIFIC INSURANCE GROUP, INC. a Delaware Corporation By: /s/ ROBERT C. GOODELL ---------------------------- 8 FINANCIAL PACIFIC INSURANCE COMPANY, a California Corporation By: [SIG] -------------------------------- FINANCIAL PACIFIC INSURANCE AGENCY, a California Corporation By: [SIG] -------------------------------- 8 9 [CELERITY PARTNERS LETTERHEAD] July 30, 1997 Mr. Robert C. Goodell, President Financial Pacific Insurance Group, Inc. P.O. Box 292220 Sacramento, CA 95829-2220 PERSONAL & CONFIDENTIAL RE: FINANCIAL PACIFIC INSURANCE GROUP, INC. Bob: This will confirm our understanding with respect to the following two compensation issues: 1. Accelerated vesting: All management optionholders shall gain two years of vesting in the event of a sale of the company; and 2. Robert Goodell's annual base salary shall be increased to $250,000, effective July 1, 1997. Call me if you have questions or need additional information. Best regards, /s/ STEPHEN E. ADAMSON Stephen E. Adamson cc: Patrick C. Haden EX-10.4 9 EMPLOYMENT AGREEMENT REGISTRANT & ROBERT KINGSLEY 1 EXHIBIT 10.4 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated February 13, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), Financial Pacific Insurance Company (FPIC), and Financial Pacific Insurance Agency (FPIA), a California corporation (Financial Pacific, FPIC and FPIA are hereinafter referred to collectively as "Companies") and Robert T. Kingsley ("Executive"). RECITALS A. Executive currently serves as Executive Vice President and Chief Operating Officer of FPIC and President of FPIA. Executive's salary is paid by FPIA, but his duties are split between FPIA and FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hard, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Robert T. Kingsley Financial Pacific Insurance Company ** Attn.: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ ROBERT T. KINGSLEY /s/ ROBERT C. GOODELL - ------------------------------------- ------------------------------------- Robert T. Kingsley Robert C. Goodell President & Chief Executive Officer 3 EX-10.5 10 EMPLOYMENT AGREEMENT REGISTRANT AND ED PAOLETTI 1 EXHIBIT 10.5 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated November 14, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and Edward J. Paoletti ("Executive"). RECITALS A. Executive currently serves as Vice President of Underwriting. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section l(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 36 weeks of Executive's then current base salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hard, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Edward J. Paoletti Financial Pacific Insurance Company ** Attn.: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ EDWARD J. PAOLETTI /s/ ROBERT C. GOODELL - -------------------------- ----------------------------------------- Edward J. Paoletti Robert C. Goodell President & Chief Executive Officer 3 EX-10.6 11 EMPLOYMENT AGREEMENT REGISTRANT & WALLACE RASCHER 1 Exhibit 10.6 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated February 14, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and Wallace G. Rascher ("Executive"). RECITALS A. Executive currently serves as Vice President of Marketing of FPIC. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices. Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hand, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Wallace G. Rascher Financial Pacific Insurance Company Attn.: Robert C. Goodell ** P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ WALLACE G. RASCHER /s/ ROBERT C. GOODELL - ---------------------- --------------------- Wallace G. Rascher Robert C. Goodell President & Chief Executive Officer 3 EX-10.7 12 EMPLOYMENT AGREEMENT REGISTRANT & TIMOTHY BLAEDE 1 Exhibit 10.7 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated February 14, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and Timothy N. Blaede ("Executive"). RECITALS A. Executive currently serves as Vice President of Information Services. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.). (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hand, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Timothy N. Blaede Financial Pacific Insurance Company ** Attn: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ Timothy N. Blaede /s/ Robert C. Goodell - ---------------------- ------------------------------ Timothy N. Blaede Robert C. Goodell President & Chief Executive Officer 3 EX-10.8 13 EMPLOYMENT AGRMT REGISTRANT & JOHN HOLLINGSHEAD 1 EXHIBIT 10.8 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated November 14, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and John Hollingshead ("Executive"). RECITALS A. Executive currently serves as General Counsel of FPIC. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current annual base salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of the Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with any of the provisions of the Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hand, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: John Hollingshead Financial Pacific Insurance Company ** Attn.: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ John Hollingshead /s/ Robert C. Goodell - --------------------- --------------------------------------- John Hollingshead Robert C. Goodell President & Chief Executive Officer 3 EX-10.9 14 EMPLOYMENT AGREEMENT REGISTRANT & ARTUR TERNER 1 EXHIBIT 10.9 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated February 14, 1997, is made and entered into among Financial Pacific Insurance Group, Inc. a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and Artur A. Terner ("Executive"). RECITALS A. Executive currently serves as Assistant Vice President and Controller. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principles thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hard, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Artur A. Terner Financial Pacific Insurance Company ** Attn: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ Artur A. Terner /s/ Robert C. Goodell - -------------------------------- ----------------------------------- Artur A. Terner Robert C. Goodell President & Chief Executive Officer 3 EX-10.10 15 EMPLOYMENT AGREEMENT REGISTRANT & CHUCK WARDLAW 1 Exhibit 10.10 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. EMPLOYMENT AGREEMENT THIS AGREEMENT, dated January 1, 1998, is made and entered into among Financial Pacific Insurance Group, Inc., a Delaware corporation ("Financial Pacific"), and Financial Pacific Insurance Company (FPIC), a California corporation (Financial Pacific, and FPIC are hereinafter referred to collectively as "Companies") and Chuck Wardlaw ("Executive"). RECITALS A. Executive currently serves as Vice President of Claims. Executive's salary is paid by FPIC. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the parties hereby agree as follows: (1) Termination: The Executive's employment hereunder may be terminated by the Companies or Executive, as applicable, under the following circumstances. (a) Death: The Executive's employment hereunder shall terminate upon his death. In the case of Executive's death, the Companies shall pay Executive's beneficiaries or estate, as appropriate, the unpaid Annual Base Salary to which he is entitled, through the date of his termination. This subsection shall not limit the entitlement of the Executive's estate or beneficiaries to any death or other benefits then available to Executive under any life insurance or other benefit plan or policy which is maintained by the Companies for Executive's benefit. (b) By the Companies: Companies may terminate Executive's employment hereunder for any reason, (with or without cause) upon 30 days written notice. In the event that Companies terminate Executive's employment, the Companies shall pay to Executive the unpaid Annual Base Salary to which he is entitled through the termination date. In addition, the Companies shall pay Executive severance benefits as set forth in Section 2. (c) Resignation: The Executive may resign his employment upon 30 days written notice to the Companies. Upon Executive's resignation, the Companies shall promptly pay to Executive (or his designated representative) the unpaid Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) to which the Executive is entitled through Executive's termination date. Executive shall be entitled to no other compensation. (d) Mutual Agreement: The Executive's employment may be terminated by mutual agreement of Executive and the Companies at any time. If Executive is terminated by mutual agreement, the severance benefits in Section 2 will apply. 1 2 (2) Severance Benefits (a) Termination: The Executive's employment is terminated pursuant to Section 1(b) or (d), above the Company shall pay Executive severance compensation which shall consist of a lump sum payment representing 1/2 of Executive's then current Annual Base Salary and any other unpaid benefits (vacation, sick, bonus, pension, business expenses, etc.) (b) Mitigation of Damages: In the event of any termination of Executive's employment by the Companies or the Executive, Executive shall not be required to seek other employment to mitigate damages, and any income earned by Executive from other employment or self-employment shall not be offset against any obligations of the Companies to the Executive under this agreement. (3) Disputes (a) Any dispute or controversy arising under, out of, in connection with, or in relation to this Agreement shall, at the election and upon written demand of any party to this Agreement, be finally determined and settled by arbitration in Sacramento, California, in accordance with the rules and procedures of the American Arbitration Association. The judgment as determined through arbitration may be entered in any court having jurisdiction thereof. (b) If any legal action, arbitration, or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief that may be granted. (4) Binding on Successors: This Agreement shall be binding upon and inure to the benefit of the Companies, Executive, and their perspective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributes, devisees, and legatees, as applicable. (5) Governing Law: This Agreement is being made, executed, and is intended to be performed in the State of California and shall be governed, construed, interpreted and enforced in accordance with the substantive laws of the State of California, without regard to the conflict of laws principle thereof. (6) Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 2 3 (7) Notices: Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by hard, telex, telecopy, or certified or registered mail, postage prepaid and addressed to the following address: Chuck Wardlaw Financial Pacific Insurance Company ** Attn.: Robert C. Goodell P.O. Box 292220 Sacramento, CA 95829-2220 IN WITNESS WHEREOF, the parties have executed put addresses inherence this Agreement as of above written. EXECUTIVE FINANCIAL PACIFIC INSURANCE CO. /s/ Chuck Wardlaw /s/ Robert C. Goodell - ----------------- --------------------------------------- Chuck Wardlaw Robert C. Goodell President & Chief Executive Officer 3 EX-10.11 16 RESTRICTED STOCK AGREEMENT 1 Exhibit 10.11 ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT. [Execution Copy] RESTRICTED STOCK AGREEMENT This Restricted Stock Agreement is made as of September 7, 1993 by and among Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), Robert C. Goodell ("RCG") and Suzanne M. Goodell ("SMG"). RCG and SMG are collectively referred to herein as ("Goodell"). RECITALS A. On the date hereof, immediately prior to the transactions referred to below, RCG owns 100% of the outstanding shares of the common stock, $.001 par value (the "Common Stock"), of the Corporation, consisting of 682,284 shares (the "Initial Shares"). B. The parties listed on Schedule 1 attached hereto (the "Purchasers") propose to purchase from the Corporation, and the Corporation proposes to sell to the Purchasers, an aggregate of 3,650,001 shares of the Corporation's Series A Convertible Preferred Stock , $.001 par value (the "Series A Stock"), pursuant to a Series A Convertible Preferred Stock Purchase Agreement of even date herewith by and among the Corporation and the Purchasers (the "Purchase Agreement"). C. RCG, SMG and the trustees of their respective Individual Retirement Accounts propose to purchase from the Corporation, and the Corporation proposes to sell to such persons, an aggregate of 500,000 additional shares of Common Stock (the "New Shares") on the terms and conditions set forth in this Agreement. The New Shares consist of the following (and any shares issued in exchange for or in connection with the following): Number of Record Holder Shares ------------- ------ 79,000 California Central Trust Bank Corporation, as Trustee #1060000539 FBO Robert C. Goodell ("RCG Trustee") California Central Trust Bank Corporation, 20,500 as Trustee #1060000539 FBO Suzanne M. Goodell ("SMG Trustee") Robert C. Goodell 200,000 Robert C. Goodell and Suzanne M. Goodell 200,300 2 As used hereafter in this Agreement, the term "Restricted Shares" shall mean the Initial Shares and the New Shares. D. The Purchasers, the holders of the Common Stock and the Corporation are entering into a Stockholders Agreement of even date herewith (the "Stockholders Agreement"). The term "Stockholders" as used herein has the meaning as provided from time to time in the Stockholders Agreement. E. Goodell believes that the consummation of the transactions contemplated by the Purchase Agreement will be of financial benefit to the Corporation and accordingly assumes certain duties toward and confers certain benefits upon the Purchasers under this Agreement in satisfaction of one of the Purchasers' closing conditions under the Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. Repurchase Option Upon Failure to Satisfy Performance Standards. (a) Performance Standards. The parties hereby agree upon the performance standard for the annual consolidated net income of the Corporation and its subsidiaries, excluding any extraordinary or nonrecurring gains or losses (net of taxes) (the "Target Annual Net Income"), to be determined in accordance with generally accepted accounting principles ("GAAP") consistently applied, as set forth below:
Target Annual Cumulative Year Net Income Net Income ---- ------------- ----------- January 1, 1994 to December 31, 1994 $ 1,119,000 $1,119,000 January 1, 1995 to December 31, 1995 1,460,000 2,579,000 January 1, 1996 to December 31, 1996 2,124,000 4,703,000 January 1, 1997 to December 31, 1997 2,744,000 7,447,000 January 1, 1998 to December 31, 1998 3,698,000 11,145,000
However, in the event the Board of Directors of the Corporation (the "Board") elects to determine a more conservative investment policy for the Corporation and its insurance subsidiary than is in effect on the date hereof, then the Target Annual Net Income, as set forth above, shall be adjusted as the Board and RCG shall reasonably agree in good faith to account for the resulting change in investment income. In addition, if the Corporation conducts a public offering of its Common Stock that would require the automatic conversion of the outstanding shares of Series A Stock into Common Stock pursuant to the Certificate of Designations of Series A Convertible Preferred Stock of the Corporation, then 2. 3 the Target Annual Net Income shall be adjusted as the Board and RCG shall reasonably agree in good faith to account for the resulting change in investment income. (b) Annual Designation of Exempt Shares. The parties hereby agree that up to 20% of the original Initial Shares shall be eligible to be converted into shares exempt from the repurchase option described in subparagraph (c) below ("Exempt Shares") each calendar year; provided, however, that all of the Initial Shares shall be converted into Exempt Shares upon the consolidation or merger of the Corporation with or into another corporation, the sale or conveyance of all or substantially all of the assets of the Corporation or a sale of all or substantially all of the capital stock of the Corporation (a "Sale Transaction"). After each calendar year end, upon the receipt of the Corporation's audited consolidated financial statements, the Board shall determine the percentage of the Target Annual Net Income achieved by the Corporation for such calendar year. For each calendar year, if the Corporation achieves: (i) 100% or more of the Target Annual Net Income for such calendar year, then the entire eligible percentage of the Initial Shares shall become Exempt Shares; (ii) less than 80% of the Target Annual Net Income for such calendar year, then no Initial Shares shall become Exempt Shares; (iii) 80% of the Target Annual Net Income for such calendar year, then 80% of the Initial Shares shall become Exempt Shares; and (iv) greater than 80%, but less than 100%, of the Target Annual Net Income for such calendar year, then a pro rata portion of the eligible percentage of Initial Shares shall become Exempt Shares; provided, however, that if the Corporation's cumulative net income on a consolidated basis, excluding any extraordinary or nonrecurring gains or losses (net of taxes), determined in accordance with GAAP consistently applied, from January 1, 1994 to the end of such calendar year is equal to or greater than the amount of Cumulative Net Income set forth above, then the portion of any eligible Initial Shares which were not converted into Exempt Shares in any prior calendar year shall be converted into Exempt Shares. Those Initial Shares that have become Exempt Shares pursuant to this subparagraph (b) shall remain Exempt Shares regardless of the future performance of the Corporation. Notwithstanding the foregoing, if RCG is employed by the Corporation on December 31, 2001, then all of the Initial Shares on such date shall be converted into Exempt Shares. Upon any Date of Determination, as hereinafter defined, the performance standards set forth in this subparagraph (b) shall be applied to the most recently completed calendar quarter and in such a manner as to give RCG the benefit of any partial year's 3. 4 performance by the Corporation, and such performance standards shall be prorated accordingly. For purposes of this Section 2, the term "Determination Date" shall mean the first date as of which any of the following occurs; (a) the termination of RCG's employment with the Corporation for any reason, (b) a Sale Transaction or (c) December 31, 1998. (c) Repurchase Upon Determination Date. As of the Determination Date, the Corporation shall have the right to repurchase for cancellation all Initial Shares that have not been converted into Exempt Shares, as follows: (i) Corporation's Repurchase Option. The Corporation shall have the option (the "Corporation's Repurchase Option") to purchase for a period of 60 days after the Determination Date any or all of the Initial Shares at the Repurchase Price (as hereinafter defined). Should the Corporation fail to purchase any or all of the Initial Shares which it is entitled to purchase pursuant to the Corporation's Repurchase Option, the balance of the Initial Shares shall become Exempt Shares. The Corporation's Repurchase Option may not be assigned by the Corporation, and all Initial Shares repurchased shall be cancelled. (ii) Purchase Price. The purchase price ("Repurchase Price") for any Initial Shares to be purchased pursuant to the Corporation's Repurchase Option shall be $.01 per Incentive Share (as adjusted for Recapitalizations, as hereinafter defined). (iii) Exercise of Repurchase Option. The Corporation's Repurchase Option shall be exercised by the Corporation by delivery (a) within the 60 day period specified in clause (i) to Goodell of a written notice specifying the number of Initial Shares to be purchased and (b) within the same 60 day period, a check in the amount of the Repurchase Price, calculated as provided in clause (iii), for all Initial Shares to be purchased by the Corporation. (iv) Payment by Goodell for Exempt Shares. Goodell shall, on the Determination Date, either (i) pay the Corporation $1.00 times the number of Exempt Shares (as adjusted for Recapitalizations) on such date (the "Cash Amount") or (ii) sell to the Corporation for cancellation at a price of $.01 per share (as adjusted for Recapitalizations) the number of Exempt Shares equal in value to the Cash Amount. 2. Repurchase Option Upon Termination. (a) Corporation's Repurchase Option. In the event that RCG's employment by the Corporation terminates for any reason on or before December 31, 1998, 4. 5 the Corporation shall have the option (the "Corporation's Repurchase Option") to purchase for cancellation for a period of 60 days after the date of such termination (the "Termination Date") any or all of the Restricted Shares (including but not limited to any Exempt Shares) at the Restricted Share Repurchase Price (as hereinafter defined). Should the Corporation fail to purchase any or all of the Restricted Shares which it is entitled to purchase pursuant to the Corporation's Repurchase Option, the Corporation shall promptly give written notice (the "Repurchase Notice") to the other stockholders of the Corporation (the "Other Stockholders") specifying the number of Restricted Shares not purchased by the Corporation. (b) Other Stockholders' Repurchase Option. Within 30 days after delivery of the Repurchase Notice, the Other Stockholders may elect to purchase (the "Other Stockholders' Repurchase Option") the Restricted Shares not purchased by the Corporation pursuant to the Corporation's Repurchase Option (the "Remaining Shares"). Should the aggregate number of shares that the Other Stockholders elect to purchase exceed the number of Remaining Shares the Other Stockholders are entitled to purchase, each Other Stockholder electing to purchase shall be entitled to purchase such proportion of the Remaining Shares as the number of shares of Common Stock held by such Other Stockholder (determined on an as-converted as to the Purchasers) bears to the aggregate number of shares of Common Stock (determined on an as-converted basis) held by all Other Stockholders electing to purchase. The Secretary of the Corporation shall promptly give notice to each Other Stockholder of the number of Remaining Shares which such Other Stockholder may purchase. (c) Purchase Price. The Corporation's Repurchase Option pursuant to Section 1 shall first be applied for the repurchase of Restricted Shares. The purchase price ("Restricted Share Repurchase Price") for any remaining Restricted Shares to be purchased pursuant to the Corporation's Repurchase Option or the Other Stockholders' Repurchase Option set forth in this Section 2 shall equal (i) for New Shares and Restricted Shares that have become Exempt Shares (A) $1.00 per Restricted Share (as adjusted for Recapitalizations) if the Termination Date is on or before September 7, 1994 and (B) the book value (as hereinafter defined) per Restricted Share if the Termination Date is after September 7, 1994 but on or before December 31, 1998; and (ii) for Restricted Shares that are then Incentive Shares, $.01 per Restricted Share (as adjusted for Recapitalizations). The book value of each Restricted Share shall equal the price per share originally paid plus the net income or minus the net loss of the Corporation and its subsidiaries on a consolidated basis, determined in accordance with GAAP consistently applied, and calculated from the date hereof to the end of the fiscal quarter immediately preceding the fiscal quarter in which the Termination Date occurs. In computing net income or net loss for purposes of the preceding sentence, there shall be excluded the amortization of intangibles. (d) Exercise of Repurchase Options. The Corporation's Repurchase Option shall be exercised by the Corporation by delivery (a) within the 60 day period specified in subparagraph (a) to Goodell of a written notice specifying the number of Restricted Shares to be purchased and (b) within the same 60 day period, a check in the 5. 6 amount of the Restricted Share Repurchase Price, calculated as provided in subparagraph (c) for all Restricted Shares to be purchased by the Corporation. The Other Stockholders' Repurchase Option shall be exercised by the Other Stockholders by delivery (a) within the 30 day period specified in subparagraph (b) to Goodell of a written notice specifying the number of Remaining Shares to be purchased and (b) within the same 30 day period, a check in the amount of the Restricted Share Repurchase Price, calculated as provided in subparagraph (c), for all Remaining Shares to be purchased by the Other Stockholders. 3. Put Option. In the event of death of RCG, his estate shall have the right, at its option (the "Put Option"), to require the Corporation to purchase in the manner and on the terms set forth in this Section 3 any Restricted Shares not repurchased by the Corporation or the Other Stockholders pursuant to Section 2. The Purchase Price for the Restricted Shares which the Corporation is required to purchase upon the exercise of the Put Option ( the "Put Price") shall be the same as the Restricted Share Repurchase Price pursuant to Section 2(c) hereof, provided, however, that the Corporation shall not be obligated to repurchase Restricted Shares in a number that would cause the payment to be made for such Restricted Shares to exceed the proceeds of the key man life insurance required under the terms of Section 5.2(k) of the Purchase Agreement, less any portion thereof applied to repay Marvin L. Oates pursuant to the terms of the Note to be issued by the Corporation to Mr. Oates. Notwithstanding the foregoing, the date upon which the Corporation is required to make payment of the Put Price shall be delayed to the extent that and for so long as the Corporation lacks sufficient legally available funds to pay the Put Price or is otherwise prohibited under Delaware or California law from making such payment. 4. Escrow. As security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of any Initial Shares upon exercise of the repurchase options herein provided for, Goodell agrees to deliver to and deposit with the Secretary of the Corporation, or such other person designated by the Corporation ("Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit A, together with the certificate or certificates evidencing the Initial Shares. Said documents are to held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Corporation and Goodell set forth in Exhibit B attached hereto and incorporated by this reference. 5. Restrictions on Transfer of Restricted Shares. The Restricted Shares shall be subject to the restrictions on transfer set forth in that certain Stockholders Agreement dated as of September 7, 1993 among the Corporation, Goodell and the other stockholders named therein (the "Stockholders Agreement"). Each qualified transferee of Restricted Shares must, prior to the acknowledgment and acceptance of such transfer by the Corporation, agree to take and hold such Restricted Shares subject to the terms and conditions of the Stockholders Agreement. 6. 7 6. RIGHTS AS STOCKHOLDER. Subject to compliance with the provisions of this Agreement, Goodell shall exercise all rights and privileges of the registered holder of the Restricted Shares and shall be entitled to receive any dividend or other distribution thereon. 7. NO CONTRACT OF EMPLOYMENT. Goodell acknowledges and agrees that this Agreement shall not be construed to give RCG any right to be retained in the employ of the Corporation or any subsidiary thereof, and that the right and power of the Corporation or any subsidiary to dismiss or discharge RCG (with or without cause) is strictly reserved. 8. RECLASSIFICATION, REORGANIZATION, ACQUISITION OF STOCK,ETC. In the event of any reclassification, reorganization, recapitalization, stock split, stock dividend, combination of shares, or any other change in the capital structure of the Corporation (a "Recapitalization"), all shares of Common Stock obtained as the result thereof by Goodell in addition to, in exchange for or in respect of the Restricted Shares shall be deemed Restricted Shares and shall be subject to this Agreement. Goodell's ownership interest shall be appropriately adjusted in a manner consistent with the Certificate of Designations of Series A Convertible Preferred Stock of the Corporation and the Warrants. 9. SHARES HELD BY IRA TRUSTEES. The Subscription Agreements pursuant to which the shares of Common stock held by RCG Trustee and SMG Trustee were issued provide that such shares shall be subject to the terms of this Agreement. RCG shall cause RCG Trustee to comply with the provisions of this Agreement, including the obligation to sell the shares of Common Stock held by RCG Trustee as provided in this Agreement. SMG shall cause SMG Trustee to comply with the provisions of this Agreement, including the obligation to sell the shares of Common Stock held by SMG Trustee as provided in this Agreement. 10. THIRD PARTY BENEFICIARIES. The Other Stockholders shall be third party beneficiaries of this Agreement. 11. MISCELLANEOUS. (a) FURTHER ASSURANCES. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent if this Agreement. (b) BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of the successors and assigns of the Corporation and the personal representatives, heirs and legatees of Goodell. (c) NOTICES. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail 7. 8 requiring a return receipt, addressed (i) to Goodell at the address set forth on the signature page hereof, (ii) to Financial Pacific Insurance Group, Inc., 8583 Elder Creek Road, Suite 100, Sacramento, California 95828, Attention: President, and (iii) if to an Other Stockholder, at the address shown on SCHEDULE 1 attached hereto. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (d) AMENDMENTS. This Agreement may be amended at any time by the written agreement and consent of the parties hereto. (e) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (f) DISPUTES. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (g) ENTIRE AGREEMENT. This Agreement, including the agreements referred to herein, constitute the entire agreement and understand among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) HEADINGS. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon or description of the contents of any such section. 8. 9 (i) Counterparts. This Agreement may be executed in two or more counterparts, all of which, when taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: /s/ Karen Oldenkamp --------------------------------- Karen Oldenkamp, Secretary /s/ Robert C. Goodell -------------------------------------- Robert C. Goodell Address: ** /s/ Suzanne M. Goodell -------------------------------------- Suzanne M. Goodell Address: ** 9. EX-10.12 17 NOTE & WARRANT PURCHASE AGREEMENT 1 EXHIBIT 10.12 EXECUTION NOTE AND WARRANT PURCHASE AGREEMENT NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement") dated the 28th day of December, 1995, by and among Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), and each of the persons severally listed on the Schedule of Purchasers attached hereto (the "Schedule of Purchasers") - The persons listed on the Schedule of Purchasers are herein referred to collectively as the "Purchasers" and individually as a "Purchaser". W I T N E S S E T H: SECTION 1. Authorization of Notes and Warrants. The Corporation has authorized the issue and sale of (a) $5,000,000 aggregate principal amount of its 12% Senior Notes due January 1, 2001 (the "Notes", such term to include all Notes issued in substitution therefor pursuant to Section 13), to be substantially in the form of Exhibit A, (b) Common Stock Purchase Warrants (the "Warrants", such terms to include any such warrants issued in substitution therefor), to be substantially in the form of Exhibit B, for the purchase of up to 1,505.4 shares (subject to adjustment) of the Corporation's Common Stock, par value $.001 per share (the "Common Stock"), at a purchase price equal to the Warrant Purchase Price (as defined in the Warrants), at any time or from time to time prior to 5:00 p.m., eastern time, on January 1, 2004 (provided, however, that if any exercise of any Warrant would result in a change in "control" of the Corporation, as defined in Section 1215(b) of the California Insurance Code, then such exercise shall be delayed until such time as the approval of the California Department of Insurance is obtained). SECTION 2. Sale and Purchase of Notes and Warrants. The Corporation will issue and sell to the Purchasers and, subject to the terms and conditions hereof, the Purchasers will purchase from the Corporation, at the Closing provided for in Section 3, Notes in the principal amount specified opposite the name of each Purchaser in the Schedule of Purchasers and Warrants for the purchase of the number of shares of Common Stock specified opposite the name of each Purchaser in the Schedule of Purchasers at the aggregate purchase price of 100% of the aggregate principal amount of such Notes. SECTION 3. Closing. (a) The closing of the sale of Notes and Warrants to the Purchasers shall take place at the offices of McCarter & English, Four Gateway Center, 100 Mulberry Street, Newark, New Jersey 07102, at 10:00 a.m., eastern time, on December 28, 1995 or on such other business day thereafter as may be agreed upon by the Corporation and the Purchasers (the "Closing Date"). At the Closing the Corporation shall deliver to 2 the Purchasers (i) the Notes to be sold to each Purchaser, in each case in the form of a single Note dated the Closing Date and registered in the name of such Purchaser, and (ii) the Warrants to be purchased by each Purchaser, in each case in the form of a single Warrant, dated the Closing Date and registered in the name of such Purchaser, against delivery by the Purchasers of immediately available funds in the aggregate amount of the purchase price therefor. If at the Closing the Corporation shall fail to tender such Notes or Warrants to the Purchasers as specified in this Section 3, or any of the conditions specified in Section 6 shall not have been fulfilled or waived, the Purchasers shall, at their election, be relieved of all further obligations hereunder, without thereby waiving any other rights the Purchasers may have by reason of such failure or such nonfulfillment. (b) The Purchasers shall have the right, in the event that the Closing shall not be held by [January 15, 1996], and if such failure to close shall be attributable to any cause or event other than a failure by any Purchaser to perform an action required to be performed by it pursuant to this Agreement, to terminate this Agreement on written notice to the Corporation. SECTION 4. Representations and Warranties of the Corporation. The Corporation represents and warrants that: 4.1 Bring Down. All representations and warranties set forth in the Stock Purchase Agreements dated September 7, 1993 and as of December 30, 1994 (the "Purchase Agreements") are complete and correct as of the date hereof as applied to the transactions contemplated under the Purchase Agreement and to the transactions contemplated by this Agreement, except (i) as affected by the closings of the transactions under the Purchase Agreements and changes in the ordinary course of business since the dates thereof, and (ii) that the Corporation's subsidiary, Financial Pacific Insurance Company, is not in compliance with the rate filing requirements of the California Department of Insurance. 4.2 Organization; Capital Stock. The Corporation is a corporation duly organized and existing and in good standing under the laws of the State of Delaware and has the corporate power to carry on its business as it is now being conducted and as it is contemplated to be conducted. The authorized capital stock of the Corporation consists of 10,000 shares of common stock (the "Common Stock"), and 5,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock"). There are 1232.284 shares of Common Stock and 4,400.001 shares of Preferred stock issued and outstanding which, together, are the only shares of capital stock of the Corporation issued and outstanding on the date hereof. All of the issued and outstanding Common Stock and Preferred Stock of the Corporation is duly authorized, validly -2- 3 issued, fully paid and non-assessable. The Common Stock and the Preferred Stock is owned of record and beneficially as set forth below: Common Stock Robert C. Goodell 1,182.284 David B. Rogers 50 Preferred Stock FinPac Partners 1,466.667 St. Paul Fire and Marine Insurance Company 1,466.667 The Firemark Global Insurance Fund, L.P. 1,466,667
Those persons and entities listed above shall herein be referred to as the "Stockholders". All the issued and outstanding Common Stock and Preferred Stock of the Corporation has been issued and sold in conformity with or under exemption from the requirements of the Securities Act of 1933, as amended, and all other applicable federal and state laws relating to the issuance and sale of securities which are applicable to the corporation or any holder of Common Stock or Preferred Stock. To the knowledge of the Corporation, the Stockholders own their respective shares of Common Stock and Preferred Stock free and clear of any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, charge or other security interest or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any capital lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing) (each, a "Lien"). Except as set forth on Schedule 4.2 and/or as set forth in the Stockholders Agreement dated as of September 7, 1993, as amended on December 28, 1995 (the "Stockholders Agreement"), there are no authorized, outstanding or existing: (a) proxies, voting trusts or other agreements or understandings with respect to the voting of any capital stock of the Corporation; (b) securities convertible into or exchangeable for any capital stock of the Corporation; (c) options, warrants or other rights to purchase or subscribe for any capital stock of the Corporation, or securities -3- 4 convertible into or exchangeable for any capital stock of the Corporation; (d) pre-emptive rights or rights of first refusal of any holder of capital stock, or agreements of any kind relating to the issuance of any capital stock of the Corporation, any such convertible or exchangeable securities or any such options, warrants or rights; or (e) stockholders' or similar agreements with respect to the voting and/or transfer of capital stock, or agreements of any kind that may obligate the Corporation to issue or purchase any of its securities. 4.3 Financial Statements; Undisclosed Liabilities. (a) Beginning with the fiscal year which began January 1, 1993, each of the Corporation and its Subsidiaries have kept proper books of record and account in accordance with generally accepted accounting principles ("GAAP"). The consolidated balance sheets of the Corporation and its Subsidiaries as of December 31, 1993 and December 31, 1994, and the related consolidated statements of income, stockholders equity and cash flows for the fiscal years then ended, all of which have been certified by the Corporation's independent certified public accountants, copies of which have been delivered to Purchaser, have been prepared in accordance with GAAP consistently applied, and present fairly the financial position of the Corporation and its Subsidiaries as of such dates and the results of their operations for such periods. The Corporation has also delivered to Purchasers copies of all audit or review comments and reports thereon or in respect thereof which were received by the Corporation or any such Subsidiary from its independent certified public accountants since the date of incorporation of the Corporation. The Consolidated Balance Sheet of the Corporation and Subsidiaries dated December 31, 1994 is herein called the "Consolidated Balance Sheet," and December 31, 1994 is herein called the "Balance Sheet Date." (b) Except as set forth on Schedule 4.5, as of the date hereof the Corporation does not have any liability of any nature (matured or unmatured, fixed contingent or otherwise) which is, individually or in the aggregate, material to the Corporation and its Subsidiaries on a consolidated basis, and was not reflected on the Consolidated Balance Sheet. 4.4 Taxes. All income, gross receipts, ad valorem, sales, use, franchise, property employment and other tax returns required to be filed by the Corporation or any Subsidiary in any jurisdiction have in fact been filed and are true and correct, and all taxes, assessments, fees and other governmental charges upon the Corporation or any Subsidiary of the Corporation, or upon any of their respective properties, income -4- 5 or franchises, which are due and payable have been paid. The provisions for taxes on the books of the Corporation and each Subsidiary are adequate for all open years, and for its current fiscal period. Neither the Corporation nor any Subsidiary has granted or agreed to any extension of the period of limitations with respect to any open tax year. 4.5 Brokers and Finders. The Corporation has not incurred any obligation or commitment to any person which could give rise to a claim for any finder's, broker's or other middleman's commission or compensation in respect of the transactions contemplated by this Agreement. 4.6 Use of Proceeds. The proceeds to the Corporation from the issuance and sale of the Notes and Warrants shall be invested in the surplus of Financial Pacific Insurance Company, Inc., the wholly-owned subsidiary of the Corporation. 4.7 Intercompany Transactions. Except for (i) Director fees, (ii) Mr. Goodell's salary, (iii) the reimbursement of Mr. Goodell's travel expenses, and (iv) the reimbursement of the Directors' travel expenses, there have been no fees charged since January 1, 1993 by any stockholder, director, officer or affiliate of the Corporation to the Corporation or by the Corporation to any stockholder, director, officer or affiliate of the Corporation, for management, computer, telephone or other services, and no space, facilities, property or assets, personnel and services have been provided to any stockholder, director, officer or affiliate of the Corporation by the Corporation or to the Corporation by any stockholder, director, officer or affiliate of the Corporation (except salaries, directors fees and reimbursements in the ordinary course of business), and (ii) there are no other contracts and transactions between the Corporation and any stockholder, director, officer or affiliate since the date of incorporation of the Corporation. 4.8 Disclosure. No representation or warranty by the Corporation contained herein, nor any information, document, statement, certificate or schedule furnished or to be furnished to Purchasers in connection herewith or with the transactions contemplated hereby, contains, or will on the Closing Date contain, any untrue statement of a material fact or omits, or will on the Closing Date omit, to state a material fact necessary to make the statements contained therein not misleading. Any projections furnished by the Corporation to the Purchasers were made in good faith, have a reasonable basis and were based on reasonable and valid assumptions as at the date that such projections were furnished to Purchasers. The Corporation has disclosed to the Purchasers all material information relating to the Corporation and its Subsidiaries and their respective business and operations, and has supplied to the Purchasers all -5- 6 information and documents requested by the Purchasers in document requests lists previously furnished to the Corporation. SECTION 5. Representations and Warranties of Purchasers. Each Purchaser represents and warrants to the Corporation, individually and not jointly, and only as to itself, that: 5.1 Organization; Corporate Power. If applicable, it is a corporation, limited partnership or limited liability company, as the case may be, duly organized and existing and in good standing under the laws of its state of organization and has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. 5.2 Due Authorization. This Agreement has been duly authorized by all necessary action of such Purchaser. Neither this Agreement nor any of the transactions provided for herein violates any provision of such Purchaser's Certificate of Incorporation or Bylaws, Certificate of Limited Partnership or Partnership Agreement, Certificate of Formation or Operating Agreement, as the case may be, or any agreement by which such Purchaser or any of its properties is bound. This Agreement will, when duly executed and delivered, be binding on such Purchaser, and enforceable against such Purchaser in accordance with its terms. 5.3 Consents. Except for the consent of the Insurance Department of the State of California, no consent, approval or authorization of, or filing, registration or qualification with, any governmental authority or other person on the part of the Purchasers is required in connection with the execution, delivery and performance of this Agreement or the purchase of the Notes and Warrants. 5.4 Investment Intent, etc. It has carefully reviewed the representations concerning the Corporation contained in this Agreement; it is experienced in evaluating and investing in companies engaged in businesses similar to that of the Corporation; it understands that this investment involves substantial risks; it or its representative has made detailed inquiry concerning the Corporation, its proposed business and services, its officers and its personnel; the officers of the Corporation have made available to it any and all written information it has requested; the officers of the Corporation have answered to its satisfaction all inquiries made by it; in making this investment it has relied upon information made available to it by the Corporation; and it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Corporation and it is able to bear the economic risk of that -6- 7 investment. Such Purchaser is acquiring the Notes and Warrants for investment for its own account and not with the view to, or for resale in connection with, any distribution thereof. It understands that the Notes and Warrants, and the shares of Common Stock issuable upon exercise of the Warrants, have not been registered under the Securities Act of 1933 nor qualified under the California Securities Law by reason of specified exemptions therefrom which depend upon, among other things, the bona fide nature of its investment intent as expressed herein. It acknowledges that the Notes and shares of Common Stock issuable upon exercise of the Warrants must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. It has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act, which generally permits limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions. SECTION 6. Conditions Precedent to Obligations of Purchasers. The obligations of the Purchasers under this Agreement are subject to and conditioned upon the satisfaction at or prior to the Closing of each of the following conditions: 6.1 Representations; Performance. The representations and warranties of the Corporation contained in this Agreement and in each other document being executed by the Corporation in connection herewith (the "Ancillary Documents") W shall be true and correct in all material respects at and as of the date hereof, and (ii) shall be true and correct in all material respects on and as of the Closing Date with the same effect as though made on and as of the Closing Date. The Corporation shall have duly performed and complied in all material respects with all agreements and conditions required by this Agreement and each of the Ancillary Documents to be performed or complied with by it prior to or on the Closing Date. The Corporation shall have delivered to the Purchasers a certificate, dated the Closing Date and signed by duly authorized officers of the Corporation to the foregoing effect and with respect to incumbency of officers and such other matters as the Purchasers may reasonably request. 6.2 Corporate Proceedings. (a) All corporate and other proceedings of the Corporation in connection with this Agreement and the Ancillary Documents and the transactions contemplated hereby and thereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to the Purchasers and its counsel, and the Purchasers and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. -7- 8 (b) Waiver of Preemptive Rights. Each stockholder of the Corporation who is not participating in this transaction shall have duly and validly waived his preemptive rights under the Stockholders Agreement insofar as such rights are applicable to this transaction. 6.3 Consents. All consents needed for the execution, delivery and performance of this Agreement and each Ancillary Document shall have been obtained. 6.4 Intentionally omitted. 6.5 certified Documents. The Purchasers shall have received copies of (1) the Certificate of Incorporation of the Corporation, as amended to date, certified by the Secretary of State of the State of Delaware, and (2) the Bylaws of the Corporation, as amended to date, certified by an appropriate officer of the Corporation. 6.6 Legal Proceedings. There shall be no law, rule or regulation and no order shall have been entered and not vacated by a court or administrative agency of competent jurisdiction in any litigation, which (i) enjoins, restrains, makes illegal or prohibits consummation of the transactions contemplated hereby, (ii) requires separation of a significant portion of the assets or business of the Corporation or any Subsidiary after the Closing or (iii) restricts or interferes with, in any material way, the operation of the Corporation or any Subsidiary or their respective businesses or assets after the Closing, materially adversely affects the financial condition, results of operations, properties, assets, business or prospects of the Corporation or any Subsidiary; and there shall be no litigation pending before a court or administrative agency of competent jurisdiction, or threatened, seeking to do, or which, if successful, would have the effect of, any of the foregoing. 6.7 Due Diligence. The Purchasers shall have completed their "due diligence" investigation of the properties, business, prospects, profits and financial condition of the Corporation and its Subsidiaries, and the information acquired by the Purchasers as a result of or in connection therewith shall be satisfactory to the Purchasers in their sole discretion. SECTION 7. Conditions Precedent to Obligations of Corporation. The obligations of the Corporation to deliver the Notes and the Warrants on the Closing Date are subject to and conditioned upon the satisfaction at or prior to the Closing of each of the following conditions: 7.1 Representations; Performance. The representations and warranties of the Purchasers contained in this Agreement (i) shall be true and correct in all material -8- 9 respects at and as of the date hereof and (ii) shall be true and correct in all material respects on and as of the Closing Date with the same effect as though made at and as of such time. The Purchasers shall have duly performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. The Purchasers shall have delivered to the Corporation a certificate, dated the Closing Date and signed by a duly authorized officer, to the foregoing effect. 7.2 Proceedings. All proceedings of the Purchasers in connection with this Agreement and the transactions contemplated hereby and thereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to the Corporation, and its counsel, and the Corporation and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. 7.3 Consents. All consents needed for the execution, delivery and performance of this Agreement shall have been obtained. SECTION 8. Prepayment of Notes. 8.1 Required Payments on Notes. (a) Commencing on January 1, 1996, interest only shall be payable on the Notes and shall be paid in semiannual installments commencing on July 1, 1996, and on every January 1 and July 1 thereafter, or, if such date is not a business day, on the next business day thereafter, to and including January 1, 2001 (the "Maturity Date"). In the event that the California Department of Insurance fails to approve any dividends proposed to be paid by Financial Pacific Insurance Company to the Corporation and, due to that fact, the Corporation is unable to make any portion of an interest payment, or up to two entire interest payments in any one calendar year, the Corporation shall, upon written notice of such an event to the Purchasers, be entitled to apply the amount of that unpaid interest to the principal of the Notes as of the date due, and shall enter into an allonge to the Notes to that effect which shall be satisfactory in all respects to the Purchasers, provided that the Corporation shall be entitled to exercise this postponement of interest only once during the term of this Agreement. (b) On the Maturity Date, the Corporation shall pay the entire principal amount then outstanding on the Notes together with any accrued interest thereon. -9- 10 (c) No partial prepayment of the Notes pursuant to section 8.2 shall relieve the Corporation from its obligation to make the required payments on the Notes provided for in this section 8.1. 8.2. Optional Prepayments of Notes. At any time or from time to time, the corporation may, at its option, prepay all or any part (in integral multiples of $1,000) of the Notes, each such prepayment to be made at the principal amount of the Notes so prepaid. 8.3 Allocation of Partial Prepayments. In the case of each partial prepayment, the principal amount to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amount thereof not theretofore called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 8.4 Maturity; Surrender, etc. In the case of each prepayment of the Notes, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date. From and after such date, unless the Corporation shall fail to pay such principal amount when so due and payable, together with the interest as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Corporation and canceled and shall not be reissued. 8.5 Acquisition of Notes. The Corporation will not, and will not permit any Subsidiary or Affiliate to, purchase, redeem or otherwise acquire any Note except upon the payment or prepayment thereof in accordance with the terms hereof and of such Note. SECTION 9. Covenants of the Corporation. The Corporation covenants and agrees that: 9.1 Purchase Agreement. All of the covenants, agreements, conditions and other terms set forth in the Purchase Agreements have been performed or complied with and the Corporation shall continue to perform or comply with them, as the case may be, for so long as the Notes remain outstanding, provided that in the event any of the purchasers under the Purchase Agreements ceases to own the stock sold pursuant to the Purchase Agreements or the Purchase Agreements or any of the terms thereof become inoperative in any way, the Corporation agrees to enter into an amendment hereto which amendment shall contain such covenants, agreements, conditions and other terms -10- 11 set forth in the Purchase Agreements as the Purchasers shall, in their sole discretion, deem prudent. 9.2 Affirmative Covenants. (a) Public Announcements. The Corporation shall not, and it shall not permit any officer, director, employee or agent to, make any public announcement, other than announcements approved by the Purchasers and made by the Corporation to its own employees, officers, directors or other personnel, in respect of this Agreement or the transactions contemplated hereby without the prior written consent of the Purchasers, provided that the corporation may make such an announcement to the extent it is required by law and in the event that it promptly notifies the Purchasers of the circumstances of such announcement. (b) Further Actions. (i) The Corporation agrees to use all reasonable good faith efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated hereby on the Closing Date. (ii) The Corporation will, as promptly as practicable, file or supply, or cause to be filed or supplied, all applications, notifications and information required to be filed or supplied by the Corporation pursuant to applicable law in connection with this Agreement, the issuance and sale of the Notes and Warrants pursuant to this Agreement and the consummation of the other transactions contemplated hereby and thereby. (iii) The Corporation, as promptly as practicable, will use its best efforts to obtain, or cause to be obtained, all consents (including, without limitation, all consents, approvals, authorizations, waivers, permits, grants, franchises, concessions agreements, licenses, exemptions or orders of registration, certificates, declarations or filings with, or reports or notices with or to any governmental authority and any consent required under any contract) necessary to be obtained in order to consummate the issuance and sale of the Notes and Warrants pursuant to this Agreement and the consummation of the other transactions contemplated hereby and thereby. (iv) At all times prior to the Closing, the Corporation shall promptly notify the Purchasers in writing of any fact, condition, event or occurrence that will or may result in the failure of any of the conditions contained in Section 6 to be satisfied, promptly upon becoming aware of the same. (c) Further Assurances. Following the Closing, the Corporation shall from time-to-time, execute and deliver such additional instruments, documents, conveyances or assurances and take such other actions as shall be necessary, or otherwise reasonably requested by the Purchasers, to confirm and assure the -11- 12 rights and obligations provided for in this Agreement and render effective the consummation of the transactions contemplated hereby and thereby. (d) Maintenance of Existence, etc. The Corporation will at all times do or cause to be done, and will cause each of its officers and employees to do, all things necessary to maintain, preserve and renew its corporate existence and the corporate existence of its Subsidiaries and all necessary licenses, permits, franchises and other governmental authorizations necessary to own and operate its properties and carry on its business, and comply with, and cause each Subsidiary to comply with, all laws applicable to the Corporation or any Subsidiary, the violation of which would have a material adverse effect on the financial condition, operations or prospects of the Corporation or such Subsidiary. (e) Payment of Taxes. The Corporation will at all times duly pay and discharge, and cause each Subsidiary duly and promptly to pay and discharge, as the same become due and payable, all taxes, assessments and governmental and other charges, levies or claims levied or imposed; provided, that nothing contained in this paragraph shall require the Corporation or any such Subsidiary to pay or discharge, or cause to be paid and discharged, any such tax, assessment, charge, levy or claim so long as the Corporation or such Subsidiary in good faith shall contest the validity thereof and shall set aside on its books adequate reserves with respect thereto. (f) Warrant Purchase Price. The Corporation shall deliver to each of the Purchasers a calculation of the Warrant Purchase Price (as such term is defined in the Warrants) on or before the date ten days after the delivery of the Corporation's 1995 audited financial statements to the Corporation. 9.3 Negative Covenants. (a) Dividends. The Corporation will not, at any time prior to the Closing Date or at any time during which any of the Notes remain outstanding (A) pay any dividends of any kind on any shares in its capital of any class or series, (B) make any payments on account of the purchase or other acquisition or redemption or other retirement of any shares in its capital of any class or series or any warrants or options to purchase any such shares, or (C) make any other distributions of any kind in respect of any shares in its capital of any class or series or in respect of any warrants or options. The parties hereto affirm that nothing in this Agreement shall be deemed to prohibit or otherwise limit the payment of dividends by any Subsidiary to the Corporation. -12- 13 (b) Sale of Stock of Subsidiaries. At any time prior to the Closing Date, the Corporation will not, and will not permit any Subsidiary to, sell, assign, transfer or otherwise dispose of (except to the Corporation or one or more wholly-owned Subsidiaries) any shares of capital stock of any class or series of any Subsidiary, or any other security of, or any funded indebtedness owing to it by, any such Subsidiary. (c) Certain Actions. The Corporation will not, at any time prior to the Closing Date, take any action or omit to take any action, which action or omission would result in a breach of any of the representations and warranties of the Corporation set forth in Section 4. (d) No Solicitation. The Corporation will not, at any time prior to the Closing Date, (i) solicit any inquiries or proposals for, or enter into any discussions with respect to, the acquisition of any capital stock or assets of the Corporation, or (ii) furnish or cause to be furnished any non-public information concerning the Corporation to any person (other than the Purchasers and their agents and representatives), other than in the ordinary course of business or pursuant to applicable law. (e) Debt. The Corporation will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become or remain directly or indirectly liable with respect to any indebtedness other than the indebtedness evidenced by the Notes, intercompany indebtedness, Permitted Indebtedness as set forth on Schedule 9.2(e) hereto and accounts payable and other liabilities and obligations arising in the ordinary course of the Corporation's business, consistent with past practice. (f) Liens. The Corporation will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of the Corporation or any Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom, except for liens for taxes not yet due and payable or being contested in good faith, mechanics liens and purchase money liens. (g) Consolidated Net Worth. The Corporation will not at any time permit Consolidated Net Worth to be less than $7,000,000. Consolidated Net Worth shall mean at any date, the excess of (a) the total assets of the Corporation and its Subsidiaries appearing on a consolidated balance sheet of the Corporation and its Subsidiaries prepared in accordance with GAAP, after eliminating all intercompany transactions and unrealized capital gains on investments, over (b) the total liabilities of the Corporation and its Subsidiaries, on a consolidated basis, after eliminating all intercompany transactions. -13- 14 (h) Debt Service Coverage. The Corporation shall maintain at all times a Debt Service Coverage Ratio of at least 5 to 1. "Debt Service Coverage Ratio" shall mean the ratio of Operating Cash Flow to scheduled principal and interest payments on the Notes, where "Operating Cash Flow" shall mean, for any period, the sum of net income, interest expense, depreciation and amortization minus extraordinary non-cash income. SECTION 10. Covenants of the Purchasers. The Purchasers covenant and agree that: 10.1 Public Announcements. The Purchasers shall not, and they shall not permit any officer, employee or agent to, make any public announcement, other than announcements approved by the Corporation and made by the Purchasers to their own employees, officers, or other personnel, in respect of this Agreement or the transactions contemplated hereby without the prior written consent of the Corporation, provided that the Purchasers may make such an announcement to the extent they are required by law and in the event that they promptly notify the Corporation of the circumstances of such announcement. SECTION 11. Registration Rights The parties hereto agree that shares of Common Stock issuable upon exercise of the Warrants shall constitute "Registrable securities" for purposes of the registration rights provisions contained in Section 6 of the Stockholders Agreement, the terms of which are incorporated by reference into this Agreement. In the event that any of the parties hereto ceases to be a party to the Stockholders Agreement, or Section 6 of the Stockholders Agreement or any of the terms thereof terminate or become inoperative in any way, the Corporation agrees to enter into an amendment hereto which amendment shall afford to the Purchasers the identical registration rights which are currently afforded to the parties to the Stockholders Agreement. SECTION 12. Registration, Transfer and Substitution of Notes. 12.1 Note Register: Ownership of Notes. The Corporation will keep at its principal office a register in which the Corporation will provide for the registration of Notes and the registration of transfers of Notes. The Corporation may treat the person in whose name any Note is registered on such register as the owner thereof for the purpose of receiving payment of the principal of and the premium, if any, and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Corporation shall not be affected by any notice to the contrary. 12.2 Transfer and Exchange of Notes. Upon surrender of any Note for registration of transfer or for -14- 15 exchange to the Corporation at its principal office, the Corporation at its expense will execute and deliver in exchange therefor a new Note or Notes in denominations, as requested by the holder or transferee, which aggregate the unpaid principal amount of such surrendered Note. Each such new Note shall be registered in the name of such person as such holder or transferee may request, shall be dated so that there will be no loss of interest on such surrendered Note and shall be otherwise of like tenor. 12.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond in such reasonable amount as the Corporation may determine (or, in the case of any Note held by a Purchaser or a Purchaser's nominee or another institutional investor, of an indemnity agreement from you or such other holder reasonably satisfactory to the Corporation), or in the case of any such mutilation, upon the surrender of such Note for cancellation to the Corporation at its principal office, the Corporation at its expense will execute and deliver, in lieu thereof, a new Note of the same class and of like tenor, dated so that there will be no loss of interest on such lost, stolen, destroyed or mutilated Note. Any Note in lieu of which any such new Note has been executed and delivered by the Corporation shall not be deemed to be an outstanding Note for any purpose hereof. SECTION 13. Events of Default and Acceleration. If any of the following conditions or events ("Events of Default") shall occur and be continuing: (a) if the Corporation shall default in the payment of any principal or interest an a Note for a period of ten (10) days beyond the date that the same becomes due and payable, whether at maturity or at a date fixed for payment or by declaration or otherwise (provided, however, that no Event of Default shall occur by reason of this subsection 13(a) under the circumstances described in the last sentence of Section 8.1(a)); or (b) if the Corporation shall default in the performance of or compliance with any term contained herein, in the Notes or the Warrants; or (c) if any representation or warranty made in writing by or on behalf of the Corporation herein or in any instrument furnished in compliance with or in reference hereto or otherwise in connection with the transactions contemplated hereby shall prove to have been false or incorrect in any material respect on the date as of which made; or -15- 16 (d) if the Corporation or any Subsidiary shall be in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or interest on any indebtedness for borrowed money which is outstanding in a principal amount of at least $100,000 (other than the Notes) or in the performance of or compliance with any term of any evidence of any such indebtedness or of any mortgage, indenture or other agreement relating thereto and, as a result thereof, such indebtedness shall have become due and payable before its stated maturity or before its regularly scheduled dates of payment, and such default, event or condition shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; or (e) if the Corporation or any Subsidiary shall (i) be generally not paying its debts as they become due, (ii) file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, (iii) make an assignment for the benefit of its creditors, (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) be adjudicated an insolvent or be liquidated, or (vi) take corporate action for the purpose of any of the foregoing; or (f) if a court or governmental authority of competent jurisdiction shall enter an order appointing, without consent by the Corporation or any Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Corporation or any Subsidiary, or if any such petition shall be filed against the Corporation or any Subsidiary and such petition shall not be dismissed within 30 days; or (g) if a final judgment which, with other outstanding final judgments against the Corporation and the Subsidiaries (other than judgments covered by insurance and/or judgments against insurance policies issued by any Subsidiary), exceeds $50,000 shall be entered against the Corporation or any Subsidiary and if, within 60 days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or if, within 60 days after the expiration of any such stay, such judgment shall not have been discharged; or -16- 17 (h) if the Corporation's and/or any Subsidiary's authorization to engage in the business of insurance is revoked or suspended for more than ten (10) days by the California Department of Insurance; then, (x) upon the occurrence of any Event of Default described in subdivision (e) or (f) of this section 13 (other than such an Event of Default described in subdivision (e)(i) or described in subdivision (e)(vi) by virtue of the reference in subdivision (e)(vi) to subdivision (e)(i)), the unpaid principal amount of and accrued interest on the Notes shall automatically become due and payable, or (y) upon the occurrence of any other Event of Default, any holder or holders (other than the Corporation or any Subsidiary or Affiliate) of 33% or more in principal amount of the Notes at the time outstanding (excluding any Notes directly or indirectly owned by the Corporation or any Subsidiary or Affiliate) may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the Corporation, declare all the Notes to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon, all without presentment, demand, protest or notice, which are hereby waived. At any time after the principal of, and interest accrued on, all of the Notes are declared due and payable, the holders of not less than 75% in principal amount of the Notes then outstanding (excluding any Notes directly or indirectly owned by the Corporation or any Subsidiary or Affiliate), by written notice to the Corporation, may rescind and annul any such declaration and its consequences if (A) the Corporation has paid all over-due interest on the Notes, the principal of on any Notes, which have become due otherwise than by reason of such declaration, and interest on such overdue principal and (to the extent permitted by applicable law) any overdue interest in respect of the Notes at a rate per annum equal to 1% per annum in excess of the interest rate otherwise in effect on the Notes, (B) all Events of Default, other than non-payment of amounts which have become due solely by reason of such declaration, and all conditions and events which constitute Events of Default have been cured or waived, and (C) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes; but no such rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. SECTION 14. Remedies on Default, etc. In case any Event of Default shall occur and be continuing, the holder of any Note at the time outstanding may proceed to protect and enforce the rights available to such holder at law, in equity, by statute or otherwise, whether for the specific performance of any agreement contained herein or in such Note, or for an injunction against a violation of any of the terms hereof or thereof, or in -17- 18 aid of the exercise of any power granted hereby or thereby or by law or otherwise. In case of a default in the payment of any principal of or premium, if any, or interest on any Note, the Corporation will pay to the holder thereof such further amount as shall be sufficient to cover the cost and expenses of collection, including, without limitation (to the extent permitted by applicable law), reasonable attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred hereby upon any holder of any Note or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity by statute or otherwise. SECTION 15. Survival; Indemnification. (a) Survival. The warranties and representations of the parties hereto shall be deemed to have been relied upon, notwithstanding any investigation made by or on behalf of any party. Such warranties and representations shall survive the execution and delivery of this Agreement and the delivery of any consideration without limitation as to time. (b) Indemnification by Corporation. From and after the Closing, the Corporation covenants and agrees to defend, indemnify and hold harmless the Purchasers, their officers, directors, employees, agents and controlling persons and the Corporation (collectively, the "Purchaser Indemnitee") from and against, and pay or reimburse the Purchaser Indemnitee for, any and all claims, liabilities, obligations, losses, fines, costs, royalties, proceedings, deficiencies or damages (whether absolute, accrued, conditional or otherwise and whether or not resulting from third party claims), including, but not limited to, out-of-pocket expenses and reasonable attorneys' and accountants' fees and expenses incurred in the investigation or defense of any of the same or in asserting any of their respective rights hereunder, resulting from or arising out of: (i) any inaccuracy of any representation or warranty made by the Corporation herein or in connection herewith or therewith; (ii) any failure of the Corporation to perform any covenant or agreement hereunder or fulfill any other obligation in respect hereof; (iii) any claim by any person for any finder's, broker's or other middleman's commission or compensation in respect of the transactions contemplated by this Agreement; and -18- 19 (iv) any claim by any person caused by or arising out of or allegedly caused by or arising out of this Agreement and the transactions contemplated hereby. SECTION 16. Entire Agreement; Amendments. This Agreement (and the Schedules and Exhibits hereto) are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the securities sold pursuant hereto. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter hereof and thereof. No term, covenant, agreement or condition of this Agreement may be amended, or compliance therewith waived (either generally or in a particular instance and either retroactively or prospectively), unless agreed to in writing by Purchasers and the Corporation. SECTION 17. Notices. All notices required or permitted hereunder shall be in writing and shall be sufficiently given if: (a) hand delivered (in which case the notice shall be effective upon delivery); (b) telecopied, provided that in such case a copy of such notice shall be concurrently sent by registered or certified mail, return receipt requested, postage prepaid (in which case the notice shall be effective two days following dispatch); (c) delivered by Express Mail, Federal Express or other nationally recognized overnight courier service (in which case the notice shall be effective one business day following dispatch); or (d) delivered or mailed by registered or certified mail, return receipt requested, postage prepaid (in which case the notice shall be effective three days following dispatch), to the parties at the following addresses and/or telecopier numbers, or to such other address or number as a party shall specify by written notice to the others in accordance with this Section 12. If to the Corporation: Financial Pacific Insurance Group, Inc. 8583 Elder Creek Road Suite 100 Sacramento, California Attn: Robert C. Goodell, CEO Telecopier No.: (916) 387-0854 with a copy to: Riordan & McKinzie California Plaza, 29th floor -19- 20 300 South Grand Avenue Los Angeles, CA 90071 Attn: Janis B. Salin, Esq. Telecopier No.: (213) 229-8550 If to Purchasers: Firemark Advisors, Inc. 67 Park Place Morristown, New Jersey 07960 Attn: Michael Morrissey Telecopier No.: 201-538-0484 with a copy to: McCarter & English Four Gateway Center 100 Mulberry Street Newark, New Jersey 07101-0652 Attn: David F. Broderick, Esq. Telecopier No.: 201-624-7070 FINPAC PARTNERS, c/o Riordan, Lewis & Haden 300 S. Grand Avenue, 29th Flr. Los Angeles, California 90071-3155 Attn: Patrick C. Haden, Esq. Telecopier No.: 213-229-8597 with a copy to: Riordan & McKinzie California Plaza, 29th floor 300 South Grand Avenue Los Angeles, CA 90071 Attn: Janis B. Salin, Esq. Telecopier No.: (213) 229-8550 ST. PAUL FIRE AND MARINE INSURANCE COMPANY 385 Washington Street St. Paul, Minnesota 55102-1396 Attn: Richard Pfeiffer, Vice President with a copy to: -20- 21 ST. PAUL FIRE AND MARINE INSURANCE COMPANY 385 Washington Street St. Paul, Minnesota 55102 Attn: Corporate Secretary CELERITY FINPAC, LLC c/o Celerity Partners, LLC 11111 Santa Monica Boulevard Suite 1127 Los Angeles, California 90025 Attn: Stephen E. Adamson with a copy to: Celerity Partners, LLC 5215 North O'Connor Blvd., Suite 2500 Irvine, Texas 75039 Attn: Gerald K. Beckman SECTION 18. Sections and Counterparts. The section headings contained in this Agreement are for reference purposes only and shall not affect the interpretation of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute the same agreement. SECTION 19. Governing Law. This Agreement shall be governed by the laws of the State of Delaware. SECTION 20. Expenses. Whether or not the transaction contemplated hereby shall be consummated, the Corporation shall pay all fees, costs and expenses in connection with such transaction and in connection with any amendments or waivers (whether or not the same become effective) under or in respect hereof, including, without limitation, the fees and disbursements of the Purchasers' counsel provided that the Corporation shall not be obligated to pay fees of the Purchasers (including counsel fees) in excess of $50,000. SECTION 21. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors, assigns, executors, administrators and personal representatives. No party may assign its rights under this Agreement without the written consent of the other parties, except that Purchasers may assign its rights and delegate its obligations to any partner or Subsidiary of Purchasers, or any Subsidiary thereof. SECTION 22. No Recourse to General Partner of Purchasers. The Corporation agrees that it shall have recourse -21- 22 only to the assets of Purchasers with respect to any breach or claimed breach of this Agreement and that any general partner of any Purchaser which is a general or limited partnership shall have no liability with respect thereto. -22- 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: /s/ ROBERT C. GOODELL ------------------------------------------ Name: Robert C. Goodell Title: President and CEO THE FIREMARK GLOBAL INSURANCE FUND, L.P. By: Firemark Advisors, Inc. General Partner By: ------------------------------------------ Name: Title: FINPAC PARTNERS By: ------------------------------------------ Name: Title: ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: ------------------------------------------ Name: Title: CELERITY FINPAC, LLC By: ------------------------------------------ Name: Title: -22- 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ------------------------------------------ Name: Title: THE FIREMARK GLOBAL INSURANCE FUND, L.P. By: Firemark Advisors, Inc. General Partner By: /s/ MICHAEL J. MORRISSEY ------------------------------------------ Name: M. J. Morrissey Title: Chairman and CEO FINPAC PARTNERS By: ------------------------------------------ Name: Title: ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: ------------------------------------------ Name: Title: CELERITY FINPAC, LLC By: ------------------------------------------ Name: Title: -22- 25 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ------------------------------------------ Name: Title: THE FIREMARK GLOBAL INSURANCE FUND, L.P. By: Firemark Advisors, Inc. General Partner By: ------------------------------------------ Name: Title: FINPAC PARTNERS By: /s/ PATRICK C. HADEN ------------------------------------------ Name: Patrick C. Haden Title: General Partner ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: ------------------------------------------ Name: Title: CELERITY FINPAC, LLC By: ------------------------------------------ Name: Title: -22- 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ------------------------------------------ Name: Title: THE FIREMARK GLOBAL INSURANCE FUND, L.P. By: Firemark Advisors, Inc. General Partner By: ------------------------------------------ Name: Title: FINPAC PARTNERS By: ------------------------------------------ Name: Title: ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: /s/ RICHARD G. PFEIFFER ------------------------------------------ Name: Richard G. Pfeiffer Title: Vice President CELERITY FINPAC, LLC By: ------------------------------------------ Name: Title: -22- 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ------------------------------------------ Name: Title: THE FIREMARK GLOBAL INSURANCE FUND, L.P. By: Firemark Advisors, Inc. General Partner By: ------------------------------------------ Name: Title: FINPAC PARTNERS By: ------------------------------------------ Name: Title: ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: ------------------------------------------ Name: Title: CELERITY FINPAC, LLC By: /s/ STEPHEN E. ADAMSON ------------------------------------------ Name: Stephen E. Adamson Title: [not legible] -22- 28 SCHEDULE OF PURCHASERS
Principal Amount Notes or of Notes or Name of Purchaser Warrant Number of Shares - ----------------- ------- ---------------- FIREMARK GLOBAL INSURANCE FUND, L.P. Senior $1,500,000.00 Notes (1) In the case of all payments on account of the Notes: By crediting in the form of Warrant #451.62 bank wire transfer of Federal or other immediately available funds, providing sufficient information to identify the source of the transfer, and the amount of interest and/or principal, to Firemark Global Insurance Fund, L.P. Account No. ______________ (1) at: (2) In the case of all notices: THE FIREMARK GLOBAL INSURANCE FUND, L.P., c/o Firemark Advisors, Inc. 1776 On The Green 67 Park Place, 6th Flr. Morristown, NJ 07960 Attn: Michael Morrissey
- ------------- (1) All purchasers, please provide this information. 29
Principal Amount Notes or of Notes or Name of Purchaser Warrant Number of Shares - ----------------- ------- ---------------- FINPAC PARTNERS Senior $1,500,000.00 Notes (1) In the case of all payments on account of the Notes: By mailing Warrant #451.62 funds, providing sufficient information to identify the source of the transfer, and the amount of interest and/or principal, to FinPac Partners at the address set forth below. (2) In the case of all notices: FINPAC PARTNERS, c/o Riordan, Lewis & Haden 300 S. Grand Avenue, 29th Flr. Los Angeles, California 90071-3155
-2- 30
Principal Amount Notes or of Notes or Name of Purchaser Warrant Number of Shares - ----------------- ------- ---------------- ST. PAUL FIRE AND MARINE Senior $1,500,000.00 INSURANCE COMPANY Notes (1) In the case of all payments on account of the Notes: By crediting in the form of Warrant #451.62 bank wire transfer of Federal or other immediately available funds, providing sufficient information to identify the source of the transfer, and the amount of interest and/or principal, to St. Paul Fire and Marine Insurance Company, Account No. ____________________ at: (2) In the case of all notices: ST. PAUL FIRE AND MARINE INSURANCE COMPANY 385 Washington Street St. Paul, Minnesota 55102-1396
-3- 31
Principal Amount Notes or of Notes or Name of Purchaser Warrant Number of Shares - ----------------- ------- ---------------- CELERITY FINPAC, LLC Senior $ 500,000.00 Notes (1) In the case of all payments on account of the Notes: By crediting in the form of Warrant #150.54 bank wire transfer of Federal or other immediately available funds, providing sufficient information to identify the source of the transfer, and the amount of interest and/or principal, to Celerity FinPac, LLC Account No. _________________ at: Nations Bank of Texas, N.A. 5201 North O'Connor Blvd., Irvine, Texas 75039 ABA # 111000025 For the account of Celerity FinPac, LLC (2) In the case of all notices: c/o Celerity Partners, LLC 5215 North O'Connor Blvd., Suite 2500 Irvine, Texas 75039 Attn: Stephen E. Adamson
-4- 32 EXHIBIT A Senior Note due January 1, 2001 R- Sacramento, California $ December 28, 1995 FINANCIAL PACIFIC INSURANCE GROUP, INC. (the "Corporation"), a Delaware corporation, for value received, hereby promises to pay to ___________________ or registered assigns, the principal amount of $___________ on January 1, 2001 with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid balance of such principal amount at the rate of 12% per annum from the date hereof, payable semi-annually on each July 1 and January 1 after the date hereof, until such unpaid balance shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) on any overdue interest, at the rate of l4% per annum until paid, payable semi-annually as aforesaid or, at the option of the registered holder hereof, on demand. Payments of principal and interest on this Note shall be made in lawful money of the United States of America as provided in the Schedule of Purchasers to the Note and Warrant Purchase Agreement referred to below. This Note is one of the Corporation's Senior Notes due January 1, 2001, originally issued in the aggregate principal amount of $5,000,000 pursuant to the Note and Warrant Purchase Agreement (the "Note and Warrant Purchase Agreement"), dated as of December 28, 1995, among the Corporation and each of the Purchasers listed therein. The registered holder of this Note is entitled to the benefits of such Note and Warrant Purchase Agreement and may enforce the agreements of the Corporation contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. This Note is a registered Note and, as provided in such Note and Warrant Purchase Agreement, is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or his attorney duly authorized in writing. The Corporation may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. 33 This Note is subject to prepayment, in whole or in part, in certain cases, all as specified in such Note and Warrant Purchase Agreement. In case an Event of Default (as defined in the Note and Warrant Purchase Agreement) shall occur and be continuing, the unpaid balance of the principal of this Note may be declared and become due and payable in the manner and with the effect provided in such Note and Warrant Purchase Agreement. THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. FINANCIAL PACIFIC INSURANCE GROUP, INC. By ----------------------------------------- Title: -2- 34 EXHIBIT B THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Warrant No. 1-A December 28, 1995 COMMON STOCK PURCHASE WARRANT This certifies that, for value received, and permitted assigns (the "Holder"), is entitled to purchase on the terms and conditions contained herein from Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), shares (subject to adjustment as set forth in Sections 4 and 5 below, the "Warrant Shares") of the Corporation's Common Stock, $.001 par value per share (the "Common Stock"), at the Warrant Purchase Price (subject to adjustment as set forth in Section 4 below) at any time on or after the date hereof, subject to Section 1.2, and prior to January 1, 2004 (the Exercise Period"), on surrender to the Corporation at its principal office at 8583 Elder Creek Road, Suite 100, Sacramento, California 95828 (or at such other location as the Corporation may advise Holder in writing) of this warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by certified or cashier's check of the Warrant Purchase Price for the appropriate number of Warrant Shares for which this Warrant is being exercised, as determined in accordance with the provisions hereof. In lieu of paying cash upon exercise of this Warrant, the Holder may elect to either (i) make a cashless exercise, in which event the Holder will be entitled to receive the Warrant Shares minus the number of shares of Common Stock valued based on the Current Market Value (as defined below) equal to the Warrant Purchase Price, or (ii) cancel indebtedness of the Corporation to the Holder in an equivalent face amount. The "Warrant Purchase Price" shall equal 1.4 times the per share book value of the Corporation's Common Stock on a fully diluted basis, without giving effect to the issuance of the Senior Notes, as set forth on the audited financial statements of the corporation dated December 31, 1995, prepared in accordance with GAAP, consistently applied. The Warrant Purchase Price is subject to adjustment pursuant to Section 4 hereof. This Warrant is subject to the following terms and conditions: 35 1. Exercise; Issuance of Certificates; Payment; Definition. 1.1 Optional Exercise. Subject to Section 1.2 hereof and to the limitations on exercise set forth in Section 2 hereof, this Warrant is exercisable at the option of the Holder, from time to time during the Exercise Period, for all or any part of the Warrant Shares. The Corporation agrees that the Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for shares of Common Stock so purchased shall be delivered to the Holder within a reasonable time after this Warrant has been exercised, and, in case of a purchase of less than all the Warrant Shares, the Corporation shall cancel this Warrant and, within a reasonable period of time, shall execute and deliver to the Holder a new Warrant of like tenor for the balance of the Warrant Shares. Each stock certificate so delivered shall be registered in the name of the Holder or such other name as shall be designated thereby, subject to the limitations contained in Section 2. 1.2 Mandatory Exercise. Notwithstanding any provision herein to the contrary, this Warrant must be exercised by the Holder, if at all, upon the effective date of a registration statement filed pursuant to the Securities Act of 1933, as amended (other than a registration relating solely to a transaction under Rule 145 under such Act or any successor thereto, or an employee benefit plan of the Corporation), in connection with the sale of the Corporation's Common Stock in a firm commitment, underwritten public offering with gross proceeds to be received by the Corporation which equal or exceed $10,000,000 and a public offering price of the Common Stock of not less than $5,000 per share (as adjusted for stock splits, dividends or other recapitalization transactions) (an "Initial Public Offering"). The Corporation shall give the Holder not less than 15 days notice of the expected date of the effectiveness of such registration statement. Not later than the effective date, the Holder shall give the Corporation notice to the effect that (i) the Holder does not elect to exercise this Warrant, (ii) the Holder elects to make a cash exercise of this Warrant (which notice shall be accompanied by the payment of the Warrant Purchase Price) or (iii) the Holder elects to make a cashless exercise of this Warrant as provided in the first paragraph hereof. If the Holder does not give any notice to the Corporation, the Holder shall be deemed to have elected to make a cashless exercise of this Warrant. -2- 36 1.3 Definitions. As used herein, the following terms shall have the following meanings: "Current Market Value" per share of Common Stock means (i) if an Initial Public Offering of the Common Stock has taken place, the price at the close of the market on the first day of trading of such Common Stock following the effectiveness of a registration statement for the Common Stock and (ii) if no Initial Public Offering has taken place, the Fair Market Value of the Common Stock based upon the Fair Market Value of 100% of the corporation if sold as a going concern and without regard to any discount for the lack of liquidity or on the basis that the relevant shares of Common Stock do not constitute a majority or controlling interest in the Corporation and assuming the exercise of all warrants, convertible securities, options or other rights to subscribe for or purchase any additional shares of Common Stock or securities convertible or exchangeable into Common Stock. "Fair Market Value" shall mean the value obtainable upon a sale in an arm's length transaction to an unaffiliated third party under usual and normal circumstances, with neither the buyer nor the seller under any compulsion to act, with equity to both, as determined by the Board in good faith; provided, however, that if the Holder shall dispute the Fair Market Value as determined by the Board, the Holder may undertake to have the Holder and the Corporation retain an Independent Expert. The determination of Fair Market value by the Independent Expert shall be final, binding and conclusive on the Corporation and the Holder. All costs and expenses of the Independent Expert shall be borne by the Holder, unless the determination of Fair Market Value by the Independent Expert is more than 5% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be shared equally by the Holder and the Corporation, or more than 10% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be borne solely by the Corporation. "Independent Expert" shall mean an investment banking firm reasonably agreeable to the Corporation and the Holder who does not (and whose affiliates do not) have a financial interest in the Corporation or any of its stockholders. 2. Limitation on Transfer and Exercise. Notwithstanding the provisions of Section 1, the Corporation shall not be required to deliver any certificate for shares of Common Stock upon exercise of this Warrant except in accordance with the provisions, and subject to the limitations, of Sections 8 and 9 hereof. -3- 37 3. Due Authorization and Issuance; Reservation of Issuance. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable shares of the Common Stock of the Corporation, free from all preemptive rights of any stockholder and free of all taxes, liens and charges with respect to the issue thereof. The Corporation further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Corporation will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of this Warrant, a sufficient number of authorized but unissued shares of Common Stock, or other securities and property, when and as required to provide for the exercise of this Warrant. 4. Adjustments to Warrant Purchase Price. The Warrant Purchase Price shall be subject to adjustment from time to time as hereinafter provided (such price, or the price as last adjusted, also being referred to herein as the "Warrant Purchase Price"). Upon each adjustment of the Warrant Purchase Price, the Holder shall thereafter be entitled to purchase, at the Warrant Purchase Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Warrant Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Warrant Purchase Price resulting from such adjustment. 4.1 Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares by way of stock split, stock dividend or similar event, the Warrant Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares by way of reverse stock split or similar event, the Warrant Purchase Price in effect immediately prior to such combination shall be proportionately increased. 4.2 Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis -4- 38 and the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant Purchase Price and of the number of shares of Common Stock purchasable and receivable upon the exercise of this warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the Holder at the last address thereof appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. 4.3 Issuance of Certain Additional Shares. If the Corporation shall sell or issue to any person any shares of Common Stock or any securities, options, warrants or rights entitling any person to subscribe for, purchase, convert or exchange into shares of Common Stock (other than (i) sales or issuances to officers or employees of, or consultants or advisors to, the Corporation pursuant to any stock incentive plan or arrangement approved by the Corporation's Board of Directors and (ii) shares issued upon the conversion of shares of Series A Convertible Preferred Stock) at a price per share of Common Stock, or having an exercise price per share of Common Stock, as the case may be, that is less than the Current Market Value of Common Stock on the date of issuance (such shares being referred to as the "Below Market Shares") , the Warrant Purchase Price shall be adjusted on and after the date of such sale or issuance by multiplying the Warrant Purchase Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock that the aggregate purchase price or exercise price of such Below Market Shares would purchase at the Current Market Value, and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of Below Market Shares. The adjustment to the Warrant Purchase Price set forth above shall be made successively whenever a sale or -5- 39 issuance of Below Market Shares occurs; provided, however, that, if any such options, warrants or rights expire without the issuance of shares of Common Stock, then the Warrant Purchase Price shall again be adjusted to equal the Warrant Purchase Price in effect had such issuance of Below Market Shares not occurred. 4.4 Notice of Adjustment. Upon any adjustment of the Warrant Purchase Price and/or number of Warrant Shares, then and in each such case the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder at the address thereof as shown on the books of the Corporation. The notice shall state the Warrant Purchase Price and/or number of Warrant Shares resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. Issue Tax. The issuance of shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any issue tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any shares of Common Stock in a name other than that of the then Holder of this Warrant. 6. Closing of Books. The Corporation will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise hereof. 7. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in this warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of Directors of the Corporation or any other matter or any rights whatsoever as a stockholder of the Corporation. No dividends or interest shall be payable or accrued in respect of this Warrant or the shares of Common Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the Warrant Purchase Price or as a stockholder of the Corporation, whether such liability is asserted by the Corporation or by its creditors. 8. Restrictions on Transferability of Securities; Compliance with Securities Act. 8.1 Restrictions on Transferability. The Warrant and the Common Stock issuable hereunder shall not be transferable -6- 40 except upon the conditions specified in this Section 8, which conditions are intended to insure compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act") Each holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferee of the Warrant or such Common Stock to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section A. 8.2 Transfers Not Subject to Restrictions. Subject to Section 9 hereof, the Holder may sell, assign or transfer this Warrant to an affiliate, or to his parents, the parents of his spouse, his spouse or issue or adopted children, or to a trust established for the benefit of his parents, the parents of his spouse, his spouse, issue, adopted children, or himself, or dispose of them under his will. 8.3 Restrictive Legend. Each certificate representing (a) this Warrant, (b) the shares of Common Stock or other securities issued upon exercise of the Warrant and (c) any other securities issued in respect of such shares of Common Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (collectively, the "Restricted Securities") , shall (unless otherwise permitted by the provisions of Section 8.4 below or unless such securities have been registered under the Securities Act) be imprinted with the following legend, in addition to any legend required under applicable state securities laws: THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Upon request of a holder of such a certificate, the Corporation shall remove the foregoing legend therefrom or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Corporation shall have received either the opinion referred to in Section 8.4(a) or the "no-action" letter referred to in Section 8.4(b) to the effect that any transfer by such holder of the securities evidenced by such certificate will be exempt from the registration and/or qualification requirements of, and that such legend is not required in order to establish compliance with, the Securities Act, and if applicable, any state securities laws under which transfer restrictions on such securities had been previously imposed. -7- 41 8.4 Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 8.4. Prior to any proposed transfer of any Restricted Securities, the holder thereof shall give written notice to the Corporation of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by either (a) an unqualified written legal opinion addressed to the Corporation from counsel who shall be reasonably satisfactory to the Corporation, which opinion shall be reasonably satisfactory in form and substance to the Corporation's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act and any applicable state securities laws, or (b) a "no-action" letter from the Securities and Exchange Commission (and any necessary state securities administrator) to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission (or such administrators) that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Corporation. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 8.4 above. 8.5 Required Approvals. Notwithstanding anything to the contrary contained herein, if any exercise of this warrant would result in a change in "control" of the Corporation, as defined in Section 1215(b) of the California Insurance Code, then such exercise shall be delayed until such time as the approval of the California Department of Insurance is obtained. 9. Transferability of Warrant. Each qualified transferee of this Warrant must, prior to the acknowledgment and acceptance of such transfer by the Corporation, agree to take and hold this Warrant subject to the provisions specified herein. Any such permitted transfers may be made without charge to the Holder (except for transfer taxes), at the office or agency of the Corporation referred to in the first paragraph of this Warrant, by the Holder or by its duly authorized attorney, upon surrender of this Warrant properly endorsed. 10. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Corporation, of the Holder and of the holder of shares of Common Stock issued upon exercise of this Warrant contained in Sections 8, 9 and 10 shall survive the exercise of this Warrant. -8- 42 11. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. Notices. Any notice, request or other document required or permitted to be given or delivered to the record Holder or the Corporation shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Corporation or to the Corporation at the address indicated therefor in the first paragraph of this Warrant. 13. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Corporation by merger, consolidation or acquisition of all or substantially all of the Corporation's assets, and all of the obligations of the Corporation relating to the Common Stock issuable upon the exercise of this Warrant shall survive such merger, consolidation or acquisition and all of the covenants and agreements of the Corporation shall inure to the benefit of the permitted successors and assigns of the Holder. 14. Descriptive Headings; Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without regard to conflicts of laws principles thereof. 15. Lost Warrant or Certificates. The Corporation represents and warrants to the Holder that upon receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant or certificate evidencing shares of Common Stock issued on exercise hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Corporation, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Corporation will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Expiration of Warrant. Subject to Section 1.2 hereof, this Warrant shall expire and shall no longer be exercisable on or after January 1, 2004. 17. Note and Warrant Purchase Agreement. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants", such term to include all Warrants in substitution therefor) originally authorized for issuance pursuant to the Note and Warrant Purchase -9- 43 Agreement (the "Note and Warrant Purchase Agreement"), dated as of December 28, 1995, between the Corporation and certain institutional investors, copies of which are on file at the principal office of the Corporation in Sacramento, California. The holder of this Warrant is entitled to the benefits of the Note and Warrant Purchase Agreement and may enforce the agreements of the Corporation contained therein, all in accordance with the terms thereof. Certain terms used in this Warrant not otherwise defined herein shall have the respective meanings specified in the Note and Warrant Purchase Agreement. 18. Stockholders Agreement. All Common Stock or other securities issuable upon exercise of this warrant shall be subject to all of the provisions of and shall be entitled to the benefits of the Stockholders Agreement dated as of September 7, 1993 by and among the Corporation and the stockholders of the Corporation as of such date (the "Stockholders Agreement"). Upon such exercise, the holder of the Common Stock or other securities issuable hereunder shall become a "Stockholder" under such Agreement, as the Stockholders Agreement may have been modified, supplemented or amended prior to the date of such exercise. The provisions of this Section 19 shall not apply if the Stockholders Agreement has been terminated, either by agreement of the parties thereto or by its own terms, prior to the date of such exercise. 19. Certain Events. In the event of the dissolution, liquidation or winding up of the Corporation, the rights to purchase Warrant Shares evidenced by this Warrant shall terminate and expire and the Holder of this Warrant shall be entitled to receive from the Corporation, after payment of all debts, obligations and liabilities of the Corporation and after payment of any liquidation preference on any class of capital stock of the Corporation having a preference as to such payments over the holders of Common Stock, payment in an amount equal to the product of (a) the amount by which the liquidating payment per share of Common Stock exceeds the Exercise Price, multiplied by (b) the number of shares of Common Stock purchasable pursuant to this Warrant. IN WITNESS WHEREOF, the Corporation has caused this warrant to be duly executed and issued by the officer or officers thereunto duly authorized as of this 28th day of December, 1995. FINANCIAL PACIFIC INSURANCE GROUP, INC., a Delaware corporation By: ------------------------------------------ Robert C. Goodell, President -10- 44 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To the Corporation: The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________________________________________________________________ (___________) of the number of shares of Common Stock purchasable under this warrant and herewith makes payment of _____________________________________________________ Dollars ($_________) therefor, and requests that a certificate(s) for such shares be issued in the name of, and delivered to, ____________________________ _______________________________________________________________________________ _________________________________, whose address is ___________________________ _______________________________________________________________________________ ____________________________________________________________. The undersigned represents that it is acquiring such shares of Common Stock for its own account for investment purposes only and not with a view to or for sale in connection with any distribution thereof. DATED:________________ __________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) Address: __________________________________________________ __________________________________________________ -11- 45 ASSIGNMENT FORM FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto: Name:_________________________________ Address:______________________________ ______________________________ the right to purchase Common Stock represented by this Warrant to the extent of _________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ___________________________________________, attorney, to transfer the same on the books of the Corporation with full power of substitution in the premises. Dated:___________________ __________________________________________________ (Signature) -12- EX-10.13 18 FORM OF 12% SENIOR NOTE DUE 2001 1 EXHIBIT 10.13 Senior Note due January 1, 2001 Sacramento, California December 28, 1995 FINANCIAL PACIFIC INSURANCE GROUP, INC. (the "Corporation"), a Delaware corporation, for value received, hereby promises to pay to ________ ___________________________ or registered assigns, the principal amount of $1,500,000.00 on January 1, 2001 with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid balance of such principal amount at the rate of 12% per annum from the date hereof, payable semi-annually on each July 1 and January 1 after the date hereof, until such unpaid balance shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) on any overdue interest, at the rate of 14% per annum until paid, payable semi-annually as aforesaid or, at the option of the registered holder hereof, on demand. Payments of principal and interest on this Note shall be made in lawful money of the United States of America as provided in the Schedule of Purchasers to the Note and Warrant Purchase Agreement referred to below. This Note is one of the Corporation's Senior Notes due January 1, 2001, originally issued in the aggregate principal amount of $5,000,000 pursuant to the Note and Warrant Purchase Agreement (the "Note and Warrant Purchase Agreement"), dated as of December 28, 1995, among the Corporation and each of the Purchasers listed therein. The registered holder of this Note is entitled to the benefits of such Note and Warrant Purchase Agreement and may enforce the agreements of the Corporation contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. This Note is a registered Note and, as provided in such Note and Warrant Purchase Agreement, is transferable only upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or his attorney duly authorized in writing. The Corporation may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. This Note is subject to prepayment, in whole or in part, in certain cases, all as specified in such Note and Warrant Purchase Agreement. In case an Event of Default (as defined in the Note and warrant Purchase Agreement) shall occur and be continuing, the unpaid balance of the principal of this Note may be declared and 2 become due and payable in the manner and with the effect provided in such Note and Warrant Purchase Agreement. THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. FINANCIAL PACIFIC INSURANCE GROUP, INC. By ------------------------------------------ Title: -2- EX-10.14 19 FORM OF WARRANT ISSUED BY THE REGISTRANT 1 EXHIBIT 10.14 THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Warrant No. 1 December 28, 1995 COMMON STOCK PURCHASE WARRANT This certifies that, for value received, _________________________ __________ and permitted assigns (the "Holder"), is entitled to purchase on the terms and conditions contained herein from Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), ______ shares (subject to adjustment as set forth in sections 4 and 5 below, the "Warrant Shares") of the Corporation's Common Stock, $.001 par value per share (the "Common Stock"), at the Warrant Purchase Price (subject to adjustment as set forth in Section 4 below) at any time on or after the date hereof, subject to Section 1.2, and prior to January 1, 2004 (the "Exercise Period"), on surrender to the Corporation at its principal office at 8583 Elder Creek Road, Suite 100, Sacramento, California 95828 (or at such other location as the Corporation may advise Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by certified or cashier's check of the Warrant Purchase Price for the appropriate number of Warrant Shares for which this Warrant is being exercised, as determined in accordance with the provisions hereof. In lieu of paying cash upon exercise of this Warrant, the Holder may elect to either (i) make a cashless exercise, in which event the Holder will be entitled to receive the Warrant Shares minus the number of shares of Common Stock valued based on the Current Market Value (as defined below) equal to the Warrant Purchase Price, or (ii) cancel indebtedness of the Corporation to the Holder in an equivalent face amount. The "Warrant Purchase Price" shall equal 1.4 times the per share book value of the Corporation's Common Stock as set forth on the audited financial statements of the Corporation dated December 31, 1995, prepared in accordance with GAAP, consistently applied. The Warrant Purchase Price is subject to adjustment pursuant to Section 4 hereof. This Warrant is subject to the following terms and conditions: 2 1. Exercise; Issuance of Certificates; Payment; Definition. 1.1 Optional Exercise. Subject to Section 1.2 hereof and to the limitations on exercise set forth in Section 2 hereof, this Warrant is exercisable at the option of the Holder, from time to time during the Exercise Period, for all or any part of the Warrant Shares. The Corporation agrees that the Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for shares of Common Stock so purchased shall be delivered to the Holder within a reasonable time after this Warrant has been exercised, and, in case of a purchase of less than all the Warrant Shares, the Corporation shall cancel this Warrant and, within a reasonable period of time, shall execute and deliver to the Holder a new Warrant of like tenor for the balance of the Warrant Shares. Each stock certificate so delivered shall be registered in the name of the Holder or such other name as shall be designated thereby, subject to the limitations contained in Section 2. 1.2 Mandatory Exercise. Notwithstanding any provision herein to the contrary, this Warrant must be exercised by the Holder, if at all, upon the effective date of a registration statement filed pursuant to the Securities Act of 1933, as amended (other than a registration relating solely to a transaction under Rule 145 under such Act or any successor thereto, or an employee benefit plan of the Corporation), in connection with the sale of the Corporation's Common Stock in a firm commitment, underwritten public offering with gross proceeds to be received by the Corporation which equal or exceed $10,000,000 and a public offering price of the Common Stock of not less than $5,000 per share (as adjusted for stock splits, dividends or other recapitalization transactions) (an "Initial Public Offering"). The Corporation shall give the Holder not less than 15 days notice of the expected date of the effectiveness of such registration statement. Not later than the effective date, the Holder shall give the Corporation notice to the effect that (i) the Holder does not elect to exercise this Warrant, (ii) the Holder elects to make a cash exercise of this Warrant (which notice shall be accompanied by the payment of the Warrant Purchase Price) or (iii) the Holder elects to make a cashless exercise of this Warrant as provided in the first paragraph hereof. If the Holder does not give any notice to the Corporation, the Holder shall be deemed to have elected to make a cashless exercise of this Warrant. 1.3 Definitions. As used herein, the following terms shall have the following meanings: -2- 3 "Current Market Value" per share of Common Stock means (i) if an Initial Public Offering of the Common Stock has taken place, the price at the close of the market on the first day of trading of such Common Stock following the effectiveness of a registration statement for the Common Stock and (ii) if no Initial Public Offering has taken place, the Fair Market Value of the Common Stock based upon the Fair Market Value of 100% of the Corporation if sold as a going concern and without regard to any discount for the lack of liquidity or on the basis that the relevant shares of Common Stock do not constitute a majority or controlling interest in the Corporation and assuming the exercise of all warrants, convertible securities, options or other rights to subscribe for or purchase any additional shares of Common Stock or securities convertible or exchangeable into Common Stock. "Fair Market Value" shall mean the value obtainable upon a sale in an arm's length transaction to an unaffiliated third party under usual and normal circumstances, with neither the buyer nor the seller under any compulsion to act, with equity to both, as determined by the Board in good faith; provided, however, that if the Holder shall dispute the Fair Market Value as determined by the Board, the Holder may undertake to have the Holder and the Corporation retain an Independent Expert. The determination of Fair Market Value by the Independent Expert shall be final, binding and conclusive on the Corporation and the Holder. All costs and expenses of the Independent Expert shall be borne by the Holder, unless the determination of Fair Market Value by the Independent Expert is more than 5% more favorable to the Corporation than the Fair Market value determined by the Board, in which event the cost of the Independent Expert shall be shared equally by the Holder and the Corporation, or more than 10% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be borne solely by the Corporation. "Independent Expert" shall mean an investment banking firm reasonably agreeable to the Corporation and the Holder who does not (and whose affiliates do not) have a financial interest in the Corporation or any of its stockholders. 2. Limitation on Transfer and Exercise. Notwithstanding the provisions of Section 1, the Corporation shall not be required to deliver any certificate for shares of Common Stock upon exercise of this Warrant except in accordance with the provisions, and subject to the limitations, of Sections 8 and 9 hereof. 3. Due Authorization and Issuance; Reservation of Issuance. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this W arrant will, upon issuance, be duly -3- 4 authorized, validly issued, fully paid and nonassessable shares of the Common Stock of the Corporation, free from all preemptive rights of any stockholder and free of all taxes, liens and charges with respect to the issue thereof. The Corporation further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Corporation will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of this Warrant, a sufficient number of authorized but unissued shares of Common Stock, or other securities and property, when and as required to provide for the exercise of this Warrant. 4. Adjustments to Warrant Purchase Price. The Warrant Purchase Price shall be subject to adjustment from time to time as hereinafter provided (such price, or the price as last adjusted, also being referred to herein as the "Warrant Purchase Price"). Upon each adjustment of the Warrant Purchase Price, the Holder shall thereafter be entitled to purchase, at the Warrant Purchase Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Warrant Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Warrant Purchase Price resulting from such adjustment. 4.1 Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares by way of stock split, stock dividend or similar event, the Warrant Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares by way of reverse stock split or similar event, the Warrant Purchase Price in effect immediately prior to such combination shall be proportionately increased. 4.2 Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as -4- 5 may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant Purchase Price and of the number of shares of Common Stock purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the Holder at the last address thereof appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. 4.3 Issuance of Certain Additional Shares. If the Corporation shall sell or issue to any person any shares of Common Stock or any securities, options, warrants or rights entitling any person to subscribe for, purchase, convert or exchange into shares of Common Stock (other than (i) sales or issuances to officers or employees of, or consultants or advisors to, the Corporation pursuant to any stock incentive plan or arrangement approved by the Corporation's Board of Directors and (ii) shares issued upon the conversion of shares of Series A Convertible Preferred Stock) at a price per share of Common Stock, or having an exercise price per share of Common Stock, as the case may be, that is less than the Current Market Value of Common Stock on the date of issuance (such shares being referred to as the "Below Market Shares"), the Warrant Purchase Price shall be adjusted on and after the date of such sale or issuance by multiplying the Warrant Purchase Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock that the aggregate purchase price or exercise price of such Below Market Shares would purchase at the Current Market Value, and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of Below Market Shares. The adjustment to the Warrant Purchase Price set forth above shall be made successively whenever a sale or issuance of Below Market Shares occurs; provided, however, that, if any such options, warrants or rights expire without the issuance of shares of Common Stock, then the Warrant Purchase -5- 6 Price shall again be adjusted to equal the Warrant Purchase Price in effect had such issuance of Below Market Shares not occurred. 4.4 Notice of Adjustment. Upon any adjustment of the Warrant Purchase Price and/or number of Warrant Shares, then and in each such case the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder at the address thereof as shown on the books of the Corporation. The notice shall state the Warrant Purchase Price and/or number of Warrant Shares resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. Issue Tax. The issuance of shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any issue tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any shares of Common Stock in a name other than that of the then Holder of this Warrant. 6. Closing of Books. The Corporation will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise hereof. 7. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of Directors of the Corporation or any other matter or any rights whatsoever as a stockholder of the Corporation. No dividends or interest shall be payable or accrued in respect of this Warrant or the shares of Common Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the Warrant Purchase Price or as a stockholder of the Corporation, whether such liability is asserted by the Corporation or by its creditors. 8. Restrictions on Transferability of Securities; Compliance with Securities Act. 8.1 Restrictions on Transferability. The Warrant and the Common Stock issuable hereunder shall not be transferable except upon the conditions specified in this Section 8, which conditions are intended to insure compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"). -6- 7 Each holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferee of the Warrant or such Common Stock to agree to take and hold such securities subject to the provisions and upon the conditions specified in Section 8. 8.2 Transfers Not Subject to Restrictions. Subject to Section 9 hereof, the Holder may sell, assign or transfer this Warrant to an affiliate, or to his parents, the parents of his spouse, his spouse or issue or adopted children, or to a trust established for the benefit of his parents, the parents of his spouse, his spouse, issue, adopted children, or himself, or dispose of them under his will. 8.3 Restrictive Legend. Each certificate representing (a) this Warrant, (b) the shares of Common Stock or other securities issued upon exercise of the Warrant and (c) any other securities issued in respect of such shares of Common Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (collectively, the "Restricted Securities"), shall (unless otherwise permitted by the provisions of Section 8.4 below or unless such securities have been registered under the Securities Act) be imprinted with the following legend, in addition to any legend required under applicable state securities laws: THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Upon request of a holder of such a certificate, the Corporation shall remove the foregoing legend therefrom or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Corporation shall have received either the opinion referred to in Section 8.4(a) or the "no-action" letter referred to in Section 8.4(b) to the effect that any transfer by such holder of the securities evidenced by such certificate will be exempt from the registration and/or qualification requirements of, and that such legend is not required in order to establish compliance with, the Securities Act, and if applicable, any state securities laws under which transfer restrictions on such securities had been previously imposed. 8.4 Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of -7- 8 this Section 8.4. Prior to any proposed transfer of any Restricted Securities, the holder thereof shall give written notice to the Corporation of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by either (a) an unqualified written legal opinion addressed to the Corporation from counsel who shall be reasonably satisfactory to the Corporation, which opinion shall be reasonably satisfactory in form and substance to the Corporation's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act and any applicable state securities laws, or (b) a "no-action" letter from the Securities and Exchange Commission (and any necessary state securities administrator) to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission (or such administrators) that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Corporation. Each certificate evidencing. the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 8.4 above. 8.5 Required Approvals. Notwithstanding anything to the contrary contained herein, if any exercise of this Warrant would result in a change in "control" of the Corporation, as defined in Section 1215(b) of the, California Insurance Code, then such exercise shall be delayed until such time as the approval of the California Department of Insurance is obtained. 9. Transferability of Warrant. Each qualified transferee of this Warrant must, prior to the acknowledgment and acceptance of such transfer by the Corporation, agree to take and hold this Warrant subject to the provisions specified herein. Any such permitted transfers may be made without charge to the Holder (except for transfer taxes) , at the office or agency of the Corporation referred to in the first paragraph of this Warrant, by the Holder or by its duly authorized attorney, upon surrender of this Warrant properly endorsed. 10. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Corporation, of the Holder and of the holder of shares of Common Stock issued upon exercise of this Warrant contained in Sections 8, 9 and 10 shall survive the exercise of this Warrant. 11. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. -8- 9 12. Notices. Any notice, request or other document required or permitted to be given or delivered to the record Holder or the Corporation shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Corporation or to the Corporation at the address indicated therefor in the first paragraph of this Warrant. 13. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Corporation by merger, consolidation or acquisition of all or substantially all of the Corporation's assets, and all of the obligations of the Corporation relating to the Common Stock issuable upon the exercise of this Warrant shall survive such merger, consolidation or acquisition and all of the covenants and agreements of the Corporation shall inure to the benefit of the permitted successors and assigns of the Holder. 14. Descriptive Headings; Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without regard to conflicts of laws principles thereof. 15. Lost Warrant or Certificates. The Corporation represents and warrants to the Holder that upon receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant or certificate evidencing shares of Common Stock issued on exercise hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Corporation, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Corporation will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Expiration of Warrant. Subject to Section 1.2 hereof, this warrant shall expire and shall no longer be exercisable on or after January 1, 2004. 17. Note and Warrant Purchase Agreement. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants", such term to include all Warrants in substitution therefor) originally authorized for issuance pursuant to the Note and Warrant Purchase Agreement (the "Note and Warrant Purchase Agreement"), dated as of December 28, 1995, between the Corporation and certain institutional investors, copies of which are on file at the principal office of the Corporation in Sacramento, California. The holder of this Warrant is entitled to the benefits of the -9- 10 Note and Warrant Purchase Agreement and may enforce the agreements of the Corporation contained therein, all in accordance with the terms thereof. Certain terms used in this Warrant not otherwise defined herein shall have the respective meanings specified in the Note and Warrant Purchase Agreement. 18. Stockholders Agreement. All Common Stock or other securities issuable upon exercise of this Warrant shall be subject to all of the provisions of and shall be entitled to the benefits of the Stockholders Agreement dated as of September 7, 1993 by and among the Corporation and the stockholders of the Corporation as of such date (the "Stockholders Agreement"). Upon such exercise, the holder of the Common Stock or other securities issuable hereunder shall become a "Stockholder" under such Agreement, as the Stockholders Agreement may have been modified, supplemented or amended prior to the date of such exercise. The provisions of this Section 19 shall not apply if the Stockholders Agreement has been terminated, either by agreement of the parties thereto or by its own terms, prior to the date of such exercise. 19. Certain Events. In the event of the dissolution, liquidation or winding up of the Corporation, the rights to purchase Warrant Shares evidenced by this Warrant shall terminate and expire and the Holder of this Warrant shall be entitled to receive from the Corporation, after payment of all debts, obligations and liabilities of the Corporation and after payment of any liquidation preference on any class of capital stock of the Corporation having a preference as to such payments over the holders of Common Stock, payment in an amount equal to the product of (a) the amount by which the liquidating payment per share of Common Stock exceeds the Exercise Price, multiplied by (b) the number of shares of Common Stock purchasable pursuant to this Warrant. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly executed and issued by the officer or officers thereunto duly authorized as of this 28th day of December, 1995. FINANCIAL PACIFIC INSURANCE GROUP, INC., a Delaware Corporation By: /s/ ------------------------------------------ President -10- 11 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To the Corporation: The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________________________________________________________________ (___________) of the number of shares of Common Stock purchasable under this warrant and herewith makes payment of _____________________________________________________ Dollars ($_________) therefor, and requests that a certificate(s) for such shares be issued in the name of, and delivered to, ____________________________ _______________________________________________________________________________ _________________________________, whose address is ___________________________ _______________________________________________________________________________ ____________________________________________________________. The undersigned represents that it is acquiring such shares of Common Stock for its own account for investment purposes only and not with a view to or for sale in connection with any distribution thereof. DATED:________________ __________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) Address: __________________________________________________ __________________________________________________ -11- 12 ASSIGNMENT FORM FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto: Name:______________________________ Address:___________________________ ___________________________ the right to purchase Common Stock represented by this Warrant to the extent of __________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ___________________________________________, attorney, to transfer the same on the books of the Corporation with full power of substitution in the premises. Dated:___________________ ________________________________________ (Signature) -12- EX-10.15 20 FORM OF WARRANT ISSUED BY THE REGISTRANT 1 EXHIBIT 10.15 THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Warrant No. 1 September 7, 1993 COMMON STOCK PURCHASE WARRANT This certifies that, for value received, ______________ and permitted assigns (the "Holder"), is entitled to purchase on the terms and conditions contained herein from Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Corporation"), ________ shares (subject to adjustment as set forth in Sections 4 and 5 below, the "Warrant Shares") of the Corporation's Common Stock, $.001 par value per share (the "Common Stock"), at the price of $1.00 per Warrant Share so purchased (subject to adjustment as set forth in Section 4 below, the "Warrant Purchase Price") at any time on or after the date hereof, subject to Section 1.2, and prior to September 7, 2003 (the "Exercise Period"), on surrender to the Corporation at its principal office at 8583 Elder Creek Road, Suite 100, Sacramento, California 95828 (or at such other location as the Corporation may advise Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by certified or cashier's check of the Warrant Purchase Price for the appropriate number of Warrant Shares for which this Warrant is being exercised, as determined in accordance with the provisions hereof. In lieu of paying cash upon exercise of this Warrant, the Holder may elect to make a cashless exercise, in which event the Holder will be entitled to receive the Warrant Shares minus the number of shares of Common Stock valued based on the Current Market Value (as defined below) equal to the Warrant Purchase Price. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment; Definition. 1.1 Optional Exercise. Subject to Section 1.2 hereof and to the limitations on exercise set forth in Section 2 hereof, this Warrant is exercisable at the option of the Holder, from time to time during the Exercise Period, for all or any part of the Warrant Shares. The Corporation agrees that the Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder as the record owner of such 2 shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for shares of Common Stock so purchased shall be delivered to the Holder within a reasonable time after this Warrant has been exercised, and, in case of a purchase of less than all the Warrant Shares, the Corporation shall cancel this Warrant and, within a reasonable period of time, shall execute and deliver to the Holder a new Warrant of like tenor for the balance of the Warrant Shares. Each stock certificate so delivered shall be registered in the name of the Holder or such other name as shall be designated thereby, subject to the limitations contained in Section 2. 1.2 Mandatory Exercise. Notwithstanding any provision herein to the contrary, this Warrant must be exercised by the Holder, if at all, upon the effective date of a registration statement filed pursuant to the Securities Act of 1933, as amended (other than a registration relating solely to a transaction under Rule 145 under such Act or any successor thereto, or an employee benefit plan of the Corporation), in connection with the sale of the Corporation's Common Stock in a firm commitment, underwritten public offering with gross proceeds to be received by the Corporation which equal or exceed $10,000,000 and a public offering price of the Common Stock of not less than $5.00 per share (as adjusted for stock splits, dividends or other recapitalization transactions) (an "Initial Public Offering"). The Corporation shall give the Holder not less than 15 days notice of the expected date of the effectiveness of such registration statement. Not later than the effective date, the Holder shall give the Corporation notice to the effect that (i) the Holder does not elect to exercise this Warrant, (ii) the Holder elects to make a cash exercise of this Warrant (which notice shall be accompanied by the payment of the Warrant Purchase Price) or (iii) the Holder elects to make a cashless exercise of this Warrant as provided in the first paragraph hereof. If the Holder does not give any notice to the Corporation, the Holder shall be deemed to have elected to make a cashless exercise of this Warrant. 1.3 Definitions. As used herein, the following terms shall have the following meanings: "Current Market Value" per share of Common Stock means (i) if an Initial Public Offering of the Common Stock has taken place, the price at the close of the market on the first day of trading of such Common Stock following the effectiveness of a registration statement for the Common Stock and (ii) if no Initial Public Offering has taken place, the Fair Market Value of the Common Stock based upon the Fair Market Value of 100% of the Corporation if sold as a going concern and without regard to any discount for the lack of liquidity or on the basis that the relevant shares of Common Stock do not constitute a majority or controlling interest in the Corporation and assuming the exercise of all warrants, convertible securities, options or other rights to subscribe for or purchase any additional shares of Common Stock or securities convertible or exchangeable into Common Stock. 2. 3 "Fair Market Value" shall mean the value obtainable upon a sale in an arm's length transaction to an unaffiliated third party under usual and normal circumstances, with neither the buyer nor the seller under any compulsion to act, with equity to both, as determined by the Board in good faith; provided, however, that if the Holder shall dispute the Fair Market Value as determined by the Board, the Holder may undertake to have the Holder and the Corporation retain an Independent Expert. The determination of Fair Market Value by the Independent Expert shall be final, binding and conclusive on the Corporation and the Holder. All costs and expenses of the Independent Expert shall be borne by the Holder, unless the determination of Fair Market Value by the Independent Expert is more than 5% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be shared equally by the Holder and the Corporation, or more than 10% more favorable to the Corporation than the Fair Market Value determined by the Board, in which event the cost of the Independent Expert shall be borne solely by the Corporation. "Independent Expert" shall mean an investment banking firm reasonably agreeable to the Corporation and the Holder who does not (and whose affiliates do not) have a financial interest in the Corporation or any of its stockholders. 2. Limitation on Transfer and Exercise. Notwithstanding the provisions of Section 1, the Corporation shall not be required to deliver any certificate for shares of Common Stock upon exercise of this Warrant except in accordance with the provisions, and subject to the limitations, of Section 9 and 10 hereof. 3. Due Authorization and Issuance; Reservation of Issuance. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable shares of the Common Stock of the Corporation, free from all preemptive rights of any stockholder and free of all taxes, liens and charges with respect to the issue thereof. The Corporation further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Corporation will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of this Warrant, a sufficient number of authorized but unissued shares of Common Stock, or other securities and property, when and as required to provide for the exercise of this Warrant. 4. Warrant Purchase Price. The Warrant Purchase Price shall be subject to adjustment from time to time as hereinafter provided (such price, or the price as last adjusted, also being referred to herein as the "Warrant Purchase Price"). Upon each adjustment of the Warrant Purchase Price, the Holder shall thereafter be entitled to purchase, at the Warrant Purchase Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Warrant Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such 3. 4 adjustment, and dividing the product thereof by the Warrant Purchase Price resulting from such adjustment. 4.1 Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares by way of stock split, stock dividend or similar event, the Warrant Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares by way of reverse stock split or similar event, the Warrant Purchase Price in effect immediately prior to such combination shall be proportionately increased. 4.2 Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant Purchase Price and of the number of shares of Common Stock purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the Holder at the last address thereof appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. 4.3 Issuance of Certain Additional Shares. If the Corporation shall sell or issue to any person any shares of Common Stock or any options, warrants or rights entitling any person to subscribe for, purchase or convert or, exchange shares of Common Stock (other than (i) sales or issuances to officers or employees of, or consultants or advisors to, the Corporation pursuant to any stock incentive plan or arrangement approved by the 5 Corporation's Board of Directors and (ii) shares issued upon the conversion of shares of Series A Convertible Preferred Stock) at a price per share of Common Stock, or having an exercise price per share of Common Stock, as the case may be, that is less than the Current Market Value of Common Stock on the date of issuance (such shares being referred to as the "Below Market Shares"), the Warrant Purchase Price shall be adjusted on and after the date of such sale or issuance by multiplying the Warrant Purchase Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock that the aggregate purchase price or exercise price of such Below Market Shares would purchase at the Current Market Value, and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of Below Market Shares. The adjustment to the Warrant Purchase Price set forth above shall be made successively whenever a sale or issuance of Below Market Shares occurs; provided, however, that, if any such options, warrants or rights expire without the issuance of shares of Common Stock, then the Warrant Purchase Price shall again be adjusted to equal the Warrant Purchase Price in effect had such issuance of Below Market Shares not occurred. 4.4 Notice of Adjustment. Upon any adjustment of the Warrant Purchase Price, then and in each such case the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder at the address thereof as shown on the books of the Corporation. The notice shall state the Warrant Purchase Price resulting from such adjustment and the revised number of Warrant Shares purchasable hereunder, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. Warrant Shares. Reference is hereby made to that certain Restricted Stock Agreement dated as of September 7, 1993, between the Corporation and Robert C. Goodell (the "Restricted Stock Agreement"), as in effect on the date hereof and without regard to any amendments adverse to the Holder made without the consent of the Holder. In the event that, pursuant to the Restricted Stock Agreement, the Corporation repurchases the Initial Shares (as defined in the Restricted Stock Agreement) from Robert C. Goodell pursuant to Section 1 of the Restricted Stock Agreement, the number of Warrant Shares purchasable hereunder by the Holder shall be reduced as provided in this Section 5. If all of the original Initial Shares are repurchased under Section 1 of the Restricted Stock Agreement, the number of Warrant Shares purchasable hereunder by the Holder shall be reduced to 89,360, as adjusted as otherwise provided herein. If some but less than all of the original Initial Shares are repurchased under Section 1 of the Restricted Stock Agreement, the number of Warrant Shares purchasable hereunder by the Holder shall be the number between 103,810 and 89,360 reduced in proportion to the percentage of the original Initial Shares so repurchased. Upon any adjustment of the number of Warrant Shares, then and in each such case the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder at the address thereof as shown on the books of the Corporation. The notice shall state the revised number of Warrant Shares, setting forth in 5. 6 reasonable detail the method of calculation and the facts upon which such calculation is based. 6. Issue Tax. The issuance of shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any issue tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any shares of Common Stock in a name other than that of the then Holder of this Warrant. 7. Closing of Books. The Corporation will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise hereof. 8. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of Directors of the Corporation or any other matter or any rights whatsoever as a stockholder of the Corporation. No dividends or interest shall be payable or accrued in respect of this Warrant or the shares of Common Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the Warrant Purchase Price or as a stockholder of the Corporation, whether such liability is asserted by the Corporation or by its creditors. 9. Restrictions on Transferability of Securities; Compliance with Securities Act. 9.1 Restrictions on Transferability. The Warrant and the Common Stock issuable hereunder shall not be transferable except upon the conditions specified in this Section 9, which conditions are intended to insure compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"). Each holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferee of the Warrant or such Common Stock to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 9. 9.2 Transfers Not Subject to Restrictions. Subject to Section 10 hereof, the Holder may sell, assign or transfer this Warrant to his parents, the parents of his spouse, his spouse or issue or adopted children, or to a trust established for the benefit of his parents, the parents of his spouse, his spouse, issue, adopted children, or himself, or dispose of them under his will. 6. 7 9.3 Restrictive Legend. Each certificate representing (a) this Warrant, (b) the shares of Common Stock or other securities issued upon exercise of the Warrant and (c) any other securities issued in respect of such shares of Common Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (collectively the "Restrictive Securities"), shall (unless otherwise permitted by the provisions of Section 9.4 below or unless such securities have been registered under the Securities Act) be imprinted with the following legend, in addition to any legend required under applicable state securities laws: THIS WARRANT AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Upon request of a holder of such a certificate, the Corporation shall remove the foregoing legend therefrom or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Corporation shall have received either the opinion referred to in Section 9.4(a) or the "no-action" letter referred to in Section 9.4(b) to the effect that any transfer by such holder of the securities evidenced by such certificate will be exempt from the registration and/or qualification requirements of, and that such legend is not required in order to establish compliance with, the Securities Act, and if applicable, any state securities laws under which transfer restrictions on such securities had been previously imposed. 9.4 Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 9.4. Prior to any proposed transfer of any Restricted Securities, the holder thereof shall give written notice to the Corporation of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by either (a) an unqualified written legal opinion addressed to the Corporation from counsel who shall be reasonably satisfactory to the Corporation, which opinion shall be reasonably satisfactory in form and substance to the Corporation's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act and any applicable state securities laws, or (b) a "no-action" letter from the Securities and Exchange Commission (and any necessary state securities administrator) to the effect that the distribution of such securities without registration will not result in a recommendation by the 7. 8 staff of the Commission (or such administrators) that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Corporation. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 9.4 above. 10. Transferability of Warrant. Each qualified transferee of this Warrant must, prior to the acknowledgement and acceptance of such transfer by the Corporation, agree to take and hold this Warrant subject to the provisions specified herein. Any such permitted transfers may be made without charge to the Holder (except for transfer taxes), at the office or agency of the Corporation referred to in the first paragraph of this Warrant, by the Holder or by its duly authorized attorney, upon surrender of this Warrant properly endorsed. 11. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Corporation, of the Holder and of the holder of shares of Common Stock issued upon exercise of this Warrant contained in Section 8, 9 and 10 shall survive the exercise of this Warrant. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Any notice, request or other document required or permitted to be given or delivered to the record Holder or the Corporation shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Corporation or to the Corporation at the address indicated therefor in the first paragraph of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Corporation by merger, consolidation or acquisition of all or substantially all of the Corporation's assets, and all of the obligations of the Corporation relating to the Common Stock issuable upon the exercise of this Warrant shall survive such merger, consolidation or acquisition and all of the covenants and agreements of the Corporation shall inure to the benefit of the permitted successors and assigns of the Holder. 15. Descriptive Headings; Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without regard to conflicts of laws principles thereof. 16. Lost Warrant or Certificates. The Corporation represents and warrants to the Holder that upon receipt of evidence reasonably satisfactory to the Corporation of the 8. 9 loss, theft, destruction or mutilation of this Warrant or certificate evidencing shares of Common Stock issued on exercise hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Corporation, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Corporation will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 17. Expiration of Warrant. Subject to Section 1.2 hereof, this Warrant shall expire and shall no longer be exercisable on or after September 7, 2003. 18. Stockholders Agreement. All Common Stock or other securities issuable upon exercise of this Warrant shall be subject to all of the provisions of and shall be entitled to the benefits of the Stockholders Agreement dated as of September 7, 1993 by and among the Corporation and the stockholders of the Corporation as of such date (the "Stockholders Agreement"). Upon such exercise, the holder of the Common Stock or other securities issuable hereunder shall become a "Stockholder" under such Agreement, as the Stockholders Agreement may have been modified, supplemented or amended prior to the date of such exercise. The provisions of this Section 18 shall not apply if the Stockholders Agreement has been terminated, either by agreement of the parties thereto or by its own terms, prior to the date of such exercise. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly executed and issued by the officer or officers thereunto duly authorized as of this 7th day of September, 1993. FINANCIAL PACIFIC INSURANCE GROUP, INC., a Delaware corporation By: /s/ ROBERT C. GOODELL ----------------------------- __________________, President 9. EX-10.16 21 PROPERTY QUOTA SHARE REINSURANCE CONTRACT 1 EXHIBIT 10.16 PROPERTY QUOTA SHARE REINSURANCE CONTRACT ORIGINALLY EFFECTIVE: JULY 1, 1993 TERMS EFFECTIVE: JANUARY 1, 1998 Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") REINSURANCE CONFIRMATION SLIP ARTICLE I - CLASSES OF BUSINESS REINSURED A. By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept quota share reinsurance of the Company's net liability under policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") issued or renewed on or after the effective date hereof, and classified by the Company as Automobile Physical Damage, Commercial Multiple Peril (Section I) and Inland Marine business. B. "Net liability" as used herein is defined as the Company's gross liability remaining after cessions, if any, to other pro rata reinsurers. C. The liability of the Reinsurer with respect to each cession hereunder shall commence obligatorily and simultaneously with that of the Company, subject to the terms, conditions and limitation hereinafter set forth. ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become effective on January 1, 1998, with respect to losses occurring under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract on December 31, 1998, or any December 31 thereafter, by giving the other party not less than 90 days prior notice by certified mail. C. Unless the Company elects to reassume the ceded unearned premium in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. Page 1 2 D. "Underwriting year" as used herein shall mean the period from January 1, 1997 through December 31, 1997, and each subsequent 12-month period shall be a separate underwriting year. However, in the event this Contract is terminated, the final underwriting year shall be from the beginning of the then current underwriting year through the effective date of termination. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. ARTICLE III - TERRITORY The liability of the Reinsurer shall be limited to losses under policies covering property located within the territorial limits of the United States of America, its territories or possessions, and the District of Columbia; but this limitation shall not apply to moveable property if the Company's policies provide coverage when said moveable property is outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS A. This Contract does not apply to and specifically excludes the following: 1. Business accepted by the Company as reinsurance from other insurers except Agency Reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. Page 2 3 "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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Insurance against earthquake, when written as such. 6. Insurance on growing crops, however, this exclusion shall not apply to greenhouses and their contents with insured values of $150,000 or less. 7. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such. 8. Liability under coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale or delivered under any trust or floor plan agreements, except under standard accounts receivable policies. 9. Boiler and Machinery, when written as such. 10. Mortgage impairment insurance and similar kinds of insurance, howsoever styled. 11. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 12. Risks which have a total insurable value of more than $250,000,000. 13. Mobile homes unless written as part of a Commercial Multiple Peril policy. 14. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 15. Fidelity and Surety Business. 16. Satellites. Page 3 4 17. Ocean Marine when written as such. 18. Inland Marine business with respect to the following: a. All bridges and tunnels; b. Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; c. Commercial negative film insurance and cast insurance; d. Stationary drilling rigs; e. Furriers' customers' policies; f. Garment contractors' policies; g. Insurance on livestock under so-called "mortality policies"; h. Jewelers' block policies and furriers' block policies; i. Mining equipment; j. Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; k. Watercraft other than watercraft insured under property floaters, yacht and/or outboard policies provided they are less than 50 feet in length; l. Petrochemical and utility risks; m. Transmission and distribution lines. 19. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause-Physical Damage Reinsurance" attached to and forming part of this Contract. 20. Railroad business, specifically insurance for "line" or "track" operations of actual railroads. 21. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, oil and gas pipelines, offshore oil and gas properties. B. If, without the knowledge of a member of the Company's underwriting department, the Company becomes bound on a risk specifically excluded from this Contract, such Page 4 5 reinsurance as would have been afforded for the risk by this Contract if the risk had not been excluded shall nevertheless apply to such risk with respect to losses occurring prior to the 66th day (60 discovery days plus 5 mailing days) after discovery by a member of such underwriting department of the existence of the hazard which makes the exclusion applicable. In case, within such 65 day period (60 discovery days plus 5 mailing days), the Company shall have forwarded to the Reinsurer complete underwriting information and shall have received from the Reinsurer written notice of its approval of the risk for the policy period reported, the risk shall be covered hereunder in the same manner as if such risk were not so excluded, subject, however, to the terms of such notice of approval. ARTICLE V - RETENTION AND LIMIT A. As respects business subject to this Contract, the Company shall retain and be liable for 30.0% of its net liability. The Company shall cede to the Reinsurer and the Reinsurer agrees to accept 70.0% of the Company's net liability. B. Notwithstanding the provisions of paragraph A above, the liability of the Reinsurer for loss hereunder shall not exceed $15,000,000 each loss occurrence. C. The term 'loss occurrence' shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one 'loss occurrence' shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly Page 5 6 occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's 'loss occurrence.' 4. As regards 'freeze,' only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's 'loss occurrence.' Except for those 'loss occurrences' referred to in subparagraphs 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those 'loss occurrences' referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more 'loss occurrences,' provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. It is understood that losses arising from a combination of two or more perils as a result of the same event shall be considered as having arisen from one 'loss occurrence.' Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single 'loss occurrence' shall encompass a time period greater than 168 consecutive hours." ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS/ECO A. In the event the Company pays or is held liable to pay an amount of loss in excess of its policy limit (bailee coverage only), but otherwise within the terms of its policy (hereinafter called "loss in excess of policy limits") or any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits (hereinafter called "extra contractual obligations") because of alleged or actual bad faith or negligence on its part in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a policy subject to this Contract, 90% of the loss in excess of policy limits and/or 90% of the extra contractual obligations shall be added to the (Company's loss, if any, under the policy involved, and the sum thereof (not exceeding, however, $2,000,000) shall be subject to the provisions of Article V. Page 6 7 B. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. C. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. Recoveries from any form of insurance or reinsurance which protects the Company against claims the subject matter of this Article shall inure to the benefit of this Contract. ARTICLE VII - OTHER REINSURANCE A. The Company shall have the option to purchase excess of loss reinsurance to protect its net, recoveries under which to inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. B. The Company shall purchase or be deemed to have purchased inuring excess facultative reinsurance to limit its loss subject hereto (inclusive of loss in excess of policy limits and extra contractual obligations) to $2,000,000 each risk, each loss. ARTICLE VIII - LOSSES AND LOSS ADJUSTMENT EXPENSES A. Losses shall be reported by the Company in summary form as hereinafter provided, however, whenever a loss is reserved by the Company for an amount greater than $100,000, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate in the adjustment of losses subject to this Contract at its own expense. B. All loss settlements made by the Company, whether under strict policy conditions or by way of compromise, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its proportion of each such settlement in accordance with Article XIV. It is agreed, however, that if the Company's gross loss is equal to or greater than $100,000, the Reinsurer shall pay its share of said loss as promptly as possible after receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. C. In the event of a claim under a policy subject hereto, the reinsurer shall be liable for its proportionate share of loss adjustment expenses incurred by the Company in connection therewith, and shall be credited with its proportionate share of any recoveries of such expense. D. "Loss adjustment expense" means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of Page 7 8 supersedes and appeal bonds, and including 1) prejudgment interest, unless included as part of the award or judgment; 2) postjudgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (4) above and office and other overhead expenses. ARTICLE IX - ALTERNATE PAYEE A. It is understood that in order to make the Company's policies generally acceptable to certain mortgagees and lending institutions, Gerling Global Reinsurance Corporation of America, New York, New York (hereinafter referred to as "Gerling Global") has agreed to issue supplemental reinsurance endorsements which guarantee that Gerling Global will pay valid claims under any of the Company's policies to which said endorsements are attached if the Company fails to pay because of its insolvency. B. Now, therefore, it is agreed that if Gerling Global, under the provisions of a supplemental reinsurance endorsement, pays or becomes liable to pay any claim or claims under any policy or policies subject to this Contract, Gerling Global shall be substituted for the Company as payee of any reinsurance recoverable hereunder in respect of such claim or claims, and the Reinsurer, upon notice from Gerling Global, shall make payment thereof directly to Gerling Global. C. In the event the foregoing provisions apply, all the other provisions of this Contract shall apply to Gerling Global in the same manner as if Gerling Global were substituted for the Company as the reinsured party hereunder, and to the extent this Contract reinsures Gerling Global, coverage hereunder shall be excluded as respects the Company. ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with its proportionate share of salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. ARTICLE XI - ORIGINAL CONDITIONS A. All reinsurance under this Contract shall be subject to the same rates, terms, conditions and waivers, and to the same modifications and alterations as the respective policies of the Page 8 9 Company. The Reinsurer shall be credited with its exact proportion of the original premiums collected by the Company, prior to disbursement of any dividends, but after deduction of premiums, if any, ceded by the Company for inuring reinsurance. B. Except as provided in Article IX, nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. ARTICLE XII - PROVISIONAL CEDING COMMISSION The Reinsurer shall allow the Company a 37.5% provisional commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. ARTICLE XIII - COMMISSION ADJUSTMENT A. The provisional commission allowed the Company shall be adjusted periodically for each underwriting year in accordance with the provisions set forth herein. The adjusted commission rate shall be calculated as follows and be applied to premiums earned for the underwriting year under consideration: 1. If the ratio of losses incurred to premiums earned is 67.5% or greater, the adjusted commission rate for the underwriting year under consideration shall be 25.0%; 2. If the ratio of losses incurred to premiums earned is less than 67.5%, but not less than 55.0%, the adjusted commission rate for the underwriting year under consideration shall be 25.0%, plus the difference in percentage points between 67.5% and the actual ratio of losses incurred to premiums earned; 3. If the ratio of losses incurred to premiums earned is less than 55.0%, but not less than 45.0%, the adjusted commission rate for the underwriting year under consideration shall be 37.5%, plus one-half the difference in percentage points between 55.0% and the actual ratio of losses incurred to premiums earned; 4. If the ratio of losses incurred to premiums earned is less than 45.0%, but not less than 40.0%, the adjusted commission rate for the underwriting year under consideration shall be 42.5%, plus the difference in percentage points between 45.0% and the actual ratio of losses incurred to premiums earned; 5. If the ratio of losses incurred to premiums earned is 40.0% or less, the adjusted commission rate for the underwriting year under consideration shall be 47.5%. B. If the ratio of losses incurred to premiums, earned for any underwriting year is greater than 67.5%, the difference in percentage points between the actual ratio of losses incurred to Page 9 10 premiums earned and 67.5% shall be, multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a debit (addition) to losses incurred. If the ratio of losses incurred to premiums earned for any underwriting year is less than 40.0%, the difference in percentage points between 40.0% and the actual ratio of losses incurred to premiums earned shall be multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a credit to (subtraction from) losses incurred. C. Within 45 days after the end of each underwriting year the Company shall calculate and report the adjusted commission on premiums earned for the underwriting year. If the adjusted commission on premiums earned is less than commissions previously allowed by the Reinsurer on premiums earned for the underwriting year, the Company shall remit the difference to the Reinsurer with its report. If the adjusted commission on premiums earned is greater than commissions previously allowed by the Reinsurer on premiums earned for the underwriting year, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. D. In the event the adjusted commission calculation for any underwriting year is based partly on ceded reserves for losses and/or loss adjustment expenses, the adjusted commission shall be recalculated within 45 days after the end of each subsequent 12-month period until all losses under policies with effective or renewal dates during the underwriting year have been settled. Any balance shown to be due either party as a result of any such recalculation shall be remitted promptly by the other party. E. "Losses incurred" as used herein shall mean ceded losses and loss adjustment expenses paid as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expenses outstanding as of the same date, plus (minus) the debit (credit) from the preceding underwriting year, it being understood and agreed that all losses and related loss adjustment expenses under policies allocated to the underwriting year shall be charged to that underwriting year, regardless of the date said losses actually occur, unless this Contract is terminated on a "cutoff" basis, in which event the Reinsurer shall have no liability for losses occurring after the effective date of termination. F. "Premiums earned" as used herein shall mean ceded net written premiums for policies allocated to the underwriting year, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies allocated to an underwriting year shall be credited to that underwriting year, unless this Contract is terminated on a "cutoff" basis, in which event the unearned reinsurance premium (less previously allowed provisional ceding commission) as of the effective date of termination shall be returned by the Reinsurer to the Company. G. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions and taxes, and all board, exchange and bureau assessments, and all other expenses of whatever nature, except loss adjustment expenses. Page 10 11 ARTICLE XIV - REPORTS AND REMITTANCES A. Within 45 days after the end of each month, the Company shall report to the Reinsurer: 1. Ceded net written premium for the month by underwriting year; 2. Collected subject premium for the month by underwriting year; 3. Provisional ceding commission allowed on (2) above; 4. Ceded losses and loss adjustment expenses paid during the month (net of any recoveries during the calendar month under the "cash call" provisions of Article VIII); 5. Ceded unearned premiums and ceded outstanding loss reserves as of the end of the month. The positive balance of (2) less (3) less (4) shall be remitted by the Company with its report. Any balance shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's report. B. Annually, the Company shall furnish the Reinsurer with such information as the Reinsurer may require to complete its Annual Convention Statement. ARTICLE XV - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XVI - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. ARTICLE XVII - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission will be rectified as soon as possible after discovery. Page 11 12 ARTICLE XVIII - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia ARTICLE XIX - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; Page 12 13 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidation, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or Page 13 14 to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. D. Any hold harmless and indemnity agreement affecting payment under this Contract shall be considered an endorsement to and therefore part of this Contract, irrespective of any language to the contrary. Any indemnitee shall be considered a 'payee' within this Article. In no event shall any reinsurer have double indemnity for any loss or expense under this Contract, it being the intent that any payments by the reinsurer to any payee as provided herein shall not be subject to and also collectible in any liquidation or similar proceeding. ARTICLE XXI - ARBITRATION A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. Page 14 15 D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place in Sacramento, California, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the State of California. ARTICLE XXII - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. ARTICLE XXIII - INTERMEDIARY E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Claims notice by the Company to the Intermediary shall be deemed to constitute notice to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. Page 15 16 FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 TERMS EFFECTIVE: JANUARY 1, 1998 Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") REINSURANCE CONFIRMATION SLIP ARTICLE I - CLASSES OF BUSINESS REINSURED A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") issued or renewed on or after the effective date hereof, and classified by the Company as Commercial Multiple Peril (Section II) and Automobile Liability business, subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become originally effective on January 1, 1997, with respect to losses arising under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract on December 31, 1998 or any other December 31 thereafter, by giving the other party not less than 90 days prior notice by certified mail. C. Notwithstanding the provisions of paragraph B, it is understood and agreed that this Contract may be terminated on a "runoff" or "cutoff" basis, as defined in paragraph D below, by Page 1 17 giving 30 days notice prior to each quarter end by certified mail to the other party upon the happening of any one of the following circumstances: 1. Either party may terminate this Contract if the other party is sold during the 1997 calendar year; 2. Either party may terminate this Contract if the other party's A. M. Best rating drops below A-; 3. The Company may terminate any reinsurers participation at any time if the policyholders surplus of that respective reinsurer drops more than 10% from the prior year end surplus level; 4. The Reinsurer may terminate this Contract at any time if the Company's policyholders surplus drops below $5 million. D. Unless the Company elects to reassume the ceded unearned premium in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. E. "Underwriting year" as used herein shall mean the period from January 1, 1997 through December 31, 1997, and each subsequent 12-month period shall be a separate underwriting year. However, in the event this Contract is terminated, the final underwriting year shall be from the beginning of the then current underwriting year through the effective date of termination. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. Page 2 18 ARTICLE III - TERRITORY This Contract shall only apply to policies issued to insureds domiciled in the United States of America, its territories and possessions and the District of Columbia; but this limitation shall not apply to losses if the Company's policies provide coverage outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS A. This Contract does not apply to and specifically excludes the following: 1. Business accepted by the Company as reinsurance from other insurers except agency reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $100,000, including Umbrella business. 6. Aviation liability including aerospace and satellite business. 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Retail liquor law liability except where liquor constitutes less than 50% of sales. Specifically excluded are bars and retail liquor stores. Page 3 19 10. Insurance covering damage claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Fidelity and Surety. 14. Watercraft liability except for boats less than 50 feet in length. 15. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 16. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment. 17. Liability insurance relating to premises or operations primarily involving: a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerin, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; Page 4 20 e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; l. Ski resorts; m. Waste disposal and deposit sites except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; q. Warehousemen's legal liability; r. Automobile racing and racetracks; s. Taxis; t. Blasting contractors; u. Licensed roofing contractors whose primary business is such; v. Wrap up construction projects. 18. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause-Liability - Reinsurance" attached to and forming part of this Contract. Page 5 21 19. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will include ISO pollution exclusion language. B. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 16 and 17 of paragraph A above, except subparagraphs 17(c) and 17(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. C. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in subparagraphs 14 through 19 of paragraph A above, these exclusions, except those set forth in subparagraphs 15, 17(c), 17(d), 18 and 19 shall be suspended with respect to such business until 65 days (60 discovery days plus 5 mailing days) after an underwriting supervisor of the Company acquires knowledge of such business. ARTICLE V - RETENTION AND LIMIT A. If the Company's ultimate net loss as respects any one insured, any one occurrence is less than or equal to $1,000,000, the following provisions shall apply: 1. The Company shall retain and be liable for the first $250,000 of ultimate net loss (whether involving any one or any combination of the classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $750,000 each insured, each occurrence. 2. If the Company's losses arising out of any one occurrence involve losses under policies allocated to more than one underwriting year, the Company's retention applicable to such occurrence for each underwriting year shall be reduced to that portion of the Company's retention determined by dividing the Company's losses arising out of the occurrence by the number of underwriting years to which such policies are allocated with pro rata consideration given depending on the primary policy limits or reinsurance retention of the underwriting years affected. The Reinsurer's limit of liability applicable to such occurrence for each such underwriting year shall be arrived at in the same manner. B. If the Company's ultimate net loss as respects any one insured, any one occurrence exceeds $1,000,000, the Company shall retain and be liable for the first amount of policy period ultimate net loss (whether involving any one or any combination of the classes of business covered hereunder, regardless of the number of policies under which such loss is payable) equal to 25% of such policy period ultimate net loss, subject to a maximum retention of Page 6 22 $250,000 each insured, each occurrence, per each underwriting year affected. The Reinsurer shall then be liable for 75% of such policy period ultimate net loss, but the liability of the Reinsurer shall not exceed $750,000 (being 75% of $1,000,000) each insured, each occurrence, per each underwriting year affected. ARTICLE VI - DEFINITIONS A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expenses, as hereinafter provided) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Ultimate net loss shall include the following loss adjustment expenses, as hereinafter defined: 1. Ultimate net loss shall include loss adjustment expenses which reduce the Company's limit of liability involved; 2. If the Company's ultimate net loss exclusive of loss adjustment expenses as respects each insured, each occurrence is less than $250,000, ultimate net loss shall include loss adjustment expenses incurred by the Company which do not reduce the Company's limit of liability under the policy involved, but the amount of such loss adjustment expenses to be included in ultimate net loss shall not exceed $750,000 as respects each insured, each occurrence. B. "Policy period ultimate net loss" as used herein is defined as the Company's ultimate net loss as respects each insured, each occurrence, divided by the number of policy periods involved in that occurrence. C. "Policy period" as used herein shall mean the period from the inception or renewal date of the primary policy through the expiration, termination or first premium anniversary date of the policy, whichever first occurs. As respects continuous or greater than one year term policies, each premium anniversary date shall be considered the beginning of a new policy period. D. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of Page 7 23 an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. E. "Occurrence" as used herein is defined as an accident or occurrence or a series of accidents or occurrences arising out of or caused by one event. However, as respects policies where the Company's limit of liability for Products and Completed Operations coverages is determined on the basis of the insured's aggregate losses during a policy period, all such losses proceeding from or traceable to the same causative agency shall, at the Company's option, be deemed to have been caused by one occurrence commencing at the beginning of the policy period, it being understood and agreed that each renewal or annual anniversary date of the policy involved shall be deemed the beginning of a new policy period. F. "Loss adjustment expense" means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) prejudgment interest, unless included as part of the award or judgment; 2) postjudgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (4) above and office and other overhead expenses. ARTICLE VII - CLAIMS AND LOSS ADJUSTMENT EXPENSES A. Whenever a claim is reserved by the Company for an amount greater than 50.0% of its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. Page 8 24 B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. C. In the event of loss hereunder for which the Company's ultimate net loss exclusive of loss adjustment expenses as respects each insured, each occurrence is greater than or equal to $250,000, loss adjustment expenses incurred by the Company in connection therewith which do not reduce the Company's limit of liability under the policy involved shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage, subrogation and other recoveries. However, if a verdict or judgment is reduced by any process other than by the trial court, resulting in an ultimate saving to the Reinsurer, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be shared by the Company and the Reinsurer in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment which do not reduce the Company's limit of liability under the policy involved shall be shared in proportion to each party's interest in such original verdict or judgment. The Reinsurer's liability for such loss adjustment expenses shall be in addition to its liability for ultimate net loss. ARTICLE VIII - SALVAGE AND SUBROGATION The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. ARTICLE IX - PROVISIONAL PREMIUM A. As provisional premium for the reinsurance provided hereunder for each underwriting year, the Company shall pay the Reinsurer 16.0% of its net written premium for the underwriting year. B. Within 45 days after the end of each month within each underwriting year, the Company shall report its net written premium for the month. The provisional premium due the Reinsurer shall be paid by the Company with its report at the rate shown in paragraph A, multiplied by the actual amount of premium collected by the Company during the month from policies allocated to the underwriting year. Page 9 25 ARTICLE X - PREMIUM ADJUSTMENT A. The provisional premium paid by the Company shall be adjusted periodically in accordance with the provisions set forth herein. The first adjustment period shall be from the effective date of this Contract through December 31, 1999, and each subsequent 36-month period shall be a separate adjustment period, unless this Contract is terminated, in which event the final adjustment period shall be from the beginning of the then current adjustment period through the date of termination. B. The adjusted premium for each adjustment period shall be equal to 160% of the Reinsurer's losses incurred for the adjustment period, plus 5.20% of the Company's net earned premium for the first underwriting year, plus 4.80% of the Company's net earned premium for each underwriting year thereafter. However, the adjusted premium for any one adjustment period shall not exceed an amount equal to 25.60% of the Company's net earned premium for the adjustment period. C. The Company shall calculate and report the adjusted premium for each adjustment period at the following times: 1. Within 45 days after the end of each underwriting year within the adjustment period; 2. Within 45 days after the end of the adjustment period; and 3. Within 45 days after the end of each 12-month period after the end of the adjustment period until all losses arising out of occurrences commencing during the adjustment period have been finally settled. Each such calculation shall be based on the Reinsurer's losses incurred and the Company's net earned premium for the adjustment period as of the date of the calculation. D. As respects calculations made in accordance with subparagraph (b) or (c) of subparagraph 3 above, if the adjusted premium is less than reinsurance premiums previously paid for the adjustment period, the Reinsurer shall remit the difference to the Company within 45 days after receipt and verification of the Company's report, subject to the following schedule: 1. 33.33% of the adjusted premium shown to be due as of the calculation due within 45 days after the end of the adjustment period; 2. 66.67% of the adjusted premium shown to be due as of the calculation due within 45 days after 12 months after the end of the adjustment period (less any adjustment premium amounts previously paid); 3. 100.0% of the adjusted premium shown to be due as of the calculation due within 45 days after 24 months after the end of the adjustment period (less any adjustment premium amounts previously paid) and as of the calculation due within 45 days after the end of any 12-month period thereafter. Page 10 26 It is further agreed that all payments under the provisions of this paragraph shall be net of ceding commission allowed thereon. E. "Net written premium" as used herein is defined as gross written premium of the Company for the Casualty classes of business reinsured hereunder, less cancellations and return premiums, and less premiums ceded by the Company for excess facultative reinsurance or other reinsurance which inures to the benefit of this Contract. F. "Losses incurred" as used herein shall mean losses and loss adjustment expense paid by the Reinsurer as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, it being understood and agreed that all losses under policies allocated to underwriting years within an adjustment period shall be charged to that adjustment period, regardless of the date said losses actually occur, unless this Contract is terminated on a "cutoff" basis, in which event the Reinsurer shall have no liability for losses arising out of occurrences commencing after the effective date of termination under policies allocated to underwriting years within the final adjustment period. G. "Net earned premium" as used herein is defined as the Company's net written premium for policies allocated to underwriting years within the adjustment period, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies allocated to underwriting years within an adjustment period shall be credited to that adjustment period, unless this Contract is terminated on a "cutoff" basis, in which event the unearned reinsurance premium as of the effective date of termination shall be returned by the Reinsurer to the Company. ARTICLE XI - COMMISSION (BRMA 1OA) A. The Reinsurer shall allow the Company a 37.5% commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. B. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature, except loss adjustment expense. ARTICLE XII - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Page 11 27 ARTICLE XIII - ACCESS TO RECORDS (BRMA ID) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. ARTICLE XIV - LIABILITY OF THE REINSURER A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. ARTICLE XV - NET RETAINED LIABILITY This Contract shall apply only to that portion of any insurance or reinsurance the Company retains net for its own account, and in calculating the amount of any loss hereunder and the amount in excess of which this Contract attaches, only loss or losses with respect to that portion of any insurance or reinsurance the Company retains net for its own account shall be included. It is understood and agreed, however, that the Reinsurer's liability hereunder with respect to 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 be due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE XVI - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission will be rectified as soon as possible after discovery. ARTICLE XVII - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Page 12 28 ARTICLE XVIII - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; Page 13 29 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XIX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Page 14 30 ARTICLE XX - ARBITRATION A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within thirty (30) days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within thirty (30)days following their appointment, each Arbiter shall nominate three candidates within ten (10) days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within thirty (30) days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than Joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place in Sacramento, California, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the State of California. ARTICLE XXI - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) Page 15 31 A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful beneficiary hereunder arising out of this Contract. ARTICLE XXII - INTERMEDIARY E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Claims notice by the Company to the Intermediary shall be deemed to constitute notice to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. Page 16 32 Financial Pacific Insurance Company Sacramento, California CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1998 REINSURANCE CONFIRMATION BUSINESS A. By this Contract the Reinsurer agrees to reinsure the REINSURED: excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Commercial Multiple Peril (Section II) and Automobile Liability business (hereinafter referred to as "Casualty business") and Commercial Multiple Peril (Section I), Automobile Physical Damage and Inland Marine business (hereinafter referred to as "Property business"), subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when such policies include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. COMMENCEMENT A. This Contract shall become effective on January 1, 1998, AND with respect to losses arising under policies allocated TERMINATION: to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract on December 31, 1998 or on any December 31 thereafter by giving the other party not less than 90 days prior notice by certified mail. C. Unless the Company elects to reassume the ceded unearned premium Page 1 33 in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. D. "Underwriting year" as used herein shall mean the period from January 1, 1998 through December 31, 1998, and each 12-month period thereafter shall be a separate underwriting year. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. EXCLUSIONS: See attached. RETENTION AND A. As regards all Property business the subject of this LIMIT: Reinsurance To pay up to $2,000,000 Ultimate Net Loss, each Insured each loss occurrence, in excess of $2,000,000 Ultimate Net Loss, each Insured each loss occurrence. B. As regards the Casualty business the subject of this Reinsurance 1a. As respects new and renewal business only with policy limits of $1,000,000 or less. To pay up to $2,000,000 Ultimate Net Loss, each Insured each loss Page 2 34 occurrence, in excess of $1,000,000 Ultimate Net Loss, each insured each loss occurrence. 1b. As regards business with limits excess of $1,000,000. To pay up to $2,000,000 Ultimate net Loss, each Insured each loss occurrence, in excess of $11,000,000 Ultimate Net Loss, each Insured each loss occurrence. C. Coverage hereunder shall apply only in the event the Reinsured sustains liability for Extra Contractual Obligations and/or losses in excess of original policy limits, arising under policies written by them. D. In the event that two or more policies covered under this Contract are involved in the same occurrence but allocated to different underwriting years, the amount to be retained by the Company for each underwriting year shall be reduced to the percentage that the Company's retained losses on the policies allocated to each underwriting year bears to the total of all the Company's retained losses contributing to the same occurrence. The indemnity and/or recovery shall be arrived at in the same manner. OTHER A. The Company shall maintain in force facultative REINSURANCE: certificates or semi-automatic facultative facilities that apply on an individual risk basis which cover indemnity loss and may or may not cover extra contractual obligations and loss in excess of policy limits in accordance with the terms of the individual certificate or semi-automatic facultative facility. Recoveries under such reinsurance shall inure to the benefit of this Contract. B. The Company shall be permitted to carry underlying reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. ULTIMATE NET See attached. Includes 100% ECO and 100% XPL. LOSS: CLAIMS AND Individual loss notices and settlements. Pro rata loss LOSS adjustment expense in addition to the limit. ADJUSTMENT Page 3 35 EXPENSE: PREMIUM: .2825% of net earned premium for the contract year (including the runoff contract year, if any), subject to an annual minimum premium of $130,000. Adjusted within 45 days after the end of each contract year. Annual deposit premium of $130,000 in four equal installments of $32,500 on January 1, April 1, July 1, and October 1, of each contract year (including the runoff contract year, if any). REINSTATEMENT: One full reinstatement in all, the additional premium for which shall be calculated at 100% for time and pro rata for amount. Other Salvage and Subrogation Provisions: Offset (BRMA 36C) Access to Records (BRMA 1D) Liability of the Reinsurer Net Retained Lines (BRMA 32E) Errors and Omissions (BRMA 14F) Taxes (BRMA 50B) Unauthorized Reinsurers (Evergreen LOC for outstanding losses/LAE; excluding IBNR) Insolvency Arbitration Service of Suit (BRMA 49C) Intermediary Page 4 36 EXCLUSIONS This Contract does not apply to and specifically excludes the following: A. The following General Exclusions: 1. Business accepted by the Company as reinsurance from other insurers except Agency Reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $100,000 or business written to apply specifically in excess over underlying insurance. However, this exclusion shall not apply to Umbrella business. 6. Aviation liability including aerospace and satellite business. 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Retail liquor law liability, except where liquor constitutes less than 50.0% of sales. Specifically excluded are bars and retail liquor stores. Page 5 37 10. Insurance covering damages claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Fidelity and Surety. B. The following Property Exclusions: 1. Insurance against earthquake, when written as such. 2. Insurance on growing crops. 3. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such. 4. Liability under coverage specifically afforded for loss or damages resulting from misappropriation, secretion, conversion, infidelity or any dishonest act on the part of the insured or other party of interest, his/her or their employees or agents, or any person or persons to whom merchandise may be entrusted (carriers for hire excepted). 5. Liability under coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale, or delivered under any trust or floor plan agreements, except under standard accounts receivable policies. 6. Boiler and Machinery, when written as such. 7. Mortgage impairment insurance and similar kinds of insurance, howsoever styled. 8. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 9. Risks which have a total insurable value of more than $250,000,000. 10. Mobile homes unless written as part of a commercial multiple peril policy. Page 6 38 11. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 12. Satellites. 13. Ocean Marine when written as such. 14. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage-Reinsurance" attached to and forming part of this Contract. 15. Railroad business, specifically insurance for "line" or "track" operations of actual railroads. 16. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, oil and gas pipelines, offshore oil and gas properties. 17. As respects aviation, hull and ingestion. C. The following Casualty Exclusions: 1. Watercraft liability except for boats less than 50 feet in length. 2. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 3. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment; 4. Liability insurance relating to premises or operations primarily involving: Page 7 39 a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerine, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; i. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; l. Ski resorts; m. Waste disposal and deposit sites except when written in conjunction with either a refuse hauler or recycling account. n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Existence, construction or maintenance of dams; q. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; r. Warehousemen's legal liability; s. Automobile racing and racetracks; Page 8 40 t. Taxis; u. Blasting contractors; v. Licensed roofing contractors whose primary business is such; w. General contractors with revenues in excess of $50,000,000; x. Wrap up construction projects. 5. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability-Reinsurance" attached to and forming part of this Contract. 6. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will include ISO pollution exclusion language. 7. Any loss, cost, or expense arising out of any governmental direction or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 3 and 4 of this paragraph, except subparagraphs 4(c) and 4(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in this paragraph, these exclusions, except those set forth in subparagraphs 2, 4(c), 4(d), 5, 6 and 7, shall be suspended with respect to such business until 30 days after an underwriting supervisor of the Company acquires knowledge of such business. Page 9 41 ULTIMATE NET LOSS A. "Ultimate net loss" as used herein is defined as the sum or sums paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 100% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 100% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including litigation expenses and interest on judgments, but not including office expenses or salaries of the Company's regular employees. Page 10 EX-10.17 22 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT 1 EXHIBIT 10.17 FINANCIAL PACIFIC INSURANCE COMPANY SACRAMENTO, CALIFORNIA CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT Originally Effective: July 1, 1996 2 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 3 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD. Lloyd's Underwriters and Companies Per Signing Schedule(s) 100.0% TOTAL 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 4 TABLE OF CONTENTS
ARTICLE PAGE I Classes of Business Reinsured 1 II Commencement and Termination 2 III Territory 3 IV Exclusions 3 V Retention and Limit 8 VI Reinstatement 9 VII Definitions 10 VIII Other Reinsurance 12 IX Claims and Loss Adjustment Expenses 13 X Salvage and Subrogation 13 XI Premium 14 XII Offset (BRMA 36C) 14 XIII Access to Records (BRMA 1D) 14 XIV Net Retained Liability 15 XV Errors and Omissions (BRMA 14F) 15 XVI Taxes (BRMA 50B) 15 XVII Unauthorized Reinsurers 15 XVIII Insolvency 16 XIX Arbitration (BRMA 6J) 17 XX Service of Suit (BRMA 49C) 18 XXI Intermediary (BRMA 23A) 19
5 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") ARTICLE I - CLASSES OF BUSINESS REINSURED A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Commercial Multiple Peril (Section II) and Automobile Liability business (hereinafter referred to as "Casualty business") and Commercial Multiple Peril (Section I), Automobile Physical Damage and Inland Marine business (hereinafter referred to as "Property business"), subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. Page 1 6 ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become effective on July 1, 1996, with respect to losses arising under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. The Company may, at its sole option, terminate and replace this Contract on December 31, 1996, if there are no known losses under this Contract as of December 31, 1996. Either party may terminate this Contract on June 30, 1997 or on any June 30 or December 31 thereafter by giving the other party not less than 90 days prior notice by certified mail. C. Unless the Company elects that the Reinsurer have no liability for losses occurring after the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. D. "Underwriting year" as used herein shall mean the period from July 1, 1996 through June 30, 1997, and each subsequent 12-month period shall be a separate underwriting year unless this Contract is terminated on December 31, 1996, in which event the term "underwriting year" shall mean the period from July 1, 1996 through December 31, 1996. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Notwithstanding the foregoing, polices in force on July 1, 1996, shall be allocated to the first underwriting year hereunder. Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. Page 2 7 ARTICLE III - TERRITORY This Contract shall only apply to policies issued to insureds domiciled in the United States of America, its territories and possessions, Puerto Rico and the District of Columbia; but this limitation shall not apply to losses if the Company's policies provide coverage outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS This Contract does not apply to and specifically excludes the following: A. The following General Exclusions: 1. Business accepted by the Company as reinsurance from other insurers except Agency Reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $10,000 or business written to apply specifically in excess over underlying insurance. However, this exclusion shall not apply to Umbrella business. 6. Aviation liability including aerospace and satellite business. 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. Page 3 8 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Liquor law liability, except where liquor constitutes less than 50.0% of sales. Specifically excluded are bars and retail liquor stores. 10. Insurance written for governmental bodies, municipalities, schools and colleges. 11. Insurance covering damages claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 12. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 13. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 14. Liability for property damage caused by the subsidence of land and arising out of or attributable to any operations of the insured. 15. Fidelity and Surety. B. The following Property Exclusions: 1. Insurance against earthquake, when written as such. 2. Insurance on growing crops. 3. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such. 4. Liability under coverage specifically afforded for loss or damages resulting from misappropriation, secretion, conversion, infidelity or any dishonest act on the part of the insured or other party of interest, his/her or their employees or agents, or any person or persons to whom merchandise may be entrusted (carriers for hire excepted). 5. Liability under coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale, or delivered under any trust or floor plan agreements, except under standard accounts receivable policies. Page 4 9 6. Boiler and Machinery, when written as such. 7. Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgage interest in property or its owner interest in foreclosed property except that physical and consequential damage will be covered and not considered mortgage impairment when physical loss, damage or extra expense is caused by perils insured under the Company's policy to all real and personal property against which the Company's insured has granted a mortgage or to which the insured has taken title, or property in which the insured retains an interest when sold under a conditional sales agreement, a deed of trust, or any other instrument whereby title remains in the insured, or the insured's interest in co-operative loans. 8. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 9. Risks which have a total insurable value of more than $250,000,000. 10. Mobile homes, unless written as part of a commercial multiple peril policy. 11. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 12. Grain elevators. 13. Satellites. 14. Ocean Marine when written as such. 15. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage -- Reinsurance" attached to and forming part of this Contract. 16. Railroad business, specifically insurance for "line" or "track" operations of actual railroads. 17. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, oil and gas pipelines, offshore oil and gas properties. 18. As respects aviation, hull and ingestion. C. The following Casualty Exclusions: 1. Watercraft liability except for boats less than 50 feet in length. Page 5 10 2. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 3. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment; e. Manufacture of automobile components critical to automobile safety. 4. Liability insurance relating to premises or operations primarily involving: a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerine, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; Page 6 11 j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; 1. Ski resorts; m. Waste disposal and deposit sites, except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Existence, construction or maintenance of dams; q. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; r. Warehousemen's legal liability; s. Automobile racing and racetracks; t. Taxis; u. Blasting contractors; v. Licensed roofing contractors whose primary business is such; w. General contractors with revenues in excess of $50,000,000; x. Wrap up construction projects. 5. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability -- Reinsurance" attached to and forming part of this Contract. 6. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company win include ISO pollution exclusion language. 7. Any loss, cost, or expense arising out of any governmental direction or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 3 and 4 of this paragraph, except Page 7 12 subparagraphs, 4(c) and 4(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in this paragraph, these exclusions, except those set forth in subparagraphs 2, 4(c), 4(d), 5, 6 and 7, shall be suspended with respect to such business until 30 days after an underwriting supervisor of the Company acquires knowledge of such business. ARTICLE V - RETENTION AND LIMIT A. COVERAGE A: As respects Casualty business subject to this Contract, the Company's retention and the Reinsurer's liability shall be determined as follows: 1. As respects in force business only, the Company shall retain and be liable for the first $2,000,000 of ultimate net loss (whether involving any one or any combination of the casualty classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one insured, any one occurrence. 2. As respects new and renewal business only with policy limits of $1,000,000 or less, the Company shall retain and be liable for the first $1,000,000 of ultimate net loss (whether involving any one or any combination of the casualty classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one insured, any one occurrence. 3. As respects new and renewal business only with policy limits greater than $1,000,000, the Company shall retain and be liable for the first $5,000,000 of ultimate net loss (whether involving any one or any combination of the casualty classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one insured, any one occurrence. Page 8 13 B. COVERAGE B: As respects Property business subject to this Contract, the Company shall retain and be liable for the first $2,000,000 of ultimate net loss as respects any one risk, each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one risk, each loss occurrence. C. Coverage hereunder shall apply only in the event the Company sustains liability for extra contractual obligations and/or losses in excess of original policy limits, arising under policies written by the Company. D. In the event that two or more policies covered under this Contract are involved in the same occurrence but allocated to different underwriting years, the amount to be retained by the Company for each underwriting year shall be reduced to the percentage that the Company's retained losses on the policies allocated to each underwriting year bears to the total of all the Company's retained losses contributing to the same occurrence. The indemnity and/or recovery shall be arrived at in the same manner. E. The maximum policy limits shown in paragraphs A and B shall be extended to follow the Company's policy if the Company's ultimate net loss is greater than one or more of said amounts because its policy includes or is deemed to include: 1. So-called "Out of State Insurance" provisions; 2. Limits of liability required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. ARTICLE VI - REINSTATEMENT A. In the event all or any portion of the reinsurance hereunder is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit reinstated (based on the ultimate net loss paid by the Reinsurer); times 2. The earned reinsurance premium for the underwriting year in which the occurrence commences (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any ultimate net loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the contract year has not been finally determined as of the date of any such statement, the calculation of reinstatement Page 9 14 premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the contract year has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer hereunder for ultimate net loss shall not exceed $2,000,000 as respects any one occurrence, nor shall it exceed $4,000,000 as respects all occurrences commencing during any one contract year. ARTICLE VII - DEFINITIONS A. "Ultimate net loss" as used herein is defined as the sum or sums paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 100% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 100% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually Page 10 15 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. C. As respects Coverage A of Article V, "occurrence" as used herein is defined as an accident or occurrence or a series of accidents or occurrences arising out of or caused by one event. However, as respects policies where the Company's limit of liability for Products and Completed Operations coverages is determined on the basis of the insured's aggregate losses during a policy period, all such losses proceeding from or traceable to the same causative agency shall, at the Company's option, be deemed to have been caused by one occurrence commencing at the beginning of the policy period, it being understood and agreed that each renewal or annual anniversary date of the policy involved shall be deemed the beginning of a new policy period. D. As respects Coverage B of Article V, the term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph ) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." Page 11 16 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." Except for those "loss occurrences" referred to in subparagraphs, 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. E. Loss adjustment expense means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) pre-judgment interest, unless included as part of the award or judgment; 2) post-judgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (4) above, and office and other overhead expenses. F. The Company shall be the sole judge of what constitutes "one risk." ARTICLE VIII - OTHER REINSURANCE A. The Company shall maintain in force facultative certificates or semi-automatic facultative facilities that apply on an individual risk basis which cover indemnity loss and may or may not cover extra contractual obligations and loss in excess of policy limits in accordance with the terms of the individual certificate or semi-automatic facultative facility. Recoveries under such reinsurance shall inure to the benefit of this Contract. Page 12 17 B. The Company shall be permitted to carry underlying reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. ARTICLE IX - CLAIMS AND LOSS ADJUSTMENT EXPENSES A. Whenever a claim is reserved by the Company for an amount greater than its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. C. In the event of loss hereunder, loss adjustment expenses incurred by the Company in connection therewith which do not reduce the Company's limit of liability under the policy involved shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage, subrogation and other recoveries. However, if a verdict or judgment is reduced by any process other than by the trial court, resulting in an ultimate saving to the Reinsurer, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be shared by the Company and the Reinsurer in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment which do not reduce the Company's limit of liability under the policy involved shall be shared in proportion to each party's interest in such original verdict or judgment. The Reinsurer's liability for such loss adjustment expenses shall be in addition to its liability for ultimate net loss. ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating Page 13 18 to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. ARTICLE XI - PREMIUM A. As premium for the reinsurance provided hereunder for each underwriting year, the Company shall pay the Reinsurer .2825% of its net written premium for the underwriting year subject to an annual minimum premium of $130,000 for the underwriting year. However, in the event this Contract is terminated on a "cutoff" basis, the minimum premium for the final underwriting year shall be $65,000. B. The Company shall pay the Reinsurer an annual deposit premium of $130,000 in four equal installments of $32,500 on July 1, October 1, January 1 and April 1 of each underwriting year. C. Within 45 days after the end of each underwriting year, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for the underwriting year, computed in accordance with paragraph A, and if the premium so computed is greater than the previously paid minimum and deposit premium, the balance shall be remitted by the Company with its report. D. "Net written premium" as used herein is defined as gross written premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. ARTICLE XII - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XIII - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Page 14 19 ARTICLE XIV - NET RETAINED LIABILITY This Contract shall apply only to that portion of any insurance or reinsurance the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and the amount in excess of which this Contract attaches, only loss or losses with respect to that portion of any insurance or reinsurance the Company retains net for its own account shall be included. It is understood and agreed, however, that the Reinsurer's liability hereunder with respect to 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 be due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE XV - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE XVI - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. ARTICLE XVII - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; Page 15 20 if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XVIII - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the Page 16 21 pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. D. Any hold harmless and indemnity agreement affecting payment under this Contract shall be considered an endorsement to and therefore part of this Contract, irrespective of any language to the contrary. Any indemnitee shall be considered a "payee" within this Article. In no event shall any reinsurer have double indemnity for any loss or expense under this Contract, it being the intent that any payments by the reinsurer to any payee as provided herein shall not be subject to and also collectible in any liquidation or similar proceeding. ARTICLE XIX - ARBITRATION (BRMA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their Page 17 22 appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. ARTICLE XX - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Page 18 23 B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. ARTICLE XXI - INTERMEDIARY (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this ____ day of ______________________________ 199___. ________________________________________ Financial Pacific Insurance Company Page 19 24 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and nether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2)III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 25 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (Approved by Lloyd's Underwriters' Fire and Non-Marine Association) (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 II 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 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 (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. 26 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 and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof, "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or 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 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, (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. 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 of 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. 27 INTERESTS AND LIABILITIES AGREEMENT of Certain Underwriting Members of Lloyd's shown in the Signing Schedule attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 40.46% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 725 South Figueroa Street, Suite 1990, Los Angeles, California 90017. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. 28 INTERESTS AND LIABILITIES AGREEMENT of Certain Insurance Companies shown in the Signing Schedule(s) attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 59.54% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 725 South Figueroa Street, Suite 1990, Los Angeles, California 90017. The following Article shall apply to the Subscribing Reinsurer's share in the attached Contract, in lieu of the provisions of Article XVII - Unauthorized Reinsurers - of the Contract: "ARTICLE XVII - LOSS RESERVES (Applicable only if the Reinsurer cannot qualify for credit by any state or any other governmental authority having jurisdiction over the Company's loss reserves.) A. As regards policies or bonds issued by the Company coming within the scope of this Contract, 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 by Page 1 of 3 29 law to set up it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company of a clean, irrevocable and unconditional Letter of Credit issued and confirmed, if confirmation is required by the regulatory authority(ies) having jurisdiction over the Company's loss reserves, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of Letters of Credit and which is (are) acceptable to said regulatory authority(ies), in an amount equal to the Reinsurer's proportion of 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 Incurred But Not Reported losses be included in the amount of the Letter of Credit. B. The Letter of Credit shall be in a form acceptable to insurance regulatory authority(ies) having jurisdiction over the Company's loss reserves, 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 issuing bank shall notify the Company by registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the federal reserve system or not chartered in New York State, shall provide sixty (60) days notice to the Company prior to any expiration in the event of non-extension. C. Notwithstanding any other provision of this Contract, the Company or its successors in interest may draw upon such credit at any time, without diminution because of the insolvency of the Company or of the Reinsurer, for one or more of the following purposes only: 1. To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any loss reinsured by this Contract, the payment of which has been agreed by the Reinsurer and which has not been otherwise paid; 2. To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Contract; 3. 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 Contract. 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. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. Page 2 of 3 30 D. At annual intervals, or more frequently as agreed but never more frequently than quarterly, 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." Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto. Page 3 of 3 31 TERMINATION ADDENDUM to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") and to the INTERESTS AND LIABILITIES AGREEMENT of Certain Underwriting Members of Lloyd's shown in the Signing Schedule attached hereto (hereinafter referred to as the "Subscribing Reinsurer") attached thereto IT IS HEREBY AGREED that this Contract and the Interests and Liabilities Agreement under which the Subscribing Reinsurer has a 40.46% share in the interests and liabilities of the "Reinsurer" shall be terminated at December 31, 1996, with respect to losses occurring after that date. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this____________day of___________________________199___. ________________________________________ Financial Pacific Insurance Company Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. 32 TERMINATION ADDENDUM to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") and to the INTERESTS AND LIABILITIES AGREEMENT of Certain Insurance Companies shown in the Signing Schedule(s) attached hereto (hereinafter referred to as the "Subscribing Reinsurer") attached thereto IT IS HEREBY AGREED that this Contract and the Interests and Liabilities Agreement under which the Subscribing Reinsurer has a 59.54% share in the interests and liabilities of the "Reinsurer" shall be terminated at December 31, 1996, with respect to losses occurring after that date. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this____________day of___________________________199___. ________________________________________ Financial Pacific Insurance Company Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. EX-10.18 23 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT 1 EXHIBIT 10.18 FINANCIAL PACIFIC INSURANCE COMPANY SACRAMENTO, CALIFORNIA CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT Originally Effective: January 1, 1997 2 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 3 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California REINSURERS PARTICIPATIONS THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD. Lloyd's Underwriters and Companies Per Signing Schedule(s) 100.0% TOTAL 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 4 TABLE OF CONTENTS
ARTICLE PAGE I Classes of Business Reinsured 1 II Commencement and Termination 2 III Territory 2 IV Exclusions 3 V Retention and Limit 7 VI Reinstatement 8 VII Definitions 9 VIII Other Reinsurance 11 IX Claims and Loss Adjustment Expenses 12 X Salvage and Subrogation 12 XI Premium 13 XII Offset (BRMA 36C) 13 XIII Access to Records (BRMA 1D) 13 XIV Net Retained Liability 14 XV Errors and Omissions (BRMA 14F) 14 XVI Taxes (BRMA 50B) 14 XVII Unauthorized Reinsurers 14 XVIII Insolvency 15 XIX Arbitration (BRMA 6J) 16 XX Service of Suit (BRMA 49C) 17 XXI Intermediary (BRMA 23A) 18
5 CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") ARTICLE I - Classes OF BUSINESS REINSURED A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Commercial Multiple Peril (Section II) and Automobile Liability business (hereinafter referred to as "Casualty business") and Commercial Multiple Peril (Section I), Automobile Physical Damage and Inland Marine business (hereinafter referred to as "Property business"), subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. Page 1 6 ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become effective on January 1, 1997, with respect to losses arising under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract on December 31, 1997 or any December 31 thereafter by giving the other party not less than 90 days prior notice by certified mail. C. Unless the Company elects that the Reinsurer have no liability for losses occurring after the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. D. "Underwriting year" as used herein shall mean the period from January 1, 1997 through December 31, 1997, and each subsequent 12-month period shall be a separate underwriting year. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Notwithstanding the foregoing, the policies in force on January 1, 1997, shall be allocated to the first underwriting year hereunder. Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. ARTICLE III - TERRITORY This Contract shall only apply to policies issued to insureds domiciled in the United States of America, its territories and possessions, Puerto Rico and the District of Columbia; but this limitation shall not apply to losses if the Company's policies provide coverage outside the aforesaid territorial limits. Page 2 7 ARTICLE IV - EXCLUSIONS This Contract does not apply to and specifically excludes the following: A. The following General Exclusions: 1. Business accepted by the Company as reinsurance from other insurers except Agency Reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $ 100,000 or business written to apply specifically in excess over underlying insurance. However, this exclusion shall not apply to Umbrella business. 6. Aviation liability including aerospace and satellite business. 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Retail liquor law liability, except where liquor constitutes less than 50.0% of sales. Specifically excluded are bars and retail liquor stores. 10. Insurance covering damages claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form Page 3 8 a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Fidelity and Surety. B. The following Property Exclusions: 1. Insurance against earthquake, when written as such. 2. Insurance on growing crops. 3. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such. 4. Liability under coverage specifically afforded for loss or damages resulting from misappropriation, secretion, conversion, infidelity or any dishonest act on the part of the insured or other party of interest, his/her or their employees or agents, or any person or persons to whom merchandise may be entrusted (carriers for hire excepted). 5. Liability under coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale, or delivered under any trust or floor plan agreements, except under standard accounts receivable policies. 6. Boiler and Machinery, when written as such. 7. Mortgage impairment insurance and similar kinds of insurance, howsoever styled. 8. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 9. Risks which have a total insurable value of more than $250,000,000. 10. Mobile homes, unless written as part of a commercial multiple peril policy. 11. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property Page 4 9 damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 12. Satellites. 13. Ocean Marine when written as such. 14. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage Reinsurance" attached to and forming part of this Contract. 15. Railroad business, specifically insurance for "line" or "track" operations of actual railroads. 16. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, oil and gas pipelines, offshore oil and gas properties. 17. As respects aviation, hull and ingestion. C. The following Casualty Exclusions: 1. Watercraft liability except for boats less than 50 feet in length. 2. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 3. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment; 4. Liability insurance relating to premises or operations primarily involving: a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; Page 5 10 c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerine, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; l. Ski resorts; m. Waste disposal and deposit sites, except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Existence, construction or maintenance of dams; q. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; r. Warehousemen's legal liability; s. Automobile racing and racetracks; t. Taxis; u. Blasting contractors; Page 6 11 v. Licensed roofing contractors whose primary business is such; w. General contractors with revenues in excess of $50,000,000; x. Wrap up construction projects. 5. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability-Reinsurance" attached to and forming part of this Contract. 6. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will include ISO pollution exclusion language. 7. Any loss, cost, or expense arising out of any governmental direction or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 3 and 4 of this paragraph, except subparagraphs 4(c) and 4(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in this paragraph, these exclusions, except those set forth in subparagraphs 2, 4(c), 4(d), 5, 6 and 7, shall be suspended with respect to such business until 30 days after an underwriting supervisor of the Company acquires knowledge of such business. ARTICLE V - RETENTION AND LIMIT A. Coverage A: As respects Casualty business subject to this Contract, the Company's retention and the Reinsurer's liability shall be determined as follows: 1. As respects business with policy limits of $1,000,000 or less, the Company shall retain and be liable for the first $ 1,000,000 of ultimate net loss (whether involving any one or any combination of the casualty classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one insured, any one occurrence. Page 7 12 2. As respects business with policy limits greater than $ 1,000,000, the Company shall retain and be liable for the first $5,000,000 of ultimate net loss (whether involving any one or any combination of the casualty classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one insured, any one occurrence. B. Coverage B: As respects Property business subject to this Contract, the Company shall retain and be liable for the first $2,000,000 of ultimate net loss as respects any one risk, each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $2,000,000 as respects any one risk, each loss occurrence. C. Coverage hereunder shall apply only in the event the Company sustains liability for extra contractual obligations and/or losses in excess of original policy limits, arising under policies written by the Company. D. In the event that two or more policies covered under this Contract are involved in the same occurrence but allocated to different underwriting years, the amount to be retained by the Company for each underwriting year shall be reduced to the percentage that the Company's retained losses on the policies allocated to each underwriting year bears to the total of all the Company's retained losses contributing to the same occurrence. The indemnity and/or recovery shall be arrived at in the same manner. E. The maximum policy limits shown in paragraphs A and B shall be extended to follow the Company's policy if the Company's ultimate net loss is greater than one or more of said amounts because its policy includes or is deemed to include: 1. So-called "Out of State Insurance" provisions; 2. Limits of liability required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. ARTICLE VI - REINSTATEMENT A. In the event all or any portion of the reinsurance hereunder is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit reinstated (based on the ultimate net loss paid by the Reinsurer); times Page 8 13 2. The earned reinsurance premium for the underwriting year in which the occurrence commences (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any ultimate net loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the contract year has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the contract year has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer hereunder for ultimate net loss shall not exceed $2,000,000 as respects any one occurrence, nor shall it exceed $4,000,000 as respects all occurrences commencing during any one contract year. Article VII - DEFINITIONS A. "Ultimate net loss" as used herein is defined as the sum or sums paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 100% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 100% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Page 9 14 Contract. An extra contractual obligation shall be deemed to have occured on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. As respects Coverage A of Article V, "occurrence" as used herein is defined as an accident or occurrence or a series of accidents or occurrences arising out of or caused by one event. However, as respects policies where the Company's limit of liability for Products and Completed Operations coverages is determined on the basis of the insured's aggregate losses during a policy period, all such losses proceeding from or traceable to the same causative agency shall, at the Company's option, be deemed to have been caused by one occurrence commencing at the beginning of the policy period, it being understood and agreed that each renewal or annual anniversary date of the policy involved shall be deemed the beginning of a new policy period. D. As respects Coverage B of Article V, the term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph ) and fire following directly occasioned by the earthquake, only those individual fire losses Page 10 15 which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." Except for those "loss occurrences" referred to in subparagraphs 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. E. Loss adjustment expense means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) pre-judgment interest, unless included as part of the award or judgment; 2) post-judgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (4) above, and office and other overhead expenses. F. The Company shall be the sole judge of what constitutes "one risk." ARTICLE VIII - OTHER REINSURANCE A. The Company shall maintain in force facultative certificates or semi-automatic facultative facilities that apply on an individual risk basis which cover indemnity loss and may or may not cover extra contractual obligations and loss in excess of policy limits in accordance with Page 11 16 the terms of the individual certificate or semi-automatic facultative facility. Recoveries under such reinsurance shall inure to the benefit of this Contract. B. The Company shall be permitted to carry underlying reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. ARTICLE IX - CLAIMS AND LOSS ADJUSTMENT EXPENSES A. Whenever a claim is reserved by the Company for an amount greater than its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. C. In the event of loss hereunder, loss adjustment expenses incurred by the Company in connection therewith which do not reduce the Company's limit of liability under the policy involved shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage, subrogation and other recoveries. However, if a verdict or judgment is reduced by any process other than by the trial court, resulting in an ultimate saving to the Reinsurer, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be shared by the Company and the Reinsurer in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment which do not reduce the Company's limit of liability under the policy involved shall be shared in proportion to each party's interest in such original verdict or judgment. The Reinsurer's liability for such loss adjustment expenses shall be in addition to its liability for ultimate net loss. ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its Page 12 17 primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. ARTICLE XI - PREMIUM A. As premium for the reinsurance provided hereunder for each underwriting year, the Company shall pay the Reinsurer .2825 % of its net written premium for the underwriting year subject to an annual minimum premium of $130,000 for the underwriting year. However, in the event this Contract is terminated on a "cutoff" basis, the minimum premium for the final underwriting year shall be $65,000. B. The Company shall pay the Reinsurer an annual deposit premium of $130,000 in four equal installments of $32,500 on, January 1, April 1, July 1 and October 1 of each underwriting year. C. Within 45 days after the end of each underwriting year, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for the underwriting year, computed in accordance with paragraph A, and if the premium so computed is greater than the previously paid minimum and deposit premium, the balance shall be remitted by the Company with its report. D. "Net written premium" as used herein is defined as gross written premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. ARTICLE XII - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XIII - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Page 13 18 ARTICLE XIV - NET RETAINED LIABILITY This Contract shall apply only to that portion of any insurance or reinsurance the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and the amount in excess of which this Contract attaches, only loss or losses with respect to that portion of any insurance or reinsurance the Company retains net for its own account shall be included. It is understood and agreed, however, that the Reinsurer's liability hereunder with respect to 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 be due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE XV - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE XVI - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. ARTICLE XVII - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; Page 14 19 if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XVIII - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which Page 15 20 claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. D. Any hold harmless and indemnity agreement affecting payment under this Contract shall be considered an endorsement to and therefore part of this Contract, irrespective of any language to the contrary. Any indemnitee shall be considered a "payee" within this Article. In no event shall any reinsurer have double indemnity for any loss or expense under this Contract, it being the intent that any payments by the reinsurer to any payee as provided herein shall not be subject to and also collectible in any liquidation or similar proceeding. Article XIX - ARBITRATION (BRMA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. Page 16 21 B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. ARTICLE XX - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom Page 17 22 may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. ARTICLE XXI - INTERMEDIARY (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this ___ day of __________________________________ 199_. ------------------------------------- Financial Pacific Insurance Company Page 18 23 U.S.A. ------ NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and either as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after lst January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 24 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (Approved by Lloyd's Underwriters' Fire and Non-Marine Association) (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 to which an insured under the (bodily injury or property damage 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 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 (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. 25 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 arises out of the furnishing by an insured bodily injury or property damage 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 there at. 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 and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof, "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or 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 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, (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. 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 of 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 on relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 26 INTERESTS AND LIABILITIES AGREEMENT of Certain Underwriting Members of Lloyd's shown in the Signing Schedule attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 64.27% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 725 South Figueroa Street, Suite 1990, Los Angeles, California 90017. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. 27 INTERESTS AND LIABILITIES AGREEMENT of Certain Insurance Companies shown in the Signing Schedule(s) attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 35.73% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 725 South Figueroa Street, Suite 1990, Los Angeles, California 90017. The following Article shall apply to the Subscribing Reinsurer's share in the attached Contract, in lieu of the provisions of Article XVII - Unauthorized Reinsurers - of the Contract: "ARTICLE XVII - LOSS RESERVES (Applicable only if the Reinsurer cannot qualify for credit by any state or any other governmental authority having jurisdiction over the Company's loss reserves.) A. As regards policies or bonds issued by the Company coming within the scope of this Contract, 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 by Page 1 28 law to set up, it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company of a clean, irrevocable and unconditional Letter of Credit issued and confirmed, if confirmation is required by the regulatory authority(ies) having jurisdiction over the Company's loss reserves, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of Letters of Credit and which is (are) acceptable to said regulatory authority(ies), in an amount equal to the Reinsurer's proportion of 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 Incurred But Not Reported losses be included in the amount of the Letter of Credit. B. The Letter of Credit shall be in a form acceptable to insurance regulatory authority(ies) having jurisdiction over the Company's loss reserves, 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 issuing bank shall notify the Company by registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the federal reserve system or not chartered in New York State, shall provide sixty (60) days notice to the Company prior to any expiration in the event of non-extension. C. Notwithstanding any other provision of this Contract, the Company or its successors in interest may draw upon such credit at any time, without diminution because of the insolvency of the Company or of the Reinsurer, for one or more of the following purposes only: 1. To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any loss reinsured by this Contract, the payment of which has been agreed by the Reinsurer and which has not been otherwise paid; 2. To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Contract; 3. 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 Contract. 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. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. Page 2 29 D. At annual intervals, or more frequently as agreed but never more frequently than quarterly, 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." Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto. Page 3 30 SIGNING PAGE ATTACHING TO AND FORMING PART OF THE INTERESTS AND LIABILITIES AGREEMENT CONTINGENT EXCESS OF LOSS REINSURANCE CONTRACT ISSUED TO AND DULY EXECUTED BY FINANCIAL PACIFIC INSURANCE COMPANY SACRAMENTO, CALIFORNIA AND REINSURERS AS PER FOLLOWING SCHEDULE The Underwriters who are signatories hereto, each for the proport on underwritten and not for another, namely, SCHEDULE OF REINSURERS
Percentage Name Number Reference - ---------- ---- ------ --------- 11.91% Terra Nova Insurance Company Limited. T3902 097BL11705AA 94L09A8CACY 23.82% St. Paul Reinsurance Co. Ltd. N0435 000661971AXC
31 We, the subscribing Reinsurers hereby bind ourselves to the Reinsured for the performance of this reinsurance contract. The subscribing Reinsurers' obligations under this contract are several and not joint and are limited solely to the extent of their individual signed subscriptions. The subscribing Reinsurers are not responsible for the subscription of any co-subscribing Reinsurer who for any reason does not satisfy all or part of its obligations. In witness whereof the name of the Chief Executive of the LONDON INTERNATIONAL INSURANCE AND REINSURANCE MARKET ASSOCIATION ("LIRMA") is subscribed on behalf of each of the LIRMA companies and such companies not being members of LIRMA who are participating in a qualifying consortium arrangement with LIRMA members in accordance with the Memorandum and Articles of Association of LIRMA. Signed /s/ Mari Louise Rossi ---------------------------------- Chief Executive 97032000 52 124 LIRMA1 EX-10.19 24 CASUALTY FACULTATIVE REINSURANCE CONTRACT 1 EXHIBIT 10.19 FINANCIAL PACIFIC INSURANCE COMPANY SACRAMENTO, CALIFORNIA SEMI-AUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT Originally Effective: July 1, 1996 2 SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 3 SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California REINSURERS PARTICIPATIONS Allstate Insurance Company 5.0% Constitution Reinsurance Corporation 15.0 Gerling Global Reinsurance Corporation, U. S. Branch 25.0 The Mercantile and General Reinsurance Company of America 12.5 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 15.0 SOREMA North America Reinsurance Company 7.5 Winterthur Reinsurance Corporation of America 15.0 TOTAL 95.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 4 TABLE OF CONTENTS
ARTICLE PAGE Preamble 1 I Application of Contract 1 II Commencement and Termination 2 III Territory 2 IV Exclusions 2 V Attachment of Reinsurer's Liability 6 VI Right of Rejection 6 VII Retention and Limit 7 VIII Definitions 7 IX Claims and Loss Adjustment Expense 8 X Salvage and Subrogation 9 XI Premium 9 XII Commission (BRMA 10A) 9 XIII Offset (BRMA 36C) 10 XIV Access to Records (BRMA ID) 10 XV Liability of the Reinsurer 10 XVI Net Retained Liability 10 XVII Errors and Omissions (BRMA 14F) 10 XVIII Taxes (BRMA 50B) 11 XIX Unauthorized Reinsurers 11 XX Insolvency 12 XXI Arbitration 13 XXII Service of Suit (BRMA 49C) 14 XXIII Intermediary (BRMA 23A) 14 Schedule A
5 SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") PREAMBLE A. In consideration of the mutual covenants and agreements expressed herein, the Reinsurer hereby authorizes the Company to bind facultative reinsurance under this Contract, subject to all the terms, conditions and limitations stipulated herein. B. While the Company is authorized and may bind facultative reinsurance automatically on any risk subject to this Contract, the Company is not obligated to do so, nor is the Reinsurer obligated to accept any reinsurance bound hereunder by the Company, except as provided in Articles VI and VII. ARTICLE I - APPLICATION OF CONTRACT This Contract and the binding authority granted herein, shall apply with respect to the Company's policies, contracts and binders of insurance (hereinafter called "policies") issued or renewed thereafter, and classified by the Company as Excess Liability business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract. Page 1 6 ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become effective on July 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract at any time by giving the other party not less than 90 days prior notice by certified mail. C. Unless the Company elects to reassume the ceded unearned premium in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months, plus odd time, following the effective date of termination. ARTICLE III - TERRITORY This Contract shall only apply to policies issued to insureds domiciled in the United States of America, its territories and possessions and the District of Columbia; but this limitation shall not apply to losses if the Company's policies provide coverage outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS This Contract does not apply to and specifically excludes the following: A. The following general exclusions: 1. Business accepted by the Company as reinsurance from other insurers, except agency reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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, Page 2 7 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $10,000 or business written to apply specifically in excess over underlying insurance. However, this exclusion shall not apply to Umbrella business. 6. Aviation liability including aerospace and satellite business. 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Liquor law liability, except where liquor constitutes less than 50.0% of sales. Specifically excluded are bars and retail liquor stores. 10. Insurance written for governmental bodies, municipalities, schools and colleges. 11. Insurance covering damages claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 12. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 13. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA) or amendments thereto. 14. Liability for property damage caused by the subsidence of land and arising out of or attributable to any operations of the insured. 15. Fidelity and Surety. B. The following Casualty exclusions: 1. Watercraft liability except for boats less than 50 feet in length. Page 3 8 2. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 3. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment; e. Manufacture of automobile components critical to automobile safety. 4. Liability insurance relating to premises or operations primarily involving: a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerine, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; Page 4 9 j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; 1. Ski resorts; m. Waste disposal and deposit sites except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Existence, construction or maintenance of dams; q. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; r. Warehousemen's legal liability; s. Automobile racing and racetracks; t. Taxis; u. Blasting contractors; v. Licensed roofing contractors whose primary business is such; w. General contractors with revenues in excess of $50,000,000; x. Wrap up construction projects. 5. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Liability Reinsurance" attached to and forming part of this Contract. 6. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will include ISO pollution exclusion language. 7. Any loss, cost, or expense arising out of any governmental direction or request that the insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 3 and 4 of this paragraph B, except Page 5 10 subparagraphs 4(c) and 4(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in this paragraph B, these exclusions, except those set forth in subparagraphs 2, 4(c), 4(d), 5, 6 and 7, shall be suspended with respect to such business until 65 days (60 days plus 5 mailing days) after an underwriting supervisor of the Company acquires knowledge of such business. ARTICLE V - ATTACHMENT OF REINSURER'S LIABILITY A. The Company shall report each reinsurance cession to the Reinsurer in writing within 45 working days after the last working day of each month. Each such report shall include the following information: 1. Name of insured. 2. Company policy number. 3. Policy effective date. 4. Total policy premium. 5. Reinsurer's gross premium. 6. Applicable ceding commission. 7. Net premium payable to the Reinsurer. 8. Policy limit written. B. Each reinsurance cession reported by the Company shall be deemed to have been accepted by the Reinsurer unless Gerling Global Reinsurance Corporation, United States Branch, New York, New York, rejects it in writing as provided in Article VII. ARTICLE VI - RIGHT OF REJECTION Gerling Global Reinsurance Corporation, USB, New York, New York, shall have the right to reject any reinsurance bound by the Company by notifying the Company in writing within 15 working days after receipt of the Company's report. However, the liability of the Reinsurer Page 6 11 with respect to any submission so rejected shall continue until the Company is able to cancel the policy involved, subject to insurance code and regulatory parameters, but not beyond 60 days after the Reinsurer's rejection notice is received by the Company. The premium for the period any rejected submission is covered shall be pro rata of what the annual premium would have been had the submission been accepted. ARTICLE VII - RETENTION AND LIMIT A. The Company shall retain and be liable for the first $1,000,000 of ultimate net loss as respects each risk, each loss. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $4,000,000 as respects any one risk, each loss. B. The Company shall be permitted to carry underlying treaty reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. ARTICLE VIII - DEFINITIONS A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and any loss adjustment expense, as hereinafter defined, which reduces the Company's limit of liability under the policy involved) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid Page 7 12 or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including litigation expenses and interest on judgments, but not including office expenses or salaries of the Company's regular employees. ARTICLE IX - CLAIMS AND LOSS ADJUSTMENT EXPENSE A. Whenever a claim is reserved by the Company for an amount greater than 50% of its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. C. In the event of loss hereunder, loss adjustment expenses incurred by the Company in connection therewith which do not reduce the Company's limit of liability under the policy involved shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage, subrogation and other recoveries. However, if a verdict or judgment is reduced by any process other than by the trial court, resulting in an ultimate saving to the Reinsurer, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be shared by the Company and the Reinsurer in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment which do not reduce the Company's limit of liability under the policy involved shall be shared in proportion to each party's interest in such original verdict or judgment. The Reinsurer's liability for such loss adjustment expenses shall be in addition to its liability for ultimate net loss. Page 8 13 ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. ARTICLE XI - PREMIUM A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer 100% of its excess limits net written premium as calculated in Schedule A attached hereto. B. Within 45 days after the end of each month within each underwriting year, the Company shall report its net written premium for the month. The premium due the Reinsurer shall be paid by the Company with this report at the rate shown in paragraph A, multiplied by the actual amount of premium collected by the Company during the month from policies allocated to the underwriting year. C. Within 45 days after the end of each month, the Company shall calculate and report the unearned reinsurance premium as of the end of the month. D. "Net written premium" as used herein is defined as gross written premium of the Company for the classes of business reinsured hereunder, less cancellations and return premiums, and less premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. ARTICLE XII - COMMISSION (BRMA 10A) A. The Reinsurer shall allow the Company a 35.0% commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. B. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature, except loss adjustment expense. Page 9 14 ARTICLE XIII - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XIV - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. ARTICLE XV - LIABILITY OF THE REINSURER A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. ARTICLE XVI - NET RETAINED LIABILITY This Contract shall apply only to that portion of any insurance or reinsurance the Company retains net for its own account, and in calculating the amount of any loss hereunder and the amount in excess of which this Contract attaches, only loss or losses with respect to that portion of any insurance or reinsurance the Company retains net for its own account shall be included. It is understood and agreed, however, that the Reinsurer's liability hereunder with respect to 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 be due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE XVII - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such Page 10 15 delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE XVIII - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. ARTICLE XIX - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: Page 11 16 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(l), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may Page 12 17 of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XXI - ARBITRATION A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom neither shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses Page 13 18 or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. ARTICLE XXII - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. ARTICLE XXIII - INTERMEDIARY (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Page 14 19 Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this ________________ day of ____________________ 199__. __________________________________________________________ Financial Pacific Insurance Company Page 15 20 SCHEDULE A to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California The ceded excess limits net written premium shall be calculated as follows:
TOTAL INSURED VALUE CEDED PREMIUM ------------------- ------------- 1. $1,000,001 - $2,000,000 (12% - 20% of total primary premium based on General and/or Auto Liability premium)* 2. $2,000,001 - $3,000,000 1/2 of 1 above not to fall below $750 minimum 3. $3,000,001 - $4,000,000 1/2 of 2 above not to fall below $500 minimum 4. $4,000,001 - $5,000,000 1/2 of 3 above not to fall below $500 minimum
- --------------- * Application of 12 % - 20% rate is discretionary but subject to a minimum premium of $1,000. 21 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE -- LIABILITY -- REINSURANCE (Approved by Lloyd's Underwriters' Fire and Non-Marine Association) (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 to which an insured under the (bodily injury or property damage 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 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 (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. 22 II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical relief to expenses incurred with respect (first aid, to (bodily injury, sickness, disease or death resulting from the hazardous properties of (bodily injury 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 arises out of the furnishing by an insured (bodily injury or property damage 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 and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or 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 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, (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. 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 of 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 relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 23 - ------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Allstate Insurance Company Northbrook, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 5.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: South Barrington, Illinois, this 25th day of July, 1997. [SIG] -------------------------- ALLSTATE INSURANCE COMPANY E. W. BLANCH CO. - ------------------------------------------------------------------------------- Reinsurance Services 24 - ------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 15.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 5th day of November, 1997. [SIG] -------------------------- CONSTITUTION REINSURANCE CORPORATION E. W. BLANCH CO. - ------------------------------------------------------------------------------- Reinsurance Services 25 INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 25.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 8th day of July, 1997. [SIG] VICE PRESIDENT --------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 26 INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 31st day of July, 1997. /s/ BARBARA A. CONNELL -------------------------------------------- SOREMA North America Reinsurance Company BARBARA A. CONNELL, CPCU, ARA ASSISTANT VICE PRESIDENT 27 REINSURANCE CONFIRMATION SIGNING PAGE E.W. BLANCH CO. 201 California Street, Suite 500 Telephone (415) 398-6380 San Francisco, California 94111 Facsimile (415) 788-6394 COMPANY: Financial Pacific Insurance Company CONTRACT: Casualty Facultative Semi-Automatic Reinsurance Contract REINSURER: St. Paul Reinsurance Management Corporation St. Paul Fire and Marine Insurance Company On the basis of the terms outlined in E.W. Blanch Co.'s Reinsurance Confirmation dated September 25, 1996, the undersigned reinsurer confirms its agreement to accept a share(s) in the Contract(s) listed below effective July 1, 1996:
Your Coverage Participation Your Your Percent Limit Retention Percent Dollar Line Reference No. ------------ ---------- ---------- ------------- ----------- ------------- Cas Fac Semi-Auto 100.0% $4,000,000 $1,000,000 15% $600,000
Revisions/Remarks: ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ Signed: /s/ [SIG] --------------------------------------------------------- St. Paul Reinsurance Management Corporation St. Paul Fire and Marine Insurance Company Date: 11/18/96 --------------------------------------------------------- Please sign and return one copy. 28 INTERESTS AND LIABILITIES AGREEMENT of The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 12.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Morristown, New Jersey, this 25th day of August, 1997. /s/ MICHAEL P. BLABER ------------------------------------------- MICHAEL P. BLABER Vice President The Mercantile and General Reinsurance Company of America 29 - ------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 15.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1996, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 17th day of July, 1997. [SIG] -------------------------- WINTERTHUR REINSURANCE COMPANY E. W. BLANCH CO. - ------------------------------------------------------------------------------- Reinsurance Services 30 Addendum No. 1 to the Interests and Liabilities Agreement of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York with respect to the Semiautomatic Casualty Facultative Reinsurance Contract Effective: July 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California It Is Hereby Agreed that Addendum No. 1 to the Contract shall form part of the Contract, effective January 1, 1997. It Is Further Agreed, effective January 1, 1997, that all references in this Agreement to "Gerling Global Reinsurance Corporation, U.S. Branch" shall be amended to read "Gerling Global Reinsurance Corporation of America." In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. ---- --- --- [SIG] - ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 8th day of July 1997. --- ---- --- [SIG] VICE-PRESIDENT - ------------------------------------------------- Gerling Global Reinsurance Corporation of America 31 - -------------------------------------------------------------------------------- ADDENDUM NO. 1 to the INTERESTS AND LIABILITIES AGREEMENT of Constitution Reinsurance Corporation New York, New York with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 5th day of November 1997. [SIG] ----------------------------------------------------- Constitution Reinsurance Corporation E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 32 - -------------------------------------------------------------------------------- ADDENDUM NO. 1 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective January 1, 1997. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 15.0% to 10.0%, effective January 1, 1997, with respect to business issued or renewed on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 17th day of July 1997. [SIG] ----------------------------------------------------- Winterthur Reinsurance Corporation of America E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 33 - -------------------------------------------------------------------------------- ADDENDUM NO. 1 to the INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 23rd day of September 1997. [SIG] ----------------------------------------------------- SOREMA North America Reinsurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 34 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and SCOR Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 (as amended by Addendum No. 1) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1997, with respect to business issued or renewed on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company South Barrington, Illinois, this 28th day of July 1997. [SIG] ----------------------------------------------------- SCOR Reinsurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 35 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and Continental Casualty Company Chicago, Illinois (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 (as amended by Addendum No. 1) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1997, with respect to business issued or renewed on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company Chicago, Illinois, this 14th day of August 1997. [SIG] Assistant Vice President ----------------------------------------------------- Continental Casualty Company CA6649 E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 36 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and Allmerica Re A Division of The Hanover Insurance Company Bedford, New Hampshire (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 (as amended by Addendum No. 1) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1997, with respect to business issued or renewed on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company Florham Park, New Jersey, this 11th day of September 1997. [SIG] --------------------------------------------------------- Allmerica Re, A Division of The Hanover Insurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 37 - -------------------------------------------------------------------------------- TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT of Allstate Insurance Company Northbrook, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that this Agreement and the Subscribing Reinsurer's 5.0% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1996, in accordance with the "runoff" provisions of paragraph C of Article II - Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company South Barrington, Illinois, this 25 day of July 1997. [SIG] ----------------------------------------------------- Allstate Insurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 38 - -------------------------------------------------------------------------------- TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT of The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the SEMIAUTOMATIC CASUALTY FACULTATIVE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1996 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that this Agreement and the Subscribing Reinsurer's 12.5% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1996, in accordance with the "runoff" provisions of paragraph C of Article II - Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 14th day of May 1997. [SIG] ----------------------------------------------------- Financial Pacific Insurance Company Morristown, New Jersey, this 25 day of August 1997. /s/ MICHAEL P. WEBER ----------------------------------------------------- Michael P. Weber Vice President The Mercantile and General Reinsurance Company of America E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services EX-10.20 25 PROPERTY QUOTA SHARE REINSURANCE CONTRACT 1 EXHIBIT 10.20 FINANCIAL PACIFIC INSURANCE COMPANY (M. L. OATES INSURANCE COMPANY) SACRAMENTO, CALIFORNIA PROPERTY QUOTA SHARE REINSURANCE CONTRACT Originally Effective: July 1, 1993 2 PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 3 PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Genamerica Management Corp. (for Generali - U.S. Branch) 12.5% Gerling Global Reinsurance Corporation, U. S. Branch 34.5 Great Lakes Re Management Corporation (for The Great Lakes Reinsurance Company, United States Branch) 13.0 SOREMA North America Reinsurance Company 20.0 Winterthur Reinsurance Corporation of America 20.0 TOTAL 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 4 TABLE OF CONTENTS
ARTICLE PAGE I Classes of Business Reinsured 1 II Commencement and Termination 1 III Territory 2 IV Exclusions 2 V Retention and Limit 6 VI Loss in Excess of Policy Limits/ECO 6 VII Other Reinsurance 7 VIII Losses and Loss Adjustment Expenses 7 IX Alternate Payee 8 X Salvage and Subrogation 8 XI Original Conditions 9 XII Provisional Ceding Commission 9 XIII Commission Adjustment 9 XIV Reports and Remittances 11 XV Offset (BRMA 36C) 11 XVI Access to Records (BRMA 1D) 11 XVII Errors and Omissions (BRMA 14F) 12 XVIII Taxes (BRMA 50B) 12 XIX Unauthorized Reinsurers 12 XX Insolvency 13 XXI Arbitration (BRMA 6J) 14 XXII Service of Suit (BRMA 49C) 15 XXIII Intermediary (BRMA 23A) 16
5 PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California (hereinafter referred to as the "Company") by The Subscribing Reinsurers Whose Respective Interests and Liabilities Agreements Are Attached Hereto (hereinafter referred to as the "Reinsurer") ARTICLE I - CLASSES OF BUSINESS REINSURED A. By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept quota share reinsurance of the Company's net liability under policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") issued or renewed on or after the effective date hereof, and classified by the Company as Commercial Multiple Peril (Section I) and Inland Marine business. B. "Net liability" as used herein is defined as the Company's gross liability remaining after cessions, if any, to other pro rata reinsurers. C. The liability of the Reinsurer with respect to each cession hereunder shall commence obligatorily and simultaneously with that of the Company, subject to the terms, conditions and limitation hereinafter set forth. ARTICLE II - COMMENCEMENT AND TERMINATION A. This Contract shall become effective on July 1, 1993, with respect to losses occurring under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract on any December 31 by giving the other party not less than 90 days prior notice by certified mail. Page 1 6 C. Unless the Company elects to reassume the ceded unearned premium in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. D. "Underwriting year" as used herein shall mean the period from July 1, 1993 through December 31, 1994, and each subsequent 12-month period shall be a separate underwriting year. However, in the event this Contract is terminated, the final underwriting year shall be from the beginning of the then current underwriting year through the effective date of termination. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. ARTICLE III - TERRITORY The liability of the Reinsurer shall be limited to losses under policies covering property located within the territorial limits of the United States of America, its territories or possessions, and the District of Columbia; but this limitation shall not apply to moveable property if the Company's policies provide coverage when said moveable property is outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS A. This Contract does not apply to and specifically excludes the following: 1. Business accepted by the Company as reinsurance from other insurers except Agency Reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. Page 2 7 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $100,000. 6. Aviation liability including aerospace and satellite business. 7. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 8. Liquor law liability except where liquor constitutes less than 50% of sales. Specifically excluded are bars and retail liquor stores. 9. Insurance written for governmental bodies, municipalities, schools and colleges. 10. Insurance covering damages claims for the withdrawal, inspection, repair, replacement or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Insurance against earthquake, when written as such. Page 3 8 14. Insurance on growing crops. 15. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such. 16. Liability under coverage specifically afforded for loss or damages resulting from misappropriation, secretion, conversion, infidelity or any dishonest act on the part of the insured or other party of interest, his/her or their employees or agents, or any person or persons to whom merchandise may be entrusted (carriers for hire excepted). 17. Liability under coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale or delivered under any trust or floor plan agreements, except under standard accounts receivable policies. 18. Boiler and Machinery, when written as such. 19. Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgage interest in property or its owner interest in foreclosed property except that physical and consequential damage will be covered and not considered mortgage impairment when physical loss, damage or extra expense is caused by perils insured under the Company's policy to all real and personal property against which the Company's insured has granted a mortgage or to which the insured has taken title, or property in which the insured retains an interest when sold under a conditional sales agreement, a deed of trust, or any other instrument whereby title remains in the insured, or the insured's interest in co-operative loans. 20. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 21. Risks which have a total insurable value of more than $250,000,000. 22. Mobile homes. 23. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 24. Fidelity and Surety Business. 25. Grain elevators. 26. Satellites. Page 4 9 27. Ocean Marine when written as such. 28. Inland Marine business with respect to the following: a. All bridges and tunnels; b. Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; c. Commercial negative film insurance and cast insurance; d. Stationary drilling rigs; e. Furriers' customers' policies; f. Garment contractors' policies; g. Insurance on livestock under so-called "mortality policies"; h. Motor Truck Cargo as respects long haul trucking; i. Jewelers' block policies and furriers' block policies; j. Mining equipment; k. Radio and television broadcasting towers; l. Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; m. Watercraft other than watercraft insured under property floaters, yacht and/or outboard policies provided they are less than 50 feet in length; n. Petrochemical and utility risks; o. Transmission and distribution lines. 29. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause-Physical Damage-Reinsurance" attached to and forming part of this Contract. 30. Railroad business, specifically insurance for "line" or "track" operations of actual railroads. Page 5 10 31. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, oil and gas pipelines, offshore oil and gas properties. 32. As respects aviation, hull and ingestion. 33. Any liability for property damage caused by the subsidence of land and arising out or attributable to any operations of the insured. 34. Business classified by the Company as Automobile Physical Damage. B. If, without the knowledge of a member of the Company's underwriting department, the Company becomes bound on a risk specifically excluded from this Contract, such reinsurance as would have been afforded for the risk by this Contract if the risk had not been excluded shall nevertheless apply to such risk with respect to losses occurring prior to the 31st day after discovery by a member of such underwriting department of the existence of the hazard which makes the exclusion applicable. In case, within such 30-day period, the Company shall have forwarded to the Reinsurer complete underwriting information and shall have received from the Reinsurer written notice of its approval of the risk for the policy period reported, the risk shall be covered hereunder in the same manner as if such risk were not so excluded, subject, however, to the terms of such notice of approval. ARTICLE V - RETENTION AND LIMIT As respects business subject to this Contract, the Company shall retain and be liable for 30% of its net liability. The Company shall cede to the Reinsurer and the Reinsurer agrees to accept 70% of the Company's net liability. ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS/ECO A. In the event the Company pays or is held liable to pay an amount of loss in excess of its policy limit (bailee coverage only), but otherwise within the terms of its policy (hereinafter called "loss in excess of policy limits") or any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits (hereinafter called "extra contractual obligations") because of alleged or actual bad faith or negligence on its part in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a policy subject to this Contract, 90% of the loss in excess of policy limits and/or 90% of the extra contractual obligations shall be added to the (Company's loss, if any, under the policy involved, and the sum thereof (not exceeding, however, $1,000,000) shall be subject to the provisions of Article V. Page 6 11 B. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. C. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. Recoveries from any form of insurance or reinsurance which protects the Company against claims the subject matter of this Article shall inure to the benefit of this Contract. ARTICLE VII - OTHER REINSURANCE A. The Company shall have the option to purchase excess of loss reinsurance to protect its net, recoveries under which to inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. B. The Company shall purchase or be deemed to have purchased inuring excess facultative reinsurance to limit its loss subject hereto (inclusive of loss in excess of policy limits and extra contractual obligations) to $1,000,000 each risk, each loss. However, in the event such reinsurance is purchased, the Company shall maintain a minimum of 5% of the placement, subject to a maximum dollar line of $250,000. ARTICLE VIII - LOSSES AND LOSS ADJUSTMENT EXPENSES A. Losses shall be reported by the Company in summary form as hereinafter provided, however, whenever a loss is reserved by the Company for an amount greater than $100,000, the Company shall notify the Reinsurer. The Reinsurer shall have the right to participate in the adjustment of losses subject to this Contract at its own expense. B. All loss settlements made by the Company, whether under strict policy conditions or by way of compromise, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its proportion of each such settlement in accordance with Article XIV. It is agreed, however, that if the Company's gross loss is equal to or greater than $100,000, the Reinsurer shall pay its share of said loss as promptly as possible after receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. C. In the event of a claim under a policy subject hereto, the reinsurer shall be liable for its proportionate share of loss adjustment expenses incurred by the Company in connection therewith, and shall be credited with its proportionate share of any recoveries of such expense. Page 7 12 D. "Loss adjustment expense" means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) prejudgment interest, unless included as part of the award or judgment; 2) postjudgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (4) above and office and other overhead expenses. ARTICLE IX - ALTERNATE PAYEE A. It is understood that in order to make the Company's policies generally acceptable to certain mortgagees and lending institutions, Gerling Global Reinsurance Corporation, U.S. Branch, New York, New York (hereinafter referred to as "Gerling Global") has agreed to issue supplemental reinsurance endorsements which guarantee that Gerling Global will pay valid claims under any of the Company's policies to which said endorsements are attached if the Company fails to pay because of its insolvency. B. Now, therefore, it is agreed that if Gerling Global, under the provisions of a supplemental reinsurance endorsement, pays or becomes liable to pay any claim or claims under any policy or policies subject to this Contract, Gerling Global shall be substituted for the Company as payee of any reinsurance recoverable hereunder in respect of such claim or claims, and the Reinsurer, upon notice from Gerling Global, shall make payment thereof directly to Gerling Global. C. In the event the foregoing provisions apply, all the other provisions of this Contract shall apply to Gerling Global in the same manner as if Gerling Global were substituted for the Company as the reinsured party hereunder, and to the extent this Contract reinsures Gerling Global, coverage hereunder shall be excluded as respects the Company. ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with its proportionate share of salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Page 8 13 ARTICLE XI - ORIGINAL CONDITIONS A. All reinsurance under this Contract shall be subject to the same rates, terms, conditions and waivers, and to the same modifications and alterations as the respective policies of the Company. The Reinsurer shall be credited with its exact proportion of the original premiums collected by the Company, prior to disbursement of any dividends, but after deduction of premiums, if any, ceded by the Company for inuring reinsurance. B. Except as provided in Article IX, nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. ARTICLE XII - PROVISIONAL CEDING COMMISSION The Reinsurer shall allow the Company a 30.0% provisional commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. ARTICLE XIII - COMMISSION ADJUSTMENT A. The provisional commission allowed the Company shall be adjusted periodically for each underwriting year in accordance with the provisions set forth herein. The adjusted commission rate shall be calculated as follows and be applied to premiums earned for the underwriting year under consideration: 1. If the ratio of losses incurred to premiums earned is 69.0% or greater, the adjusted commission rate for the underwriting year under consideration shall be 23.5%; 2. If the ratio of losses incurred to premiums earned is less than 69.0%, but not less than 62.5%, the adjusted commission rate for the underwriting year under consideration shall be 23.5%, plus the difference in percentage points between 69.0% and the actual ratio of losses incurred to premiums earned; 3. If the ratio of losses incurred to premiums earned is less than 62.5%, but not less than 47.5%, the adjusted commission rate for the underwriting year under consideration shall be 30.0%, plus one-half the difference in percentage points between 62.5% and the actual ratio of losses incurred to premiums earned; 4. If the ratio of losses incurred to premiums earned is 47.5%, but not less than 41.0%, the adjusted commission rate for the underwriting year under consideration shall be 37.5%, Page 9 14 plus the difference in percentage points between 47.5% and the actual ratio of losses incurred to premiums earned; 5. If the ratio of losses incurred to premiums earned is 41.0% or less, the adjusted commission rate for the underwriting year under consideration shall be 44.0%. B. If the ratio of losses incurred to premiums, earned for any underwriting year is greater than 69.0%, the difference in percentage points between the actual ratio of losses incurred to premiums earned and 69.0% shall be, multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a debit (addition) to losses incurred. If the ratio of losses incurred to premiums earned for any underwriting year is less than 41.0%, the difference in percentage points between 41.0% and the actual ratio of losses incurred to premiums earned shall be multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a credit to (subtraction from) losses incurred. C. Within 45 days after the end of each underwriting year the Company shall calculate and report the adjusted commission on premiums earned for the underwriting year. If the adjusted commission on premiums earned is less than commissions previously allowed by the Reinsurer on premiums earned for the underwriting year, the Company shall remit the difference to the Reinsurer with its report. If the adjusted commission on premiums earned is greater than commissions previously allowed by the Reinsurer on premiums earned for the underwriting year, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. D. In the event the adjusted commission calculation for any underwriting year is based partly on ceded reserves for losses and/or loss adjustment expenses, the adjusted commission shall be recalculated within 45 days after the end of each subsequent 12-month period until all losses under policies with effective or renewal dates during the underwriting year have been settled. Any balance shown to be due either party as a result of any such recalculation shall be remitted promptly by the other party. E. "Losses incurred" as used herein shall mean ceded losses and loss adjustment expenses paid as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expenses outstanding as of the same date, plus (minus) the debit (credit) from the preceding underwriting year, it being understood and agreed that all losses and related loss adjustment expenses under policies allocated to the underwriting year shall be charged to that underwriting year, regardless of the date said losses actually occur, unless this Contract is terminated on a "cutoff" basis, in which event the Reinsurer shall have no liability for losses occurring after the effective date of termination. F. "Premiums earned" as used herein shall mean ceded net written premiums for policies allocated to the underwriting year, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies allocated to an underwriting year shall be credited to that underwriting year, unless this Contract is Page 10 15 terminated on a "cutoff" basis, in which event the unearned reinsurance premium (less previously allowed provisional ceding commission) as of the effective date of termination shall be returned by the Reinsurer to the Company. G. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions and taxes, and all board, exchange and bureau assessments, and all other expenses of whatever nature, except loss adjustment expenses. ARTICLE XIV - REPORTS AND REMITTANCES A. Within 45 days after the end of each month, the Company shall report to the Reinsurer: 1. Ceded net written premium for the month by underwriting year; 2. Collected subject premium for the month by underwriting year; 3. Provisional ceding commission allowed on (2) above; 4. Ceded losses and loss adjustment expenses paid during the month (net of any recoveries during the calendar month under the "cash call" provisions of Article VIII); 5. Ceded unearned premiums and ceded outstanding loss reserves as of the end of the month. The positive balance of (2) less (3) less (4) shall be remitted by the Company with its report. Any balance shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's report. B. Annually, the Company shall furnish the Reinsurer with such information as the Reinsurer may require to complete its Annual Convention Statement. ARTICLE XV - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XVI - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Page 11 16 ARTICLE XVII - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission will be rectified as soon as possible after discovery. ARTICLE XVIII - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. ARTICLE XIX - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to Page 12 17 the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any Page 13 18 defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. D. Any hold harmless and indemnity agreement affecting payment under this Contract shall be considered an endorsement to and therefore part of this Contract, irrespective of any language to the contrary. Any indemnitee shall be considered a 'payee' within this Article. In no event shall any reinsurer have double indemnity for any loss or expense under this Contract, it being the intent that any payments by the reinsurer to any payee as provided herein shall not be subject to and also collectible in any liquidation or similar proceeding. ARTICLE XXI - ARBITRATION (BRMA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial Page 14 19 formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. ARTICLE XXII - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Page 15 20 ARTICLE XXIII - INTERMEDIARY (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this 23rd day of December 1994. ---- --------- -- /s/ [SIG] ----------------------------- M. L. OATES INSURANCE COMPANY Page 16 21 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 22 INTERESTS AND LIABILITIES AGREEMENT of Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 12.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1993, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 6th day of March 1995. ---- ----- --- [SIG] VICE PRESIDENT, -------------------------------------------- Generali - U.S. Branch (also known as General Insurance Company #3874 of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 23 INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 34.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1993, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 14 day of April 1995. --- -------- --- [SIG] [SIG] ------------------------------------------------ Gerling Global Reinsurance Corporaion, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 24 INTERESTS AND LIABILITIES AGREEMENT of The Great Lakes Reinsurance Company (United States Branch) New York, New York by Great Lakes Re Management Corporation (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 13.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1993, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 17th day of February 1995. ----- -------- --- [SIG] ----------------------------------------- The Great Lakes Reinsurance Company (United States Branch) By: Great Lakes Re Management Corporation 25 INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 20.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1993, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 9TH day of January 1997. --- -------- --- [SIG] ------------------------------------------------- SOREMA North America Reinsurance Company THOMAS P. ASQUINO VICE President & Manager Treaty Property 26 INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT TERMS EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 20.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on July 1, 1993, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 5th day of April 1995. --- ------ --- [SIG] ------------------------------------------------- Winterthur Reinsurance Corporation of America 27 ANCILLARY AGREEMENT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California (hereinafter referred to as the "Company") by Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Reinsurer") SECTION 1 - SCOPE OF AGREEMENT A. In order to make policies of the Company generally acceptable to certain mortgagees or lending institutions, the Reinsurer hereby authorizes the Company to attach to its policies a supplemental reinsurance endorsement reciting, in effect, that the Reinsurer guarantees payment of any valid first party claim under such policies should the Company fail to pay because of its insolvency. A copy of the form of supplemental reinsurance endorsement to be used by the Company is attached to and forms part of this Agreement. B. The authority granted herein by the Reinsurer is specifically limited to property policies (including the property sections of multiple peril policies) with physical damage limits not exceeding $2,000,000, unless otherwise mutually agreed, provided such policies are subject to the Company's Property Quota Share Reinsurance Contract, effective July 1, 1993. C. The Company shall be responsible for all supplemental reinsurance endorsements entrusted to it by the Reinsurer, whether issued or not, and shall only issue supplemental reinsurance endorsements in series. D. The Company shall investigate and settle or conduct the defense in any and all claims, or cause the investigation and settlement or defense in any and all claims to be made according to the terms of its policies in the same manner as if no supplemental reinsurance endorsement were attached. However, in the event of the insolvency of the Company, its liquidator, receiver, conservator or statutory successor shall promptly notify the Reinsurer of any claim filed against the Company in the conservation or liquidation proceeding or in the receivership if such claim might involve liability on the part of the Reinsurer because of the attachment of a supplemental reinsurance endorsement to a Company policy. During the Page 1 of 4 28 pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. E. Should the Reinsurer, as a result of the attachment of a supplemental reinsurance endorsement to a Company policy, be required to pay a loss directly to an insured of the Company, the Company or its liquidator, receiver, conservator or statutory successor agrees to hold the Reinsurer harmless with respect to such loss and reimburse and indemnify the Reinsurer for the amount of its net loss (i.e., after all reinsurance recoveries and salvage). SECTION 2 - COMMENCEMENT AND TERMINATION A. This Agreement shall become effective on July 1, 1993, and shall continue in force thereafter until terminated. B. This Agreement shall terminate automatically upon termination of the Company's Property Quota Share Reinsurance Contract, and may be terminated at any underwriting year anniversary by either party giving the other party not less than 90 days prior notice by certified mail. C. In the event that this Agreement is terminated, the Reinsurer shall remain liable under all supplemental reinsurance endorsements in force on the effective date of termination until such time as the policies associated with such supplemental reinsurance endorsements are allocated to a new underwriting year as set forth in the Property Quota Share Reinsurance Contract. SECTION 3 - REINSURANCE WARRANTY A. The Company warrants that during the currency of this Agreement it will purchase and maintain in force the following reinsurance on every policy to which a supplemental reinsurance endorsement is attached: 1. Property Quota Share Reinsurance of 7O% of $1,000,000 any one risk. 2. Excess per risk treaty reinsurance for $200,000 excess of $100,000 any one risk. 3. Excess per risk treaty reinsurance for $1,000,000 excess of $1,000,000 any one risk. B. The Company also warrants that the reinsurance referred to in paragraph A above will in every case include or be endorsed to include provisions similar in intent to the following: 1. If the Reinsurer, under the provisions of a supplemental reinsurance endorsement, pays or becomes liable to pay any claim or claims under any policy or policies subject to the Page 2 of 4 29 reinsurance, the Reinsurer shall be substituted for the Company as payee of any reinsurance recoverable thereunder in respect of such claim or claims, and the reinsurer, upon notice from the Reinsurer, shall make payment thereof directly to the Reinsurer; 2. In the event the foregoing provisions apply, all the other provisions of the reinsurance shall apply to the Reinsurer in the same manner as if the Reinsurer were substituted for the Company as the reinsured party thereunder, and to the extent the reinsurance reinsures the Reinsurer, coverage thereunder shall be excluded as respects the Company. SECTION 4 - REPORTS AND REMITTANCES A. Within 45 days after the end of each calendar quarter, the Company shall prepare and submit a report to the Reinsurer, on forms mutually acceptable, setting forth the following: 1. Supplemental reinsurance endorsements issued during the calendar quarter; 2. Supplemental reinsurance endorsements issued and outstanding as of the end of the calendar quarter. B. Within 45 days after the end of each calendar quarter, the Company shall send the Reinsurer a copy of each supplemental reinsurance endorsement issued, voided or cancelled during the calendar quarter. SECTION 5 - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. SECTION 6 - ARBITRATION (BMRA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Agreement, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. Page 3 of 4 30 B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Agreement as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Agreement from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Agreement, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. SECTION 7 - INTERMEDIARY E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431, is hereby recognized as the intermediary by whom this Agreement was negotiated and through whom all communications relating hereto shall be transmitted to both parties. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 23rd day of December 1994. ---- -------- --- [SIG] --------------------------------------------------- M.L. Oates Insurance Company New York, New York, this 10th day of October 1995. --- -------- -- [SIG] --------------------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager Page 4 of 4 31 Supplemental Reinsurance Endorsement Issued By GERLING GLOBAL REINSURANCE CORPORATION, U.S. BRANCH New York, New York This endorsement forms a part of policy no. issued by M. L. Oates Insurance Company (hereinafter referred to as the "Company") to the Insured named below: Named Insured: _________________________________________________________ Insured's Address: _____________________________________________________ Policy Amount: __________________________________________________________ Policy Term: Effective Date: _________ Expiration Date: ______________ Mortgagee: _______________________________________________________________ Mortgagee's Address: _____________________________________________________ For value received, Gerling Global Reinsurance Corporation, U.S. Branch (hereinafter referred to as the "Reinsurer") agrees that in the event of the insolvency of the Company, the Reinsurer will immediately become liable for 100% of any physical damage loss payable by the Company to the Mortgagee under the policy to which this endorsement is attached (it being understood and agreed that when this endorsement is attached to a multiple peril policy, it applies only to Property Coverage Parts thereof). The Reinsurer will make payment thereof directly to the Mortgagee or Beneficiary under any present or future mortgage or trust deed, both contingent upon receipt of the proportionate share(s) of all other participating reinsurers, if any, in the accounts of the undersigned Reinsurer, subject always to the other terms of the policy. As a condition precedent to payment hereunder, the Reinsurer shall be subrogated to all the rights of the Mortgagee or Beneficiary to the extent of such payment. The Company and the Reinsurer covenant that the provisions of this endorsement take precedence over any other reinsurance agreement, contract or arrangement between them to the extent the Reinsurer shall not be subject to duplicate liability because of any payment or payments made under the terms hereof. Cancellation of the policy shall automatically and simultaneously cancel this Endorsement. The Reinsurer reserves the right to cancel this endorsement upon 30 days prior notice in writing to the Company, the Insured and the Mortgagee. M. L. Oates Insurance Company Gerling Global Reinsurance Corporation, U.S. Branch By: _______________________________ BY: ________________________________ Title: ___________________________ Title: ______________________________ White-Mortgagee Pink-Insured Blue-M. L. Oates Yellow/Green-Reinsurer 32 ADDENDUM NO. 1 to the ANCILLARY AGREEMENT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California by Gerling Global Reinsurance Corporation, U.S. Branch New York, New York IT IS HEREBY AGREED, effective December 31, 1993, that all references in this Agreement to "M. L. Oates Insurance Company" shall be amended to read "Financial Pacific Insurance Company." The provisions of this Agreement shall remain otherwise unchanged. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 23rd day of December 1994. ---- ---------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 10th day of October 1995. ------ -------- -- [SIG] ------------------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 33 SUPPLEMENTAL REINSURANCE ENDORSEMENT Issued By GERLING GLOBAL REINSURANCE CORPORATION, U. S. BRANCH New York, New York This endorsement forms a part of policy no. issued by Financial Pacific Insurance Company (hereinafter referred to as the "Company") to the Insured named below: Name Insured: ____________________________________________________________ Insured's Address: _______________________________________________________ Policy Amount: ___________________________________________________________ Policy Term: Effective Date: ___________ Expiration Date: ____________ Mortgagee: _______________________________________________________________ Mortgagee's Address: _____________________________________________________ For value received, Gerling Global Reinsurance Corporation, U.S. Branch (hereinafter referred to as the "Reinsurer") agrees that in the event of the insolvency of the Company, the Reinsurer will immediately become liable for 100% of any physical damage loss payable by the Company to the Mortgagee under the policy to which this endorsement is attached (it being understood and agreed that when this endorsement is attached to a multiple peril policy, it applies only to Property Coverage Parts thereof). The Reinsurer will make payment thereof directly to the Mortgagee or Beneficiary under any present or future mortgage or trust deed, both contingent upon receipt of the proportionate shares(s) of all other participating reinsurers, if any, in the accounts of the undersigned Reinsurer, subject always to the other terms of the policy. As a condition precedent to payment hereunder, the Reinsurer shall be subrogated to all the rights of the Mortgagee or Beneficiary to the extent of such payment. The Company and the Reinsurer covenant that the provisions of this endorsement take precedence over any other reinsurance agreement, contract or arrangement between them to the extent the Reinsurer shall not be subject to duplicate liability because of any payment or payments made under the terms hereof. Cancellation of the policy shall automatically and simultaneously cancel this Endorsement. The Reinsurer reserves the right to cancel this endorsement upon 30 days prior notice in writing to the Company, the Insured and the Mortgagee. Financial Pacific Insurance Company Gerling Global Reinsurance Corporation U. S. Branch By: ________________________________ By: __________________________________ Title: _____________________________ Title: _______________________________ White-Mortgagee Pink-Insured Blue-Financial Pacific Yellow/Green-Reinsurer 34 (Revised: January 1, 1994) PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Genamerica Management Corp. (for Generali - U.S. Branch) 12.5% Gerling Global Reinsurance Corporation, U. S. Branch 30.0 San Francisco Reinsurance Company 12.5 SOREMA North America Reinsurance Company 20.0 Sydney Reinsurance Corporation 5.0 Winterthur Reinsurance Corporation of America 20.0 Total 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 35 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT Of Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective December 31, 1993. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 23rd day of December 1994. ------ --------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 6th day of MARCH 1995 --- --------------- [SIG] VICE PRESIDENT ------------------------------------------------- Generali - U.S. Branch (also known as General Insurance Company #3874 of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 36 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT OF Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective December 31, 1993. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 34.5% to 30.0%, effective January 1, 1994, with respect to business issued or renewed on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 23rd day of DECEMBER 1994 ------ ------------ -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 14th day of April 1995 --- ------- --- [SIG] ------------------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 37 TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT OF The Great Lakes Reinsurance Company (United States Branch) New York, New York by Great Lakes Re Management Corporation (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California IT IS HEREBY AGREED, effective December 31, 1993, that all references in the Contract to "M. L. Oates Insurance Company" shall be amended to read "Financial Pacific Insurance Company." IT IS FURTHER AGREED that this Agreement and the Subscribing Reinsurer's 13.0% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1993, in accordance with the "runoff" provisions of paragraph C of Article II -- Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 23rd day of December 1994 ------ -------- -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 17th day of February 1995. ----- -------- -- [SIG] ------------------------------------------------- The Great Lakes Reinsurance Company (United States Branch) By: Great Lakes Re Management Corporation 38 INTERESTS AND LIABILITIES AGREEMENT of San Francisco Reinsurance Company San Francisco, California (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addendum No. 1) issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 12.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1994, with respect to business issued or renewed on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: San Francisco, California, this 1st day of December 1995. ---- -------- -- [SIG] ------------------------------------------------- San Francisco Reinsurance Company 39 Addendum No.1 to the Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective December 31, 1993. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 23rd day of December 1994. ---- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 9th day of January 1992. --- ------- -- [SIG] ------------------------------------------------- SOREMA North America Reinsurance Company THOMAS P. ASQUINO Vice President & Manager Treaty Property 40 INTERESTS AND LIABILITIES AGREEMENT of Sydney Reinsurance Corporation Philadelphia, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addendum No. 1) issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 5.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1994, with respect to business issued or renewed on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York, this 6th day of June 1995. --- ---- --- [SIG] ------------------------------------------------- Sydney Reinsurance Corporation 41 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective December 31, 1993. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 23rd day of December l994. ---- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 5th day of April 1995. --- ---- --- [SIG] ------------------------------------------------- Winterthur Reinsurance Corporation of America 42 (Revised: January 1, 1995) PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Genamerica Management Corp. (for Generali - U.S. Branch) 15.0% Gerling Global Reinsurance Corporation, U. S. Branch 30.0 The Mercantile and General Reinsurance Company of America 10.0 SOREMA North America Reinsurance Company 20.0 Sydney Reinsurance Corporation 5.0 Winterthur Reinsurance Corporation of America 20.0 TOTAL 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 43 ADDENDUM NO.2 to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED, effective January 1, 1995, with respect to policies allocated to underwriting years commencing on or after that date, that this Contract shall be amended as follows: 1. Article V - Retention and Limit - shall be deleted and the following substituted therefor: "ARTICLE V - RETENTION AND LIMIT A. As respects business subject to this Contract, the Company shall retain and be liable for 30.0% of its net liability. The Company shall cede to the Reinsurer and the Reinsurer agrees to accept 70.0% of the Company's net liability. B. Notwithstanding the provisions of paragraph A above, the liability of the Reinsurer for loss hereunder shall not exceed $15,000,000 each loss occurrence. C. The term 'loss occurrence' shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one 'loss occurrence' shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. Page 1 44 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's 'loss occurrence.' 4. As regards 'freeze,' only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's 'loss occurrence.' Except for those 'loss occurrences' referred to in subparagraphs 1 and 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those 'loss occurrences' referred to in subparagraphs 1 and 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more 'loss occurrences,' provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. It is understood that losses arising from a combination of two or more perils as a result of the same event shall be considered as having arisen from one 'loss occurrence.' Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single 'loss occurrence' shall encompass a time period greater than 168 consecutive hours." 2. Article XII - Provisional Ceding Commission - shall be deleted and the following substituted therefor: "The Reinsurer shall allow the Company a 35.0% provisional commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate." Page 2 45 3. Subparagraphs 2, 3, 4 and 5 of paragraph A and paragraph B of Article XIII - ComMission Adjustment - shall be deleted and the following substituted therefor: "2. If the ratio of losses incurred to premiums earned is less than 69.0%, but not less than 57.5%, the adjusted commission rate for the underwriting year under consideration shall be 23.5%, plus the difference in percentage points between 69.0% and the actual ratio of losses incurred to premiums earned; 3. If the ratio of losses incurred to premiums earned is less than 57.5%, but not less than 42.5%, the adjusted commission rate for the underwriting year under consideration shall be 35.0%, plus one-half the difference in percentage points between 57.5% and the actual ratio of losses incurred to premiums earned; 4. If the ratio of losses incurred to premiums earned is 42.5% or less, the adjusted commission rate for the underwriting year under consideration shall be 42.5%." "B. If the ratio of losses incurred to premiums earned for any underwriting year is greater than 69.0%, the difference in percentage points between the actual ratio of losses incurred to premiums earned and 69.0% shall be multiplied by premiums earned for the underwriting year, and the product shall be carried forward to the next underwriting year as a debit (addition) to losses incurred. If the ratio of losses incurred to premiums earned for any underwriting year is less than 42.5%, the difference in percentage points between 42.5% and the actual ratio of losses incurred to premiums earned shall be multiplied by premiums earned for the underwriting year, and the product shall be carried forward to the next underwriting year as a credit to (subtraction from) losses incurred." The provisions of this Contract shall remain otherwise unchanged. Page 3 46 ADDENDUM NO.2 TO THE INTERESTS AND LIABILITIES AGREEMENT OF Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 2 to the Contract shall form part of the Contract, effective January 1, 1995. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be increased from 12.5% to 15.0%, effective January 1, 1995, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 24th day of February 1996. ---- -------- - [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this day of MAR - 6 1996 199 . --- -------------- -- Ian G Davey [SIG] Senior Vice President ------------------------------------------------- Generali - U.S. Branch (also known as General Insurance Company # 3874 of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 47 ADDENDUM NO. 2 to the INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 2 to the Contract shall form part of the Contract, effective January 1, 1995. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. ---- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 18th day of March 1996. ---- ----- --- [SIG] VICE PRESIDENT ------------------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 48 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1 and 2) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1995, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. ---- -------- -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company Morristown, New Jersey, this 13th day of July 1996. ---- ---- -- [SIG] ------------------------------------------------- The Mercantile and General Reinsurance Company of America 49 ADDENDUM NO. 2 to the INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 2 to the Contract shall form part of the Contract, effective January 1, 1995. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. ---- -------- -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 9th day of January 1997. --- ------- -- [SIG] ------------------------------------------------- SOREMA North America Reinsurance Company THOMAS P. ASQUINO Vice President & Manager Treaty Property 50 ADDENDUM NO. 1 to the INTERESTS AND LIABILITIES AGREEMENT of Sydney Reinsurance Corporation Philadelphia, Pennsylvania with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 2 to the Contract shall form part of the Contract, effective January 1, 1995. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. ---- -------- -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 5th day of April 1996. --- ----- -- [SIG] ------------------------------------------------- Sydney Reinsurance Corporation Our Ref #31337 51 ADDENDUM NO. 2 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 2 to the Contract shall form part of the Contract, effective January 1, 1995. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. ---- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 23rd day of September 1996. ---- --------- --- [SIG] ------------------------------------------------- Winterthur Reinsurance Corporation of America 52 TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT of San Francisco Reinsurance Company Novato, California (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that this Agreement and the Subscribing Reinsurer's 12.5% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1994, in accordance with the "runoff" provisions of paragraph C of Article II -- Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 26th day of February 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company Novato, California, this 7th day of March 1996. --- ----- --- [SIG] ------------------------------------------------- San Francisco Reinsurance Company 53 (Revised: January 1, 1996) PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to M. L. Oates Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Constitution Reinsurance Corporation 7.5% Folksamerica Reinsurance Company 7.5 Genamerica Management Corp. (for Generali - U.S. Branch) 7.5 Gerling Global Reinsurance Corporation, U. S. Branch 25.0 The Mercantile and General Reinsurance Company of America 12.5 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 7.5 SOREMA North America Reinsurance Company 17.5 Winterthur Reinsurance Corporation of America 15.0 Total 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 54 ADDENDUM NO.3 to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED, effective January 1, 1996, that subparagraph 4 of paragraph A and paragraph B of Article XIII - Commission Adjustment (as amended by Addendum No. 2) - shall be deleted and the following substituted therefor: "4. If the ratio of losses incurred to premiums earned is less than 42.50%, but not less than 40.0%, the adjusted commission rate for the underwriting year under consideration shall be 42.50%, plus the difference in percentage points between 42.50% and the actual ratio of losses incurred to premiums earned; 5. If the ratio of losses incurred to premiums earned is 40.0% or less, the adjusted commission rate for the underwriting year under consideration shall be 45.0%." "B. If the ratio of losses incurred to premiums earned for any underwriting year is greater than 69.0%, the difference in percentage points between the actual ratio of losses incurred to premiums earned and 69.0% shall be multiplied by premiums earned for the underwriting year, and the product shall be carried forward to the next underwriting year as a debit (addition) to losses incurred. If the ratio of losses incurred to premiums earned for any underwriting year is less than 40.0%, the difference in percentage points between 40.0% and the actual ratio of losses incurred to premiums earned shall be multiplied by premiums earned for the underwriting year, and the product shall be carried forward to the next underwriting year as a credit to (subtraction from) losses incurred." The provisions of this Contract shall remain otherwise unchanged. 55 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1, 2 and 3) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 24th day of February 1997. ---- -------- --- [SIG] ------------------------------------------------- Constitution Reinsurance Corporation 56 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and Folksamerica Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1, 2 and 3) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- -- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 29th day of January 1997. ---- ------- --- [SIG] ------------------------------------------------- Folksamerica Reinsurance Company 57 ADDENDUM NO.3 to the INTERESTS AND LIABILITIES AGREEMENT of Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 15.0% to 7.5%, effective January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 8th day of January 1997. --- ------- ---- [SIG] ------------------------------------------------- Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 58 ADDENDUM NO. 3 to the INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 30.0% to 25.0%, effective January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 18th day of February 1997. ---- -------- --- [SIG] ------------------------------------------------- Gerling Global Reinsurance Corporation, U.S. Branch By: Gerling Global Offices, Inc., U.S. Manager 59 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT of The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be increased from 10.0% to 12.5%, effective January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company Morristown, New Jersey, this 21st day of February 1997. ---- -------- --- [SIG] ------------------------------------------------- The Mercantile and General Reinsurance Company of America 60 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and St. Paul Fire and Marine Insurance Company St. Paul, Minnesota (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1, 2 and 3) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 13th day of January 1997. ---- ------- --- [SIG] ------------------------------------------------- St. Paul Fire and Marine Insurance Company St. Paul Reinsurance Management Corporation, Reinsurance Managers 61 ADDENDUM NO.3 to the INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 20.0% to 17.5%, effective January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 26th day of July 1997. ---- ---- --- [SIG] ------------------------------------------------- SOREMA North America Reinsurance Company THOMAS P. ASQUINO Vice President & Manager Treaty Property 62 ADDENDUM NO.3 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. It IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 20.0% to 15.0%, effective January 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 11th day of March 1997. ---- ----- --- [SIG] ------------------------------------------------- Winterthur Reinsurance Corporation of America 63 TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT of Sydney Reinsurance Corporation Philadelphia, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 3 to the Contract shall form part of the Contract, effective January 1, 1996. IT IS FURTHER AGREED that this Agreement and the Subscribing Reinsurer's 5.0% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1995, in accordance with the "runoff" provisions of paragraph C of Article II -- Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this 5th day of December 1996. --- -------- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company New York, New York, this 24th day of March 1997. ---- ----- --- [SIG] ------------------------------------------------- Sydney Reinsurance Corporation 64 ADDENDUM NO.4 to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") IT IS HEREBY AGREED, effective July 1, 1996, with respect to policies allocated to underwriting years commencing on or after that date, that this Contract shall be amended as follows: 1. Paragraph A of Article I - Classes of Business Reinsured - shall be deleted and the following substituted therefor: "A. By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept quota share reinsurance of the Company's net liability under policies, contracts and binders of insurance or reinsurance (hereinafter called 'policies') issued or renewed on or after the effective date hereof, and classified by the Company as Commercial Multiple Peril (Section I), Automobile Physical Damage and Inland Marine business." 2. Subparagraph 22 of paragraph A of Article IV - Exclusions - shall be deleted and the following substituted therefor: "22. Mobile Homes unless written as part of a commercial multiple peril policy." 3. Subparagraph 34 of paragraph A of Article IV - Exclusions - shall be deleted from this Contract. 4. Paragraph A of Article VI - Loss in Excess of Policy Limits/ECO - shall be deleted and the following substituted therefor: "A. In the event the Company pays or is held liable to pay an amount of loss in excess of its policy limit (bailee coverage only), but otherwise within the terms of its policy (hereinafter called 'loss in excess of policy limits') or any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits (hereinafter called 'extra contractual obligations') because of alleged or actual bad faith or negligence on its part in rejecting a settlement within policy limits, or in discharging Page 1 of 2 65 its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a policy subject to this Contract, 90% of the loss in excess of policy limits and/or 90% of the extra contractual obligations shall be added to the (Company's loss, if any, under the policy involved, and the sum thereof (not exceeding, however, $2,000,000) shall be subject to the provisions of Article V." 5. Paragraph B of Article VII - Other Reinsurance - shall be deleted and the following substituted therefor: "B. The Company shall purchase or be deemed to have purchased inuring excess facultative reinsurance to limit its loss subject hereto (inclusive of loss in excess of policy limits and extra contractual obligations) to $2,000,000 each risk, each loss." IT IS FURTHER AGREED that the Company shall remit to the Reinsurer the ceded unearned premium in force at 12:01 a.m., October 1, 1996, (less provisional commission allowed thereon), with respect to Automobile Physical Damage business in force on October 1, 1995, or issued or renewed on or after October 1, 1995, as promptly as possible after that date. The provisions of this Contract shall remain otherwise unchanged. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at: Sacramento, California, this 12th day of June 1997. ---- ---- --- [SIG] ------------------------------------------------- Financial Pacific Insurance Company Page 2 of 2 66 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT of Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 29th day of July 1997. ---- ---- --- [SIG] ------------------------------------------------- Constitution Reinsurance Corporation 67 ADDENDUM NO. 1 to the INTERESTS AND LIABILITIES AGREEMENT of Folksamerica Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 1st day of July 1997. --- ---- ---- [SIG] ------------------------------------------------- Folksamerica Reinsurance Company 68 ADDENDUM NO.4 to the INTERESTS AND LIABILITIES AGREEMENT of Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 8th day of July 1997. --- ---- --- [SIG] ------------------------------------------------- Generali-U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 69 ADDENDUM NO.4 to the INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 8th day of July 1997. --- ---- --- [SIG] ------------------------------------------------- VICE PRESIDENT Gerling Global Reinsurance Corporation, U.S. Branch By: Global Offices, Inc., U.S. Manager 70 ADDENDUM NO.4 to the INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 25th day of July 1997. ---- ---- --- [SIG] ------------------------------------------------- SOREMA North America Reinsurance Company THOMAS P. ASQUINO Vice President & Manager Treaty Property 71 ADDENDUM NO.1 to the INTERESTS AND LIABILITIES AGREEMENT of St. Paul Fire and Marine Insurance Company St. Paul, Minnesota (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 9th day of July 1997. --- ---- --- [SIG] ------------------------------------------------- St. Paul Fire and Marine Company St. Paul Reinsurance Management Corporation, Reinsurance Managers 72 ADDENDUM NO.2 to the INTERESTS AND LIABILITIES AGREEMENT of The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Morristown, New Jersey, this 25th day of August 1997. ---- ------ --- [SIG] ------------------------------------------------- MICHAEL P. BLABER VICE PRESIDENT The Mercantile and General Reinsurance Company of America 73 ADDENDUM NO.4 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 4, as duly executed by the Company, as part of the Contract, effective July 1, 1996. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this 16th day of July 1997. ---- ---- --- [SIG] ------------------------------------------------- Winterthur Reinsurance Corporation of America 74 (Revised: January 1, 1997) PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Allmerica Re, A Division of The Hanover Insurance Company 10.0% Constitution Reinsurance Corporation 7.5 Folksamerica Reinsurance Company 7.5 Genamerica Management Corp. (for Generali - U.S. Branch) 5.0 Gerling Global Reinsurance Corporation of America 25.0 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 7.5 SCOR Reinsurance Company 10.0 SOREMA North America Reinsurance Company 17.5 Winterthur Reinsurance Corporation of America 10.0 TOTAL 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 75 ADDENDUM NO.5 to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED, effective January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date, that this Contract shall be amended as follows: 1. Subparagraphs 5, 6, 7, 8, 9, 10, 11, 12, 16 and 17 of paragraph A of Article IV - Exclusions - shall be deleted from this Contract. 2. Subparagraph 19 of paragraph A of Article IV - Exclusions - shall be deleted and the following substituted therefor: "19. Mortgage impairment insurance and similar kinds of insurance, howsoever styled." 3. Subparagraph 25, 28(h), 28(k), 32 and 33 of paragraph A of Article IV - Exclusions - shall be deleted from this Contract. 4. Paragraph B of Article IV - Exclusions - shall be deleted and the following substituted therefor: "B. If, without the knowledge of a member of the Company's underwriting department, the Company becomes bound on a risk specifically excluded from this Contract, such reinsurance as would have been afforded for the risk by this Contract if the risk had not been excluded shall nevertheless apply to such risk with respect to losses occurring prior to the 66th day (60 discovery days plus 5 mailing days) after discovery by a member of such underwriting department of the existence of the hazard which makes the exclusion applicable. In case, within such 65 day period (60 discovery days plus 5 mailing days), the Company shall have forwarded to the Reinsurer complete underwriting information and shall have received from the Reinsurer written notice of its approval of the risk for the policy period reported, the risk shall be covered hereunder in the same manner as if such risk were not so excluded, subject, however, to the terms of such notice of approval." Page 1 76 IT IS FURTHER AGREED, effective January 1, 1997, that this Contract shall be amended as follows: 1. Paragraph A of Article IX - Alternate Payee - shall be deleted and the following substituted therefor: "A. It is understood that in order to make the Company's policies generally acceptable to certain mortgagees and lending institutions, Gerling Global Reinsurance Corporation of America, New York, New York (hereinafter referred to as 'Gerling Global') has agreed to issue supplemental reinsurance endorsements which guarantee that Gerling Global will pay valid claims under any of the Company's policies to which said endorsements are attached if the Company fails to pay because of its insolvency." 2. Article X - Salvage and Subrogation - shall be deleted and the following substituted therefor: "ARTICLE X - SALVAGE AND SUBROGATION The Reinsurer shall be credited with its proportionate share of salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder." IT IS ALSO AGREED, effective January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date, that Article XII - Provisional Ceding Commission (as amended by Addendum No. 2) - shall be deleted and the following substituted therefor: "ARTICLE XII - PROVISIONAL CEDING COMMISSION The Reinsurer shall allow the Company a 37.5% provisional commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate." IT IS ALSO AGREED, effective January 1, 1997, that this Contract shall be amended as follows: 1. Subparagraphs 1,2,3,4, and 5 of paragraph A and paragraph B of Article XIII - Commission Adjustment (as amended by Addendum Nos. 2 and 3) - shall be deleted and the following substituted therefor: "1. If the ratio of losses incurred to premiums earned is 67.5% or greater, the adjusted commission rate for the underwriting year under consideration shall be 25.0%; 2. If the ratio of losses incurred to premiums earned is less than 67.5%, but not less than 55.0%, the adjusted commission rate for the underwriting year under Page 2 77 consideration shall be 25.0%, plus the difference in percentage points between 67.5% and the actual ratio of losses incurred to premiums earned; 3. If the ratio of losses incurred to premiums earned is less than 55.0%, but not less than 45.0%, the adjusted commission rate for the underwriting year under consideration shall be 37.5%, plus one-half the difference in percentage points between 55.0% and the actual ratio of losses incurred to premiums earned; 4. If the ratio of losses incurred to premiums earned is less than 45.0%, but not less than 40.0%, the adjusted commission rate for the underwriting year under consideration shall be 42.5%, plus the difference in percentage points between 45.0% and the actual ratio of losses incurred to premiums earned; 5. If the ratio of losses incurred to premiums earned is 40.0% or less, the adjusted commission rate for the underwriting year under consideration shall be 47.5%. B. If the ratio of losses incurred to premiums, earned for any underwriting year is greater than 67.5%, the difference in percentage points between the actual ratio of losses incurred to premiums earned and 67.5% shall be, multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a debit (addition) to losses incurred. If the ratio of losses incurred to premiums earned for any underwriting year is less than 40.0%, the difference in percentage points between 40.0% and the actual ratio of losses incurred to premiums earned shall be multiplied by premiums earned for the underwriting year and the product shall be carried forward to the next underwriting year as a credit to (subtraction from) losses incurred." 2. The title portion and paragraph E of Article XXI - Arbitration (BRMA 6J) - shall be deleted and the following substituted therefor: "ARTICLE XXI - ARBITRATION" "E. Any arbitration proceedings shall take place in Sacramento, California, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the State of California." 3. Article XXIII - Intermediary (BRMA 23A) shall be deleted and the following substituted therefor: "ARTICLE XXIII - INTERMEDIARY E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer Page 3 78 through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Claims notice by the Company to the Intermediary shall be deemed to constitute notice to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company." The provisions of this Contract shall remain otherwise unchanged. Page 4 79 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and Allmerica Re A Division of The Hanover Insurance Company Bedford, New Hampshire (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1 through 5) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this ___ day of ______________ 199__. _________________________________________________ Financial Pacific Insurance Company Florham Park, New Jersey, this ___ day of ____________ 199__. _________________________________________________ Allmerica Re, A Division of The Hanover Insurance Company 80 ADDENDUM NO. 2 to the INTERESTS AND LIABILITIES AGREEMENT of Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 5, as duly executed by the Company, as part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ___ day of _______________________ 199__. _________________________________________________ Constitution Reinsurance Corporation 81 ADDENDUM NO. 2 to the INTERESTS AND LIABILITIES AGREEMENT of Folksamerica Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 5, as duly executed by the Company, as part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ___ day of __________________________ 199__. _________________________________________________ Folksamerica Reinsurance Company 82 ADDENDUM NO. 5 to the INTERESTS AND LIABILITIES AGREEMENT of Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 5 to the Contract shall form part of the Contract, effective January 1, 1997. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 7.5% to 5.0%, effective January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this ___ day of ____________________ 199__. _________________________________________________ Financial Pacific Insurance Company New York, New York, this ___ day of ____________________ 199__. _________________________________________________ Generali - U.S. Branch (also known as General Insurance Company of Trieste and Venice, U.S. Branch) By: Genamerica Management Corp. 83 ADDENDUM NO.5 to the INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation, U.S. Branch New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 5, as duly executed by the Company, as part of the Contract, effective January 1, 1997. Effective January 1, 1997, all references in this Agreement to "Gerling Global Reinsurance Corporation, U.S. Branch" shall be amended to read "Gerling Global Reinsurance Corporation of America." IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ___ day of ____________________ 199__. _________________________________________________ Gerling Global Reinsurance Corporation of America 84 ADDENDUM NO.2 to the INTERESTS AND LIABILITIES AGREEMENT of St. Paul Fire and Marine Insurance Company St. Paul, Minnesota (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 5, as duly executed by the Company, as part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ___ day of ____________________ 199__. _________________________________________________ St. Paul Fire and Marine Insurance Company St. Paul Reinsurance Management Corporation, Reinsurance Managers 85 INTERESTS AND LIABILITIES AGREEMENT entered into by and between Financial Pacific Insurance Company Sacramento, California and SCOR Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") IT IS HEREBY AGREED that the Subscribing Reinsurer shall have a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract entitled: PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 (as amended by Addenda Nos. 1 through 5) IT IS FURTHER AGREED that this Agreement shall become effective on January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Contract. IT IS ALSO AGREED that the Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the dates undermentioned at: Sacramento, California, this ___ day of ____________________ 199__. _________________________________________________ Financial Pacific Insurance Company South Barrington, Illinois, this ___ day of ____________________ 199__. _________________________________________________ SCOR Reinsurance Company 86 ADDENDUM NO.5 to the INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 5, as duly executed by the Company, as part of the Contract, effective January 1, 1997. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ___ day of ____________________ 199__. _________________________________________________ SOREMA North America Reinsurance Company 87 ADDENDUM NO.5 to the INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that Addendum No. 5 to the Contract shall form part of the Contract, effective January 1, 1997. IT IS FURTHER AGREED that the Subscribing Reinsurer's share in the interests and liabilities of the "Reinsurer" under the Contract shall be decreased from 15.0% to 10.0%, effective January 1, 1997, with respect to policies allocated to underwriting years commencing on or after that date. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this this ___ day of ____________________ 199__. _________________________________________________ Financial Pacific Insurance Company New York, New York, this ___ day of ____________________ 199__. _________________________________________________ Winterthur Reinsurance Corporation of America 88 TERMINATION ADDENDUM to the INTERESTS AND LIABILITIES AGREEMENT of The Mercantile and General Reinsurance Company of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the PROPERTY QUOTA SHARE REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1993 issued to Financial Pacific Insurance Company Sacramento, California IT IS HEREBY AGREED that this Agreement and the Subscribing Reinsurer's 12.5% share in the interests and liabilities of the "Reinsurer" under the Contract shall be terminated on December 31, 1996, in accordance with the "runoff" provisions of paragraph C of Article II - Commencement and Termination. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Sacramento, California, this ___ day of ____________________ 199__. _________________________________________________ Financial Pacific Insurance Company Morristown, New Jersey, this ___ day of ____________________ 199__. _________________________________________________ The Mercantile and General Reinsurance Company of America EX-10.21 26 FIRST EXCESS CASUALTY REINSURANCE CONTRACT 1 EXHIBIT 10.21 - -------------------------------------------------------------------------------- FINANCIAL PACIFIC INSURANCE COMPANY SACRAMENTO, CALIFORNIA FIRST EXCESS CASUALTY REINSURANCE CONTRACT Originally Effective: January 1, 1997 - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 - -------------------------------------------------------------------------------- 3 FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California
REINSURERS PARTICIPATIONS Allmerica Re, A Division of The Hanover Insurance Company 5.0% Constitution Reinsurance Corporation 15.0 Continental Casualty Company 7.5 Gerling Global Reinsurance Corporation of America 25.0 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 15.0 SCOR Reinsurance Company 10.0 SOREMA North America Reinsurance Company 12.5 Winterthur Reinsurance Corporation of America 10.0 TOTAL 100.0%
E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 - -------------------------------------------------------------------------------- 4 TABLE OF CONTENTS ARTICLE PAGE I Classes of Business Reinsured 1 II Commencement and Termination 1 III Territory 3 IV Exclusions 3 V Retention and Limit 6 VI Definitions 7 VII Claims and Loss Adjustment Expenses 9 VIII Salvage and Subrogation 9 IX Provisional Premium 10 X Premium Adjustment 10 XI Commission (BRMA 10A) 12 XII Offset (BRMA 36C) 12 XIII Access to Records (BRMA 1D) 12 XIV Liability of the Reinsurer 12 XV Net Retained Liability 12 XVI Errors and Omissions (BRMA 14F) 13 XVII Taxes (BRMA 50B) 13 Will Unauthorized Reinsurers 13 XIX Insolvency 14 XX Arbitration 15 XXI Service of Suit (BRMA 49C) 16 XXII Intermediary 16 5 FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JANUARY 1, 1997 issued to Financial Pacific Insurance Company Sacramento, California (hereinafter referred to as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Subscribing Reinsurers") ARTICLE I -- CLASSES OF BUSINESS REINSURED A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") issued or renewed on or after the effective date hereof, and classified by the Company as Commercial Multiple Peril (Section II) and Automobile Liability business, subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. ARTICLE 11 -- COMMENCEMENT AND TERMINATION A. This Contract shall become originally effective on January 1, 1997, with respect to losses arising under policies allocated to underwriting years commencing on or after that date, and shall continue in force thereafter until terminated. Page 1 6 B. Either party may terminate this Contract on December 31, 1998 or any other December 31 thereafter, by giving the other party not less than 90 days prior notice by certified mail. C. Notwithstanding the provisions of paragraph B, it is understood and agreed that this Contract may be terminated on a "runoff" or "cutoff" basis, as defined in paragraph D below, by giving 30 days notice prior to each quarter end by certified mail to the other party upon the happening of any one of the following circumstances: 1. Either party may terminate this Contract if the other party is sold during the 1997 calendar year; 2. Either party may terminate this Contract if the other party's A. M. Best rating drops below A-; 3. The Company may terminate any reinsurers participation at any time if the policyholders surplus of that respective reinsurer drops more than 10% from the prior year end surplus level; 4. The Reinsurer may terminate this Contract at any time if the Company's policyholders surplus drops below $5 million. D. Unless the Company elects to reassume the ceded unearned premium in force on the effective date of termination, and so notifies the Reinsurer prior to or as promptly as possible after the effective date of termination, reinsurance hereunder on business in force on the effective date of termination shall remain in full force and effect until expiration, cancellation or next premium anniversary of such business, whichever first occurs, but in no event beyond 12 months following the effective date of termination. E. "Underwriting year" as used herein shall mean the period from January 1, 1997 through December 31, 1997, and each subsequent 12-month period shall be a separate underwriting year. However, in the event this Contract is terminated, the final underwriting year shall be from the beginning of the then current underwriting year through the effective date of termination. All premiums and losses from policies allocated to an underwriting year shall be credited or charged, respectively, to such underwriting year, regardless of the date said premiums earn or such losses occur, it being understood that a policy will be allocated to the underwriting year which is in effect as of: 1. As respects all new policies, the effective date of such policies; 2. As respects renewals of one year or less term policies, the renewal date of such policies; 3. As respects continuous or greater than one year term policies, the premium anniversary date of such policies. Page 2 7 Such policies shall remain in the same underwriting year, as originally allocated, until the next renewal date or premium anniversary date, at which time such policies shall be reallocated to the underwriting year in effect as of such date as provided in subparagraphs 2 and 3 above. ARTICLE III - TERRITORY This Contract shall only apply to policies issued to insureds domiciled in the United States of America, its territories and possessions and the District of Columbia; but this limitation shall not apply to losses if the Company's policies provide coverage outside the aforesaid territorial limits. ARTICLE IV - EXCLUSIONS A. This Contract does not apply to and specifically excludes the following: 1. Business accepted by the Company as reinsurance from other insurers except agency reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $100,000, including Umbrella business. 6. Aviation liability including aerospace and satellite business. Page 3 8 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Retail liquor law liability except where liquor constitutes less than 50% of sales. Specifically excluded are bars and retail liquor stores. 10. Insurance covering damage claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Fidelity and Surety. 14. Watercraft liability except for boats less than 50 feet in length. 15. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 16. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products; b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment. 17. Liability insurance relating to premises or operations primarily involving: a. Aircraft or airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusement parks, carnivals, circuses, speed contests and racing; Page 4 9 c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerin, celluloid, pyroxylin or explosive substances intended for use as an explosive; d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural or artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; l. Ski resorts; m. Waste disposal and deposit sites except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; q. Warehousemen's legal liability; r. Automobile racing and racetracks; s. Taxis; t. Blasting contractors; u. Licensed roofing contractors whose primary business is such; Page 5 10 v. Wrap up construction projects. 18. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause-Liability Reinsurance" attached to and forming part of this Contract. 19. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will include ISO pollution exclusion language. B. If the Company provides insurance for an insured with respect to any premises, operations, products or completed operations listed in subparagraphs 16 and 17 of paragraph A above, except subparagraphs 17(c) and 17(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion(s) shall not apply. C. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in subparagraphs 14 through 19 of paragraph A above, these exclusions, except those set forth in subparagraphs; 15, 17(c), 17(d), 18 and 19 shall be suspended with respect to such business until 65 days (60 discovery days plus 5 mailing days) after an underwriting supervisor of the Company acquires knowledge of such business. ARTICLE V - RETENTION AND LIMIT A. If the Company's ultimate net loss as respects any one insured, any one occurrence is less than or equal to $1,000,000, the following provisions shall apply: 1. The Company shall retain and be liable for the first $250,000 of ultimate net loss (whether involving any one or any combination of the classes of business covered hereunder, regardless of the number of policies under which such loss is payable) as respects each insured, each occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed $750,000 each insured, each occurrence. 2. If the Company's losses arising out of any one occurrence involve losses under policies allocated to more than one underwriting year, the Company's retention applicable to such occurrence for each underwriting year shall be reduced to that portion of the Company's retention determined by dividing the Company's losses arising out of the occurrence by the number of underwriting years to which such policies are allocated with pro rata consideration given depending on the primary policy limits or reinsurance retention of the underwriting years affected. The Reinsurer's limit of liability Page 6 11 applicable to such occurrence for each such underwriting year shall be arrived at in the same manner. B. If the Company's ultimate net loss as respects any one insured, any one occurrence exceeds $1,000,000, the Company shall retain and be liable for the first amount of policy period ultimate net loss (whether involving any one or any combination of the classes of business covered hereunder, regardless of the number of policies under which such loss is payable) equal to 25% of such policy period ultimate net loss, subject to a maximum retention of $250,000 each insured, each occurrence, per each underwriting year affected. The Reinsurer shall then be liable for 75% of such policy period ultimate net loss, but the liability of the Reinsurer shall not exceed $750,000 (being 75% of $1,000,000) each insured, each occurrence, per each underwriting year affected. Article VI - DEFINITIONS A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expenses, as hereinafter provided) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Ultimate net loss shall include the following loss adjustment expenses, as hereinafter defined: 1. Ultimate net loss shall include loss adjustment expenses which reduce the Company's limit of liability involved; 2. If the Company's ultimate net loss exclusive of loss adjustment expenses as respects each insured, each occurrence is less than $250,000, ultimate net loss shall include loss adjustment expenses incurred by the Company which do not reduce the Company's limit of liability under the policy involved, but the amount of such loss adjustment expenses to be included in ultimate net loss shall not exceed $750,000 as respects each insured, each occurrence. B. "Policy period ultimate net loss" as used herein is defined as the Company's ultimate net loss as respects each insured, each occurrence, divided by the number of policy periods involved in that occurrence. C. "Policy period" as used herein shall mean the period from the inception or renewal date of the primary policy through the expiration, termination or first premium anniversary date of the policy, whichever first occurs. As respects continuous or greater than one year term policies, each premium anniversary date shall be considered the beginning of a new policy period. Page 7 12 D. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. E. "Occurrence" as used herein is defined as an accident or occurrence or a series of accidents or occurrences arising out of or caused by one event. However, as respects policies where the Company's limit of liability for Products and Completed Operations coverages is determined on the basis of the insured's aggregate losses during a policy period, all such losses proceeding from or traceable to the same causative agency shall, at the Company's option, be deemed to have been caused by one occurrence commencing at the beginning of the policy period, it being understood and agreed that each renewal or annual anniversary date of the policy involved shall be deemed the beginning of a new policy period. F. "Loss adjustment expense" means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including 1) prejudgment interest, unless included as part of the award or judgment; 2) postjudgment interest; 3) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and 4) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense Page 8 13 includes, but is not limited to, salaries and expenses of employees, other than (4) above, and office and other overhead expenses. ARTICLE VII - CLAIMS AND LOSS ADJUSTMENT EXPENSES A. Whenever a claim is reserved by the Company for an amount greater than 50.0% of its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. The Reinsurer shall leave the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. C. In the event of loss hereunder for which the Company's ultimate net loss exclusive of loss adjustment expenses as respects each insured, each occurrence is greater than or equal to $250,000, loss adjustment expenses incurred by the Company in connection therewith which do not reduce the Company's limit of liability under the policy involved shall be shared by the Company and the Reinsurer in the proportion the ultimate net loss paid or payable by the Reinsurer bears to the total loss paid or payable by the Company, prior to any reinsurance recoveries, but after deduction of all salvage, subrogation and other recoveries. However, if a verdict or judgment is reduced by any process other than by the trial court, resulting in an ultimate saving to the Reinsurer, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be shared by the Company and the Reinsurer in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment which do not reduce the Company's limit of liability under the policy involved shall be shared in proportion to each party's interest in such original verdict or judgment. The Reinsurer's liability for such loss adjustment expenses shall be in addition to its liability for ultimate net loss. ARTICLE VIII - SALVAGE AND SUBROGATION The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. Page 9 14 ARTICLE IX - PROVISIONAL PREMIUM A. As provisional premium for the reinsurance provided hereunder for each underwriting year, the Company shall pay the Reinsurer 16.0% of its net written premium for the underwriting year. B. Within 45 days after the end of each month within each underwriting year, the Company shall report its net written premium for the month. The provisional premium due the Reinsurer shall be paid by the Company with its report at the rate shown in paragraph A, multiplied by the actual amount of premium collected by the Company during the month from policies allocated to the underwriting year. ARTICLE X - PREMIUM ADJUSTMENT A. The provisional premium paid by the Company shall be adjusted periodically in accordance with the provisions set forth herein. The first adjustment period shall be from the effective date of this Contract through December 31, 1999, and each subsequent 36-month period shall be a separate adjustment period, unless this Contract is terminated, in which event the final adjustment period shall be from the beginning of the then current adjustment period through the date of termination. B. The adjusted premium for each adjustment period shall be equal to the Reinsurer's losses incurred for the adjustment period, plus 5.20% of the Company's net earned premium for the first underwriting year, plus 4.80% of the Company's net earned premium for each underwriting year thereafter. However, the adjusted premium for any one adjustment period shall not exceed an amount equal to 25.60% of the Company's net earned premium for the adjustment period. C. The Company shall calculate and report the adjusted premium for each adjustment period at the following times: 1. Within 45 days after the end of each underwriting year within the adjustment period; 2. Within 45 days after the end of the adjustment period; and 3. Within 45 days after the end of each 12-month period after the end of the adjustment period until all losses arising out of occurrences commencing during the adjustment period (including a proportion of losses covered on an aggregate basis, based on the unexpired portion of the underlying policy year as of the beginning of the adjustment period) have been finally settled. Each such calculation shall be based on the Reinsurer's losses incurred and the Company's net earned premium for the adjustment period as of the date of the calculation. Page 10 15 D. As respects calculations made in accordance with subparagraph (b) or (c) of subparagraph 3 above, if the adjusted premium is less than reinsurance premiums previously paid for the adjustment period, the Reinsurer shall remit the difference to the Company within 45 days after receipt and verification of the Company's report, subject to the following schedule: 1. 33.33% of the adjusted premium shown to be due as of the calculation due within 45 days after the end of the adjustment period; 2. 66.67% of the adjusted premium shown to be due as of the calculation due within 45 days after 12 months after the end of the adjustment period (less any adjustment premium amounts previously paid); 3. 100.0% of the adjusted premium shown to be due as of the calculation due within 45 days after 24 months after the end of the adjustment period (less any adjustment premium amounts previously paid) and as of the calculation due within 45 days after the end of any 12-month period thereafter. It is further agreed that all payments under the provisions of this paragraph shall be net of ceding commission allowed thereon. E. "Net written premium" as used herein is defined as gross written premium of the Company for the Casualty classes of business reinsured hereunder, less cancellations and return premiums, and less premiums ceded by the Company for excess facultative reinsurance or other reinsurance which inures to the benefit of this Contract. F. "Losses incurred" as used herein shall mean losses and loss adjustment expense paid by the Reinsurer as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, it being understood and agreed that all losses under policies allocated to underwriting years within an adjustment period shall be charged to that adjustment period, regardless of the date said losses actually occur, unless this Contract is terminated on a "cutoff' basis, in which event the Reinsurer shall have no liability for losses arising out of occurrences commencing after the effective date of termination under policies allocated to underwriting years within the final adjustment period. G. "Net earned premium" as used herein is defined as the Company's net written premium for policies allocated to underwriting years within the adjustment period, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies allocated to underwriting years within an adjustment period shall be credited to that adjustment period, unless this Contract is terminated on a "cutoff' basis, in which event the unearned reinsurance premium as of the effective date of termination shall be returned by the Reinsurer to the Company. Page 11 16 ARTICLE XI - COMMISSION (BRMA 10A) A. The Reinsurer shall allow the Company a 37.5% commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. B. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature, except loss adjustment expense. ARTICLE XII - OFFSET (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. ARTICLE XIII - ACCESS TO RECORDS (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. ARTICLE XIV - LIABILITY OF THE REINSURER A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. ARTICLE XV - NET RETAINED LIABILITY This Contract shall apply only to that portion of any insurance or reinsurance the Company retains net for its own account, and in calculating the amount of any loss hereunder and the amount in excess of which this Contract attaches, only loss or losses with respect to that portion of any insurance or reinsurance the Company retains net for its own account shall be included. It is understood and agreed, however, that the Reinsurer's liability hereunder with respect to any loss or losses shall not be increased by reason of the inability of the Company to collect from any Page 12 17 other reinsurers, whether specific or general, any amounts which may be due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE XVI - ERRORS AND OMISSIONS (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission will be rectified as soon as possible after discovery. ARTICLE XVII - TAXES (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. ARTICLE XVIII - UNAUTHORIZED REINSURERS A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said Page 13 18 expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(l), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. ARTICLE XIX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any Page 14 19 defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XX - ARBITRATION A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within thirty (30) days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within thirty (30) days following their appointment, each Arbiter shall nominate three candidates within ten (10) days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within thirty (30) days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. Page 15 20 C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place in Sacramento, California, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the State of California. ARTICLE XXI - SERVICE OF SUIT (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful beneficiary hereunder arising out of this Contract. ARTICLE XXII - INTERMEDIARY E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Page 16 21 Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Claims notice by the Company to the Intermediary shall be deemed to constitute notice to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Sacramento, California, this ________ day of ____________________________199___. ----------------------------------------------- Financial Pacific Insurance Company Page 17 22 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (Approved by Lloyd's Underwriters' Fire and Non-Marine Association) (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 the 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 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 (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. Page 18 23 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 and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof, "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or 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 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, (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 an forms of radioactive contamination of property. ( includes all forms of radioactive contamination of property. 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 of 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 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Allmerica Re A Division of The Hanover Insurance Company Bedford, New Hampshire (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 5.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: Florham Park, New Jersey, this 11th day of September 1997. [SIG] ------------------------------------------------------- Allmerica Re, A Division of The Hanover Insurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 25 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 15.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: New York, New York, this 29th day of July 1997. [SIG] ------------------------------------------------------- Constitution Reinsurance Corporation E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 26 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Continental Casualty Company Chicago, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 7.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: Chicago, Illinois, this 14th day of August 1997. [SIG] Assistant Vice President ------------------------------------------------------- Continental Casualty Company CA6648 E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 27 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Gerling Global Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 25.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: New York, New York, this 8 day of July 1997. [SIG] Vice-President ------------------------------------------------------- Gerling Global Reinsurance Corporation of America E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 28 REINSURANCE CONFIRMATION SIGNING PAGE E.W. BLANCH CO. 201 California Street, Suite 500 Telephone (415) 398-6380 San Francisco, California 94111 Facsimile (415) 788-6394 COMPANY: Financial Pacific Insurance Company CONTRACT: Property/Casualty Reinsurance Program REINSURER: St. Paul Reinsurance Management Corporation St. Paul Fire and Marine Insurance Company On the basis of the terms outlined in E.W. Blanch Co.'s Reinsurance Confirmation dated February 28, 1997, the undersigned reinsurer confirms its agreement to accept a share(s) in the Contract(s) listed below effective January 1, 1997:
Your Participation Your Percent Reference No. ------------- ------------- First XOL 15.0% TP 9418093 Cas Fac Semi-Auto 15.0% TP 9609468
Revisions/Remarks: ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ Signed: /s/ [SIG] --------------------------------------------------------- St. Paul Reinsurance Management Corporation St. Paul Fire and Marine Insurance Company Date: March 4, 1997 --------------------------------------------------------- Please sign and return one copy. 29 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of SCOR Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: South Barrington, Illinois, this 15th day of September, 1997. [SIG] ------------------------------------------------------- SCOR Reinsurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 30 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 12.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: New York, New York, this 23rd day of September 1997. [SIG] ------------------------------------------------------- SOREMA North America Reinsurance Company E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services 31 - -------------------------------------------------------------------------------- INTERESTS AND LIABILITIES AGREEMENT of Winterthur Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the FIRST EXCESS CASUALTY REINSURANCE CONTRACT EFFECTIVE: JULY 1, 1997 issued to and duly executed by Financial Pacific Insurance Company Sacramento, California The Subscribing Reinsurer hereby accepts a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1997, and shall continue in force until terminated in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representatives has executed this Agreement as of the date undermentioned at: New York, New York, this 17th day of July 1997. [SIG] ------------------------------------------------------- Winterthur Reinsurance Corporation of America E. W. BLANCH CO. - -------------------------------------------------------------------------------- Reinsurance Services EX-10.22 27 PRODUCER AGREEMENT 1 EXHIBIT 10.22 PRODUCER AGREEMENT - #MAUMR10011 AMERICAN UNDERWRITING MANAGERS AGENCY, INC., GLEN ALLEN, VIRGINIA, hereinafter designated as Manager, and FINANCIAL PACIFIC INSURANCE AGENCY, INC. SACRAMENTO, CALIFORNIA hereafter designated as Producer, pursuant to the Producer's request for underwriting facilities and other services of the Manager, agree as follows: This Agreement shall become effective on the 1st day of October, 1995. Whereas the Manager is organized for the purpose of underwriting risks of insurance under contract, for insurance companies, subject to the statutes of the various states of the United States of America where such business is domiciled; and Whereas the Producer (subject to restrictions imposed upon the Producer by law in the state(s) in which the Producer is authorized to write) is desirous of placing contracts of insurance for insureds or principals named in such contracts of insurance: 1. OWNERSHIP OF THE BUSINESS The Manager expressly recognizes the independent ownership by the Producer of the insurance business covered by this Agreement and agrees in the event of termination of this Agreement, the Producer having promptly accounted for an paid over premiums for which he is liable, the Producer's records, use and control of these expirations, shall remain the property of the Producer, and be left in his undisputed possession; the Manager's record or knowledge of names of insureds and expiration dates shall not be referred or communicated by the Manager to any other agent or Producer or person. If the Producer has not properly accounted for and paid all premiums due to the Manager in accordance with the payment terms of this Agreement, the ownership and control of the Producer's expirations shall be vested in the Manager. If the Manager assumes control of the Producer's expirations, the Manager shall have the sole right to use and control such expirations and commissions, if any, received by the Manager from the expirations, less applicable expenses, will be credited against balances due the Manager from the Producer. Upon payment of any settlement of outstanding balances, expirations will revert to Producer. If the Producer furnishes collateral that is acceptable to the Manager in the amount of the balances due the Manager from the Producer, the expirations will remain with the Producer. 1 2 2. BINDING AUTHORITY Unless added by Addendum, the Producer has no authority, either in his own name or in the name of the Manager, or any companies for which the Manager is providing underwriting services, to make, alter, bind or discharge any contract of insurance. 3 COMMISSIONS The Manager shall pay the Producer as commission, a percentage rate of the premium on each license bond written and paid for under this Agreement, at the rate of commission from time to time as agreed to by the Manager and Producer. Return commissions shall be credited at the same rate on any return premiums. 4. REVISION OF AGREEMENT This Agreement may be revised by the Manager after it gives the Producer at least sixty (60) days written advance notice of the proposed revision and the effective date. Such notice will be communicated by the Manager to the Producer in writing and will provide an opportunity to discuss the revisions and reasons for such changes. 5. CANCELLATION OF INSURANCE Nothing in the Agreement shall be construed as limiting or restricting the right of the Manager to cancel any binder, policy or contract. The Producer is authorized to cancel on behalf of the Manager or any company for which the Manager is providing underwriting services, any contracts, certificates, binders or policies of insurance that they have issued or caused to be issued for the Manager. 6. ACCOUNTING AND REMITTANCE A. All business received by the Producer must be reported to the Manager within 10 calendar days of each month-end in which the bond becomes effective. Premiums, net of commissions are to be remitted, to the Manager no later than 20 days after each month-end. The Producer hereby guarantees all premiums due the Company on all insurances effective under this Agreement or any Addendum to this Agreement. The Producer shall be liable for earned premium whether or not collected from the insured. D. Until the Producer receives written notice to the contrary, he shall remit all accounts and premium to American Underwriting Managers, Inc., P.O. Box 4919, Glen Allen, Virginia 23058-4919. 2 3 7. EXPENSES The Manager shall not be responsible for any Producer's expenses whatsoever. 8. SUPPLIES All supplies furnished to the Producer by the Manager shall always remain the property of the Manager and shall be returned to the Manager or its representative promptly upon demand. 9. CLAIMS The Producer agrees to cooperate fully with the Manager to facilitate the investigation, adjustment, settlement and payment of any claim when and as requested by the Manager, and under any rules or regulations as may be agreed upon from time to time. 10. ADVERTISING The Producer shall not limit any advertisement referring to the Manager or any company for which the Manager is providing underwriting services, or issue or cause to have issued any circular, letter, pamphlet or other publication or statement referring to the Manager or any company for which the Manager is providing underwriting services without the express written consent of the Manager. In the event the Manager or any company for which the Manager is providing underwriting services shall be subject to loss or expense arising out of any unauthorized advertisement, statement or publication of the Producer, the Producer shall be liable for all resulting damages and costs. 11. TERMINATION OF AGREEMENT This Agreement supersedes all previous Agreements, whether oral or written, between the Manager and the Producer. This Agreement may be canceled at any time by either party giving ninety (90) days written notice to the other. After the date of cancellation of this Agreement, unless otherwise stipulated at the option of the Manager, the Producer shall complete the collection and account to the Manager for all premiums, commissions and other transactions unaccounted for on the date of cancellation or arising thereafter in respect to outstanding insurances. In case the Manager shall find it necessary to perform any duty otherwise required of the Producer under this Agreement, the Producer shall be liable for all cost incidental thereto. 3 4 12. UNDERWRITING MANAGER This Agreement pertains only to business written through AMERICAN UNDERWRITING MANAGERS AGENCY, INCORPORATED, underwriting Managers, for the insurance company(ies) as shown below: MARKEL AMERICAN INSURANCE COMPANY MARKEL INSURANCE COMPANY who has the authority to act for the company(ies) in all matters pertaining to this Agreement; 13. ASSIGNMENT This Agreement shall not be transferred or assigned by either party, without the prior written consent of the other. 14. DOUBLE BROKERING The writing of business produced by another wholesaler or surplus fines general agent, through the Producer, is not permitted without the prior consent of the Manager, and may be considered as grounds for the immediate termination of this Agreement. 15. CONFORMITY OF STATUTE Terms of the Agreement which are in conflict with the statutes of the state wherein this Agreement applies are hereby amended to conform to such applicable statutes. 16. APPLICABLE LAW The law applicable to this Agreement shall be the law of the Commonwealth of Virginia. 17. ARTICLE VII, ARBITRATION A. In the event of a conflict or dispute hereunder which cannot be amicably settled between the parties, such dispute shall be submitted to arbitration. The Manager and the Producer shall each nominate an arbiter and the two named arbiters shall then select an umpire. The arbiters and umpire shall be disinterested persons familiar with the insurance business. Each party shall submit its case to its arbiter within 30 days of the decision to refer to arbitration. Should either party fail to name its arbiter 4 5 within 30 days of the date it is requested to do so, that arbiter shall be appointed by the Bureau of Insurance of the State of Virginia. B. The arbiter shall consider the dispute and shall submit any issues upon which they disagree to the umpire. The umpire's written decision thereon shall be binding upon the parties. The arbiters and umpire shall be relieved from judicial formalities and may abstain from following strict rules of evidence, interpreting this Agreement as an honorable engagement and not merely as a legal obligation. The procedural laws of the Commonwealth of Virginia shall govern the interpretation and application of this Agreement and the enforcement of the arbitration award. The venue of the arbitration shall be in Richmond, Virginia and each party shall pay the fee of its own arbiter and half the fee of the umpire. The remaining costs of the arbitration shall be paid as the arbiters or umpire shall direct. C. In the event of any actions or proceeding subsequent to the arbitration to enforce any rights under this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees. IN WITNESS WHEREOF the Manager and the Producer have executed this Agreement this 1st day of October, 1995. WITNESS AMERICAN UNDERWRITING MANAGERS, AGENCY, INCORPORATED BY /s/ MARK J. RICKEY - ----------------------------- -------------------------------------- Mark J. Rickey, President FINANCIAL PACIFIC INSURANCE AGENCY, INC. /s/ ANN SCHREMP - ----------------------------- Ann Schremp BY /s/ ROBERT T. KINGSLEY -------------------------------------- Robert T. Kingsley 5 6 Addendum No. 1 to Agreement No. MAUMR10011 between AMERICAN UNDERWRITING MANAGERS AGENCY, INCORPORATED (Hereafter called the Manager) and FINANCIAL PACIFIC INSURANCE AGENCY, INC. (Hereafter called the Producer) Effective October 1, 1995, the following Addendum is hereby added to and made a part of this Agreement: BINDING AUTHORITY The Producer is hereby authorized to bind and issue policies on behalf of the Manager for the Company(ies) as specified below. The Producer agrees to adhere strictly to the authority provided and acknowledges that any written or implied authority granted may only be exercised by the individual(s) designated below and shall not be delegated to any other person, firm or corporation, other than the Producer's own underwriters. Designated individual(s): Robert T. Kingsley The Producer may bind and issue policies in the following company(ies), subject to any special conditions indicated: Company(ies): MARKEL AMERICAN INSURANCE COMPANY MARKEL INSURANCE COMPANY In addition to the other terms and conditions shown in this Addendum, special conditions apply as indicated: Special Conditions: Authority is granted only to license and permit bond products of a class and in those states authorized in writing, by the manager. 1. INCEPTION AND PERIOD OF INSURANCE Any policy bound under this Addendum shall become effective during the currency of this Addendum and in no case shall any risk be bound for a period of greater than 30 days, unless prior approval is obtained from the Manager. All certificates issued under this Addendum shall become effective during the currency of this Addendum and in no case shall any policy be issued for a period greater than 36 months, unless prior approval is obtained from the Manager. 6 7 2. TERRITORIAL LIMITATION All insurance bound shall be domiciled or located within the United States of America subject to the following exceptions: As file approved and authorized from time to time by the Manager. 3. CANCELLATION OF INSURANCE A. All policies bound hereunder shall include an appropriate Cancellation Clause with a maximum period of written notice to the Insured not to exceed 30 days required to effect cancellation, unless otherwise required by statute and approved in advance by the Manager. B. The Manager shall have the right any time to cancel any insurance bound under this Addendum, The Producer shall return to the Manager legal evidence of all cancellations. 4. INSPECTIONS AND AUDITS A. The Producer shall maintain policy and certificate files for each issued policy and certificate, in a fashion agreed to by the Manager and the Producer. These policy files should be available for audit from time to time, by the Manager, at the premises of the Producer. B. The Manager or its duly authorized representatives may inspect or audit any insurance bound or the subject matter thereof C. The Producer shall be responsible for the prompt adjustment of any auditable insurance bound under this Addendum and for reporting to the Manager any additional and/or return premium which may become due as a result of such adjustment. 5. SPECIAL CONDITIONS This Addendum will continue in force until terminated: 1. By either party upon written notice to the other party. 2. By termination of the Producer Agreement. 7 8 IN WITNESS WHEREOF the Manager and the Producer have executed this Addendum this 1st DAY of October, 1995. WITNESS AMERICAN UNDERWRITING MANAGERS AGENCY, INCORPORATED BY /s/ MARK J. RICKEY - ----------------------------- -------------------------------------- Mark J. Rickey, President FINANCIAL PACIFIC INSURANCE AGENCY, INC. /s/ ANN SCHREMP - ----------------------------- Ann Schremp BY /s/ ROBERT T. KINGSLEY -------------------------------------- Robert T. Kingsley 8 9 Addendum No. 3 to Agreement No. MAUMR10011 between AMERICAN UNDERWRITING MANAGER, INCORPORATED (Hereafter called the Manager) and FINANCIAL PACIFIC INSURANCE AGENCY, INC. (Hereafter called the Producer) LICENSE & PERMIT BOND CONTINGENCY COMMISSION PLAN ADDENDUM Effective October 1, 1995, the following Addendum is hereby added to and made a part of this Agreement: 1. REPORTING OF RESULTS Within 90 days after December 31, 1996 ("Accounting Date"), Company shall render an accounting for the calendar year ended the previous December 31 (subject year) to the Producer reflecting the experience on an earned premium basis for premiums written under this Agreement, showing the following: A. Subject period's earned premiums. B. Subject period's incurred losses (as defined below). C. Development for periods before subject period. 2. SUBJECT PERI0D INCURRED LOSSES DEFINED Subject Period Incurred Losses shall be defined as the total amount of all claims paid, plus all Manager allocated claim expenses (legal fees, investigation fees, court costs, et cetera), plus Claim Reserves (which includes claim reported and unpaid, and continuing claims determined in accordance with the Manager's normal accounting practice) for the subject year period premium. 1 10 3. CONTINGENT COMMISSION CRITERIA The threshold for calculating the Contingent Commission shall be a loss ratio below that determined according to the following calculation: A Written Premium Volume greater than $1,000,000 in the preceding 12 months is required. Contingency Commission Threshold Calculation 100% Net Earned Premium Volume -57% Commission attributable to the Producer -12% Attributable to the Manager -X% Premium Tax -X% All commissions and fees payable to any resident agents, etc., as agreed to between the Producer and the Manager --- Difference = Contingent Commission Threshold 4. CONTINGENT COMMISSION CALCULATION a. The current period loss ratio shall be calculated by dividing the subject period incurred losses as defined in Section 2, by the earned premium for the subject period. The contingent commission will be equal to the contingent commission threshold minus the actual loss ratio, divided by 2 and multiplied by the subject period earned premium. If the result of this calculation is positive, the amount will be paid 90 days after the end of the subject period. If the result is negative, the negative amount will be carried forward into the calculation of the subsequent period contingent commission. 2 11 b. Each period's calculation will, be updated annually. The payment amount due will be adjusted if there has been any development, either positive or negative. In the event that a given period has had negative development resulting in a total due amount lower than the amount already paid, that overpayment will be deducted from the payment due for other periods until it has been recovered. If there are not sufficient payments due in the correct period's payments to offset the overpayment, there will be no payment made to the Producer for that period. The negative amount will be carried forward to the next period and subtracted from any amounts that otherwise become payable to the Producer under the aforesaid formula until all overpayments are recovered. IN WITNESS WHEREOF the Manager and the Producer have executed this addendum this 1st day of October, 1995. WITNESS AMERICAN UNDERWRITING MANAGERS, INC. [SIG] BY /s/ MARK J. RICKEY - ----------------------------- -------------------------------------- Mark J. Rickey, President FINANCIAL PACIFIC INSURANCE AGENCY, INC. /s/ ANN SCHREMP /s/ ROBERT T. KINGSLEY - ------------------------------ ---------------------------------------- Ann Schremp Robert T. Kingsley 3 EX-10.23 28 CLAIMS MANAGEMENT AGREEMENT 1 EXHIBIT 10.23 CLAIMS MANAGEMENT AGREEMENT between FINANCIAL PACIFIC INSURANCE AGENCY, INC. (The "Producer") and AMERICAN UNDERWRITING MANAGERS (the "Manager") Recitals A. Whereas the Manager is organized for the purpose of underwriting risks of insurance under contract, for insurance companies, subject to the statutes of the various states of the United States of America where such business is domiciled; and B. The Producer is experienced and skilled in the sales, production and customer service of the Insurance Product and desires to serve in this capacity as the Producer of the Product. In consideration of the foregoing and the mutual agreements below, the parties agree as follows: ARTICLE I. GENERAL PRINCIPALS 1.1 The Manager. The Manager, relying upon the expertise of the Producer, grants the authority described in this Agreement to the Producer. Nonetheless, the Manager, being at risk and having ultimate responsibility for the policies issued on its behalf, at all times shall have the ultimate authority with respect to all matters pertaining to the business serviced under this Agreement and to the general welfare of the Manager. 1.2 The Producer. The Producer shall manage the affairs of the Manager in an ethical, legal and professional manner. 1.3 Unfair Claims Practices. The Producer shall be solely responsible for compliance with all pertinent Unfair Claims Practices statutes, however named, and does agree to indemnify the Manager for any fines, judgements, penalties or similar payments resulting from the Producer's failure to do so. ARTICLE II. CLAIMS AUTHORITY 2.1 Claims Management. The Manager grants to the Producer authority to adjust, settle, and compromise, claims arising out of policies of the Insurance Product. The Producer shall pursue diligently and supervise the prompt, fair and just settlement or defense of all claims in the Manager's best interests. 2.2 Claims Adjusters. The Manager will appoint or grants to the Producer the authority to appoint and supervise professional adjusters and to investigate, adjust, settle and compromise such claims as deemed necessary by the Producer. 1 2 2.3 Attorneys. The Producer is not granted authority to appoint or supervise attorneys, defend or litigate on behalf of the Manager in any matter without prior written consent. All suit papers shall be immediately forwarded to the Manager along with a complete copy of the Producer's file regarding the particular claim on issue. If Producer is a named party in the suit, the Producer has the right to defend or litigate, to protect its interest. 2.4 Recoveries. The Manager grants to the Producer authority to and the Producer will pursue diligently and secure all rights of subrogation, salvage or recoveries on behalf of the Manager and any deductible recoveries where applicable. The Producer shall deposit all recoveries hereunder, in the Manager's Claims Account established pursuant to Section 2.8. 2.5 Settlement Authority. The Producer is not granted authority to settle or pay, any claim or claims. The Producer will forward to the Manager, all claims ready for settlement within three (3) business days of completion of the Producer's investigation. The Manager will be responsible for paying all valid claims after review of the Producer's claim fill. 2.6 Notification Obligations. The Producer shall notify the Manager in the following instances according to the time frames specified below: (a) any loss or claim whose value in part or in total exceeds $5,000.00 prior to payment, for Manager approval; (within 30 calendar days of Loss) (b) any loss or claim resulting in legal action being instituted against the Producer or the Manager, or suits requesting punitive damages in accordance with Addendum 1; (c) any loss or claim causing a complaint to be filed with any regulatory authority or a threat to file a complaint with a regulatory authority according to the procedure prescribed by the Manager; in accordance with Addendum 1; (d) any inquiry from a regulatory authority that involves a claim or claims even if no complaint causes the inquiry according to the procedure prescribed by the Manager (Addendum 1); in accordance with Addendum 1; (e) any claims the Producer deems appropriate to deny; (within 30 calendar days) (f) any claim over which the Producer intends to file suit on behalf of the Manager before such suit is filed; It is understood and agreed that the Producer shall undertake to accept and act upon subsequent instructions from the Manager resulting from a claim or loss being brought to the attention of the Manager in accordance with this Section 2.6 or for any other cause. 2.7 Manager Claims Account. For the purposes of depositing subrogation and salvage collected and settling and paying claims, the Manager shall establish on behalf of the Manager account (the "Manager Claims Account") at a financial institution mutually acceptable to the Manager and the Producer. The Manager shall own and have ultimate control over the Manager Claims Account but shall grant the Producer power and authority to deposit, and withdraw funds from such account for purposes of fulfilling its obligations under this Agreement. The Manager agrees to maintain a minimum balance agreed upon the by the Manager and the Producer in the Manager Claims Account for the purpose of avoiding service fees. Interest income from the Manager Claims Account shall be payable to the Manager. 2 3 2.8 Payment of Claims. To the extent authorized in Sections 2.5 and 2.6 the producer may pay claims and settlements out of funds in the Manager Claims Account. The Manager agrees to maintain sufficient funds in the Manager Claims Account to pay claims under the program. ARTICLE III. RECORDS, REPORTS, REMITTANCES AND PROCEDURES 3.1 Maintenance of Records. The Producer shall maintain complete and orderly files, records and accounts of all transaction involving the Manager and/or the Program in accordance with generally accepted insurance and accounting practices. All such files shall be the property of the Manager and subject to review by the Manager, by Manager-authorized representatives and by regulatory authorities at all reasonable times. All such files shall be returned to the Manager upon demand at the Manager's expense. No lien may be claimed nor may said files be held as security for any lien claimed by the Producer. Notwithstanding the ownership of such records, the Manager recognizes the Producer's right to free and open access to the records. The Manager acknowledges that the Producer's filing methods were acceptable to the Manager on the date this Agreement was signed. 3.2 Inspection and Availability of Records (a) The Manager or its authorized representatives shall have the right at all reasonable times to inspect, review, analyze, copy or abstract all books and records, including but not limited to, accounting records, statistical records, databases,or other general business records of the Producer pertaining to the Program and the Insurance Product. Additionally, the Manager shall have the right to conduct periodic audits of all books and records relating to the Program. (b) The Producer shall make available to the Department of Insurance of the State of or other states or their respective designees all books, records, and documents pertaining to the Insurance Product. 3.3 Reports. (a) Monthly. Within 10 days after the close of each calender month, the Producer shall render to the Manager reports of transactions for said month in formats acceptable to the Manager. The reports shall include, but not necessarily be limited to, an accounting of all claims and claims expenses reserved, paid, incurred and outstanding, claims closed, claims re-opened, all salvage and subrogation and all transactions and balances related to the Manager Claims Account. The Producer shall, by fax, render to the Manager reports including, but not limited to, a listing of all checks drawn against the Manager Claims Account during said month or since the previous listing, a listing of all salvage or subrogation or similar recoveries deposited into the Manager Claims Account, and a listing of all claims newly known or suspected to exceed $10,000.00 in total value. These reports shall be in a format acceptable to the Manager. 3.4 Operational Procedure Manual. The producer shall establish and maintain a written operational procedure manual satisfactory to the Manger to handle all business written under this Agreement. The Producer shall submit said operational procedure manual to the Manager in draft form as soon as possible and in final form not later than January 1, 1996. 3.5 Records Retention. The Producer will maintain permanent copies of all claim files or correspondence related to these claims hereunder either in hard copies or microfiche or archived on fixed and/or movable media as agreed upon by the Manager. All such copies shall be the property of the Manager. The Producer will not destroy these permanent copies without the written permission of the Manager and of the Department of Insurance of the appropriate State(s). 3 4 ARTICLE IV. EXPENSES 4.1 Producer's Expenses. The Producer shall accept and pay all expenses incurred in connection with the administration and servicing of the claim hereunder, including but not limited to the following: (a) Expenses incurred in pursuing and securing the Manager's rights of subrogation, salvage and recoveries except any incentive compensation arrangements that the Manager and the Producer may from time to time agree upon with respect to subrogation recoveries; (b) The Producer's general office expenses, including rent, salaries, utilities, transportation, furniture, fixtures, equipment, supplies, telephone, postage, and other general overhead expenses; (c) Preparation and printing of documents required to fulfill the obligations of the Producer under this Agreement. 4.2 Manager's Expenses. The Manager shall absorb and pay directly the following direct and indirect claims expenses: (a) Expenses associated with regulatory audits conducted by any Departments of Insurance, personnel, costs and related costs of the Manager's internal management and review of the Program and expenses of administering or internally auditing the Program. In the event that a follow-up audit is conducted attributed to the fault of the Producer, the cost of said audit or its proportional share shall be borne by the Producer. 4.3 Manager Employee. The Manager and the Producer may mutually determine it necessary or desirable for one of the Manager's employees to work in the Program under the direct supervision of the Producer. In such event, the salary and benefits attributable to such employee, which shall be mutually agreed upon by the Manager and the Producer, would be billed to the Producer on a monthly basis. ARTICLE V. ANNUAL REVIEW 5.1 The Manager and the Producer shall, within 30 days of each anniversary date of this Agreement, review the terms and conditions of this Agreement, review the terms and conditions of this Agreement and make any necessary or desirable amendments pursuant to Section 10.4. If the parties are unable to agree on amended terms and conditions and until any amendments are made pursuant to Section 10.4, the then existing terms of this Agreement will continue to govern. ARTICLE VI. TERMINATION 6.1 Manager Termination. The Manager may terminate this Agreement upon 90 days written notice to the Producer. 6.2 Producer Termination. The Producer may terminate this Agreement upon 90 days written notice to the Manager. 4 5 6.3 Immediate Termination. This Agreement will terminate immediately if: (a) the Manager gives the Producer written notice of termination following the cancellation or non-renewal of the Producer's license in the State of Domicile; (b) either party gives written notice to the other in the event of fraud, gross and willful misconduct or insolvency, bankruptcy or an assignment for the benefit of creditors on the part of such other party; or (c) on the effective date of sale, transfer or merger of the Producer's business without the Manager's prior written consent, not to be unreasonably withheld. (d) the Production Agreement between the Manager and Financial Pacific Insurance Agency is terminated, but only at the Manager's option. 6.4 Effect of Termination. In the event of termination of this Agreement: (a) The obligations of the Merger and the Producer in Article IV shall survive termination of this Agreement. (b) No party shall have a claim upon the other for loss of prospective profit or damage to its business arising therefrom. (c) The Producer shall cooperate fully with the Manager in providing all necessary or appropriate notice to any and all third parties, including without limitation, insureds, producers, sub-producers, intermediaries, and regulatory authorities. (d) The Producer shall promptly return to the Manager any checks, forms or other supplies imprinted with the Manager's name regardless of who incurred the cost for same or any policies, forms or other supplies furnished to the Producer by the Manager. (e) The Manager agrees to maintain sufficient funds in the Manager Claims Account to pay claims during any run-off period. ARTICLE VII. ARBITRATION (a) In the event of a conflict or dispute hereunder which cannot be amicably settled between the parties, such dispute shall be submitted to arbitration. The Manager and the Producer shall each nominate an arbiter and the two named arbiters shall then select an umpire. The arbiters and umpire shall be disinterested persons familiar with the insurance business. Each party shall submit its case to its arbiter within 30 days of the decision to refer to arbitration. Should either party fail to name its arbiter within 30 days of the date it is requested to do so, that arbiter shall be appointed by the Bureau of Insurance of the State of Virginia. 5 6 (b) The arbiter shall consider the dispute and shall submit any issues upon which they disagree to the umpire. The umpire's written decision thereon shall be binding upon the parties. The arbiters and umpire shall be relieved from judicial formalities and may abstain from following strict rules of evidence, interpreting this Agreement as an honorable engagement and not merely as a legal obligation. The procedural laws of the Commonwealth of Virginia shall govern the interpretation and application of this Agreement and the enforcement of the arbitration award. The venue of the arbitration shall be in Richmond, Virginia and each party shall pay the fee of its own arbiter and half of the fee of the umpire. The remaining costs of the arbitration shall be paid as the arbiters or umpire shall direct. (c) In the event of any action or proceeding subsequent to the arbitration to enforce any rights under this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees. ARTICLE VIII. INSURANCE COVERAGE The Producer shall at all times during the terms of this Agreement and at its expense maintain at a minimum: (a) A Fidelity Bond providing coverage for all officers and other employees of the Producer (including but not limited to "money and securities" coverage, employee dishonesty, and mysterious disappearances), issued by an insurer reasonably acceptable to the Manager in an amount not less than $1,000,000; (b) General Liability insurance issued by an insurer reasonably acceptable to the Manager with a policy limit in an amount not less than $2,000,000 in the aggregate and $1,000,000 per occurrence; and (c) Automobile Liability insurance issued by an insurer reasonably acceptable to the Manager with a policy limit in an amount not less than $1,000,000. (d) Errors and Omissions insurance with not less than a $1,000,000 per claim limit. The Manager shall be provided with evidence of the above insurance coverage in the form of a properly executed Certificate of Insurance, which at all times during the term of this policy shall be kept current. ARTICLE IX. GENERAL PROVISIONS 9.1 Effective Date. This Agreement shall become effective upon October 1, 1995. 9.2 Independent Contractor Status. The Producer is an independent contractor of the Manager for the purposes set forth in this Agreement with all the rights, powers, and duties as such. Nothing herein shall create the relationship of employer and employee, joint ventures, partners or associates between the Manager and the Producer. 9.3 Assignment. The Producer shall not assign, sell or otherwise transfer all or part of this Agreement or the rights hereunder without the prior written consent of the Manager. 9.4 Amendment. This Agreement may be amended only by written agreement signed by both parties hereto. 9.5 Regulatory Issues. If either the Producer or the Manager receives an inquiry or complaint from an regulatory authority, prompt notice shall be given to the other party. If a response affecting the Manager is required, the Producer shall draft a response and submit the draft to the Manager for prior approval within five business days. The Manager may instruct the Producer to reply on behalf of the Manager. 6 7 9.6 Licenses and Compliance with Laws. (a) The Manager and the Producer will maintain all licenses and regulatory approvals necessary to conduct business in the State(s) in which the program is marketed. (b) The Manager is responsible for ensuring that all forms, procedures, practices, and licenses necessary to fulfill its obligations under this Agreement are in compliance with all state laws and regulations. (c) The Producer is responsible for carrying out the Program in accordance with the policies and guidelines approved by the Manager. 9.7 Advertising. The Producer shall not insert or permit any advertisement referring to the Manager or the business written on its behalf or issue or cause to be issued or permit a producer to issue any circular, pamphlet or other publication about the Manager or the business written on its behalf without the expresses prior written approval of the Manager. The Producer shall require its producers to see the Producer's approval in writing to use the Producer's or the Manager's name in any advertisement or the promotional material in connection with the Program or the Insurance Product. 9.8 Non-Waiver. The failure of the Manager or the Producer to insist on strict compliance with this Agreement, or to exercise any right or remedy under this Agreement, shall not constitute a waiver of any rights contained herein or estop the parties from thereafter demanding full and complete compliance therewith nor prevent the parties from exercising such remedy in the future. 9.9 Notices. Any notice require or permitted to be given under this Agrement shall be in writing and shall be deemed duly given if delivered personally, by overnight express or certified mail (return receipt) to the party for whom it is intended at the following address or such other address as the party may designate from time to time. For the Producer: Financial Pacific Insurance Agency 8583 Elder Creek Road Suite 100 Sacramento, CA 95828 Attention: Robert T. Kingsley For the Manager: Markel American Insurance Company/Markel Insurance Company 4551 Cox Road Glen Allen, VA 23060 Attention: Mark Rickey 9.10 Legality. If any provision of this Agreement should be invalid under or in conflict with any law, this Agreement shall be deemed amended to comply with the minimum requirements of such laws without affecting the remaining provisions of this Agreement. 9.11 Governing Law. This Agreement shall be interpreted under and pursuant to the laws of the Commonwealth of Virginia. 9.12 Successors and Assigns. This Agreement shall bind and benefit the successors and assigns (if permitted) of the parties. 7 8 9.13 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter of this Agreement and may only be supplemented, amended or revised in a further written document signed by both parties hereto. All previous agreements and/or understanding, whether oral or written, between the Manager and the Producer as to the subject matter hereof are superseded by this Agreement. The parties executed this Agreement this 28th day of November, 1995. AMERICAN UNDERWRITING MANAGERS By: /s/ MARK J. RICKEY Attest: -------------------------- ---------------------- Mark J. Rickey Title: President -------------------------- FINANCIAL PACIFIC INSURANCE AGENCY, INC. By: /s/ ROBERT T. KINGSLEY Attest: /s/ ANN SCHREMP -------------------------- ---------------------- Robert T. Kingsley Ann Schremp Title: Executive Vice President -------------------------- 8 9 ADDENDUM 1 TO CLAIMS MANAGEMENT AGREEMENT BETWEEN FINANCIAL PACIFIC INSURANCE AGENCY, INC. (THE "PRODUCER") AND AMERICAN UNDERWRITING MANAGERS (THE "MANAGERS") Compliant Handling Log. The Producer will retain a complete log of all formal Insurance Commission complaints received by The Producer. The log will contain information for tracking purposes. A copy of the log will be sent to The Manager at the end of each month. The log will include columns that contain the following information: o the name of the insured and the complainant, o the policy number and claim number; o the date the compliant was received and the final disposition date; o a brief synopsis of the file explanation of the final disposition; and o a short note as to the negligence issues. Compliant Handling Procedures. The Producer will do the following upon receipt of a complaint: o within 24 hours of receipt of the compliant, forward a copy of the complaint by facsimile machine to The Manager; o within 72 hours of receipt of the compliant, a draft of the answer from The Producer will be sent by facsimile to The Manager for review. The Manager will then response within suggestions and/or alterations within 24 hours after receipt of the drafted answer, and o The Producer will respond with the formal answer to the complainant no later than 24 hours after the drafted answer is approved by The Manager. For further clarification of the definitions of "complaint," the term could be, but is not limited to the following: o TIME LIMIT DEMANDS made by either the part(s) involved or their representative; o allegation of UNFAIR CLAIM PRACTICES violations; and/or o INSURANCE COMMISSION COMPLAINTS upon the Commissioner of the State of or any other appropriate jurisdiction. This process anticipates a total handling time of TEN (10) working days from receipt of the complaint until a formal written response by the Producer. This time frame may be modified only under special circumstances such as a review by Legal 9 10 Council prior to the formal answer. At no time will any answers exceed TIME LIMITS as set by the Statutes or Procedures as designated by the Regulations of the appropriate jurisdiction. The Producer agrees to date-stamp all correspondence and follow any other specific handling regulations promulgated by the appropriate jurisdiction. The parties executed this Agreement this 28th day of November, 1995. AMERICAN UNDERWRITING MANAGERS By: /s/ MARK J. RICKEY Attest: /s/ [SIG] -------------------------- ---------------------- Mark J. Rickey Title: President -------------------------- FINANCIAL PACIFIC INSURANCE AGENCY, INC. By: /s/ ROBERT T. KINGSLEY Attest: /s/ ANN SCHREMP -------------------------- ---------------------- Robert T. Kingsley Ann Schremp Title: Executive Vice President -------------------------- 10 EX-10.24 29 AGREEMENT BETWEEN FPIC & GENERAL REINSURANCE CORP. 1 EXHIBIT 10.24 FINANCIAL PACIFIC INSURANCE COMPANY Agreement No. 118 2 PROPERTY FACULTATIVE BINDING AGREEMENT NO. 118 between GENERAL REINSURANCE CORPORATION a Delaware corporation having its principal offices at Financial Centre 695 East Main Street P.O. Box 10350 Stamford, Connecticut 06904-2350 (herein referred to as the "Reinsurer") and FINANCIAL PACIFIC INSURANCE COMPANY 8583 Elder Creek Road, Suite 100 Sacramento, California (herein referred to as the "Company") SECTION I - BINDING AUTHORITY The Company shall bind on behalf of the Reinsurer, with respect to each individual risk that has a total insured value of greater than $10,000,000 but no greater than $25,000,000 and is insured under policies issued by the Company, a maximum amount of reinsurance of $8,000,000 in excess of a Company retention of $2,000,000. Such policies shall be classifiable in the NAIC form of annual statement as fire, allied lines, inland marine, commercial multiple peril (property coverages), and automobile physical damage (comprehensive and collision) and shall insure risks wherever located in the United States of America. This Agreement shall apply to individual risks where the Company's liability attaches, increases, or renews on and after July 1, 1996. All reinsurance bound under this Agreement shall be governed by the terms and conditions of the Reinsurer's Certificate of Facultative Reinsurance. 3 SECTION II - MECHANICS OF BINDING Within 90 days after binding the Reinsurer, the Company shall forward to the Reinsurer the Reinsurer's Property Facultative Worksheet for each risk, attaching pertinent underwriting information such as inspection reports, diagrams, and policy forms. If the Company fails to notify the Reinsurer within 90 days after binding the Reinsurer, the risk shall be individually submitted and the effective date of reinsurance shall be determined by mutual agreement. Promptly upon receipt of such Worksheet and information, the Reinsurer shall review the submission and provide the Company with a premium quotation. If the Company accepts such premium quotation, the Reinsurer shall issue a Facultative Reinsurance Certificate retroactive to the date it was bound, which shall become the reinsurance contract between the parties and which shall be cancelable in accordance with its terms. If the Company rejects the premium quotation, it shall advise the Reinsurer within 5 days after the date of such quotation and reinsurance coverage shall be canceled flat. If the Company fails to notify the Reinsurer of its rejection within 5 days after the date of such quotation, the Reinsurer shall issue a Facultative Reinsurance Certificate for the period from the inception date of the binder to the date on which the Company notifies the Reinsurer of its rejection of the quotation. In such instance, the Company shall pay to the Reinsurer a reinsurance premium equal to pro rata of the Reinsurer's premium quotation for the time the Certificate is in force. SECTION III - DEFINITIONS (a) RISK The Company shall establish what constitutes one risk, provided: (1) A building and its contents, including time element coverages, shall never be considered more than one risk; - 2 - 4 (2) When two or more buildings and their contents are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company those individual buildings and their contents that are considered to constitute each risk; if such identification is not made, each building and its contents shall be considered to be a separate risk. (b) BUILDING This term shall mean each structure that is considered by the local fire insurance rating organization to be a separate building for rate making purposes. With reference to structures not rated specifically by the local fire insurance rating organization, the term building shall mean each separately roofed structure enclosed within exterior walls. SECTION IV - EXCLUSIONS The Company may not bind the Reinsurer on: (a) Business accepted by the Company as reinsurance from other insurers other than its affiliates, (b) Policies written to apply in excess of underlying insurance or policies written with a deductible or franchise of more than $25,000; however, this exclusion shall not apply to policies which provide a percentage deductible or franchise in connection with windstorm; (c) Insurance against earthquake, when written as such; however, this exclusion shall not apply to ensuing loss by fire or explosion not otherwise excluded; (d) Insurance on growing crops; (e) Insurance against flood, surface water, waves, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not, except when written in conjunction with fire and otherwise eligible perils; (f) Business classified as fidelity; (g) Coverage afforded for loss or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale, or delivered under any trust or floor plan agreements, except under standard accounts receivable policies; - 3 - 5 (h) Coverage afforded for any loss or damage caused by or resulting from: (1) Explosion of steam boilers, steam pipes, steam engines or steam turbines owned by, leased by or operated under the control of the insured; however, this exclusion shall not apply to loss or damage resulting from fire or combustion explosion, nor to loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass; (2) Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires- however, this exclusion shall not apply to ensuing loss by fire not otherwise excluded; (3) Mechanical breakdown, including rupture or bursting caused by centrifugal force; however, this exclusion shall not apply to any resulting loss or damage caused by elevator collision; (i) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (j) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (k) Risks which have a total insured value of more than $25,000,000; (1) Mobile homes unless written as part of a commercial multiple peril policy; (m) Watercraft; (n) Inland marine business with respect to the following: (1) All bridges and tunnels; (2) Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; (3) Faulty film, tape, processing and editing insurance and cast insurance; (4) Stationary drilling rigs; - 4 - 6 (5) Furriers' customers policies; (6) Garment contractors policies; (7) Insurance on livestock under so-called "mortality policies"; (8) Jewelers' block policies and furriers' block policies; (9) Mining equipment while underground; (10) Motor truck cargo as respects long haul vehicles; (11) Radio and television broadcasting towers; (12) Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; (13) Builders risks; (o) Vacant or unoccupied properties; (p) Risks located on the keys and islands listed in Appendix A attached hereto; (q) Risks located within one mile of tidal waters, including the Intracoastal Waterway, as respects the Gulf of Mexico from Brownsville, Texas to Key West, Florida and the Atlantic Ocean from Key West, Florida to Sandy Hook, New Jersey; (r) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subsequently amended or by any similar endorsement affording such coverage; (s) Coverage afforded for pollutant clean up or removal, including time element coverage associated therewith, under any commercial property policy or any inland marine policy written by the Company which does not contain the provisions of ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services Office exclusion or where other regulatory constraints prohibit the Company from implementing such exclusion. If the Company elects to implement an exclusion independent of ISO, such exclusion will be deemed a suitable substitute provided the Com- - 5 - 7 pany has submitted the wording to the Reinsurer and received the Reinsurer's prior approval. Section V - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an inadvertent error or accidental omission of the Company, of a clerical or administrative nature, in reporting any claim or loss or in reporting any business reinsured under this Agreement, provided that the error or omission is rectified immediately after discovery. The Company shall not be liable for any errors or omissions on the part of the Reinsurer in transferring information from the Worksheet to the Certificate of Facultative Reinsurance. Section VI - INSPECTION The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the reinsurance bound in accordance with this Agreement, including Company files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. Section VII - TERMINATION Either party may withdraw this Agreement by sending to the other by registered mail to the address listed in this Agreement, notice stating the time and date when, not less than 90 days after the date of mailing of such notice, withdrawal shall be effective. If the Reinsurer withdraws this binding authority, it shall issue Certificates of Facultative Reinsurance for any reinsurance bound by the Company prior to the effective date of such withdrawal. Section VII - CHANGES OR ENDORSEMENTS The terms of this Agreement shall not be waived or changed except by endorsement issued hereto executed by a duly authorized representative of the Company and the Reinsurer. - 6 - 8 Any increase in the Company's liability on risks covered hereunder shall be automatically bound, subject to the Limit of Liability of the Reinsurer as set forth in the section entitled BINDING AUTHORITY and subject to all other terms of this Agreement, for a period of not more than 90 days from the date of such increase. The Company shall notify the Reinsurer of all increases by forwarding a copy of the Company's amendatory endorsement or notice of change which shall be acknowledged by the Reinsurer in the form of an endorsement to the Certificate of Facultative Reinsurance with the additional reinsurance premium, if any, entered thereon. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, this 6th day of February, 1997, GENERAL REINSURANCE CORPORATION [SIG] Vice President Attest: [SIG] and this 10th day of February, 1997 FINANCIAL PACIFIC INSURANCE COMPANY [SIG] Attest: [SIG] - 7 - Agreement No. 118 9 APPENDIX A Attached to and made a part of AGREEMENT NO. 118 EXCLUDED KEYS AND ISLANDS ALABAMA: Oyster Keys Piney Island Aux Herbes Island Plantation Key Dauphin Island St. George Island St. Vincent Island FLORIDA: Sand Keys Santa Rosa Island Amelia Island Sanibel Island Anclote Island Siesta Key Anna Marie Island Snead Island Big Pine Key Snipe Keys Big Torch Key Stock Island Bush Key Sugarloaf Key Cabbage Key Ten Thousands Islands Captiva Island Treasure Island Caladesi Island Upper Matecumbe Key Casey Key Vaca Key Cayo Costa Island Cedar Key GEORGIA: Coquina Key Crooked Key Cumberland Island Cudjoe Key Jekyll Island Elliott Key Ossabaw Island Estero Island St. Catherines Island Gasparilla Island St. Simons Island Hog Island Sapelo Island Honeymoon Island Skidaway Island Hutchinson Island Tybee Island J.N. Ding Darling NWR Wassaw Island Johnston Key Jupiter Island LOUISIANA: Key Biscayne Key Largo Breton Island Key West Chandeleur Island Long Key Curlew Island Longboat Key Freemason Island Lower Matecumbe Key Grand Gosier Island Marco Island Grand Isle Merritt Island Grand Terre Island Meed Keys Isle au Pitre Mullet Key Marsh Island No Name Key North Island North Captiva Island Shell Keys Old Rhodes Key 10 MISSISSIPPI: TEXAS: Cat Island Brazos Island Horn Island Galveston Island Petit Bois Island High Island Ship Island Matagorda Island Mustang Island NORTH CAROLINA: Padre Island San Jose Island Cedar Island South Padre Island Durant Island Harkers Island VIRGINIA: Knotts Island Mackay Island Cedar Island Ocean Isle Island Cobb Island Ocracoke Island Fishermans Island Pea Island Hog Island Roanoke Island (Nags Head) Metomkin Island Portsmounth Island Myrite Island Smith Island Parramore Island Plum Tree Island SOUTH CAROLINA: Ship Shoal Island Tangier Island Cape Island Wallops Island Capers Island Wreck Island Cedar Island Daufuskie Island Dewees Island Edisto Island Fripp Island Folly Island Hilton Head Island Hunting Island Isle of Palms John Island Kiawah Island Morgan Island Morris Island Murphy Island North Island Pritchards Island Seabrook Island South Island The Grand Strand Page 2 of 2 Appendix A Agreement No. II 8 EX-10.25 30 AGREEMENT BETWEEN FPIC & GENERAL REINSURANCE CORP. 1 EXHIBIT 10.25 FINANCIAL PACIFIC INSURANCE COMPANY AGREEMENT NO. AFF-G243440 2 AGREEMENT OF REINSURANCE NO. AFF-G243440 between GENERAL REINSURANCE CORPORATION a Delaware corporation having its principal offices at Financial Centre 695 East Main Street P.O. Box 10350 Stamford, Connecticut 06904-2350 (herein referred to as the "Reinsurer") and FINANCIAL PACIFIC INSURANCE COMPANY 8583 Elder Creek Road, Suite 100 Sacramento, California (herein referred to as the "Company") In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT As a condition precedent to the Reinsurer's obligations under this Agreement, the Company shall cede to the Reinsurer the business described in this Agreement, and the Reinsurer shall accept such business as reinsurance from the Company. This Agreement is comprised of General Articles I through XI and the Exhibit(s) listed below and each Exhibit which may be made a part of this Agreement. The terms of the General Articles and of the Exhibit(s) shall determine the rights and obligations of the parties. The terms of the General Articles shall apply to each Exhibit unless specifically amended therein. In the event of termination of all the Exhibits made a part of this Agreement, the General Articles shall automatically terminate when the liability of the Reinsurer under said Exhibits ceases. EXHIBIT A - EXCESS OF LOSS REINSURANCE of COMMERCIAL PROPERTY BUSINESS 3 Article II - PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement. Article III - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses by the Company within the terms and limits of its policies which are within the limits set forth in the applicable Exhibit shall be binding on the Reinsurer, subject to the terms of this Agreement. Article IV - RECOVERIES The Company shall pay to or credit the Reinsurer with the Reinsurer's portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment expenses for recoveries shall be deducted from the amount recovered. The Reinsurer shall be subrogated to the rights of the Company to the extent of its loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurer. - 2 - 4 If the reinsurance under an Exhibit is on a share basis, the recoveries shall be apportioned between the parties in the same ratio as the amounts of their liabilities bear to the loss. If the reinsurance under an Exhibit is on an excess basis, recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued. Article V - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an inadvertent error or accidental omission of the Company, of a clerical or administrative nature, in reporting any claim or loss or any business reinsured under this Agreement, provided that the error or omission is rectified immediately after discovery. The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. Article VI - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. Article VII - RESERVES AND TAXES The Reinsurer shall maintain the required reserves as to the Reinsurer's portion of unearned premium, claims, losses, and adjustment expense. The Company shall be liable for all premium taxes on premium ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this premium, the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium. - 3 - 5 Article VII - OFFSET The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer. Article IX - INSPECTION OF RECORDS The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. Article X - ARBITRATION Any unresolved difference of opinion between the Reinsurer and the Company shall be submitted to arbitration by three arbitrators. One arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be active or retired persons whose principal occupation is or was as officers of property and casualty insurance or reinsurance companies. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a - 4 - 6 reply brief. On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees of the arbitrators, shall be shared equally unless the arbitrators decide otherwise. The arbitration shall be held at the times and places agreed upon by the arbitrators. ARTICLE XI - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurer shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be - 5 - 7 executed in duplicate, this 10th day of September ,1996, GENERAL REINSURANCE CORPORATION [SIG] Vice President Attest: and this 3rd day of October ,1996. FINANCIAL PACIFIC INSURANCE COMPANY [SIG] Attest: 10/3/96 [SIG] - 6 - Agreement No. AFF-G243440 8 EXHIBIT A Attached to and made a part of AGREEMENT OF REINSURANCE NO. AFF-G243440 EXCESS OF LOSS REINSURANCE OF COMMERCIAL PROPERTY BUSINESS SECTION 1 - LIABILITY OF THE REINSURER The Reinsurer shall pay to the Company, with respect to each risk of the Company ceded hereunder, the amount of net loss sustained by the Company in excess of the Company Retention but not exceeding the Limit of Liability of the Reinsurer as set forth in the Schedule of Reinsurance or the amount of reinsurance ceded to the Reinsurer on the monthly bordereau report, whichever is less. However, in no event shall net loss include payments made by the Company under "unlimited" or "non ceded" coverages unless specific limits of liability have been included in the total amount of insurance reported and ceded on the monthly bordereau reports. SCHEDULE OF REINSURANCE
- ---------------------------------------------------------------------------------------------------- Class of Business Company Retention Limit of Liability of the Reinsurer - ---------------------------------------------------------------------------------------------------- Commercial Property Business $2,000,000 $8,000,000 - ----------------------------------------------------------------------------------------------------
All insurance written under one or more policies of the Company against the same peril on the same risk shall be combined, and the Company Retention and Limit of Liability of the Reinsurer shall be determined on the basis of the sum of all insurance against the same peril and on the same risk which is in force at the time of a claim or loss. 9 SECTION 2 - ALLOCATION OF ADJUSTMENT EXPENSE In addition to payments for its share of net loss, the Reinsurer shall pay to the Company a share of adjustment expenses proportionate to the Reinsurer's share of net loss. SECTION 3 - OTHER REINSURANCE The obligations of the Company to reinsure business falling within the scope of this Exhibit and of the Reinsurer to accept such reinsurance are mandatory and no other reinsurance (either facultative or treaty) is permitted, except treaty reinsurance within the Company Retention. SECTION 4 - DEFINITIONS (a) COMMERCIAL PROPERTY BUSINESS This term shall mean insurance which is classified in the NAIC form of annual statement as fire, allied lines, inland marine, commercial multiple peril (property coverages) and automobile physical damage (comprehensive and collision), except those lines specifically excluded in the section entitled EXCLUSIONS, on risks wherever located in the United States of America. (b) COMPANY RETENTION This term shall mean the amount the Company and its treaty reinsurers shall retain for their own account; however, this requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership. Recoveries from catastrophe reinsurance shall be deemed not to reduce the amount required with respect to the Company Retention. (c) NET LOSS This term shall mean all payments by the Company within the terms and limits of its policies in settlement of claims or losses after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance, except catastrophe reinsurance and except treaty reinsurance within the Company Retention, whether collectible or not. This A - 2 10 term shall not include adjustment expense. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (d) ADJUSTMENT EXPENSE This term shall mean expenditures by the Company within the terms and limits of its policies in the direct defense of claims and as allocated to an individual claim or loss (other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company) made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs; prejudgment interest; and interest on any judgment or award. (e) RISK The Company shall establish what constitutes one risk, provided: (1) A building and its contents, including time element coverages, and vehicles garaged at same location shall never be considered more than one risk; (2) When two or more buildings and their contents are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company those individual buildings and their contents that are considered to constitute each risk; if such identification is not made, each building and its contents shall be considered to be a separate risk. (f) BUILDING This term shall mean each structure that is considered by the local fire insurance rating organization to be a separate building for rate making purposes. With reference to structures not rated specifically by the local fire insurance rating organization, the term building shall mean each separately roofed structure enclosed within exterior walls. (g) TOTAL INSURED VALUE This term shall mean the sum total of values for building, personal property, business income, extra expense, accounts receivable, valuable papers, fine arts, and electronic data processing (hardware, software and related extra expense) and automobiles physical damage (comprehensive and collision) according to the policy form written. A - 3 11 SECTION 5 - EXCLUSIONS This Exhibit shall not apply to: (a) Business accepted by the Company as reinsurance from other insurers other than its affiliates; (b) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage Reinsurance attached hereto; (c) Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the Company is required under any statutes or regulations; (d) Any liability of the Company arising from its participation or membership in any insolvency fund; (e) Any loss or damage which is occasioned by war, including undeclared or civil war; warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or insurrection, rebellion, revolution, usurped power, or action taken by governmental authority in hindering or defending against any of these; however, this exclusion shall not apply to any policy which contains a standard war exclusion; (f) Policies written to apply in excess of underlying insurance or policies written with a deductible or franchise of more than $25,000; however, this exclusion shall not apply to policies which provide a percentage deductible or franchise in connection with windstorm; (g) Insurance against earthquake, when written as such; however, this exclusion shall not apply to ensuing loss by fire or explosion not otherwise excluded; (h) Insurance on growing crops; (i) Insurance against flood, surface water, waves, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not except when written in conjunction with fire and otherwise eligible perils; (j) Business classified as fidelity; A - 4 12 (k) Liability under coverage afforded for loss. or damage resulting from failure to account or pay for any goods or merchandise sold on credit, delivered under deferred payment agreements, consigned for sale, or delivered under any trust or floor plan agreements, except under standard accounts receivable policies; (l) Any loss or damage caused by or resulting from: (1) Explosion of steam boilers, steam pipes, steam engines or steam turbines owned by, leased by or operated under the control of the insured; however, this exclusion shall not apply to loss or damage resulting from fire or combustion explosion, nor to loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass; (2) Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires; however, this exclusion shall not apply to ensuing loss by fire not otherwise excluded; (3) Mechanical breakdown, including rupture or bursting caused by centrifugal force; however, this exclusion shall not apply to any resulting loss or damage caused by elevator collision; (m) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (n) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (o) Risks which have a total insurable value of more than $10,000,000; (p) Mobile homes unless written as part of a commercial multiple peril policy; (q) Watercraft; (r) Inland marine business with respect to the following: (1) All bridges and tunnels; (2) Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; A - 5 13 (3) Faulty film, tape, processing and editing insurance and cast insurance; (4) Stationary drilling rigs; (5) Furriers' customers policies; (6) Garment contractors policies; (7) Insurance on livestock under so-called "mortality policies"; (8) Jewelers' block policies and furriers' block policies; (9) Mining equipment while underground; (10) Motor truck cargo as respect long haul vehicles; (11) Radio and television broadcasting towers; (12) Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; (13) Builders risks; (s) Vacant or unoccupied properties; (t) Risks located on the keys and islands listed in Appendix A attached hereto; (u) Risks located within one mile of tidal waters, including the Intracoastal Waterway, as respects the Gulf of Mexico from Brownsville, Texas to Key West, Florida and the Atlantic Ocean from Key West, Florida to Sandy Hook, New Jersey; (v) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subsequently amended or by any similar endorsement affording such coverage; (w) Pollutant clean up or removal, including time element coverage associated therewith, under any commercial property policy or any inland marine policy written by the Company which does not contain the provisions of ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services A - 6 14 Office exclusion or where other regulatory constraints prohibit the Company from implementing such exclusion. If the Company elects to implement an exclusion independent of ISO, such exclusion will be deemed a suitable substitute provided the Company has submitted the wording to the Reinsurer and received the Reinsurer's prior approval. SECTION 6 - REINSURANCE PREMIUM As a condition precedent to the Reinsurer's obligations hereunder, the Company shall pay to the Reinsurer, with respect to each risk reinsured hereunder, a reinsurance premium equal to the Company's premium for the business ceded hereunder and the applicable reinsurance rates set forth in Appendix B, attached hereto. SECTION 7 - REPORTS AND REMITTANCES (a) BORDEREAU REPORTS AND REINSURANCE PREMIUM Within 25 days after the close of each month the Company shall render to the Reinsurer a bordereau report giving details of each risk insured under policies issued or endorsed during the month and reinsured hereunder, and the reinsurance premium for the month with respect to such business, summarizing the reinsurance premium by line of insurance. The bordereau report shall include for each risk ceded: (1) Name(s) of insured(s); (2) Risk occupancy; (3) Location(s), (4) Policy number(s); (5) Policy term; (6) Transaction description (new, renewal, endorsement); (7) ISO protection class; (8) Total insured value; (9) Construction; A - 7 15 (10) Reinsurance limit; (11) Pro rata ceded premium. The amount due the Reinsurer shall be remitted within 90 days after the close of each calendar quarter. (b) CLAIMS AND LOSSES The Company shall report promptly to the Reinsurer, but within no more than 25 days, each claim or loss which, in the Company's opinion, may involve the reinsurance afforded by this Exhibit. The Company shall advise the Reinsurer of the estimated amount of net loss and adjustment expense in connection with each such claim or loss and of any subsequent changes in such estimates. Promptly upon receipt of a definitive statement of net loss and adjustment expense from the Company, but within no more than 25 days, the Reinsurer shall promptly pay to the Company the Reinsurer's portion of net loss and the Reinsurer's portion of adjustment expense, if any. Any subsequent changes in the amount of net loss and/or adjustment expense shall be reported by the Company to the Reinsurer and the amount due either party shall be remitted promptly, but within no more than 25 days. (c) P.C.S. CATASTROPHE BULLETINS The Company shall furnish to the Reinsurer, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services: (1) The preliminary estimates of the amount recoverable from the Reinsurer; (2) The Reinsurer's portion of claims, losses and adjustment expenses paid less salvage recovered during each calendar quarter; (3) The Reinsurer's portion of reserves for claims, losses, and adjustment expenses at the end of each calendar quarter. (d) GENERAL In addition to the reports required by (a), (b), and (c) above, the Company shall furnish such other information as may be required by the A - 8 16 Reinsurer for the completion of the Reinsurer's quarterly and annual statements and internal records. All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer. SECTION 8 - COMMENCEMENT AND TERMINATION This Exhibit shall apply to claims and losses resulting from occurrences insured under new and renewal policies of the Company becoming effective at and after 12:01 A.M., July 1, 1996. Either party may terminate this Exhibit by sending to the other, by registered mail to its principal office, notice stating the time and date when, not less than 90 days after the date of mailing of such notice, termination shall be effective. Upon termination of this Exhibit, the Reinsurer shall continue to be liable, with respect to policies in force at the time and date of termination, for claims and losses resulting from occurrences taking place until the expiration, cancellation, or next anniversary date, not to exceed one year, of each such policy of the Company, whichever occurs first. When all reinsurance is expired or terminated, the Reinsurer shall return to the Company the reinsurance premium unearned, if any, calculated on the monthly pro rata basis. A - 9 Agreement No. AFF-G243440 17 APPENDIX A Attached to and made a part of AGREEMENT NO. AFF-G243440 EXCLUDED KEYS AND ISLANDS ALABAMA: FLORIDA (CONTINUED): Aux Herbes Island Merritt Island Dauphin Island Meed Keys Mullet Key FLORIDA: No Name Key North Captiva Island Amelia Island Old Rhodes Key Anclote Island Oyster Keys Anna Marie Island Piney Island Big Pine Key Plantation Key Big Torch Key St. George Island Bush Key St. Vincent Island Cabbage Key Sand Keys Captiva Island Santa Rosa Island Caladesi Island Sanibel Island Casey Key Siesta Key Cayo Costa Island Snead Island Cedar Key Snipe Keys Coquina Key Stock Island Crooked Key Sugarloaf Key Cudjoe Key Ten Thousands Islands Elliott Key Treasure Island Estero Island Upper Matecumbe Key Gasparilla Island Vaca Key Hog Island Honeymoon Island GEORGIA: Hutchinson Island J.N. Ding Darling NWR Cumberland Island Johnston Key Jekyll Island Jupiter Island Ossabaw Island Key Biscayne St. Catherines Island Key Largo St. Simons Island Key West Sapelo Island Long Key Skidaway Island Longboat Key Tybee Island Lower Matecumbe Key Wassaw Island Marco Island 18 LOUISIANA: SOUTH CAROLINA (CONTINUED) Breton Island Fripp Island Chandeleur Island Folly Island Curlew Island Hilton Head Island Freemason Island Hunting Island Grand Gosier Island Isle of Palms Grand Isle John Island Grand Terre Island Kiawah Island Isle au Pitre Morgan Island Marsh Island Morris Island North Island Murphy Island Shell Keys North Island Pritchards Island MISSISSIPPI: Seabrook Island South Island Cat Island The Grand Strand Horn Island Petit Bois Island TEXAS: Ship Island Brazos Island NORTH CAROLINA: Galveston Island High Island Cedar Island Matagorda Island Durant Island Mustang Island Harkers Island Padre Island Knotts Island San Jose Island Mackay Island South Padre Island Ocean Isle Island Ocracoke Island VIRGINIA: Pea Island Roanoke Island (Nags Head) Cedar Island Portsmounth Island Cobb Island Smith Island Fishermans Island Hog Island SOUTH CAROLINA: Metomkin Island Myrite Island Cape Island Parramore Island Capers Island Plum Tree Island Cedar Island Ship Shoal Island Daufuskie Island Tangier Island Dewees Island Wallops Island Edisto Island Wreck Island Page 2 of 2 Appendix A Agreement No. AFF-G243440 19 APPENDIX B Attached to and made a part of AGREEMENT OF REINSURANCE NO. AFF-G243440 REINSURANCE RATES COMMERCIAL PROPERTY
TOTAL LIMITS PERCENT OF GROSS PROPERTY PREMIUM GROSS MINIMUM PREMIUM $2,000,001 - $3,000,000 4.6% $154 $3,000,001 - $4,000,000 15.4% $308 $4,000,001 - $5,000,000 21.5% $462 $5,000,001 - $6,000,000 29.2% $615 $6,000,001 - $7,000,000 35.4% $769 $7,000,001 - $8,000,000 40.0% $923 $8,000,001 - $9,000,000 44.6% $1,077 $9,000,001 - $10,000,000 49.2% $1,231
o Apply appropriate % shown above against the Company's gross property annual premium. o Apply higher of two premiums (% GPP vs Minimum) for premium cede to this Agreement. o All gross reinsurance premiums include 35% ceding commission. AUTOMOBILE PHYSICAL DAMAGE Apply a gross excess rate of .077 per $100 of total insurable values reported at each location in excess of $2,000,000. 20 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (i) Nuclear reactor power plants including all auxiliary property on the site, or (ii) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or (iii) Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or (iv) Installations other than those listed in paragraph (2) (iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate: (a) where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this subparagraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof (7) The Company to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. N.M.A. 1119 EX-10.26 31 AGREEMENT BETWEEN FPIC & GENERAL REINSURANCE CORP. 1 EXHIBIT 10.26 FINANCIAL PACIFIC INSURANCE COMPANY AGREEMENT NO. 8090 2 VARIABLE QUOTA SHARE AGREEMENT OF REINSURANCE NO. 8090 between GENERAL REINSURANCE CORPORATION A Delaware corporation having its principal offices at Financial Centre 695 East Main Street P.O. Box 10350 Stamford, Connecticut 06904-2350 (herein referred to as the "Reinsurer") and FINANCIAL PACIFIC INSURANCE COMPANY Sacramento, California (herein referred to as the "Company") - -------------------------------------------------------------------------------- In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT The Company shall cede to the Reinsurer and the Reinsurer shall accept as reinsurance from the Company the business described in the article entitled BUSINESS COVERED. The terms of this Agreement shall determine the rights and obligations of the parties. ARTICLE II - PARTIES This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party to this Agreement shall be rendered solely to the other party; however, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no 3 instance shall any principal, indemnitor, or obligee of the Company or any claimant against a principal, indemnitor, or obligee of the Company have any rights under this Agreement. ARTICLE III - BUSINESS COVERED This Agreement shall apply to all surety business written by the Company, except surety business written via direct mail operations which is excluded hereunder. ARTICLE IV - COMMENCEMENT AND TERMINATION This Agreement shall apply to new and renewal bonds becoming effective on and after July 1, 1995. This Agreement may be terminated by either party sending to the other, by certified mail to its principal office, notice stating the time and date when, not less than 90 days after the date of mailing of such notice, termination shall be effective. Upon termination of this Agreement, the Reinsurer shall continue to be liable: (a) With respect to bonds in force at the effective time and date of termination which are written for an indefinite period containing a valid cancellation clause, until the next renewal date of each such bond following the effective date of termination of this Agreement; and (b) With respect to all other bonds in force at the effective time and date of termination, until the termination date of the Company's liability. ARTICLE V - RETENTION AND LIMIT As respects each bond subject to this Agreement, the Company shall retain a percentage of each net loss and shall cede to the Reinsurer a percentage of each net loss, in accordance with the Schedule of Reinsurance. - 2 - 4 SCHEDULE OF REINSURANCE
---------------------------------------------------------------------------------- GREATER OF CONTRACT LIMIT OF LIABILITY PRICE OR BOND PENALTY COMPANY RETENTION OF THE REINSURER ---------------------------------------------------------------------------------- $ 1 - $ 100,000 50% 50% $ 100,001 - $ 200,000 Greater of 30% or $ 50,000 Remainder $ 200,001 - $1,000,000 Greater of 20% or $100,000 Remainder $1,000,001 - $2,000,000 Greater of 10% or $200,000 Remainder ----------------------------------------------------------------------------------
In addition to payments for its share of net loss, the Reinsurer shall pay to the Company its proportionate share of adjustment expense. For purposes of this Agreement: (a) As respects contract bonds, no single contract bond in excess of $2,000,000 shall be subject to this Agreement and the uncompleted work program (bonded and unbonded) of any principal shall not exceed $4,000,000; and (b) As respects subdivision bonds, no single subdivision bond in excess of $2,000,000 shall be subject to this Agreement and the aggregate in force liability of any one principal shall not exceed $4,000,000. ARTICLE VI - DEFINITIONS (a) COMPANY RETENTION The Company shall retain for its own account the amount set forth as the Company Retention. This requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership. (b) NET LOSS This term shall mean all loss payments made by the Company in the settlement or mitigation of claims or potential claims (including the prevention of defaults) on the surety business of the Company, less salvage and subrogation recoveries and less amounts due from all other reinsurance, whether collectible or not. This term shall not include adjustment expense. If the Company becomes insolvent, this definition shall be - 3 - 5 modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (c) ADJUSTMENT EXPENSE This term shall mean all allocated expense payments made by the Company in the investigation, defense, settlement, or mitigation of claims or potential claims (including the prevention of defaults) on the surety business of the Company and in the recovery or attempted recovery of loss payments. Office expenses and salaries of employees of the Company or of any subsidiary or related or wholly owned company of the Company are not allocated expense payments. (d) EACH PRINCIPAL This term shall mean one or more principals under the same management and control, or one or more principals for whom bonds were executed in reliance upon the indemnity of the same person, firm or corporation, or in reliance upon the indemnity of a related group of persons, firms, or corporations. ARTICLE VII - EXCLUSIONS This Agreement shall not apply to: (a) Reinsurance assumed by the Company; (b) Any liability of the Company arising from its participation or membership in any insolvency fund; (c) Bonds issued by the Company in connection with Small Business Administration Guarantee under SBA 990 (or such form as may be used in the future in place thereof); (d) The advancement of any funds or loan guarantees provided by the Company to any account; (e) Bonds written on behalf of the Company's claims department; (f) Bonds of the following classifications: (1) Asbestos abatement/removal bonds; (2) Bail bonds; - 4 - 6 (3) Bank depository bonds; (4) Blue sky bonds; (5) Co-surety not originated and controlled by the Company; (6) Credit enhancement and financial guaranty insurance or bonds classified by the Surety Association of America manual as (noncontract) classes 580, 581 or 597; (7) Dual obligee bonds without a "savings clause" or "California clause"; (8) EPA or hazardous waste bonds including closure and post-closure bonds; (9) Fidelity bonds including financial institution bonds; (10) Insurance company qualifying bonds; (11) Lease bonds; (12) Mortgage deficiency bonds; (13) Mortgage guaranty bonds; (14) Note guaranty bonds; (15) Patent infringement bonds; (16) Reclamation bonds; (17) Self-insurer workers' compensation bonds; (18) Security and Exchange Commission liability bonds. ARTICLE VIII - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. - 5 - 7 ARTICLE IX - EXTRA CONTRACTUAL OBLIGATIONS Notwithstanding the provisions of the article entitled CLAIMS AND LOSSES, if the Company incurs an extra contractual obligation, the Reinsurer shall afford additional reinsurance to the Company for a share of 80% of the extra contractual obligation. Such share will be in accordance with the Schedule of Reinsurance set forth in the article entitled RETENTION AND LIMIT for the bond out of which the extra contractual obligation arose. The liability of the Reinsurer with respect to extra contractual obligations, shall not exceed $1,000,000 any one principal nor $3,000,000 for the entire term of this Agreement. For purposes of this Article, the term "extra contractual obligation" shall mean a loss which the Company is legally liable to pay, which is not covered under any other provision of this Agreement and which arises from the Company's handling of any claim on the bonds reinsured hereunder. The date on which an extra contractual obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original loss. This Article shall not apply where the extra contractual obligation has been incurred due to the fraud or criminal conduct of a member of the Board of Directors, a corporate officer of the Company, or any other employee of the Company, acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the investigation, defense or settlement of any claim covered hereunder. Any insurance or reinsurance, whether collectible or not, which indemnifies or protects the Company against claims which are the subject matter of this Article and any contribution, subrogation, or recovery shall inure to the benefit of the Reinsurer and shall be deducted to arrive at the amount of the Company's loss. ARTICLE X - CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the - 6 - 8 Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses by the Company within the penal sum or limits of its bonds and within the amount of reinsurance set forth in the article entitled RETENTION AND LIMIT shall be binding on the Reinsurer, subject to the terms of this Agreement. ARTICLE XI - SALVAGE AND SUBROGATION The Company shall pay to or credit the Reinsurer with the Reinsurer's portion of any recovery obtained from salvage or subrogation. The Reinsurer shall be subrogated to the rights of the Company to the extent of their loss payments to the Company. The Company agrees to enforce its rights of salvage and subrogation by taking whatever action is necessary to recover its loss from an obligee, principal, indemnitor, or any other party who caused or contributed to its loss or part thereof, or in the event that the Company fails to or elects not to enforce its rights, at the Reinsurer's option, the Company will assign those rights to the Reinsurer. Recoveries shall be apportioned between the parties in the same ratio as the amounts of their liabilities bear to the loss. Article XII - REINSURANCE PREMIUM AND COMMISSION The Company shall pay to the Reinsurer a reinsurance premium equal to the proportion of Company's written premium for the business reinsured hereunder for each bond that the cession to the Reinsurer bears to greater of contract price or bond penalty on the same bond. The reinsurance premium set forth above shall be subject to a fixed commission allowance of 40%. - 7 - 9 ARTICLE XIII - REPORTS AND REMITTANCES (a) QUARTERLY REPORTS The Company shall report to the Reinsurer, within 45 days after the close of each calendar quarter: (1) The reinsurance premium written for the quarter; and (2) The commission allowed on the reinsurance premium for the quarter; and (3) The Reinsurer's portion of claims, losses, and adjustment expense paid during the quarter by year of claim or loss; and (4) The Reinsurer's portion of salvage recovered during the quarter by year of claim or loss. Any amount due the Reinsurer shall be remitted with such report and any amount due the Company shall be remitted immediately upon verification of such report. The Company shall also report to the Reinsurer, within 45 days after the close of each quarter: (i) The Reinsurer's portion of reserves for claims, losses, and adjustment expense at the end of the quarter by year of claim or loss; and (ii) The reinsurance premium unearned and the contribution for the quarter to the reinsurance premium in force. All reinsurance reports may be sent to: ASD Treaty Accounting Department General Reinsurance Corporation Financial Centre P.O. Box 10353 Stamford, CT 06904-2353 All reinsurance premiums and any other amounts due the Reinsurer may be remitted to the following lockbox address: - 8 - 10 General Reinsurance Corporation P.O. Box 92555 Chicago, IL 60675-2555 (b) GENERAL In addition to the reports required by (a) above, the Company shall furnish such other information as may be required by the Reinsurer for the completion of the Reinsurer's quarterly and annual statements and internal records. All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer. ARTICLE XIV - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an error or accidental omission by the Company in reporting any premium, claim, or loss reinsured under this Agreement, provided that the error or omission is rectified promptly after discovery. The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. Article XV - RESERVES AND TAXES The Reinsurer shall maintain the required reserves as to the Reinsurer's portion of claims and losses. The Company shall be liable for all premium taxes on business ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this business, the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium. ARTICLE XVI - INSPECTION OF RECORDS The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company - 9 - 11 files concerning claims, losses, or legal proceedings which involve or may involve the Reinsurer. ARTICLE XVII - OFFSET The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer. ARTICLE XVIII - ARBITRATION Any unresolved difference of opinion between any of the Reinsurer and the Company shall be submitted to arbitration by three arbitrators. One arbitrator shall be chosen by the Reinsurer(s), and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be active or retired persons whose principal occupation is or was an officer of property and casualty insurance or reinsurance companies. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a reply brief. On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's - 10 - 12 rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees of the arbitrators, shall be shared equally unless the arbitrators decide otherwise. The arbitration shall be held at the times and places agreed upon by the arbitrators. ARTICLE XIX - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator immediately upon demand, with reasonable provision for verification, on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurer shall be given written notice of the pendency of each claim against the Company on the bond(s) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be - 11 - 13 executed in duplicate, this 11th day of August, 1995, GENIE GENERAL CORPORATION /s/ RICHARD S. SKEWES ---------------------------------------- Richard S. Skewes Vice President Attest: /s/ RITA C. KERRIGAN --------------------------- and this 14th day of August, 1995. FINANCIAL PACIFIC INSURANCE COMPANY /s/ [SIG] ---------------------------------------- Attest: /s/ ANN SCHREMP - 12 - 14 ENDORSEMENT NO. 1 Attached to and made a part of VARIABLE QUOTA SHARE AGREEMENT OF REINSURANCE NO. 8090 between GENERAL REINSURANCE CORPORATION and FINANCIAL PACIFIC INSURANCE COMPANY IT IS MUTUALLY AGREED that, as respects new and renewal bonds becoming effective on and after August 1, 1996, ARTICLE V is amended to read as follows: "ARTICLE V - RETENTION AND LIMIT As respects each bond subject to this Agreement, the Company shall retain a percentage of each net loss and shall cede to the Reinsurer a percentage of each net loss, in accordance with the Schedule of Reinsurance. SCHEDULE OF REINSURANCE
------------------------------------------------------------------------------------ GREATER OF CONTRACT LIMIT OF LIABILITY PRICE OR BOND PENALTY COMPANY RETENTION OF THE REINSURER ------------------------------------------------------------------------------------ $ 1 - $ 50,000 100% 0% $ 50,001 - $ 100,000 Greater of 75% or $ 50,000 Remainder $ 100,001 - $ 500,000 Greater of 40% or $100,000 Remainder $ 500,001 - $1,000,000 Greater of 30% or $200,000 Remainder $1,000,001 - $2,000,000 Greater of 25% or $300,000 Remainder $2,000,001 - $3,000,000 Greater of 20% or $500,000 Remainder ------------------------------------------------------------------------------------
In addition to payments for its share of net loss, the Reinsurer shall pay to the Company its proportionate share of adjustment expense. For purposes of this Agreement: (a) As respects contract bonds, no single contract bond in excess of $3,000,000 shall be subject to this Agreement and the uncompleted work 15 program (bonded and unbonded) of any Principal shall not exceed $6,000,000; and (b) As respects subdivision bonds, no single subdivision bond in excess of $3,000,000 shall be subject to this Agreement and the aggregate in force liability of any one principal shall not exceed $6,000,000." IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be executed in duplicate, this 23rd day of August 1996. GENERAL REINSURANCE CORPORATION [SIG] ---------------------------------------- Vice President Attest: /s/ RITA C. KERRIGAN --------------------------- and this __ day of _________, 199_. FINANCIAL PACIFIC INSURANCE COMPANY [SIG] ---------------------------------------- Attest: - 2 - EX-10.27 32 QUOTA SHARE REINSURANCE AGREEMENT 1 EXHIBIT 10.27 AMERICAN RE-INSURANCE PLACEMENT SLIP QUOTA SHARE REINSURANCE AGREEMENT COMPANY REINSURED: Financial Pacific Insurance Company APPLICATION OF AGREEMENT: Commercial Excess Liability EFFECTIVE: January 1, 1998 COMPANY'S POLICY LIMIT: $10,000,000 REINSURER'S LIMITS OF LIABILITY: 100% of $10,000,000 excess of Primary 90% of $2,000,000 in excess of limits for ECO/XPL combined COMPANY RETENTION: Nil% excess of Primary RISK UNDERWRITING AND PRICING: Per the Company's underwriting guidelines and rates. PREMIUM: 100% of premium applicable to reinsured limits of liability CEDING COMMISSION: 35% CANCELLATION: At any time with 90 days notice by either party to the agreement TERMS AND CONDITIONS WITHIN AGREEMENT COMMERCIAL EXCLUSIONS ATTACHED COMMERCIAL UNDERLYING INSURANCE ATTACHED DEFINITIONS ATTACHED INSOLVENCY ATTACHED OFFSET AND SECURITY ATTACHED COMMENCEMENT AND TERMINATION ATTACHED LOSSES AND LOSS ADJUSTMENT EXPENSES ATTACHED REPORTS AND REMITTANCES ATTACHED ACCESS TO RECORDS ATTACHED RESERVES AND TAXES ATTACHED CHANGE IN POLICY FORMS ATTACHED EXTRA CONTRACTUAL OBLIGATIONS ATTACHED EXCESS JUDGMENTS CLAUSE ATTACHED ACCEPTED BY: OFFERRED BY: FINANCIAL PACIFIC INSURANCE CO. AMERICAN RE-INSURANCE COMPANY [SIG] [SIG] - ------------------------------- ----------------------------------- DATE: 10/23/97 DATE: 10/3/97 -------------------------- ----------------------------- 2 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP COMMERCIAL EXCLUSIONS A. This Contract does not apply to and specifically excludes the following: 1. Business accepted by the Company as reinsurance from other insurers except agency reinsurance where risk underwriting and all servicing, including claim handling, is done by the Company. 2. Any loss or liability accruing to the Company directly or indirectly from any insurance written by or through any pool or association including pools or associations in which membership by the company is required under any statutes or regulations. 3. 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. 4. Any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 5. Business written to apply in excess of a deductible or self-insured amount of more than $100,000, including Umbrella business. 6. Aviation liability including aerospace and satellite business 7. Workers' Compensation business, including Longshoremen's and Harbor Workers' Act and Jones Act. 8. Kidnap and Ransom, Surety, Credit, Financial Guarantee or Fiduciary Insurance. 9. Retail liquor law liability except where liquor constitutes less than 50% of sales. Specifically excluded are bars and retail liquor stores. 10. Insurance covering damage claims for the withdrawal, inspection, repair, replacement, or loss of use of the insured's products or of any property of which such products form a part of, or if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 11. Liabilities for bodily injury, personal damage and/or property damage from asbestos and/or asbestos products, including but not limited to liability arising from the mining, manufacture, installation, transport, storage, habitation or use of materials, products or structure containing asbestos. 12. Any loss or liability accruing to the Company arising out of the Employee Retirement Income Security Act of 1974 (ERISA), or amendments thereto. 13. Fidelity and Surety 3 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP COMMERCIAL EXCLUSIONS 14. Watercraft liability except for boats less than 50 feet in length. 15. All professional liability and/or malpractice insurance except as pertains to barber and beauty shops, funeral directors, druggists, opticians and optometrists. 16. Liability insurance relating to products or completed operations involving the manufacture or importation of: a. Cosmetics, hair or skin products, b. Drugs, pharmaceuticals or agricultural chemicals; c. Aircraft, aircraft parts or aircraft engines, all motorized vehicles, or mobile equipment; d. Heavy machinery and equipment, home power tools, or oil drilling equipment. 17. Liability insurance relating to premises or operations primarily involving: a. Aircraft airports, as respects coverage for all liability arising out of the ownership, maintenance, or use of any aircraft or flight operations; b. Amusements parks, carnivals, circuses, speed contests and racing; c. Manufacturing, packing, handling, shipping or storage of explosives, ammunitions, fuses, arms, magnesium, fireworks, nitroglycerin, celluloid, pyroxylin or explosive substances intended for use as an explosive. d. Gas or public utility companies, gas or public utility works, or gas lease operations; e. Production, refining, handling, shipping or storage of natural of artificial fuel gases, synthetic or coal or shale based fuel, butane, propane, gasoline or liquefied petroleum gas; f. Oil and gas risks, by which is meant drilling rigs, exploration risks, cracking plants, refineries and depots, and oil and gas pipelines; g. Railroad operations, specifically "line" or "on track" operations of actual railroads; h. Ship building, ship repair yard, dry docks, stevedoring; i. Tunneling, subway and underground mining; j. Offshore or subaqueous work; k. Wrecking of structures over eight stories in height, or marine wrecking; 4 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP COMMERCIAL EXCLUSIONS l. Ski resorts; m. Waste disposal and deposit sites except when written in conjunction with either a refuse hauler or recycling account; n. Crane rentals without operators whose primary business is crane rentals; o. Scaffold installation, repair, removal or rental, unless incidental; p. Aerial crop dusting to include application of fertilizers, herbicides, pesticides; q. Warehousemen's legal liability; r. Automobile racing and racetracks; s. Taxis; t. Blasting contractors; u. Licensed roofing contractors whose primary business is such; v. Wrap up construction projects. 18. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause-Liability Reinsurance" attached to and forming part of this Contract. 19. Pollution liability as excluded by the Company's policies. It is hereby warranted that any Commercial General Liability policy issued by the Company will also include ISO pollution exclusion language. B. If the Company provides insurance for an insured with respect to any premises, operations products or completed operations listed in subparagraphs 16 and 17 of paragraph A above, except subparagraphs 17(c) and 17(d), and if such premises, operations, products or completed operations constitute only a minor incidental part of the total premises, operations, products or completed operations of the insured, such exclusion (s) shall not apply. C. If the Company is bound, without the knowledge of and contrary to the instructions of the Company's supervisory underwriting personnel, on any business failing within the scope of one or more of the exclusions set forth in subparagraphs 14 through 19 of paragraph A above, these exclusions, except those set forth in subparagraphs 15, 17(c) , 17(d), 18 and 19 shall be suspended with the respect to such business until 65 days (60 discovery days plus 5 mailing days) after an underwriting supervisor of the Company acquires knowledge of such business. 5 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP COMMERCIAL UNDERLYING INSURANCE (a) The Underlying carrier must be Financial Pacific. (b) The following underlying limits shall be required and maintained: 1. Comprehensive General Liability $1,000,000 each occurrence limit $1,000,000 personal and advertising injury limit $1,000,000 general aggregate limit (other than products-completed operations) $1,000,000 products-completed operations aggregate limit 2. Comprehensive Auto Liability Single Limit Liability $1,000,000 each accident Split-Limits Liability $1,000,000 bodily injury each person $1,000,000 bodily injury each occurrence $1,000,000 property damage each accident 3. Employers' Liability Bodily Injury Liability $500,000 each accident (by accident) $500,000 policy limit (by disease) $500,000 each employee (by disease) (c) Other underlying limits may be required for certain classes of risks and shall be so stated in the Company's Umbrella Underwriting Guidelines. 6 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP DEFINITIONS a) The term "net retained insurance liability" as used herein means the remaining portion of the Company's gross liability on the policies covered hereunder after deducting all excess of loss reinsurance and all pro rata reinsurance, other than the quota share reinsurance provided under this Agreement. (b) The definition of the term "occurrence" as used herein shall be the definition of said term as set forth in the Company's policy, provided, however, in the event said term is not defined in any policy covered hereunder, then as respects such policy the term "each occurrence" as used herein shall be understood to mean each accident or occurrence or series of accidents or occurrences arising out of one event, and shall include aggregate limits of liability for a period not exceeding 12 months when such Company's policy covered hereunder applies in excess of aggregate limits. (c) If the date of loss, accident or occurrence cannot be specifically determined, the date of loss, accident or occurrence shall be the inception date of the original policy (i.e., the policy reinsured hereunder); such policy period shall be deemed not to exceed 12 calendar months. (d) The term "policies" as used herein means each of the Company's binders, policies and contracts providing insurance and reinsurance on the business reinsured under this Agreement. 7 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP INSOLVENCY (CALIFORNIA) (a) In the event of the insolvency of the Company and the appointment of a conservator, liquidator or statutory successor of the Company, the reinsurance provided by this Agreement shall be payable to such conservator, liquidator or statutory successor immediately upon demand, subject to the right of offset and with reasonable provision for verification of the Reinsurer's liability, on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of such insolvency or because such conservator, liquidator or statutory successor has failed to pay all or a portion of any claims. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator or statutory successor, except where this Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company. (b) In the event of the insolvency of the Company, the liquidator, conservator or statutory successor of the Company shall give the Reinsurer written notice of the pendency of each claim against the Company on a policy or bond reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer may, at its own expense, investigate such claim and interpose in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company, its conservator, liquidator or statutory successor. Subject to court approval, any expense thus incurred by the Reinsurer shall be chargeable against the Company as part of the expense of liquidation to the extent of such proportionate share of the benefit as shall accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 8 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP OFFSET AND SECURITY CLAUSE (a) Each party hereto has the right, which may be exercised at any time, to offset any amounts, whether on account of premiums or losses or otherwise, due from such party to another party under this agreement or any other reinsurance agreement heretofore or hereafter entered into between them, against any amounts, whether on account of premiums or losses or otherwise due from the latter party to the former party. The party asserting the right of offset may exercise this right, whether as assuming or ceding insurer or in both roles in the relevant agreement or agreements. (b) Each party hereby assigns and pledges to the other party (or to each other party, if more than one) all of its rights under this agreement to receive premium or loss payments at any time from such other party ("Collateral"), to secure its premium or loss obligations to such other party at any time under this agreement and any other reinsurance agreement heretofore or hereinafter entered into by and between them ("Secured Obligations"). If at any time a party is in default under any Secured Obligation or shall be subject to any liquidation, rehabilitation, reorganization or conservation proceeding, each other party shall be entitled in its discretion, to apply, or to withhold for the purpose of applying in due course, any Collateral assigned and pledged to it by the former party and otherwise to realize upon such Collateral as security for such Secured Obligations. (c) The security interest described herein, and the term "Collateral," shall apply to all payments and other proceeds in respect of the rights assigned and pledged. A party's security interest in Collateral shall be deemed evidenced only by the counterpart of this Agreement delivered to such party. (d) Each right under this Article is a separate and independent right, exercisable, without notice or demand, alone or together with other rights, in the sole election of the party entitled thereto, and no waiver, delay, or failure to exercise, in respect of any right shall constitute a waiver of any other right. The provisions of this Article shall survive any cancellation or other termination of this Agreement. 9 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP COMMENCEMENT AND TERMINATION (a) This Agreement shall take effect as of 12:01 A.M., January 1, 1998 and is entered into for an unlimited period but either party may terminate this Agreement at any time by giving not less than 90 days notice in writing to the other party. (b) The Reinsurer shall participate in business coming within the terms of this Agreement until the date of termination of this Agreement. (c) In the event of cancellation of this Agreement, the Reinsurer shall not be liable for any losses occurring under new and renewal policies becoming effective after the date of cancellation. The Reinsurer shall remain liable for losses occurring after the date of cancellation on all policies in force at such cancellation date until the next annual anniversary date or prior termination date of such policies; provided, however, any reinsurance still in force one year after the date of cancellation of this Agreement shall be automatically canceled at that time and the Reinsurer shall not be liable for losses occurring thereafter. The Reinsurer shall return to the Company the unearned premiums on the business in force, calculated on the monthly pro rata basis less the commissions allowed thereon. (d) Every notice of termination shall be given by certified letter addressed to the intended recipient at such recipient's address as herein above set forth. In determining whether the requisite number of days' notice has been given in any case, the date of termination shall be counted but the date of mailing shall not. (e) Notwithstanding the termination of this Agreement as herein above provided, the provisions of this Agreement shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities incurred by each party hereunder prior to such termination shall be fully performed and discharged. 10 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP LOSSES AND LOSS ADJUSTMENT EXPENSES (a) The Reinsurer, in proportion to its participation, shall pay to the Company a pro rata share of sums actually paid by the Company in settlement of losses under its policies; provided, however, that in the event of the insolvency of the Company payment of loss for which the Company is liable shall be made by the Reinsurer to the liquidator, receiver or statutory successor of the Company in accordance with the provisions of Article XIV of this Agreement. (b) The Reinsurer shall bear its pro rata share of all expenses incurred by the Company in the investigation, adjustment and litigation of all claims under its policies, excluding the office expenses of the Company and the salaries and expenses of its officials and employees. (c) The Reinsurer shall benefit pro rata in all salvages, discounts and other recoveries. (d) The Company shall advise the Reinsurer promptly of all claims and any subsequent developments pertaining thereto which may develop into losses involving reinsurance hereunder. (e) The Company has the obligation to investigate and, to the extent that may be required by the policies reinsured hereunder, defend any claim affecting this reinsurance and to pursue such claim to final determination. (f) It is understood that 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 or control of any claim or suit or proceeding involving this reinsurance; and the Company and the Reinsurer shall cooperate in every respect in the defense of such suit or claim or proceeding. 11 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP OTHER TERMS AND CONDITIONS REPORTS AND REMITTANCES (a) Within 30 days after the end of each month, the Company shall furnish to the Reinsurer a bordereau indicating, as respects each policy covered hereunder the name of the Insured, the policy number, term, limit of liability and original premium, plus any additional or return premiums as respects each cession and the reinsurance premiums thereon. (b) Within 30 days after the end of each month, the Company shall render a monthly account summarizing the premiums ceded, return premiums and commissions on net premiums. The balance due either party shall be remitted with the account. (c) Payment by the Reinsurer of its proportion of loss and loss expenses paid by the Company will be made by the Reinsurer to the Company within 15 days after proof of payment by the Company is received by the Reinsurer. The Reinsurer shall have the right, at its option, to offset the amount of such loss against any balance or balances past due. ACCESS TO RECORDS The Company shall place at the disposal of the Reinsurer and the Reinsurer shall have the right to inspect, through its authorized representatives, at all reasonable times during the currency of this Agreement and thereafter, the books, records and papers of the Company pertaining to the reinsurance provided hereunder and all claims made in connection therewith. RESERVES AND TAXES (a) The Reinsurer shall maintain legal reserves with respect to unearned premiums and claims hereunder. (b) The Company will be liable for all taxes on premiums reported to the Reinsurer hereunder and will reimburse the Reinsurer for such taxes where the Reinsurer is required to pay the same. CHANGE IN POLICY FORMS The Company and the Reinsurer have agreed on the Company's form as respects the policies covered hereunder and the Company shall advise the Reinsurer of any change in such policy form. 12 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP EXTRA CONTRACTUAL OBLIGATIONS (a) As reinsured under this Agreement, the Company shall be protected for any Extra Contractual Obligation awarded by a court of competent jurisdiction against the Company. Such Extra Contractual Obligation shall be added to the amount of the award in addition to the Company's policy limit and the sum thereof shall be considered one loss subject to the exclusions and limitations set forth in this Agreement. (b) Extra Contractual Obligation shall be defined as those liabilities, not covered under any other provision of this Agreement, and any legal costs and expenses incurred in connection therewith, which arise from the Company's handling of any claim on business covered hereunder as a result of the failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence or bad faith or fraud, in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. (c) For the purpose of the application of this Agreement an Extra Contractual Obligation shall be deemed to have arisen on the same date as the original loss that gave rise to the extra contractual obligation. (d) However, this Article shall not apply where the Extra Contractual Obligation has been incurred due to the fraud or criminal act of a member of the Board of Directors, a corporate officer or an employee of the Company or any other party or organization involved in the presentation, defense or settlement of any claim covered hereunder acting individually or collectively or in collusion with any individual or corporation. (e) Recoveries from any form of insurance or reinsurance, whether separately purchased from another insurance carrier or self insurance issued by the Company to itself, which protects the Company against claims which are the subject matter of this Article will inure to the benefit of the Reinsurer and shall be first deducted to arrive at the amount of any Extra Contractual Obligation covered hereunder, whether collectible or not (f) If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Agreement or the enforceability of such provision in any other jurisdiction. 13 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP EXCESS JUDGMENTS CLAUSE (a) As reinsured under this Agreement, the Company shall be protected for any Excess Judgment awarded by a court of competent jurisdiction against the Company. Such Excess Judgment shall be added to the amount of the award in addition to the Company's policy limit and the sum thereof shall be considered one loss subject to the exclusions and limitations set forth in this Agreement. (b) Excess Judgment shall mean any amount in excess of the Company's original policy limits, but otherwise within the coverage terms of the policy, that is paid by the Company, together with any legal costs and expenses incurred in connection therewith, as a result of an action against it by its insured or its insured's assignee to recover damages, awarded by a court of competent jurisdiction to a third party claimant, arising out of the Company's alleged or actual negligence or bad faith or fraud in rejecting a settlement within the policy limits, in discharging its duty to defend, in preparing the defense in an action against its insured or in discharging its duty to prepare or prosecute an appeal consequent upon such action. (c) However this Article shall not apply where the Excess Judgment has been incurred due to the fraud or criminal act of a member of the Board of Directors, a corporate officer, an employee or an agent of the Company, or any other party or organization involved in the presentation, defense or settlement of any claim covered hereunder acting individually or collectively or in collusion with any individual or corporation. (d) Recoveries from any form of insurance or reinsurance, whether separately purchased from another insurance carrier or self insurance issued by the Company to itself, which protects the Company against claims which are the subject matter of this Article will inure to the benefit of the Reinsurer and shall be first deducted to arrive at the amount of any Excess Judgment hereunder, whether collectible or not. (e) If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Agreement or the enforceability of such provision in any other jurisdiction. 14 AMERICAN RE-INSURANCE COMPANY PLACEMENT SLIP ADDENDUM COMMERCIAL UNDERLYING INSURANCE: Section (a) shall be replaced by the following: (a) The Underlying Carrier must be Financial Pacific or an A.M. Best B+ VII or better carrier. REPORTS AND REMITTANCES: Section (b) shall be replaced by the following: (b) The amount due the Reinsurer shall be remitted within ninety (90) days after the close of each calendar quarter. LOSS AND LOSS ADJUSTMENT EXPENSES: Section (d) shall be replaced by the following: (d) The Company shall advise the Reinsurer promptly of all claims and any subsequent developments pertaining thereto which may develop into losses involving reinsurance hereunder. In addition, the following categories of claims shall be reported to the Reinsurer immediately, regardless of any questions of liability of the insured or coverage under the policy: 1. Fatalities; 2. Paraplegics and quadriplegics; 3. Serious bums; 4. Serious brain injuries; 5. Amputation of any extremity; 6. Any loss on which the Company holds a loss reserve of greater than or equal to $500,000 and on which this reinsurance may apply. ACCEPTED BY: OFFERED BY: FINANCIAL PACIFIC INSURANCE CO. AMERICAN REINSURANCE COMPANY [SIG] [SIG] - ------------------------------ ------------------------------ DATE 10/23/97 DATE 10/22/97 ------------------------- ------------------------- 15 ANNUAL STATEMENT FOR THE YEAR 1997 OF THE FINANCIAL PACIFIC INSURANCE COMPANY SCHEDULE Y - INFORMATION CONCERNING ACTIVITIES OF INSURER MEMBERS OF A HOLDING COMPANY GROUP PART I ORGANIZATIONAL CHART [CHART] EX-10.28 33 NET LEASE AGREEMENT 1 EXHIBIT 10.28 NET LEASE AGREEMENT (OFFICE) ROCKLIN, CALIFORNIA BETWEEN STANFORD RANCH I, LLC, A DELAWARE LIMITED LIABILITY COMPANY AND FINANCIAL PACIFIC INSURANCE COMPANY, A CALIFORNIA CORPORATION JUNE 11, 1996 2 TABLE OF CONTENTS PAGE(S) 1. BUILDING IMPROVEMENTS ........................................ 4 2. PREMISES ..................................................... 9 3. ACCEPTANCE OF PREMISES ....................................... 9 4. TERM .........................................................10 5. RENT .........................................................10 6. SECURITY DEPOSIT .............................................11 7. TAXES ........................................................11 8. USE; LIMITATION ON USE .......................................13 9. MAINTENANCE ..................................................15 10. ALTERATIONS ..................................................15 11. MECHANIC'S LIEN ..............................................16 12. UTILITIES AND SERVICES .......................................16 13. INDEMNITY, EXCULPATION AND INSURANCE .........................17 14. DESTRUCTION ..................................................19 15. CONDEMNATION .................................................23 16. ASSIGNMENT ...................................................24 17. DEFAULT ......................................................26 18. SUBORDINATION; ESTOPPEL ......................................29 19. SURRENDER OF PREMISES; HOLDING OVER ..........................30 20. ENVIRONMENTAL PROVISIONS .....................................31 21. OPTION TO PURCHASE ...........................................32 22. TERMINATION RIGHTS ...........................................33 23. FIRST RIGHT OF REFUSAL .......................................34 24. SIGNS ........................................................35 25. LANDLORD'S ENTRY ON PREMISES .................................35 26. NOTICE .......................................................36 -1- 3 27. RECORDATION; QUITCLAIM DEED...................................36 28. SALE OR TRANSFER OF PREMISES..................................36 29. ATTORNEYS' FEES...............................................36 30. MISCELLANEOUS PROVISIONS......................................37 -2- 4 NET LEASE AGREEMENT (OFFICE) ROCKLIN, CALIFORNIA BASIC LEASE Information Defined Terms: Information: LEASE DATE: June 11, 1996 LANDLORD: Stanford Ranch I, LLC, a Delaware limited liability company Post Office Box 1200 Rocklin, California 95677 TENANT: Financial Pacific Insurance Company 8583 Elder Creek Road, Suite 100 Sacramento, California 95828 (until Commencement Date) ----------------------------------------- ----------------------------------------- ----------------------------------------- (after Commencement Date) PREMISES: The Premises referred to in this Lease consist of the parcel ("LOT") known as Lot 12 in Atherton Center within Stanford Ranch Rocklin, California, and the approximately 25,000 square foot building ("BUILDING") to be constructed thereon in accordance with the provisions of this Lease, as shown in Exhibit A. The Building and the Land are collectively referred to as the "PREMISES." INITIAL TERM: The term of this Lease shall be ten (10) years, beginning on the Commencement Date (as hereinafter defined), subject to extensions pursuant to Section 4b. of this Lease. BASE RENT: Twenty Thousand and No/100ths Dollars ($20,000.00) per month, based upon Building Square Footage (as hereinafter defined) of twenty-five thousand (25,000), at $.80 per square foot per month, for years 1 through 5, inclusive, of the Initial Term. Base Rent may be adjusted in accordance with Section 1h. Twenty One Thousand Two Hundred Fifty and No/100ths Dollars ($21,250.00) per month, based upon Building Square Footage of twenty-five thousand (25,000), at $.85 per square foot per month, for years 6 through 10, inclusive, of the Initial Term. Base Rent may be adjusted in accordance with Section 1h. -1- 5 TENANT'S USE: General office use and no other use without Landlord's prior written consent. SECURITY DEPOSIT: Thirty Thousand and No/100ths Dollars ($30,000.00) or, in the alternative, an irrevocable letter of credit in such amount, upon terms and conditions reasonably acceptable to Landlord and Tenant, issued in the name of Landlord. BROKER FOR TENANT: Cornish & Carey Commercial 1601 Response Road, Suit 160 Sacramento, California Attention: Tom Heacox BROKER FOR LANDLORD: N/A -2- 6 LIST OF EXHIBITS A. Description of Premises B. Site Plan C. Agreement of Purchase and Sale D. Legal Description of Parcel 11 E. Legal Description of Parcel 13 -3- 7 NET LEASE AGREEMENT (OFFICE) This Lease is made and entered into by the Landlord and Tenant referred to in the Basic Lease Information. The Basic Lease Information attached to this Lease as page 1 is hereby incorporated into this Lease by this reference. This Lease is intended to be a "NET NET NET" Lease and Tenant shall pay all expenses associated with maintaining and operating the Premises during the term of this Lease, including, without limitation, real estate taxes, utilities, maintenance costs, repair costs, and any insurance premiums. Under no circumstances or conditions, whether now existing or hereafter arising, or whether within or beyond the present contemplation of the parties, shall the Landlord or its successor or assigns be expected or required to make any payment of any kind whatsoever, or be under any other obligation or liability hereunder, except as herein otherwise specifically set forth. 1. BUILDING IMPROVEMENTS: a. SITE PLAN AND PRELIMINARY PLANS: Prior to the Lease Date, Landlord and Tenant have agreed upon a conceptual site plan and elevations ("SITE PLAN") for the Building, a copy of which is attached hereto as Exhibit B. Following the Lease Date, Landlord shall cause its engineer ("ENGINEER") to prepare and deliver to Tenant a set of draft preliminary plans and specifications ("PRELIMINARY PLANS"), based upon the Site Plan, setting forth the description of (i) the shell of the Building, and (ii) the space plan of the Premises and the improvements to be constructed therein, which shall include a description of the materials to be used therein, and the electrical, mechanical and HVAC systems, except as provided below, to be installed within the Building. The improvements described in subsection (ii) are referred to as the "TENANT IMPROVEMENTS." Landlord and Tenant agree that the Preliminary Plans shall include descriptions of the following, which improvements shall be supplied by Landlord at its sole cost and expense and shall not be within the definition of Tenant Improvements: (i) Fire safety sprinklers; (ii) Landscaping; (iii) Parking lot and striping; (iv) Electrical with power panel to Building; (v) Planter boxes with automatic irrigation; (vi) Exterior lighting with photo sensors and timers; (vii) Driveways; (viii) Gutters; (ix) Sidewalks; (x) Storm drains; -4- 8 (xi) Base plumbing for water, sewer, drainage to the Building; (xii) Exterior windows; (xiii) Three (3) exit double doors; and (xiv) Fire alarms. Tenant shall approve or disapprove of the Preliminary Plans within twenty (20) days following Tenant's receipt of such documents by providing Landlord with written notice ("OBJECTION NOTICE") of such determination within such time period. The failure of Tenant to provide such notice, and the subsequent failure of Tenant to respond within five (5) days following receipt of a second written notice from Landlord, shall be deemed Tenant's approval of the Preliminary Plans. In the event that Tenant disapproves of the Preliminary Plans as provided herein, Landlord and Tenant shall use their good faith efforts and due diligence to resolve the matters set forth in the Objection Notice to the reasonable satisfaction of Landlord and Tenant; provided, however, if Landlord and Tenant have not resolved such matters within twenty (20) days following Landlord's receipt of the Objection Notice, such disputed matter shall be submitted to an engineer or architect, reasonably acceptable to Landlord and Tenant, who shall render a determination of such matter within five (5) days following such appointment, which determination shall be binding upon Landlord and Tenant. Upon Landlord and Tenant reaching agreement upon the Preliminary Plans, such document shall be referred to as the "APPROVED PRELIMINARY PLANS." b. ABOVE STANDARD BUILDING IMPROVEMENTS: Landlord acknowledges that Tenant desires certain improvements within and adjacent to the Building to be constructed by Landlord, which otherwise would be done by contractors retained by Tenant, but due to Landlord's construction of the Building in accordance with the Preliminary Plans, it is reasonable that Landlord construct such items on Tenant's behalf. Such items, collectively referred to as "ABOVE-STANDARD IMPROVEMENTS", are as follows and shall be described in greater detail in the Preliminary Plans: (i) Two (2) additional exit double doors (approximately Four Thousand One Dollars ($4,100.00)); (ii) Installation, below concrete work, of conduit (one inch in diameter) for use of video surveillance equipment, at a cost of approximately Five Dollars ($5.00) per lineal foot; and (iii) Concrete patio, broom finish, along the western side of the Building (size approximately fifteen feet by one hundred forty feet (15' x 140') at a cost of approximately Five Thousand Two Hundred Fifty Dollars ($5,250.00). Landlord's cost associated with the procurement of materials, construction and installation of the Above-Standard Building Improvements shall be paid for out of the Allowance (as hereafter defined), and such cost shall be detailed in the Tenant Improvement Bid (as hereafter defined). -5- 9 c. ALLOWANCE: Landlord agrees to pay a maximum amount of Twenty Two and No/100ths Dollars ($22.00) per square foot of the Building ("ALLOWANCE") for the obtaining of materials, designing work, construction and installation of the Tenant Improvements. Landlord shall cause Boomer Construction, Sierra Olympus Construction, Voit Construction, Rudolph & Sletten, Inc., Earl Construction, and Kimmel Construction to issue construction bids for the construction of the Building and Above-Standard Improvements, and in addition to such bids, shall cause the aforementioned contractors, as well as ASI Construction and Baker Construction, to issue construction bids for the Tenant Improvements. Landlord shall retain the contractor with the lowest competent bid for such construction projects, and shall provide Tenant with written notice of such selection, as well as a summary of such bids, concurrent with the delivery of the Preliminary Plans. Tenant shall have the right to cause Landlord to modify the Preliminary Plans, as they relate to the Tenant Improvements, up to three (3) times by delivery of an Objection Notice as provided in Section la to Landlord, in which case, to the extent required, Landlord shall obtain a revised construction bid from the contractor selected for such construction. The bid amount agreed upon pursuant to this Section shall be referred to as the "FINAL TENANT IMPROVEMENT COST." To the extent that the Final Tenant Improvement Cost is in excess of the Allowance ("ABOVE-ALLOWANCE AMOUNT"), prior to the commencement of construction of the Tenant Improvement, Tenant shall pay one-half (1/2) of such excess to Landlord, and the remaining one-half (1/2) of such excess shall be payable on the Commencement Date. To the extent that Landlord's actual cost relating to the construction of the Tenant Improvements is less than the Allowance, Landlord shall credit the amount of such savings against the first payment of Base Rent due following the Commencement Date. d. FINAL PLANS: Within sixty (60) days following agreement upon the Approved Preliminary Plans and the Final Tenant Improvement Cost, Landlord shall prepare and deliver to Tenant final plans and specifications ("FINAL PLANS") substantially in conformity with the Approved Preliminary Plans. Within fifteen (15) days after delivery of the Final Plans, Tenant shall give written notice of any changes necessary to bring the Final Plans into substantial conformity with the Approved Preliminary Plans, and Tenant shall not object to any logical refinement of the Approved Preliminary Plans or any newly arising applicable governmental laws or regulations. Failure of Tenant to deliver to Landlord written notice of such changes within the ten (10) day period, and the subsequent failure of Tenant to respond within five (5) days following receipt of a written notice from Landlord, shall be deemed approval of the Final Plans. Upon approval of the Final Plans, both parties shall endorse their approval on the Final Plans as may be necessary for filing such documents with the appropriate governmental entity for approval, which shall be the responsibility of Landlord. Upon obtaining the appropriate approvals of the Final Plan from the applicable governmental -6- 10 entity, such document shall be referred to as the "APPROVED FINAL PLANS." e. COMMENCEMENT OF CONSTRUCTION: Promptly upon obtaining the Approved Final Plans, and following Landlord obtaining all requisite permits and authorizations, Landlord shall commence construction of the building shell and improvements described therein, which are collectively referred to as the "BUILDING IMPROVEMENTS," and diligently prosecute such construction to completion. Landlord, using Landlord's good faith efforts and due diligence, shall cause the Premises to be Ready for Occupancy (as hereinafter defined), excepting Punch List Items (as hereinafter defined), on or before August 1, 1997 ("COMPLETION DEADLINE"). The Completion Deadline shall be adjusted, on a day to day basis, as a result of any delays that result from Tenant failing to meet its obligations at the times required by this Lease. f. COMPLETION AND DELIVERY: The Premises shall be ready for occupancy ("READY FOR OCCUPANCY") when (i) construction of the Building Improvements is substantially completed in accordance with the Approved Final Plans, (ii) Landlord has obtained for the Premises any permits (temporary or final) that are legally required for Tenant's occupancy for general office purposes, but not the operation of Tenant's business, (iii) any and all parking areas to be constructed by Landlord, as set forth in the Approved Final Plans, relating to the Premises have been completed, (iv) any and all landscaping, sidewalks and other outdoor common area improvements in the Approved Final Plans have been completed, and (v) any all utility hook-ups necessary for the use of the Building are in place and are fully operational. Landlord shall deliver to Tenant a written statement certifying (a) that the Premises are Ready for Occupancy; and (b) the date of such completion. Landlord shall use its good faith efforts to give Tenant thirty (30) days prior written notice ("PRE-OCCUPANCY NOTICE") of the date when the Premises will be Ready for Occupancy. g. EARLY ENTRY: Tenant may, following its receipt of the Pre-Occupancy Notice, at Tenant's sole risk, enter the Premises and install trade fixtures, equipment and other tenant improvements in the Premises; provided, however, that (i) Tenant's early entry shall not unreasonably interfere with construction of the Building improvements; and (ii) all provisions of this Lease, excepting the payment of Base Rent, shall apply during such entrance. Upon Landlord's completion of the Tenant Improvements and Above-Standard Building Improvements, Tenant shall thereafter be responsible for all utility charges used at the Premises in conjunction with such pre-Commencement Date activities by Tenant. h. COMPLETION DEADLINE: In the event that Landlord has not caused the Premises to be Ready for Occupancy on or before the Completion Deadline, this Lease shall remain effective and the following shall apply: -7- 11 (1) Upon the Commencement Date, Tenant shall be entitled to an offset against Base Rent in the amount equal to Tenant's holdover rental expense incurred by Tenant at its leased premises, located at 8583 Elder Creek Road, Suite 100, Sacramento, California 95828, as a result of Landlord's failure to have the Premises Ready for Occupancy on the Completion Deadline, provided that in no event shall such amount exceed One Hundred Thousand and No/100ths Dollars ($100,000.00). Tenant shall provide Landlord with an invoice of such expense prior to the Commencement Date, provided that delay in doing so shall not release Landlord of its obligations under this Section. (2) In the event that the Premises is not Ready for Occupancy by December 31, 1997, for a period of ten (10) days thereafter, Tenant shall have the right to terminate this Lease by providing Landlord with written notice of such election, in which case this Lease shall terminate, and the parties shall have no further obligations hereunder, except for those obligations of Landlord and Tenant hereunder which expressly survive the expiration or early termination of this Lease. The failure of Tenant to deliver such notice within such time period shall be deemed a waiver of such right to terminate. For the purpose of this Lease, the Completion Deadline shall be automatically extended for any delays beyond the reasonable control of Landlord, such as acts of God, fire, earthquake, acts of a public enemy, riot, insurrection, unavailability of materials, governmental restrictions on the sale of materials or supplies or on the transportation of such materials or supplies, strike directly affecting construction or transportation of materials or supplies, shortages of materials or labor resulting from government controls, or weather conditions (collectively, "FORCE MAJEURE EVENT"). Landlord shall provide Tenant with written notice of the occurrence of any Force Majeure Event, which notice specifies the action or inaction which Landlord contends constitutes such Force Majeure Event. If Tenant has not objected to such Force Majeure Event, in writing, within five (5) business days following Tenant's receipt of such written notice from Landlord, the Force Majeure Event, as set forth in such notice, shall be deemed to have occurred. If Tenant objects to such Force Majeure Event, and such objection is not resolved within ten (10) days following Landlord's receipt of such objection, the disputed matter shall be submitted to binding arbitration in accordance with the commercial rules of the American Arbitration Association ("ARBITRATION"). The cost of the Arbitration shall be paid by the non-prevailing party in accordance with Section 29. i. MEASUREMENT OF PREMISES AND BUILDING: The total square footage ("SQUARE FOOTAGE") of the Building as shown on the Approved Final Plans, as amended by notations reflecting the actual construction of the Building, shall be binding and conclusive on Landlord and Tenant. If the Square Footage of the Building is different that set forth in the Basic Lease Information, as determined by the preceding sentence, Landlord and Tenant shall execute a written amendment to modify the Basic -8- 12 Lease information, as well as other modifications due to such change. j. REPRESENTATIVES: Landlord hereby appoints Larry Kelley as Landlord's representative to act for Landlord in all matters covered by Section 1. Tenant hereby appoints Robert Goodell as Tenant's representative to act for Tenant in all matters covered by this Agreement. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Section 1 shall be related to Landlord's representative or Tenant's representative, as the case may be. Tenant will not make any inquiries of or request to, and will not give any instructions or authorizations to any other employee or agent of Landlord, including Landlord's architects, engineers, and contractors or any of their agents or employees, with regard to matters covered by this Agreement. Either Landlord or Tenant may change its representative at any time by written notice to the other. k. CONDITION OF CONSTRUCTION: As of the Commencement Date, Landlord represents and warrants that the Building and the Tenant Improvements, to the extent that such were constructed by or caused to be constructed by Landlord, are in compliance with all applicable laws, statutes and ordinances, which includes ADA (as hereinafter defined), and shall be in good working order and repair. 2. PREMISES: This Lease shall be effective as of the date of execution hereof by Landlord and Tenant. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord upon the terms and conditions contained herein the Premises. 3. ACCEPTANCE OF PREMISES: Excepting Punch List Items, if any, Tenant's taking possession of the Premises shall constitute Tenant's acknowledgment that the Premises are in good condition and constructed in accordance with the provisions of this Lease and that Tenant agrees to accept the same in its condition existing as of the date of such entry, excepting latent defects, which shall remain the responsibility of Landlord. Within thirty (30) days after the Tenant takes possession of the Premises, Tenant shall deliver to Landlord a list of items ("PUNCH LIST ITEMS") that Tenant reasonably deems that Landlord complete or correct in order for the Premises to be reasonably acceptable. Following Landlord's receipt of the Punch List Items, Landlord shall complete and/or correct such items set forth on the Punch List Items using its good faith efforts and due diligence within thirty (30) days following Landlord's receipt of such document. If Tenant does not deliver the Punch List Items to Landlord within such time period, Tenant shall be deemed to have accepted the condition of the Premises. Landlord shall use its reasonable efforts to not unreasonably interfere with Tenant's use of the Premises as a result of such repair work. -9- 13 4. TERM: a. Initial Term: This Lease shall be effective as of the date of execution hereof by Landlord and Tenant. The Initial Term of this Lease shall commence (i) on the date the Premises is Ready for Occupancy, or (ii) the first day of business operation in the Premises by Tenant, whichever is first to occur ("COMMENCEMENT DATE"), and shall expire on the last day of the one hundred twenty (120th) full month following the Commencement Date ("EXPIRATION DATE"), unless earlier terminated in accordance with the provisions of this Agreement. The time period between the Commencement Date and the Expiration Date shall be referred to as the "INITIAL TERM." b. OPTION TO EXTEND TERM: Tenant is given the option to extend the Initial Term on all the provisions contained in this Lease, except for Base Rent, for two (2) consecutive five (5) year periods ("EXTENDED TERMS") following the expiration of the Initial Term or Extended Term, as applicable, by giving written notice of exercise of the option ("OPTION NOTICE") to Landlord at least one hundred twenty (120) days prior to the expiration of the Initial Term or an Extended Term, as applicable. Provided that, if Tenant is in default on the date of giving the Option Notice, the Option Notice shall be totally ineffective, or if Tenant is in default on the date any Extended Term is to commence, such Extended Term shall not commence and this Lease shall expire at the end of the term then in effect, unless, in either of the foregoing cases, Tenant cures the applicable defaults within the notice and cure periods provided herein. Tenant shall have no other right to extend the term beyond the two (2) Extended Terms. Base Rent for the (i) first (1st) Extended Term shall be the amount of ninety cents ($.90) per Square Foot of the Building, and (ii) second (2nd) Extended Term shall be the amount of ninety-five cents ($.95) per Square Foot of the Building. 5. RENT: a. BASE RENT: Tenant shall pay to Landlord the Base Rent without deduction, setoff, prior notice, or demand, in advance on or before the first (1st) day of each month, commencing on the Commencement Date, and continuing during the Initial Term and any Extended Terms, if applicable. Base Rent for the first month, or portion of it, shall be paid upon execution of this Lease, which amount shall be prorated at the rate of one thirtieth (1/30) of the Base Rent per day for any partial month. All rent shall be paid to Landlord at the address to which notices to Landlord are given. Landlord acknowledges that prior to the Lease Date, Tenant has paid Landlord the amount of Fifty Thousand and No/100ths Dollars ($50,000.00), which amount shall be applied by Landlord as Base Rent the first (1st) month following the Commencement Date. The balance of such Fifty Thousand and No/100ths Dollars ($50,000.00) payment, shall be held by Landlord as the "SECURITY DEPOSIT," or if Tenant utilizes the letter of credit for the Security Deposit described in the -10- 14 Basic Lease Information, such balance shall be credited to next payment of Base Rent due and payable. b. LATE CHARGE: If Tenant fails to make any payment of Base Rent when due, or other charges, within thirty (30) days after receipt of an invoice (which describes in reasonable detail the basis for such requested payment) from Landlord, and such default is not cured within ten (10) days following such due date, Landlord and Tenant agree that it would be impracticable or extremely difficult to fix the actual damage to Landlord resulting from nonpayment and the collection efforts of Landlord necessitated thereby. Therefore, Landlord and Tenant estimate that such damage shall be five percent (5.00%) of the amount in default, and Tenant shall pay as additional rent, that sum, in addition to all other sums owing. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord. 6. SECURITY DEPOSIT: Upon execution of this Lease, Tenant shall deposit with Landlord the Security Deposit as security for the full and faithful performance by Tenant of the provisions of this Lease. If Tenant is in default, Landlord may use the Security Deposit, or any portion of it, to cure the default or to compensate Landlord for all damages which Landlord may suffer by reason of Tenant's default. Tenant shall immediately on demand pay to Landlord a sum equal to the portion of the Security Deposit expended or applied by Landlord as provided in this Section so as to maintain the Security Deposit in the sum specified. Tenant's failure to forthwith remit to Landlord an amount in cash sufficient to restore the Security Deposit to the original sum deposited with thirty (30) days after receipt of such demand from Landlord shall constitute an event of default under the terms of this Lease. At the expiration or termination of this Lease, Landlord shall return the Security Deposit to Tenant, less such amounts as are reasonably necessary to remedy Tenant's default, to repair damages to the Premises caused by Tenant, or to clean the Premises upon such termination, as soon as practicable thereafter. Landlord's obligations with respect to the Security Deposit are those of a debtor and not a trustee. Landlord may maintain the Security Deposit with Landlord's general and other funds. Landlord shall not be required to pay Tenant interest on the Security Deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord. If Landlord sells its interest in the Premises, Landlord may deliver the Security Deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 7. TAXES: a. PERSONAL PROPERTY TAXES: Tenant shall pay before delinquency all taxes, assessments, license fees, and charges (collectively, "TAXES") that are levied and assessed against Tenant's business or Tenant's personal property installed or -11- 15 located in or on the Premises, and that become payable during the Initial Term or Extended Terms, if applicable. Upon written demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. b. REAL PROPERTY TAXES: Tenant shall pay, directly to the appropriate taxing authority, before delinquency all real property taxes, general and special assessments, bonds and other assessments (collectively, "REAL PROPERTY TAXES") levied and assessed against the Premises. (1) Landlord shall notify Tenant of the Real Property Taxes following receipt of the tax bill shall furnish Tenant with a copy of the tax bill. Tenant shall pay the Real Property Taxes semiannually not later than ten (10) days (i) after receipt of the tax bill, or (ii) prior to the delinquency date, whichever is later. (2) Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included in the Initial Term. (3) Tenant, at its cost shall have the right, at any time, to seek a reduction in the assessed valuation of the Premises or to contest any Real Property Taxes that are to be paid by Tenant. (a) Landlord shall not be required to join in any proceeding or contest brought by Tenant unless the provisions of any law require that the proceeding or contest be brought by or in the name of Landlord or any owner of the Premises. In that case, Landlord shall join in the proceeding or contest or permit it to be brought in Landlord's name as long as Landlord is not required to bear any cost. Tenant, on final determination of the proceeding or contest, shall immediately pay or discharge any decision or judgment rendered, together with all costs, charges, interest, and penalties incidental to the decision or judgment. (b) If Tenant does not pay the Real Property Taxes when due and Tenant seeks a reduction or contests them as provided in this Paragraph, before the commencement of the proceeding or contest, Tenant shall furnish to Landlord a surety bond issued by an insurance company suitable to Landlord and qualified to do business in California. The amount of the bond shall equal one hundred twenty-five percent (125%) of the total amount of Real Property Taxes in dispute. The bond shall hold Landlord and the Premises harmless from any damage arising out of the proceeding or contest and shall insure the payment of any judgment that may be rendered. (c) Notwithstanding the definition of Real Property Taxes, in the event that Landlord conveys its interest in the Premises to a third party, constituting a "change of ownership" pursuant to the California Real Estate Tax, resulting -12- 16 in a reassessment of the Premises by the taxing authorities, for the purpose of calculating the incremental increases in the Real Property Taxes as a result of such change of ownership, the value of the Premises shall not be in excess of: (i) Two Million, Eight Hundred Thousand and No/100ths Dollars ($2,800,000.00) if such change of ownership occurs during the first five (5) years following the Commencement Date; or (ii) Three Million and No/100ths Dollars ($3,000,000.00) if such change of ownership occurs during the second five (5) years following the Commencement Date. Landlord shall be responsible for any excess Real Property Taxes resulting from such change of ownership above the threshold amounts established in this Section. (4) Tenant shall not be required to pay any municipal, county, state, or federal income or franchise taxes of Landlord, or any municipal, county, state, or federal estate, succession, inheritance, or transfer taxes of Landlord. If at any time during the Initial Term or Extended Terms, if applicable, the State of California or any political subdivision of the state, including any county, city, city and county, public corporation, district, or any other political entity or public corporation of this state, levies or assesses against Landlord a tax, fee, or excise on (1) rents, (2) the square footage of the Premises, (3) the act of entering into this Lease, or (4) the occupancy of Tenant, or levies or assesses against Landlord any other tax, fee, or excise, as a direct substitution in whole or in part for, but not in addition to, any Real Property Taxes, Tenant shall pay, before delinquency such amount, which for the purpose of this Lease shall be within the definition of Real Property Tax. 8. USE; LIMITATION ON USE: a. USE: Tenant shall use the Premises for the Tenant's Use and for no other use or purpose, without the prior written consent of Landlord. Tenant shall comply with all the requirements of all easements, cross easements, joint maintenance obligations and similar matters applicable to the Premises which are in effect or may become effective with any governmental agency or private party. Landlord represents and warrants that no such matters, to the extent imposed by Landlord, shall have an adverse effect in any material respect on the use of the Premises and associated parking, ingress and egress, for general office purposes. Tenant shall be responsible for obtaining all appropriate operating licenses necessary for the Tenant's Use. b. LIMITATIONS ON USE: Tenant's Use of the Premises shall be in accordance with the following: (1) Tenant shall not do, bring, or keep anything in or about the Premises that will cause a cancellation of any insurance covering the Premises, or any part thereof or any of its contents. If the rate of any insurance carried by Landlord is increased as a result of Tenant's use, Tenant shall pay the Landlord within ten (10) days before the date Landlord is -13- 17 obligated to pay a premium on the insurance, or within ten (10) days after Landlord delivers to Tenant a certified statement from Landlord's insurance carrier stating that the rate increase was caused solely by an activity on the Premises as permitted in this Lease, whichever date is later, the sum equal to the difference between the original premium and the increased premium. (2) Following the Commencement Date, and subject to Landlord's representation set forth in Section 1(j) and 3, Tenant shall, at Tenant's sole expense, comply with all present and future laws, rules, requirements, ordinances, orders, directions and regulations of any state, municipal, or other governmental or lawful authority affecting the Premises or appurtenances thereto, which includes, but is not limited to, the Americans with Disabilities Act of 1990 (42 U.S.C. 12101 et seq.) ("ADA") (collectively, "APPLICABLE LAWS"); and, subject to Landlord's representation in Section 1(j) and 3, Tenant shall, at Tenant's sole expense, make such alterations and additions to the Premises as may be required to comply with all Applicable Laws; and Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any Applicable Laws. The judgment of any court of competent jurisdiction or the admission by Tenant in any action, whether Landlord be a party thereto or not, that Tenant has violated any Applicable Law shall be conclusive of the fact of Tenant's default under this Paragraph. If Landlord is subjected to any loss or liability as a result of Tenant's failure to comply with any Applicable Laws, the same shall be subject to Tenant's indemnification obligations hereunder. (3) Tenant shall not use the Premises in any manner that will constitute waste, nuisance, or unreasonable annoyance (including, without limitation, the use of loudspeakers or sound or light apparatus that can be heard or seen outside the Premises) to owners or occupants of adjacent properties. Tenant shall not use the Premises for the preparation, manufacture, or mixing of anything that might emit any odor or objectionable noises or lights onto adjacent properties. (4) Tenant shall not do anything on the Premises that will cause damage to the Premises. The Premises shall not be overloaded. No machinery, apparatus, or other appliance shall be used or operated in or on the Premises that will in any manner injure, vibrate, or shake the Premises, excepting customary office equipment used in conjunction with general use (e.g. copy machines, phone systems, computers, "KACHUNGADA," office apparatus and similar machines). (5) Tenant shall not store, use or permit to be used in or about the Premises any Hazardous Materials (as hereinafter defined), other than office supplies and typical cleaning materials containing Hazardous Materials which are customarily for general office use. Tenant shall comply, at its expense, with all federal, state and local statues or regulations concerning Hazardous Materials. -14- 18 9. MAINTENANCE: Tenant, at its sole cost, shall keep in first class order, condition and repair, maintain the Premises and every part thereof, interior and exterior, roof, and all adjacent sidewalks, landscaping, driveways, parking lots and signs located within or adjacent to the Premises and shall make all replacements necessary to keep the Premises in such condition. All repairs and replacements shall be of a quality equal to or exceeding that of the original. Tenant shall do all acts necessary to comply with all Applicable Laws. Landlord shall not have any responsibility to maintain the Premises, provided that Landlord shall remain responsible for the repair of (i) the structure and foundation of the Building, to the extent such damage was not caused by Tenant, its employees, agents, contractors, or invitees, and (ii) any latent defects to the Building, to the extent constructed by Landlord, its agents, employees or contractors. Tenant waives the provisions of Civil Code Sections 1941 and 1942, and any amendment or successor statutes thereto, with respect to Landlord's obligations for tenantability of the Premises and Tenant's right to make repairs and deduct the expenses of such repairs from rent. Should Tenant fail to make these repairs and replacements or otherwise to maintain the Premises for a period of thirty (30) days after written demand by Landlord, or should Tenant commence or fail to complete, any repainting, repairs or replacements within a reasonable time after written demand by Landlord, Landlord may make the same without liability to Tenant for any loss or damage that may occur to Tenant's business, except any resulting from the gross negligent or intentional acts or omissions of Landlord, and Tenant shall pay to Landlord the costs incurred by Landlord in making such repairs or replacements together with interest thereon at the maximum rate permitted by law from the date of commencement of the work until repaid. Tenant shall contract with a service company licensed and experienced in servicing HVAC equipment and approved by Landlord for regular maintenance and replacement, if required by Landlord, of the HVAC equipment serving the Premises. The cost of the contract and any required replacements or repairs shall be paid by Tenant. 10. ALTERATIONS: a. LANDLORD CONSENT REQUIRED: Tenant shall not make any alterations to the Premises without Landlord's prior written consent. Notwithstanding the foregoing, Tenant shall be entitled to make nonstructural internal modifications to the Building, which do not effect the base electrical or mechanical systems of the Building, without the prior written consent of Landlord, which are not in excess of Twenty Five Thousand and No/100ths Dollars ($25,000.00) during any year within the Initial Term, or Extended Term, as applicable. Any alterations made shall comply with Applicable Law and shall remain on and be surrendered with the Premises on expiration or termination of the Initial Term or Extended Term, if applicable, except that Landlord can elect at the time Tenant seeks Landlord's approval of the alterations, to require Tenant to remove any alterations that Tenant has made to the Premises. If Landlord so elects, Tenant, at its cost, shall restore the Premises to the condition designated by Landlord in -15- 19 its election before the last day of the Initial Term or Extended Term, if applicable, or within thirty (30) days after notice of election is given, whichever is later. b. NOTICE: If Tenant makes any alterations to the Premises as provided in this Section, the alterations shall not be commenced until ten (10) days after Landlord has received written notice from Tenant stating the date the installation of the alterations is to commence so that Landlord can post and record an appropriate notice of nonresponsibility. c. TRADE FIXTURES: Tenant may install fixtures, machinery or other equipment. Except for items belonging to Landlord, Tenant may remove any of such trade fixtures or equipment upon the termination of this Lease; provided that Tenant is not in default under the terms and conditions of this Lease. 11. MECHANIC'S LIEN: a. TENANT PAYS CONSTRUCTION COSTS: Tenant shall pay all costs for construction done by it or caused to be done by it on the Premises which construction is beyond the scope of construction to be performed by Landlord pursuant to Section 1. Tenant shall keep the Premises free and clear of all mechanics' liens resulting from construction done by or for Tenant. b. LIEN RELEASE BOND: Tenant shall have the right to contest the correctness or the validity of any such lien, if immediately on demand by Landlord, Tenant procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half (1-1/2) times the amount of the lien. The bond shall meet the requirements of Civil Code Section 3143, and any amendment or successor statute thereto, and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit if recovered in the action.) 12. UTILITIES AND SERVICES: Tenant shall make all arrangements for and pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, telephone service, and trash collection, and for all connection charges. Landlord shall not be liable for any failure or interruption of any utility service being furnished to the Premises, and no such failure or interruption shall entitle Tenant to terminate this Lease. Notwithstanding the preceding sentence, in the event that the cause of such failure or interruption in gas, electricity, water or telephone service to the Premises was a result of an act taken by Landlord, its agents, employees, contractors or subcontractors, and Landlord, using its good faith efforts and due diligence, does not reestablish such utility service within two (2) business days following Landlord's receipt of written notice from Tenant, Tenant shall be entitled to an abatement of -16- 20 Base Rent from the date of such failure or interruption until such utility service is restored. 13. INDEMNITY, EXCULPATION AND INSURANCE: a. WAIVER OF LIABILITY: Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord, its partners, officers, trustees, affiliates, directors, shareholders, employees, contractors, agents and representatives (collectively, "AFFILIATES") for any injury or damage to any person or property occurring or incurred in connection with or in any way relating to the Premises from any cause. Without limiting the foregoing, neither Landlord nor any of its Affiliates shall be liable for and there shall be no abatement of rent for (i) any damage to Tenant's property stored with or entrusted to Affiliates of Landlord, (ii) loss of or damage to any property by theft or any other wrongful or illegal act, or (iii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Premises or from the pipes, appliances, appurtenances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other cause whatsoever or from the acts or omissions of visitors to the Premises or from any other cause whatsoever, or (iv) any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Premises. Tenant agrees that in no case shall Landlord ever be responsible or liable on any theory for any injury to Tenant's business, loss of profits, loss of income or any other form of consequential damage. Tenant shall give prompt notice to Landlord in the event of (a) the occurrence of a fire or accident in the Premises, or (b) the discovery of any defect therein or in the fixtures or equipment thereof. Notwithstanding any other provision of this Lease to the contrary, Tenant waives any claims based on damage or injury resulting from Landlord's failure to police or provide security for the Premises. b. INDEMNIFICATION: Tenant shall indemnify, defend (with legal counsel selected by Landlord and consented to by Tenant), protect and hold Landlord and the Premises harmless from and against any and all claims, suits, judgments, losses, costs, obligations, damages, expenses, interest and liabilities, including, without limitation, reasonable attorneys' fees, resulting from Tenant's use of the Premises, or for any injury or damage to any person or property whatsoever arising out of or in connection with this Lease, the Premises or Tenant's and/or its patrons' activities in the Premises, including, without limitation, when such injury or damage has been caused in whole or in part by the act, negligence, fault or omission of Tenant, its agents, servants, contractors, employees, representatives, licenses, patrons or invitees. Without limiting the foregoing, Tenant shall reimburse Landlord for all expenses, damages and fines incurred or suffered by Landlord by reason of any breach, violation or non-performance by Tenant, its agents, servants, or employees, of any covenant of this Lease, or by reason of damage to persons or property caused by moving property of or for Tenant -17- 21 in or out of the Premises, or by the installation or removal of furniture or other property, or by reason of carelessness, negligence or improper conduct of Tenant or its agents, employees, or servants in the use or occupancy of the Premises. Nothing contained in this Section 13 shall obligate Tenant to indemnify Landlord against Landlord's own gross negligence or willful acts. The provisions of this Section 13 shall survive the expiration or earlier termination of this Lease. c. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE: Tenant at its cost shall maintain public liability and property damage insurance with a One Million and No/100ths Dollar ($1,000,000.00) public liability and property damage insurance policy, plus a Five Million and No/100ths Dollars ($5,000,000.00) public liability and property damage umbrella policy, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the Premises. All public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of Section 12. Both parties shall be named as additional insureds, and the policy shall contain cross-liability endorsements, (if commercially available). d. TENANT'S FIRE INSURANCE: Tenant at its cost shall maintain on all Tenant Improvements and alterations, in, on, or about the Premises, a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of full replacement value, with a replacement cost endorsement. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of any Tenant Improvements or any alterations that may have been made to the Premises by Tenant. e. FIRE INSURANCE ON BUILDING AND OTHER IMPROVEMENTS: Tenant shall maintain on the building and other improvements that are a part of the Premises a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of full replacement value, with a replacement cost endorsement. The insurance policy shall be issued in the names of Landlord and Tenant as their interests appear. The insurance policy shall provide that any proceeds shall be made payable to Landlord. Tenant's obligation to pay the insurance costs shall be prorated for any partial year following the Commencement Date or as of the Termination Date. The proceeds from any such policy shall be used by Tenant for the reconstruction of any improvements which are damaged by the insurable destruction. f. WAIVER OF SUBROGATION: The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the Premises and to the fixtures, personal property, Tenant's improvements, and alterations of either Landlord or Tenant in or on the Premises that are caused by or result from risks insured against under any insurance policies carried or required to be carried pursuant to -18- 22 this Lease by the parties and in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against and actually paid upon under any insurance policy required by this Lease. g. OTHER INSURANCE MATTERS: ALL the insurance required under this Lease shall: (1) Be issued by insurance companies authorized to do business in the State of California, with a financial rating of at least an A + 3A status as rated in the most recent edition of Best's Insurance Reports, or Financial Pacific Insurance Company, a California corporation, if acceptable to Landlord's lender or any purchaser of the Premises. (2) Be issued as a primary policy. (3) Contain an endorsement requiring thirty (30) days' written notice from the insurance company to both parties and Landlord's lender before cancellation or change in the coverage, scope, or amount of any policy. (4) Each policy, or a certificate of the policy, together with evidence of payment of premiums, shall be deposited with the other party at the Commencement Date, and on renewal of the policy not less than twenty (20) days before expiration of the term of the policy. 14. DESTRUCTION: a. DESTRUCTION DUE TO RISK COVERED BY INSURANCE: If, during the Initial Term or Extended Term, if applicable, the Premises are totally or partially destroyed from a risk covered by the insurance described in Section 13, rendering the Premises totally or partially inaccessible or unusable, Tenant, at its cost, shall restore the Premises to substantially the same condition as they were in immediately before the destruction, whether or not the insurance proceeds are sufficient to cover the actual cost of restoration. Such destruction shall not terminate this Lease. If the existing laws do not permit the restoration, following Tenant's exhaustion of all applicable appeal rights, either party can terminate this Lease immediately by giving written notice to the other party, in which case this Lease shall be deemed terminated as of the date of delivery of such notice. b. DESTRUCTION DUE TO RISK NOT COVERED BY INSURANCE: If, during the Initial Term or Extended Term, if applicable, the Premises are totally or partially destroyed from a risk not covered by the insurance described in Section 13, rendering the Premises totally or partially inaccessible or unusable, subject to subsections (1), (2) and (3) below, Tenant shall restore the Premises to substantially the same condition as they were in -19- 23 immediately before the destruction. Such destruction shall not terminate this Lease. If the existing laws do not permit restoration, following Tenant's exhaustion of all applicable appeal rights, either party can terminate this Lease immediately by giving notice to the other party, in which case this Lease shall be deemed terminated as of the date of delivery of such notice. (1) If the cost of restoration exceeds twenty percent (20.00%) of the then replacement value of the Premises destroyed and is not an insured loss, Tenant can elect to terminate this Lease by giving notice to Landlord within fifteen (15) days after determining the restoration cost and replacement value, which determination shall be made within thirty (30) days after the date of the damage and acceptable to Landlord. (2) If Tenant elects to terminate this Lease as provided above, Landlord, within fifteen (15) days after receiving Tenant's notice to terminate, can elect to pay to Tenant, at the time Landlord notifies Tenant of its election, the difference between twenty percent (20.00%) of the then replacement value of the Premises destroyed and the actual cost of restoration, in which case Tenant shall restore the Premises. Tenant shall give Landlord satisfactory evidence that all sums contributed by Landlord as provided in this Paragraph have been expended by Tenant in paying the cost of restoration. (3) If Tenant elects to terminate this Lease, and Landlord does not elect to contribute toward the cost of restoration as provided in this Paragraph, this Lease shall terminate as of the date of Tenant's delivery of its notice to terminate. c. DESTRUCTION DURING LAST TWELVE MONTHS: Regardless of any contrary provision in this Lease, if the Building is damaged or destroyed by any cause to the extent of more than thirty percent (30.00%) of its insurable value during the last twelve (12) months of the Initial Term, or Extended Terms, as applicable, Tenant may, at Tenant's sole option, terminate the Lease by written notice delivered to Landlord within forty-five (45) days of such damage or destruction, which termination shall become effective on the date of delivery of such notice. In the event of a termination of the Lease pursuant to this Section, Tenant shall pay to Landlord all insurance proceeds received by Tenant as a result of such damage or destruction. d. TENANT'S RESTORATION OF PREMISES: (1) If, during the Initial Term or Extended Term, if applicable, the Premises are destroyed from a risk covered by the insurance described in Section 13, and the total amount of loss does not exceed Fifty Thousand and No/100ths Dollars ($50,000.00), Tenant shall make the loss adjustment with the insurance company insuring the loss. The proceeds shall be paid directly to Tenant for the sole purpose of making the restoration of the Premises. -20- 24 (2) If, during the Initial Term or Extended Term, if applicable, the Premises are destroyed from a risk covered by the insurance described in Section 13, and the total amount of loss exceeds Fifty Thousand and No/100ths Dollars ($50,000.00), Tenant shall make the loss adjustment with the insurance company insuring the loss and on receipt of the proceeds shall immediately pay them to an insurance trustee selected by Landlord ("INSURANCE TRUSTEE"). If the Premises are destroyed from a risk not covered by the insurance described in Section 12, and Tenant has the obligation to restore the Premises, both parties shall deposit with the Insurance Trustee their respective contributions toward the cost of restoration. All sums deposited with the Insurance Trustee shall be held for the following purposes and the Insurance Trustee shall have the following powers and duties: (a) The sums shall be paid in installments by the Insurance Trustee to the contractor retained by Tenant, who is acceptable to Landlord, which approval shall not be unreasonably withheld, as construction progresses for payment of the cost of restoration. A ten percent (10.00%) retention fund shall be established that will be paid to the contractor on completion of restoration, payment of all costs, expiration of all applicable lien periods, and proof that the Premises are free of all mechanics, liens and lienable claims. (b) Payments shall be made on presentation of certificates or vouchers from the architect or engineer retained by Tenant showing the amount due. If the Insurance Trustee, in its reasonable discretion, determines that the certificates or vouchers are being improperly approved by the architect or engineer retained by Tenant, the Insurance Trustee shall have the right to appoint an architect or an engineer to supervise construction and to make payments on certificates or vouchers approved by the architect or engineer retained by the Insurance Trustee. The reasonable expenses and charges of the architect or engineer retained by the Insurance Trustee shall be paid by the Insurance Trustee out of the trust fund. (c) If the sums held by the Insurance Trustee are not sufficient to pay the actual cost of restoration, Tenant shall deposit the amount of the deficiency with the Insurance Trustee within twenty (20) days after request by the Insurance Trustee indicating the amount of the deficiency. (d) Any sums not disbursed by the Insurance Trustee after restoration has been completed and final payment has been made to Tenant's contractor shall be delivered within fifteen (15) days (after demand made by either party on the Insurance Trustee) as follows: (i) First, to Landlord to the extent of Landlord's contribution to the fund; (ii) Next, to Tenant to the extent of Tenant's contribution to the fund; and -21- 25 (iii) The balance, if any, to Tenant. (e) All actual costs and charges of the Insurance Trustee shall be paid by Tenant. (f) If the Insurance Trustee resigns or for any reason is unwilling to act or continue to act, Landlord shall substitute a new trustee in the place of the designated Insurance Trustee. The new trustee must be an institutional lender or title company doing business in the area of the Premises. (g) Both parties shall promptly execute all documents and perform all acts reasonably required by the Insurance Trustee to perform its obligation under this Paragraph. e. PROCEDURE FOR RESTORING PREMISES: Within thirty (30) days after the date that Tenant is obligated to commence to restore the Premises, Tenant at its cost shall prepare final plans and specifications and working drawings complying with applicable laws that will be necessary for restoration of the Premises. The plans and specifications and working drawings must be approved by Landlord. Landlord shall have thirty (30) days after receipt of the plans and specifications and working drawings to either approve or disapprove the plans and specifications and working drawings and return them to Tenant. If Landlord disapproves the plans and specifications and working drawings, Landlord shall notify Tenant of its objections and Landlord's proposed solution to each objection. Tenant acknowledges that the plans and specifications and working drawings shall be subject to approval of the appropriate government bodies and Franchisor and that they will be prepared in such a manner as to obtain that approval. The restoration of the Premises shall be accomplished as follows: (1) Tenant shall complete the restoration within one hundred twenty (120) working days after final plans and specifications and working drawings have been approved by the appropriate government bodies and all required permits have been obtained (subject to a reasonable extension for delays resulting from causes beyond Tenant's reasonable control). (2) Tenant shall retain a licensed contractor, which contractor shall be subject to the written approval of Landlord, such approval not to be unreasonably withheld. (3) Tenant shall notify Landlord of the date of commencement of the restoration not later than five (5) days before commencement of the restoration to enable Landlord to post and record notices of nonresponsibility. (4) Tenant shall accomplish the restoration in a manner that will cause the least inconvenience, annoyance, and disruption. -22- 26 (5) On completion of the restoration, Tenant shall immediately record a notice of completion in the county in which the Premises are located. f. ABATEMENT OF RENT: In case of destruction, there shall be no abatement or reduction of rent. g. WAIVER OF CIVIL CODE SECTIONS: Tenant waives the provisions of Civil Code Sections 1932(2) and 1933(4), and any amendment or successor statute thereto, with respect to any destruction of the Premises. 15. CONDEMNATION: a. DEFINITIONS: (1) "CONDEMNATION" means (a) the exercise of any governmental power, whether by legal proceedings or otherwise, by a condemnor and (b) a voluntary sale or transfer by Landlord to any condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. (2) "DATE OF TAKING" means the date the condemnor has the right to possession of the property being condemned. (3) "AWARD" means all compensation, sums, or anything of value awarded, paid, or received on a total or partial condemnation. (4) "CONDEMNOR" means any public or quasi-public authority, or private corporation or individual, having the power of condemnation. b. PARTIES' RIGHTS AND OBLIGATIONS TO BE GOVERNED BY LEASE: If, during the Initial Term or Extended Term, if applicable, there is any taking of all or any part of the Premises or any interest in this Lease by condemnation, the rights and obligations of the parties shall be determined pursuant to this Section. c. TOTAL TAKING: If the Premises are totally taken by condemnation, this Lease shall terminate on the date of taking. d. PARTIAL TAKING: If any portion of the Premises is taken by condemnation, this Lease shall remain in effect; except that Tenant can elect to terminate this Lease if thirty percent (30.00%) or more of the total square footage in the Building, or fifteen percent (15.00%) of parking for the Premises (rendering the Tenant's Use in violation with applicable laws, statutes or ordinances) is taken, or if as a result of such condemnation, Tenant is prevented from continuing Tenant's Use on the Premises due to applicable ordinances of governmental entities or agencies having jurisdiction over the Premises. If Tenant elects to terminate this Lease, Tenant must exercise its right to terminate pursuant to this Paragraph by giving written notice to Landlord -23- 27 within thirty (30) days after the nature and the extent of the taking have been finally determined. If Tenant elects to terminate this Lease as provided in this Paragraph, Tenant also shall notify Landlord of the date of termination, which date shall not be earlier than thirty (30) days nor later than ninety (90) days after Tenant has notified Landlord of its election to terminate; except that this Lease shall terminate on the date of taking if the date of taking falls on a date before the date of termination as designated by Tenant. If Tenant does not terminate this Lease within the thirty (30) day period, this Lease shall continue in full force and effect, except that Base Rent shall be abated as provided in this Section 15. (1) EFFECT ON RENT: If any portion of the Building or parking is taken by condemnation and this Lease remains in full force and effect, on the date of taking the Base Rent shall be reduced by an amount that is in the same ratio to Base Rent as the total number of square feet in the Building taken, or no longer usable due to loss of parking, bears to the total number of square feet in the Building immediately before the date of taking. (2) WAIVER: Each party waives the provisions of Code of Civil Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease in the event of a partial taking of the Premises. (3) RESTORATION OF PREMISES: If there is a partial taking of the Premises or parking and this Lease remains in full force and effect, Tenant, at its cost, shall accomplish all necessary restoration. (4) ABATEMENT OF RENT: Rent, shall be abated or reduced during the period from the date of taking until the completion of restoration, but all other obligations of Tenant under this Lease shall remain in full force and effect. The abatement or reduction of rent shall be based on the extent to which the restoration unreasonably interferes with Tenant's use of the Building. e. AWARD-DISTRIBUTION: The award shall belong to and be paid to Landlord, except that Tenant shall receive directly from the condemning authority an amount attributable to alterations made to the Premises by Tenant in accordance with this Lease, which alterations Tenant has the right to remove from the Premises pursuant to the provisions of this Lease but elects not to remove; or, if Tenant elects to remove any such Tenant's improvements or costs not to exceed the market value of such alterations. Any award by the condemnor specifically for the loss of Tenant's business shall belong to Tenant. 16. ASSIGNMENT: a. PROHIBITION AGAINST VOLUNTARY ASSIGNMENT, SUBLETTING, AND ENCUMBERING: Tenant shall not assign or hypothecate this Lease or any interest herein (by operation of -24- 28 law or otherwise) or sublet the Premises or any part hereof, or permit the use of the Premises by any party other than Tenant without the prior written consent of Landlord. Notwithstanding the foregoing, Tenant may assign this Lease to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from merger or consolidation with Tenant, or to any person or entity which acquires all of the assets as a going concern of the business of Tenant that is being conducted on the Premises, without the prior consent of Landlord, provided that such assignment or sublease shall in no way release Tenant from any liability under this Lease. (1) PROCEDURE: In the event that Tenant should desire to sublet the Premises or any part thereof, or assign this Lease, Tenant shall provide Landlord with written notice of such desire at least twenty (20) days in advance of the effective date of such subletting or assignment. Such notice shall include (i) the name of the proposed subtenant or assignee; (ii) the nature of business to be conducted by the proposed subtenant or assignee in the Premises; (iii) the terms and conditions of the proposed assignment or sublease; and (iv) the current financial statements of the proposed subtenant or assignee. Landlord shall not unreasonably withhold its consent to a proposed subletting or assignment, provided that (1) the proposed subtenant or assignee is engaged in a business which, and the Premises shall be used in a manner which, is consistent with the permissible use set forth in this Lease; (2) the proposed subtenant or assignee is a reputable party of reasonable financial worth in light of the responsibilities involved and Tenant shall have provided Landlord with reasonable proof thereof; and (3) Tenant is not in default hereunder at the time it makes its request for such consent. No assignment of Tenant's interest in this Lease shall relieve Tenant from its obligations pursuant to the provisions of this Lease. (2) EXCESS RENT: Fifty percent (50.00%) of all rent received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord under this Lease shall be paid to Landlord, and fifty percent (50.00%) of any sums to be paid by an assignee to Tenant on consideration of the assignment of this Lease shall be paid to Landlord. (3) PAYMENT OF ATTORNEYS' FEES: If Tenant requests Landlord to consent to a proposed assignment or subletting, Tenant shall pay to Landlord, whether or not consent is ultimately given, Landlord's reasonable attorneys' fees incurred in connection with each such request, not to exceed One Thousand and No/100ths Dollars ($1,000.00). b. INVOLUNTARY ASSIGNMENT: No interest of Tenant in this Lease shall be assignable by operation of law (including, without limitation, the transfer of this Lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: -25- 29 (1) BANKRUPTCY: It Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes a proceeding under the Bankruptcy Act in which Tenant is the bankrupt party; or, if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; (2) ATTACHMENT: If a writ of attachment or execution is levied on this Lease; or (3) RECEIVER: If, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An involuntary assignment shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. If a writ of attachment or execution is levied on this Lease, Tenant shall have twenty (20) days in which to cause the attachment or execution to be removed. If any involuntary proceeding in bankruptcy is brought against Tenant, or if a receiver is appointed, Tenant shall have sixty (60) days in which to have the involuntary proceeding dismissed or the receiver removed. 17. DEFAULT: a. TENANT'S DEFAULT: The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (1) The abandonment or vacation of the Premises by Tenant (failure to occupy and operate the Premises for sixty (60) consecutive days shall be deemed an abandonment). (2) The failure by Tenant to make any payment of Base Rent or any other payment required to be made by Tenant hereunder as and when due, where such failure shall continue for a period of five (5) days after the due date. (3) Tenant's failure to observe or perform any of the covenants, conditions, or provisions of this Lease to be observed or performed by Tenant, other than as described in subparagraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than twenty (20) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30)-day period and thereafter diligently prosecutes such cure to completion. (4) The making by Tenant of any general assignment or general arrangement for the benefit of creditors, or the appointment of a trustee or a receiver to take possession -26- 30 of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days, or the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. (5) The filing of any voluntary petition in bankruptcy by Tenant, or the filing of any involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of thirty (30) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease, and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligation under this Lease. (6) Without the prior written consent of Landlord, which shall not be unreasonably withheld, selling, leasing, assigning, encumbering, hypothecating, transferring, or otherwise disposing of all or substantially all of the Tenant's assets. b. REMEDIES FOR TENANT'S DEFAULT: In the event of Tenant's default, Landlord may: (1) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant: (a) the worth at the time of the award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of the award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss which Tenant proves could have been reasonably avoided; plus (c) the worth at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss which Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom (including, without limitation, the cost of recovering possession -27- 31 of the Premises, expenses of reletting including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and real estate commissions actually paid and that portion of the leasing commission paid by Landlord and applicable to the unexpired portion of this Lease); plus (e) such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. As used in Subsections (a) and (b) above, the "WORTH AT THE TIME OF THE AWARD" shall be computed by allowing interest at the lesser of ten percent (10.00%) per annum, or the maximum rate permitted by law per annum. As used in Subsection (c) above, the "WORTH AT THE TIME OF AWARD" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1.00%). (2) Continue this Lease in full force and effect, and the Lease will continue in effect, as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due. During the period Tenant is in default, Landlord may enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all costs Landlord reasonably incurs in reletting the Premises, including, without limitation, brokers, commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the Rent due under this Lease on the dates the Rent is due, less the rent Landlord receives from any reletting. In no event shall Tenant be entitled to any excess rent received by Landlord. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. (3) Cause a receiver to be appointed to collect Rent. Neither the filing of a petition for the appointment of a receiver nor the appointment itself shall constitute an election by Landlord to terminate the Lease. (4) Cure the default at Tenant's cost. If Landlord at any time, by reason of Tenant's default, reasonably pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the lesser of ten percent (10.00%) per annum, or the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be additional Rent. -28- 32 The foregoing remedies are not exclusive; they are cumulative, in addition to any remedies now or later allowed by law, to any equitable remedies Landlord may have, and to any remedies Landlord may have under bankruptcy laws or laws affecting creditors' rights generally. The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any proceeding breach other than a failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 18. SUBORDINATION; ESTOPPEL: a. SUBORDINATION: This Lease is and shall be subordinate to any encumbrance now of record or recorded after the date of this Lease affecting the Building, other improvements, and land of which the Premises are a part. Such subordination is effective without any further act of Tenant. If any mortgagee, trustee, or ground lessor shall elect to have this Lease and any options granted hereby prior to the lien of its mortgage, deed of trust, or ground lease, and shall give written notice thereof to Tenant, this Lease and such options shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease or such options are deeded prior or subsequent to the date of said mortgage, deed of trust, or ground lease, or the date of recording thereof. b. ATTORNMENT: In the event any proceedings are brought for foreclosure, or in the event of a sale or exchange of the real property on which the Building is located, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the purchaser upon any such foreclosure and sale and recognize such purchaser as the Landlord under this Lease. Tenant agrees to execute any documents required to effectuate an attornment or to make this Lease or any options granted herein prior to the lien of any mortgage, deed of trust, or ground lease, as the case may be. If Tenant fails to execute and deliver any such documents or instruments as required hereunder, Tenant irrevocably constitutes and appoints Landlord as Tenant's special attorney-in-fact to execute and deliver any such documents or instruments. c. Notwithstanding Section 18a, Landlord agrees that Tenant's obligations to subordinate under this Section 18 to any existing or future ground lease, mortgage, or deed of trust shall be conditioned upon Tenant's receipt of a non-disturbance agreement from the holder of such encumbrance (which party is referred to for the purposes of this Section as the "SUPERIOR LIENOR"). Such non-disturbance agreement shall provide, at a minimum, that (i) Tenant's possession, and all other rights -29- 33 hereunder, of the Premises shall not be interfered with following a foreclosure, provided Tenant is not in default beyond any applicable cure periods, and (ii) upon the payment of the amounts required to be paid pursuant to Section 21 of this Lease, concurrent with the sale of the Premises to Tenant in accordance with Section 21, such Superior Lienor shall release the Premises from such encumbrances. Landlord's obligation with respect to such a non-disturbance agreement shall be limited to obtaining the non-disturbance agreement in such form as the Superior Lienor generally provides in connection with its standard commercial loans, however, Tenant shall have the right to negotiate, and Landlord shall use its good faith efforts and due diligence in assisting Tenant in the negotiation of, revisions to that non-disturbance directly with the Superior Lienor. Tenant agrees to use its good faith efforts to reach agreement with the Superior Lienor upon acceptable terms and conditions of a nondisturbance agreement. Landlord shall obtain such nondisturbance agreement from any Superior Lienor holding an existing encumbrance as of the Lease Date within forty-five (45) days following the Lease Date. d. ESTOPPEL: Either party shall, within ten (10) days after written notice from the other party, execute and deliver to requesting party, in recordable form, a certificate stating that this Lease is unmodified and in full force and effect, or in full force and effect as modified, and stating the modifications. The certificate also shall state the amount of Base Rent, the date to which the rent has been paid in advance, the amount of any security deposit or prepaid rent and any other information reasonably requested by the requesting party. Failure to deliver the certificate within the ten (10) days shall be conclusive that this Lease is in full force and effect and has not been modified except as may be represented by the party requesting the certificate. 19. SURRENDER OF PREMISES; HOLDING OVER: a. SURRENDER OF PREMISES: On expiration or ten (10) days after termination of the Initial Term or Extended Term, if applicable, Tenant shall surrender to Landlord the Premises and all Tenant's improvements and alterations in good condition (except for ordinary wear and tear occurring after the last necessary maintenance made by Tenant and destruction to the Premises as provided in this Lease), except for alterations that Tenant has the right to remove or is obligated to remove as provided in this Lease. Tenant shall remove all its personal property within the above stated time. Tenant shall perform all restoration made necessary by removal of any alterations or Tenant's personal property within the time periods stated in this Section. (1) Landlord can elect to retain or dispose of in any manner any alterations or Tenant's personal property that Tenant does not remove from the Premises on expiration or termination of the Initial Term or Extended Term, if applicable, as allowed or required by this Lease by giving at least ten (10) -30- 34 days' notice to Tenant. Title to any such alterations or Tenant's personal property that Landlord elects to retain or dispose of on expiration of the ten (10) day period shall vest in Landlord. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord's retention or disposition of any such alterations or Tenant's personal property. Tenant shall be liable to Landlord for Landlord's costs for storing, removing and disposing of any alterations or Tenant's personal property. (2) If Tenant fails to surrender the Premises to Landlord on expiration or ten (10) days after termination of the term as required by this Article, Tenant shall indemnify, defend and hold Landlord harmless from all claims, damages and liabilities resulting from Tenant's failure to surrender the Premises, including, without limitation, claims made by a succeeding tenant resulting from Tenant's failure to surrender the Premises. b. HOLDING OVER: If Tenant remains in possession of the Premises after expiration or termination of the Initial Term or Extended Term, if applicable, or after the date in any notice given by Landlord to Tenant terminating this Lease, such possession by Tenant shall be deemed to be a month-to-month tenancy terminable on thirty (30) days notice given at any time by either party. During any such month-to-month tenancy, Tenant shall pay an amount equal to one hundred twenty-five percent (125.00%) of the rent required by this Lease. Except as provided in this Section, all provisions of this Lease, except those pertaining to term and option to extend, shall apply to the month-to-month tenancy. 20. ENVIRONMENTAL PROVISIONS: a. TENANT INDEMNITY: Tenant shall indemnify, defend and hold harmless Landlord, its employees, agents, contractors, licensees, invitees, customers, successors and assigns from and against any and all losses, costs, claims, damages, liabilities and causes of action (including attorneys' fees) directly or indirectly arising out of or in any way connected with the presence, use, generation, manufacture, storage, disposal, transportation or release of Hazardous Materials on, under or about the Premises, including the soils and groundwaters thereof, caused or authorized by Tenant, including, without limitation, the cost of any required or necessary repair, clean-up, remediation or detoxification of Hazardous Materials and the preparation of any closure, remedial action or other required plans; provided, however, that Tenant shall be under no obligation under this Section 20(a) with respect to any Hazardous Materials that (i) were or under the Premises, including the soils and groundwater thereof, prior to the Commencement Date, (ii) came upon or migrated to the Premises, including the soils and groundwater thereof, from the land adjacent to the Premises and not owned or controlled by Tenant, or (iii) results from the acts or negligence of Landlord, its agents, employees, contractors or subcontractors. For the purposes of this Lease, -31- 35 "HAZARDOUS MATERIALS" shall mean any petroleum based product, flammable explosives, asbestos, urea formaldehyde, contamination or polluting materials, substances or wastes or any other substances presently or hereafter defined as "hazardous substances", "hazardous materials", "hazardous waste", "toxic substances" or "toxic waste" under any federal, state or local statute, ordinance, rule or regulation relating to industrial hygiene or to the environmental conditions on, under or about the Premises, including the soil or groundwater conditions thereof. Tenant's obligations under the foregoing indemnity shall survive the termination of this Lease. b. LANDLORD INDEMNITY: To the best of Landlord's actual current knowledge, except as disclosed by that certain environmental report-Phase I ("ENVIRONMENTAL REPORT") delivered by Landlord to Tenant prior to the Lease Date, as of the Lease Date, the Lot does not contain any Hazardous Materials. Landlord shall, subject to the provisions of this Lease, indemnify, defend and hold harmless Tenant, its employees, agents, contractors, licensees, invitees, customers, successors and assigns, from and against any and all losses, costs, claims, damages, liabilities and causes of action (including attorneys' fees) arising out of or in any way connected with the presence, use, generation, manufacture, storage, disposal, transportation, or release of Hazardous Materials on, under or about the Premises prior to the Commencement Date caused by Landlord, its agents, employees, contractors or subcontractors, including, without limitation, the cost of any required or necessary repair, clean-up, remediation or detoxification of Hazardous Materials and the preparation of any closure, remedial action or other required plan, to the extent required by applicable law. Landlord's obligations under the foregoing indemnity shall survive the termination of this Lease. 21. OPTION TO PURCHASE: In addition to all other rights that Tenant has under this Lease to use and occupy the Premises during the Term, Landlord grants Tenant an option ("OPTION") to purchase the Premises on the following terms and conditions: a. OPTION TERM: This Option may only be exercised by Tenant (which specifically excludes any assignee of Tenant in accordance with the provisions of this Lease) during the Initial Term ("OPTION TERM"). If Tenant does not exercise the Option during the Option Term, Landlord shall be released from all obligations under this Option, and all of Tenant's rights under this Option, legal or equitable, shall cease. b. TRANSFERABILITY OF OPTION: This Option may be assigned only with the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. The Option granted under this Lease is personal to Tenant and may not be separated from or transferred independently from the Lease. c. EXERCISE OF OPTION: The Option may be exercised by delivery of a written notice ("EXERCISE NOTICE") to Landlord prior to the expiration of the Option Term. It is a condition to -32- 36 the effectiveness of Tenant's exercise of the Option that Tenant not then be in monetary default under the Lease beyond any applicable cure period. If Tenant is in default under this Lease beyond any applicable cure period at the time Tenant gives the Exercise Notice, the Exercise Notice shall be void. Simultaneously with Tenant's delivery of the Exercise Notice, Tenant shall execute and deliver to Landlord, the Agreement of Purchase and Sale ("PURCHASE AGREEMENT") which shall be in the form of Exhibit C. The "PURCHASE PRICE" (as defined in the Purchase Agreement) for the Premises for (i) the first five (5) years of the Initial Term is the amount of Two Million Five Hundred Thousand and No/100ths Dollars ($2,500,000.00), and (ii) the final five (5) years of the Initial Term is the amount of Two Million Seven Hundred Fifty Thousand and No/100ths Dollars ($2,750,000.00); provided that in the event that Landlord conveys fee title in the Premises to any unrelated third party during the Initial Term, the Purchase Price for the Premises for (1) the first five (5) years of the Initial Term shall be increased to Two Million Eight Hundred Thousand and No/100ths Dollars ($2,800,000.00), and (2) the second five (5) years of the Initial Term shall be increased to Three Million and No/100ths Dollars ($3,000,000.00). The date of the "CLOSE OF ESCROW" (as defined in the Purchase Agreement) shall be determinative of the Purchase Price. Within ten (10) days following Landlord's receipt of the Purchase Agreement, provided that the Option is effective pursuant to this Section, Landlord shall execute the Purchase Agreement and return an original thereof to Tenant, and such document shall control the purchase and sale transaction regarding the Premises. The Purchase Agreement shall not be effective for any purpose unless Tenant timely and effectively exercises the Option. To the extent of any inconsistencies between the provisions of the Purchase Agreement and the Option, the provisions of the Option shall prevail. d. NOTICES: The Exercise Notice shall be delivered to Landlord in accordance with the notice requirements set forth in this Lease. e. EFFECT OF EXERCISE: In the event that Tenant elects to exercise the Option and thereafter does not acquire fee title to the Premises for any reason, this Lease shall remain effective and in full force. 22. TERMINATION RIGHTS: Provided that Tenant is not in default under the terms and conditions of this Lease beyond any applicable cure period, Tenant shall have the right to terminate this Lease on the last day of the months set forth below following the Commencement Date by delivering written notice of such election to Landlord at least ninety (90) days prior to the last day of the corresponding month. In the event that Tenant makes such election, as a condition precedent to the effectiveness of the termination of this Lease, Tenant shall pay Landlord the corresponding "TERMINATION FEE" set forth below, which amount is in addition to any other amount which may be owing at such time by Tenant. Provided that Tenant has complied with the provisions of this Section, this Lease shall terminate, -33- 37 on the last day of the year that such election was made, and the parties shall have no further obligations hereunder except (i) for those obligations of Landlord and Tenant hereunder which expressly survive the expiration or early termination of the Lease; and (ii) that Landlord shall return to Tenant the unused portion of Security Deposit in accordance with the provisions of this Lease. Month following Commencement Date Termination Fee - ----------------- --------------- Month 60 24 months of the current Base Rent Month 72 20 months of the current Base Rent Month 84 16 months of the current Base Rent Month 96 12 months of the current Base Rent Month 108 8 months of the current Base Rent 23. FIRST RIGHT OF REFUSAL: a. Landlord is the owner of two (2) separate parcels, adjacent to the Premises, referred to as "PARCEL 11" and "PARCEL 13," which described in Exhibit D and Exhibit E, respectively, attached hereto. At any time during the Initial Term or Extended Term, if applicable, provided that Tenant is not in default under the provisions of this Lease beyond any applicable notice and cure periods, Landlord and Tenant hereby agree that Tenant shall have the first right of refusal to purchase ("FIRST RIGHT OF REFUSAL") Parcel 11 and/or Parcel 13 from Landlord the terms and conditions set forth in this Section. b. Landlord shall give Tenant written notice ("OFFER NOTICE") of any bona fide offer to purchase Parcel 11 and/or Parcel 13 that Landlord intends to accept, which notice shall advise Tenant of the terms and conditions of such offer to purchase. On or before 5:00 p.m. on the date which is five (5) days following Tenant's receipt of the Offer Notice, Tenant shall notify Landlord in writing whether it elects to purchase Parcel 11 and/or Parcel 13, as applicable, upon the exact terms and conditions set forth in the Offer Notice. If Tenant fails to respond in writing to such Offer Notice within the specified time period, or elects not to exercise its First of Right of Refusal, Buyer's First Right of Refusal shall terminate and Buyer shall have no further rights under this Section; provided, however, that if the transaction described in the Offer Notice does not close, and Seller thereafter elects to accept an additional offer to purchase Parcel 11 and/or Parcel 13, as applicable, the provisions of this Section shall apply. Landlord makes no representation or warranty regarding its efforts, if any, to sell Parcel 11 and/or Parcel 13. c. For the purpose of this Section, Tenant's "FIRST RIGHT OF REFUSAL" shall also be applicable to any offer in which Landlord is willing to accept with regard to a build-to-suit lease transaction on Parcel 11 and/or Parcel 13, as applicable; provided, however, in such situation, if Tenant elects to exercise its First Right of Refusal by delivery of an Offer -34- 38 Notice as provided in Subsection (b) above, such election shall be to be purchase Parcel 11 and/or Parcel 13, as applicable, at a cost of Three and 50/100ths Dollars ($3.50) per square foot, increased at a rate of three and one-half percent (3.50%) per annum, commencing as of the Lease Date, payable in cash, and closing forty-five (45) days following Landlord's receipt of Tenant's election to exercise the First Right of Refusal. If Tenant makes such election (i) Landlord shall not be obligated to construct the intended facility, and (ii) Landlord and Tenant shall enter into purchase and sale documentation incorporating the provisions of this Section within ten (10) days following Tenant's election of the First Right of Refusal which purchase and sale documentation shall be consistent with the Purchase Agreement, to the extent applicable. 24. SIGNS: Tenant shall have the right to place its business sign on the Premises, provided such sign is in compliance with the applicable ordinances of all appropriate governmental agencies, the design guidelines of Atherton Center, Tenant obtains the prior written approval of Landlord regarding the sign, which approval shall not be unreasonably withheld, and that such signage complies with the CC&Rs (as hereinafter defined). Tenant shall be responsible for the cost of maintenance and repair of such signage during the term of this Lease and the removal of such signage upon the expiration or earlier termination of such term. 25. LANDLORD'S ENTRY ON PREMISES: Landlord and its authorized representatives shall have the right to enter the Premises at all reasonable times during business hours with reasonable advance notice for any of the following purposes: a. To determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; b. To do any necessary maintenance or repair and to make any restoration to the Premises that Landlord has the right or the obligation to perform pursuant to the provisions of this Lease; c. To serve, post, or keep posted any notices required or allowed under the provisions of this Lease; d. To post "for sale" signs at any time during the term, to post "for rent" or "for lease" signs during the last three (3) months of the terms; e. To show the Premises to prospective brokers, agents, buyers, tenants, or persons interested in an exchange or purchase, at any time during the Initial Term or Extended Term, if applicable. -35- 39 Landlord shall conduct its activities on the Premises as allowed in this Article in a manner that will cause the least possible inconvenience, annoyance, or disturbance to Tenant. 26. NOTICE: Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally or sent by certified mail, return receipt requested. Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party shall be addressed to the other party at the address set forth in this Lease. Either party may change its address by notifying the other party in writing of the change of address. Notice shall be deemed communicated within seventy-two (72) hours from the time of mailing if mailed as provided in this Article. 27. RECORDATION; QUITCLAIM DEED: This Lease or a memorandum hereof shall not be recorded. Tenant shall execute and deliver to Landlord on the expiration or termination of this Lease, immediately on Landlord's request, a quitclaim deed to the Premises, in recordable form, designating Landlord as transferee. 28. SALE OR TRANSFER OF PREMISES: If Landlord sells or transfers all or any portion of the Premises, Landlord, on consummation of the sale or transfer, shall be released from any liability thereafter accruing under this Lease. 29. ATTORNEYS' FEES: If Tenant or Landlord shall be in breach or default under this Lease, such party (the "DEFAULTING PARTY") shall reimburse the other party (the "NON-DEFAULTING PARTY") upon demand for any costs or expenses that the Non-Defaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys, fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor -36- 40 or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord. 30. MISCELLANEOUS PROVISIONS: a. CC&RS: Tenant agrees to comply with the provisions of any and all covenants, conditions and restrictions (collectively, "CC&RS"), which encumber the Premises as of the Lease Date, and any amendments, additions or modifications thereto in which Tenant has been provided written notice of by Landlord. The CC&Rs and any amendments, additions or modifications thereto shall not adversely affect the Tenant's use of the Premises for general office purposes. b. TIME OF ESSENCE: Time is of the essence of each provision of this Lease. c. CORPORATE AUTHORITY: If Tenant is a corporation, Tenant shall deliver to the other party on execution of this Lease a certified copy of a resolution of Tenant's board of directors authorizing the execution of this Lease and naming the officers that are authorized to execute this Lease on behalf of the corporation. d. SUCCESSORS: This Lease shall be binding on and inure to the benefit of the parties and their successors. e. REAL ESTATE BROKERS: Each party represents that it has not had dealing with any real estate broker, finder, or other person, with respect to this Lease in any manner, except as set forth in the Basic Lease Information. Each party shall hold harmless the other party from all damages resulting from any claims that may be asserted against the other party by any other broker, finder, or other person, with whom the other party has or purportedly has dealt. f. EXHIBITS: All exhibits referred to are attached to this Lease and incorporated herein by reference. g. CALIFORNIA LAW: This Lease shall be construed and interpreted in accordance with the laws of the State of California. h. WAIVER: The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of Landlord to insist upon the -37- 41 performance by Tenant in strict accordance with said terms. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. i. EXECUTION: Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. j. WAIVER OF CALIFORNIA CODE SECTIONS: Notwithstanding any other provision of this Lease and in addition to any waivers which may be contained in this Lease, Tenant waives the provisions of Civil Code Section 1932(2) and 1933(4) with respect to the destruction of the Premises; Civil Code Sections 1932(l), 1941 and 1942 with respect to Landlord's repair duties and Tenant's right of repair; and Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises for public or quasi-public use by statute, by right of imminent domain, or by purchase in lieu of imminent domain; and any right of redemption or reinstatement of Tenant under any present of future case law or statutory provision (including Code of Civil Procedure Section 473, 1174(c) and 1179 and Civil Code Section 3275) in the event Tenant is dispossessed from the premises for any reason. This waiver applies to future statutes enacted in addition or in substitution to the statue specified herein, and this waiver shall apply even though Tenant may be the subject of a voluntary or involuntary petition in bankruptcy. k. PROVISIONS ARE COVENANTS AND CONDITIONS: All provisions, whether covenants or conditions, on the part of Tenant and Landlord, shall be deemed to be both covenants and conditions. l. SINGULAR AND PLURAL: When required by the context of this Lease, the singular shall include the plural. m. JOINT AND SEVERAL OBLIGATIONS: "PARTY" shall mean Landlord and Tenant; and if more than one person or entity is Landlord or Tenant, the obligations imposed on that party shall be joint and several. n. SEVERABILITY: The unenforceability, invalidity, or illegality of any provision shall not render the other provisions unenforceable, invalid, or illegal. o. CAPTIONS: The captions of this Lease shall have no effect on its interpretation. -38- 42 p. NEGATION OF PARTNERSHIP: Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of the provisions of this Lease. q. MORTGAGEE PROTECTION CLAUSE: Tenant agrees to give any mortgagees and/or trust deed holders, by registered mail, a copy of any notice of default served upon the Landlord, provided that prior to such notice Tenant has been notified in writing (by way of notice of assignment of lease, or otherwise) of the addresses of such mortgagees and/or trust deed holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary, provided such mortgagees and/or trust deed holders commence such cure within thirty (30) days and diligently pursue the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. r. TENANT FINANCING: Tenant shall not mortgage or encumber the leasehold estate created by this Lease without Landlord's prior consultation, review and consent. Landlord may give or withhold such consent in Landlord's reasonable discretion. Tenant acknowledges that fixtures and equipment incorporated in or affixed to the Premises, to the extent paid for by the Allowance, constitute real property improvements to be surrendered upon termination of the Lease. s. LIMITATION ON LIABILITY: In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (1) Tenant's sole and exclusive recourse shall be against Landlord's interest in the Premises. Tenant shall not have any right to satisfy any judgment which it may have against Landlord from any other assets of Landlord; (2) No partner, stockholder, director, officer, employee or beneficiary or trustee (collectively, "Partner") of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction over Landlord); (3) No service of process shall be made against any Partner of Landlord (except as may be necessary to secure jurisdiction over Landlord); (4) No Partner of Landlord shall be required to answer or otherwise plead to any service of process; (5) No judgment will be taken against any Partner of Landlord; (6) Any judgment taken against any Partner of Landlord may be vacated and set aside at any time nunc pro tunc; (7) No writ of execution will ever be levied against the assets of any Partner of Landlord; and (8) These covenants and agreements are enforceable both by Landlord and also by any Partner of Landlord. t. MODIFICATION FOR LENDER: If, in connection with obtaining construction, interim or permanent financing for the -39- 43 Building, the lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder. u. ACCORD AND SATISFACTION; APPLICATION OF DELINQUENT PAYMENTS: No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. No endorsement on any check nor any letter accompanying any check or payment of rent or partial payment thereof, shall prevent Landlord from treating such payment as on account of the earliest delinquent sum owed Landlord, and Tenant waives the benefit of any contrary court decision or statute (including, without limitation, Civil Code Section 1479). v. NO CONSTRUCTION AGAINST DRAFTER: The provisions of this Lease shall be construed in accordance with the fair meaning of the language used and shall not be strictly construed against either party. If the parties delete any provision appearing in the original draft of this Lease, this Lease will be interpreted as if the deleted language were never a part of this Lease. w. INDEPENDENT COVENANTS: Each covenant, agreement, obligation or other provision of this Lease to be performed by Tenant is a separate and independent covenant of Tenant, and not dependent on the performance of Landlord's obligations hereunder. x. ENTIRE AGREEMENT: The terms of this Lease are intended by the parties as a final expression of their agreement with respect to such terms as are included in this Lease and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Lease constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial proceedings, if any, involving this Lease. y. FINANCIAL STATEMENTS: In order to induce Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord is true and correct. If Tenant requests in writing, Landlord shall enter into a confidentiality agreement concerning the materials described in this Section in a form reasonably acceptable to Landlord and Tenant. -40- 44 z. CONSENTS: Except as expressly provided in this Lease, any consent or approval requested under this Lease by either Tenant or Landlord shall be granted or withheld in such party's reasonable discretion. aa. PRELIMINARY REPORT: Prior to the Lease Date, Landlord has provided Tenant with a preliminary report concerning the Lot which sets forth all matters encumbering such real property discovered by the issuer of such report, which report establishes that Landlord holds fee title to the Lot. LANDLORD: TENANT: STANFORD RANCH I, LLC, FINANCIAL PACIFIC INSURANCE a Delaware limited liability COMPANY, a California company corporation By: /s/ LARRY D. KELLEY By: /s/ [SIG] ------------------------------- ------------------------------- Larry D. Kelley Its: President Its: [not legible] Date: June 18, 1996 Date: June 18, 1996 ----------------------------- ----------------------------- Address: Address: Stanford Ranch I, LLC 8585 [not legible] Road 3715 Atherton Road Sacramento, CA 95828 Rocklin, California 95765 -41- 45 EXHIBIT A THAT CERTAIN REAL PROPERTY SITUATED IN THE STATE OF CALIFORNIA, CITY OF ROCKLIN, COUNTY OF PLACER, DESCRIBED AS FOLLOWS: -42- 46 EXHIBIT B SITE PLAN -43- 47 EXHIBIT C AGREEMENT OF PURCHASE AND SALE This Agreement of Purchase and Sale ("AGREEMENT"), dated for reference purposes only , 19 , is entered into by and between STANFORD RANCH I, LLC, a Delaware limited liability company ("SELLER"), and FINANCIAL PACIFIC INSURANCE COMPANY, a California corporation ("BUYER"). RECITALS A. Seller is the owner of certain real property ("REAL PROPERTY"), located in Rocklin ("CITY"), Placer County ("COUNTY"), California ("STATE"), also known as Assessor's Parcel Number ____________. B. The Real Property has constructed thereon a certain building, containing approximately twenty-five thousand (25,000) gross square feet ("IMPROVEMENTS"). The Real Property and Improvements are collectively referred to as the "PROPERTY." C. Buyer, as tenant, and Seller, as Landlord, prior to the Effective Date, have entered into a certain Net Lease Agreement ("LEASE") dated _______, pursuant to which Buyer and Seller have entered into this Agreement. D. Buyer desires to purchase from Seller and Seller desires to sell to Buyer the Property pursuant to the provisions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows: AGREEMENT 1. Purchase and Sale. Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase from Seller, the Property on the terms and subject to the conditions set forth in this Agreement. For the purposes of this Agreement, the date which the last party executes this Agreement and delivers it to the other party shall hereinafter be referred to as the "EFFECTIVE DATE." 2. Purchase Price. The purchase price ("PURCHASE PRICE") for the Property shall be Dollars ($ ) (to be determined pursuant to Section 21 of the Lease). 3. Payment of Purchase Price. On or before the Close of Escrow, Buyer shall deposit with Escrow Holder the remaining portion of the Purchase Price, in immediately available funds, which shall be paid to Seller at Close of Escrow. -44- 48 4. Escrow. (a) Opening of Escrow. Within two (2) days following the Effective Date, Buyer shall open an escrow ("ESCROW") with Escrow Holder. Buyer and Seller agree to execute and deliver to Escrow Holder, in a timely manner, all escrow instructions necessary to consummate the transaction contemplated by this Agreement. Any such instructions shall not conflict with, amend or supersede any portion of this Agreement. If there is any inconsistency between such instructions and this Agreement, this Agreement shall control. (b) Close of Escrow. For purposes of this Agreement, "CLOSE OF ESCROW" shall be defined as the date that the Grant Deed (as hereinafter defined) is recorded in the Official Records of the County. The Close of Escrow shall occur within thirty (30) days following the Effective Date ("OUTSIDE DATE"), unless extended by the mutual written consent of the parties. 5. Conditions of Title. It shall be a condition to the Close of Escrow and a covenant of Seller that title to the Property be conveyed to Buyer by Seller by a Grant Deed, which shall be in the form customarily used by Escrow Holder in the County ("GRANT DEED"), subject only to (a) a lien to secure payment of real estate taxes, not yet due and payable; (b) the lien of supplemental taxes, not yet due and payable; (c) exceptions which are approved and/or accepted by Buyer in writing in accordance with this Agreement; (d) the CC&Rs (as defined in the Lease); and (e) all applicable laws, ordinances, rules and governmental regulations (including, but not limited to those relative to building, zoning and land use) affecting the development, use, occupancy or enjoyment of the Property (collectively, "APPROVED CONDITIONS OF TITLE"). 6. Conditions to Close of Escrow. (a) Conditions to Buyer's Obligations. The Close of Escrow and Buyer's obligations to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions (or Buyer's written waiver thereof) which are for Buyer's sole benefit, on or prior to the dates designated below for the satisfaction of such conditions, or the Close of Escrow in absence of a specified date: (i) Title. Buyer shall have the right to approve any and all matters of and exceptions to title of the Property, including the legal description, as disclosed by the following documents and instruments (collectively, "TITLE DOCUMENTS"): (A) a Preliminary Report ("PRELIMINARY REPORT") issued by Escrow Holder with respect to the Property and all matters referenced therein; and (B) legible copies of all documents, whether recorded or unrecorded, referred to in such Preliminary Report. Buyer shall cause Escrow Holder to deliver the Title Documents to Buyer and Seller within five (5) calendar days following the Effective Date. Buyer shall have ten (10) calendar days following its receipt of the Title Documents to give Seller and -45- 49 Escrow Holder written notice ("BUYER'S TITLE NOTICE") of Buyer's approval or disapproval, which shall be made in Buyer's sole and absolute discretion, of the legal description and every item or exception disclosed by the Title Documents. The failure of Buyer to give Buyer's Title Notice to Seller within the specified time period shall be deemed Buyer's disapproval of title to the Property, in which case the Agreement shall be canceled pursuant to the provisions of this Section. In the event that Buyer's Title Notice disapproves of any matter of title shown in the Title Documents, Seller shall, within five (5) calendar days after Buyer's Title Notice is received by Seller, give Buyer written notice ("SELLER'S TITLE NOTICE") of those disapproved title matters, if any, which Seller is unable or unwilling to have eliminated from title to the Property by Close of Escrow. In the event that Seller is unable to remove all of the title matters objected to by Buyer in Buyer's Title Notice, Buyer shall have three (3) calendar days from receipt of Seller's Title Notice to notify Seller in writing that either (1) Buyer is willing to purchase the Property subject to such disapproved exceptions, or (2) Buyer elects to cancel this transaction. Failure of Buyer to take either one of the actions described in Subsection (1) or (2) above shall be deemed to be Buyer's election to take the action described in Subsection (2) above. In the event this Agreement is canceled or deemed canceled pursuant to this Section, except as otherwise provided herein, the parties shall have no further obligations under this Agreement, and all monies delivered to Escrow Holder by Buyer shall immediately be returned to Buyer. (ii) Title Insurance. As of the Close of Escrow, Title Company (as hereinafter defined) shall have issued or shall have committed to issue the Title Policy (as hereinafter defined) to Buyer. (iii) Seller's Obligations. As of the Close of Escrow, Seller shall have performed all of the obligations required to be performed by Seller under this Agreement. (b) Conditions to Seller's Obligations. The Close of Escrow and Seller's obligations to consummate the transaction contemplated by this Agreement are subject to the satisfaction of the following conditions (or Seller's waiver thereof) which are for Seller's sole benefit, on or prior to the dates designated below for the satisfaction of such conditions, or the Close of Escrow in absence of a specified date: (i) Buyer's Obligations. As of the Close of Escrow, Buyer shall have timely performed all of the obligations required by the terms of this Agreement to be performed by Buyer. (ii) Buyer's Representations. As of the Close of Escrow, all representations and warranties made by Buyer to Seller in this Agreement shall be true and correct as of the Close of Escrow. -46- 50 (iii) Outside Date. The Close of Escrow shall occur on or before the Outside Date. (c) Failure of Condition to Close of Escrow. Except as provided in Section 6(a) or 6(b), in the event any of the conditions set forth in Section 6(a) or 6(b) are not timely satisfied or waived by the appropriate benefitted party, for a reason other than the default of Buyer or Seller, this Agreement shall terminate, and all other monies delivered to Escrow Holder by Buyer shall be immediately be returned to Buyer, and, except as otherwise provided herein, the parties shall have no further obligations hereunder. 7. Deposits By Seller. Unless otherwise provided in this Section, at least one (1) business day prior to the Close of Escrow, Seller shall deposit with Escrow Holder the following documents: (a) Grant Deed. The Grant Deed, duly executed and acknowledged in recordable form by Seller, conveying fee title to the Property. (b) FIRPTA Certificate. A certification, acceptable to Escrow Holder and duly executed by Seller under penalty of perjury setting forth Seller's address and federal tax identification number in accordance with and/or for the purpose of the provisions of Sections 7701 and 1445, as may be amended, of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. (c) California Franchise Tax Withholding. Evidence satisfactory to Buyer and Escrow Holder that Seller is exempt from the provisions of the withholding requirements of the California Revenue and Taxation Code, as amended, and that neither Buyer nor Escrow Holder is required to withhold any amounts from the Purchase Price pursuant to such provisions. 8. Deposits By Buyer. At least one (1) business day prior to the Close of Escrow, Buyer shall deposit or cause to be deposited with Escrow Holder the required funds which are to be applied towards the payment of the Purchase Price. 9. Issuance of Title Insurance. At the Close of Escrow, Escrow Holder's title insurer ("TITLE COMPANY"), shall issue to Buyer its standard form California Land Title Association ("CLTA") Owner's Policy of Title Insurance showing fee title to the Property vested in Buyer subject only to the Approved Conditions of Title ("TITLE POLICY"). The Title Policy shall be issued with liability in an amount equal to the Purchase Price. Seller shall pay for the expense of the Title Policy. If Buyer elects to have Title Company issue its American Land Title Association ("ALTA") Owner's Policy of Title Insurance, Buyer shall pay for the expense of such ALTA premium increment, any endorsement thereto and any survey costs. -47- 51 10. Costs and Expenses. Except as otherwise specified in this Agreement, Seller and Buyer shall equally divide (a) all escrow fees and costs; (b) any document recording charges; and (c) documentary transfer tax charged by the County and any other transfer tax charged by the City. All other costs and expense of escrow and title shall be shared pursuant to the custom in the County. Buyer and Seller shall each pay all legal and professional fees and fees of other consultants incurred by Buyer and Seller, respectively. 11. Prorations. (a) Revenues. Rentals, revenues, and other income, if any, from the Property, which includes the Lease, affecting the Property shall be prorated as of 11:59 p.m. on the day following the Close of Escrow. (b) Taxes/Assessments. All non-delinquent real estate taxes on the Property shall be prorated as of 11:59 p.m. on the day following the Close of Escrow based on the actual current tax bill, but if such tax bill has not yet been received by Seller by the Close of Escrow, then the current year's taxes shall be deemed to be one hundred two percent (102%) of the amount of the previous year's tax bill for the Property. All delinquent taxes and all assessments, if any, on the Property shall be paid at the Close of Escrow from funds accruing to Seller. (c) Other Expenses. All other expenses for the Property shall be prorated as of 11:59 p.m. on the day following to the Close of Escrow between the parties based upon the latest available information. (d) Corrections. If any errors or omissions are made regarding adjustments and prorations as set forth herein, the parties shall make the appropriate corrections promptly upon discovery thereof. If any estimates are made at the Close of Escrow regarding adjustments or prorations, the party shall make the appropriate correction promptly when accurate information becomes available. Any corrected adjustment or proration shall be paid in cash to the party entitled thereto. 12. Condition and Inspection of Property. Seller makes no representation or warranty regarding the condition of the Property, its past use, or its suitability for Buyer's intended use, and the Property is sold AS-IS, WHERE-IS, WITH ALL FAULTS, AND THERE IS NO WARRANTY, EXPRESS OR IMPLIED, REGARDING THE CONDITION OF THE PROPERTY. Buyer is relying solely upon its own independent inspection, investigation, and analysis of the Property as it deems necessary or appropriate in so acquiring the Property from Seller, including, without limitation, any and all matters concerning the condition, use and/or sale of the Property. 13. Liquidated Damage. BUYER RECOGNIZES THAT THE PROPERTY WILL BE REMOVED BY THE SELLER FROM THE MARKET DURING THE EXISTENCE OF THIS AGREEMENT, AND THAT IF THIS AGREEMENT IS NOT -48- 52 CONSUMMATED BECAUSE OF BUYER'S DEFAULT, IT WOULD BE EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN THE EXTENT OF THE DETRIMENT TO SELLER. THE PARTIES HAVE DETERMINED AND AGREED THAT THE ACTUAL AMOUNT OF DAMAGES THAT WOULD BE SUFFERED BY SELLER AS A RESULT OF ANY SUCH DEFAULT IS DIFFICULT OR IMPRACTICABLE TO DETERMINE AS OF THE DATE OF THIS AGREEMENT AND THAT THE MOUNT OF FIFTY THOUSAND AND NO/100THS DOLLARS ($50,000.00) IS A REASONABLE ESTIMATE OF THE AMOUNT OF SUCH DAMAGES. FOR THESE REASONS, THE PARTIES AGREE THAT IF THIS PURCHASE AND SALE IS NOT CONSUMMATED BECAUSE OF BUYER'S DEFAULT, SELLER SHALL BE ENTITLED TO THE AMOUNT OF FIFTY THOUSAND AND NO/100THS DOLLARS ($50,000.00), AS LIQUIDATED DAMAGES. THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. SELLER HEREBY WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 3389. SELLER AGREES THAT THESE LIQUIDATED DAMAGES SHALL BE IN LIEU OF ANY OTHER MONETARY RELIEF OR OTHER REMEDY, INCLUDING, WITHOUT LIMITATION, SPECIFIC PERFORMANCE, TO WHICH SELLER MIGHT OTHERWISE BE ENTITLED UNDER THIS AGREEMENT, AT LAW OR IN EQUITY, AND SHALL BE SELLER'S SOLE AND EXCLUSIVE RIGHT AND REMEDY. NOTHING CONTAINED HEREIN SHALL IN ANY MANNER LIMIT THE AMOUNT OF DAMAGES OBTAINABLE BY SELLER PURSUANT TO AN ACTION UNDER ANY HOLD HARMLESS, DEFENSE OR INDEMNIFICATION PROVISION HEREOF. Seller _______ Buyer _______ 14. Waiver of Right to Record Lis Pendens. AS PARTIAL CONSIDERATION FOR SELLER ENTERING INTO THE AGREEMENT, BUYER EXPRESSLY WAIVES ANY RIGHT UNDER CALIFORNIA CODE OF CIVIL PROCEDURE, PART II, TITLE 4.5 (SECTIONS 409-409.8) OR AT COMMON LAW OR OTHERWISE TO RECORD OR FILE A LIS PENDENS OR A NOTICE OF LAW OR OTHERWISE TO RECORD OR FILE A LIS PENDENS OR A NOTICE OF PENDENCY OF ACTION OR SIMILAR NOTICE AGAINST ALL OR ANY PORTION OF THE PROPERTY IN CONNECTION WITH ANY ALLEGED DEFAULT BY SELLER HEREUNDER. SUBJECT TO THE FOREGOING, BUYER FURTHER AGREES THAT AN ACTION FOR DAMAGES WOULD BE AN ADEQUATE REMEDY FOR BUYER IF SELLER WERE TO FAIL TO CONVEY TITLE TO THE PROPERTY TO BUYER IN DEFAULT OF SELLER'S OBLIGATIONS UNDER THIS AGREEMENT. ACCORDINGLY, BUYER HEREBY WAIVES ANY AND ALL RIGHTS WHICH BUYER OTHERWISE WOULD HAVE HAD TO SPECIFICALLY ENFORCE SELLER'S OBLIGATION TO CONVEY TITLE TO THE PROPERTY PURSUANT TO THIS AGREEMENT. BUYER AND SELLER HEREBY EVIDENCE THEIR SPECIFIC AGREEMENT TO THE TERMS OF THIS WAIVER BY PLACING THEIR INITIALS IN THE PLACE PROVIDED HEREINAFTER. Seller _______ Buyer _______ 15. Condemnation and Destruction. (a) Eminent Domain or Taking. If, prior to the Close of Escrow, any material portion of the Real Property or Improvements is taken by eminent domain or otherwise, Seller shall immediately notify Buyer of such fact. If such taking is "material," Buyer shall have the option, in its reasonable -49- 53 discretion, to terminate this Agreement upon written notice to Seller given not later than ten (10) days after receipt of Seller's notice. If this Agreement is terminated pursuant to this Section, the provisions of Section 6(c) shall govern. If Buyer does not exercise this option to terminate this Agreement, or if there has not been a material taking by eminent domain or otherwise to give rise to such option, neither party shall have the right to terminate this Agreement, but the Seller shall assign and turn over, and the Buyer shall be entitled to receive and keep, all awards for the taking by eminent domain which accrue to Seller and the parties shall proceed to the Close of Escrow pursuant to the terms hereof, without modification of the terms of this Agreement and without any reduction in the Purchase Price. For the purpose hereof, "material" shall be deemed to be any diminution in the value of the Property as a result of a taking by eminent domain or otherwise which exceeds Fifty Thousand and No/100ths Dollars ($50,000.00), as determined by Seller using its good faith judgment. (b) Fire or Casualty. Prior to the Close of Escrow, the entire risk of loss or damage by earthquake, flood, landslide, fire or other casualty shall be borne and assumed by Seller, except as otherwise provided in this Section. If, prior to the Close of Escrow, any part of the Improvements are damaged or destroyed by earthquake, flood, landslide, fire or other casualty, Seller shall immediately notify Buyer of such fact. If such damage or destruction is "material", Buyer shall have the option to terminate this Agreement upon written notice to the Seller given not later than ten (10) days after receipt of Seller's notice. For purposes hereof, "material" shall be deemed to be any uninsured damage or destruction to the Property or any insured damage or destruction where the cost of repair or replacement is estimated to be Fifty Thousand Dollars ($50,000.00) or more or shall take more than ninety (90) days to repair, in Seller's good faith judgment; provided, however, in the case of uninsured damage or destruction, Seller may, at Seller's option, elect to repair such damage and destruction and keep this Agreement in full force and effect so long as such repair can be and is completed by Seller prior to the Close of Escrow. If this Agreement is so terminated, the provisions of Section 6(c) shall govern. If Buyer does not exercise this option to terminate this Agreement, or if the casualty is not material, neither party shall have the right to terminate this Agreement but Seller shall assign and turn over, and Buyer shall be entitled to receive and keep, all insurance proceeds payable to it with respect to such destruction, and the parties shall proceed to the Close of Escrow pursuant to the terms hereof without modification of the terms of this Agreement and without any reduction in the Purchase Price. 16. Notices. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or sent by electronic facsimile and shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the -50- 54 person to receive such notice, (ii) if mailed, on the date of posting by the United States Post Office, or (iii) if given by electronic facsimile, when received by the other party. TO BUYER: Financial Pacific Insurance Company ___________________________ ___________________________ Telephone: ________________ Facsimile: ________________ Attention: ______________________________ TO SELLER: Stanford Ranch I Post Office Box 1200 3715 Atherton Road Rocklin, California 95765 Telephone: (916) 965-7100 Facsimile: (916) 624-0741 Attention: Larry Kelley, President WITH COPY TO: Trainer - Robertson 701 University Avenue, Suite 200 Sacramento, California 95825-6708 Telephone: (916) 929-7000 Facsimile: (916) 929-7111 Attention: Jay Heckenlively, Esquire TO ESCROW HOLDER: Placer Title Company ___________________________ ___________________________ Telephone: ________________ Facsimile: ________________ Attention: ______________________________ Notice of change of address shall be given by written notice in the manner described in this Section. 17. Brokers. There are no real estate brokers involved in the transaction described herein. If any additional claims for brokers' or finders' fees for the consummation of this Agreement arise, then Buyer hereby agrees to indemnify, hold harmless and defend Seller from and against such claims if they shall be based upon any statement, representation or agreement by Buyer, and Seller hereby agrees to indemnify, hold harmless and defend Buyer if such claims shall be based upon any statement, representation or agreement made by Seller. 18. Exchange. The parties to this Agreement acknowledge that either party may desire to structure the sale and/or the purchase of the Property as an exchange for like-kind property pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, in order to defer recognition of income from the disposition of the Property and other properties. The parties agree to reasonably cooperate with each other to accomplish such exchanges and each party hereby agrees that any and all costs associated with said exchange shall be borne solely by the exchanging party and shall in no way be attributable to the non- -51- 55 exchanging party. In no event shall the non-exchanging party be required to take title to the exchanged property(ies) to effectuate the tax deferred exchange contemplated by this Section. 19. Miscellaneous. (a) Partial Invalidity. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid, and shall be enforced to the fullest extent permitted by law. (b) Waivers. No waiver of any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of time for performance of any other obligation or act except those of the waiving party, which shall be extended by a period of time equal to the period of the delay. (c) Survival of Representations. The indemnification, defense and hold harmless obligations, and the representations and warranties made by each party herein shall survive (1) the Close of Escrow and shall not merge into the Grant Deed and the recordation thereof, and (2) the termination and/or cancellation of this Agreement. (d) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the permitted successors and assigns of the parties hereto. (e) Professional Fees. If either party commences an action against the other to interpret or enforce any of the terms of this Agreement or because of the breach by the other party of any of the terms hereof, the losing party shall pay to the prevailing party reasonable attorneys' fees, costs and expenses and court costs and other costs of action incurred in connection with the prosecution or defense of such action, whether or not the action is prosecuted to a final judgment. For the purpose of this Agreement, the terms "attorneys' fees" or "attorneys' fees and costs" shall mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" shall also include, without-limitation, all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any action or proceeding is brought with respect to the matter for which said -52- 56 fees and expenses were incurred. The term "attorney" shall have the same meaning as the term "counsel." (f) Entire Agreement. This Agreement (including all Exhibits attached hereto) is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented, superseded, canceled or terminated, nor may any obligations hereunder be waived, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto and lawful assignees. (g) Assignment. Buyer may not assign its right, title or interest in this Agreement to any other party without the prior written consent of Seller, which determination may be withheld in Seller's sole and absolute discretion. Any attempted assignment without the prior written consent of Seller shall be void and be deemed a default of Buyer hereunder. Any permitted assignment shall not relieve the assigning party from any liability under this Agreement. (h) Time of Essence. Seller and Buyer hereby acknowledge and agree that time is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that failure to timely perform any of the terms, conditions, obligations or provisions hereof by either party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (i) Relationship of Parties. Nothing contained in this Agreement shall be deemed or construed by the parties to create the relationship of principal and agent, a partnership, joint venture or any other association between Buyer and Seller. (j) Construction. Headings at the beginning of each paragraph and subparagraph are solely for the convenience of the parties and are not a part of the Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to paragraphs, sections, subparagraphs and subsections are to this Agreement. All exhibits referred to in this Agreement are attached and incorporated by this reference. (k) Governing Law. The parties hereto acknowledge that this Agreement has been negotiated and entered into in the State of California. The parties hereto expressly agree that this Agreement shall be governed by, interpreted under, and -53- 57 construed and enforced in accordance with the laws of the State of California. (1) Possession of Property. Buyer shall be entitled to the possession of the Property immediately following the Close of Escrow. (m) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. (n) Days of Week. If any date for performance herein falls on a Saturday, Sunday or holiday, as defined in Section 6700 of the California Government Code, the time for such performance shall be extended to 5:00 p.m. on the next business day. (o) Representation by Counsel. Notwithstanding any rule or maxim of construction to the contrary, any ambiguity or uncertainty shall not be construed against either Seller or Buyer based upon authorship of any of the provisions hereof. Seller and Buyer each hereby warrant, represent and certify to the other as follows: (a) that the contents of this Agreement have been completely and carefully read by the representing party and counsel for the representing party; (b) that the representing party has been separately represented by counsel and the representing party is satisfied with such representation; (c) that the representing party's counsel has advised the representing party of, and the representing party fully understands, the legal consequences of this Agreement; and (d) that no other person (whether a party to this Agreement or not) has made any threats, promises or representations of any kind whatsoever to induce the execution hereof, other than the performance of the terms and provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the dates set forth below. BUYER: SELLER: FINANCIAL PACIFIC INSURANCE STANFORD RANCH I, LLC COMPANY, a California a Delaware limited liability corporation company By: [SIG] By: /s/ LARRY D. KELLEY ------------------------------ ------------------------------ Larry D. Kelley Its: President & CEO Its: President ----------------------------- ----------------------------- Date: June 18, 1996 Date: June 18, 1996 ---------------------------- ---------------------------- -54- 58 EXHIBIT D LEGAL DESCRIPTION OF PARCEL 11 -55- 59 EXHIBIT E LEGAL DESCRIPTION OF PARCEL 12 -56- EX-10.29 34 PROMISSORY NOTE DATED SEPTEMBER 15, 1997 1 [U.S. BANK LOGO] EXHIBIT 10.29 PROMISSORY NOTE
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $530,000.00 09-15-1997 07-01-1998 815-34 001 2908539323 47085
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. BORROWER: FINANCIAL PACIFIC INSURANCE LENDER: U.S. BANK GROUP, INC. CALIFORNIA CORPORATE BANKING 8583 ELDER CREEK ROAD, #100 980 9TH STREET, SUITE 1100 SACRAMENTO, CA 95828 SACRAMENTO, CA 95814 - ------------------------------------------------------------------------------- Principal Amount: $530,000.00 Date of Note: September 15, 1997 PROMISE TO PAY. FINANCIAL PACIFIC INSURANCE GROUP, INC. ("Borrower") promises to pay to U.S. BANK ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Hundred Thirty Thousand & 00/100 Dollars ($530,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one payment of all outstanding principal plus all accrued unpaid interest on July 1, 1998. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning October 1, 1997, and all subsequent interest payments are due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE. THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES AS ITS PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH LENDER COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "Index"). THE INTEREST RATE SHALL BE ADJUSTED WITHOUT NOTICE EFFECTIVE ON THE DAY LENDER'S PRIME RATE CHANGES. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Borrower is in default under any other note, security agreement, lease agreement or lease schedule, loan agreement or other agreement, whether now existing or hereafter made, between Borrower and U.S. Bancorp or any direct or indirect subsidiary of U.S. Bancorp. (g) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (h) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (i) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. (j) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 6.000 percentage points over the Index. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lenders' legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SACRAMENTO COUNTY, THE STATE OF CALIFORNIA. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided on this paragraph. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: ROBERT C. GOODELL, President. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to 2 09-15-1997 PROMISSORY NOTE PAGE 2 LOAN NO 815-34 (CONTINUED) - ------------------------------------------------------------------------------- advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. ARBITRATION. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Note or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. LATE CHARGE. If a payment is 15 days or more past due, borrower will be charged a late charge of 5% of the delinquent payment. OUT OF DEBT PERIOD. Borrower agrees to maintain a consecutive thirty (30) day out-of-debt period during the term of this loan at which time the principal balance on this Line of Credit shall be reduced to zero (0) dollars. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: FINANCIAL PACIFIC INSURANCE GROUP, INC. By: ----------------------------------------------- ROBERT C. GOODELL, President LENDER: U.S. BANK By: ----------------------------------------------- Authorized Officer ============================================================================== Variable Rate, Line of Credit LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24(c) 1997 CFI ProServices, Inc. All rights reserved. [CA-D20 FINPAC.LN C1.OVL] EX-10.30 35 STOCK PURCHASE AGREEMENT DATED FEBRUARY 24, 1997 1 EXHIBIT 10.30 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of February 24, 1997 by and among Robert C. Goodell, an individual ("Seller"), FinPac Partners, a California limited partnership ("FinPac"), St. Paul Fire and Marine Insurance Company ("St. Paul"), and The Firemark Global Insurance Fund, L.P., a Delaware limited partnership, a Delaware limited partnership ("Firemark") (FinPac, St. Paul and Firemark are collectively referred to herein as the "Buyers" and individually as a "Buyer"). R E C I T A L S A. The Seller is the owner of shares of common stock, $.001 par value per share (the "Common Stock"), of Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Company"). B. The Seller desires to sell to each Buyer and each Buyer desires to purchase from the Seller 38.509 shares of Common Stock, upon the terms and conditions hereinafter set forth. A G R E E M E N T NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties do hereby agree as follows: ARTICLE I PURCHASE OF SHARES 1.1 Purchase of Shares. Subject to the terms and conditions set forth in this Agreement, the Seller shall sell, convey, transfer and deliver to each Buyer and each Buyer shall purchase and accept from the Seller 38.509 shares of Common Stock (collectively, the "Shares"), free and clear of all liens, encumbrances, charges, restrictions or rights or interests of others of any kind, including, but not limited to, any rights of any person to acquire, own, hold or otherwise obtain any interest in any capital stock of the Company. Such sale and purchase of the Shares shall occur at on such date and at such location as is mutually acceptable to the parties, and the date of such sale is hereinafter referred to as the "Closing Date." 1.2 Taxes. The Seller shall be liable for and shall pay all of Seller's federal, state or local income or transfer taxes that may be or may become due and payable by reason of the sale contemplated by Section 1.1 hereof. 1. 2 1.3 Conveyances at the Closing. On the Closing Date, the Seller shall deliver to the Buyers such stock certificates, stock powers and other good and sufficient instruments of conveyance and assignment, satisfactory in form and substance to the Buyers, as shall be necessary to warrant and vest in the Buyers good and marketable right, title and interest in and to the Shares to be sold, assigned, conveyed and delivered hereunder, against delivery to the Seller of the aggregate purchase price of $450,000. 1.4 Purchase Price. As consideration for the Shares, each Buyer shall pay the Seller on the Closing Date $150,000 by the delivery of a check made payable to Robert C. Goodell and Suzanne M. Goodell, JT TEN. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER As an inducement to the Buyers to enter into this Agreement, the Seller makes the following representations and warranties: 2.1 Ownership of Stock. On the Closing Date, the Seller will have valid and marketable title to the Shares, free and clear of all liens, encumbrances or charges, restrictions, rights or interests of others of any kind. Upon delivery of the purchase price for the Shares, and upon receipt of certificates for the Shares, duly endorsed for transfer or accompanied by stock powers, in each case with the signature of the Seller appropriately witnessed, the Buyers will acquire valid title to the Shares, free and clear of all liens, encumbrances or charges, restrictions or rights or interests of others of any kind. 2.2 Authority. The Seller has full power, capacity and authority to execute and deliver this Agreement and to perform his obligations hereunder. This Agreement has been duly executed and delivered by, and constitutes the valid, binding and enforceable obligation of, the Seller, except as the same may be limited by bankruptcy, insolvency or similar laws relating to or affecting the enforcement of creditors' rights and rules of law governing specific performance, injunctive relief and other equitable remedies. 2.3 No Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby by the Seller, on the Closing Date, will be in conflict with, or will constitute a default under, any contract, agreement or instrument to which the Seller is a party or by which the Seller or any of his properties are bound, or will violate any statute or law or any judgment, decree, order, regulation or rule of any court or governmental authority. 2.4 Consents and Approvals of Governmental Authorities. No consent, order, approval or authorization of, or declaration, filing or registration with, any governmental or 2. 3 regulatory authority is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby by the Seller. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYERS As an inducement to the Seller to enter into this Agreement, each Buyer makes the following representations and warranties: 3.1 Authority. The Buyer has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by, and constitutes the valid, binding and enforceable obligation of the Buyer, except as the same may be limited by bankruptcy, insolvency or similar laws relating to or affecting the enforcement of creditors' rights and rules of law governing specific performance, injunctive relief and other equitable remedies. 3.2 No Violation. Neither the execution, delivery or performance of this Agreement nor the consummation of the transactions contemplated hereby by the Buyer results or will result in any breach of any of the terms or provisions of, or constitute or will constitute a default under, the organizational documents of the Buyer or any contract, agreement or instrument to which the Buyer is a party or by which the Buyer or any of its properties is bound, or violates or will violate any applicable statute, law, rule, regulation or any judgment, decree, order, regulation or rule of any court or governmental authority. 3.3 Consents and Approvals of Governmental Authorities. No consent, order, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required in connection with the execution, delivery and performance of this Agreement by the Buyer or the consummation of the transactions contemplated hereby by the Buyer. ARTICLE IV MISCELLANEOUS PROVISIONS 4.1 Applicable Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. 4.2 Non-Assignment. This Agreement may not be assigned by any party. 4.3 Waiver and Amendment. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or 3. 4 condition or as a waiver of any other term, provision or condition of this Agreement. This Agreement may be amended only by a written agreement signed by the parties hereto. 4.4 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute a single original agreement. 4.5 Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes and replace any and all prior agreements and understandings, whether oral or written, among the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE BUYERS: FINPAC PARTNERS, a California limited partnership By: Riordan, Lewis & Haden, General Partner By: [SIG] ---------------------------------- Patrick C. Haden, General Partner ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: [SIG] ---------------------------------- THE FIREMARK GLOBAL INSURANCE FUND, L.P., a Delaware limited partnership By: [SIG] ---------------------------------- 4. 5 THE SELLER: [SIG] ------------------------------------- Robert C. Goodell For purposes of agreeing and consenting in her capacity as the spouse of Robert C. Goodell to this Agreement and the transactions contemplated hereby, and for purposes of further representing to the Buyers that none of the agreements, representations and warranties contained in this Agreement conflict with, and that the transactions contemplated hereby will not conflict with, either her separate or community property rights: [SIG] ------------------------------------- Suzanne M. Goodell 5. EX-10.31 36 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.31 INDEMNIFICATION AGREEMENT This Agreement is made as of the ____ day of ___________, by and between Financial Pacific Insurance Company, a California Corporation ("the Company"), and the undersigned Director of the Company (the "Indemnitee"), with reference to the following facts: The Indemnitee is currently serving as a Director of the Company and the Company wishes the Indemnitee to continue in such capacity. The Indemnitee is willing, under certain circumstances, to continue serving as a Director of the Company. The Indemnitee has indicated that he does not regard the indemnities available under the Company's By-Laws as adequate to protect him against the risks associated with his service to the Company and has noted that the Company does not provide directors' and officers' liability insurance for his benefit. In this connection the Company and the Indemnitee now agree they should enter into this Indemnification Agreement in order to provide greater protection to Indemnitee against such risks of service to the Company. Section 145 of the General Corporation Law of the State of Delaware, under which Law the Company is organized, empowers corporations to indemnify a person serving as a director, officer, employee or agent of the corporation and a person who serves at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, and said Section 145 and the By-Laws of the Company specify that 2 the indemnification set forth in said Section 145 and in the By-Laws, respectively, shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise. In order to induce the Indemnitee to continue to serve as a Director of the Company and in consideration of his continued service, the Company hereby agrees to indemnify the Indemnitee as follows: 1. Indemnity. The Company will indemnify the Indemnitee, his executors, administrators or assigns, for any Expenses (as defined below) which the Indemnitee is or becomes legally obligated to pay in connection with any Proceeding. As used in this Agreement the term "Proceeding" shall include any threatened, pending or completed claim, action, suit or proceeding, whether brought by or in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which the Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any actual or alleged error or misstatement or misleading statement made or suffered by the Indemnitee, by reason of any action taken by him or of any inaction on his part while acting as such director or officer, or by reason of the fact that he was serving at the request of the Company as a director, trustee, officer, employee or agent of 2 3 another corporation, partnership, joint venture, trust or other enterprise; provided, that in each such case Indemnitee acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, in the case of a criminal proceeding, in addition had no reasonable cause to believe that his conduct was unlawful. As used in this Agreement, the term "other enterprise" shall include (without limitation) employee benefit plans and administrative committees thereof, and the term "fines" shall include (without limitations) any excise tax assessed with respect to any employee benefit plan. 2. Expenses. As used in this Agreement, the term "Expenses" shall include, without limitation, damages, judgments, fines, penalties, settlements and costs, attorneys' fees and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. 3. Enforcement. If a claim or request under this Agreement is not paid by the Company, or on its behalf, within thirty days after a written claim or request has been received by the Company, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such suit. The Company shall have the right to recoup 3 4 from the Indemnitee the amount of any item or items of Expenses theretofore paid by the Company pursuant to this Agreement, to the extent such Expenses are not reasonable in nature or amounts; provided, however, that the Company shall have the burden of proving such Expenses to be unreasonable. The burden of proving that the Indemnitee is not entitled to indemnification for any other reason shall be upon the Company. 4. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 5. Exclusions. The Company shall not be liable under this Agreement to pay any Expenses in connection with any claim made against the Indemnitee: (a) to the extent that payment is actually made to the Indemnitee under a valid, enforceable and collectible insurance policy; (b) to the extent that the Indemnitee is indemnified and actually paid otherwise than pursuant to this Agreement; (c) in connection with a judicial action by or in the right of the Company, in respect of any claim, issue or matter as to which the Indemnitee 4 5 shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that any court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper; (d) if it is proved by final judgment in a court of law or other final adjudication to have been based upon or attributable to the Indemnitee's in fact having gained any personal profit or advantage to which he was not legally entitled; (e) for a disgorgement of profits made from the purchase and sale by the Indemnitee of securities pursuant to Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless a judgment or other final adjudication thereof adverse to the 5 6 Indemnitee shall establish that he committed (i) acts of active and deliberate dishonesty, (ii) with actual dishonest purpose and intent, (iii) which acts were material to the cause of action so adjudicated; or (g) for any judgment, fine or penalty which the Company is prohibited by applicable law from paying as indemnity or for any other reason. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against any and all Expenses incurred in connection therewith. 7. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses to which the Indemnitee is entitled. 8. Advance of Expenses. Expenses incurred by the Indemnitee in connection with any Proceeding, except the amount of any settlement, shall be paid by the Company in advance upon request of the Indemnitee that the Company pay such Expenses. The Indemnitee hereby 6 7 undertakes to repay to the Company the amount of any Expenses theretofore paid by the Company to the extent that it is ultimately determined that such Expenses were not reasonable or that the Indemnitee is not entitled to indemnification. 9. Approval of Expenses. No Expenses for which indemnity shall be sought under this Agreement, other than those in respect of judgments and verdicts actually rendered, shall be incurred without the prior consent of the Company, which consent shall not be unreasonably withheld. 10. Notice of Claim. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement; provided, however, that any failure to give prompt notice shall not affect or limit the Company's obligations hereunder unless the Company has actually been prejudiced by such failure, in which event the Company shall be relieved of its obligations hereunder solely to the extent of such prejudice. Notice to the Company shall be given at its principal office and shall be directed to the Corporate Secretary (or such other address as the Company shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In 7 8 addition, the Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within the Indemnitee's power. 11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one instrument. 12. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Certificate of Incorporation or By-Laws of the Company and amendments thereto or under law. 13. Governing Law. This Agreement shall be governed by and construed in accordance with Delaware law. 14. Saving Clause. Wherever there is conflict between any provision of this Agreement and any applicable present or future statute, law or regulation contrary to which the Company and the Indemnitee have no legal right to contract, the latter shall prevail, but in such event the affected provisions of this Agreement shall be curtailed and restricted only to the extent necessary to bring them within applicable legal requirements. 15. Coverage. The provisions of this Agreement shall apply with respect to the Indemnitee's service as a Director of the Company prior to the date of this Agreement and with respect to all periods of such service after the date of this Agreement, even though 8 9 the Indemnitee may have ceased to be a Director of the Company. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. Financial Pacific Insurance Company By [SIG] ------------------------------------- /s/ ----------------------------------------- [Director] 10 EX-11.1 37 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 FINANCIAL PACIFIC INSURANCE GROUP, INC. COMPUTATION OF NET INCOME PER SHARE FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
Year Ended December 31, ------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------------------------------------------------------------------------- Weighted average shares outstanding - (fully diluted): # of shares outstanding @ EOY 5,271.571 6,046.571 7,551.971 7,576.971 7,606.971 Stock split adjustment (394.375 to 1) 394.375 394.375 394.375 394.375 394.375 ------------------------------------------------------------------------------- Net adjusted shares 2,078,976.376 2,384,617.083 2,978,309.369 2,988,168.747 3,000,000.000 =============================================================================== Weighted average # of shares outstanding 2,078,976.376 2,231,796.730 2,681,463.226 2,983,239.058 2,994,084.374 Rounded 2,079 2,232 2,681 2,983 2,994 Earnings per share: Net Income $ 1,209,783 $ 777,080 $ 2,149,504 $ 2,003,286 $ 2,342,003 Weighted average # of shares outstanding 2,078,976.376 2,231,796.730 2,681,463.226 2,983,239.058 2,994,084.374 ------------------------------------------------------------------------------- Earnings per share $ 0.58 $ 0.35 $ 0.80 $ 0.67 $ 0.78 ===============================================================================
2 FINANCIAL PACIFIC INSURANCE GROUP, INC. COMPUTATION OF NET INCOME PER SHARE FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
Year Ended December 31, --------------------------------------------------------------------- 1993 1994 1995 1996 1997 --------------------------------------------------------------------- Supporting Schedule of Number of Shares Outstanding - Fully Diluted: Preferred Stock 3,650.001 4,400.001 4,400.001 4,400.001 4,400.001 Common Stock 1,232.284 1,232.284 1,232.284 1,232.284 1,232.284 Original Purchase - Common Stock Warrants 389.286 389.286 389.286 389.286 389.286 Senior Notes - Commons Stock Warrants 1,505.400 1,505.400 1,505.400 Vested management options 25.000 25.000 50.000 80.000 --------------------------------------------------------------------- 5,271.571 6,046.571 7,551.971 7,576.971 7,606.971 =====================================================================
EX-21.1 38 SUBSIDIARIES OF THE REGISTRANT 1 SUBSIDIARIES
PERCENTAGE OWNED BY STATE OF NAME COMPANY INCORPORATION - ---- ---------- ------------- Financial Pacific Insurance Agency 100% California Financial Pacific Insurance Company 100% California Financial Pacific Technology, Inc. 100% California
EX-27.1 39 FINANCIAL DATA SCHEDULE
7 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-01-1996 30,028 24,764 29,977 24,046 29,977 24,046 0 0 0 0 0 0 29,977 24,046 632 497 638 0 5,357 3,778 65,893 54,684 19,592 13,944 21,968 18,979 0 0 0 0 4,985 5,479 0 0 5 5 486 486 0 0 65,893 54,684 22,854 14,987 1,720 1,449 (46) 52 801 547 12,748 9,750 7,440 4,785 932 (1,293) 3,579 3,040 1,237 1,037 2,342 2,003 0 0 0 0 0 0 2,342 2,003 4.82 4.12 0.79 0.69 9,937 7,664 10,991 7,395 1,757 2,356 3,371 2,414 5,908 5,063 13,407 9,937 0 0
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