-----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, LnEvU2l0ctpgz2froXcwusd+9JF7p9MzWNw6/h0pHg0MguwLEuzWZb5v653/+TvH GT9kqDnRxWODNiq3vpJKIA== 0000950137-98-001381.txt : 19980401 0000950137-98-001381.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950137-98-001381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERE GROUP INC CENTRAL INDEX KEY: 0000922887 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 431675969 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26062 FILM NUMBER: 98583543 BUSINESS ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178620650 MAIL ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year Ended December 31, 1997 Commission File Number 0-24800 THE TENERE GROUP, INC. (Exact name of Registrant as specified in its charter) MISSOURI 43-1675969 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1903 E. Battlefield, Springfield, MO 65804 (Address of principal executive offices) (Zip Code) 417-889-1010 (Registrant's Telephone Number Including Area Code) Securities Registered Pursuant To Section 12(b) of the Act: None Securities Registered Pursuant To Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value as of March 27, 1998 of the voting stock held by non-affiliates of the Registrant cannot be determined since there is no market at this time for the stock. As of March 27, 1998 there were 1,999,774 shares outstanding of the Registrant's common stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE As provided herein, portions of the following documents are incorporated herein by reference. Document Part of 10-K -------- ------------ 1997 Annual Report to Stockholders II Proxy Statement for the 1998 Annual Meeting of Stockholders III 1 2 THE TENERE GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1. Business....................................................................................................... 3 2. Properties..................................................................................................... 11 3. Legal Proceedings.............................................................................................. 11 4. Submission of Matters to a Vote of Security Holders............................................................ 11 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................................................................................................ 12 6. Selected Financial Data........................................................................................ 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........................................................................................... 12 8. Financial Statements and Supplementary Data.................................................................... 12 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......................................................................................... 13 PART III 10. Directors and Executive Officers............................................................................... 13 11. Executive Compensation......................................................................................... 13 12. Security Ownership of Certain Beneficial Owners and Management................................................. 13 13. Certain Relationships and Related Transactions................................................................. 14 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................. 14
2 3 PART I ITEM 1. BUSINESS HISTORY Risk Control Associates, Inc., an assessable mutual property and casualty insurance company, was organized in 1976 under Chapter 383 of the Revised Missouri Statutes (RSMo) to provide professional liability coverage to physicians and dentists practicing in the State of Missouri. In 1991, the Company reorganized under Section 379.010 of the RSMo and became a non-assessable mutual property and casualty insurance company and its name was changed to RCA Mutual Insurance Company (RCA). In 1995, the Company converted from a mutual to a stock property and casualty insurance company and its name was changed to Intermed Insurance Co. (Intermed). Effective with the demutualization, Intermed became a wholly-owned subsidiary of The Tenere Group, Inc. (Tenere), a Missouri holding company formed during the demutualization process, and the policyholders of RCA became the stockholders of Tenere. Tenere has two principal operating subsidiaries, Intermed, which writes medical and dental malpractice insurance, and Interlex Insurance Company (Interlex) which writes legal malpractice insurance. Interlex was formed in 1994 when RCA merged two of its subsidiaries, Insurance Risks, Ltd., a Cayman Island corporation , into Springfield Casualty Company, a Missouri corporation. Tenere operates its businesses through a wholly-owned management company, Insurance Services, Inc. (ISI), pursuant to a management contract between Intermed, Interlex and ISI. Neither Tenere, Intermed nor Interlex have employees and all persons conducting the businesses of these companies are employees of ISI. The management contract with ISI is, in effect, a cost reimbursement so that ISI makes neither a profit nor a loss. PRODUCTS Intermed currently writes medical and dental malpractice insurance in the States of Missouri, Kansas and, through two purchasing groups, Texas. Since the formation in 1976 of a predecessor company, medical and dental malpractice insurance has been its only line of business. Insurance is written on two policy forms, occurrence and claims-made. Prior to September 1, 1995, Intermed also wrote business on a claims-paid policy form. Estimates of losses and loss adjustment expenses on occurrence coverages are charged to income as claims are incurred. Estimates of losses and loss adjustment expenses on claims-made coverages are charged to income as claims are reported. Claims-paid coverages insured against claims which were reported and paid during the period the policy was in effect. Intermed's obligation to defend and pay claims ended upon expiration of a claims-paid policy. Claims-paid losses were incurred at the time of payment so no reserves were required on open claims. Intermed, however, was contractually liable for claims that had been reported during the claims-paid policy period if the Company chose not to renew a claims-paid policy. Intermed ceased writing claims-paid policies effective September 1, 1995. As these policies expired over the twelve-month period ending August 31, 1996, claims-paid policyholders were given the opportunity to convert to a claims-made policy. Reserves for all reported claims on claims-paid policies which were non-renewed during the period September 1, 1995 through August 31, 1996 totaled $995,000 at December 31, 1997, net of reinsurance. At December 31, 1997, Intermed had 1,476 insureds: 501 occurrence and 975 claims-made. This was an increase of 248 from the prior year end. Interlex writes legal malpractice insurance on a claims-made policy form. At December 31, 1997, the Company had 693 insureds, an increase of 265 over the prior year end. 3 4 MARKETING Intermed sells its products through salaried employees and independent agents. For the calendar year 1997, salaried employees wrote 63% and agents wrote 37% of total premiums written. Intermed will continue to market its products through salaried employees and agents, with primary emphasis on direct sales. During 1996, Intermed formed a purchasing group, Intermedical of Texas, Inc., and commenced operations offering medical malpractice insurance to physicians in the State of Texas. Employees of ISI staff the purchasing group from an office in Austin, Texas. During the first quarter of 1997, a second purchasing group, Dental Defense Specialists, Inc., was organized for the purpose of marketing malpractice insurance to dentists in Texas. Interlex also markets legal malpractice insurance through salaried employees and independent agents. In calendar year 1997, salaried employees produced 87% of total premiums written and agents 13%. Interlex plans to continue distributing its products through salaried employees and agents, with primary emphasis on direct sales. A purchasing group for lawyers, Lawyers' Liability Association, Inc., has been organized but has not commenced operations. COMPETITION The insurance business is highly competitive. In both Missouri and Kansas, Intermed and Interlex compete with both regional and national companies. In 1996, the last year for which statistics are available from the Missouri Department of Insurance, there were 54 companies writing medical malpractice insurance in the state. The top five writers had 60.54% of the market. The largest market share was 20.07%. Intermed, the seventh largest writer in 1996 in the state, had a market share of 6.08%. Ten companies wrote legal malpractice insurance in the State of Missouri in 1996 according to the Missouri Department of Insurance. One company, sponsored by the Missouri Bar Association, had a market share of 71.75%; Interlex, which commenced operations in October 1994, had a market share of 4.26% and was the fifth largest writer. A number of hospitals in Missouri have begun purchasing the medical practices of fee-for-service physicians and hiring the physicians as employees of the hospital or a corporate entity affiliated with the hospital. A number of such physicians formerly purchased their own professional liability insurance through smaller insurance companies such as Intermed . As a result of the consolidation, many of the hospitals purchasing the practices of physicians have self-insured or seek professional liability insurance from professional liability carriers with capital and surplus greater than that of Intermed and at premiums lower than those currently offered by Intermed. The insurance industry is impacted by legislative changes, judicial interpretations, market competition, inflation and other statutory requirements. The insurance industry is subject to cyclical patterns varying between "hard" and "soft" markets. The usual duration of the cycle from one "hard" market through a "soft" market to another "hard" market is approximately six to seven years. During the "hard" part of the cycle, insurance is more difficult to obtain and the price of the product is higher. It is possible to characterize this segment as a "seller's" market. The "soft" part of the cycle is characterized with ready availability of insurance products and commensurately lower prices for the product. This segment could be characterized as a "buyer's" market. During the soft portion of the cycle there is a downward pressure on pricing, thereby subjecting Intermed to increased pricing pressures which may have an adverse impact on its business and operations. At the present time, the insurance industry has generally been in the 4 5 soft portion of the cycle for approximately ten years. While the industry has been in the soft portion of the cycle for an unusually long period, no assurance can be given that the industry will enter a hard market in the near future. Intermed currently has excess capacity and could double its current premium volume while maintaining required premium to surplus ratios. UNDERWRITING Underwriting for both Intermed and Interlex is performed by an experienced staff at the Company's home office in Springfield, Missouri. This is augmented by Underwriting Committees composed of physicians and dentists for Intermed and lawyers for Interlex. Because these Committees are geographically broad-based, there is, in most instances, personal knowledge of applicants and renewals. This structure has enabled the Intermed and Interlex to maintain uniformly high underwriting standards. REGULATION The activities of Intermed and Interlex are regulated by the Missouri Department of Insurance. The companies are subject to examination by the Department on a periodic basis. Such examinations pertain to many aspects of the companies' operations and financial condition, including loss reserves, investments, licensing and rates. A financial examination and a limited market conduct examination were conducted by the Missouri Department of Insurance during 1996. There were no material adverse findings or material recommendations for changes in Intermed's or Interlex's business operations. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves are the amounts reserved by Intermed and Interlex to provide funds for payment of policyholders' claims in the future. An insurance company must accumulate substantial loss reserves because policies provide for payments of substantial amounts in the future for claims that have occurred in prior contract periods. These loss reserves are established as balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred, including events that have not yet been reported. Loss reserves associated with professional liability coverage tend to be relatively higher than other types of property and casualty insurance for primarily two reasons: the "tail" and the "trend." The time between the occurrence and settlement of a claim is the "tail." Property coverage is generally a "short tail" line of business where loss reserves represent only those claims in the adjustment or reporting stages of the claim and which will, for the most part, be settled within the next year. Liability coverage is generally a "long tail" line and the reserves represent claims that can take up to five to seven years to settle due to the fact that discovery of the injury can take several years and because of the complexity of the issues inherent in the claims. This means that while property loss reserves may represent as little as a few months to a year of losses, professional liability loss reserves may represent five to seven or more years of losses at any one time. Also, professional liability loss reserves, due to the length of time before settlement, are more sensitive than property lines to changes in external factors such as increased medical costs, increased jury awards and changes in the litigation environment. These external factors are used to calculate the "trend," which is the yearly change in the overall costs of coverage. The trend is factored into the calculation of the loss reserves and has generally contributed to higher reserves for professional liability coverages. 5 6 Intermed employs an independent consulting actuary to make recommendations in the establishment of loss reserves and to render an opinion regarding the adequacy of Intermed's statutory loss reserves. The quantification of reserves is complex and subjective as a result of the need to project future contingent events and other factors previously mentioned which are related to medical professional liability claims. In determining reserve levels, the actuaries rely primarily on historical loss experience, adjusted for changing circumstances as deemed appropriate. This reliance is based on the assumption that historical loss experience provides a good indication of future loss experience despite uncertainties in loss cost trends and delays in reporting and settling claims. These uncertainties are increased by changes in normal inflation, changing propensities of individuals to file claims and new causes of action. Despite these uncertainties in the determination of reserve levels, management believes that the methods used by Intermed and Interlex in establishing reserves are reasonable and appropriate. As additional information becomes available and is reviewed, estimates reflected in earlier reserves may be revised upward or downward. Any such increases could have an adverse effect on results for the period in which adjustments are made. The uncertainties inherent in estimating ultimate losses on the basis of past experience have grown significantly in recent years as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. Reserves for losses and loss adjustment expenses are estimated based on Tenere's consolidated historical loss and loss adjustment expense experience supplemented by insurance industry loss data. The reserves are reported on a present value basis discounted at the rate of 2% in 1997, 3% in 1996, 4% in 1995 and 5% in 1994. At the direction of the Missouri Department of Insurance, the discount will be eliminated ratably over the five-year period ending December 31, 1998. The table that follows presents the development of net balance sheet liabilities of Tenere and subsidiaries for reserves for losses and loss adjustment expenses for 1987 through 1997: - Net Liability. The first row of data shows the estimated net liability for reserves for losses and loss adjustment expenses at December 31 for each year from 1987 to 1997. The liability includes both case and IBNR reserves as of each year-end date, net of anticipated recoveries from reinsurers. The rows immediately following the first row of data show cumulative paid data at December 31, as of one year, two years, etc., through up to 10 years of subsequent payments. - Net Liability Re-estimated. The middle rows of data show the re-estimated amount for previously reported net liability based on experience as of the end of each subsequent calendar year's results. This estimate is changed as more information becomes known about the underlying claims for individual years. The cumulative redundancy (deficiency) shown in the table is the aggregate net change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective columns. The amount in the line titled "Redundancy (Deficiency) at December 31, 1997," represents for each calendar year (the "Base Year") the aggregate change in (i) the Company's original estimate of net liability for reserves for losses and loss adjustment expenses for all years prior to and including the Base Year compared to (ii) the Company's re-estimate as of December 31, 1997, of net liability for reserves for losses and loss adjustment expenses for all years prior to and including the Base Year. A redundancy means that the original estimate was greater than the re-estimate and a deficiency means that the original estimate was less than the re-estimate. By way of example, the deficiency for the year 1990, calculated as of December 31, 1997, represents a deficiency in the Company's original estimate of unpaid claims and claim expenses for 1990 and prior years. - The last seven lines of data present the development of reserves on a "gross of reinsurance" basis, reconciled to the "net of reinsurance" basis shown in the immediately preceding tables. 6 7 CHANGES IN HISTORICAL RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES FOR THE LAST TEN YEARS - GAAP BASIS AS OF DECEMBER 31, 1997
Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net liability for losses and loss adjustment expenses $21,310 27,120 29,389 21,737 17,070 25,021 25,304 25,695 25,461 25,788 21,080 Paid (cumulative) as of: One year later 1,870 2,893 6,787 7,771 6,598 5,740 4,761 4,720 8,399 8,773 Two years later 4,646 9,546 14,200 14,060 12,093 9,830 9,088 11,342 14,263 Three years later 7,082 16,636 19,851 18,030 15,096 13,476 14,375 14,924 Four years later 11,496 21,949 23,262 20,433 18,160 18,441 17,003 Five years later 15,097 24,731 24,523 21,863 21,922 20,388 Six years later 16,844 25,251 25,250 23,926 23,228 Seven years later 17,303 25,738 27,258 24,648 Eight years later 17,704 26,542 27,972 Nine years later 18,450 27,103 Ten years later 19,001 Net liability re-estimated as of: One year later 17,612 26,765 28,186 22,351 26,877 26,277 25,850 23,759 26,876 24,627 Two years later 19,467 26,217 26,147 28,462 28,436 27,023 23,824 23,550 25,236 Three years later 18,904 24,660 28,835 28,711 28,861 25,280 23,253 22,149 Four years later 17,824 26,899 30,947 29,360 27,309 24,303 22,060 Five years later 18,565 30,275 31,136 28,567 26,094 24,070 Six years later 20,485 30,131 30,822 26,883 25,790 Seven years later 20,418 29,201 29,592 26,292 Eight years later 19,949 28,101 29,317 Nine years later 19,335 28,119 Ten years later 19,647 Redundancy (Deficiency) at December 31, 1997 1,663 (999) 72 (4,555) (8,720) 951 3,244 3,546 225 1,161 Gross liability-end of year 21,310 27,120 29,389 21,737 17,070 25,021 25,304 26,280 26,623 32,887 31,030 Reinsurance recoverables - - - - - - - 585 1,162 7,099 9,950 Net liability-end of year 21,310 27,120 29,389 21,737 17,070 25,021 25,304 25,695 25,461 25,788 21,080 Gross re-estimated liability-latest 19,647 28,119 29,317 26,301 25,791 24,071 22,132 22,753 30,578 31,944 Re-estimated reinsurance recoverables - - - 9 1 1 72 604 5,342 7,317 Net re-estimated liability-latest 19,647 28,119 29,317 26,292 25,790 24,070 22,060 22,149 25,236 24,627 Gross redundancy (deficiency) 1,663 (999) 72 (4,564) (8,721) 950 3,172 3,527 (3,955) 943
7 8 A summary of the reserves for losses and loss adjustment expenses follows:
December 31, December 31, 1997 1996 -------------- -------------- Undiscounted reserves for losses and loss adjustment expenses $ 31,990,412 35,051,777 Less discount (see note 1) (960,000) (2,164,370) -------------- -------------- Discounted reserves for losses and loss adjustment expenses $ 31,030,412 32,887,407 ============== ==============
Following is the activity in the reserves for losses and loss adjustment expenses:
1997 1996 1995 -------------- -------------- -------------- Balance at January 1 $ 32,887,407 26,623,138 26,279,977 Less reinsurance recoverable on reserves for losses and loss adjustment expenses (7,099,463 (1,162,495) (584,913) -------------- -------------- -------------- 25,787,944 25,460,643 25,695,064 -------------- -------------- -------------- Incurred related to: Current year 5,646,863 9,812,694 9,612,075 Prior Year (1,168,439) 1,413,767 (1,935,587) -------------- ------------- -------------- Total incurred 4,478,424 11,226,461 7,676,488 -------------- -------------- -------------- Paid related to: Current year 413,191 2,499,788 3,190,397 Prior Year 8,773,277 8,399,372 4,720,512 -------------- -------------- -------------- Total paid 9,186,468 10,899,160 7,910,909 -------------- -------------- -------------- Net balance at December 31 21,079,900 25,787,944 25,460,643 Plus reinsurance recoverable on reserves for losses and loss adjustment expenses 9,950,512 7,099,463 1,162,495 -------------- -------------- -------------- Balance at December 31 $ 31,030,412 32,887,407 26,623,138 ============== ============== ==============
The reserves for losses and loss adjustment expenses are estimated based on development information available at each reporting date. As a result of the nature of the risks underwritten, claims development may occur over an extended period of time. The changes in the incurred amounts disclosed above related to prior years are the result of utilizing improved claim development information as that information becomes available. 8 9 Tenere's claim philosophy is to defend fully all claims in which an evaluation reveals little or no negligence. For those claims in which liability exists, Tenere moves promptly to settle the claim early in order to minimize indemnity and loss adjustment expenses. The Claim Department is staffed with experienced claims specialists and is supervised by the Vice President-Claims/General Counsel of Tenere. The case load per claim specialist is approximately 200 cases. This allows for intensive scrutiny of each claim, close tracking of the progress of each claim and containment of loss adjustment expenses through constant monitoring. In 1997, 83% of the claims closed by Intermed were without the payment of indemnity and 17% were closed with payments averaging $177,500. Average allocated loss adjustment expenses for claims closed in 1997 was $11,900. In 1996, 80% of claims closed by Intermed were without payment of indemnity and 20% were closed with payments averaging $165,000. Average allocated loss adjustment expenses for claims closed in 1996 was approximately $11,000. Interlex completed its third full year of operation in 1997 and claims statistics for that company are not comparable due to its limited history. REINSURANCE Intermed had three reinsurance treaties in place during 1997: (1) Effective October 1, 1996, Intermed renewed a multi-year excess of loss reinsurance agreement through September 30, 1999. This agreement provides excess of loss coverage on Intermed's claims-paid, occurrence and claims-made policies up to $1,600,000 in excess of $400,000 on each claim, with an aggregate recoverable of 300% of the ceded premiums earned. The maximum premium ceded under the contract, assuming the contract remains in effect for the full three-year period, is 20% of direct premiums earned. In addition to the above, the treaty provides coverage for the difference between $2,000,000 each loss and/or $4,000,000 in the aggregate and $1,000,000 and/or $3,000,000 in the aggregate each policy where applicable, with an aggregate recoverable of $5,000,000. In 1997, Intermed ceded earned premiums of approximately $3,294,000 and losses and allocated loss adjustment expenses of approximately $2,682,000. This type of reinsurance provides protection during periods when losses are both frequent and severe and is not intended to cover all losses. (2) A "catastrophic awards made" excess of loss reinsurance with Lloyd's Underwriters of London with limits of $5,000,000 excess of $250,000 over original policy limits for claims made after October 1, 1993 and excess of $1,000,000 for claims made prior to that date, net of all other reinsurance. The period covered by the treaty is through September 30, 1998 at an annual premium of 1.6% of gross net premiums written. In 1997, ceded earned premiums were approximately $146,000 and losses were $-0-. This type of insurance covers the reassured for awards made in excess of policyholder's original policy limit for which the policyholder is able to hold the reassured responsible. It also covers claims related to extra-contractual obligations. (3) Effective January 1, 1996, Intermed entered into an Accident Year Excess of Loss Reinsurance Agreement with American Re-Insurance Company. Under Section A of this Agreement, the reinsurer is responsible for 100% of the Company's aggregate ultimate net loss from claims-paid coverages in 1996 in excess of $4,176,000. The reinsurers' maximum liability is limited to $4,800,000. In 1997, ceded earned premiums were $-0-. At December 31, 1997, Intermed had ceded cumulative loss and allocated loss adjustment expenses of $3,707,600. 9 10 Under Section B of this Agreement, the reinsurer also agreed to indemnify Intermed for the aggregate ultimate net loss on occurrence and claims-made coverages in excess of Intermed's accident year loss ratio for the four years commencing January 1, 1996 and ending December 31, 1999. The accident year loss ratio for 1996 was 75% and 85% for 1997. For subsequent years, the loss ratio is a weighted average loss ratio for the three accident years immediately preceding the accident year for which the computation is being made plus 2%-5% as mutually agreed to by the reinsurer and the Company. Intermed ceded losses of $2,000,000 and $310,266 in 1996 and 1997, respectively, under this section of the agreement. In 1997, Intermed ceded earned premiums of $800,000. Interlex had three reinsurance treaties in place during 1997: (1) A primary excess of loss reinsurance treaty with Lloyd's Underwriters of London. The treaty covers the period October 1, 1997 through September 30, 1998 with limits of $700,000 excess of $300,000 subject to a maximum recoverable of $2,100,000. However, if the ceded premiums written exceed $500,000, the maximum recoverable shall increase to $3,500,000. The premium is 7.5% of gross net premiums written for policy limits of $300,000 or less, 16.5% of gross net premiums written for policies with limits of $500,000 and 36% of gross net written premiums for policies with limits of $1,000,000. In 1997, Interlex ceded earned premiums of approximately $261,000 and losses of $-0-. (2) A prior agreement excess of loss reinsurance treaty with Lloyd's Underwriters of London covering the period October 1, 1997 through September 30, 1998. Limits of the treaty are $5,000,000 with a minimum underlying of $1,000,000 for each insured and $3,000,000 in the aggregate each policy where applicable. Ceded premium is equal to 100% of the policy premium less a 10% ceding commission. In 1997, Interlex ceded earned premiums of approximately $128,000. (3) Effective October 1, 1996, the "catastrophic awards made" treaty with Lloyd's Underwriters of London was expanded to include Interlex Insurance Company under the same terms outlined above. Management has confidence in the financial strength of the Lloyd's syndicates and American Re-Insurance Company with which it reinsures, and believes that amounts shown as due from reinsurers are fully recoverable. INVESTMENTS Both Intermed and Interlex employ Boatmen's Capital Management, Inc. (Boatmen's), headquartered in St. Louis, Missouri, to manage their investment portfolios. Boatmen's operates under general investment guidelines which are adopted by the Boards of Directors of Intermed and Interlex and reviewed periodically to assure that they are consistent with the companies' philosophy and income requirements. Under the companies' current guidelines, investments will be in U.S. Treasuries, U.S. Agencies, high grade (Moody's and Standard & Poor's rated A or better) corporate debt, and municipal tax-exempt debt rated Aa or better by Moody's and Standard & Poor's. No security purchased shall have a final maturity longer than ten years. Additionally, the following guidelines are followed to ensure diversification of the portfolio: - direct or guaranteed obligations of the U.S. Government and its agencies may be held without limit. - corporate debt shall not exceed 10% of the portfolio. No more than 2% will be invested in any one issuer. 10 11 - municipal (tax-exempt) debt shall not exceed 15% of the portfolio. No more than 2% will be invested in any one issuer. - portfolio investments are limited to U.S. dollar denominated securities. At December 31, 1997, investments totaled $47,386,000. During 1997, $16,500,000 was reinvested at a yield of approximately 7%. Tenere also disposed of $4,186,000 in low-yielding bonds without realizing a significant loss. Proceeds from these sales, as well as from other sales and maturities, were invested short-term pending an anticipated increase in interest rates in early 1998. The fair value of bonds held available-for-sale and carried at market at December 31, 1997 was $40,931,000 and there was a net unrealized gain of $1,068,000. At prior year end, the fair value of bonds held available for sale was $252,000 above amortized cost. TRENDS Tenere's most significant costs are losses and loss adjustment expenses and the impacts of regulatory changes, increases in medical costs and jury awards and changes in the litigation environment as discussed above. EFFECT OF INFLATION Inflation has an effect on Tenere's general and administration expenses through higher wages and the costs of goods and services. Inflation also impacts loss adjustment expenses as attorneys and other consultants pass on their increased costs through increased fees. EMPLOYEES Neither Tenere, Intermed nor Interlex had employees during 1997. Insurance Services had 23 employees at December 31, 1997 and these employees provided all services required by Tenere and its two insurance subsidiaries under management contracts approved by each company's Board of Directors. ITEM 2. PROPERTIES Neither Tenere nor any of its subsidiaries owned any real estate at December 31, 1997. ISI, a wholly-owned subsidiary of Intermed, leases the Company's home office for approximately $90,000 per year to June 30, 2000 and approximately $95,000 per year thereafter through June 30, 2002. The lease commenced on July 1, 1995 for a period of seven years with an option to renew for an additional three years. ISI also leases office space in Austin, Texas at a current rate of $28,000 which will increase to $29,000 on May 7, 1998. ITEM 3. LEGAL PROCEEDINGS Neither Tenere nor any of its subsidiaries are subject to any material pending legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Tenere did not submit any matters to a vote of its security holders during the quarter ended December 31, 1997. 11 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Tenere Common Stock is not listed on any securities exchange or quoted on any automated quotation system such as the National Association of Securities Dealers Automated Quotations System ("NASDAQ"). There has been no independent market for Tenere Common Stock and no assurance can be given that an independent market will develop. As of March 16, 1998, there were approximately 1,132 holders of record of shares of Tenere Common Stock. Tenere has not paid a dividend since inception. However, the Company's Board of Directors will, from time to time, consider the issue based upon Tenere's then current financial condition, results of operations and capital requirements. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data is included on Page 26 of Tenere's 1997 Annual Report to Stockholders and is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is included on Pages 4 through 7 of Tenere's 1997 Annual Report to Stockholders and is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of Tenere are included on the following pages of Tenere's 1997 Annual Report to Stockholders and are incorporated by reference herein. Annual Report Page(s) ------ Independent Auditors' Report 8 Consolidated Balance Sheets at December 31, 1997 and 1996 9 Consolidated Statements of Operations Years ended December 31, 1997, 1996 and 1995 10 Consolidated Statements of Stockholders' Equity/Policyholders' Surplus Years ended December 31, 1997, 1996 and 1995 11 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 12 Notes to Consolidated Financial Statements 13 Statement of Management's Responsibility 25 12 13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information regarding Directors set forth under the caption "Election of Directors" of the Registrant's Proxy Statement for its 1998 annual meeting of stockholders is incorporated herein by reference. The other executive officers of Tenere, their ages and principal offices held in Tenere, Intermed, Interlex and ISI are set forth below: ANDREW K. BENNETT, age 46, serves as Vice President - Claims and General Counsel of Tenere, Intermed, Interlex and ISI. He also serves as a Director of ISI. Mr. Bennett joined Tenere in June, 1994 as Corporate Counsel and was elected to his current positions in May 1995. Prior to joining Tenere, Mr. Bennett practiced law in Springfield, Missouri for 17 years. He is a member of the Missouri Bar. ANDREW C. FISCHER, age 47, serves as Vice President - Underwriting and Policy Services of Tenere, Intermed, Interlex and ISI. He also serves as a Director and Secretary of ISI. Mr. Fischer joined Tenere in 1987 as Chief Operating Officer and was elected to his current positions in May 1995. CLIFTON R. STEPP, age 35, serves as Vice President - Marketing of Tenere, Intermed, Interlex and ISI. Mr. Stepp joined Tenere in 1990 as Marketing Director and was elected to his current positions in May 1995. JOSEPH D. WILLIAMS, CPA, age 61, serves as Vice President - Finance and Chief Financial Officer of Tenere, Intermed, Interlex and ISI. He also serves as Assistant Treasurer of Tenere, Intermed and ISI and as Treasurer of Interlex. Mr. Williams joined Tenere in October 1994 as Chief Financial Officer and was elected to his current positions in May 1995. Prior to joining Tenere, Mr. Williams served as Senior Vice President and Controller of ITT Lyndon Insurance Group from 1987 to 1993 and as Senior Vice President and Deputy Controller of ITT Diversified Financial Corporation from 1990 to 1991. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is included in Tenere's Proxy Statement for the 1998 Annual Meeting of Stockholders under the caption "Compensation of Executive Officers" and is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is included in Tenere's Proxy Statement for the 1998 Annual Meeting of Stockholders under the captions "Voting Securities and Principal Holders Thereof" and "Security Ownership by Management," which is incorporated herein by reference. 13 14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption, "Certain Transactions" of the Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES (1) The financial statements incorporated by reference herein are listed in PART II - Item 8 hereof. (2) The financial statement schedules and independent auditors' report thereon included herein are listed below: Form 10-K Page No. -------- Independent Auditors' Report on Financial Statement Schedules 16 Schedule II Condensed Financial Information of Registrant 17 Schedule III Supplemental Information Concerning Property- Casualty Insurance Operations 21 Schedules other than listed above are omitted because they are either not required or not applicable or because the information is presented in the consolidated financial statements or notes thereto. (B) EXHIBITS See exhibit index (C) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by Tenere during the three months ended December 31, 1997. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. THE TENERE GROUP, INC. By: /s/ Raymond A. Christy --------------------------------------- Date: March 18, 1998 Raymond A. Christy, M.D. -------------- President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated: NAME TITLE DATE ---- ----- ---- /s/ Thomas E. Ashley ------------------------- Thomas E. Ashley, M.D. Director and Vice President March 23, 1998 -------------- /s/ Gary O. Baker ------------------------- Gary O. Baker, D.D.S. Director March 18, 1998 -------------- /s/ Albert J. Bonebrake ------------------------- Albert J. Bonebrake, M.D. Director March 20, 1998 -------------- /s/ Raymond A. Christy ------------------------- Raymond A. Christy, M.D. Director, President and Chief Executive Officer March 18, 1998 ------------------ /s/ Harry O. Cole ------------------------- Harry O. Cole, M.D. Chairman of the Board of Directors March 19, 1998 -------------- /s/ C. Richard Gulick ------------------------- C. Richard Gulick, M.D. Director March 19, 1998 -------------- /s/ Michael D. Hoeman ------------------------- Michael D. Hoeman, M.D. Director, Secretary and Treasurer March 20, 1998 -------------- /s/ Christopher H. Jung ------------------------- Christopher H. Jung, M.D. Director March 19, 1998 -------------- /s/ Carroll R. Wetzel ------------------------- Carroll R. Wetzel, D.O. Director March 24, 1998 -------------- /s/ J. D. Williams ------------------------- Joseph D. Williams,CPA Vice President-Finance, Chief Financial Officer and March 18, 1998 Principal Accounting Officer -------------- 15 16 INDEPENDENT AUDITORS' REPORT The Board of Directors The Tenere Group, Inc.: Under date of March 17, 1998, we reported on the consolidated balance sheets of The Tenere Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity/policyholders' surplus and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules, as listed in the accompanying index. 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. /s/ KPMG Peat Marwick LLP Kansas City, Missouri March 17, 1998 16 17 SCHEDULE II THE TENERE GROUP, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 ------ ----------- ---------- Investment in subsidiaries, at equity $21,741,059 21,561,303 Deferred income taxes 392,288 88,400 ----------- ---------- Total assets $22,133,347 21,649,703 =========== ========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deferred compensation payable $ 561,887 260,000 Deferred retirement benefit 591,901 - ----------- ---------- Total liabilities 1,153,788 260,000 Stockholders' equity Common stock, $.01 par value; 7,000,000 shares authorized; 1,999,774 shares issued and outstanding 19,998 19,998 Contributed capital 21,940,828 21,940,828 Accumulated deficit (1,690,370) (737,596) Unrealized gain on subsidiaries' investments, net of tax 709,103 166,473 Commitments and contingencies ----------- ---------- Total stockholders' equity 20,979,559 21,389,703 ----------------------- Total liabilities and stockholders' equity $22,133,347 21,649,703 =========== ==========
See note to condensed financial statements of the registrant 17 18 SCHEDULE II THE TENERE GROUP, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT Statements of Operations For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Expenses Deferred compensation $ 301,887 260,000 - Deferred retirement benefit 591,901 - - ----------- ---------- ---------- Total expenses 893,788 260,000 - Loss before income taxes (893,788) (260,000) - Income tax benefit 303,888 88,400 - ----------- ---------- ---------- Net loss (parent only) (589,900) (171,600) - Equity in net income (loss) of subsidiaries (362,874) (2,762,886) 2,509,856 ----------- ---------- ---------- Consolidated net income (loss) $ (952,774) (2,934,486) 2,509,856 =========== ========== ========== Basic and diluted net income (loss) per share $ (0.48) (1.47) 1.26 =========== ========== ==========
See note to condensed financial statements of the registrant 18 19 SCHEDULE II THE TENERE GROUP, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Net loss (parent only) $ (589,900) (171,600) - Adjustments to reconcile net loss to net cash from operating activities: Deferred income tax benefit (303,888) (88,400) - Change in deferred compensation payable 301,887 260,000 - Change in deferred retirement benefit 591,901 - - ----------- --------- ----- Net cash provided by operating activities - - - Net increase in cash and short-term investments - - - Cash and short-term investments at beginning of year - - - ----------- --------- ----- Cash and short-term investments at end of year $ - - - =========== ========= =====
See note to condensed financial statements of the registrant 19 20 SCHEDULE II THE TENERE GROUP, INC. (PARENT ONLY) NOTE TO CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT BASIS OF PRESENTATION In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the registrant are condensed and omit many disclosures presented in the consolidated financial statement and notes thereto. Tenere is an insurance holding company with no operation of its own. Its businesses are conducted through two property and casualty insurance subsidiaries, Intermed Insurance Co. and Interlex Insurance Co. The condensed financial statements and note thereto are representations of the Company's management, which is responsible for their integrity and objectivity. The condensed financial statements have been prepared on the basis of generally accepted accounting principles. 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. 20 21 SCHEDULE III THE TENERE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION For the Years Ended December 31, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 -------- ------- ------- Deferred policy acquisition costs $ 183 85 140 Reserves for unpaid losses and loss adjustment expenses 31,030 32,887 26,623 Discount deducted from unpaid losses and loss adjustment expenses 960 2,164 2,933 Unearned premiums 7,717 6,300 10,447 Earned premiums 4,498 7,646 11,901 Net investment income 2,623 2,627 2,654 Losses and loss adjustment expenses incurred related to: Current year 5,647 9,813 9,612 Prior year (1,169) 1,414 (1,936) Amortization of deferred policy acquisition costs 263 340 431 Other operating expenses 2,200 1,784 1,438 Paid losses and loss adjustment expenses 9,186 10,899 7,911 Net premiums written 5,802 3,469 8,369 Discount rates utilized on reserves are as follows: 2% 3% 4%
21 22 EXHIBIT INDEX EXHIBIT DESCRIPTION NO. - ------- -------------------- [S] [C] 3.1 Articles of Incorporation of the Registrant,filed as Exhibit 3.1 to the Registrant's Registration Statement on Forms S-1 (Reg. No. 33-78702) is incorporated herein by this reference. 3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78702) is incorporated herein by this reference. 4.1 Form of common stock certificate, filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78702) is incorporated herein by this reference. 10.1 Management Contract, dated July 8, 1994, by and between RCA Mutual Insurance Company, Interlex Insurance Co. and Insurance Services, Inc. 10.2 Lease Agreement, dated December 7, 1994, by and between Georgetown Square II, Ltd. and Insurance Services, Inc., filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.3 Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated October 1, 1993, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.4 Addendum No. 1 to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated February 1, 1996, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.5 Addendum No. 2 to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, effective April 27, 1996, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.6 Reinsurance Cover Note: 95/1146/RM to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated October 16, 1996, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 22 23 EXHIBIT DESCRIPTION NO. - ----------- -------------------- 10.7 Reinsurance Cover Note: 95/1212/RM(A) to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, dated October 16, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.8 Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, commencing February 1, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London including Amendment No. 1, effective April 27, 1995, filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.9 Reinsurance Cover Note: 95/1249/IP to Lawyers' Professional Liability Primary Excess of Loss Reinsurance Treaty, dated October 16, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.10 Lawyers' Professional Liability Primary Excess of Loss Reinsurance Contract, commencing July 1, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.11 Reinsurance Cover Note: 95/1250/IP to Prior Agreement Excess of Loss Reinsurance Contract, dated October 16, 1996, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.12 Prior Agreement Excess of Loss Reinsurance Contract, commencing July 1, 1996, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.13 Draft Reinsurance Slip by and between Intermed Insurance Company and American Re-Insurance Company filed as Exhibit 10.13 to the Registran'ts Quarterly Report on Form 10-Q for the three months March 31, 1996, is incorporated herein by reference. 10.14 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive Officer, filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 23 24 10.15 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel, filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.16 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew C. Fischer, Vice President-Underwriti ng and Policy Services, filed as Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.17 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing, filed as Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.18 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer filed, as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.19 The Tenere Group, Inc. Retirement Plan for Directors effective May 17, 1996, filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.20 The Tenere Group, Inc. 1996 Long Term Incentive Plan effective April 17, 1996, filed as Annex A to the Registrant's definitive proxy statements for the 1996 Annual Meeting of Shareholders, is incorporated herein by reference. 10.21 Amendment No. 1 to Employment Agreement, dated February 28, 1997, between The Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive Officer. 10.22 Amendment No. 1 to Employment Agreement, dated February 28, 1997, between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel. 10.23 Amendment No. 1 to Employment Agreement, dated February 28, 1997, between The Tenere Group, Inc. and Andrew C. Fischer, Vice President - Underwriting and Policy Services. 10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing. 10.25 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer. 24 25 10.26 Reinsurance Cover Note: 96/1212/RM to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, effective October 1, 1996, by and between Intermed Insurance Company and/or Interlex Insurance Company and certain Reinsurers of Lloyd's of London. 10.27 Addendum No. 2 to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, effective October 1, 1996, by and between Intermed Insurance Company and/or Interlex Insurance Company and certain Reinsurers of Lloyd's of London. 10.28 Reinsurance Cover Note: 97/1212/RM to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, effective October 1, 1997, by and between Intermed Insurance Company and/or Interlex Insurance Company and certain Reinsurers of Lloyd's of London. 10.29 Addendum No. 3 to Catastrophe "Awards Made" Excess of Loss Reinsurance Contract, effective October 1, 1997, by and between Intermed Insurance Company and/or Interlex Insurance Company and certain Reinsurers of Lloyd's of London. 10.30 Reinsurance Cover Note: 94/1146/RM to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, effective October 1, 1994, by and between Intermed Insurance Company and Certain Reinsurers of Lloyd's of London. 10.31 Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, effective October 1, 1996, by and between Intermed Insurance Company and Certain Reinsurers of Lloyd's of London. 10.32 Addendum No. 1 to Medical Practitioners' Liability Combined Reinsurance Contract (formerly the Primary Excess of Loss Reinsurance Contract), effective October 1, 1996, by and between Intermed Insurance Company and Certain Reinsurers of Lloyd's of London. 10.33 Addendum No. 2 to Medical Practitioners' Liability Combined Reinsurance Contract (formerly the Primary Excess of Loss Reinsurance Contract), effective October 1, 1997, by and between Intermed Insurance Company and Certain Reinsurers of Lloyd's of London. 10.34 Reinsurance Cover Note: 97/1146/RM to Medical Practitioners' Liability Combined Reinsurance Contract (formerly the Primary Excess of Loss Reinsurance Contract), effective October 1, 1997, by and between Intermed Insurance Company and Certain Reinsurers of Lloyd's of London. 10.35 Lawyers' Professional Liability Primary Excess of Loss Reinsurance Contract, effective October 1, 1996, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London. 10.36 Lawyers' Professional Liability Primary Excess of Loss Reinsurance Contract, effective October 1, 1997, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London. 10.37 Lawyers' Professional Liability Prior Agreement Excess Reinsurance Contract, effective October 1, 1996, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London. 25 26 10.38 Lawyers' Professional Liability Prior Agreement Excess Reinsurance Contract, effective October 1, 1997, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London. 13 1997 Annual Report to Shareholders 21 Subsidiaries of the Registrant, filed as Exhibit 21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 27 Financial Data Schedules 26 EX-10.26 2 REINSURANCED COVER NOTE: 96/1212/RM 1 Exhibit 10.26 CARVILL REINSURANCE BROKERS R.K. CARVILL & CO. LTD. St. Helen's, 1 Undershaft London EC3A8JT & at Lloyd's Tel: 0171-9292800 Fax: 0171-9291604 27th September, 1996 Intermed Insurance Co 1903 E Battlefield Springfield, Missouri 65804 USA REINSURANCE COVER NOTE: 96/1212/RM This is to certify that, in accordance with your instructions, we have effected the following placement. Please examine this Cover Note carefully and advise us immediately if it is in any way incorrect or does not otherwise meet your requirements. RESSURED: INTERMED INSURANCE COMPANY and/or INTERLEX INSURANCE COMPANY 1903 E. Battlefield Springfield, MO 65804 U.S.A. (NAIC Code 33367) PERIOD: Annual re-signing at 1st October, 1996, of continuous Contract commencing 1st February 1995, covering Awards Made against the Reassured on and after that date, arising out of policies issued by the Reassured on and after 1st January, 1977. Contract to be re-signed annually, but may be cancelled at any 1st October anniversary date, subject to at least 90 days prior notice. At the option of the Reassured, providing such option is exercised prior to anniversary date, the current period of this Contract may be extended at its anniversary date by 90 days, at pro rata additional premium: with reinstatement conditions remaining unchanged but to apply to entire extended period, reinstatement additional premium being based on final earned premium for entire extended period. TYPE: CATASTROPHE "AWARDS MADE" EXCESS OF LOSS REINSURANCE CONTRACT. 2 CLASS: Covering Medical Practitioners' Liability policies (including Dentists' Liability) and all other ancillary coverages as original, and Lawyers' Professional Liability policies and all other incurred as a result of coverages as original; but only to indemnify that portion of their the Reassured in respect of liability Ultimate Net Loss relating to awards in excess of their original policy limit and/or relating to claims related extra-contractual obligations on such business. TERRITORIAL SCOPE: As per the Reassured's original policies. LIMIT: Section (A) In respect of original losses to Intermed Insurance Company with claims made dates on or after 1st October, 1993: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss occurrence, which in turn in excess of the Reassured's applicable reinsurance programme. Reinsurers hereon shall have the benefit of all recoveries under all Excess of Loss Contracts effected by the Reassured in respect of all original losses coming within the scope of this Section, as such Contracts apply to the limit of the original policy against which the Award is made: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted exhausted or otherwise, which for the purposes of this Section are deemed to be in full force. Section (B) In respect of original losses to Intermed Insurance Company with claims made dates prior to 1st October, 1993: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss occurrence, which in turn in excess of the original policy limit issued by the Reassured. Section (C) In respect of original losses to Interlex Insurance Company with claims made dates on or after 1st July 1995: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss occurrence, which in turn in excess of the Reassured's applicable reinsurance programme. 3 Reinsurers hereon shall have the benefit of all recoveries under all Excess of Loss Contracts effected by the Reassured in respect of all original losses coming within the scope of this Section, as such Contracts apply to the limit of the original policy against which the Award is made: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted exhausted or otherwise, which for the purposes of this Section are deemed to be in full force. However, the maximum limit recoverable hereunder in respect of Sections (A), (B) and (C) combined shall not exceed US$5,000,000 each and every loss occurrence. CO-REINSURANCE WARRANTY: Warranted that the Reassured retain 10% of the premium and of any loss recoverable hereunder, net and unreinsured in any way. REINSTATEMENT: One full reinstatement at 100% additional premium (pro rata as to amount). Annual Minimum and Deposit Premium $160,000 payable quarterly in advance in equal installments. Adjustable within 60 days of the expiry hereof at 1.6% of the Reassured's subject matter Premium Income for the period hereon. For adjustment purposes hereon, the above rate is calculated on the sum of Intermed Insurance Company's Gross Net Earned Premium Income for original policies up to US$1,000,000 or so deemed, and Interlex Insurance Company's Gross Net Written Premium Income for original policies up to US$1,000,000 or so deemed, including Premium in respect of Defence Costs Allowance Rider on policy limits up to $1,000,000. U. S. CLASS- IFICATION: U.S. Reinsurance TAXES: 1% Federal Excise Tax where applicable LOSS RESERVES: Letter of Credit (Citibank NA Scheme) in respect of known and reported losses only, excluding any losses Incurred But Not Reported ("I.B.N.R"), or any application thereto, in compliance with Statutory/Regulatory requirements, as required by the Reassured from all Reinsurers hereon (including Lloyd's). CLAIMS ARRANGEMENTS: Individual loss advices and settlements 4 GENERAL CONDlTIONS: Ultimate Net Loss Clause: (1) excluding all loss adjustment expenses and costs incurred up to the time an award is made. However such expenses and costs (net of all amounts recoverable from more specific Reinsurances) shall be included within and have first priority in contributing: a) Where the applicable underlying Reinsurances provide for pro-rata costs in addition, to the Reassured's applicable retention of US$250,000 for Sections (A) or (B) or (C) hereon only, but; b) Where the applicable underlying Reinsurances are on a costs-inclusive basis, to the retentions and limits of the said underlying reinsurances and thereafter to the Reassured's applicable retention of US$250,000 for Sections (A) or (B) or (C) hereon only. (2) including, once an award is made, all further expenses and costs/appeal costs for excess of original policy limits and/or extra-contractual obligations awards, net of all amounts recoverable from more specific Reinsurers. Reassured's co-reinsurances in their applicable underlying reinsurance programme to be disregarded for the purpose of determining the Ultimate Net Loss hereunder Second Generation Awards Clause. Insolvency Clause. Errors and Omissions Clause. Amendments and Alterations Clause. Currency Clause (U.S. Dollars only) Access to Records Clause. Arbitration Clause. Service of Suit Clause (U.S.A. - NMA 1998). Insolvency Funds Exclusion Clause. Nuclear Incident Exclusion Clause - Liability - Reinsurance U.S.A. Confidentiality Clause. Carvill Intermediary Clause. Several Liability Notice The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing reinsurers are not responsible for the subscription of any co-subscribing reinsurer who for 5 any reason does not satisfy all or part of its obligations. - Ref: LSW 1001 (Reinsurance). WORDING: To be agreed by Underwriters. INFORMATION: In years immediately prior to 1st October, 1993 Intermed purchased a layer of $2million xs $1million (Claims Made Basis) covering Clash and ECO/XPL. Recoveries, if applicable, to inure to benefit of Section B. HEREON: 100.00% of 90.00% of the above LIMIT and PREMIUM. EFFECTED WITH: Security as per Schedule A attached hereto. R.K. CARVILL & COMPANY LIM1TED Director E. & O.E. 6 Attaching to and forming part of Cover Note Number: 96/1212/RM 100.00% LLOYD'S UNDERWR1TERS London, England. 100.00% OF 90.00% The breakdown of Lloyd's Syndicates is as follows: Share Syndicate No. Pseudonym NAIC Id.No. 7.50% 435 DPM AA 1126435 9.36% 1007 SVH AA 1127007 3.75% 623 AFB AA 1126623 3.75% 623 AFB AA 1126623 7.49% 672 IAM AA 1126672 7.49% 190 FRW AA 1126190 5.62% 219 RAE AA 1126219 5.62% 205 HGJ AA 1126205 2.09% 1027 MFN AA 1127027 0.91% 2027 MFN AA 1128027 5.62% 362 WEH AA 1126362 2.62% 470 GNR AA 1126470 1.26% 376 JHV AA 1126376 0.24% 2376 JHV AA 1128376 3.39% 861 MEB AA 1126861 1.10% 1209 MEB AA 1127209 1.80% 1212 SJB AA 1127212 2.70% 1212 SJB AA 1127212 2.22% 1003 SJC AA 1127003 0.78% 2003 SJC AA 1128003 0.75% 727 SAM AA 1126727 0.56% 990 BAR AA 1126990 0.56% 991 AEG AA 1126991 0.33% 724 SAH AA 1126724 0.61% 2724 SAH AA 1128724 1.03% 227 ROS AA 1126227 0.09% 2227 CMP AA 1128227 0.94% 1096 RAS AA 1127096 0.75% 314 CFP AA 1126314 1.12% 529 HLM AA 1126529 0.94% 51 ANT AA 1126051 0.56% 122 RJH AA 1126122 0.75% 958 GSC AA 1126958 1.87% 510 RJK AA 1126510 0.46% 590 COX AA 1126590 0.10% 2591 COX AA 1128591
7 0.75% 484 JSM AA 1126484 0.75% 47 JRR AA 1126047 0.50% 947 CBK AA 1126947 0.12% 2947 CBK AA 1128947 0.25% 923 FCD AA 1126923 0.06% 2923 FCD AA 1128923 1.12% 183 DFB AA 1126183 1.87% 1047 RGW AA 1127047 0.75% 780 BFC AA 1126780 0.37% 114 DER AA 1126114 1.87% 79 PJE AA 1126079 1.12% 204 FLD AA 1126204 1.12% ll41 JEM AA 1127141 2.62% 1215 BHB AA 1127215 - ------- 100.00% of 90.00%
EX-10.27 3 ADDENDUM NO. 2 TO CATASTROPHE 1 Exhibit 10.27 96/1212/RM ADDENDUM NO. 2 attaching to and forming part of the CATASTROPHE "AWARDS MADE" EXCESS OF LOSS REINSURANCE CONTRACT made between INTERMED INSURANCE COMPANY and/or INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereafter referred to as the "Reassured") And REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") U.S. CLASSIFICATION: U.S. REINSURANCE With effect from 1st October, 1996, the following amendments are made to this Contract: 1. The PREAMBLE is amended to read as follows and not as heretofore: This Contract is made and entered into between Intermed Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 33367) and/or Interlex Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 10037), (hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred as the "Reinsurers"), on the following terms and conditions: 2. ARTICLE 1, BUSINESS REINSURED is amended to read as follows and not as heretofore: ARTICLE 1 BUSINESS REINSURED This Contract is to indemnify the Reassured for any loss or losses sustained by them in respect of their net retentions, as hereinafter provided and specified, on any contracts of Medical Practitioners' Liability policies (including Dentists' Liability policies) including all other ancillary coverages as original, and Lawyers' Professional Liability policies including all other coverages as original, issued by the Reassured, hereinafter referred to as "policies". However, this Contract is only to indemnify the Reassured in respect of all liability incurred as the result of that portion of the Reassured's Ultimate Net Loss relating to awards in excess of their original policy limits and/or relating to claims-related extra-contractual obligations on such business, both as more fully defined herein. 2 3. ARTICLE 3, COVER LIMIT AND RETENTION is amended to read follows and not as heretofore: ARTICLE 3 COVER LIMIT AND RETENTION Section (A) In respect of original losses to Intermed Insurance Company with claims made dates on or after 1st October, 1993, the Reinsurers shall be liable under this Contract in respect of each and every loss occurrence, for the Reassured's Ultimate Net Loss in excess of US$250,000 Ultimate Net Loss each and every loss occurrence in excess of the Reassured's applicable reinsurance programme, subject to a limit of liability to the Reinsurers of US$5,000,000 Ultimate Net Loss each and every loss occurrence. The Reinsurers hereon shall have the benefit of all recoveries under all Excess of Loss Contracts effected by the Reassured, including specific treaties effected by the Reassured covering extra-contractual obligations and excess of original policy limits awards, in respect of all original losses coming within the scope of this Contract: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted, exhausted or otherwise, which for the purposes of this Contract are deemed to be in full force. Section (B) In respect of original losses to Intermed Insurance Company with claims made dates prior to 1st October, 1993, the Reinsurers shall be liable under this Contract in respect of each and every loss occurrence, for the Reassured's Ultimate Net Loss in excess of US$250,000 Ultimate Net Loss each and every loss occurrence in excess of either the Reassured's applicable reinsurance programme, or, if the applicable reinsurance programme has expired, in excess of the original policy limit issued by the Reassured, subject to a limit of liability to the Reinsurers of US$5,000,000 Ultimate Net Loss each and every loss occurrence. The Reinsurers hereon shall have the benefit of all recoveries under reinsurances effected by the Reassured, including specific treaties previously effected by the Reassured covering extracontractual obligations and excess of original policy limits awards, in respect of all original losses coming within the scope of this Contract; but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted, exhausted or otherwise, which for the purposes of this Contract are deemed to be in full force. Section (C) In respect of original losses to Interlex Insurance Company with claims made dates on or after 1st July, 1995, the Reinsurers shall be liable under this Contract in respect of each and every loss occurrence, for the Reassured's Ultimate Net Loss in excess of US$250,000 each and every loss occurrence in excess of the Reassured's applicable reinsurance programme, subject to a limit of liability to the Reinsurers of US$5,000,000 Ultimate Net Loss each and every loss occurrence. The Reinsurers hereon shall have the benefit of all recoveries under all reinsurances effected by the Reassured, including specific treaties effected by the Reassured covering extracontractual obligations and excess of original policy limits awards, in respect of all original losses coming within the scope of this Contract: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted, exhausted or otherwise, which for the purposes of this Contract are deemed to be in full force. 3 The Reassured warrant that they will retain 10%, of the premium and of any loss recoverable hereunder net for their own account and unreinsured in any manner. The maximum recoverable under this Contract in respect of Section (A), (B) and (C) combined, shall not exceed $5,000,000 each and every loss occurrence. 4. Item F. of ARTICLE 4, DEFINITIONS is amended to read as follows and not as heretofore: F. The term "Ultimate Net Loss" as used in this Contract shall mean the sum actually paid or payable by the Reassured in settlement of any liability incurred by the Reassured as a result of awards in excess of their original policy limits and/or in respect of claims-related extra-contractual obligations, both as more fully defined herein. The amount of the Reassured's Ultimate Net Loss shall, once an award has been made, include all further expenses and costs or appeal costs incurred by the Reassured for awards in excess of original policy limits and/or claims-related extracontractual obligations awards, net of all amounts recovered from more specific Reinsurers as provided in ARTTCLE 3, COVER LIMIT AND RETENTION. For the purposes hereof, the Ultimate Net Loss shall not include expenses incurred by the Reassured up to the date that an award has been made, in connection with the adjustment, settlement or compromise of any loss including expenses of litigation if any and all subrogation, salvage and recovery expenses; nor the salaries of employees and all office expenses of the Reassured. However, such expenses and costs may be included within, and have first priority in contributing to, either the Reassured's applicable retention of US$250,000 in respect of Sections (A), (B) and (C), where the applicable inuring reinsurances provided for pro-rata expenses and costs in addition to the limit; or the retention and the limits of the Reassured's underlying excess of loss programme as applicable and thereafter to the Reassured's applicable retention of US$250,000 in respect of Sections (A), (B) and (C) where the applicable inuring reinsurances provide for expenses and costs within the limit. All salvages and recoveries, including recoveries under all reinsurances which inure to the benefit of this Contract as warranted in ARTICLE 3, COVER LIMIT AND RETENTION, whether collected or not, shall first be deducted from such loss to arrive at the amount of the Reassured's Ultimate Net Loss for the purposes of this Contract. All salvages recoveries or payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. However, nothing in the foregoing shall be construed as meaning that losses are not recoverable hereunder until the Reassured's Ultimate Net Loss has been ascertained. 4 For the purposes hereof, the Reassured's retention's and co-insurance's in their current reinsurance programme, as warranted in ARTICLE 3, COVER LIMIT AND RETENTION, shall be disregarded for the purpose of determining the Ultimate Net Loss hereunder. The Reassured shall have the benefit of underlying recoveries, if any, under all reinsurance contracts. 5. ARTICLE 8, PREMIUM is amended to read as follows and not as heretofore: ARTICLE 8 PREMIUM In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Contract, the Reassured shall pay the Reinsurers a premium for each Contract Year hereunder, calculated at the rate of 1.60% of the Reassured's subject matter Premium Income (being the sum of Intermed Insurance Company's Gross Net Earned Premium Income for original policies up to US$1,000,000 or so deemed, and Interlex Insurance Company's Gross Net Written Premium Income for original policies up to US$1,000,000 or so deemed, including Premium in respect of Defence Costs Allowance Rider on policy limits up to US$1,000,000) for the Contract Year under consideration, subject, however, to an annual Minimum and Deposit Premium of US$160,000 payable in four equal instalments on 1st October, 1996, 1st January, 1997, 1st April, 1997 and 1st July, 1997. Notwithstanding the above, the Minimum and Deposit Premium for subsequent Contract Years shall be as mutually agreed. Within 60 days following the end of each Contract Year, the Reassured shall report the reinsurance premium due, calculated at the rate stipulated above, but subject always to the applications of the Minimum Premium for that Contract Year. Any additional premium due in excess of the previously paid Minimum and Deposit Premium for that Contract Year shall be remitted to the Reinsurers concurrently with the report. The term "Gross Net Earned Premium Income" shall, for all purposes of this Contract, be understood to mean the full gross amount of the premiums charged by the Reassured to their original insureds for original policy limits of up to US$1,000,000 or so deemed as per the Reassured's Primary Excess of Loss Contracts, less cancellations and return premiums and less premiums paid for reinsurances, recoveries under which would inure to the benefit of this Contract, which is allocated by the Reassured as earned during the Contract Year under consideration. The term "Gross Net Written Premium Income" shall, for all purposes of this Contract, be understood to mean the full gross amount of the premiums charged by the Reassured to their original insureds for original policy limits of up to US$1,000,000 or so deemed, including Premium in respect of Defence Costs Allowance Rider on policy limits up to US$1,000,000 as per the Reassured's Primary Excess of Loss Contract, less cancellations and return premiums, and less premiums paid for reinsurances, recoveries under which would inure to the benefit of this Contract, which is allocated by the Reassured as written during the Contract Year under consideration. 6. The participations of Reinsurers shall be as shown in the attached schedule and not as heretofore. 5 IN W1TNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Addendum as follows: Signed in Springfield, Missouri this 8th day of October 1996 For and on behalf of the Reassured INTERMED INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedule which shall be considered to form an integral part of this Addendum. EX-10.28 4 REINSURANCE COVER NOTEE: 97/1212/RM 1 Exhibit 10.28 CARVILL REINSURANCE BROKERS R.K. CARVILL & CO. LTD. St. Helen's, 1 Undershaft London EC3A8JT & at Lloyd's Tel: 0171-9292800 Fax: 0171-9291604 27th September, 1996 Intermed Insurance Co 1903 E Battlefield Springfield, Missouri 65804 USA REINSURANCE COVER NOTE: 97/1212/RM This is to certify that, in accordance with your instructions, we have effected the following placement. Please examine this Cover Note carefully and advise us immediately if it is in any way incorrect or does not otherwise meet your requirements. RESSURED: INTERMED INSURANCE COMPANY and/or INTERLEX INSURANCE COMPANY 1903 E. Battlefield Springfield, MO 65804 U.S.A. (NAIC Code 33367) PERIOD: Annual re-signing at 1st October, 1997, of continuous Contract commencing 1st February 1995, covering Awards Made against the Reassured on and after the date, arising out of policies issued by the Reassured on and after 1st January, 1977. Contract to be re-signed annually, but may be cancelled at any 1st October anniversary date, subject to at least 90 days prior notice. At the option of the Reassured, providing such option is exercised prior to anniversary date, the current period of this Contract may be extended at its anniversary date by 90 days, at pro rata additional premium: with reinstatement conditions remaining unchanged but to apply to entire extended period, reinstatement additional premium being based on final earned premium for entire extended period. TYPE: CATASTROPHE "AWARDS MADE" EXCESS OF LOSS REINSURANCE CONTRACT. 2 CLASS: Covering Medical Practitioners' Liability policies (including Dentists' Liability) and all other ancillary coverages as original, and Lawyers' Professional Liability policies and all other coverages as original; but only to indemnify the Reassured in respect of liability incurred as a result of that portion of their Ultimate Net Loss relating to awards in excess of their original policy limit and/or relating to claims related extra-contractual obligations on such business. TERRITORIAL SCOPE: As per the Reassured's original policies. LIMIT: Section (A) In respect of original losses to Intermed Insurance Company with claims made dates on or after 1st October, 1993: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss occurrence, which in turn in excess of the Reassured's applicable reinsurance programme. Reinsurers hereon shall have the benefit of all recoveries under all Excess of Loss Contracts effected by the Reassured in respect of all original losses coming within the scope of this Section, as such Contracts apply to the limit of the original policy against which the Award is made: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted exhausted or otherwise, which for the purposes of this Section are deemed to be in full force. Section (B) In respect of original losses to Intermed Insurance Company with claims made dates prior to 1st October, 1993: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss occurrence, which in turn in excess of the original policy limit issued by the Reassured. Section (C) In respect of original losses to Interlex Insurance Company with claims made dates on or after 1st July 1995: To pay up to US$5,000,000 Ultimate Net Loss each and every loss occurrence, excess of US$250,000 Ultimate Net Loss each and every loss 3 occurrence, which in turn in excess of the Reassured's applicable reinsurance programme. Reinsurers hereon shall have the benefit of all recoveries under all Excess of Loss Contracts effected by the Reassured in respect of all original losses coming within the scope of this Section, as such Contracts apply to the limit of the original policy against which the Award is made: but only to the extent of the limits of the Reassured's applicable reinsurance programmes, whether commuted exhausted or otherwise, which for the purposes of this Section are deemed to be in full force. However, the maximum limit recoverable hereunder in respect of Sections (A), (B) and (C) combined shall not exceed US$5,000,000 each and every loss occurrence. CO-REINSURANCE WARRANTY: Warranted that the Reassured retain 10% of the premium and of any loss recoverable hereunder, net and unreinsured in any way. REINSTATEMENT: One full reinstatement at 100% additional premium (pro rata as to amount). Annual Minimum and Deposit Premium $170,000 payable quarterly in advance in equal installments. Adjustable within 60 days of the expiry hereof at 1.6% of the Reassured's subject matter Premium Income fore the period hereon. For adjustment purposes hereon, the above rate is calculated on the sum of Intermed Insurance Company's Gross Net Earned Premium Income for original policies up to US$1,000,000 or so deemed, and Interlex Insurance Company's Gross Net Written Premium Income for original policies up to US$1,000,000 or so deemed, including Premium in respect of Defence Costs Allowance Rider on policy limits up to $1,000,000. U. S. CLASS- IFICATION: U.S. Reinsurance TAXES: 1% Federal Excise Tax where applicable LOSS RESERVES: Letter of Credit (Citibank NA Scheme) in respect of known and reported losses only, excluding any losses Incurred But Not Reported ("I.B.N.R"), or any application thereto, in compliance with Statutory/Regulatory requirements, as required by the Reassured from all Reinsurers hereon (including Lloyd's). 4 CLAIMS ARRANGEMENTS: Individual loss advices and settlements GENERAL CONDlTIONS: Ultimate Net Loss Clause: (1) excluding all loss adjustment expenses and costs incurred up to the time an award is made. However such expenses and costs (net of all amounts recoverable from more specific Reinsurances) shall be included within and have first priority in contributing: a) Where the applicable underlying Reinsurances provide for pro-rata costs in addition, to the Reassured's applicable retention of US$250,000 for Sections (A) or (B) or (C) hereon only, but; b) Where the applicable underlying Reinsurances are on a costs-inclusive basis, to the retentions and limits of the said underlying reinsurances and thereafter to the Reassured's applicable retention of US$250,000 for Sections (A) or (B) or (C) hereon only. (2) including, once an award is made, all further expenses and costs/appeal costs for excess of original policy limits and/or extra-contractual obligations awards, net of all amounts recoverable from more specific Reinsurers. Reassured's co-reinsurances in their applicable underlying reinsurance programme, to be disregarded for the purpose of determining the Ultimate Net Loss hereunder Second Generation Awards Clause. Insolvency Clause. Errors and Omissions Clause. Amendments and Alterations Clause. Currency Clause (U.S. Dollars only) Access to Records Clause. Arbitration Clause. Service of Suit Clause (U.S.A. - NMA 1998). Insolvency Funds Exclusion Clause. Nuclear Incident Exclusion Clause - Liability - Reinsurance U.S.A. Confidentiality Clause. Carvill Intermediary Clause. 5 Several Liability Notice The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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. - Ref: LSW 1001 (Reinsurance). WORDING: To be agreed by Underwriters. INFORMATION: In years immediately prior to 1st October, 1993 Intermed purchased a layer of $2million xs $1million (Claims Made Basis) covering Clash and ECO/XPL. Recoveries, if applicable, to inure to benefit of Section 1. HEREON: 100.00% of 90.00% of the above LIMIT and PREMIUM. EFFECTED WITH: Security as per Schedule A attached hereto. R.K. CARVILL & COMPANY LIM1TED Director E. & O.E. 6 Attaching to and forming part of Cover Note Number: 97/1212/RM 100.00% LLOYD'S UNDERWR1TERS London, England. 100.00% OF 90.00% The breakdown of Lloyd's Syndicates is as follows: Share Syndicate No. Pseudonym NAIC Id.No. 7.49% 435 DPM AA 1126435 9.13% 1007 SVH AA 1127007 3.65% 623 AFB AA 1126623 3.65% 623 AFB AA 1126623 7.31% 672 IAM AA 1126672 7.31% 190 FRW AA 1126190 5.48% 219 RAE AA 1126219 5.47% 205 HGJ AA 1126205 1.62% 1027 MFN AA 1127027 1.30% 2027 MFN AA 1128027 5.47% 362 WEH AA 1126362 2.55% 570 GNR AA 1126570 0.99% 376 JHV AA 1126376 0.47% 2376 JHV AA 1128376 3.18% 861 MEB AA 1126861 1.20% 1209 MEB AA 1127209 1.75% 1212 SJB AA 1127212 2.63% 1212 SJB AA 1127212 1.11% 1003 SJC AA 1127003 1.81% 2003 SJC AA 1128003 0.73% 727 SAM AA 1126727 0.55% 990 BAR AA 1126990 0.73% 991 AEG AA 1126991 1.09% ll41 JEM AA 1127141 1.82% 1047 RGW AA 1127047 2.55% 1215 BHB AA 1127215 0.48% 947 CBK AA 1126947 0.13% 2947 CBK AA 1128947 0.24% 923 FCD AA 1126923 0.07% 2923 FCD AA 1128923 0.91% 1096 RAS AA 1127096 1.82% 510 KLN AA 1126510 0.91% 1223 MEL AA1127223 0.91% 227 ROS AA 1126227 0.19% 2227 CMP AA 1128227 0.73% 314 CFP AA 1126314 1.09% 529 HLM AA 1126529 0.91% 51 ANT AA 1126051 0.55% 122 RJH AA 1126122 0.73% 958 GSC AA 1126958 0.32% 590 COX AA 1126590 0.23% 2591 COX AA 1128591 1.09% 183 DFB AA 1126183
7 0.73% 484 JSM AA 1126484 0.73% 47 JRR AA 1126047 0.73% 780 BFC AA 1126780 1.82% 79 PJG AA 1126079 1.09% 204 FLD AA 1126204 0.36% 112 DER AA 1126112 2.19% 1218 DJN AA 1127218 - ------- 100.00% of 90.00%
EX-10.29 5 ADDENUM NO. 3 TO CATASTROPHE 1 EXHIBIT 10.29 ADDENDUM NO. 3 attaching to and forming part of the CATASTROPHE "AWARDS MADE" EXCESS OF LOSS REINSURANCE CONTRACT made between INTERMED INSURANCE COMPANY and/or INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as "the Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as "the Reinsurers") U.S. CLASSIFICATION: U.S. REINSURANCE With effect from 1st October, 1997, the following amendments are made to this Contract: 1. The first paragraph of ARTICLE 8 - PREMIUM, is amended to read as follows: In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Contract, the Reassured shall pay the Reinsurers a premium for each Contract Year hereunder, calculated at the rate of 1.50% of the Reassured's subject matter Premium Income (being the sum of Intermed Insurance Company's Gross Net Earned Premium Income for original policies up to US$1,000,000 or so deemed, and Interlex Insurance Company's Gross Net Written Premium Income for original policies up to US$1,000,000 or so deemed, including Premium in respect of Defence Costs Allowance Rider on policy limits up to US$1,000,000) for the Contract Year under consideration, subject, however, to an annual Minimum and Deposit Premium of US$170,000 payable in four equal instalments on 1st October, 1997, 1st January, 1998, 1st April, 1998 and 1st July, 1998. 2. The participations of Reinsurers shall be as shown in the attached Schedules and not as heretofore. ALL OTHER TERMS AND CONDITIONS REMAIN UNALTERED IN WITNESS WHERREOF the parties hereto have, by their duly authorised representative, executed this Addendum as follows. Signed in Springfield, Missouri, this 29th day of December, 1997 For and on behalf of the Reassured: INTERMED INSURANCE COMPANY /s/ And for the Reinsurers by means of and in accordance with the attached Schedules which shall be considered to form an integral part of this Contract. EX-10.30 6 REINSURANCE COVER NOTE: 94/1146/RM 1 Exhibit 10.30 CARVILL REINSURANCE BROKERS R.K. CARVILL & CO., LTD. 1 Minster Court Mincing Lane London EC3R7AA & at Lloyd's Tel: 071-9292800 Tlx: 8952946 CARCORP Fax: 071-9291604 5 October 1994 RCA Mutual Insurance Co 1111 S. Glenstone Suite 3-102 Springfield, Missouri 65804 USA REINSURANCE COVER NOTE: 94/1146/RM This is to certify that, in accordance with your instructions, we have effected the following placement. Please examine this Cover Note carefully and advise us immediately if it is in any way incorrect or does not otherwise meet your requirements. REASSURED: RCA MUTUAL INSURANCE COMPANY (or name to be agreed by Underwriters) of Springfield, Missouri. PERIOD: Annual re-signing at 1st October, 1994, of Contract covering claims first made against the Reassured during the period 1st October, 1993, to 30th September, 1996, both dates inclusive. Contract to be re-signed annually, but may be cancelled at any 1st October anniversary date subject to 90 days prior notice of cancellation. In the event of cancellation and non-renewal of this Contract, Reinsurers hereon shall continue to be liable for all claims first made against the Reassured during an additional 60 months reporting period from the effective date of cancellation and non-renewal. Such 60 months reporting period coverage shall not apply to claims first made on new or renewal policies incepting after the effective date of cancellation and non-renewal of this Contract. 2 TYPE: PRIMARY EXCESS OF LOSS REINSURANCE TREATY. CLASS: Covering Medical Practitioners' Liability policies (including Dentists' Liability,) and all other ancillary coverages as original. TERRITORIAL SCOPE: As per the Reassured's original policies. LIMITS: To pay: (A) Up to US$1,600,000 Ultimate Net Loss each and every loss, each policy and/or insured, excess of US$400,000 Ultimate Net Loss each and every loss, each policy and/or insured, and, in addition, where two or more policies and/or insureds are involved in the same loss occurrence: (B) Up to US$1,600,000 Ultimate Net Loss each and every loss occurrence, excess of US$500,000 Ultimate Net Loss each and every loss occurrence Recoveries under Section (A) to inure to the benefit of Section (B). In the event that two or more policies or insureds are involved in the same loss occurrence and there is a difference in the dates claims are made, the date on which the first claim is made shall establish the date of loss for all related claims arising out of the same loss occurrence. Notwithstanding the foregoing, in any loss occurrence, should any claim made date(s) fall prior to the inception of this Contract, it is hereby understood and agreed that those specific loss(es) shall be disregarded for the purposes of determining recoveries hereunder. For the purposes of this Contract, the date of loss shall be the date of receipt by the Reassured of acceptable notice from its original insured or a representative of its original insured; that a claim is being or may be made against that original insured. Maximum recoverable hereon to be 300% of the maximum reinsurance premium payable hereunder for the Contract Period. WARRANTY: Warranted Maximom Original Policy Limit US$1,000,000 or so deemed, except as respects Excess of Original Policy Limits and/or Extra-Contractual Obligation coverage. 3 PREMIUM: Second Annual Provisional Premium US$1,45O,000 payable in quarterly installments in advance at 1st October, 1994, 1st January, 1995, 1st April, 1995 and 1st July, 1995 and adjustable at expiry of each annual period at provisional rates indicated below. Further adjustable 12 months after expiry of Contract Period and annually thereafter until all losses for Contract Period are finally settled or commuted at a rate equivalent to 110% of the cumulative Incurred Loss Cost, plus the Minimum rate for the Contract Period as indicated below. In no event however shall the Contract Period Minimum rate plus 110% of the cumulative Incurred Loss Cost for the Contract Period exceed the Maximum rate for the applicable Contract Period as indicated below. Annual Period is that period from 1st October, 1993 to 30th September, 1994, both dates inclusive, and each successive 12 month period thereof. Contract Period is that period from 1st October, 1993 to 30th September, 1996 both dates inclusive, or earlier in the event of cancellation. Minimum, Provisional and Maximum Rates as follows:
MIN PROV MAX If Contract terminated at 1st October 1995 7.50% 17.00% 25.00 If Contract terminated at 1st October 1996 6.00% 16.50% 22.50
For adjustment purposes hereon, rates above calculated on the cumulative Gross Net Earned Premium Income for original policy limits up to US$1,000,000 or so deemed. In the event of cancellation and non-renewal of this Contract any applicable unearned premium shall accrue back to the last Annual Period hereof and shall be added to the Reassured's subject Gross Net Earned Premium Income for the purpose of the premium rating formula hereunder. SPECIAL CONDITION: In the event that the Reassured cancels and non-renews this Contract and continues to be reinsured hereon for claims first made during an additional 60 month period, it is agreed that the Maximum rate for the last Annual Periodhereon shall be automatically increased by a factor of 1.65 with the resulting Maximum premium for the Contract Period hereon to be calculated accordingly. DEDUCTIONS: 1% Federal Excise Tax where applicable. 4 CLAIMS ARRANGEMENTS: Reassured to provide quarterly bordereaux detailing paid losses hereunder, and quarterly bordereaux detailing all outstanding losses reserved by the Reassured at US$300,000 Ultimate Net Loss and above. Settlement of paid losses recoverable hereunder as per bordereaux to be effected as soon as practicable after receipt of bordereaux, provided that individual losses of US$200,000 Ultimate Net Loss or greater hereto shall be subject to cash loss collection on provision by Reassured of Proof of Loss. LOSS RESERVES: Letter of Credit (Citibank N.AScheme) in respect of known and reported outstanding losses, excluding losses Incurred But Not Reported ("I.B.N.R") or any application thereto, in compliance with statutory/regulatory requirements, as required by Reassured from non-admitted Reinsurers only. GENERAL CONDITIONS: Excess of Original Policy Limits and Extra-Contractual Obligations Inclusion Clauses, both included within Reassured's Ultimate Net Loss. Ultimate Net Loss Clause, including Loss Adjustment Expenses. Net Retained Lines Clause. Insolvency Clause. Errors and Omissions Clause. Currency Clause (U.S. Dollars only). Access to Records and Claims Review Clause. Amendments and Alterations Clause. Arbitration Clause. Service of Suit Clause - U.S.A. - NMA 1998. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. Insolvency Funds Exclusion Clause. Carvill Intermediary Clause. COMMUTATION: Reassured to have right one year after end of the Contract Period or at any time thereafter to commute losses at their discretionary reserves and relieve Reinsurers of all further liability hereunder provided rate at that time is below the maximum rate for the Contract Period hereon. WORDING: Wording to be agreed by Underwriters. INFORMATION: 1. Medical Practitioners' Liability (including Dentists' Liability), and all other ancillary coverages as original, issued by Reassured on Claims Paid, Occurrence and Claims Made Policy Form. It is 5 hereby understood and agreed that all coverage hereunder is provided on a claims first made during basis only. 2. Unlimited pre-paid discovery coverage is available a) Deceased Doctors. b) Doctors who through disablement are unable to continue medical practice. c) Doctors who retire. 3. Original policies may contain Aggregate Limitation but no aggregate coverage hereon. 4. Estimated Gross Net Earned Premium Income for 12 months at 1st October, 1994 US$9,000,000. HEREON: 100% of the above LIMIT and PREMIUM. EFFECTED WITH: LLOYD'S UNDERWRITERS London, England. R.K. CARVILL & COMPANY LIMITED Director E. & O.E. EX-10.31 7 MEDICAL PRECTITIONERS 1 Exhibit 10.31 96/1146/RM TITLE: MEDICAL PRACTITIONERS' LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT BETWEEN: INTERMED INSURANCE COMPANY AND THE REINSURERS SIGNATORY HERETO COMMENCING: 1ST OCTOBER, 1996 U.S. CLASS- IFICATION: U.S. REINSURANCE 2 INDEX OF ARTICLES PREAMBLE IDENTITY OF PARTIES ARTICLE 1 BUSINESS REINSURED ARTICLE 2 COVER, LIMIT AND RETENTION ARTICLE 3 DEFINITIONS ARTICLE 4 TERRITORIAL SCOPE ARTICLE 5 EXCLUSIONS ARTICLE 6 NET RETAINED LINES ARTICLE 7 ULTIMATE NET LOSS ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS ARTICLE 1 0PREMIUM ARTICLE 11 PERIOD ARTICLE 12 LOSS REPORTS AND PAYMENTS ARTICLE 13 CURRENCY ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW ARTICLE 15 COMMUTATION ARTICLE 16 LOSS RESERVES ARTICLE 17 TAX PROVISIONS ARTICLE 18 DELAYS, ERRORS OR OMISSIONS ARTICLE 19 INSOLVENCY OF THE REASSURED ARTICLE 20 AMENDMENTS AND ALTERATIONS ARTICLE 21 ARBITRATION ARTICLE 22 SERVICE OF SUIT (NMA 1998) ARTICLE 23 INTERMEDIARY ARTICLE 24 PARTICIPATION ATTACHMENTS NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY REINSURANCE- U.S.A.
3 Exhibit 10.31 96/1146/RM MEDICAL PRACTITIONERS' LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT PREAMBLE This Contract is made and entered into between Intermed Insurance Company of 1903 E. Battlefield, Springfield, Missouri, U.S.A. (NAIC Code 33367) (hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred to as the "Reinsurers"), on the following terms and conditions: ARTICLE 1 BUSINESS REINSURED For and in consideration of the premium being paid by the Reassured in accordance with ARTICLE 1Q, PREMIUM, the Reinsurers agree to indemnify the Reassured in respect of the net excess liability incurred by the Reassured resulting from losses under Medical Practitioners' Liability policies (including Dentists' Liability policies), including all other ancillary coverages as original, issued by the Reassured, hereinafter referred to as "policies." ARTICLE 2 COVER. LIMIT AND RETENTION Section (A) below applies to each and every loss, each policy and/or insured. Section (B) below applies to the sum of the Reassured's Section (A) retentions in respect of two or more policies and/or insureds involved in the same loss occurrence. The Reinsurers shall accordingly be liable hereunder: Section (A): Whenever the Reassured has paid or advanced, or agreed to pay or advance, or become liable to pay on account of a loss under any policy an amount in excess of US$400,000 Ultimate Net Loss each and every loss, each policy and/or insured, the amount recoverable from the Reinsurers hereunder shall be the amount in excess of US$400,000 Ultimate Net Loss each and every loss, each policy and/or insured, but such amount recoverable shall not exceed up to a further US$1,600,000 Ultimate Net Loss each and every loss, each policy and/or insured and/or Section (B): Whenever two or more policies and/or insureds are involved in the same loss occurrence the amount recoverable from the Reinsurers hereunder shall be the amount in excess of US$400,000 Ultimate Net Loss each and every loss occurrence, but such amount recoverable shall not exceed a further US$1,600,000 Ultimate Net Loss each and every loss occurrence. Recoveries by the Reassured under Section (A) above shall inure to the benefit of the Reinsurers under Section (B). 4 It is agreed that the maximum overall recovery under this Contract shall be 300% of the maximum premium payable hereunder for the Contract Period, as determined in ARTICLE 10, PREMIUM. It is warranted that the Maximum Original Policy Limit for the purposes of this Contract is US$1,000,000, or so deemed, except as respects awards in excess of the Reassured's original policy limits and/or awards arising out of any extra-contractual obligation, both as more fully defined in ARTICLES 8 and 9 of this Contract, where coverage hereon applies to original policies issued irrespective of limits. It is agreed that although the original policies are issued by the Reassured on an occurrence, claims made and claims paid basis, recoveries hereunder shall be made on a claims made basis only. It is further agreed that although original policies may contain aggregate coverage, no aggregate coverage shall be provided by this Contract. ARTICLE 3 DEFINITIONS A. The term "Policy" or "Policies" as used in this Contract shall mean any binder, policy, endorsement, extended reporting endorsement or contract of insurance issued, accepted or held covered by the Reassured. For the purposes hereof, the original policy period shell be no greater than 12 months, plus odd time, not exceeding 18 months in all, except as respects extended reporting endorsements, which may be unlimited in period. B. The term "loss occurrence" as used in this Contract shall mean the happening of one or a series of related acts, errors, omissions, accidents, events or occurrences. C. For the purposes of this Contract the "claim made" date for any loss recoverable hereunder shall be deemed to be date of the receipt by the Reassured of acceptable notice from its original insured or a representative of its original insured that a claim is being or may be made against that original insured. The date of such receipt shall determine the date of loss for the purposes of this Contract. Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this Contract. In the event that two or more policies and/or insureds are involved in the same loss occurrence and there is a difference in the dates claims are made during this Contract Period, or subsequent renewal thereof, the date on which the first claim is made shall establish the date of loss for all related claims arising out of the same loss occurrence. Notwithstanding the foregoing, in any loss occurrence, should any claim made date(s) fall prior to 1st October 1993, it is understood and agreed that those specific loss(es) shall be disregarded for the purposes of determining the Reassured's Ultimate Net Loss hereunder D. The term "Annual Period" as used in this Contract shall mean the period from 1st October, 1996 to 30th September, 1997, both dates inclusive, and each successive 12 month period thereof within this Contract Period. E. The term "Contract Period" as used in this Contract shall mean the period commencing at October 1st, 1996 and ending at September 30th, 1999 both dates inclusive, or any earlier date of termination as provided for in ARTICLE 11, PERIOD. F. The term "retention" as used in this Contract shall mean the amount retained by the Reassured in respect of each and every loss hereunder and which amount shall be retained net by the Reassured. 5 ARTICLE 4 TERRITORIAL SCOPE This Contract shall cover wherever the Reassured's policies cover. ARTICLE 5 EXCLUSIONS This Contract does not apply to and absolutely excludes the following: 1. Nuclear Incidents, in accordance with the attached Nuclear Incident Exclusion Clause - Liability Reinsurance - U.S.A. 2. All liability of the Reassured arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured 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. 3. Reinsurance Assumed. ARTICLE 6 NET RETAINED LINES Subject always to the provisions of ARTICLE 7. ULTIMATE NET LOSS. this Contract applies only to that portion of any insurance covered by this Contract which the Reassured retains net for its own account and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance which the Reassured retains net for its own account shall be included. It is understood and agreed that the amount of the Reinsurers' liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reassured to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE 7 ULTIMATE NET LOSS The term "Ultimate Net Loss" as used in this Contract shall mean the sum actually paid or payable by the Reassured in settlement of any loss or losses for which it is liable under its original policy or policies, and/or any additional liability incurred by the Reassured as a result of an award in excess of its original policy limits, and/or any additional liability incurred by the Reassured from any extra-contractual obligation, both as more fully defined in ARTICLES 8 and 9 of this Contract. The amount of the Reassured's Ultimate Net Loss shall also include all loss adjustment expenses incurred by the Reassured in connection with the adjustment, settlement or compromise of any loss including 6 expenses of litigation, if any, and all subrogation, salvage and recovery expenses, but excluding the salaries of employees and all office expenses of the Reassured. All salvages and recoveries, including recoveries under all reinsurances which inure to the benefit of this Contract, whether collected or not, shall first be deducted from such loss to arrive at the amount of the Reassured's actual loss for the purposes of this Contract. All salvages, recoveries and payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. However, nothing in the foregoing shall be construed as meaning that losses are not recoverable hereunder until the Reassured's Ultimate Net Loss has been ascertained. ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any additional liability incurred by the Reassured as the result of an award in excess of their original policy limit as more fully defined below. The Reinsurers agree that the additional liability so incurred, plus the Reassured's contractual loss, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2, COVER. LIMIT AND RETENTION. Awards in excess of the Reassured's original policy limit are defined as losses which the Reassured would have been contractually liable to pay, had it not been for the limit of the original policy and where such losses in excess of the original policy limit have been incurred because of failure by the Reassured to settle within the original policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such award in excess of the original policy limit shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such award attaches. However, this Article shall not apply where such awards in excess of original policy limit have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any liability incurred by the Reassured as the result of an award in respect of any extra-contractual obligation, as more fully defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2, COVER. LIMIT AND RETENTION. "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reassured to settle within 7 the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such extra-contractual obligation shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such extra-contractual obligation attaches. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 10 PREMIUM A. The Reassured shall pay to the Reinsurers for the Annual Period commencing 1st October, 1996, a Provisional Premium of US$1,000,000 in four equal instalments at 1st October 1st, 1996, 1st January, 1997, 1st April, 1997 and 1st July, 1997. The Provisional Premiums payable for subsequent Annual Periods shall be as mutually agreed. B. As soon as practicable after the close of each Annual Period, the Reassured shall render a statement of its cumulative Gross Net Earned Premium Income (as defined herein) and the Reassured shall pay or be paid by the Reinsurers as follows: 1) if the Contract is in effect for one year, the difference between the annual Provisional Premium and the Premium determined by applying a rate of 10.00% to the Gross Net Earned Premium Income. 12 months after the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which shall be added a minimum rate of 4.50% of the Gross Net Earned Premium Income. In no event however shall the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 22.00%. 2) if the Contract is in effect for two years, the difference between the Provisional Premium for the two years and the premium determined by applying a rate of 10.00% to the cumulative Gross Net Earned Premium Income. 12 months after the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which shall be added a minimum rate of 4.50% of the cumulative Gross Net Earned Premium Income. In no event however shall the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 21.50%; 3) if the Contract is in effect for three years, the difference between the Provisional Premium for the three years and the premium determined by applying a rate of 10.00% to the cumulative Gross Net Earned Premium Income. 12 months after the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which shall be added a minimum rate of 3.875% of the cumulative Gross Net Earned Premium Income. In no event however shall the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 20.00%. 8 C. In the event of cancellation and non-renewal of this Contract, as defined in ARTICLE 11, PERIOD, the maximum rate for the last Annual Period hereon shall be automatically increased by a factor of 1.65, with the resulting Maximum premium for the Contract Period hereon to be calculated accordingly, as determined above. Further, in the event of cancellation and non-renewal of this Contract, any unearned premium applicable to policies in force at the effective date of cancellation and non-renewal, including any extended reporting endorsements attached thereto, shall be applied to the last Annual Period hereof, and the unearned premium shall be added to the Gross Net Earned Premium Income accruing to the last Annual Period of this Contract for the purposes of the rating formula. D. The premium determined for the Contract Period shall be re-calculated annually thereafter until all losses for the Contract Period are either settled, or commuted in accordance with ARTICLE 15, COMMUTATION. E. The term "Gross Net Earned Premium Income" shall, for all purposes of this Contract, be understood to mean the full gross earned amount of the premiums charged by the Reassured to its original insureds, for original policy limits up to US$1,000,000 or so deemed, less cancellations and return premiums and less premiums paid for reinsurances which inure to the benefit of this Contract, but including earned premium income for extended reporting endorsements. F. For the purpose of this article, the term "cumulative Incurred Loss Cost and Expenses" shall mean, on business the subject matter of this Contract, paid and outstanding losses and loss expenses recoverable under this Contract and all such incurred losses shall be charged to the Annual Period of this Contract to which the loss or losses fall for the purpose of determining the rate applicable to the Contract Period. G. It is agreed that in the event of commutation in accordance with ARTICLE 15, COMMUTATION, the difference between the premium paid at that time and the premium adjustment due in consequence of such commutation shall be immediately payable. ARTICLE II PERIOD This Contract takes effect on 1st October, 1996 and applies to claims first made on or alter that date as respects Medical Practitioners' Liability (including Dentists' Liability), and all other ancillary coverages as in the original policies. This Contract shall remain in full force and effect until 30th September, 1999 but may be terminated at 30th September, 1997, or 30th September, 1998, by either party giving to the other not less than 90 days written notice prior to anniversary date. In the event of the cancellation and non-renewal of this Contract, the Reinsurers shall continue to be liable hereunder in respect of all claims first made against the Reassured during an additional 60 months reporting period from the effective date of cancellation and non-renewal. In respect of the foregoing, the maximum rate for the last Annual Period hereon shall be automatically increased by a factor of 1.65, with the resulting Maximum premium for the Contract Period hereon to be calculated accordingly, as detailed in ARTICLE 10, PREMIUM. The 60 months reporting period provisions provided above shall not apply to claims first made on new or renewal policies incepting after the effective date of cancellation and non-renewal of this Contract. Further, in the event of cancellation and non-renewal of this Contract, all claims first made against the Reassured during the additional 60 months reporting period shall be applied to the last Annual Period hereof. 9 The 60 months reporting period provisions provided above shall not be operative if the Reassured replaces the reinsurance coverage afforded by this Contract, whether in part or in full, or if the Reassured retains the limits provided herein net and for its own account, whether in part or in full. If any law or regulation of the Federal, State or Local Government of any jurisdiction in which the Reassured is doing business shall render illegal the arrangements made herein this Contract can be terminated immediately in so far as it applies to such jurisdiction by the Reassured giving notice to the Reinsurers to such effect. ARTICLE 12 LOSS REPORTS AND PAYMENTS The Reinsurers agree to abide by all loss settlements of the Reassured, provided such loss settlements are within the terms and conditions of the Reassured's original policies and of this Contract, which at its sole discretion shall adjust, settle or compromise all losses. All such adjustments, settlements or compromises shall be unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. The Reassured shall advise the Reinsurers by quarterly bordereaux of all paid losses hereunder, and of outstanding losses including any subsequent developments in connection therewith, which are reserved by the Reassured at, or in excess of $400,000 Ultimate Net Loss. Such bordereaux shall be furnished by the Reassured within 60 days following the end of each quarter. The information contained therein shall be in brief summary form but shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Bordereaux shall detail, for each individual loss: 1. The amounts paid by the Reassured and the amounts outstanding in its own books for both indemnity and expenses, as at the end of the quarter under consideration. and the Reinsurers' share thereof. 2. Indemnity and expense payments made by the Reassured during the quarter under consideration in respect of which reimbursement by the Reinsurers is then required. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the quarterly bordereaux have been furnished to them; but in the event of the Reassured sustaining a loss in respect of which the Reinsurers' share amounts to or exceeds $200,000 Ultimate Net Loss, the Reassured shall have the option of requiring the Reinsurers to effect immediate payment outside of the quarterly bordereaux upon submission of proof of loss. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Contract shall be United States Dollars. ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW All documents and records in the possession of the Reassured concerning this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by 10 the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. Specifically, the Reinsurers shall be entitled to nominate a representative to assess the Reassured's claims and claims procedures. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the expiration of this Contract and shall be exercised at the Reinsurers' own expense. ARTICLE 15 COMMUTATION The Reassured at its option may, 12 months after the expiry of the Contract Period or at any time thereafter, commute all losses outstanding to this Contract. The Reinsurers agree to accept the Reassured's discretionary reserves existing at the time of commutation in consideration of which they will be relieved of all further liability in respect of the Contract period both in respect of known and unknown losses. The option to commute may only be exercised by the Reassured provided that the rate as determined in accordance with ARTICLE 10, PREMIUM, after commutation, is less than the maximum rate stipulated in that Article and commutation shall constitute a complete release of the Reinsurers from all further liability under this Contract. ARTICLE 16 LOSS RESERVES This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves. The Reassured agrees that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its bocks statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract it shall forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing the amounts involved for known outstanding losses and allocated loss expenses and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of a clean, irrevocable and unconditional Letter of Credit, in an amount equal to their proportion of the stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in fall conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreen" in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the life of the Letter of Credit in question beyond its forthcoming expiration date. 11 In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby undertakes to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the proceeds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any liability for loss or allocated loss expense reinsured by this Contract; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any liability for loss or allocated loss expense reinsured by this Contract. c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that the obligations secured by the Letter of Credit remain unliquidated and undischarged at the time of receipt by the Reassured of such notice, to create a cash deposit account, separate from its own assets, in an amount equal to the participation of the cancelling or non-renewing Reinsurer(s) in the Letter of Credit. That cash deposit account may then be used as in sub-paragraphs a and b above. It is understood and agreed that this procedure may only be implemented before the expiry of the notice period in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under this Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorised representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the original statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days alter receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of these items. If, however, the statement shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorising the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive security so determined be applied towards securing the Reassured reserves for losses or loss expenses Incurred But Not Reported. All expenses incurred in the establishment or maintenance of such Letters of Credit shall be for the account of the Reinsurers. ARTICLE 17 TAX PROVISIONS 12 The Reassured shall be liable for all fazes (except Federal Excise Tax) levied on premiums payable to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. To the extent that such premium is subject to Federal Excise Tax, the Reinsurers hereby agree to allow as a deduction from the premium, for the purpose of paying Federal Excise Tax, 1% of the premium payable hereon. In the event of any return premium becoming due hereunder the Reinsurers will deduct 1% from the amount of the return, and the Reassured or their agents shall take steps to recover the tax from the Government of the United States of America. Notwithstanding the above, any changes in the Federal Excise Tax rate or the exemption status of Reinsurers shall be automatically applicable to this Contract. In consideration of the terms under which this Contract is issued, the Reassured undertake not to claim any deduction in respect of premium payable hereon when making tax returns, other than Income or Profits tax returns, to any fiscal authority of the United States of America or any State or Territory thereof. ARTICLE 18 DELAYS. ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Contract if such delay, error or omission had not been made, provided that rectification is made immediately upon discovery. INSOLVENCY OF THE REASSURED Amounts due to the Reassured under this Contract shall be payable by the Reinsurers on the basis of the liability of the Reassured under the original policies reinsured hereunder without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the original policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such claim is to be adjudicated and interpose any defense or defenses which they may deem available to the Reassured or its Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or to interpose defence to such claim, the expense shall be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a Receiver be appointed, the Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Contract any sums which are due to the Reinsurers from the Reassured under this Contract and which are expressed herein to be payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. 13 In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Contract shall be payable by the Reinsurers directly to the Reassured or to its Liquidator, Receiver or Statutory Successor. ARTICLE 20 AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Contract between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 21 ARBITRATION As a condition precedent to any right of action hereunder, all disputes or differences arising out of or connected with this Contract (whether or not arising before or after cancellation) including interpretation or implementation of its terms, shall be referred to arbitration, in the City in which the Reassured's principal office is located. The party which desires to refer a matter to Arbitration ("the Claimant") shall so notify the other party ("the Respondent") in writing and at the time of so doing shall request the Respondent to agree as sole Arbitrator one of a list of three individuals whom the Claimant shall name. The Respondent shall, within 30 days of receipt of the said notice, notify the Claimant either (a) that it agrees one of those three individuals as sole Arbitrator, thus completing the constitution of the Arbitral Tribunal, or (b) that it nominates another person as its own Arbitrator. In the event that the Respondent nominates its own Arbitrator, the Claimant shall itself nominate its own Arbitrator within 30 days of receipt by it of the Respondent's notice. The two Arbitrators so nominated shall, within 30 days of the appointment of the second of them, themselves appoint a third Arbitrator to complete the constitution of the Arbitral Tribunal. Should the Respondent or the two chosen Arbitrators fail to make the appointment required of them, then on application of the Claimant, the American Arbitration Association will appoint the third arbitrator, and such appointment will be made in accordance with the qualifications set forth in this Article without regard to any of the American Arbitration Association's commercial arbitration rules, including its rules concerning the qualifications and/or nationality of arbitrators. All Arbitrators shall be active or former disinterested officials of Insurance or Reinsurance Companies or Lloyd's Underwriters who have experience of the class of business which is the subject matter of this Contract. The Arbitral Tribunal shall interpret this Contract as if it were an honourable engagement and not as merely a legal obligation; it is relieved of all judicial formalities and may abstain from following the strict rules of law, and shall make its award with a view to effecting the general purpose of this Contract in a reasonable manner with due regard to the custom and usage of the insurance and reinsurance business. The Arbitral Tribunal shall have full discretion to make such orders as it thinks fit in connection with all procedural matters in the Arbitration, including but not limited to the conduct of the reference by written or oral submissions, the production of documents, the examination of witnesses, and the imposition of time limits for the taking of necessary procedural steps. The Arbitral Tribunal shall also have full discretion to make such orders as it thinks fit with regard to the payment of the costs of the Arbitration including attorneys' costs and fees. Punitive damages shall not be awarded, however the Arbitral Tribunal may, at its discretion, award such other costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. 14 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 clause, and communications shall be made by the Reassured to each of the Reinsurers constituting the one party, provided that nothing therein 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 under the terms of this Contract from several to joint. Any Award or order of the Arbitral Tribunal or a majority thereof shall be binding on the parties and there shall be no right of appeal therefrom. For the purpose of enforcement of any Final Award, such Final Award may be made a Rule of any Court of competent jurisdiction. ARTICLE 22 SERVICE OF SUIT (NMA 1998) This Article applies only to those Reinsurers signatory hereto who are domiciled outside the United States of America or, should the Reassured be authorised to do business in the State of New York, those Reinsurers who are unauthorised in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, 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 Reinsurers' 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. It is further agreed that service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York, N.Y. 10019-6829, and that in any suit instituted against any one of them upon this Contract, the Reinsurers will abide by the final decision of such Court or of any Appellate Court in the event of any appeal. The above-named are authorised and directed to accept service of process on behalf of the Reinsurers in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they will enter a general appearance upon the Reinsurers' behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurers hereon hereby designate 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 their 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 Reassured or any beneficiary hereunder arising out of this Contract of Reinsurance, and hereby designate the above-named as the person to whom the said officer is authorised to mail such process or a true copy thereof. ARTICLE 23 INTERMEDIARY Carvill America Inc. of 180 North Stetson Avenue, Suite 5100, Chicago, Illinois, U.S.A. is hereby recognised as the Intermediary negotiating this Contract. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurers through Carvill America. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intemmediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reassured. 15 ARTICLE 24 PARTICIPATION This Contract obligates each of the Reinsurers for their proportion of the interests and liabilities set forth under this Contract, such proportions being shown in the attached Schedules. The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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. - Ref: LSW 1001 (Reinsurance). IN WITNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Contract as follows: Signed in Springfield, Missouri, this day of 199 For and on behalf of the Reassured: INTERMED INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 16 SCHEDULE B Attaching to and forming part of the MEDICAL PRACTITIONERS' LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT effected between INTERMED INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England this day of 199 The London Insurance and Reinsurance Market Association for and on behalf of the following Reinsurers: 7.08% SPHERE DRAKE (UNDERWRITING) LIMITED For and on behalf of: SPHERE DRAKE INSURANCE PLC Ref: 96MWDCA14284 LIRMA Ref: S0289 NOW KNOW YE that We, the Reinsurers each of us to the extent of the amount/percentage underwritten by us respectively, do hereby assume the burden of the Reinsurance, and promise and bind ourselves, each for itself only and not one for the other and in respect only of the due proportion of each of us. to the Reinsured, their Executors, Administrators and Assigns, for the true performance and fulfilment of this Contract. IN WITNESS WHEREOF the Director of Policy Signing Services of LONDON INSURANCE AND REINSURANCE MARKET ASSOCIATION ("LIRMA") has subscribed his name on behalf of each of the LIRMA Companies and (where the Companies Collective Signing Agreement ("CCSA") is being implemented) on behalf of the Leading CCSA Company which is a LIRMA Member and authorised to sign this Contract (either itself or by delegation to LIRMA) on behalf of all the other CCSA Companies. Signed: ------------------------------------- Director of Policy Signing Services 17 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (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 thc 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 thc operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all thc original policies of thc 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 bc deemed to include the following provision (specified as thc Limited Exclusion Provision): Limited Exclusion Provision: * I. It is agreed that the policy docs not apply under any liability coverage, (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 bc 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): 18 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 l954, 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 Stares of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments (immediate medical or Provision relating to surgical relief, to expenses incurred with respect (first aid, to (bodily injury, sickness, disease or death bodily injury resulting from thc hazardous properties of nuclear material and arising out of thc operation of a nuclear facility by any person or organization. III. (injury, sickness, disease, death or Under any Liability Coverage, to destruction (bodily injury or property damage resulting from thc hazardous properties of nuclear material, if (a) the nuclear material ( I ) 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 behallf 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 by-product material; "source material", "special nuclear material", and "by-product 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 by-product material other than tailings or wastes produced by the extraction or 19 concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition at nuclear facility; "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 designed or 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 or the Independent Insurance Conference of Canada. *NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. EX-10.32 8 ADDENDUM NO. 1 TO MEDICAL 1 Exhibit 10.32 96/1146/RM ADDENDUM NO. 1 attaching to and forming part of the MEDICAL PRACTITIONERS' LIABILITY COMBINED REINSURANCE CONTRACT (formerly the Primary Excess Of Loss Reinsurance Contract) made between INTERMED INSURANCE COMPANY of 1903 E.Battlefield, Springfield, Missouri, USA (hereinafter referred to as "the Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as "the Reinsurers") With effect from 1st October, 1996, the following amendments are made to this Contract: 1. PREAMBLE is amended to read as follows: PREAMBLE This Contract is made and entered into between Intermed Insurance Company of 1903 E.Battlefield, Springfield, Missouri, USA (NAIC Code: 33367) (hereinafter refered to as "the Reassured") and the Reinsurers signatory hereto (hereinafter referred to as "the Reinsurers"), on the following terms and conditions: This COMBINED REINSURANCE CONTRACT (hereinafter referred to as ~this Contract") comprises two Sections as follows: SECTION (1): PRIMARY EXCESS OF LOSS REINSURANCE and SECTION (2): FIRST EXCESS CESSION REINSURANCE Unless otherwise specified, the ARTICLES of this Contract shall apply to both Sections, as mentioned above. 2. ARTICLE 2, COVER LIM1T AND RETENTION is amended to read as follows: ARTICLE 2 COVER. LIMIT AND RETENTION SECTION (1) SECTION (1)(A) below applies to each and every loss, each policy and/or insured. SECTION (1)(B) below applies to the sum of the Reassured's SECTION (1)(A) retentions in respect of two or more policies and/or insureds involved in the same loss occurrence. The Reinsurers shall accordingly be liable hereunder - 2 SECTION (1)(A): Whenever the Reassured has paid or advanced or agreed to pay or advance, or become liable to pay on account of a loss under any policy, an amount in excess of US$400,000 Ultimate Net Loss each and every loss, each policy and/or insured, the amount recoverable from the Reinsurers hereunder shall be the amount in excess of US$400,000 Ultimate Net Loss each and every loss, each policy and/or insured, but such amount recoverable shall not exceed up to a further US$1,600,000 Ultimate Net Loss each and every loss, each policy and/or insured. and/or SECTION (1)(B): Whenever two or more policies and/or insureds are involved in the same loss occurrence the amount recoverable from the Reinsurers hereunder shall be the amount in excess of US$400,000 Ultimate Net Loss each and every loss occurrence, but such amount recoverable shall not exceed a further US$1,600,000 Ultimate Net Loss each and every loss occurrence. Recoveries by the Reassured under SECTION (1)(A) above shall inure to the benefit of the Reinsurers under SECTION (1)(B). It is agreed that the maximum overall recovery under SECTION (1)(A) and (1)(B) of this Contract combined shall be 300% of the maximum premium payable hereunder for the Contract Period, as determined in ARTICLE 10, PREMIUM. It is warranted that the Maximum Original Policy Limit for the purposes of SECTION (1) of this Contract is US$1,000,000, or so deemed, except as respects awards in excess of the Reassured's original policy limits and/or awards arising out of any extra-contractual obligation, both as more fully defined in ARTICLES 8 and 9 of this Contract, where coverage hereon applies to original policies issued for limits up to a maximum of US$2,000,000. It is agreed that although the original policies are issued by the Reassured on an occurrence, claims made and claims paid basis, recoveries hereunder shall be made on a claims made basis only. It is further agreed that although original policies may contain aggregate coverage, no aggregate coverage shall be provided by SECTION (1) of this Contract. SECTION (2) SECTION (2) of this Contract applies to excess policies coming within the scope of this Contract which are issued by the Reassured for limits in excess of US$1,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and/or insured where applicable. The Reassured shall retain the said underlying limits for its own account but, without projudiee to the above, shall be at liberty to protect that retention by way of Excess of Loss Reinsurance as detailed in SECTION (1) of this contract for its own account and benefit. With respect to each such cession, no claim shall be made under SECTION (2) of this Contract unless and until the Reassured has paid or advanced, or agreed to pay or advance, an amount in excess of the said underlying limits. 96/1146/RM The Reinsurers shall then be liable for the amount in excess of the said underlying limits as follows: 3 (A) up to the difference between US$2,000,000 each and every loss, each policy and/or insured and/or US$4,000,000 in the aggregate each policy and/or insured where applicable and the aforementioned underlying limits of US$1,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and/or insured where applicable, or (B) up to the difference between US$2,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and/or insured where applicable and the aforementioned underlying limits of US$1,000,000 each and every loss, each policy and/or insured and/or USS$3,000,000 in the aggregate each policy and/or insured where applicable. Reinsurers shall be further liable for their proportionate share of loss adjustment expenses as provided for in ARTICLE 12, LOSS REPORTS AND PAYMENTS, SECTION (2). In addition to the retention and limits as detailed in SECTIONS (2)(A) and (2)(B) above, should the Reassured incur additional liability from a cession made to SECTION (2) of this Contract as the result of an award in excess of its original policy limit or from any extracontractual obligation, both as more fully defined herein, the Reinsurers shall accept as a separate limit hereunder the additional liability incurred, subject however to the limits available under the underlying Primary Excess of Loss having first been exhausted and the total amount recoverable under SECTION (2) of this Contract in respect of any award(s) in excess of original policy limits and/or extra-contractual obligations being limited to an amount not exceeding one further cession limit in all. The Reassured shall be the sole judge of what constitutes "each excess policy" or "in the aggregate" as used in SECTION (2) of this Contract. The amount of the Reinsurers' liability hereunder in respect of any loss or losses shell not be increased by reason of the inability of the Reassured to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise. It is agreed that the maximum overall recovery under SECTION (2) of this Contract shall be limited to US$5,000,000 (exclusive of loss expenses) for the contract period hereon. SECTIONS (1) AND (2) Recoveries under SECTION (1) of this Contract shell be disregarded when calculating the amount of any loss recoverable under SECTION (2). However, the coverage provided under SECTION (1) for all losses, including specific coverage for awards in excess of original policy limits and/or extracontractual obligations, shall be fully exhausted before any amount of loss derived from specific coverage for losses in excess of original policy limits and/or extracontractual obligations can be recoverable under SECTION (2). This Contract is a contract of reinsurance separate and distinct from the original policies written by the Reassured. 3. Items C, D and E of ARTICLE 3, DEFINITIONS are amended to read as follows: C. For the purposes of this Contract the "claim made" date for any loss recoverable hereunder shall be deemed to be date of the receipt by the Reassured of acceptable notice from its original insured or a representative of its original insured that a claim is being or may be made against that original insured. The date of such receipt shall determine the date of loss for the purposes of this Contract. 96/1146/RM Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this Contract 4 With regard to SECTION (1) of this Contract only, in the event that two or more policies and/or insureds are involved in the same loss occurrence and there is a difference in the dates claims are made during this Contract Period, or subsequent renewal thereof, the date on which the first claim is made shall establish the date of loss for all related claims arising out of the same loss occurrence. Notwithstanding the foregoing, in any loss occurrence, should any claim made date(s) fall prior to 1st October 1993, it is understood and agreed that those specific loss(es) shall be disregarded for the purposes of determining the Reassured's Ultimate Net Loss hereunder. D. The term "Annual Period" as used in respect of SECTION (1) of this Contract shall mean the period from 1st October, 1996 to 30th September, 1997, both dates inclusive, and each successive 12 month period thereof within this Contract Period. E. The term "Contract Period" as used in respect of SECTION (1) of this Contract shall mean the period commencing at October 1st, 1996 and ending at September 30th, 1999 both dates inclusive, or any earlier date of termination as provided for in ARTICLE 11, PERIOD, SECTION (1). 4. The following is added to ARTICLE 5, EXCLUSIONS: 4 Policies written in "The Valley," Texas (applicable to SECTION (2) only). 5. ARTICLE 6, NET RETAINED LINES, ARTICLE 7, ULTIMATE NET LOSS and ARTICLE 15, COMMUTATION are deemed to apply to SECTION (1) of this contract only. 6. ARTICLE 8, EXCESS OF ORIGINAL POLICY LIMITS, is amended to read as follows: ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS SECTION (1) As provided for in ARTICLE 7. ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of SECTION (1), in respect of any additional liability incurred by the Reassured as the result of an award in excess of their original policy limit as more fully defined below. The Reinsurers agree that the additional liability so incurred, plus the Reassured's contractual loss, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under SECTION (1) subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under SECTION (1) as provided in ARTICLE 2. COVER LIMIT AND RETENTION. SECTION (2) In addition to the coverage afforded under ARTICLE 4, COVER. LIMIT AND RETENTION, should the Reassured incur additional liability as the result of an award in excess of its original policy limit as more fully defined below, and provided the Reassured shall have first sustained a contractual loss recoverable under SECTION (2) of this Contract, the Reinsurers shall accept as an additional separate limit hereunder their proportion of the additional liability incurred, subject always, however, to the additional amount recoverable hereunder not exceeding the amount of the original cession to this Contract for each and every original policy. 5 96/l146/RM SECTION (1) AND SECTION (2) Awards in excess of the Reassured's original policy limit are defined as contractual losses which the Reassured would have been contractually liable to pay, had it not been for the limit of the original policy and where such losses in excess of the original policy limit have been incurred because of failure by the Reassured to settle within the original policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such award in excess of the original policy limit shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such award attaches. However, this Article shall not apply where such awards in excess of original policy limit have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured 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. 7. ARTICLE 9, EXTRA-CONTRACTUAL OBLIGATIONS, is amended to read as follows: ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS SECTION (1) As provided for in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured within the limits of SECTION (1) in respect of any liability incurred by the Reassured as the result of an award in respect of any extra-contractual obligation, as more fully defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under SECTION (1), subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under SECTION (1) as provided in ARTICLE 2. COVER LIMIT AND RETENTION. SECTION (2) In addition to the coverage afforded under ARTICLE 2, COVER. LIMIT AND RETENTION, should the Reassured incur liability as the result of an award in respect of any extra-contractual obligation, as more fully defined below, and provided the Reassured shall have effected a cession hereunder in respect of the policy on which such claim arose, the Reinsurers agree that the liability so incurred shall be considered as a separate loss for the purposes of recovery under this Contract. The Reinsurers shall accept up to one additional separate cession limit hereunder for such extracontractual obligation. 6 96/l146/RM SECTION (1) AND SECTION (2) "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reassured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such extra-contractual obligation shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such extracontractual obligation attaches. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured 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. 8. ARTICLE 10, PREMIUM. is amended to read as follows: ARTICLE 10 PREMIUM SECTION (1) A. The Reassured shall pay to the Reinsurers for the Annual Periad commencing 1st October, 1996, a Provisional Premium of US$1,000,000 in four equal instalments at 1st October 1st, 1996, 1st January, 1997, 1st April, 1997 and 1st July, 1997. The Provisional Premium payable for subsequent Annual Periods shall be as mutually agreed. B. As soon as practicable after the close of each Annual Period, the Reassured shall render a statement of its cumulative Gross Net Earned Premium Income (as defined herein) and the Reassured shall pay or be paid by the Reinsurers as follows: 1) if the Contract is in effect for one year, the difference between the annual Provisional Premium and the Premium determined by applying a rate of 10.00% to the Gross Net Earned Premium Income. 12 months after the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which shall be added a minimum rate of 4.50% of the Gross Net Earned Premium Income. In no event however shall the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 22.00%; 7 96/1146/RM 2) if the Contract is in effect for two years, the difference between the Provisional Premium for the two years and the premium determined by applying a rate of 10.00% to the cumulative Gross Net Earned Premium Income. 12 months alter the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which sha11 be added a minimum rate of 4.50% of the cumulative Gross Net Earned Premium Income. In no event however shell the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 21.50%; 3) if the Contract is in effect for three years, the difference between the Provisional Premium for the three years and the premium determined by applying a rate of 10.00% to the cumulative Gross Net Earned Premium Income. 12 months alter the expiry of the Contract Period a further premium adjustment shall be made by applying a rate of 110.00% to the cumulative Incurred Loss Cost and Expenses recoverable hereunder, to which shall be added a minimum rate of 3.875% of the cumulative Gross Net Earned Premium Income. In no event however shall the minimum rate plus 110.00% of the cumulative Incurred Loss Cost and Expenses for the Contract Period exceed a maximum rate of 20.00%. C. In the event of cancellation and non-renewal of this Contract, as defined in ARTICLE 11, PERIOD, the maximum rate for the last Annual Period hereon shall be automatically increased by a factor of 1.65, with the resulting Maximum premium for the Contract Period hereon to be calculated accordingly, as determined above. Further, in the event of cancellation and non-renewal of this Contract, any unearned premium applicable to policies in force at the effective date of cancellation and non-renewal, including any extended reporting endorsements attached thereto, shall be applied to the last Annual Period hereof, and the unearned premium shell be added to the Gross Net Earned Premium Income accruing to the last Annual Period of this Contract for the purposes of the rating formula D. The premium determined for the Contract Period shall be re-calculated annually thereafter until all losses for the Contract Period are either settled, or commuted in accordance with ARTICLE 15, COMMUTATION. E. The term "Gross Net Earned Premium Income. shall, for all purposes of this Contract, be understood to mean the full gross earned amount of the premiums charged by the Reassured to its original insureds, for original policy limits up to US$1,000,000 or so deemed, less cancellations and return premiums and less premiums paid for reinsurances which inure to the benefit of this Contract, but including earned premium income for extended reporting endorsements. F. For the purpose of this article, the term "cumulative Incurred Loss Cost and Expenses" shall mean, on business the subject matter of this Contract, paid and outstanding losses and loss expenses recoverable under this Contract, and all such incurred losses shall be charged to the Annual Period of this Contract to which the loss or losses fall for the purpose of determining the rate applicable to the Contract Period. G. It is agreed that in the event of commutation in accordance with ARTICLE 15, COMMUTATION, the difference between the premium paid at that time and the premium adjustment due in consequence of such commutation shall be immediately payable. 8 96/1146/RM SECTION (2) In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Contract, the Reassured shall pay to the Reinsurers the Original Gross Net Written Premium for limits attaching to this Contract in respect of all policies ceded hereunder. The term "Original Gross Net Written Premium for limits attaching to this Contract" shall, for all purposes of this Contract, be understood to mean the full gross amount of the premium charged by the Reassured to its original insureds or allocated by the Reassured for limits in excess of either (A) up to the difference between US$2,000,000 each and every loss, each policy and/or insured and/or US$4,000,000 in the aggregate each policy and/or insured where applicable and the underlying limits of US$1,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and/or insured where applicable, or (B) up to the difference between US$2,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and/or insured where applicable and the underlying limits of US$1,000,000 each and every loss, each policy and/or insured and/or US$3,000,000 in the aggregate each policy and insured where applicable, less cancellations and return premiums and less an allowance in respect of original commission of 15%. Accounts between the parties shall be rendered and settled by the Reassured on a quarterly basis within 60 days following the end of each quarter. Any balance due from the Reinsurers shall be settled by them as soon as possible after the accounts have been rendered to them. Such accounts shall detail the transactions during the quarter as follows: 1. Original Gross Net Written Premiums ceded to the Reinsurers. 2. Original commission allowed by the Reinsurers. 9. ARTICLE 11, PERIOD, is amended to read as follows: ARTICLE 11 PERIOD SECTION (1) This Contract takes effect on 1st October, 1996 and applies to claims first made on or after that date as respects Medical Practitioners' Liability (including Dentists' Liability), and all other ancillary coverages as in the original policies. This Contract shall remain in full force and effect until 30th September, 1999 but may be terminated at 30th September, 1997, or 30th September, 1998, by either party giving to the other not less than 90 days written notice prior to anniversary date. 9 96/1146/RM In the event of the cancellation and non-renewal of this Contract, the Reinsurers shall continue to be liable hereunder in respect of all claims first made against the Reassured during an additional 60 months reporting period from the effective date of cancellation and non-renewal. In respect of the foregoing, the maximum rate for the last Annual Period hereon shall be automatically increased by a factor of 1.65, with the resulting Maximum premium for the Contract Period hereon to be calculated accordingly, as detailed in ARTICLE 10, PREMIUM. The 60 months reporting period provisions provided above shall not apply to claims first made on new or renewal policies incepting after the effective date of cancellation and non-renewal of this Contract. Further, in the event of cancellation and non-renewal of this Contract, all claims first made against the Reassured during the additional 60 months reporting period shall be applied to the last Annual Period hereof The 60 months reporting period provisions provided above shall not be operative if the Reassured replaces the reinsurance coverage afforded by this Contract, whether in part or in fall, or if the Reassured retains the limits provided herein net and for its own account, whether in part or in full. If any law or regulation of the Federal, State or Local Government of any jurisdiction in which the Reassured is doing business shall render illegal the arrangements made herein, this Contract can be terminated immediately in so far as it applies to such jurisdiction by the Reassured giving notice to the Reinsurers to such effect. SECTION (2) This Contract takes effect on 1st October, 1996 and applies to claims made on policies incepting or renewed on or after that date, including extended reporting endorsements attaching to any such policies. This contract shall remain in full force and effect unless and until cancelled on any subsequent 1st October by either party giving to the other not less than 90 days written prior notice. In the event of cancellation, Reinsurers shall continue to be liable hereunder in respect of all claims made on ceded policies, including extended reporting endorsements attached thereto, in force as of the effective date of cancellation until the natural expiry, termination or first anniversary (whichever sooner) of such ceded policies or extended reporting endorsements, but in no event for longer that twelve months, plus odd time, except where such extended reporting endorsements are issued for periods greater than twelve months in which case coverage hereunder will follow such extended reporting endorsements. If any law or regulation of the Federal, State or Local Government of any jurisdiction in which the Reassured is doing business shall render illegal the arrangements made herein, this Contract can be terminated immediately in so far as it applies to such jurisdiction by the Reassured giving notice to the Reinsurers to such effect. 10 96/1146/RM 10. ARTICLE 12, LOSS REPORTS AND PAYMENTS, is amended to read as follows: ARTICLE 12 LOSS REPORTS AND PAYMENTS SECTIONS (1) and (2) The Reinsurers agree to abide by all loss settlements of the Reassured, provided such loss settlements are within the terms and conditions of the Reassured's original policies and of this Contract, which at its sole discretion Shall adjust, settle or compromise all losses. All such adjustments, settlements or compromises shall be unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. SECTION (1) It is a condition precedent to liability hereunder that the Reassured shall advise the Reinsurers by quarterly bordereaux of all paid losses hereunder, and of outstanding losses including any subsequent developments in connection therewith which are reserved by the Reassured at or in excess of $400,000 Ultimate Net Loss. Such bordereaux shall be furnished by the Reassured within 60 days following the end of each quarter. The information contained therein shall be in brief summary form but shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Bordereaux shall detail, for each individual loss: 1. The amounts paid by the Reassured and the amounts outstanding in their own books for both indemnity and expenses, as at the end of the quarter under consideration, and the Reinsurers' share thereof. 2. Indemnity and expense payments made by the Reassured during the quarter under consideration in respect of which reimbursement by the Reinsurers is then required. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the quarterly bordereaux have been furnished to them; but in the event of the Reassured sustaining a loss in respect of which the Reinsurers' share amounts to or exceeds $200,000 Ultimate Net Loss, the Reassured shall have the option of requiring the Reinsurers to effect immediate payment outside of the quarterly bordereaux upon submission of proof of loss. SECTION (2) It is a condition precedent to liability hereunder that the Reassured shall advise the Reinsurers promptly of all losses, and of any subsequent developments in connection therewith, which in the opinion of the Reassured appear likely to involve the liability of the Reinsurers under SECTION (2) of this Contract. The Reinsurers agree to pay any amount for which they may be liable immediately upon receipt of reasonable evidence of the amount paid or advanced by the Reassured or scheduled to be paid or advanced by the Reassured. 11 96/1146/RM 11. ARTICLE 14, ACCESS TO RECORDS AND CLAlMS REVIEW is amended to read as follows. ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW SECTIONS (1) AND (2) All documents and records in the possession of the Reassured concerning this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the expiration of this Contract and shall be exercised at the Reinsurers' own expense. SECTION (1) ONLY In accordance with the above provisions, Reinsurers, at their own expense, shall be afforded the opportunity to appoint an Attorney of their own choice to carry out, on a timely basis, an independent audit of the Reassured's Claims information and Claims procedures and to report to the Reinsurers the result of such review accordingly. 12. ARTICLE 16. LOSS RESERVES, is amended to read as follows: LOSS AND UNEARNED PREMIUM RESERVES ARTICLE 16 This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves and unearned premium reserves. Any references to loss reserves in this Article shall apply to SECTION (1) and SECTION (2) but references to unearned premium reserves shall only apply to SECTION (2). The Reassured agree that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its books statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract or for unearned premium in respect of business coming within the scope of this Contract, it shell forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing separately the amounts involved for known outstanding losses and allocated loss expenses and for unearned premium and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of clean, irrevocable and unconditional Letters of Credit, in amounts equal to their proportion of the stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in fall conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreen" in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at 12 least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the life of the Letter of Credit in question beyond its forthcoming expiration date. In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby undertake to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the proceeds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any liability for loss or allocated loss expense reinsured by this Contract or of any refund of unearned premium; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any liability for loss or allocated loss expense reinsured by this Contract or of any refund of unearned premium. c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that the obligations secured by the Letter of Credit remain unliquidated and undischarged at the time of receipt by the Reassured of such notice, to create a cash deposit account, separate from their own assets, in an amount equal to the participation of the canceling or non-renewing Reinsurer(s) in the Letter of Credit. That cash deposit account may then be used as in sub-paragraphs a and b above. It is understood and agreed that this procedure may only be implemented before the expiry of the notice period in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under this Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorized representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and unearned premium reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the original statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses or unearned premium reserves exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days after receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of these items. If, however, the statement, shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorizing the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive security so determined be applied towards securing the Reassured's reserves for losses or loss expenses Incurred But Not Reported. All expenses incurred in the establishment or maintenance of such Letters of Credit shell be for the account of the Reinsurers. 13 ALL OTHER TERMS AND CONDITIONS REMAIN UNALTERED. IN WITNESS WHEREOF the parties hereto have, by their duly authorized representative, executed this Contract as follows: Signed in Springfield, Missouri, this day of 199 For and on behalf of the Reassured: INTERMED INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 14 SCHEDULE B Attaching to and forming part of ADDENDUM NO. 1 to the MEDICAL PRACTITIONERS' LIABILITY COMBINED REINSURANCE CONTRACT effected between INTERMED INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England this ______ day of __________ 199 The London Insurance and Reinsurance Market Association for and on behalf of the following Reinsurers: 7.08% SPHERE DRAKE (UNDERWRITING) LIMITED For and on behalf of: SPHERE DRAKE INSURANCE PLC Ref: 96MWDCA14284 LIRMA Ref: S0289 EX-10.33 9 ADDENDUM NO. 2 TO MEDICAL 1 Exhibit 10.33 ADDENDUM NO.2 attaching to and forming part of the MEDICAL PRACTITIONERS' LIABILITY COMBINED REINSURANCE CONTRACT (formerly the Primary Excess Of Loss Reinsurance Contract) made between INTERMED INSURANCE COMPANY of 1903 E. Battlefield, Springfield, Missouri, USA (hereinafter referred to as "the Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as "the Reinsurers") With effect from 1st October, 1997, the following amendments are made to this Contract: 1. Item A of SECTION (1) of ARTICLE 10 - PREMIUM is amended to read as follows: A. The Reassured shall pay to the Reinsurers for the Annual Period commencing 1st October, 1997, a Provisional Premium of US$1,000,000 in four equal instalments at 1st October, 1997, 1st January, 1998, 1st April, 1998 and 1st July, 1998. 2. The participations of Reinsurers shall be as shown in the attached Schedules and not as heretofore. ALL OTHER TERMS AND CONDITIONS REMAIN UNALTERED IN WITNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Contract as follows: Signed in Springfield, Missouri, this day of 199 ------ ------ For and on behalf of the Reassured: INTERMED INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached Schedules which shall be considered to form an integral part of this Contract. 2 SCHEDULE B Attaching to and forming part of ADDENDUM NO. 2 to the MEDICAL PRACTITIONERS' LIABILITY COMBINED REINSURANCE CONTRACT (formerly the Primary Excess of Loss Reinsurance Contract) made between INTERMED INSURANCE COMPANY of 1903 E. Battlefield Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England this day of 199 ------ ------ The London Insurance and Reinsurance Market Association for and on behalf of the following Reinsurers: 6.83% SPHERE DRAKE (UNDERWRITING) LIMITED For and on behalf of: SPHERE DRAKE INSURANCE PLC Ref: 97LNCX014284 LIRMA Ref: S0289 EX-10.35 10 LAWYERS' PROFESSIONAL LIABILITY 1 Exhibit 10.35 96/1249/IP TITLE: LAWYERS' PROFESSIONAL LIABILITY - ----------- PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT BETWEEN: INTERLEX INSURANCE COMPANY - ----------- AND THE REINSURERS SIGNATORY HERETO COMMENCING: 1ST OCTOBER, 1996 - ----------- U.S. CLASS- IFICATION: U.S. REINSURANCE - ----------- 2 INDEX OF ARTICLES PREAMBLE IDENTITY OF PARTIES ARTICLE 1 BUSINESS REINSURED ARTICLE 2 COVER, LIMIT AND RETENTION ARTICLE 3 DEFINITIONS ARTICLE 4 TERRITORIAL SCOPE ARTICLE 5 EXCLUSIONS ARTICLE 6 NET RETAINED LINES ARTICLE 7 ULTIMATE NET LOSS ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS ARTICLE 10 PREMIUM ARTICLE 11 PERIOD ARTICLE 12 LOSS REPORTS AND PAYMENTS ARTICLE 13 CURRENCY ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW ARTICLE 15 LOSS RESERVES ARTICLE 16 TAX PROVISIONS ARTICLE 17 DELAYS, ERRORS OR OMISSIONS ARTICLE 18 INSOLVENCY OF THE REASSURED ARTICLE 19 AMENDMENTS AND ALTERATIONS ARTICLE 20 ARBITRATION ARTICLE 21 SERVICE OF SUIT (NMA 1998) ARTICLE 22 INTERMEDIARY ARTICLE 23 PARTICIPATION ATTACHMENTS NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY REINSURANCE- U.S.A.
3 LAWYERS' PROFESSIONAL LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT PREAMBLE This Contract is made and entered into between Interlex Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 10037) hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred to as the "Reinsurers"), on the following terms and conditions: BUSINESS REINSURED ARTICLE 1 For and in consideration of the premium being paid by the Reassured in accordance with ARTICLE 10, PREMIUM. Reinsurers agree to indemnify the Reassured in respect of the net excess liability to the Reassured resulting from losses under Lawyers' Professional Liability policies and all other ancillary coverages, including State Judges' Liability Policies, as in the original policies issued by the Reassured, hereinafter referred to as "policies". ARTICLE 2 COVER LIMIT AND RETENTION Whenever the Reassured has paid or advanced, or agreed to pay or advance, or become liable to pay on account of a loss under any policy an amount in excess of US$300,000 Ultimate Net Loss each insured, each claim, the amount recoverable from Reinsurers hereunder shall be the amount in excess of US$300,000 but such amount recoverable shall not exceed a further US$700,000 Ultimate Net Loss each insured, each claim, except in the event that the Reassured has issued a Defence Costs Allowance Rider as part of the original policy, in which event the Ultimate Net Loss covered hereunder may be increased in respect of defence costs by up to a further US$250,000 each insured, each claim. Notwithstanding the foregoing, the fatal amount recoverable from Reinsurers hereunder shall not exceed the sum of US$2,100,000 except in the event that the Premium Income payable to Reinsurers hereo4 as further defined in ARTICLE 10, PREMIUM shall exceed US$500,000, in which event the maximum amount recoverable hereon from Reinsurers shell automatically be increased to US$3,500,000. The specific coverage afforded under this Contract for awards in excess of original policy limits and/or awards arising out of any extra-contractual obligation, subject to the limits set forth above is to apply to all losses regardless of original policy limit, prior to recoveries if any. ARTICLE 3 DEFINITIONS A. The term "Policy" or "Policies" as used in this Contract shall mean any binder, policy, endorsement, extended reporting endorsement or contract of insurance issued, accepted or held covered by the Reassured. B. For the purposes of this Contract the "claim made" date shall be as defined under the original policy. Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this contract. C. The term "retention" as used in this Contract shall mean the amount retained by the Reassured in respect of each and every loss hereunder and which amount shall be retained net by the Reassured. 4 ARTICLE 4 TERRITORIAL SCOPE This Contract shall cover wherever the Reassured's policies cover. ARTICLE 5 EXCLUSIONS This Contract does not apply to and absolutely excludes the following: 1. Nuclear Incidents, in accordance with the attached Nuclear Incident Exclusion Clause -Liability - Reinsurance - U.S.A. 2. All liability of the Reassured arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured 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. 3. Reinsurance Assumed. ARTICLE 6 NET RETAINED LINES Subject always to the provisions of ARTICLE 7, ULTIMATE NET LOSS, this Contract applies only to that portion of any insurance covered by this Contract which the Reassured retains net for its own account and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance which the Reassured retains net for its own account shall be included. It is understood and agreed that the amount of the Reinsurers' liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reassured to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE 7 ULTIMATE NET LOSS The term "Ultimate Net Loss" as used in this Contract shall mean the sum actually paid or payable by the Reassured in settlement of any loss or losses for which it is liable under its original policy or policies, including any Pre-Judgement interest awarded by any Trial Court or Appeal Court, and/or any additional liability incurred by the Reassured as a result of an award in excess of their original policy limits, and/or any additional liability incurred by the Reassured from any extra-contractual obligation, both as more fully defined in ARTICLES 8 and 9 below. The amount of the Reassured's Ultimate Net Loss shall also include all loss adjustment expenses incurred by the Reassured in connection with the adjustment, settlement or compromise of any loss including expenses of litigation, if any, and all subrogation, salvage and recovery expenses, but excluding the 5 salaries of employees and all office expenses of the Reassured. For the purposes hereof, loss adjustment expenses shall include Post-Judgement Interest awarded by any Trial Court or Appeal Court. All salvages and recoveries, including recoveries under all reinsurances which inure to the benefit of this Contract, whether collected or not, shall first be deducted from such loss to arrive at the amount of the Reassured's actual Loss for the purposes of this Contract. All salvages, recoveries and payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. However, nothing in the foregoing shall be construed as meaning that losses are not recoverable hereunder until the Reassured's Ultimate Net Loss has been ascertained. ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any additional liability incurred by the Reassured as the result of an award in excess of their original policy limit as more fully defined below. The Reinsurers agree that the additional liability so incurred, plus the Reassured's contractual loss, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2. COVER LIMIT AND RETENTION. Awards in excess of the Reassured's original policy limit are defined as losses which the Reassured would have been contractually liable to pay, had it not been for the limit of the original policy and where such losses in excess of the original policy limit have been incurred because of failure by the Reassured to settle within the original policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such award in excess of the original policy limit shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such award attaches. However, this Article shall not apply where such awards in excess of original policy limit have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any liability incurred by the Reassured as the result of an award in respect of any extra-contractual obligation, as more fully defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2, COVER LIMIT AND RETENTION. "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reassured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting 6 an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such extra-contractual obligation shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such extra-contractual obligation attaches. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 10 PREMIUM A. In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Contract, the Reassured shall pay to the Rcinsurer: 1) a Minimum and Deposit Premium of US$35,000, payable in advance in four equal instalments at 1st October 1996, 1st January 1997, 1st April 1997 and 1st July 1997. As soon as possible after the expiry of this Contract, the Reassured shall determine the adjusted reinsurance premium due hereon by applying a rate of 5.00% to the total Gross Net Written Premium Income applicable to original each claim policy limits of up to and including US$300,000, including Premium in respect of the Reassured's Defence Costs Allowance Rider issued on original each claim policy limits of US$100,000, but subject always to the application of the Minimum Premium due for the period hereon. Any additional premium due in excess of the previously paid Minimum and Deposit Premium due for the period hereon shall be remitted to Reinsurers. 2) an Additional Reinsurance Premium to be determined quarterly within 60 days of the close of each quarter at a rate determined by reference to the original Gross Net Written Premium Income for all policies incepting or renewed during the applicable quarter, according to the following scale; a) 36.00% of the Original Gross Net Written Premium Income for original policies with an each claim limit of US$ 1,000,000; b) 16.50% of the Original Gross Net Written Premium Income for original policies with an each claim limit of US$500,000. The Reinsurers agree to allow the Reassured to deduct and retain for their own benefit as Ceding Commission 15.00% of the additional Gross Reinsurance Premium so determined. The Additional Reinsurance Premium so determined shall be payable in addition to that determined under 1) above. 3) further Additional Reinsurance Premium in respect of additional limits issued under the Reassured's Defence Costs Allowance Rider, according to the following scale; a) US$112 per lawyer on original policies with an each claim limit of US$250,000 and an additional Defence Costs Allowance limit of US$125,000; 7 b) US$250 per lawyer on original policies with an each claim limit of US$500,000 and an additional Defence Costs Allowance limit of US$250,000; c) US$220 per lawyer on original policies with an each claim limit of US$1,000,000 and an additional Defence Costs Allowance limit of US$250,000. The Reinsurers agree to allow the Reassured to deduct and retain for their own benefit as Ceding Commission 15.00% of the Additional Gross Reinsurance Premium so determined. The Additional Reinsurance Premium so determined shall be payable in addition to that determined under 1) and 2) above. B. The Premium Income payable hereon for the purposes of determining the Maximum Recoverable hereunder, shall comprise the sum of a) The adjusted Premium payable under Section 1) above, plus b) The net Additional Reinsurance Premium payable under Section 2) above, after deduction of Ceding Commission, plus c) The net Additional Reinsurance premium payable under Section 3) above, after deduction of Ceding Commission. The term "Gross Net Written Premium Income" shall for all purposes of this Contract, be understood to mean the full gross amount of the premiums charged by the Reassured to their original insureds less cancellation and return premiums, and less premiums paid for reinsurances which inure to the benefit of this Contract. ARTICLE 11 PERIOD This Contract takes effect on 1st October, 1996 and applies to claims made on original policies attaching during the period from 1st October, 1996 to 30th September 1997, both days inclusive, including extended reporting endorsements issued by the Reassured attached thereto. In the event of the non-renewal of this Contract, Reinsurers shall continue to be liable hereunder in respect of all claims made on original policies, including discovery period coverage and/or extended reporting endorsements attached thereto, in force on the date of non-renewal under the natural expiry or first anniversary (whichever sooner) of such policies but in no event for longer than twelve months plus odd time, except in the case of discovery period coverage and/or extended reporting endorsements which may have up to an unlimited period. For all purposes of this Article, any extent reporting endorsement attaching to a policy covered hereunder shall be considered as part of the period of the said policy, subject to the provision that a separate limit of liability may apply in respect thereof. Any claim or incident reported under any extended reporting endorsement shall be deemed to have been made on the last day coverage was in force prior to the issuance of such endorsement. LOSS REPORTS AND PAYMENTS The Reinsurers agree to abide by all loss settlements of the Reassured which, at its sole discretion, shall adjust, settle or compromise all losses. All such adjustments, settlements or compromises shall be 8 unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. The Reassured shall advise the Reinsurers of all paid losses and outstanding losses hereunder, and of any subsequent developments in connection therewith, which are reserved by the Reassured at, or in excess of US$300,000 Ultimate Net Loss. The information provided by the Reassured shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the settlement request has been furnished to them. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Contract shall be United States Dollars. ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW All documents and records in the possession of the Reassured concerning this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. Specifically, the Reinsurers shall be entitled to nominate a representative to assess the Reassured's claims and claims procedures. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers' by this Article shall continue in effect notwithstanding the expiration of this Contract and shell be exercised at the Reinsurers' own expense. ARTICLE 15 LOSS RESERVES This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves. The Reassured agrees that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its books statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract it shall forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing the amounts involved for known outstanding losses and allocated loss expenses and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of a clean, irrevocable and unconditional Letter of Credit, in an amount equal to their proportion stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. 9 All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in full conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreen" in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the Life of the Letter of Credit in question beyond its forthcoming expiration date. In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby undertakes to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the proceeds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any Liability for loss or allocated loss expense reinsured by this Contract; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any Liability for loss or allocated loss expense reinsured by this Contract. c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that the obligations secured by the Letter of Credit remain unliquidated and undischarged at the time of receipt by the Reassured of such notice, to create a cash deposit account, separate from its own assets, in an amount equal to the participation of the canceling or non-renewing Reinsurer(s) in the Letter of Credit. That cash deposit account may then be used only as in subparagraphs a and b above. It is understood and agreed that this procedure may only be implemented before the expiry of the notice period in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under This Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorized representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the origina1 statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days after receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of those items. If, however, the statement shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorizing the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive security so determined be applied towards securing the Reassured reserves for losses or loss expenses Incurred But Not Reported. 10 All expenses incurred in the establishment or maintenance of such Letters of Credit shall be for the account of the Reinsurers. ARTICLE 16 TAX PROVISIONS The Reassured shell be Liable for all taxes (except Federal Excise Tax) levied on premiums payable to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. To the extent that such premium is subject to Federal Excise Tax, the Reinsurers hereby agree to allow as a deduction from the premium, for the purpose of paying Federal Excise Tax, 1% of the premium payable hereon. In the event of any return premium becoming due hereunder the Reinsurers will deduct 1% from the amount of the return, and the Reassured or their agents shall take stops to recover the tax from the Government of the United States of America. Notwithstanding the above, any changes in the Federal Excise Tax rate or the exemption status of Reinsurers shall be automatically applicable to this Contract. In consideration of the terms under which this Contract is issued, the Reassured undertake not to claim any deduction in respect of premium payable hereon when making tax returns, other than Income or Profits tax returns, to any fiscal authority of the United States of America or any State or Territory thereof. ARTICLE 17 DELAYS. ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Contract if such delay, error or omission had not been made, provided that rectification is made immediately upon discovery. ARTICLE 18 INSOLVENCY OF THE REASSURED Amounts due to the Reassured under this Contract shall be payable by the Reinsurers on the basis of the liability of the Reassured under the original policies reinsured hereunder without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the origina1 policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such claim is to be adjudicated and interpose any defense or defenses which they may deem available to the Reassured or its Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. 11 When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or to interpose defence to such claim, the expense shell be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a Receiver be appointed, Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Contract any sums which are due to Reinsurers from the Reassured under this Contract and which are expressed herein to be payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Contract shall be payable by the Reinsurers directly to the Reassured or to its Liquidator, Receiver or Statutory Successor. ARTICLE 19 AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Contract between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 20 ARB1TRATION As a condition precedent to any right of action hereunder, all disputes or differences arising out of or connected with this Contract (whether or not arising before or after cancellation) including interpretation or implementation of its terms, shall be referred to arbitration, in the City in which the Reassured's principal office is located. The party which desires to refer a matter to Arbitration ("the Claimant") shall so notify the other party ("the Respondent") in writing and at the time of so doing shall request the Respondent to agree as sole Arbitrator one of a list of three individuals whom the Claimant shall name. The Respondent shall, within 30 days of receipt of the said notice, notify the Claimant either (a) that it agrees one of those three individuals as sole Arbitrator, thus completing the constitution of the Arbitral Tribunal, or (b) that it nominates another person as its own Arbitrator. In the event that the Respondent nominates its own Arbitrator, the Claimant shall itself nominate its own Arbitrator within 30 days of receipt by it of the Respondent's notice. The two Arbitrators so nominated shall, within 30 days of the appointment of the second of them, themselves appoint a third Arbitrator to complete the constitution of the Arbitral Tribunal. Should the Respondent or the two chosen Arbitrators fail to make the appointment required of them, then on application of the Claimant, the American Arbitration Association will appoint the third arbitrator, and such appointment will be made in accordance with the qualifications set forth in this Article without regard to any of the American Arbitration Association's commercial arbitration rules, including its rules concerning the qualifications and/or nationality of arbitrators. All Arbitrators shall be active or former disinterested officials of Insurance or Reinsurance Companies or Lloyd's Underwriters who have experience of the class of business which is the subject matter of this Contract. The Arbitral Tribunal shall interpret this Contract as if it wore an honorable engagement and not as merely a legal obligation; it is relieved of all judicial formalities and may abstain from following the strict 12 rules of law, and shall make its award with a view to effecting the general purpose of this Contract in a reasonable manner with due regard to the custom and usage of the insurance and reinsurance business. The Arbitral Tribunal shall have fall discretion to make such orders as it thinks fit in connection with all procedural matters in the Arbitration, including but not limited to the conduct of the reference by written or oral submissions, the production of documents, the examination of witnesses, and the imposition of time limits for the taking of necessary procedural stops. The Arbitral Tribunal shall also have fall discretion to make such orders as it thinks fit with regard to the payment of the costs of the Arbitration including attorneys' costs and fees. Punitive damages shall not be awarded, however the Arbitral Tribunal may, at its discretion, award such other costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. 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 clause, and communications shall be made by the Reassured to each of the Reinsurers constituting the one party, provided that nothing therein 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 under the terms of this Contract from several to joint. Any Award or order of the Arbitral Tribunal or a majority thereof shall be binding on the parties and there shall be no right of appeal therefrom For the purpose of enforcement of any Final Award7 such; ~> Final Award may be made a Rule of any Court of competent jurisdiction. ARTICLE 21 SERVICE OF SUIT (NMA 1998) This Article applies only to those Reinsurers signatory hereto who are domiciled outside the United States of America or, should the Reassured be authorized to do business in the State of New York, those Reinsurers who are unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, 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 Reinsurers' 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. It is further agreed that service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York N.Y. 10019-6829, and that in any suit instituted against any one of them upon this Contract, Reinsurers will abide by the final decision of such Court or of any Appellate Court in the event of any appeal. The above-named are authorized and directed to accept service of process on behalf of Reinsurers in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they will enter a general appearance upon Reinsurers' behalf in the event such a suit shall be instituted Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, Reinsurers hereon hereby designate 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 their 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 Reassured or any beneficiary hereunder arising out of this Contract of Reinsurance, and hereby designate the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof 13 ARTICLE 22 INTERMEDIARY Carvill America, 180 North Stetson Avenue, Suite 5100, Chicago, Illinois, 60601, is hereby recognized as the Intermediary negotiating this Contract. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurers through Carvill America. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reassured. ARTICLE 23 PARTICIPATION This Contract obligates each of the Reinsurers for their proportion of the interests and liabilities set forth under this Contract, such proportions being shown in the attached Schedules. The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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 parties hereto have, by their duly authorized representative, executed this Contract as follows: Signed in Springfield, Missouri this day of 1997 For and on behalf of the Reassured: INTERLEX INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 14 SCHEDULE A Attaching to and forming part of the LAWYERS' PROFESSIONAL LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CON=ACT effected between INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England, this day of 199 93.01% VARIOUS UNDERWRITING MEMBERS OF LLOYD'S per schedule attached hereto 15 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (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 thc 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 thc operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all thc original policies of thc 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 bc deemed to include the following provision (specified as thc Limited Exclusion Provision): Limited Exclusion Provision: * I. It is agreed that the policy docs not apply under any liability coverage, (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 bc 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 16 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 l954, 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 Stares of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments (immediate medical or Provision relating to surgical relief, to expenses incurred with respect (first aid, to (bodily injury, sickness, disease or death bodily injury resulting from thc hazardous properties of nuclear material and arising out of thc operation of a nuclear facility by any person or organization. III. (injury, sickness, disease, death or Under any Liability Coverage, to destruction (bodily injury or property damage resulting from thc hazardous properties of nuclear material, if (a) the nuclear material ( I ) 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 behallf 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 by-product material; "source material", "special nuclear material", and "by-product 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 by-product material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of 17 any nuclear facility included under the first two paragraphs of the definition at nuclear facility; "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 designed or 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 or the Independent Insurance Conference of Canada. *NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. EX-10.36 11 LAWYERS' PROFESSIONAL LIABILITY 1 Exhibit 10.36 97/1249/IP TITLE: LAWYERS' PROFESSIONAL LIABILITY - ----------- PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT BETWEEN: INTERLEX INSURANCE COMPANY - ----------- AND THE REINSURERS SIGNATORY HERETO COMMENCING: 1ST OCTOBER, 1997 - ----------- U.S. CLASSIFICATION: U.S. REINSURANCE - -------------------- 2
INDEX OF ARTICLES PREAMBLE IDENTITY OF PARTIES ARTICLE 1 BUSINESS REINSURED ARTICLE 2 COVER, LIMIT AND RETENTION ARTICLE 3 DEFINITIONS ARTICLE 4 TERRITORIAL SCOPE ARTICLE 5 EXCLUSIONS ARTICLE 6 NET RETAINED LINES ARTICLE 7 ULTIMATE NET LOSS ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS ARTICLE 10 PREMIUM ARTICLE 11 PERIOD ARTICLE 12 LOSS REPORTS AND PAYMENTS ARTICLE 13 CURRENCY ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW ARTICLE 15 LOSS RESERVES ARTICLE 16 TAX PROVISIONS ARTICLE 17 DELAYS, ERRORS OR OMISSIONS ARTICLE 18 INSOLVENCY OF THE REASSURED ARTICLE 19 AMENDMENTS AND ALTERATIONS ARTICLE 20 ARBITRATION ARTICLE 21 SERVICE OF SUIT (NMA 1998) ARTICLE 22 INTERMEDIARY ARTICLE 23 PARTICIPATION ATTACHMENTS NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY REINSURANCE- U.S.A.
3 LAWYERS' PROFESSIONAL LIABIL1TY PRIMARY EXCESS OF LOSS REINSURANCE CONTRACT PREAMBLE This Contract is made and entered into between Interlex Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 10037) hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred to as the "Reinsurers"), on the following terms and conditions: BUSINESS REINSURED ARTICLE 1 For and in consideration of the premium being paid by the Reassured in accordance with ARTICLE 10, PREMIUM. Reinsurers agree to indemnify the Reassured in respect of the net excess liability to the Reassured resulting from losses under Lawyers' Professional Liability policies and all other ancillary coverages, including State Judges' Liability Policies, as in the original policies issued by the Reassured, hereinafter referred to as "policies". ARTICLE 2 COVER LIMIT AND RETENTION Whenever the Reassured has paid or advanced, or agreed to pay or advance, or become liable to pay on account of a loss under any policy an amount in excess of US$300,000 Ultimate Net Loss each insured, each claim, the amount recoverable from Reinsurers hereunder shall be the amount in excess of US$300,000 but such amount recoverable shall not exceed a further US$700,000 Ultimate Net Loss each insured, each claim, except in the event that the Reassured has issued a Defence Costs Allowance Rider as part of the original policy, in which event the Ultimate Net Loss covered hereunder may be increased in respect of defence costs by up to a further US$250,000 each insured, each claim. Notwithstanding the foregoing, the fatal amount recoverable from Reinsurers hereunder shall not exceed the sum of US$2,100,000 except in the event that the Premium Income payable to Reinsurers hereo4 as further defined in ARTICLE 10, PREMIUM shall exceed US$500,000, in which event the maximum amount recoverable hereon from Reinsurers shell automatically be increased to US$3,500,000. The specific coverage afforded under this Contract for awards in excess of original policy limits and/or awards arising out of any extra-contractual obligation, subject to the limits set forth above is to apply to all losses regardless of original policy limit, prior to recoveries if any. ARTICLE 3 DEFINITIONS A. The term "Policy" or "Policies" as used in this Contract shall mean any binder, policy, endorsement, extended reporting endorsement or contract of insurance issued, accepted or held covered by the Reassured. B. For the purposes of this Contract the "claim made" date shall be as defined under the original policy. Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this contract. C. The term "retention" as used in this Contract shall mean the amount retained by the Reassured in respect of each and every loss hereunder and which amount shall be retained net by the Reassured. 4 ARTICLE 4 TERRITORIAL SCOPE This Contract shall cover wherever the Reassured's policies cover. ARTICLE 5 EXCLUSIONS This Contract does not apply to and absolutely excludes the following: 1. Nuclear Incidents, in accordance with the attached Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. 2. All liability of the Reassured arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured 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. 3. Reinsurance Assumed. ARTICLE 6 NET RETAINED LINES Subject always to the provisions of ARTICLE 7, ULTIMATE NET LOSS, this Contract applies only to that portion of any insurance covered by this Contract which the Reassured retains net for its own account and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance which the Reassured retains net for its own account shall be included. It is understood and agreed that the amount of the Reinsurers' liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reassured to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE 7 ULTIMATE NET LOSS The term "Ultimate Net Loss" as used in this Contract shall mean the sum actually paid or payable by the Reassured in settlement of any loss or losses for which it is liable under its original policy or policies, including any Pre-Judgement interest awarded by any Trial Court or Appeal Court, and/or any additional liability incurred by the Reassured as a result of an award in excess of their original policy limits, and/or any additional liability incurred by the Reassured from any extra-contractual obligation, both as more fully defined in ARTICLES 8 and 9 below. The amount of the Reassured's Ultimate Net Loss shall also include all loss adjustment expenses incurred by the Reassured in connection with the adjustment, settlement or compromise of any loss including expenses of litigation, if any, and all subrogation, salvage and recovery expenses, but excluding the 5 salaries of employees and all office expenses of the Reassured. For the purposes hereof, loss adjustment expenses shall include Post-Judgement Interest awarded by any Trial Court or Appeal Court. All salvages and recoveries, including recoveries under all reinsurances which inure to the benefit of this Contract, whether collected or not, shall first be deducted from such loss to arrive at the amount of the Reassured's actual Loss for the purposes of this Contract. All salvages, recoveries and payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. However, nothing in the foregoing shall be construed as meaning that losses are not recoverable hereunder until the Reassured's Ultimate Net Loss has been ascertained. ARTICLE 8 EXCESS OF ORIGINAL POLICY LIMITS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any additional liability incurred by the Reassured as the result of an award in excess of their original policy limit as more fully defined below. The Reinsurers agree that the additional liability so incurred, plus the Reassured's contractual loss, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2. COVER LIMIT AND RETENTION. Awards in excess of the Reassured's original policy limit are defined as losses which the Reassured would have been contractually liable to pay, had it not been for the limit of the original policy and where such losses in excess of the original policy limit have been incurred because of failure by the Reassured to settle within the original policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such award in excess of the original policy limit shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such award attaches. However, this Article shall not apply where such awards in excess of original policy limit have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 9 EXTRA-CONTRACTUAL OBLIGATIONS As provided in ARTICLE 7, ULTIMATE NET LOSS, this Contract shall protect the Reassured, within the limits of this Contract, in respect of any liability incurred by the Reassured as the result of an award in respect of any extra-contractual obligation, as more fully defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of recovery under this Contract as provided in ARTICLE 2, COVER LIMIT AND RETENTION. "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reassured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting 6 an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The claims made date for any such extra-contractual obligation shall be deemed, in all circumstances, to be the same as the claims made date of the original claim to which such extra-contractual obligation attaches. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defence or settlement of any claim. ARTICLE 10 PREMIUM A. In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Contract, the Reassured shall pay to the Rcinsurer: 1) a Minimum and Deposit Premium of US$35,000, payable in advance in four equal instalments at 1st October 1997, 1st January 1998, 1st April 1998 and 1st July 1998. As soon as possible after the expiry of this Contract, the Reassured shall determine the adjusted reinsurance premium due hereon by applying a rate of 5.00% to the total Gross Net Written Premium Income applicable to original each claim policy limits of up to and including US$300,000, including Premium in respect of the Reassured's Defence Costs Allowance Rider issued on original each claim policy limits of US$100,000, but subject always to the application of the Minimum Premium due for the period hereon. Any additional premium due in excess of the previously paid Minimum and Deposit Premium due for the period hereon shall be remitted to Reinsurers. 2) an Additional Reinsurance Premium to be determined quarterly within 60 days of the close of each quarter at a rate determined by reference to the original Gross Net Written Premium Income for all policies incepting or renewed during the applicable quarter, according to the following scale; a) 36.00% of the Original Gross Net Written Premium Income for original policies with an each claim limit of US$ 1,000,000; b) 16.50% of the Original Gross Net Written Premium Income for original policies with an each claim limit of US$500,000. The Reinsurers agree to allow the Reassured to deduct and retain for their own benefit as Ceding Commission 15.00% of the additional Gross Reinsurance Premium so determined. The Additional Reinsurance Premium so determined shall be payable in addition to that determined under 1) above. 3) further Additional Reinsurance Premium in respect of additional limits issued under the Reassured's Defence Costs Allowance Rider, according to the following scale; a) US$112 per lawyer on original policies with an each claim limit of US$250,000 and an additional Defence Costs Allowance limit of US$125,000; 7 b) US$250 per lawyer on original policies with an each claim limit of US$500,000 and an additional Defence Costs Allowance limit of US$2S0,000; c) US$220 per lawyer on original policies with an each claim limit of US$1,000,000 and an additional Defence Costs Allowance limit of US$250,000. The Reinsurers agree to allow the Reassured to deduct and retain for their own benefit as Ceding Commission 15.00% of the Additional Gross Reinsurance Premium so determined. The Additional Reinsurance Premium so determined shall be payable in addition to that determined under 1) and 2) above. B. The Premium Income payable hereon for the purposes of determining the Maximum Recoverable hereunder, shall comprise the sum of a) The adjusted Premium payable under Section 1) above, plus b) The net Additional Reinsurance Premium payable under Section 2) above, after deduction of Ceding Commission, plus c) The net Additional Reinsurance premium payable under Section 3) above, after deduction of Ceding Commission. The term "Gross Net Written Premium Income" shall for all purposes of this Contract, be understood to mean the full gross amount of the premiums charged by the Reassured to their original insureds less cancellation and return premiums, and less premiums paid for reinsurances which inure to the benefit of this Contract. ARTICLE 11 PERIOD This Contract takes effect on 1st October, 1997 and applies to claims made on original policies attaching during the period from 1st October, 1997 to 30th September 1998, both days inclusive, including extended reporting endorsements issued by the Reassured attached thereto. In the event of the non-renewal of this Contract, Reinsurers shall continue to be liable hereunder in respect of all claims made on original policies, including discovery period coverage and/or extended reporting endorsements attached thereto, in force on the date of non-renewal under the natural expiry or first anniversary (whichever sooner) of such policies but in no event for longer than twelve months plus odd time, except in the case of discovery period coverage and/or extended reporting endorsements which may have up to an unlimited period. For all purposes of this Article, any extent reporting endorsement attaching to a policy covered hereunder shall be considered as part of the period of the said policy, subject to the provision that a separate limit of liability may apply in respect thereof. Any claim or incident reported under any extended reporting endorsement shall be deemed to have been made on the last day coverage was in force prior to the issuance of such endorsement. LOSS REPORTS AND PAYMENTS The Reinsurers agree to abide by all loss settlements of the Reassured which, at its sole discretion, shall adjust, settle or compromise all losses. All such adjustments, settlements or compromises shall be 8 unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. The Reassured shall advise the Reinsurers of all paid losses and outstanding losses hereunder, and of any subsequent developments in connection therewith, which are reserved by the Reassured at, or in excess of US$300,000 Ultimate Net Loss. The information provided by the Reassured shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the settlement request has been furnished to them. ARTICLE 13 CURRENCY The currency to be used for all purposes of this Contract shall be United States Dollars. ARTICLE 14 ACCESS TO RECORDS AND CLAIMS REVIEW All documents and records in the possession of the Reassured concerning this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. Specifically, the Reinsurers shall be entitled to nominate a representative to assess the Reassured's claims and claims procedures. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers' by this Article shall continue in effect notwithstanding the expiration of this Contract and shell be exercised at the Reinsurers' own expense. ARTICLE 15 LOSS RESERVES This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves. The Reassured agrees that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its books statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract it shall forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing the amounts involved for known outstanding losses and allocated loss expenses and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of a clean, irrevocable and unconditional Letter of Credit, in an amount equal to their proportion stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. 9 All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in full conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreen" in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the Life of the Letter of Credit in question beyond its forthcoming expiration date. In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby undertakes to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the proceeds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any Liability for loss or allocated loss expense reinsured by this Contract; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any Liability for loss or allocated loss expense reinsured by this Contract. c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that the obligations secured by the Letter of Credit remain unliquidated and undischarged at the time of receipt by the Reassured of such notice, to create a cash deposit account, separate from its own assets, in an amount equal to the participation of the canceling or non-renewing Reinsurer(s) in the Letter of Credit. That cash deposit account may then be used only as in subparagraphs a and b above. It is understood and agreed that this procedure may only be implemented before the expiry of the notice period in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured will account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the benefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under This Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorized representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the origina1 statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days after receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of those items. If, however, the statement shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorizing the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive security so determined be applied towards securing the Reassured reserves for losses or loss expenses Incurred But Not Reported. 10 All expenses incurred in the establishment or maintenance of such Letters of Credit shall be for the account of the Reinsurers. ARTICLE 16 TAX PROVISIONS The Reassured shell be Liable for all taxes (except Federal Excise Tax) levied on premiums payable to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. To the extent that such premium is subject to Federal Excise Tax, the Reinsurers hereby agree to allow as a deduction from the premium, for the purpose of paying Federal Excise Tax, 1% of the premium payable hereon. In the event of any return premium becoming due hereunder the Reinsurers will deduct 1% from the amount of the return, and the Reassured or their agents shall take stops to recover the tax from the Government of the United States of America. Notwithstanding the above, any changes in the Federal Excise Tax rate or the exemption status of Reinsurers shall be automatically applicable to this Contract. In consideration of the terms under which this Contract is issued, the Reassured undertake not to claim any deduction in respect of premium payable hereon when making tax returns, other than Income or Profits tax returns, to any fiscal authority of the United States of America or any State or Territory thereof. ARTICLE 17 DELAYS. ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Contract if such delay, error or omission had not been made, provided that rectification is made immediately upon discovery. ARTICLE 18 INSOLVENCY OF THE REASSURED Amounts due to the Reassured under this Contract shall be payable by the Reinsurers on the basis of the liability of the Reassured under the original policies reinsured hereunder without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the origina1 policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such claim is to be adjudicated and interpose any defense or defenses which they may deem available to the Reassured or its Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. 11 When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or to interpose defence to such claim, the expense shell be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a Receiver be appointed, Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Contract any sums which are due to Reinsurers from the Reassured under this Contract and which are expressed herein to be payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Contract shall be payable by the Reinsurers directly to the Reassured or to its Liquidator, Receiver or Statutory Successor. ARTICLE 19 AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Contract between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 20 ARB1TRATION As a condition precedent to any right of action hereunder, all disputes or differences arising out of or connected with this Contract (whether or not arising before or after cancellation) including interpretation or implementation of its terms, shall be referred to arbitration, in the City in which the Reassured's principal office is located. The party which desires to refer a matter to Arbitration ("the Claimant") shall so notify the other party ("the Respondent") in writing and at the time of so doing shall request the Respondent to agree as sole Arbitrator one of a list of three individuals whom the Claimant shall name. The Respondent shall, within 30 days of receipt of the said notice, notify the Claimant either (a) that it agrees one of those three individuals as sole Arbitrator, thus completing the constitution of the Arbitral Tribunal, or (b) that it nominates another person as its own Arbitrator. In the event that the Respondent nominates its own Arbitrator, the Claimant shall itself nominate its own Arbitrator within 30 days of receipt by it of the Respondent's notice. The two Arbitrators so nominated shall, within 30 days of the appointment of the second of them, themselves appoint a third Arbitrator to complete the constitution of the Arbitral Tribunal. Should the Respondent or the two chosen Arbitrators fail to make the appointment required of them, then on application of the Claimant, the American Arbitration Association will appoint the third arbitrator, and such appointment will be made in accordance with the qualifications set forth in this Article without regard to any of the American Arbitration Association's commercial arbitration rules, including its rules concerning the qualifications and/or nationality of arbitrators. All Arbitrators shall be active or former disinterested officials of Insurance or Reinsurance Companies or Lloyd's Underwriters who have experience of the class of business which is the subject matter of this Contract. The Arbitral Tribunal shall interpret this Contract as if it wore an honorable engagement and not as merely a legal obligation; it is relieved of all judicial formalities and may abstain from following the strict 12 rules of law, and shall make its award with a view to effecting the general purpose of this Contract in a reasonable manner with due regard to the custom and usage of the insurance and reinsurance business. The Arbitral Tribunal shall have fall discretion to make such orders as it thinks fit in connection with all procedural matters in the Arbitration, including but not limited to the conduct of the reference by written or oral submissions, the production of documents, the examination of witnesses, and the imposition of time limits for the taking of necessary procedural stops. The Arbitral Tribunal shall also have fall discretion to make such orders as it thinks fit with regard to the payment of the costs of the Arbitration including attorneys' costs and fees. Punitive damages shall not be awarded, however the Arbitral Tribunal may, at its discretion, award such other costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. 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 clause, and communications shall be made by the Reassured to each of the Reinsurers constituting the one party, provided that nothing therein 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 under the terms of this Contract from several to joint. Any Award or order of the Arbitral Tribunal or a majority thereof shall be binding on the parties and there shall be no right of appeal therefrom For the purpose of enforcement of any Final Award7 such;-> Final Award may be made a Rule of any Court of competent jurisdiction. ARTICLE 21 SERVICE OF SUIT (NMA 1998) This Article applies only to those Reinsurers signatory hereto who are domiciled outside the United States of America or, should the Reassured be authorized to do business in the State of New York, those Reinsurers who are unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, 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 Reinsurers' 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. It is further agreed that service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York N.Y. 10019-6829, and that in any suit instituted against any one of them upon this Contract, Reinsurers will abide by the final decision of such Court or of any Appellate Court in the event of any appeal. The above-named are authorized and directed to accept service of process on behalf of Reinsurers in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they will enter a general appearance upon Reinsurers' behalf in the event such a suit shall be instituted Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, Reinsurers hereon hereby designate 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 their 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 Reassured or any beneficiary hereunder arising out of this Contract of Reinsurance, and hereby designate the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof 13 ARTICLE 22 INTERMEDIARY Carvill America, 180 North Stetson Avenue, Suite 5100, Chicago, Illinois, 60601, is hereby recognized as the Intermediary negotiating this Contract. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurers through Carvill America. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reassured. ARTICLE23 PARTICIPATION This Contract obligates each of the Reinsurers for their proportion of the interests and liabilities set forth under this Contract, such proportions being shown in the attached Schedules. The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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 parties hereto have, by their duly authorized representative, executed this Contract as follows: Signed in Springfield, Missouri this day of 1997 For and on behalf of the Reassured: INTERLEX INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 14 SCHEDULE A Attaching to and forming part of the LAWYERS' PROFESSIONAL LIABILITY PRIMARY EXCESS OF LOSS REINSURANCE CON=ACT effected between INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England, this day of 199 93.01% VARIOUS UNDERWRITING MEMBERS OF LLOYD'S per schedule attached hereto EX-10.37 12 LAWYERS' PROFESSIONAL LIABILITY 1 Exhibit 10.37 TITLE: LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS REINSURANCE CONTRACT BETWEEN: INTERLEX INSURANCE COMPANY AND THE REINSURERS SIGNATORY HERETO COMMENCING: 1ST OCTOBER, 1996 U. S. CLASSIFICATION: U.S. REINSURANCE 2 INDEX PREAMBLE IDENTITY OF PARKS ARTICLE 1 BUSINESS REINSURED ARTICLE 2 COVER, LIMIT AND RETENTION ARTICLE 3 DEFINITIONS ARTICLE 4 TERRITORTIAL SCOPE ARTICLE 5 EXCLUSIONS ARTICLE 6 EXTRA-CONTRACTUAL OBLIGATIONS ARTICLE 7 PREMIUM ARTICLE 8 PERIOD ARTICLE 9 LOSS REPORTS AND PAYMENTS ARTICLE 10 CURRENCY ARTICLE 11 ACCESS TO RECORDS AND CLAIMS REVIEW ARTICLE 12 LOSS RESERVES ARTICLE 13 TAX PROVISIONS ARTICLE 14 DELAYS, ERRORS OR OMISSIONS ARTICLE 15 INSOLVENCY OF THE REASSURED ARTICLE 16 AMENDMENTS AND ALTERATIONS ARTICLE 17 ARB1TRATION ARTICLE 18 SERVICE OF SUIT (NMA 1998) ARTICLE 19 INTERMEDIARY ARTICLE 20 PARTICIPATION ATTACHMENTS NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY REINSURANCE - U.S.A. 3 LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS OF LOSS REINSURANCE CONTRACT PREAMBLE This Contract is made and entered into between Interlex Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 10037) (hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred to as the "Reinsurers"), on the following terms and conditions: ARTICLE 1 BUSINESS REINSURED Claims made against the Reassured as hereinafter provided and specified on any policies written or renewed by the Reassured covering Lawyers' Professional Liability and all other ancillary coverages as original and as declared and agreed prior to binding by Reinsurers. ARTICLE 2 COVER LIMIT AND RETENTION This Contract applies to excess policies coming within the scope of this Contract which are issued by the Reassured for limits in excess of either US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. In respect of all such excess policies the Reassured shall cede, and the Reinsurers shall accept by way of reinsurance under this Contract, liability in excess of minimum underlying limits of either US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. The Reassured shall retain the said underlying limits for their own account but, without prejudice to the above, shall be at liberty to protect that retention by way of reinsurance for their own account and benefit. With respect to each such cession, no claim shall be made under this Contract unless and until the Reassured have paid or advanced, or agreed to pay or advance, an amount in excess of the said underlying limits. The Reinsurers shall then be liable for the amount in excess of the said underlying limits, but the amount recoverable hereunder shall not exceed the difference between up to US$5,000,000 each and every insured each claim and/or US$5,000,000 in the aggregate each policy where applicable and the aforementioned underlying limit of US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. ARTICLE 3 DEFINITIONS A. The terms "Policy" or "Policies", as used in this Contract shall mean any binder, policy, endorsement or contract of insurance, including any certificates issued thereunder, issued, accepted or held covered by the Reassured. 4 B. For the purposes of this Contract the "claim made" date shall be as defined under the original policy. Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this contract. ARTICLE 4 TERRITORLAL SCOPE This Contract shall cover wherever the Reassured's original policies cover. ARTICLE 5 EXCLUSIONS This Contract does not apply to and absolutely excludes the following: 1. Nuclear Incidents, in accordance with the attached Nuclear Incident Exclusion Clause Liability- Reinsurance- U.S.A. 2. All liability of the Reassured arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured of part or aU 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. 3. Reinsurance Assumed ARTICLE 6 EXTRA-CONTRACTUAL OBLIGATIONS This Contract shall protect the Reassured, within the limits of the original policy, in respect of any liability incurred by the Reassured as the result of an award in respect of any extra contractual obligation as more full defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of the original policy. "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arises from the handling of any claim on business covered hereunder, such liabilities arising because of, but no limited to, the following: failure by the Reassured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The date of which any extra-contractual obligation is incurred by the Reassured shall be deemed, in all circumstances, to be the date the original claim was made. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation. 5 ARTICLE 7 PERIOD This Contract takes effect on 1st October, 1996 and applies to claims made against the Reassured on original policies attaching during the period from 1st October, 1996 to 30th September, 1997 both days inclusive, including extended reporting endorsements attaching to any said policies. In the event of non-renewal of this Contract, all policies, including extended reporting endorsements attaching thereto, in force as of the effective time and date of non-renewal shall continue to be covered until their individual natural expiration termination or next anniversary dates, whichever comes first, but in no event for longer than twelve months plus odd time from the effective time and date of cancellation, except in the case of extended reporting endorsements coverage which may be unlimited. For all purposes of this Article, any extended reporting endorsement attaching to a policy covered hereunder shall be considered as part of the period of the said policy, subject to the provision that a separate limit of liability may apply in respect thereof. Any claim or incident reported under any extended reporting endorsement shall be deemed to have been made on the last day coverage was in force prior to the issuance of such endarsement. ARTICLE 8 PREMIUM The Reassured shall pay to the Reinsurers the Original net premiums for limits attaching to this Contract. Original net premium is the Original Gross Premium of the Individual Policy as determined and agreed by Reinsurers, less 10%. Accounts between the parties shall be rendered and settled by the Reassured on a quarterly basis within 60 days following the end of each quarter. Any balance due from the Reinsurers shall be settled by them as soon as possible after the accounts have been rendered to them. ARTICLE 9 LOSS REPORTS AND PAYMENTS The Reinsurers agree to abide by all loss settlements of the Reassured subject to such settlements being within the terms and conditions of the policies and of this Contract. The Reassured at its sole discretion shall adjust, settle or compromise all losses and all such adjustments, settlements or compromises shall be unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. The Reassured shall advise the Reinsurers promptly of all losses, and of any subsequent developments in connection therewith, which are reserved by the Reassured at $1,000,000 Ultimate Net Loss or more, from the ground up. The information provided by the Reassured shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the settlement request has been furnished to them. 6 ARTICLE IO CURRENCY The currency to be used for all purposes of this Contract shall be United States Dollars. ARTICLE I 1 ACCESS TO RECORDS AND CLAIMS REVIEW All documents and records in the possession of the Reassured conceming this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. Specifically, the Reinsurers shall be entitled to nominate a representative to assess the Reassured's claims and claims procedures. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the expiration of this Contract and shall be exercised at the Reinsurers' own expense. ARTICLE 12 LOSS RESERVES This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves. The Reassured agree that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its books statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract it shall forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing the amounts involved for known outstanding losses and allocated loss expenses and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of clean, irrevocable and unconditional Letters of Credit, in amounts equal to their proportion of the stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in full conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreenn in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the life of the Letter of Credit in question beyond its forthcoming expiration date. In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby 7 undertakes to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the procesds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any liability for loss or allocated loss expense reinsured by this Contract; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any liability for loss or aUocated loss expense reinsured by this Contract; c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured with account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the banefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under this Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorized representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the original statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses reserves exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days after receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of these items. If, however, the statement, shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorizing the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive secutity so determined be applied towards securing the Reassured's reserves for losses or loss expenses Incurred But Not Reported. All expenses incurred in the establishment or maintenance of such Letters of Credit shall be for the account of the Reinsurers. ARTICLE 13 TAX PROVISIONS The Reassured shall be liable for all taxes (except Federal Excise Tax) levied on premiums payable to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. To the extent that such premium is subject to Federal Excise Tax, the Reinsurers hereby agree to allow as a deduction from the premium, for the purpose of paying Federal Excise Tax, 1% of the premium payable hereon. 8 In the event of any return premium becoming due hereunder the Reinsurers with deduct 1% from the amount of the return, and the Reassured or their agents shall take stops to recover the tax from the Government of the United States of America. Notwithstanding the above, any changes in the Federal Excise Tax rate or the exemption status of Reinsurers shall be automatically applicable to this Contract. In consideration of the terms under which this Contract is issued, the Reassured undertake not to claim any deduction in respect of premium payable hereon when mailing tax returns, other than Income or Profits tax returns, to any fiscal authority of the United States of America or any State or Territory thereof. ARTICLE 14 DELAYS, ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Contract if such delay, error or omission had not been made, provided that recitification is made immediately upon discovery. ARTICLE 15 INSOLVENCY OF THE REASSURED Amounts due to the Reassured under this Contract shall be payable by the Reinsurers on the basis of the liability of the Reassured under the original policies reinsured hereunder without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the original policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such claim is to be adjudicated and interpose any defence or defences which they may deem available to the Reassured or their Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or to interpose defence to such claim, the expense shall be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a receiver be appointed, the Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Contract any sums which are due to the Reinsurers from the Reassured under this Contract and which are expressed herein to be payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Contract shell be payable by the Reinsurers directly to the Reassured or to their Liquidator, Receiver or Statutory Successor. 9 ARTICLE 16 AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Contract between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 17 ARBITRATION As a condition precedent to any right of action hereunder, all disputes or differences arising out of or conlnected with this Contract (whether or not arising before or after cancellation) including interpretation or implementation of its terms, shall be referred to arbitration, in the City in which the Reassured's principal office is located. The party which desires to refer a matter to Arbitration (.the Claimant") shall so notify the other party ("the Respondent") in writing and at the time of so doing shall request the Respondent to agree as sole Arbitrator one of a list of three individuals whom the Claimant shall name. The Respondent shall, within 30 days of receipt of the said notice, notify the Claimant either (a) that it agrees one of those three individuals as sole Arbitrator, thus completing the constitution of the Arbitral Tribunal, or (b) that it nominates another person as its own Arbitrator. In the event that the Respondent nominates its own Arbitrator, the Claimant shall itself nominate its own Arbitrator within 30 days of receipt by it of the Respondent's notice. The two Arbitrators so nominated shall, within 30 days of the appointment of the second of them, themselves appoint a third Arbitrator to complete the constitution of the Arbitral Tribunal. Should the Respondent or the two chosen Arbitrators fail to make the appointment required of them, then on application of the Claimant, the American Arbitration Association will appoint the third arbitrator, and such appointment wiU be made in accordance with the qualifications set forth in this Article without regard to any of the American Arbitration Association's commercial arbitration rales, including its rules conceming the qualifications and/or nationality of arbitrators. All Arbitrators shall be active or former disinterested officials of Insurance or Reinsurance Companies or Lloyd's Underwriters who have experience of the class of business which is the subject matter of this Contract. The Arbitral Tribunal shall interpret this Contract as if it were an honourable engagement and not as merely a legal obligation; it is relieved of all judicial formalities and may abstain from following the strict rules of law, and shall make its award with a view to effecting the general purpose of this Contract in a reasonable manner with due regard to the custom and usage of the insurance and reinsurance business. The Arbitral Tribunal shall have full discretion to make such orders as it thinks fit in connection with all procedural matters in the Arbitration, including but not limited to the conduct of the reference by written or oral submissions, the production of documents, the examination of witnesses, and the imposition of time limits for the taking of necessary procedural steps. The Arbitral Tribunal shall also have full discretion to make such orders as it thinks fit with regard to the payment of the costs of the Arbitration including attorneys' costs and fees. Punitive damages shall not be awarded, however the Arbitral Tribunal may, at its discretion, award such other costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. 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 clause, and communications shall be made by the Reassured to each of the 10 Reinsurers constituting the one party, provided that nothing therein 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 under the terms of this Contract from several to joint. Any Award or order of the Arbitral Tribunal or a majority thereof shall be binding on the parties and there shall be no right of appeal therefrom. For the purpose of enforcement of any Final Award, such Final Award may be made a Rule of any Court of competent jurisdiction. ARTICLE 18 SERVICE OF SUIT (USA - NMA 1998) This Article applies only to those Reinsurers signatory hereto who are domiciled outside the United States of America or, should the Reassured be authorized to do business in the State of New York, those Reinsurers who are unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, 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 Reinsurers' 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. It is further agreed that service of process in such suit may be made upon Mendes & Mount, 750 Seventh Avenue, New York NY, 10019 - 6829, and that in any suit instituted against any one of them upon this Contract, Reinsurers will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of Reinsurers in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they will enter a general appearance upon Reinsurers' behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, Reinsurers hereon hereby designate 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 their 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 Reassured or any beneficiary hereunder arising out of this Contract, and hereby designate the above-named as the person to whom the said officer is authorised to mail such process or a true copy thereof. ARTICLE 19 INTERMEDIARY Carvill America, 180 North North Stetson Avenue, Suite 5100, Chicago, Illinois 60601, is hereby recognized as the Intermediary negotiating this Agreement. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurers through Carvill America. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reinsurer. 11 ARTICLE 20 PARTICIPATION This Contract obligates each of the Reinsurers for their proportion of the interests and liabilities set forth under this Contract, such proportions being shown in the attached Schedules. The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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. - Ref: LSW 1001 (Reinsurance). IN WlTNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Contract as follows: Signed in Springfield, Missouri this day of 1996 For and on behalf of the Reassured: INTERLEX INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 12 SCHEDULE A l Attaching to and forming part of the LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS REINSURANCE CONTRACT effected between INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England, this day of 199 % VARIOUS UNDERWR1TING MEMBERS OF LLOYD'S per schedule attached hereto 13 SCHEDULE B Attaching to and forming part of the LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS REINSURANCE CONTRACT effected between INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England this day of 199 The London Insurance and Reinsurance Market Association for and on behalf of the following Reinsurers: % SPHERE DRAKE (UNDERWR1TING) LIMITED For and on behalf of: SPHERE DRAKE INSURANCE PLC ReL. 960JHCA00245 LIRMA Ref: S0289 14 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (l) 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 agrecd that for all purposes of this reinsurance all the orginal policies of the Reassured (new, renewal and replacement) of the classes specified Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION: * I. It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada. or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policics of a similar nature; and thc 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 atter 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 (l) 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. Landords 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 sucth coverages from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): 15 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 l954, 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 Stares of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments (immediate medical or Provision relating to surgical relief, to expenses incurred with respect (first aid, to (bodily injury, sickness, disease or death bodily injury resulting from thc hazardous properties of nuclear material and arising out of thc operation of a nuclear facility by any person or organization. III. (injury, sickness, disease, death or Under any Liability Coverage, to destruction (bodily injury or property damage resulting from thc hazardous properties of nuclear material, if (a) the nuclear material ( I ) 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 behallf 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 by-product material; "source material", "special nuclear material", and "by-product 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 by-product material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition at nuclear facility; "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, 16 c) any equipment or device designed or 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 or the Independent Insurance Conference of Canada. *NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. EX-10.38 13 LAWYERS' PROFESSIONAL LIABILITY 1 Exhibit 10.38 TITLE: LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS REINSURANCE CONTRACT BETWEEN: INTERLEX INSURANCE COMPANY AND THE REINSURERS SIGNATORY HERETO COMMENCING: 1ST OCTOBER, 1996 U. S. CLASS- IFICATION: U.S. REINSURANCE 2 INDEX PREAMBLE IDENTITY OF PARKS ARTICLE 1 BUSINESS REINSURED ARTICLE 2 COVER, LIMIT AND RETENTION ARTICLE 3 DEFINITIONS ARTICLE 4 TERRITORTIAL SCOPE ARTICLE 5 EXCLUSIONS ARTICLE 6 EXTRA-CONTRACTUAL OBLIGATIONS ARTICLE 7 PREMIUM ARTICLE 8 PERIOD ARTICLE 9 LOSS REPORTS AND PAYMENTS ARTICLE 10 CURRENCY ARTICLE 11 ACCESS TO RECORDS AND CLAIMS REVIEW ARTICLE 12 LOSS RESERVES ARTICLE 13 TAX PROVISIONS ARTICLE 14 DELAYS, ERRORS OR OMISSIONS ARTICLE 15 INSOLVENCY OF THE REASSURED ARTICLE 16 AMENDMENTS AND ALTERATIONS ARTICLE 17 ARB1TRATION ARTICLE 18 SERVICE OF SUIT (NMA 1998) ARTICLE 19 INTERMEDIARY ARTICLE 20 PARTICIPATION ATTACHMENTS NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY REINSURANCE - U.S.A.
3 LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS OF LOSS REINSURANCE CONTRACT PREAMBLE This Contract is made and entered into between Interlex Insurance Company of 1903 E. Battlefield, Springfield, Missouri 65804, U.S.A. (NAIC Code 10037) (hereinafter referred to as the "Reassured") and the Reinsurers signatory hereto (hereinafter referred to as the "Reinsurers"), on the following terms and conditions: ARTICLE 1 BUSINESS REINSURED Claims made against the Reassured as hereinafter provided and specified on any policies written or renewed by the Reassured covering Lawyers' Professional Liability and all other ancillary coverages as original and as declared and agreed prior to binding by Reinsurers. ARTICLE 2 COVER LIMIT AND RETENTION This Contract applies to excess policies coming within the scope of this Contract which are issued by the Reassured for limits in excess of either US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. In respect of all such excess policies the Reassured shall cede, and the Reinsurers shall accept by way of reinsurance under this Contract, liability in excess of minimum underlying limits of either US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. The Reassured shall retain the said underlying limits for their own account but, without prejudice to the above, shall be at liberty to protect that retention by way of reinsurance for their own account and benefit. With respect to each such cession, no claim shall be made under this Contract unless and until the Reassured have paid or advanced, or agreed to pay or advance, an amount in excess of the said underlying limits. The Reinsurers shall then be liable for the amount in excess of the said underlying limits, but the amount recoverable hereunder shall not exceed the difference between up to US$5,000,000 each and every insured each claim and/or US$5,000,000 in the aggregate each policy where applicable and the aforementioned underlying limit of US$1,000,000 each and every insured each claim and/or US$3,000,000 in the aggregate each policy where applicable. ARTICLE 3 DEFINITIONS A. The terms "Policy" or "Policies", as used in this Contract shall mean any binder, policy, endorsement or contract of insurance, including any certificates issued thereunder, issued, accepted or held covered by the Reassured. 4 B. For the purposes of this Contract the "claim made" date shall be as defined under the original policy. Furthermore, as regards extended reporting endorsements, the date a claim is made shall determine the date of loss for the purpose of this contract. ARTICLE 4 TERRITORIAL SCOPE This Contract shall cover wherever the Reassured's original policies cover. ARTICLE 5 EXCLUSIONS This Contract does not apply to and absolutely excludes the following: 1. Nuclear Incidents, in accordance with the attached Nuclear Incident Exclusion Clause Liability- Reinsurance- U.S.A. 2. All liability of the Reassured arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured of part or aU 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. 3. Reinsurance Assumed ARTICLE 6 EXTRA-CONTRACTUAL OBLIGATIONS This Contract shall protect the Reassured, within the limits of the original policy, in respect of any liability incurred by the Reassured as the result of an award in respect of any extra contractual obligation as more full defined below. The Reinsurers agree that the liability so incurred, plus the Reassured's contractual loss if any, shall be considered as one combined loss for the purposes of the Reassured's retention and of the recovery under this Contract subject always, however, to the amount recoverable hereunder not exceeding the limit of the original policy. "Extra-contractual obligations" are defined as those liabilities of the Reassured not covered under any other provision of this Contract and which arises from the handling of any claim on business covered hereunder, such liabilities arising because of, but no limited to, the following: failure by the Reassured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defence or in the trial of any action against their insured or in the preparation or prosecution of an appeal consequent upon such action. The date of which any extra-contractual obligation is incurred by the Reassured shall be deemed, in all circumstances, to be the date the original claim was made. However, this Article shall not apply where such extra-contractual obligations have been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Reassured acting individually or collectively or in collusion with any individual or corporation or any other organisation or party involved in the presentation, defense or settlement of any claim. 5 ARTICLE 7 PERIOD This Contract takes effect on 1st October, 1996 and applies to claims made against the Reassured on original policies attaching during the period from 1st October, 1996 to 30th September, 1997 both days inclusive, including extended reporting endorsements attaching to any said policies. In the event of non-renewal of this Contract, all policies, including extended reporting endorsements attaching thereto, in force as of the effective time and date of non-renewal shall continue to be covered until their individual natural expiration termination or next anniversary dates, whichever comes first, but in no event for longer than twelve months plus odd time from the effective time and date of cancellation, except in the case of extended reporting endorsements coverage which may be unlimited. For all purposes of this Article, any extended reporting endorsement attaching to a policy covered hereunder shall be considered as part of the period of the said policy, subject to the provision that a separate limit of liability may apply in respect thereof. Any claim or incident reported under any extended reporting endorsement shall be deemed to have been made on the last day coverage was in force prior to the issuance of such endarsement. ARTICLE 8 PREMIUM The Reassured shall pay to the Reinsurers the Original net premiums for limits attaching to this Contract. Original net premium is the Original Gross Premium of the Individual Policy as determined and agreed by Reinsurers, less 10%. Accounts between the parties shall be rendered and settled by the Reassured on a quarterly basis within 60 days following the end of each quarter. Any balance due from the Reinsurers shall be settled by them as soon as possible after the accounts have been rendered to them. ARTICLE 9 LOSS REPORTS AND PAYMENTS The Reinsurers agree to abide by all loss settlements of the Reassured subject to such settlements being within the terms and conditions of the policies and of this Contract. The Reassured at its sole discretion shall adjust, settle or compromise all losses and all such adjustments, settlements or compromises shall be unconditionally binding upon the Reinsurers, who shall also benefit in due proportion from any salvages, recoveries and compromises effected or negotiated by the Reassured. The Reassured shall advise the Reinsurers promptly of all losses, and of any subsequent developments in connection therewith, which are reserved by the Reassured at $1,000,000 Ultimate Net Loss or more, from the ground up. The information provided by the Reassured shall be sufficient to enable the individual losses, the nature of each claim, the claim made date and the inception or renewal dates of the policies to which such losses relate, to be readily identified. The Reinsurers agree to pay any amount for which they may be liable under this Contract as soon as possible after the settlement request has been furnished to them. 6 ARTICLE 10 CURRENCY The currency to be used for all purposes of this Contract shall be United States Dollars. ARTICLE I 1 ACCESS TO RECORDS AND CLAIMS REVIEW All documents and records in the possession of the Reassured conceming this Contract shall be made available upon reasonable notice at the request of the Reinsurers for inspection at the Reassured's offices by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Contract or the subject matter hereof. Specifically, the Reinsurers shall be entitled to nominate a representative to assess the Reassured's claims and claims procedures. For the avoidance of doubt, it is hereby expressly agreed that the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the expiration of this Contract and shall be exercised at the Reinsurers' own expense. ARTICLE 12 LOSS RESERVES This Article applies only to those Reinsurers signatory hereto who do not qualify for credit under the regulations of the State insurance authorities or departments which have jurisdiction over the Reassured's loss reserves. The Reassured agree that when, for its Annual Convention Statement purposes, it files with the authorities or departments mentioned above or sets up in its books statutory reserves for known outstanding losses and allocated loss expenses reinsured by this Contract it shall forward to the Reinsurers a clear statement of the Reinsurers' proportion of those reserves detailing the amounts involved for known outstanding losses and allocated loss expenses and also how those amounts are calculated. The Reinsurers, promptly upon receipt of the Reassured's statement, shall apply for and secure delivery to the Reassured of clean, irrevocable and unconditional Letters of Credit, in amounts equal to their proportion of the stated reserves. Under no circumstances shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the amount of the Letter of Credit. All Letters of Credit procured pursuant to this Contract shall be issued by a Bank which is a Member of the Federal Reserve and shall be in full conformity with the requirements of the authorities or departments mentioned in the first paragraph of this Article current at the date of the Reassured's statement. Further, they shall be "Evergreenn in that they shall be issued for an initial period of not less than one year and shall be automatically extended for one year from their original expiration dates and subsequently from their extended expiration dates unless and until, at least thirty days before any expiration date, the issuing bank gives notice to the Reassured by registered mail that the issuing bank elects not to extend the life of the Letter of Credit in question beyond its forthcoming expiration date. In consideration of the agreement of the Reinsurers to furnish such Letters of Credit to the Reassured to enable it to obtain credit for the reinsurance provided under this Contract, the Reassured hereby 7 undertakes to hold such Letters of Credit and the proceeds of any drawings made upon them in trust for the Reinsurers and to use and apply the procesds of any such drawings for the following purposes only: a. To pay the Reinsurers' share or to reimburse the Reassured for that share of any liability for loss or allocated loss expense reinsured by this Contract; b. To refund to the Reinsurers any balance by which the amount of the Letter of Credit exceeds the Reinsurers' proportion of any liability for loss or aUocated loss expense reinsured by this Contract; c. In the event that one or more of the Reinsurers participating in the Letter of Credit gives timely notice of cancellation or non-renewal of their participation in the Letter of Credit and provided that in respect of cancellation or non-renewal and that if it is implemented, the Reassured will ensure that a rate of interest is obtained for the Reinsurers on such a deposit account that is at least equal to the rate which would be paid by Citibank N.A. in New York, and further that the Reassured with account to the Reinsurers on an annual basis for all interest accruing on the cash deposit account for the banefit of the Reinsurers. The issuing bank shall have no responsibility whatsoever in connection with the propriety of drawings made by the Reassured on the Letters of Credit issued under this Contract or in connection with the disposition of any funds so withdrawn, except to ensure that drawings are made only upon the order of properly authorized representatives of the Reassured. All Letters of Credit procured for the Reassured under this Contract shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurers' proportion of the Reassured's known outstanding loss and allocated loss expense reserves and the Reassured shall produce a statement for this purpose detailed in the same way as the original statement on the basis of which such Letters of Credit were first issued. If the statement shows that the Reinsurers' proportion of such losses and allocated expenses reserves exceeds the current amount of the Letters of Credit, the Reinsurers shall, within thirty days after receipt of the statement secure the amendment of the Letters of Credit increasing their amount to the amount of the current balance of these items. If, however, the statement, shows that the Reinsurers' proportion of the current balance of those items is less than the amount of the Letters of Credit the Reassured shall, within thirty days of receipt of a written request from the Reinsurers to do so, facilitate the release of the excessive security by authorizing the amendment of the Letters of Credit so as to reduce their amount to the current balance required. Under no circumstances shall any excessive secutity so determined be applied towards securing the Reassured's reserves for losses or loss expenses Incurred But Not Reported. All expenses incurred in the establishment or maintenance of such Letters of Credit shall be for the account of the Reinsurers. ARTICLE 13 TAX PROVISIONS The Reassured shall be liable for all taxes (except Federal Excise Tax) levied on premiums payable to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside the United States of America. To the extent that such premium is subject to Federal Excise Tax, the Reinsurers hereby agree to allow as a deduction from the premium, for the purpose of paying Federal Excise Tax, 1% of the premium payable hereon. 8 In the event of any return premium becoming due hereunder the Reinsurers with deduct 1% from the amount of the return, and the Reassured or their agents shall take stops to recover the tax from the Government of the United States of America. Notwithstanding the above, any changes in the Federal Excise Tax rate or the exemption status of Reinsurers shall be automatically applicable to this Contract. In consideration of the terms under which this Contract is issued, the Reassured undertake not to claim any deduction in respect of premium payable hereon when mailing tax returns, other than Income or Profits tax returns, to any fiscal authority of the United States of America or any State or Territory thereof. ARTICLE 14 DELAYS, ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Contract if such delay, error or omission had not been made, provided that recitification is made immediately upon discovery. ARTICLE 15 INSOLVENCY OF THE REASSURED Amounts due to the Reassured under this Contract shall be payable by the Reinsurers on the basis of the liability of the Reassured under the original policies reinsured hereunder without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the original policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such claim is to be adjudicated and interpose any defence or defences which they may deem available to the Reassured or their Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or to interpose defence to such claim, the expense shall be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a receiver be appointed, the Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Contract any sums which are due to the Reinsurers from the Reassured under this Contract and which are expressed herein to be payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Contract shell be payable by the Reinsurers directly to the Reassured or to their Liquidator, Receiver or Statutory Successor. 9 ARTICLE 16 AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Contract between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 17 ARBITRATION As a condition precedent to any right of action hereunder, all disputes or differences arising out of or conlnected with this Contract (whether or not arising before or after cancellation) including interpretation or implementation of its terms, shall be referred to arbitration, in the City in which the Reassured's principal office is located. The party which desires to refer a matter to Arbitration (.the Claimant") shall so notify the other party ("the Respondent") in writing and at the time of so doing shall request the Respondent to agree as sole Arbitrator one of a list of three individuals whom the Claimant shall name. The Respondent shall, within 30 days of receipt of the said notice, notify the Claimant either (a) that it agrees one of those three individuals as sole Arbitrator, thus completing the constitution of the Arbitral Tribunal, or (b) that it nominates another person as its own Arbitrator. In the event that the Respondent nominates its own Arbitrator, the Claimant shall itself nominate its own Arbitrator within 30 days of receipt by it of the Respondent's notice. The two Arbitrators so nominated shall, within 30 days of the appointment of the second of them, themselves appoint a third Arbitrator to complete the constitution of the Arbitral Tribunal. Should the Respondent or the two chosen Arbitrators fail to make the appointment required of them, then on application of the Claimant, the American Arbitration Association will appoint the third arbitrator, and such appointment wiU be made in accordance with the qualifications set forth in this Article without regard to any of the American Arbitration Association's commercial arbitration rales, including its rules conceming the qualifications and/or nationality of arbitrators. All Arbitrators shall be active or former disinterested officials of Insurance or Reinsurance Companies or Lloyd's Underwriters who have experience of the class of business which is the subject matter of this Contract. The Arbitral Tribunal shall interpret this Contract as if it were an honourable engagement and not as merely a legal obligation; it is relieved of all judicial formalities and may abstain from following the strict rules of law, and shall make its award with a view to effecting the general purpose of this Contract in a reasonable manner with due regard to the custom and usage of the insurance and reinsurance business. The Arbitral Tribunal shall have full discretion to make such orders as it thinks fit in connection with all procedural matters in the Arbitration, including but not limited to the conduct of the reference by written or oral submissions, the production of documents, the examination of witnesses, and the imposition of time limits for the taking of necessary procedural steps. The Arbitral Tribunal shall also have full discretion to make such orders as it thinks fit with regard to the payment of the costs of the Arbitration including attorneys' costs and fees. Punitive damages shall not be awarded, however the Arbitral Tribunal may, at its discretion, award such other costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. 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 clause, and communications shall be made by the Reassured to each of the 10 Reinsurers constituting the one party, provided that nothing therein 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 under the terms of this Contract from several to joint. Any Award or order of the Arbitral Tribunal or a majority thereof shall be binding on the parties and there shall be no right of appeal therefrom. For the purpose of enforcement of any Final Award, such Final Award may be made a Rule of any Court of competent jurisdiction. ARTICLE 18 SERVICE OF SUIT (USA - NMA 1998) This Article applies only to those Reinsurers signatory hereto who are domiciled outside the United States of America or, should the Reassured be authorized to do business in the State of New York, those Reinsurers who are unauthorized in New York as respects suits instituted in New York. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, 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 Reinsurers' 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. It is further agreed that service of process in such suit may be made upon Mendes & Mount, 750 Seventh Avenue, New York NY, 10019 - 6829, and that in any suit instituted against any one of them upon this Contract, Reinsurers will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of Reinsurers in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they will enter a general appearance upon Reinsurers' behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, Reinsurers hereon hereby designate 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 their 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 Reassured or any beneficiary hereunder arising out of this Contract, and hereby designate the above-named as the person to whom the said officer is authorised to mail such process or a true copy thereof. ARTICLE 19 INTERMEDIARY Carvill America, 180 North North Stetson Avenue, Suite 5100, Chicago, Illinois 60601, is hereby recognized as the Intermediary negotiating this Agreement. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurers through Carvill America. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reinsurer. 11 ARTICLE 20 PARTICIPATION This Contract obligates each of the Reinsurers for their proportion of the interests and liabilities set forth under this Contract, such proportions being shown in the attached Schedules. The subscribing reinsurers' obligations under contracts of reinsurance to which they subscribe are several and not joint and are limited solely to the extent of their individual 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. - Ref: LSW 1001 (Reinsurance). IN WlTNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Contract as follows: Signed in Springfield, Missouri this day of 1996 For and on behalf of the Reassured: INTERLEX INSURANCE COMPANY And for the Reinsurers by means of and in accordance with the attached schedules which shall be considered to form an integral part of this Contract. 12 SCHEDULE B Attaching to and forming part of the LAWYERS' PROFESSIONAL LIABILITY PRIOR AGREEMENT EXCESS REINSURANCE CONTRACT effected between INTERLEX INSURANCE COMPANY of Springfield, Missouri (hereinafter referred to as the "Reassured") and REINSURERS SIGNATORY HERETO (hereinafter referred to as the "Reinsurers") Signed in London, England this day of 199 The London Insurance and Reinsurance Market Association for and on behalf of the following Reinsurers: 8.26% SPHERE DRAKE (UNDERWRITING) LIMITED For and on behalf of: SPHERE DRAKE INSURANCE PLC ReL. 960JHCA00245 LIRMA Ref: S0289 EX-13 14 1997 ANNUAL REPORT TO SHAREHOLDER 1 Exhibit 13 CORPORATE PROFILE The Tenere Group, Inc., a publicly held insurance holding company, was organized on April 27, 1995, when the demutualization of RCA Mutual Insurance Company was completed. Policyholders of RCA Mutual on that date became shareholders of The Tenere Group, Inc. in proportion to their premiums over the previous five years. The Tenere Group, Inc. is composed of Intermed Insurance Co. (formerly RCA Mutual Insurance Company), which markets professional liability insurance to physicians, surgeons, dentists, oral surgeons and ancillary healthcare professionals in the States of Missouri and Kansas; Interlex Insurance Co., which markets professional liability insurance to lawyers and judges in Missouri and Kansas; and Insurance Services, Inc., a management company. Intermed Insurance Co. markets professional liability insurance to physicians in Texas through a purchasing group, Intermedical of Texas, Inc., and to dentists through a second purchasing group, Dental Defense Specialists, Inc. The Tenere Group, Inc. had its origin in 1976 when three physicians in Springfield, Missouri organized Risk Control Associates, Inc., an assessable mutual insurance company, to provide defense for themselves and their associates against claims of medical malpractice. In 1991, the Company was reorganized as a non-assessable mutual property and casualty insurance company, RCA Mutual Insurance Company, and, in 1995, was reorganized as a stock property and casualty insurance company known as Intermed Insurance Co. Intermed is a wholly-owned subsidiary of The Tenere Group, Inc.; Interlex Insurance Co. and Insurance Services, Inc. are wholly-owned subsidiaries of Intermed. TABLE OF CONTENTS Corporate Profile............... 1 Financial Highlights............ 2 Selected Operating Statistics... 2 President's Report.............. 3 Management's Discussion and Analysis..................... 4 Independent Auditors' Report.... 8 Consolidated Financial Statements................... 9 Notes to Consolidated Financial Statements......... 13 Statement of Management's Responsibility............... 25 Selected Financial Information.. 26 Directors and Officers.......... 27 Corporate Information........... 28
1 2 FINANCIAL HIGHLIGHTS*
DECEMBER 31 CHANGE ----------- ------ 1996 TO 1995 TO ------- ------- 1997 1996 1995 1997 1996 ---- ---- ---- ---- ---- Cash and invested assets $47,488,000 46,306,000 53,585,000 +2.6% -13.6% Total assets 65,726,000 61,820,000 62,614,000 +6.3% -1.3% Total reserves, including unearned premiums 38,748,000 39,188,000 37,070,000 -1.1% +5.7% Stockholders' equity 20,980,000 21,390,000 24,537,000 -1.9% -12.8% Direct premiums written 10,541,000 8,124,000 9,874,000 +29.8% -17.7% Net premiums written 5,802,000 3,469,000 8,369,000 +67.3% -58.5% Net premiums earned 4,498,000 7,646,000 11,901,000 -41.2% -35.8% Net investment income 2,623,000 2,627,000 2,654,000 -0.2% -1.0% Net portfolio yield 5.8% 5.5% 5.1% +0.3% +0.4% Total revenues 7,107,000 10,256,000 14,519,000 -30.7% -29.4% Losses and loss adjustment expenses 4,478,000 11,226,000 7,676,000 -60.1% +46.2% Loss ratio 99.6% 146.8% 64.5% -47.2% +82.3% Sales, marketing and other underwriting expenses 3,990,000 3,543,000 2,393,000 +12.6% +48.1% Expense ratio 37.9% 43.6% 24.2% -5.7% +19.4% Combined ratio 137.5% 190.4% 88.7% -52.9% +101.7% Net income (loss) (953,000) (2,934,000) 2,510,000 +67.5% -216.9% Basic and diluted net income (loss) per share (.48) (1.47) 1.26 +67.3% -216.7% Book value per share 10.49 10.70 12.27 -2.0% -12.8%
* Amounts rounded to nearest thousand, except per share items. SELECTED OPERATING STATISTICS
1997 1996 1995 1997 1996 1995 ----- ----- ----- -------- ------- ------ Number of claims settled with Number of insureds Indemnity Intermed 1,476 1,228 1,317 Intermed 38 49 49 Interlex 693 428 196 Interlex 2 1 0 ----- ----- ----- -------- ------- ------ Total 2,169 1,656 1,513 Total 40 50 49 Number of claims reported Average indemnity paid Intermed 190 166 240 Intermed $177,500 165,200 98,000 Interlex 36 11 4 Interlex 13,300 500 0 ----- ----- ----- Total 226 177 244 Number of claims settled Trial experience without indemnity Intermed Intermed 183 192 157 Tried 9 10 16 Interlex 11 3 0 Won 7 9 14 ----- ----- ----- Lost 1 1 2 Total 194 195 159 Interlex (none)
2 3 PRESIDENT'S REPORT 1997 was a year of successes and disappointment. Among the positive developments were: - - Interlex Insurance Co., Tenere's legal malpractice insurance subsidiary, increased premiums written in 1997 by 83% over the prior year. The number of lawyers insured increased from 428 at December 31, 1996 to 693 at the current year end. I believe that the marketplace in Missouri and Kansas will continue to be receptive to our products, and we anticipate premiums written of $1,600,000 in 1998, an increase of 41% over 1997. - - Intermed Insurance Co., Tenere's medical malpractice subsidiary, entered the State of Texas in 1996 as a surplus lines carrier where it markets professional liability insurance to physicians and dentists through two purchasing groups. Premiums written in Texas increased from $250,000 in 1996 to $2,620,000 in 1997. The Company's marketing efforts in Texas are comprised of marketing representatives and several carefully selected brokers in key geographical locations who specialize in medical malpractice insurance. I continue to be optimistic about the Company's potential in Texas and anticipate premiums written of $6,000,000 in 1998, an increase of 129% over the current year. While these two developments were extremely encouraging, Intermed continued to face difficulty in Missouri, its primary market: - - The market for medical malpractice insurance in the State of Missouri continues to be extremely competitive and hampered by the presence of several competitors who use extremely aggressive pricing to gain market share. While one of these competitors failed in 1997, several more have stepped forward to take its place. As a result of these intense competitive pressures, premiums written in the State of Missouri fell from $7,177,000 in 1996 to $6,707,000 in 1997, a decrease of $470,000 or 7%. That we have been able to maintain as much of our business as we have in what many consider to be the most competitive market in the United States is a tribute to your Company's dedicated marketing and policy services staffs and to the superior claim service provided to our insureds when they are faced with a claim. I anticipate premiums written in Missouri in 1998 will be approximately $7,000,000. While we are excited over the bright prospects of Interlex in the Missouri marketplace and Intermed in Texas, your Board of Directors and the management of the Company are mindful of the consolidation that is underway in the property/casualty industry, especially among medical malpractice carriers. Merger mania swept through the insurance industry in 1997. A.M. Best reports there were over 200 insurance deals in 1997 with 68 of those being in the property/casualty field. Since we are in the property/casualty field, the Board of Directors has directed management to develop strategies to address the issues posed by the consolidation trend. The establishment of Interlex Insurance Co. in 1994 and Intermed's expansion into Texas in 1996 were strategies initiated by your Company to diversify beyond one state and one product. I want to assure you that through all of this, the long-term interests of our stockholders and insureds are paramount. I appreciate your continued loyalty to the Company and your expression of confidence by keeping your professional liability insurance with us, and I want to assure you that we will continue to provide the quality professional services that you deserve. /s/ Raymond A. Christy Raymond A. Christy, M.D. President and Chief Executive Officer Springfield, Missouri March 27, 1998 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION ASSETS The Company's investment portfolio increased from $44,260,000 at December 31, 1996 to $47,386,000 at the current year end, an increase of $3,126,000 or 7%. $10,811,000 held in short-term investments at the prior year end was reinvested in long-term bonds during 1997. Over a three year period beginning in the spring of 1995, the Company sold $35,100,000 of low-yielding bonds and held the proceeds in short-term investments until interest rates improved. At December 31, 1997, $30,219,000 had been reinvested in long-term bonds with an improvement of approximately 160 basis points in portfolio yield. The one remaining low-yielding bond was sold in January, 1998. Approximately $5,000,000 currently held in short-term investments will be reinvested long-term when interest rates improve above current levels. The bond portfolio is invested solely in U.S. Treasury Notes, obligations of U.S. government agencies and high-grade state and municipal bonds. There are no known credit risks in the portfolio. At December 31, 1997, the portfolio (including short-term investments) had an average yield-to-maturity of 6.2% and there was an unrealized gain of $1,068,000 compared to an average yield of 5.9% and an unrealized gain of $252,000 at December 31, 1996. At the current year end approximately 34% of the portfolio will mature in one to five years and 66% in five to ten years. Cash decreased from $2,045,000 at December 31, 1996 to $102,000 at December 31, 1997 due to changes in cash management practices in December 1997 when there was a change in banking relationships. The reinsurance recoverable increased from $7,198,000 at December 31, 1996 to $10,414,000 at the current year end primarily due to an increase in ceded losses over the prior year. The federal income tax recoverable decreased from $1,680,000 at December 31, 1996 to $300,000 at the current year end due to net cash recoveries of $1,304,000 in 1997. Primarily as a result of the increase in reinsurance recoverable, total assets increased from $61,820,000 at December 31, 1996 to $65,726,000 at the current year end, an increase of $3,906,000 or approximately 6% over the prior year end. LIABILITIES Reserves for losses and loss adjustment expenses declined slightly in 1997, from $32,887,000 at the prior year end to $31,030,000 at December 31, 1997. The decrease of $1,857,000 or approximately 6% was primarily attributable to a re-evaluation of and release from reserves held for prior years. Management and the Company's consulting actuarial firm believe that reserves at December 31, 1997 are adequate to meet claims and defense costs attributable to 1997 and prior years. Premiums are earned over the one-year lives of policies written by the Company's insurance subsidiaries and unearned premiums are held in a reserve account. The reserve for unearned premiums increased from $6,300,000 at December 31, 1996 to $7,717,000 at the current year end. The increase of $1,417,000 or 22% was due to the substantial increase in premiums written in 1997 discussed in greater detail in the Results of Operations section of this analysis. The reinsurance payable increased from $506,000 at December 31, 1996 to $4,435,000 at December 31, 1997 due to the increase in premiums and losses ceded to the Company's reinsurers in 1997 compared to cessions in the prior year. 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS Other liabilities increased from $737,000 at December 31, 1996 to $1,563,000 at the current year end due primarily to the accrual of retirement benefits for the Board of Directors and Chief Executive Officer. Due to the factors discussed above, total liabilities increased from $40,430,000 at December 31, 1996 to $44,746,000 at the current year end, an increase of $4,316,000 or approximately 11%. STOCKHOLDERS' EQUITY Stockholders' equity declined from $21,390,000 at December 31, 1996 to $20,980,000 at December 31, 1997. The components of the $410,000 decrease were: $(953,000) Net loss 543,000 Change in unrealized gains on investment securities, net of --------- federal income taxes $(410,000) Decrease in Stockholders' Equity
The net loss of $953,000 is discussed in greater detail in the Results of Operations section of this report. RESULTS OF OPERATIONS Direct premiums written in 1997 totaled $10,541,000, an increase of $2,417,000 or approximately 30% over the prior year:
1997 1996 CHANGE ---- ---- ------ Medical malpractice premiums written Missouri $ 6,707,000 7,176,000 (469,000) Kansas 77,000 77,000 -0- Texas 2,620,000 250,000 2,370,000 ----------- --------- --------- Total medical $ 9,404,000 7,503,000 1,901,000 Legal malpractice premiums written Missouri $ 1,082,000 588,000 494,000 Kansas 55,000 33,000 22,000 ----------- ---------- --------- Total legal $ 1,137,000 621,000 516,000 ----------- ---------- --------- Total premiums written $10,541,000 $8,124,000 2,417,000
The significant increase in premiums written occurred in Texas where Intermed markets professional liability insurance to physicians and dentists through two purchasing groups, Intermedical of Texas, Inc. and Dental Defense Specialists, Inc., and in Missouri where Interlex markets professional liability insurance to lawyers. The medical malpractice market in Missouri continues to suffer from intense competitive pressure due to the large number of companies active in the state, several of whom engage in extremely aggressive pricing in order to gain market share. The Company has continued its long-standing policy of actuarially sound premium rates even though this has resulted in a loss of market share. One of our principal competitors, which built market share over the past decade by charging inadequate rates failed in 1997 and is now under state supervision. While this competitor is no longer present in the Missouri market, several other companies have stepped in with premium rates as aggressive as those of the company which failed. Intermed continues to price its products responsibly and to provide outstanding defense when our insureds are sued. This has enabled the Company to hold our attrition rate to approximately 10%. 5 6 MANAGEMENT'S DISCUSSION AND ANALYSIS Your management believes that the Missouri market for medical malpractice insurance will continue to be extremely competitive in 1998 and the growth of Intermed Insurance Co. will be in Texas where we expect to write an additional $3,000,000 in premiums. The prospects for Interlex Insurance Co. in Missouri in 1998 appear to be extremely positive and we expect to write an additional $500,000 in premiums. Premiums ceded to reinsurers totaled $4,739,000 in 1997 compared to $4,655,000 in 1996. Net premiums written were $5,802,000 in 1997 compared to $3,469,000 in the prior year, an increase of $2,333,000 or 67%. Due primarily to the 30% increase in direct premiums written in 1997, there was an increase of $1,304,000 in the unearned premium reserve compared to a decrease of $4,178,000 in 1996. The decrease in the UPR in 1996 was due to the decrease in premiums written in 1996 compared to 1995 and to a release of $3,128,000 from the death, disability and retirement component of the reserve caused by the conversion of claims-paid policyholders to claims-made coverages in 1996. As a result of the significant changes in the UPR in 1997 and 1996, net premiums earned in 1997 were $4,498,000 compared to $7,646,000 in 1996. However, the significant increase in the UPR in 1997 will result in an increase in premiums earned in 1998 as these premiums are taken into income. Net investment income in 1997 was approximately level with prior years, $2,623,000 compared to $2,627,000 in 1996 and $2,654,000 in 1995. Net investment losses of $14,000 in 1997, $17,000 in 1996 and $36,000 in 1995 were attributable to the portfolio yield improvement project discussed in the Asset section of this report. Sales, marketing and other underwriting expenses totaled $3,990,000 in 1997, $3,543,000 in 1996 and $2,393,000 in 1995. The growth in expenses over the three-year period was due to expansion of the direct marketing staff of Intermed, start-up costs of Interlex, the establishment of a sales office in Austin, Texas to support the marketing efforts of the two purchasing groups discussed above and the accrual of certain post-retirement benefits for Directors and the Chief Executive Officer. Losses and loss adjustment expenses totaled $4,478,000 in 1997 compared to $11,226,000 in 1996 and $7,676,000 in 1995. Loss ratios were 99.6% in 1997, 146.8% in 1996 and 64.5% in 1995. Losses and loss adjustment expenses in 1996 were significantly impacted by the establishment of reserves for reported claims on claims-paid policies that were non-renewed during the eight-month period ended August 31, 1996. The impact on 1996 earnings was $2,119,000. Primarily because of the non-renewal of claims-paid policies in 1995 and 1996, there were significant variations in operating results between years.: - Total losses and expenses were $8,468,000 in 1997, $14,755,000 in 1996 and $10,686,000 in 1995. - There was a loss before income taxes of $1,362,000 in 1997 compared to a loss before income taxes of $4,499,000 in 1996 and income before income taxes of $3,833,000 in 1995. - There was an income tax benefit of $409,000 in 1997 and $1,564,000 in 1996. There was a tax expense of $1,323,000 in 1995. - There was a net loss of $953,000 in 1997 compared to a net loss of $2,934,000 in 1996 and net income of $2,510,000 in 1995. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES There was a positive cash flow from operations of $476,000 in 1997 compared to a negative cash flow of $5,811,000 in 1996 and a positive cash flow of $1,175,000 in 1995. The significant improvement in 1997 compared to 1996 was primarily attributable to the following factors: - An increase of $870,000 in premium receipts in 1997. - Net payments to reinsurers of $751,000 in 1997 compared to $3,315,000 in 1996. - A reduction of $147,000 in dividends to policyholders in 1997. - A reduction of $1,446,000 in loss and loss adjustment expenses in 1997. - Net cash recoveries of $1,304,000 of federal income taxes in 1997. Cash and short-term investments of $6,550,000 at December 31, 1997 and projected net investment income of $2,600,000 in 1998 provide ample assurance that bonds will not have to be sold to meet unexpected cash requirements in the coming year. YEAR 2000 ISSUE While many companies face enormous costs in resolving the Year 2000 issue, Tenere has only one line of business, professional liability insurance, and only issues policies with one-year lives. Based on a preliminary survey of computer equipment and automated systems, the Company's Management does not believe that Tenere's cost of addressing this issue will be material. A plan has been designed to address and resolve these issues in 1998. Computer consultants have been engaged to assist in all stages of this project. EFFECT OF INFLATION Inflation has an impact on Tenere's general and administrative expenses through higher wages and the costs of goods and services. Inflation also impacts loss adjustment expenses as attorneys and other consultants pass on their increased costs through increased fees. FORWARD LOOKING INFORMATION This report contains forward-looking statements with respect to the Company's future operations, including statements with respect to increases in premiums written by Intermed in Texas and by Interlex in Missouri. The Company's actual results may vary materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and in the business environment generally. 7 8 INDEPENDENT AUDITORS' REPORT The Board of Directors The Tenere Group, Inc.: We have audited the accompanying consolidated balance sheets of The Tenere Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity/policyholders' surplus 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. These 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 The Tenere Group, Inc. and subsidiaries as of December 31, 1997 and 1996, 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. /s/ KPMG Peat Marwick LLP Kansas City, Missouri March 17, 1998 8 9 CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
Assets 1997 1996 Investments: Bonds held available for sale, at fair value (amortized cost - $39,863,330 in 1997; $29,117,835 in 1996) $40,930,956 29,370,067 Common stock, at fair value 7,057 340 Short-term investments, at cost which approximates fair value 6,447,758 14,889,744 ---------- ---------- Total investments 47,385,771 44,260,151 Cash, primarily compensating balances 102,175 2,045,378 Premiums receivable 3,124,660 2,580,691 Reinsurance recoverable 10,413,593 7,197,901 Ceded unearned premiums 369,727 260,397 Accrued investment income 674,843 527,139 Deferred policy acquisition costs 183,253 84,550 Deferred income taxes 2,304,087 2,098,792 Income taxes recoverable 300,000 1,680,190 Other 867,543 1,084,992 ---------- ---------- Total assets $65,725,652 61,820,181 =========== ========== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss adjustment expenses $31,030,412 32,887,407 Unearned premium reserve 7,717,308 6,300,111 Reinsurance premiums payable 4,435,317 506,381 Other 1,563,056 736,579 ---------- ---------- Total liabilities 44,746,093 40,430,478 Stockholders' equity: Common stock, $.01 par value; 7,000,000 shares authorized; 1,999,774 shares issued and outstanding 19,998 19,998 Contributed capital 21,940,828 21,940,828 Accumulated deficit (1,690,370) (737,596) Unrealized gain on investment securities, net of tax 709,103 166,473 Commitments and contingencies (see notes 8 & 10) ---------- ---------- Total stockholders' equity 20,979,559 21,389,703 ---------- ---------- Total liabilities and stockholders' equity $65,725,652 61,820,181 =========== ==========
See notes to consolidated financial statements 9 10 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- Revenues: Direct premiums written $10,541,048 8,124,319 9,874,270 Premiums ceded to reinsurers (4,739,209) (4,655,382) (1,505,427) ----------- ---------- ---------- Net premiums written 5,801,839 3,468,937 8,368,843 (Increase) decrease in unearned premium reserve (1,304,002) 4,177,545 3,532,480 ----------- ---------- ---------- Net premiums earned 4,497,837 7,646,482 11,901,323 Net investment income 2,623,033 2,626,983 2,654,037 Net realized investment losses (14,049) (17,135) (36,263) ----------- ---------- ---------- Total revenues 7,106,821 10,256,330 14,519,097 Losses and expenses: Losses and loss adjustment expenses 4,478,424 11,226,461 7,676,488 Sales and marketing expenses 1,790,215 1,758,312 955,021 Other underwriting expenses 2,199,776 1,784,324 1,437,718 Dividends to policyholders - (13,921) 616,948 ----------- ---------- ---------- Total losses and expenses 8,468,415 14,755,176 10,686,175 ----------- ---------- ---------- Income (loss) before income taxes (1,361,594) (4,498,846) 3,832,922 Income tax benefit (expense) 408,820 1,564,360 (1,323,066) ----------- ---------- ---------- Net income (loss) $ (952,774) (2,934,486) 2,509,856 =========== ========== ========== Basic and diluted net income (loss) per share $ (0.48) (1.47) 1.26 =========== ========== ==========
See notes to consolidated financial statements 10 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/POLICYHOLDERS' SURPLUS Years Ended December 31, 1997, 1996, and 1995
Unrealized Retained gain (loss) earnings/ on investment Common Contributed (accumulated securities, net Unassigned stock capital deficit) of tax surplus Total ----- ------- ------- ------ ------- ----- Balance at December 31, 1994 $ - - - (2,279,304) 21,647,860 19,368,556 Demutualization (note 1) 19,998 21,940,828 (312,966) - (21,647,860) - Change in unrealized investment gains - - - 2,658,866 - 2,658,866 Net income - - 2,509,856 - - 2,509,856 ------- ---------- ---------- ------- ----------- ---------- Balance at December 31, 1995 19,998 21,940,828 2,196,890 379,562 - 24,537,278 Change in unrealized investment losses - - - (213,089) - (213,089) Net loss - - (2,934,486) - - (2,934,486) ------- ---------- ---------- ------- ----------- ---------- Balance at December 31, 1996 19,998 21,940,828 (737,596) 166,473 - 21,389,703 Change in unrealized investment gains - - - 542,630 - 542,630 Net loss - - (952,774) - - (952,774) ------- ---------- ---------- ------- ----------- ---------- Balance at December 31, 1997 $19,998 21,940,828 (1,690,370) 709,103 - 20,979,559 ======= ========== ========== ======= =========== ==========
See notes to consolidated financial statements 11 12 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ------------ ----------- ---------- Net income (loss $ (952,774) (2,934,486) 2,509,856 Adjustments to reconcile net income (loss) to net cash from operating activities: Net realized investment losses 14,049 17,135 36,263 Depreciation and amortization expense 170,374 187,418 160,634 Net change in deferred policy acquisition costs (98,703) 55,900 147,172 Deferred income tax expense (benefit) (484,833) (216,705) 487,427 Net amortization of discount on bonds 51,714 105,218 516,508 Change in operating assets and liabilities Premiums receivable (543,969) 1,139,511 423,063 Reinsurance balances 603,914 (4,752,048) (1,308,346) Accrued investment income (147,704) 40,167 795,427 Income taxes recoverable 1,380,190 (1,894,634) 650,715 Other assets 94,441 241,485 1,208 Reserve for losses and loss adjustment expenses (1,856,995) 6,244,114 245,816 Unearned premium reserve 1,417,197 (4,146,895) (3,299,570) Policyholder dividends payable - (152,042) (277,596) Other liabilities 828,678 254,507 86,240 ------------ ----------- ---------- Net cash provided by (used in) operating activities 475,579 (5,811,355) 1,174,817 Cash flows from investing activities: Maturity of bonds held to maturity or available for sale 1,450,000 1,700,000 1,360,000 Sale of bonds held to maturity - 1,826,094 - Sale of bonds available for sale 4,269,066 2,750,826 27,246,304 Purchase of bonds held to maturity or available for sale (16,530,324) (13,688,573) - Redemption on stock rights 56 - - Purchase of intangible asset - (400,000) - Purchase of furniture and equipment (49,566) (622,795) (250,255) ------------ ----------- ---------- Net cash provided by (used in) investing activities (10,860,768) (8,434,448) 28,356,049 Net increase (decrease) in cash and short-term investments (10,385,189) (14,245,803) 29,530,866 Cash and short-term investments at beginning of year 16,935,122 31,180,925 1,650,059 ------------ ----------- ---------- Cash and short-term investments at end of year $ 6,549,933 16,935,122 31,180,925 ============ =========== ==========
See notes to consolidated financial statements 12 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of The Tenere Group, Inc. (Tenere, the Company) and its wholly-owned subsidiaries, Intermed Insurance Company (Intermed), Interlex Insurance Company (Interlex) and Insurance Services, Inc. (ISI), is presented to assist in understanding the Company's consolidated financial statements. The consolidated financial statements herein represent the operations of Intermed and its subsidiaries, Interlex and ISI. Tenere, the holding company, currently has no operations other than ownership of Intermed. The consolidated financial statements and notes thereto are representations of the Company's management, which is responsible for their integrity and objectivity. The consolidated financial statements have been prepared on the basis of generally accepted accounting principles. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications to 1996 and 1995 amounts were made to conform with 1997 presentation. DESCRIPTION OF COMPANY Effective April 27, 1995, RCA Mutual Insurance Company (RCA), a non-assessable mutual property and casualty insurance company, completed the demutualization process which began in 1993 and became a stock property and casualty insurance company. The Company's name was changed from RCA Mutual Insurance Company to Intermed Insurance Company. Also effective April 27, 1995, Intermed became a wholly-owned subsidiary of The Tenere Group, Inc., an insurance holding company organized under the laws of the State of Missouri, and the policyholders of RCA became the stockholders of Tenere. This transaction was accounted for using policyholders' equity as of April 1, 1995. Issued in exchange for $21,960,826 of membership interests were 1,999,774 shares of Tenere Group stock which approximated one share of $.01 par value Tenere Group stock for every $10.98 of policyholder surplus attributable to the policyholder. Intermed writes medical and dental professional liability insurance on occurrence and claims-made bases in the States of Missouri and Kansas. Prior to September 1, 1995, the Company also wrote coverages on a claims-paid basis in the State of Missouri. Effective August 1, 1996 Intermed was recognized as a surplus lines carrier in the State of Texas and began writing professional liability insurance on physicians through a physician-sponsored purchasing group, Intermedical of Texas, Inc. In 1997, the Company began to write professional liability insurance on dentists in Texas through a second physician-sponsored purchasing group, Dental Defense Specialists, Inc. Coverages in Texas are written on both occurrence and claims-made policy forms. Interlex writes legal professional liability insurance on a claims-made basis in the States of Missouri and Kansas. Since operations are currently conducted in only three states, they are subject to changes in the legal and economic climates of those states. CASH Cash balances are primarily compensating balances required to pay for banking services. Excess cash is reinvested in a variety of short-term investments. INVESTMENTS Investments in bonds and common stocks are classified as "available for sale" and are accordingly reported at fair value. Unrealized gains and losses are included as a separate component of stockholders' equity, net of income tax. Short-term investments are reported at cost which approximates fair value. Gains and losses from the sale of investments are calculated using the specific identification method. 13 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS (LOSS) PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which requires the presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, unless there is a net loss and the exercise would be anti-dilutive. Implementation of SFAS No. 128 resulted in no change in EPS for prior periods. PREMIUMS RECEIVABLE Premiums receivable represent unpaid premium balances due from the insured and are substantially offset by the related unearned premiums. The Company cancels all policies with receivable balances outstanding more than 90 days. PREMIUMS Premium income is recognized on a pro rata basis over the terms of the respective policy contracts. The unearned premium reserve represents the portion of premiums written which are applicable to the unexpired terms of policies in force. The Company reserves for future utilization of the death, disability and retirement waiver benefit as a component of the unearned premium reserve. This reserve was estimated to be $1,966,977 at December 31, 1997 and $1,647,682 at December 31, 1996. POLICY ACQUISITION COSTS Policy acquistion costs, consisiting primarily of commissions , are deferred and amortized in proportion to the premium revenue recognized. Amortization of policy acquistion costs were $263,000, $340,000 and $431,000 in 1997, 1996 and 1995, respectively. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses represent the estimated liabilities for reported claims plus those incurred but not yet reported and the related estimated loss adjustment expenses. The reserves for losses and loss adjustment expenses are determined using case-basis evaluations and statistical analyses, including insurance industry loss data, and represent estimates of the ultimate cost of all claims incurred through December 31 of each year. Although considerable variability is inherent in such estimates, management believes that the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations and are accounted for as changes in estimates. The reserves for losses and loss adjustment expenses are reported on a present value basis discounted at the rate of 2% in 1997 and 3% in 1996 as permitted by the Missouri Department of Insurance. The discount will be 1% in 1998 and will be eliminated effective January 1, 1999. (See note 4) Estimates of losses and loss adjustment expenses on occurrence coverages are charged to income as claims are incurred. Estimates of losses and loss adjustment expenses on claims-made coverages are charged to income as claims are reported. Claims-paid coverages insured against claims which were reported and paid during the period the policy was in effect. The Company's obligation to defend and pay claims ended upon expiration of a claims-paid policy. Claims-paid losses were incurred at the time of payment so no reserves were required on open claims. The Company discontinued writing claims-paid policies effective September 1, 1995. As these policies expired over the twelve-month period ending August 31, 1996, 14 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS claims-paid policyholders were given the opportunity to convert to claims-made coverage. Upon non-renewal of the claims-paid contract, the Company became contractually liable for reported claims. Reserves for all reported claims on claims-paid policies which non-renewed during the period September 1, 1995 through August 31, 1996 totaled $995,141 at December 31, 1997, net of reinsurance. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. ESTIMATES AND ASSUMPTIONS 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. The reserves for losses and loss adjustment expenses represent the most significant estimate in the accompanying financial statements. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 130, "Reporting Comprehensive Income" requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the statement of financial position. The change in unrealized investment gains and losses is the most significant component of other comprehensive income for the Company. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. (2) RELATED PARTIES Insurance Services, Inc. has management contracts with two purchasing groups, Intermedical of Texas, Inc. and Dental Defense Specialists, Inc. The Company and the two purchasing groups have certain members in common on their respective Boards of Directors. In 1997 the two purchasing groups produced written premiums of $2,619,000 in the State of Texas for Intermed Insurance Company. 15 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTMENTS The amortized cost and estimated fair values of investments in bonds and common stock as of December 31, 1997 and December 31, 1996 are presented below. The estimated fair values presented in this footnote were determined using quoted market prices, where available, or independent pricing services.
Gross Gross Estimated Amortized unrealized unrealized fair Type of Investment basis gains losses value - ------------------ --------- ---------- ---------- --------- December 31, 1997 Bonds: United State government, Government agencies and $38,003,757 1,012,229 (7,020) 39,008,966 Authorities State municipalities and Political subdivisions 1,859,573 62,417 - 1,921,990 ----------- --------- -------- ---------- Total bonds 39,863,330 1,074,646 (7,020) 40,930,956 Common stock 284 6,773 - 7,057 Short-term investments 6,447,758 - - 6,447,758 ----------- --------- -------- ---------- Total investments $46,311,372 1,081,419 (7,020) 47,385,771 =========== ========= ======== ========== Gross Gross Estimated Amortized unrealized unrealized fair Type of Investment basis gains losses value - ------------------ --------- ---------- ---------- --------- December 31, 1996 Bonds: United State government, Government agencies and $27,246,527 364,640 (136,238) 27,474,929 Authorities State municipalities and Political subdivisions 1,871,308 23,830 - 1,895,138 ----------- --------- -------- ---------- Total bonds 29,117,835 388,470 (136,238) 29,370,067 Common stock 340 - - 340 Short-term investments 14,889,744 - - 14,889,744 ----------- --------- -------- ---------- Total investments $44,007,919 388,470 (136,238) 44,260,151 =========== ========= ========= ==========
16 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and estimated fair value of investments in bonds at December 31, 1997 by contractual maturity are shown 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.
Estimated Amortized fair cost value ---- ----- Due in one year or less $ 50,091 50,141 Due after one year through five years 13,468,709 13,649,437 Due after five years through ten years 26,344,530 27,231,378 ----------- ---------- $39,863,330 40,930,956 =========== ==========
Proceeds from sales of available-for sale securities were $4,269,066 in 1997, $2,750,826 in 1996 and $27,246,304 in 1995. Gross gains and losses on those sales were: $0 and $14,049 in 1997; $2,120 and $19,255 in 1996; and $383,816 and $420,079 in 1995. Net investment income for the years ended December 31, 1997, 1996 and 1995 is comprised of the following:
1997 1996 1995 ---- ---- ---- Investment income: Interest on short-term investments $ 742,735 1,115,565 616,621 Interest on bonds 2,056,416 1,695,754 2,217,427 ---------- --------- --------- Gross investment income 2,799,151 2,811,319 2,834,048 Investment expenses (176,118) (184,336) (180,011) ---------- --------- --------- Net investment income $2,623,033 2,626,983 2,654,037 ========== ========= =========
Bonds with an estimated fair value of $1,878,081 at December 31, 1997 and $1,846,866 at December 31, 1996 were on deposit with the Missouri Department of Insurance. The net changes in unrealized investment gains (losses) are as follows:
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Unrealized investment gains (losses) $ 822,167 (322,862) 4,028,585 Federal income (taxes) benefit at 34% (279,537) 109,773 (1,369,719) --------- -------- ---------- Net unrealized investment gains (losses) $ 542,630 (213,089) 2,658,866 ========= ======== ==========
The carrying values of cash, short-term investments, premiums receivable, other assets and other liabilities approximate their fair values at December 31, 1997 and 1996. 17 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES A summary of the reserves for losses and loss adjustment expenses follows:
December 31, December 31, 1997 1996 ---- ---- Undiscounted reserves for losses and loss adjustment expenses $ 31,990,412 35,051,777 Less discount (see note 1) (960,000) (2,164,370) Discounted reserves for losses and loss ------------ ---------- adjustment expenses $ 31,030,412 32,887,407 ============ ==========
Following is the activity in the reserves for losses and loss adjustment expenses:
1997 1996 1995 ---- ---- ---- Balance at January 1 $ 32,887,407 26,623,138 26,279,977 Less reinsurance recoverable on reserves for losses and loss adjustment expenses (7,099,463) (1,162,495) (584,913) ------------ ---------- ---------- 25,787,944 25,460,643 25,695,064 ------------ ---------- ---------- Incurred related to: Current year 5,646,863 9,812,694 9,612,075 Prior Year (1,168,439) 1,413,767 (1,935,587) ------------ ---------- ---------- Total incurred 4,478,424 11,226,461 7,676,488 ------------ ---------- ---------- Paid related to: Current year 413,191 2,499,788 3,190,397 Prior Year 8,773,277 8,399,372 4,720,512 ------------ ---------- ---------- Total paid 9,186,468 10,899,160 7,910,909 ------------ ---------- ---------- Net balance at December 31 21,079,900 25,787,944 25,460,643 Plus reinsurance recoverable on reserves for losses and loss adjustment expenses 9,950,512 7,099,463 1,162,495 ------------ ---------- ---------- Balance at December 31 $ 31,030,412 32,887,407 26,623,138 ============ ========== ==========
The reserves for losses and loss adjustment expenses are estimated based on development information available at each reporting date. As a result of the nature of the risks underwritten, claims development may occur over an extended period of time. The changes in the incurred amounts disclosed above related to prior years are the result of utilizing improved claim development information as that information becomes available. (5) REINSURANCE As is customary in the insurance industry, the Company reinsures portions of certain insurance policies it writes, thereby providing a greater diversification of risk and minimizing exposure on larger risks. The Company remains contingently at risk with respect to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the reinsurance treaty. 18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Amounts recoverable from one reinsurer at December 31, 1997 represented 58% of total reserves for losses and loss adjustment expenses ceded. Effective January 1, 1996, Intermed entered into a multi-year aggregate excess of loss reinsurance agreement through December 31, 1999. This agreement provides excess of loss coverage on Intermed's claims-paid, occurrence and claims-made policies. Aggregate coverage provided by the agreement is $4,800,000 in excess of $4,176,000 on claims-paid policies and up to $2,000,000 per accident year or $6,000,000 in aggregate for all incurred losses in excess of an annual accident year loss ratio for occurrence and claims-made policies. Ceded earned premiums under this agreement were $800,000 in 1997 and $2,050,000 in 1996. Ceded incurred losses under this agreement were $1,131,403 in 1997 and $4,886,463 in 1996. Effective October 1, 1996, Intermed renewed a multi-year excess of loss reinsurance agreement through September 30, 1999. This agreement provides excess of loss coverage on Intermed's claims-paid, occurrence and claims-made policies up to $1,600,000 in excess of $400,000 on each claim, with an aggregate recoverable of 300% of the ceded premiums earned. This agreement also provides coverage for the difference between $2,000,000 each loss and/or $4,000,000 in the aggregate and $1,000,000 and/or $3,000,000 in the aggregate each policy where applicable, with an aggregate recoverable of $5,000,000. Ceded earned premiums under this agreement were $3,294,126, $2,207,681 and $1,134,208 in 1997, 1996 and 1995, respectively. Ceded incurred losses under this agreement were $2,681,760, $1,674,075 and $577,582 in 1997, 1996 and 1995, respectively. Effective October 1, 1997: - Intermed and Interlex renewed a "catastrophic awards made" excess of loss reinsurance agreement through September 30, 1998. This agreement provides excess of loss coverage on claims-paid, occurrence and claims-made policies. Aggregate coverage provided by the agreement is $5,000,000 in excess of $250,000 per occurrence on awards made on policies in excess of their original policy limit or on extra-contractual obligations, with an aggregate recoverable of $5,000,000. Ceded earned premiums were $146,251, $144,000 and $132,480 in 1997, 1996 and 1995, respectively. There are no ceded incurred losses under this agreement. - Interlex renewed an excess of loss reinsurance agreement through September 30, 1998. This agreement provides excess of loss coverage on Interlex's claims-made policies up to $700,000 in excess of $300,000 on each claim, with an aggregate recoverable of $2,100,000. However, if ceded premiums written exceed $500,000, the maximum recoverable shall increase to $3,500,000. Ceded earned premiums under this agreement were $261,210, $161,389 and $23,791 in 1997, 1996 and 1995, respectively. There are no ceded incurred losses under this agreement. - Interlex renewed a facultative excess of loss reinsurance agreement through September 30, 1998. This agreement provides excess coverage on claims-made policies for limits exceeding $1,000,000/3,000,000 up to $5,000,000/5,000,000 with an aggregate recoverable of $5,000,000. Ceded earned premiums under this agreement were $128,292, $64,825 and $2,554 in 1997, 1996 and 1995, respectively. There were no ceded incurred losses under this agreement. 19 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Premiums and losses related to reinsurance amounts for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995 ---- ---- ---- Ceded premiums written $4,739,209 4,655,382 1,505,427 ========== ========= ========= Ceded premiums earned $4,629,879 4,627,895 1,343,578 ========== ========= ========= Ceded losses and loss adjustment expenses $3,813,163 6,560,538 577,582 ========== ========= =========
(6) STOCKHOLDERS' EQUITY The National Association of Insurance Commissioners (NAIC) requires a risk-based capital (RBC) calculation as part of the information filed with the annual statutory statement of insurance companies. This risk-based capital calculation and analysis is an attempt to measure the theoretical capital and surplus needs of an insurance company compared with its adjusted capital and surplus. The capital and surplus of Intermed and Interlex substantially exceeds the NAIC's RBC requirements for Property and Casualty companies at the end of 1997 and 1996:
1997 1996 ---- ---- Intermed Insurance Company Total adjusted capital $17,062,404 17,104,149 Authorized control level risk-based capital $ 3,212,711 3,526,130 Interlex Insurance Company Total adjusted capital $ 5,861,150 5,903,754 Authorized control level risk-based capital $ 212,475 159,125
Dividends paid to the Company by its insurance subsidiaries are restricted by regulatory requirements of the subsidiaries' state of domicile. The maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Missouri without prior approval of the Insurance Director is limited to the lesser of (a) 10% of a company's statutory capital and surplus as of December 31 of the preceding year or (b) net investment income for the twelve-month period ending December 31 of the preceding year. At December 31, 1997 statutory capital and surplus of Intermed was $17,830,404 and net investment income of Intermed was $2,336,958. The maximum dividend which can be paid in 1998 by Intermed without the prior approval of the Missouri Insurance Director is, therefore, $1,783,040. 20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) FEDERAL INCOME TAXES The Company files a consolidated federal income tax return. Income tax expense varies from the amount which would be provided by applying the federal income tax rates to income before income taxes. The following reconciles the expected provision for income tax expense using the federal statutory tax rate of 34% to the provision for income tax expense (benefit) reported herein for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Expected tax expense (benefit) using statutory rates $(462,942) (1,529,607) 1,303,787 Other, net 54,122 (34,753) 19,279 --------- ---------- --------- Income tax expense (benefit) $(408,820) (1,564,360) 1,323,066 ========= ========== =========
Income taxes consist of the following at December 31:
1997 1996 1995 ---- ---- ---- Current expense (benefit) $ 76,013 (1,347,655) 835,639 Deferred expense (benefit) (484,833) (216,705) 487,427 --------- ---------- --------- Income tax expense (benefit) $(408,820) (1,564,360) 1,323,066 ========= ========== =========
Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. The sources of these differences and the tax effect of each are as follows:
1997 1996 1995 ---- ---- ---- Losses and loss adjustment expenses incurred for financial reporting purposes but not deductible for tax purposes $ 773,171 (348,223) 70,676 Unearned premiums not deductible for tax purposes (88,673) 284,074 240,209 Deferred compensation (102,642) (88,400) - Deferred retirement benefit (201,246) - - Net operating loss carryforward (868,852) (86,660) - Other, net 3,409 22,504 176,542 --------- -------- ------- Deferred tax expense (benefit) $(484,833) (216,705) 487,427 ========= ======== =======
21 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and December 31, 1996 are presented below:
1997 1996 ---- ---- Deferred tax assets: Discounted unpaid loss reserves $1,080,048 1,853,219 Discounted unearned premium reserves 499,158 410,485 Deferred compensation 191,042 88,400 Deferred retirement benefit 201,246 - Deferred commissions payable 47,465 26,916 Net operating loss carryforward 1,115,423 246,571 ---------- --------- Total gross deferred tax assets 3,134,382 2,625,591 Less valuation allowance (390,400) (400,000) ---------- --------- Net deferred tax assets 2,743,982 2,225,591 Deferred tax liabilities: Investments adjusted to market value (365,295) (85,758) Deferred acquistion costs (62,306) (28,747) Other (12,294) (12,294) ---------- --------- Total gross deferred tax liabilities (439,895) (126,799) ---------- --------- Net deferred tax asset $2,304,087 2,098,792 ========== =========
The valuation allowance for deferred tax assets at December 31, 1997 was $390,400, a decrease of $9,600 from a balance of $400,000 at December 31, 1996. Based on the Company's historical earnings, future expectations of adjusted taxable income, its ability to change its investment strategy, as well as reversing gross deferred tax liabilities, management believes it is more likely than not that the Company will fully realize the gross deferred tax assets less the valuation allowance. However, there can be no assurances that the Company will generate the necessary adjusted taxable income in any future period. Net cash payments (recoveries) for federal income taxes were ($1,304,177), $546,983 and $184,925 in 1997, 1996 and 1995, respectively. Amounts and expiration dates of the net operating loss carryforward are as follows:
Year of net operating loss Net operating loss Expiration date -------------------------- ------------------ --------------- 1992 $ 597,617 2007 1996 98,077 2011 1997 2,584,962 2012
(8) STOCK OPTIONS In 1996 the shareholders of the Company adopted the 1996 Long Term Incentive Plan. The Plan was designed to encourage certain employees, officers and directors of the Company and its subsidiaries to acquire Common Stock of the Company or to receive monetary payments based on the value of such stock or based upon achieving certain goals on a basis mutually advantageous to such employees and the Company. The authorized number of shares of Common Stock reserved for issuance under the Plan is 350,000. 22 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 31, 1997, the compensation committee of the board of directors granted options to purchase 182,052 shares of common stock to certain officers of the Company and non-employee directors. The fair market value of the Company's stock, as determined by the Board of Directors using factors they deemed relevant, was $5.35 and the exercise price was $5.45 per share. The options became fully exerciseable on July 31, 1997 and were all outstanding and exerciseable at December 31, 1997. The term of the options is ten years ending January 31, 2007. The options shall terminate earlier in the event of the death, retirement or disability of the optionee or after termination of the optionee's employment with the Company or its subsidiaries. The Company has chosen not to adopt the accounting provisions on SFAS No. 123, "Accounting for Stock-Based Compensation," and, accordingly, there has been no expense recognized in the accompanying financial statements. If the Company had recorded expense based on the fair value of the stock options at the grant date under SFAS No. 123, the Company would have recognized $470,210 as compensation expense in 1997. The resulting pro forma net loss for the year would have been ($1,263,113) and the resulting pro forma basic and diluted loss per share would have been ($0.63) in 1997. The fair value of the options granted in 1997 was estimated using an option pricing model that utilized the following assumptions: annual risk-free interest rate of 7%, option term of 10 years, volatility of 0% and dividend yield of 0%. The preceding dividend and volatility assumptions were utilized based on the historical and future intentions of the Company to not pay regular dividends and the non-volatile nature of the Company stock. (9) BENEFIT PLANS The Company sponsors a defined contribution pension plan that covers substantially all employees, the Insurance Services, Inc. Employees' Money Purchase Pension Plan. Contributions to the Plan by the Company are discretionary, but may not exceed 15% of the participants annual compensation. The Company also sponsors a profit sharing plan, the Insurance Services, Inc. Employees' 401(k) Profit Sharing Plan, to which employees may contribute up to 10% of their annual compensation. The Company also makes annual discretionary contributions to the plan. The Company's total contributions to the two pension plans was $201,415 in 1997, $178,068 in 1996 and $141,325 in 1995. Effective May 17, 1996 the Company established The Tenere Group, Inc. Retirement Plan for Directors. The purpose of the Plan is to provide retirement benefits to Directors who have rendered extended service to the Company as a Director. A Director shall be eligible to receive a benefit under this Plan if he retires after May 17, 1996 and has five or more years of service at the time of his retirement. The annual benefit paid under this plan shall be equal to the retainer at the date of his retirement multiplied by 10% for each year of service as a Director. The maximum annual benefit is limited to the Directors' annual retainer at the time of retirement and will be paid quarterly during his lifetime for a maximum of ten years. All current Directors are vested in the Plan and the estimated cost to the Company of $591,901 was included as expense in 1997 and is reflected in other liabilities. The Company provides a retirement plan for the chief executive officer of the Company. The agreement entitles the executive or the estate of the executive to receive an $80,000 annual payment for ten years upon retirement and after attainment by the executive of 70 years of age. The Company accrued retirement costs of $301,887 in 1997 and $260,000 in 1996. Such amounts have been discounted using a rate of 7%. 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) COMMITMENTS AND CONTINGENCIES The Company has non-cancellable operating leases for office space which expire in June 2000 and June 2002. Future minimum lease payments are $119,000 in 1998, $101,000 in 1999, $92,000 in 2000, $95,000 in 2001, and $47,000 in 2002. The Company is involved in claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on its financial condition or results of operations. On May 6, 1996, the Company entered into three-year employment agreements with five executives and one key employee which include severance provisions granting the executives the right to receive certain benefits, including among others, their annual base salary and bonus if terminated (as defined in the respective agreements) within the term of the agreements. The agreements also contain a provision whereby the executives, in the event of termination after a change in control, would receive severance payments in an amount 2.99 times their then current base salaries. As of December 31, 1997, the maximum contingent liability under the severance provisions of the agreements was approximately $2,300,000. (11) STATUTORY ACCOUNTING Intermed and its subsidiary Interlex are domiciled in Missouri and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Missouri Department of Insurance. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the the NAIC. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. Intermed and its subsidiary Interlex have no significant permitted accounting practices that vary from prescribed accounting practices, except for discounting of loss reserves. Stockholder's equity and net income (loss), as reported to the domiciliary state insurance departments in accordance with its prescribed or permitted statutory accounting practices, for the Company's insurance subsidiaries are summarized as follows: December 31, 1997 1996 ---- ---- Statutory capital and surplus: Intermed 17,830,404 18,402,549 Interlex 5,861,150 5,903,754 Net income (loss): Intermed (498,840) (2,812,009) Interlex (45,604) 74,797
24 25 STATEMENT OF MANAGEMENT'S RESPONSIBILITY The financial statements and related information of The Tenere Group, Inc. and Subsidiaries presented in this Report were prepared by management, which has sole responsibility for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and include estimates and judgments based upon the best available information and management's view of current conditions and circumstances. Management believes that these statements present fairly the Company's financial position and results of operations and that the other information contained in the annual report is consistent with the financial statements. Management has developed and maintains a system of internal accounting control designed to provide reasonable assurance that the Company's assets are protected from improper use and that accounting records provide a reliable basis for the preparation of financial statements. This system is continually reviewed, improved and modified in response to changing business conditions and operations and to recommendations made by the Company's independent auditors. While no system of internal control can provide absolute assurance that irregularities will not take place, management believes that Tenere's internal control system provides reasonable assurance that assets are safeguarded and financial information is reliable. The Company's independent auditors, KPMG Peat Marwick LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards, which includes the consideration of Tenere's internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. During the course of their audit, the independent auditors were given unrestricted access to all financial records and related data. Management believes that all representations made to the independent auditors were accurate and complete. /s/ J.D. Williams Joseph D. Williams, CPA Vice President-Finance and Chief Financial Officer Springfield, Missouri March 27, 1998 25 26 SELECTED FINANCIAL INFORMATION (in thousands)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net premiums earned $ 4,498 7,646 11,901 10,657 8,154 Net investment income 2,623 2,627 2,654 2,639 2,754 Net realized investment gains (losses) (14) (17) (36) (423) 1,318 ------- ------ ------ ------ ------ Total revenues 7,107 10,256 14,519 12,873 12,226 Losses and loss adjustment expenses 4,478 11,226 7,676 8,197 8,503 Dividends to policyholders - (14) 617 1,289 1,091 Amortization of net assets acquired in excess of cost (1) - - - - (1,484) Other expenses 3,991 3,543 2,393 2,488 2,865 ------- ------ ------ ------ ------ Total expenses 8,469 14,755 10,686 11,974 10,975 ------- ------ ------ ------ ------ Income (loss) before income taxes (1,362) (4,499) 3,833 899 1,251 Income tax benefit (expense) 409 1,564 (1,323) (102) 117 Cumulative effect of change in accounting for income taxes - - - - 67 ------- ------ ------ ------ ------ Net income (loss) $ (953) (2,935) 2,510 797 1,435 ======= ====== ====== ====== ====== Basic and diluted net income (loss) per share $ (0.48) (1.47) 1.26 N.A. N.A. ======= ====== ====== ====== ====== CONSOLIDATED BALANCE SHEETS DATA: Total assets $65,726 61,820 62,614 61,119 62,128 Reserve for losses and loss adjustment expenses 31,030 32,887 26,623 26,280 25,553 Unearned premium reserve 7,717 6,300 10,447 13,747 13,379 Stockholders' equity/policyholders' surplus 20,980 21,390 24,537 19,369 20,845 ======= ====== ====== ====== ======
(1) On January 2, 1992, Intermed acquired all of the outstanding stock of Insurance Risks, Ltd. for $2,500,048 in cash. The acquisition was recorded as a purchase and, accordingly, the purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as of the date of acquisition. The fair value of the net assets acquired in excess of the purchase price was $2,967,008 calculated as follows: Fair value of assets acquired $ 14,833,461 Liabilities assumed (12,973,636) Net cash from the purchase 1,107,183 ------------ Net assets acquired in excess of cost $ 2,967,008 ============
Net assets acquired in excess of cost were amortized over the estimated period of benefit of two years. The amortization caused a favorable non-recurring impact on net income for the years ended 1993 and 1992 in the amount of $1,483,500. If these amounts are excluded from net income before income taxes, 1993 net income before income tax would decrease 119% from $1,251,000 to ($232,500). The selected consolidated financial data for each of the five years in the period ended December 31, 1997 has been derived from audited consolidated financial statements of Tenere as of and for the years ended December 31, 1997, 1996 and 1995 and of its predecessor, RCA Mutual Insurance Company, as of and for the years ended December 31, 1994 and 1993. These data include all adjustments which are, in the opinion of the management of Tenere, necessary to present a fair statement of the financial condition and results of operations of Tenere for these periods and are of a normal and recurring nature. The information should be read in conjunction with and is qualified by reference to such statements and the related notes thereto. 26 27 DIRECTORS AND OFFICERS THE TENERE GROUP, INC. INTERMED INSURANCE CO. THOMAS E. ASHLEY, M.D. GARY O. BAKER, D.D.S. ALBERT J. BONEBRAKE, M.D. VICE PRESIDENT Southwest Oral Surgery, Inc. Woman's Clinic, Inc. Springfield, Missouri St. Louis, Missouri Springfield, Missouri RAYMOND A. CHRISTY, M.D. HARRY O. COLE, M.D. C. RICHARD GULICK, M.D. PRESIDENT AND CHAIRMAN OF THE BOARD OB/GYN Associates, Inc. CHIEF EXECUTIVE OFFICER Neurosurgical Associates, Inc. St. Louis, Missouri Springfield, Missouri St. Louis, Missouri MICHAEL D. HOEMAN, M.D. CHRISTOPHER H. JUNG, M.D. CARROLL R. WETZEL, D.O. SECRETARY AND TREASURER Southeast Missouri ENT Wetzel Clinic, Inc., The Diagnostic Clinic, Inc. Consultants Clinton, Missouri Springfield, Missouri Cape Girardeau, Missouri INTERLEX INSURANCE CO. ALBERT J. BONEBRAKE, M.D. LLOYD J. CARMICHAEL RAYMOND A. CHRISTY, M.D. Woman's Clinic, inc., SECRETARY PRESIDENT AND Springfield, Missouri Carmichael, Gardner & Clark CHIEF EXECUTIVE OFFICER Springfield, Missouri Springfield, Missouri B. H. CLAMPETT MAX W. LILLEY PETER F. SPATARO Springfield, Missouri CHAIRMAN OF THE BOARD VICE PRESIDENT Springfield, Missouri Moser and Marsalek St. Louis, Missouri CARROLL R. WETZEL, D.O. STEVEN W. WHITE Wetzel Clinic, Inc. White, Allinder & Graham Clinton, Missouri Independence, Missouri OFFICERS ANDREW K. BENNETT ANDREW C. FISCHER CLIFTON R. STEPP VICE PRESIDENT-CLAIMS VICE PRESIDENT-UNDERWRITING VICE PRESIDENT- AND GENERAL COUNSEL AND POLICY SERVICES MARKETING JOSEPH D. WILLIAMS, CPA JULIE D. WOLFE VICE PRESIDENT-FINANCE ASSISTANT SECRETARY AND CHIEF FINANCIAL OFFICER
27 28 CORPORATE INFORMATION CORPORATE HEADQUARTERS: 1903 E. Battlefield Springfield, MO 65804 Tel: 417-889-1010 800-865-0650 Fax: 417-889-1099 INDEPENDENT AUDITORS: KPMG Peat Marwick LLP Kansas City, MO CORPORATE COUNSEL: Thompson Coburn St. Louis, MO PRINCIPAL DEFENSE COUNSEL: Amelung, Wulff & Willenbrock PC, St. Louis, MO Andereck, Evans, Milne, Peace & Baumhoer LLC Springfield, MO Anderson & Gilbert, St. Louis, MO Behr, Mantovani, McCarter & Potter PC, St. Louis, MO Blackwell, Sanders, Matheny, Weary & Lombardi LLP, Kansas City and Springfield, MO Brinker & Doyen LLP, St. Louis, MO Brown & James PC, St. Louis, MO Daniel, Clampett, Powell & Cunningham LLC, Springfield, MO Douthit, Frets, Rouse & Gentile LLC, Kansas City, MO Frederick, Rogers & Vaughn PC, Springfield, MO Moser and Marsalek PC, St. Louis, MO Newberry, Haden, Cowherd, Bullock & Keck LLC, Springfield, MO Shaffer Lombardo Shurin, Kansas City, MO Shook, Hardy & Bacon LLP, Kansas City, MO Shughart, Thomson & Kilroy PC, Kansas City, MO Summers, Walsh, Pritchett & Blaich PC, Poplar Bluff, MO Turner, Reid, Duncan, Loomer & Patton PC, Springfield, MO CONSULTING ACTUARIES: Ernst & Young LLP Chicago, IL INVESTMENT MANAGER: Boatmen's Capital Management, Inc. St. Louis, MO ADVERTISING AGENCY: Schilling/Sellmeyer & Associates, Inc. Springfield, MO TRANSFER AGENT AND REGISTRAR: UMB Bank, n.a. Securities Transfer Division P.O. Box 410064 Kansas City, MO 64141-0064 MARKET INFORMATION: The Company's Common Stock is not listed on any securities exchange or quoted on any automated quotation system. There has been no independent market established for the stock. As of March 16, 1998 there were 1,132 holders of Common Stock. No dividends have been declared on Common Stock. STOCKHOLDER INFORMATION: The Tenere Group, Inc.'s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available at no cost by writing to: Chief Financial Officer The Tenere Group, Inc. 1903 E. Battlefield Springfield, MO 65804 28 EX-27 15 FDS
7 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 40,930,956 0 0 7,057 0 0 47,385,771 102,175 463,081 183,253 65,725,652 31,030,412 7,717,308 0 0 0 0 0 19,998 20,969,561 65,725,652 4,497,837 2,623,033 (14,049) 0 4,478,424 1,790,215 2,199,776 (1,361,594) (408,820) 0 0 0 0 (952,774) ($.48) ($.48) 25,787,944 5,646,863 (1,168,439) 413,191 8,773,277 21,079,900 1,663,000
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