-----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, MMMKNaWlu3xgKFtaiX0K5genNTvpfsUBBbR0hgXNi7bdO6+i5NhB2frhBeShUvY1 m0teMWAhpr1X0/CGvBHFlA== 0000912057-97-027773.txt : 19970815 0000912057-97-027773.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027773 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MERCURY FINANCIAL CORP CENTRAL INDEX KEY: 0000929186 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 383164336 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-83382 FILM NUMBER: 97660333 BUSINESS ADDRESS: STREET 1: 29621 NORTHWESTERN HWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 8103584010 MAIL ADDRESS: STREET 1: 29621 NORTHWESTERN HGWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48086 10-Q 1 10-Q - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission File Number 33-83382 FIRST MERCURY FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-3164336 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 29621 Northwestern Highway, P.O. Box 5096 Southfield, Michigan 48086 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (248) 358-4010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's Common Stock, par value $.01, as of August 14, 1997 was 6,164.07. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ FIRST MERCURY FINANCIAL CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Consolidated Balance Sheets; June 30, 1997 (Unaudited) and December 31, 1996 2 Condensed Consolidated Statements of Operations (Unaudited); Three Months and Six Months Ended June 30, 1997 and 1996 3 Condensed Consolidated Statements of Stockholders' Equity (Unaudited); Six Months Ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited); Six Months Ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION 12 1 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Balance Sheets
June 30, December 31, ASSETS 1997 1996 ------ ---- ---- (Unaudited) Investments: Debt securities available for sale, at market value $ 69,215,296 71,871,818 Preferred stocks, at market 1,344,385 2,691,194 Common stocks, at market 53,108 52,200 Short-term investments 2,688,210 1,810,340 ------------- ------------ Total investments 73,300,999 76,425,552 Cash and cash equivalents 3,979,454 3,945,289 Premiums and reinsurance balances receivable 2,301,876 2,584,644 Accrued investment income receivable 1,017,768 1,078,346 Other receivables 300,000 300,000 Reinsurance recoverable on unpaid losses 9,843,066 8,484,364 Prepaid reinsurance premiums 1,020,417 1,799,876 Deferred acquisition costs 701,646 691,319 Deferred federal income taxes 2,252,842 2,288,715 Federal income taxes recoverable 417,964 571,541 Fixed assets, net of accumulated depreciation 1,639,010 1,667,317 Other assets 1,268,383 2,274,410 ------------- ------------ Total assets $ 98,043,425 102,111,373 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Loss and loss adjustment expense reserves $ 53,044,881 55,519,174 Unearned premium reserves 4,871,042 5,656,660 Long-term debt 9,159,000 9,225,000 Ceded reinsurance payable 95,783 87,373 Deferred revenue 1,694,315 2,181,975 Accounts payable and accrued expenses 2,105,839 2,922,516 ------------- ------------ Total liabilities 70,970,860 75,592,698 Minority interest 2,959 3,278 Stockholders' equity: Cumulative preferred stock, issued and outstanding 20,850 shares 209 209 Common stock, issued and outstanding 6,164.07 shares 62 62 Gross paid-in and contributed capital 3,437,372 3,437,372 Unrealized gains on marketable securities, net of federal income taxes 154,415 183,780 Retained earnings 23,477,548 22,893,974 ------------- ------------ Total stockholders' equity 27,069,606 26,515,397 ------------- ------------ Total liabilities and stockholders' equity $ 98,043,425 102,111,373 ------------- ------------ ------------- ------------
2 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ---------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net earned premiums $ 2,235,859 6,581,880 4,541,551 14,477,527 Net investment income 1,261,308 1,314,120 2,414,965 2,709,833 Realized gains (losses) on the sale of investments 124,249 77,567 248,543 230,258 Gain on assignment of non-standard automobile agency contracts - 1,111,292 - 1,111,292 Miscellaneous income 313,188 316,434 582,907 332,689 ------------ --------- --------- ---------- Total revenues and other income 3,934,604 9,401,293 7,787,966 18,861,599 ------------ --------- --------- ---------- Losses and loss adjustment expenses, net 1,603,796 4,906,835 3,337,299 12,414,469 Amortization of deferred acquisition expenses 486,944 1,200,096 944,797 3,017,369 Other underwriting expenses 1,050,847 1,152,951 2,037,166 2,112,022 Interest expense 276,470 307,284 554,590 605,891 ------------ --------- --------- ---------- Total expenses 3,418,057 7,567,166 6,873,852 18,149,751 ------------ --------- --------- ---------- Income before federal income taxes 516,547 1,834,127 914,114 711,848 Federal income taxes 188,962 501,510 330,540 255,785 ------------ --------- --------- ---------- Net income $ 327,585 1,332,617 583,574 456,063 ------------ --------- --------- ---------- ------------ --------- --------- ---------- Per-share earnings $ 53.14 216.19 94.67 73.99 ------------ --------- --------- ---------- ------------ --------- --------- ----------
3 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
NET UNREALIZED GROSS PAID-IN GAINS (LOSSES), PREFERRED COMMON AND CONTRIBUTED NET OF FEDERAL RETAINED STOCK STOCK CAPITAL INCOME TAXES EARNINGS TOTAL ----- ----- ------- ------------ -------- ----- Balance at December 31, 1995 $ 209 62 3,474,872 1,270,614 21,655,479 26,401,236 Net income - - - - 456,063 456,063 Dividends paid to preferred stockholders - - - - (344,025) (344,025) Change in market values of marketable investment securities - - - (1,356,758) - (1,356,758) ------ ------ --------- ---------- ---------- ---------- Balance at June 30, 1996 $ 209 62 3,474,872 (86,144) 21,767,517 25,156,516 ------ ------ --------- ---------- ---------- ---------- ------ ------ --------- ---------- ---------- ---------- Balance at December 31, 1996 $ 209 62 3,437,372 183,780 22,893,974 26,515,397 Net income - - - - 583,574 583,574 Dividends paid to preferred stockholders - - - - - - Change in market values of - - marketable investment securities - - - (29,365) - (29,365) ------ ------ --------- ---------- ---------- ---------- Balance at June 30, 1997 $ 209 62 3,437,372 154,415 23,477,548 27,069,606 ------ ------ --------- ---------- ---------- ---------- ------ ------ --------- ---------- ---------- ----------
4 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------- 1997 1996 -------------- ------------- Net cash used in operating activities $ (2,636,440) (746,700) Cash flows from investing activities: Cost of short-term investments acquired (15,307,900) (19,973,655) Proceeds from disposals of short-term investments 14,430,030 20,373,270 Cost of debt securities acquired (11,521,354) (10,373,212) Proceeds from maturities of debt securities 7,555,554 4,620,066 Proceeds from debt securities sold 6,656,971 7,122,117 Cost of equity securities acquired (658,930) (575,411) Proceeds from equity securities sold 2,188,420 1,090,212 Other, net (122,186) (232,398) ------------- ----------- Net cash provided by investing activities 3,220,605 2,050,989 ------------- ----------- Cash flows used in financing activities: Interest payments on senior subordinated notes (550,000) (550,000) Dividends paid to preferred stockholders - (344,025) ------------- ----------- Net cash used in financing activities (550,000) (894,025) ------------- ----------- Net increase (decrease) in cash and cash equivalents 34,165 410,264 Cash and cash equivalents at beginning of period 3,945,289 2,336,140 ------------- ----------- Cash and cash equivalents at end of period $ 3,979,454 2,746,404 ------------- ----------- ------------- -----------
5 FIRST MERCURY FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements of First Mercury Financial Corporation and subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In management's opinion, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of financial position and results of operations, have been made. It is recommended that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes related thereto included in the December 31, 1996 annual report on Form 10-K. The results of operations for the six month period ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. 2. Per share earnings are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Mercury Financial Corporation ("Mercury") is an insurance holding company incorporated in Delaware in December 1993 and engaged, through its subsidiaries, in the underwriting of specialty commercial lines and non-standard automobile insurance for individuals. Mercury's subsidiaries are First Mercury Insurance Company ("FMIC"), an Illinois property and casualty insurance company and successor to First Mercury Syndicate, Inc. (the "Syndicate"), All Nation Insurance Company ("All Nation") and its wholly owned subsidiary, National Family Insurance Corporation ("National Family"), both Minnesota property and casualty insurance companies. Mercury and its subsidiaries are referred to herein as the "Company." National Family has been in liquidation under the oversight of the Ramsey County District Court in Minnesota since December 1996. Prior to the liquidation order, National Family was in rehabilitation for over 30 years. The Company became affiliated with National Family upon its purchase of All Nation in 1992. Because All Nation lacks voting control over National Family and is not liable for National Family's debts, the financial statements of National Family are not consolidated with the financial statements of the Company. Prior to its withdrawal from the Illinois Insurance Exchange ("IIE") in December 1996, the Syndicate operated as an underwriting member of the IIE. Under the eligibility of the IIE, the Syndicate wrote general liability insurance, allied property and auto physical damage coverage in 44 states, the District of Columbia, and the U.S. Virgin Islands. On June 28, 1996, the Syndicate formed FMIC as an Illinois property and casualty insurance subsidiary with an initial capitalization of $5 million and a subsequent $15 million contribution to surplus. The formation of FMIC, a licensed Illinois insurer, provided the Syndicate with an affiliated company in which to potentially place coverages offered by the Syndicate and in which to reinsure certain of the Syndicate's outstanding liabilities. Under a loss portfolio transfer, on June 28, 1996, the Syndicate transferred approximately $35 million in loss and loss adjustment expense reserves and corresponding assets to FMIC. In conjunction with the formation of FMIC and the loss portfolio transfer, on July 8, 1996, the Syndicate notified the IIE of its intention to withdraw from the IIE. On November 7, 1996, the Syndicate and the IIE executed a withdrawal agreement. Subsequent to the Syndicate's withdrawal, the Syndicate was merged into FMIC on December 16, 1996. Due to its withdrawal from the IIE, the Syndicate lost its ability to write direct premium under the eligibility of the IIE. As a result, FMIC has aggressively applied for eligibility to write premiums in many states. As of June 30, 1997, FMIC is eligible to write direct premium in seventeen states. In the interim, FMIC and Empire Fire and Marine Insurance Company and Empire Indemnity Company ("Empire") entered into a quota share reinsurance agreement effective July 18, 1996 whereby Empire writes on a direct basis the coverages previously offered by the Syndicate and cedes 50 percent of such business to FMIC. On May 1, 1996, an agreement was entered into between Mercury, All Nation, Allstate Insurance Company ("Allstate") and its wholly owned subsidiary, Deerbrook Insurance Company ("Deerbrook"), for the assignment of All Nation's independent agent contracts to Deerbrook and the ceding of associated prospective premium to Allstate on the agency-produced non-standard automobile business of All Nation. The agreement also included a three year non-compete clause and various financial guarantees by Mercury. Under the agreement, All Nation continues to write agency non-standard automobile coverages and cedes 100 percent of the written business to Allstate under a quota share reinsurance agreement for a period of up to two years, as Deerbrook is taking over the direct writing and servicing responsibility from All Nation on a state-by-state basis over the two-year period. In addition, All Nation provided underwriting and administrative services for the 7 ceded business on a percentage of premiums basis until May 1997. The agreements do not include All Nation's agency-produced non-standard automobile business written prior to May 1, 1996 or its direct response non-standard automobile business. RESULTS OF OPERATIONS The following table reflects revenues of the Company for the three month and six month periods ended June 30, 1997 and 1996:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996 --------------- --------------- --------------- --------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) NET PREMIUMS EARNED: Specialty commercial lines: Security, fire and alarm . . . . $1,492 66.7% 2,091 31.8% $3,109 68.5% 4.189 28.9% Police . . . . . . . . . . . . . 0 0.0 216 3.3 19 0.4 508 3.5 Public officials . . . . . . . . 71 3.2 170 2.6 164 3.6 356 2.5 Other. . . . . . . . . . . . . . 361 16.2 206 3.1 730 16.1 513 3.5 Non-standard automobile lines: Agency auto liability. . . . . . 1 0.0 2,815 42.8 1 0.0 6,382 44.1 Direct auto liability. . . . . . 189 8.5 183 2.8 323 7.1 395 2.7 Agency auto physical damage. . . 10 0.4 769 11.6 10 0.2 1,852 12.8 Direct auto physical damage. . . 112 5.0 132 2.0 186 4.1 283 2.0 ------ ----- ------ ----- ------ ----- ------- ----- Total net premiums earned. . . . . $2,236 100.0% $6,582 100.0% $4,542 100.0% $14,478 100.0% ------ ----- ------ ----- ------ ----- ------- ----- ------ ----- ------ ----- ------ ----- ------- -----
NET PREMIUMS EARNED Net premiums earned for the three months and six months ended June 30, 1997 declined 66.0% and 68.6%, respectively, in comparison to the year earlier periods. The Company's specialty commercial lines, security, fire, alarm, police, public official and miscellaneous commercial coverages, decreased 28.3% and 27.7%, respectively, for the three months and six months ended June 30, 1997 versus the three months and six months ended June 30, 1996. This decrease occurred principally due to the quota share reinsurance arrangement entered into with Empire and the Company's decision to non-renew a substantial amount of the police business beginning in the first quarter of 1996. Although net premiums earned for the Company's specialty commercial lines have been declining, the Company has experienced average rate increases in excess of 10% on this book of business in the first half of 1997. Effective July 1, 1997, the Company has entered into a 100 percent quota share reinsurance arrangement with Reliance Insurance Company of Illinois ("Reliance") to offer liability coverage to non-profit entities and day care facilities. In addition, the Company has been actively pursuing a workers' compensation program as a complementary product to the security, fire and alarm coverages currently provided. Due to the sale of All Nation's independent agent contracts to Deerbrook effective May 1, 1996, net premiums earned for private passenger non-standard automobile coverages decreased 92.0% and 94.2% in the three and six months ended June 30, 1997, respectively. Net premiums earned for direct response non-standard automobile coverages have declined for the first six months of 1997 versus the first six months of 1996 due to a moratorium on advertising, however, the Company has implemented rating changes for the direct response business effective July 1, 1997 and has begun actively marketing this program late in the second quarter. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES) Net investment income decreased approximately $53,000 for the three months ended June 30, 8 1997 as compared to the three months ended June 30, 1996. For the six months ended June 30, 1997, net investment income decreased $295,000 or 10.8% in comparison to the same period of the preceding year. The decrease resulted from a decline in the Company's average invested assets due to the reduction in premium revenues at both All Nation and FMIC under the quota share reinsurance agreements with Allstate and Empire, respectively. For the three months ended June 30, 1997, the Company realized a net gain on the sale of investments of $124,000 versus a net gain of $78,000 for the same period in the prior year. The Company recognized a net gain on the sale of investments of $249,000 for the six months ended June 30, 1997 as compared to a $230,000 net gain for the six months ended June 30, 1996. At June 30, 1997, the unrealized gain on investments available for sale, net of deferred taxes, was $154,000 in comparison to a $184,000 unrealized gain as of December 31, 1996. The decline in interest rates in the second quarter of 1997 resulted in a recovery of the Company's portfolio from the unrealized losses experienced in the first quarter. GAIN ON ASSIGNMENT OF AGENCY CONTRACTS The gain on the assignment of the All Nation agency contracts of $1.1 million was recognized in the second quarter of 1996. The gain recognized represents the net present value of the related payments from Deerbrook reduced by All Nation's estimated liability for losses under the quota share reinsurance contract and costs attendant with the sale. LOSS AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses incurred decreased 67.3% to $1.6 million for the three months ended June 30, 1997 from $4.9 million for the three months ended June 30, 1996. For the six months ended June 30, 1997, loss and loss adjustment expenses incurred decreased 73.1% versus the comparable period in the preceding year, principally due to the decline in premiums written under the quota share reinsurance agreements with Allstate and Empire. The loss and loss adjustment expense ratio for private passenger automobile coverages increased marginally to 91.6% for the six months ended June 30, 1997 as compared to 90.3% for the six months ended June 30, 1996. Within the specialty commercial lines, the loss and loss adjustment expense ratio decreased to 71.1% for the six months ended June 30, 1997 versus 75.8% for the comparable period in the preceding year. The 1997 loss ratio reflects a release of reserve redundancies approximating $350,000. There were no reserve redundancy releases in the first six months of 1996. AMORTIZATION OF DEFERRED ACQUISITION COSTS, OTHER UNDERWRITING EXPENSES AND INTEREST EXPENSE Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For the second quarter of 1997, acquisition costs and other underwriting expenses declined approximately 34.6% to $ 1.5 million for the three months ended June 30, 1997 as compared to $2.4 million for the same period in the preceding year. The Company's underwriting expense ratio increased to 52.9% for the six months ended June 30, 1997 in comparison to 38.9% for the two quarters ended June 30, 1996. The increase in the expense ratio principally occurred due to the decline in net premiums written in the first six months of 1997 in comparison to the Company's fixed costs of its insurance operations. In addition, the Company incurred approximately $200,000 of expenses during the second quarter of 1997 for the implementation of new rate filings for its direct response private passenger auto program. 9 The Company realized $583,000 of miscellaneous income in the first six months of 1997 as compared to $333,000 in the first two quarters of 1996 primarily due to the recognition of approximately $381,000 of revenue under the non-compete agreement with Allstate. No revenue was recognized under this agreement in the six months ended June 30, 1996. The Company incurred $555,000 and $606,000 of interest expense related to the $10 million senior subordinated notes during the six months ended June 30, 1997 and 1996, respectively. The decrease in interest expense resulted from the Company's repurchase of $841,000 of its own senior subordinated notes during 1996 and 1997. FEDERAL INCOME TAXES The effective tax rate for the six months ended June 30, 1997 of 36.2% has increased slightly from the effective tax rate for the first two quarters of 1996 of 35.9%. The Company has eliminated all tax-exempt interest since the first quarter of 1997. NET INCOME Pre-tax net income for the three months ended June 30, 1997 was $517,000 compared to $1.8 million for the same period in the preceding year, primarily due to the recognition of the gain on the assignment of the non-standard automobile agency contracts to Deerbrook of $1.1 million in 1996. For the first six months of 1997, pre-tax net income was $914,000 versus $712,000 for the six months ended June 30, 1996. Net income for the first two quarters of 1997 includes $350,000 related to the release of reserve redundancies, $381,000 in revenue under the non-compete clause and $200,000 in rate filing costs, while the results for the six months ended June 30, 1996 includes the gain on the assignment of $1.1 million. LIQUIDITY AND CAPITAL RESOURCES Mercury is a holding company whose principal assets are its investment in the capital stock of FMIC and All Nation. Generally, Mercury is dependent upon the receipt of dividends from FMIC and All Nation to fund any necessary cash requirements, including debt service requirements. FMIC and All Nation are restricted by regulation as to the amount of dividends they may pay without regulatory approval. No dividends were paid by FMIC or All Nation to Mercury in the first six months of 1997. Mercury anticipates cash payments from Deerbrook of $1.2 million in 1997 for the non-compete agreement. In addition, Mercury receives annual payments from its subsidiaries when appropriate pursuant to a tax allocation agreement between Mercury and its subsidiaries. The Company believes these amounts are sufficient to meet Mercury's current cash flow requirements. The Company's subsidiaries' primary sources of cash are from premiums collected and amounts earned from the investment of this cash flow. The principal uses of funds are the payment of claims and related expenses, other operating expenses and interest expense. The Company's insurance operations utilized cash in operations of $2,636,000 during the six months ended June 30, 1997 as compared to $747,000 in the first two quarters of 1996. The decreased cash flow resulted primarily from a decline in premium revenues at both All Nation and FMIC under the quota share reinsurance agreements with Allstate and Empire. At June 30, 1997, the insurance subsidiaries maintained cash and cash equivalents and short-term investments of $2.7 million to meet short-term payment obligations. In addition, the Company's investment portfolio is heavily weighted toward short-term fixed maturities and a portion of the 10 portfolio could be liquidated without material adverse financial impact should further liquidity be necessary. As part of its investment strategy, and as required by debt covenants, the Company establishes a level of cash and highly liquid short- and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities. The weighted average maturity of the Company's fixed income portfolio as of June 30, 1997 was approximately three years. Under IIE regulations, the Syndicate maintained a $1,000,000 deposit in a Guaranty Fund Trust Account prior to its withdrawal from the IIE which required at least 50 percent of the deposit to be in cash and/or marketable securities. Under the terms of the Syndicate's withdrawal agreement with the IIE, a $1,000,000 deposit must be maintained in the Guaranty Fund Trust Account of the IIE for a period of three years from November 7, 1996. The Syndicate's withdrawal agreement also required FMIC to establish a trust fund for the payment of claims under insurance policies issued and reinsurance agreements entered into by the Syndicate. Investments held in trust for payment of Syndicate claims approximated $31.9 million at June 30, 1997. 11 FIRST MERCURY FINANCIAL CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's subsidiaries are subject to routine legal proceedings in connection with their property and casualty insurance business. Neither Mercury nor any of its subsidiaries are involved in any pending or threatened legal proceedings which reasonably could be expected to have a material adverse impact on the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the second quarter of 1997. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS 10.24 Reinsurance Agreement effective July 18, 1996 between Empire and FMIC. 27 Financial Data Schedule. b. REPORTS ON FORM 8-K No report on Form 8-K was filed by the Registrant during the quarter ended June 30, 1997. 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MERCURY FINANCIAL CORPORATION Date: August 14, 1997 By: /S/ WILLIAM S. WEAVER --------------------------------- William S. Weaver Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the Registrant) 13 EX-10.24 2 EX-10.24 REINSURANCE AGREEMENT EXHIBIT 10.24 REINSURANCE AGREEMENT NO. 60-2110-0 QUOTA SHARE REINSURANCE AGREEMENT (hereinafter referred to as the "AGREEMENT") between EMPIRE FIRE AND MARINE INSURANCE COMPANY Omaha, Nebraska EMPIRE INDEMNITY COMPANY Oklahoma City, Oklahoma (herein collectively referred to as the "COMPANY") and FIRST MERCURY INSURANCE COMPANY (hereinafter referred to as the "REINSURER") Effective: 12:01 a.m., July 1, 1996 Term: Continuous TABLE OF CONTENTS Page Article 1 Scope of Agreement ................................. 1 Article 2 Reinsuring Clause ................................. 1 Article 3 Term ................................................ 2 Article 4 Retention and Limits ................................ 2 Article 5 Exclusion ........................................... 2 Article 6 Premium ............................................. 4 Article 7 Commission ...................................... 4 Article 8 Reports and Remittances ............................. 5 Article 9 Losses and Allocated Loss Adjustment Expense......... 5 Article 10 Offset ........................................... 7 Article 11 Definitions ......................................... 7 Article 12 Territory .......................................... 8 Article 13 Taxes .............................................. 9 Article 14 Currency............................................. 9 Article 15 Errors and Omissions ............................... 9 Article 16 Access to Records ................................... 9 Article 17 Insolvency .......................................... 9 Article 18 Arbitration ......................................... 10 Article 19 Other Reinsurance ................................... 11 Article 20 Termination ........................................ 12 Article 21 Funding of Reserves; Unearned Premium, Outstanding Losses and IBNR .................................... 13 Signing Page ........................................ 14 In consideration of payment of the premium and upon the terms, conditions, and limitations set forth in this AGREEMENT, the parties agree as follows: ARTICLE 1 SCOPE OF AGREEMENT By this AGREEMENT, the COMPANY obligates itself to cede to the REINSURER and the REINSURER obligates itself to accept the liability business described in this AGREEMENT. The liability of the REINSURER with respect to each cession hereunder shall commence obligatory and simultaneously with that of the COMPANY, subject to the terms, conditions and limitations set forth herein. The terms of this AGREEMENT shall determine the rights and obligations of the parties. This AGREEMENT is solely between the COMPANY and the REINSURER. When more than one COMPANY is named as a party to this AGREEMENT, the first COMPANY named shall be the agent of the other companies as to all matters pertaining to this AGREEMENT. Performance of the obligations of each party under this AGREEMENT shall be rendered solely to the other party. However, if the COMPANY becomes insolvent, the liability of the REINSURER shall be modified to the extent set forth in the Article entitled "Insolvency." In no instance shall any insured of the COMPANY have any rights under this AGREEMENT. ARTICLE 2 REINSURING CLAUSE The REINSURER agrees to indemnify the COMPANY for that amount of net loss reinsured hereunder after deduction of all other reinsurance, whether collectable or not, which the COMPANY has become obligated to pay or has agreed to pay arising out of any and all policies, binders and contracts of insurance (hereinafter referred to as "policies") for in force, new and renewal business underwritten on behalf of the COMPANY by CoverX Corporation of Southfield, Michigan, on risks domiciled in all those states in which the COMPANY is licensed or otherwise authorized to do business. ARTICLE 3 TERM This AGREEMENT shall become effective at 12:01 a.m., Central Daylight Time on July 1, 1996, and shall continue in force for an unlimited period subject to Article 20, Termination. The REINSURER shall be subject to the same conditions as the original policies and shall follow, subject to the terms of this AGREEMENT, the fortunes of the COMPANY in respect of all business ceded hereunder. ARTICLE 4 RETENTION AND LIMITS The REINSURER shall indemnify the COMPANY for 50% of the amount of net loss allocable to the first $1,000,000 of insurance for each occurrence/$10,000,000 annual aggregate, under policies of the COMPANY covered by this AGREEMENT plus a proportionate share of the allocated loss adjustment expenses. The COMPANY shall retain for its own account the remaining 50% of the first $1,000,000 each occurrence/$10,000,000 annual aggregate; however, this requirement shall be satisfied if such amount is retained by the COMPANY or, if applicable, its affiliated COMPANIES under the common management or ownership or both in accordance with Article 1 of this AGREEMENT. It is warranted that the maximum policy limits covered by this AGREEMENT are $1,000,000 each occurrence/$10,000,000 annual aggregate. However, the COMPANY is permitted to obtain facultative or other reinsurance for limits in excess of $1,000,000. ARTICLE 5 EXCLUSIONS 1. All assumed reinsurance. 2. All liability arising out of nuclear risks, including, without limitation, that described in the attached Nuclear Incident Exclusion Clause. 3. Losses directly or indirectly caused by: a. War, invasion, act of foreign enemy, hostilities, or war- like operations (whether war be declared or not), civil war; b. Mutiny, civil commotion assuming the proportions of or amounting to a popular rising, military rising, insurrections, rebellion, revolution, military or usurped power, or any act of any person acting on behalf or in connection with any organization with activity directed toward the overthrow by force of its Government. 4. Liability arising from Insurance Loss Portfolio Transfers of any kind. 5. Retroactive liability except for Prior Acts Coverage under a claims-made policy. 6. Liability underwritten or accepted by any third party other than CoverX Corporation. 7. Liability assumed by the COMPANY as a member of a syndicate, pool, or underwriting association; however, this exclusion does not apply to participation in assigned risk plans. 8. Insurance Guarantee Associations as provided by the Insolvency Fund Exclusion Clause which is attached. 9. Liability of the COMPANY classified by the COMPANY as arising out of ERISA. 10. Fidelity, Surety, Libel and Slander, Credit, Financial Guarantee, Bankers Blanket Bond Risks and contingency risks such as personal injury insurances when written as such. 11. Liability arising out of the ownership, maintenance, operation or use of aircraft, air cushioned vehicles and airports or the installation of equipment therein. 12. Kidnap and Ransom and/or Extortion Coverage. 13. Insurance coverage for punitive or exemplary damages. 14. Security Exchange Commission Liability. 15. Business classified by the COMPANY as Ocean Marine or arising out of the operation or navigation of ships or vessels other than yachts or small pleasure craft. 16. Liability of the COMPANY classified by the COMPANY as arising from risks having an exposure to asbestos resulting from the existence, mining, handling, processing, manufacture, sale, distribution, storage or use of asbestos, asbestos products, and/or products containing asbestos. 17. Environmental impairment of Pollution Liability. 18. Workers' Compensation and Employers' Liability. 19. Automobile Liability. Notwithstanding the exclusions set forth in Items 15 through 19 above, any reinsurance that is specifically accepted by the REINSURER from the COMPANY shall be covered under this AGREEMENT and subject to the terms hereof, except as such terms shall be modified by such Special Acceptance. In the event that the COMPANY insures such an excluded risk under its Policies, either because an existing insured has expanded its operations or because CoverX has placed such an excluded risk with the COMPANY, the COMPANY shall be protected by and afforded reinsurance under this AGREEMENT to the extent as if there were no exclusion, but only until the COMPANY is able to effect cancellation of such coverage and then not for more than forty-five (45) days from the date of discovery of such excluded risk by the underwriters of the COMPANY's home office. ARTICLE 6 PREMIUM A. The COMPANY shall pay to the REINSURER its pro rata share, being 50% of the gross net written premiums and the REINSURER shall refund to the COMPANY its pro rata share of any return premiums, on business which is the subject matter of this AGREEMENT, less gross premium ceded for other reinsurance inuring to the benefit of this AGREEMENT as specified in Article 19, Other Reinsurance, and less the applicable ceding commission if any, as specified in Article 7, Ceding Commission. B. When the reinsurance of in-force policies is specified in Article 2, Reinsurance Clause, the REINSURER shall receive its pro rata share of the unearned premium on such business subject to the conditions specified in Paragraph A above. In the event of a change in the reinsurance cession quota or a change in the REINSURER's share, this procedure shall be applied accordingly. ARTICLE 7 CEDING COMMISSION A. The REINSURER shall allow the COMPANY a ceding commission in accordance with the attached Schedule A on all premiums ceded to the REINSURER hereunder. The COMPANY shall allow the REINSURER return commission on return premiums at the same rate. B. It is expressly agreed that the ceding commission allowed the COMPANY includes provision for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature, except allocated loss adjustment expense. ARTICLE 8 REPORTS AND REMITTANCES A. Reinsurance Premium - within 45 days after the close of each month, the COMPANY shall render to the REINSURER a report of the gross net written premium and unearned premiums for the month with respect to business covered hereunder summarizing the reinsurance premiums and commissions applicable. B. Within 15 days after the close of each month the COMPANY shall render to the REINSURER a claims summary, on a form acceptable to the REINSURER, giving details of any losses paid and outstanding, allocated loss adjustment expenses, salvage and recoveries. The COMPANY shall include a summary sheet with "A" and "B" above, reflecting the net balance. The net balance due shall be payable by the debtor party within 75 days after the close of the month involved. The net balance will be adjusted by inclusion of the REINSURER's part of losses settled, allocated loss adjustment expenses, salvage and other recoveries, through the most current month at the time of payment. ARTICLE 9 LOSSES AND ALLOCATED LOSS ADJUSTMENT EXPENSE A. The COMPANY shall promptly notify the REINSURER of all claims which: 1. Originate from fatal injuries, 2. Originate from bodily injuries as specified below: a. Serious brain damage, b. Spinal injuries resulting in partial or total paralysis, c. Amputations or permanent loss of use of upper or lower extremities, d. All other injuries likely to result in a serious permanent disability, e. Severe burn injuries involving 25% or more of the body, f. Loss of sight of one or both eyes, g. Multiple fractures, h. Sexual abuse or molestation, and will also promptly notify the REINSURER of other applicable reinsurance that would affect the REINSURER's liability. B. The COMPANY, as its sole discretion, may commence, continue, defend, compromise, settle, or withdraw from any action, suit or prosecution and generally do such matters relating to any loss, claim or damage which, in its judgement, may be beneficial. The COMPANY agrees to investigate and conduct diligently the defense of all claims arising under its policies with respect to which this AGREEMENT applies. The COMPANY shall have original and primary responsibility for all claim settlements. However, the REINSURER shall have the right and opportunity to be associated at its own expense with the COMPANY in the defense of any claim, suit, or proceeding which might involve the REINSURER's obligations under this AGREEMENT and the COMPANY and the REINSURER shall cooperate in every respect in the defense of any such claim, suit or proceeding, but the REINSURER shall not have any obligation to assume the defense of any claim. C. The REINSURER shall proportionally share with the COMPANY all allocated loss adjustment expense. The term "allocated loss adjustment expense" shall mean sums actually disbursed by the COMPANY in payment of allocated expenses to investigate, appraise, adjust, settle, arbitrate, defend or resist claims for losses, whether valid or not, including court costs (when such costs are not included in the judgment) and interest accrued after judgement. Such expenses shall not include sums paid to attorneys as retainer nor salaries of officials and employees of the COMPANY, and shall exclude office or overhead expenses of the COMPANY. In the event of salvage, subrogation, a verdict, award, or judgement is reduced or reversed by an appeal taken by the COMPANY or other recovery, the REINSURER shall share in such recovery in the same proportion as the Quota Share amount. D. Where a judgement has been entered against the COMPANY which results in the liability of the REINSURER under this AGREEMENT, and the COMPANY does not wish to appeal such judgement, or the possibility of subrogation exists and the COMPANY elects not to subrogate, the COMPANY will nevertheless prosecute such appeal or subrogation at the request of the REINSURER and the REINSURER shall pay all the expenses thereof. If the appeal or subrogation is successful, the COMPANY shall share proportionately in the recovery and, the COMPANY shall bear its proportion of the expenses, such proportion being determined by the relationship of the COMPANY's net retention to the total gross amount of the judgement. ARTICLE 10 OFFSET The COMPANY or the REINSURER may offset any balance due the other party under this AGREEMENT or any others previously or subsequently entered into between them. ARTICLE 11 DEFINITIONS A. NET LOSS The term "net loss" shall mean all amounts which the COMPANY has paid or has become liable to pay in the settlement of claims or losses, payment of benefits or satisfaction of verdicts, awards, or judgements for which it is liable, including prejudgement interest or delay damages, and excess of original policy limits and extra contractual obligations (as specified in their respective articles) after deduction of all net recoveries, salvages and amounts due from other reinsurance which inures to the benefit of the REINSURER under this AGREEMENT, whether collectible or not. However, in the event of the insolvency of the COMPANY, "net loss" shall mean the amount of loss which the COMPANY has incurred or for which it is liable, including prejudgement interest or delay damages, and excess of original policy limits and extra contractual obligation (as specified in their respective articles) after deduction of all net recoveries, salvages and amounts due from other reinsurance which inures to the benefit of the REINSURER under this AGREEMENT, whether collectible or not, and payment by the REINSURER shall be made to the liquidator, receiver or statutory successor of the COMPANY in accordance with the provisions of the article entitled "Insolvency." Net Loss shall exclude Allocated Loss Adjustment Expense unless Allocated Loss Adjustment Expense is included as part of the policy limit under the COMPANY's original policy. If Allocated Loss Adjustment Expense is included within the policy limit, Allocated Loss Adjustment Expense will be included in the definition of Net Loss. B. PREJUDGEMENT INTEREST OR DELAY DAMAGES This term shall mean interest or damages added to a settlement, verdict, award or judgement based on the amount of time prior to the settlement, verdict, award or judgement that the claim or loss occurred, whether or not made a part of the settlement, verdict, award or judgement. C. OCCURRENCE The term "Occurrence" means the happening of one or a series of related or consequential accidents, acts, errors, omissions or mistakes arising out of one event regardless of the number of persons, claimants, insureds, policies or coverage involved, which results in loss payable by the COMPANY, under its policy or policies. All loss or series of losses having a common origin or traceable to the same accident, omission, error, mistake, injurious condition or occurrence, shall be construed to be the result of one occurrence. The COMPANY shall be the sole judge of what constitutes one occurrence under this definition. D. SALVAGE This term shall mean any recovery made by the COMPANY in connection with a claim or loss less all expenses paid by the COMPANY other than payments to any salaried employee of the COMPANY making such recovery. Salvage recoveries shall be apportioned between the COMPANY and the REINSURER in the same ratio as the payment of loss. E. GROSS NET WRITTEN PREMIUMS This term shall mean the COMPANY's gross original premiums on policies which are the subject matter of this AGREEMENT, prior to any deductions except applicable return premiums and premiums ceded for reinsurance which inures to the benefit of this AGREEMENT as specified in the Article entitled "Other Reinsurance." F. POLICIES The term "Policies" shall mean policies, contracts, and binders of insurance issued by the COMPANY, including endorsements thereto. ARTICLE 12 TERRITORY The REINSURER shall be liable only in respect to policies written and providing coverage within the United States of America, except for such incidental foreign exposure as may be covered under the territorial provisions of these policies. ARTICLE 13 TAXES The COMPANY shall pay taxes on premium ceded under this AGREEMENT. If the REINSURER is obligated to pay any taxes on such premiums, the COMPANY shall reimburse the REINSURER; however, the COMPANY shall not be required to pay the same tax twice. ARTICLE 14 CURRENCY All payments under this AGREEMENT shall be made in United States currency. ARTICLE 15 ERRORS AND OMISSIONS A. Inadvertent delays, errors or omissions made in connection with this AGREEMENT or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that the error or omission is rectified as soon as possible after discovery. B. The liability of the REINSURER under this AGREEMENT or any exhibits or endorsements attached thereto shall in no event exceed the limits specified therein, nor be extended to cover any risks, perils, or classes of insurance generally or specifically excluded therein. ARTICLE 16 ACCESS TO RECORDS The REINSURER or its designated representative shall have free access at all reasonable times to all records of the COMPANY which pertain to the reinsurance provided hereunder. ARTICLE 17 INSOLVENCY A. In the event of the insolvency of the COMPANY, this reinsurance shall be payable directly to the COMPANY or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the COMPANY without diminution because of the insolvency of the COMPANY or because the liquidator, receiver, conservator or statutory successor of the COMPANY has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the COMPANY shall give written notice to the REINSURER of the pendency of a claim against the COMPANY indicating the policy or bond reinsured, which claim would involve a possible liability on the part of the REINSURER within a reasonable time after such claim is filed in the conversation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the REINSURER may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the COMPANY or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the REINSURER shall be chargeable, subject to the approval of the court, against the COMPANY as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the COMPANY solely as a result of the defense undertaken by the REINSURER. B. Where two or more REINSURERS are involved in the same claim and a majority in interest elect to interpose defense to such claims, the expense shall be apportioned in accordance with the terms of the reinsurance contract as though such expense had been incurred by the COMPANY. C. As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement, the reinsurance shall be payable as set forth above by the REINSURER to the COMPANY or to its liquidator, receiver, conservator or statutory successor (except as provided by Sections 4118(a)(I)(A) and 1114-C- of the New York Insurance Law or) except (I) where the AGREEMENT specifically provides another payee in the event of the insolvency of the COMPANY, and (ii) where the REINSURER, with the consent of the direct insured or insureds, have assumed such policy obligations of the COMPANY as direct obligations of the REINSURER to the payees under such policies and in substitution for the obligations of the COMPANY to such payees. Then, and in that event only, the COMPANY, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Insurance of the State of New York, is entirely released from its obligation and the REINSURER pays any loss directly to payees under such policy. ARTICLE 18 ARBITRATION A. Any dispute or other matter in question between the COMPANY and the REINSURER arising out of or relating to the formation, interpretation, performance or breach of this Agreement, whether such dispute arises before or after termination of this Agreement, shall be settled by arbitration. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. B. Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint a third arbitrator. If either party refuses or neglects to appoint an arbitrator within sixty (60) days after receiving a written request to do so, the other party may appoint the second arbitrator. If the two arbitrators do not agree on a third arbitrator within sixty (60) days of their appointment, each of the arbitrators shall nominate three individuals. Each arbitrator shall then decline two of the nominations presented by the other arbitrator. The third arbitrator shall then be chosen from the remaining two nominations by drawing lots. The arbitrators shall be active or former officers of insurance or reinsurance companies or have recognized expertise in insurance or reinsurance law or regulation. The arbitrators shall not have a personal or financial interest in the result of the arbitration. C. The arbitration hearings shall be held in Omaha, Nebraska, or such other place as may be mutually agreed. Each party shall submit its case to the arbitrators within sixty (60) days of the selection of the third arbitrator or within such longer period as may be agreed upon by the arbitrators. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governing law, that is, the state law of the situs of the arbitration as herein agreed; they shall make their decisions according to the practice of the reinsurance business. The decision rendered by a majority of the arbitrators shall be final and binding on both parties. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. Judgement upon the award rendered may be entered in any court having jurisdiction thereof. D. Each party shall pay the fee and expenses of its own arbitrator and one-half of the fee and expenses of the third arbitrator. All other expenses of the arbitration shall be equally divided between the parties. In certain circumstances, the arbitrators may apportion to one of the parties with all of the costs of the arbitration. E. Except as provided above, arbitration shall be based, insofar as applicable, upon the procedures of the American Arbitration Association. ARTICLE 19 OTHER REINSURANCE It is understood that the COMPANY shall have the right to effect facultative or treaty reinsurance on business covered by this AGREEMENT. The REINSURER'S pro rata share of the cost of such reinsurance net of ceding commission shall be deducted from the REINSURER'S premium prior to the pplication of any commission allowance. ARTICLE 20 TERMINATION A. This AGREEMENT may be terminated by either party, effective at the end of any calendar year, upon giving to the other party not less than 90 days prior to the notice of cancellation in writing by certified mail. Except as provided for in Paragraph B. of this article, termination initiated by either party, (the COMPANY or the REINSURER), shall give the other party its choice of cancellation on either a runoff or cutoff basis as described below: 1. "Cutoff basis" - In the event of termination on a cutoff basis the REINSURER shall have no liability with respect to loss occurrences happening after the effective time and date of cancellation. 2. "Runoff basis" - In the event of termination on a runoff basis, the REINSURER shall remain liable for occurrences arising out of covered policies in force at the date of cancellation until expiration, cancellation or next renewal of such policies, but in no case shall this reinsurance be extended for a period longer than one year after the date of cancellation of this AGREEMENT. B. Should at any time the REINSURER or the COMPANY: 1. Be 100% reinsured without the previous written consent of the other party. 2. Default in payment due under the terms of this AGREEMENT. 3. Amalgamate with or have its shares purchased by any other company, corporation, individual or individuals for the purpose of gaining control. 4. Agree to any arrangement which would end its separate existence. 5. Have proceedings instituted or filed against them by any insurance regulatory authority for bankruptcy, rehabilitation, conservation, liquidation or dissolution. 6. Reach mutual agreement to do so. This AGREEMENT may be terminated by either the REINSURER or the COMPANY upon giving 30 days notice of cancellation in writing by certified mail to the other party. In the event of termination under the provisions of this paragraph the REINSURER shall remain liable for loss arising from occurrences happening prior to the effective time and date of cancellation, but shall have no liability with respect to loss occurrences happening after that time. C. When all reinsurance is expired or terminated, but in case for more than one year after the date of such expiration or termination, the REINSURER shall return to the COMPANY the reinsurance premium unearned, if any, calculated on the monthly pro rata basis, less the commission previously allowed thereon. ARTICLE 21 FUNDING OF RESERVES; UNEARNED PREMIUM OUTSTANDING LOSSES AND IBNR If a jurisdiction of the United States will not permit the COMPANY, in the statements required to be filed with its regulatory authority(ies), to receive full credit as admitted reinsurance for any of the REINSURER'S share of obligations, the COMPANY will forward to the REINSURER a statement showing the proportion of such reserves which is applicable to the REINSURER. Upon receipt of such statement, the REINSURER hereby agrees to fund such reserves in respect of unearned premium, know outstanding losses that have been reported to the REINSURER and allocated loss adjustment expense relating thereto, losses and allocated loss adjustment expense paid by the COMPANY but not recovered from the REINSURER, plus reserves for losses incurred but not reported, as shown in the statement prepared by the COMPANY (hereinafter referred to as "Reinsurer's Obligations") by funds withheld, a trust fund, or a Letter of Credit. The REINSURER shall have the option of determining the method of funding, provided it is acceptable to the insurance regulatory authorities having jurisdiction over the COMPANY's reserves, and provided REINSURER give COMPANY and the regulatory authorities sufficient notice to obtain regulatory approval of the funding mechanism in a timely manner. When funding by a Letter of Credit, the REINSURER agrees to apply for and secure timely delivery to the COMPANY of a clean, irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the COMPANY's reserves in an amount equal to the REINSURER's proportion of said reserves. Such Letter of Credit shall be issued for a period of not less than one (1) year, and shall be automatically extended for one year from its date of expiration or any future expiration date, unless sixty (60) days prior to any expiration date, the issuing bank shall notify the COMPANY by certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. The REINSURER and COMPANY agree that the Letters of Credit, trust funds or funds withheld provided by the REINSURER pursuant to the provisions of this Agreement may be drawn upon at any time, notwithstanding any other provision of this Agreement, and be used by the COMPANY or any successor, by operation of law, of the COMPANY including, without limitation, any liquidator, rehabilitator, receiver or conservator of the COMPANY for the following purposes, unless otherwise provided for in a separate trust agreement: 1. To reimburse the COMPANY for the REINSURER's Obligations, the payment of which is due under the terms of this Agreement and which has not been otherwise paid; 2. To make refund of any sum which is in excess of the actual amount required to pay the REINSURER's Obligations under this Agreement; 3. To fund an account with the COMPANY for the REINSURER's Obligations. Such cash deposit shall be held in an interest bearing account separate form the COMPANY's other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the REINSURER. 4. To pay the REINSURER's share of any other amounts the COMPANY claims are due under this Agreement. In the event the amount drawn by the COMPANY on any Letter of Credit is in excess of the actual amount required for (1) or (3), or in the case of (4), the actual amount determined to be due, the COMPANY shall promptly return to the REINSURER the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the COMPANY or the REINSURER. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the COMPANY or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the COMPANY. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the COMPANY shall prepare a specific statement of the REINSURER's Obligations, for the sole purpose of amending the Letter of Credit, the funds withheld or the trust fund, in the following manner. 1. If the statement shows that the REINSURER's Obligations exceed the balance of credit as of the statement date, the REINSURER shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the COMPANY of an amendment to the Letter of Credit, increasing the amount of credit by the amount of such difference. 2. If, however, the statement shows that the REINSURER's Obligations are less than the balance of credit as of the statement date, the COMPANY shall, within thirty (30) days after receipt of written request from the REINSURER, release such excess credit by agreeing to secure an amendment to the Letter of Credit, reducing the amount of credit available by the amount of such excess credit. IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed in duplicate by their duly authorized representatives. In New York, New York this first day of February, 1997. FIRST MERCURY INSURANCE COMPANY \s\ RICHARD H. SMITH President \s\ THOMAS B. DULAPA Secretary And in Omaha, Nebraska this first day of February, 1997. EMPIRE FIRE AND MARINE INSURANCE COMPANY/EMPIRE INDEMNITY COMPANY \s\ AMY S. BONES Senior Vice President \s\ DOMINIC A. WEBER Vice President INSOLVENCY FUNDS EXCLUSION CLAUSE This AGREEMENT excludes all liability of the COMPANY arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the COMPANY of part or all of any claims, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. EX-27 3 EX-27
7 1,000 OTHER DEC-31-1996 JUN-30-1997 69,215 0 0 1,397 0 0 73,301 3,979 3 702 98,043 0 4,871 53,045 0 9,159 0 0 0 3,437 98,043 4,542 2,415 249 583 3,337 945 2,037 914 331 584 0 0 0 584 94.7 94.7 47,035 4,822 (1,485) 981 6,189 43,202 0
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