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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[S]
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
[S]
For the transition period from ___to___
[S]
Commission file number 1-7411
[S]
ALLCITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
[S]
New York 13-2530665
(State of incorporation) (I.R.S. Employer Identification Number)
335 Adams Street, Brooklyn, N.Y. 11201-3731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 718-422-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 III of this
Form 10-K or any amendment to this Form 10-K. [x]
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 aggregate market value of the voting stock held by nonaffiliates
of the registrant as of March 19, 2001 was $3,117,680.
The number of shares outstanding of each of the registrant's
classes of common shares, as of March 19, 2001, was 7,078,625.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
Exhibit Index on Page 25. Total number of pages 54.
TABLE OF CONTENTS
Part I
Page
Item 1- Business............................................... 1
Item 2- Properties............................................. 9
Item 3- Legal Proceedings...................................... 9
Item 4- Submission of Matters to a Vote of Security Holders.... 9
Part II
Item 5- Market for the Registrant's Common Equity and Related
Stockholder Matters.................................. 10
Item 6- Selected Financial Data................................ 10
Item 7- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12
Item 7A- Quantitative and Qualitative
Disclosures about Market Risk......................... 15
Item 8- Financial Statements and Supplementary Data............ 16
Item 9- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 16
Part III
Item 10- Directors and Executive Officers of the Registrant..... 17
Item 11- Executive Compensation................................. 20
Item 12- Security Ownership of Certain Beneficial
Owners and Management................................. 21
Item 13- Certain Relationships and Related Transactions......... 22
Part IV
Item 14- Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ............................... 23
Signatures......................................................... 24
PART I
Item 1. Business
General
Allcity Insurance Company (the "Registrant", "Allcity" or the
"Company") is a property and casualty insurer. Empire
Insurance Company ("Empire"), a property and casualty insurer,
owns approximately 84.6% of the outstanding common shares of
the Company and 100% of the outstanding common shares of
Centurion Insurance Company ("Centurion"). Empire's common
shares are 100% owned and controlled, through subsidiaries, by
Leucadia National Corporation ("Leucadia"). Additionally,
Leucadia indirectly owns an additional 6.7% of the outstanding
common shares of the Company. The Company, Empire and
Centurion are sometimes hereinafter collectively referred to
as the Group.
Historically, the Group has specialized in commercial and
personal property and casualty insurance business primarily in
the New York metropolitan area. The Group has offered
insurance products for vehicles (including medallion and
radio-controlled livery vehicles), general liability coverage,
property coverage (including mercantile and multi-family
residential real estate) and workers' compensation to
commercial accounts and private passenger automobile and
homeowners products to individuals. The Group is organized
into three divisions: the Small Business Division, the
Personal Lines Division and the Mid-Market Division. Each of
these divisions has separate management teams responsible for
all underwriting decisions with the Small Business Division
focusing on commercial package products for small businesses;
the Personal Lines Division focusing on personal automobile
and homeowners insurance; and the Mid-Market Division focusing
on commercial automobile, commercial package and workers'
compensation insurance for larger accounts.
During the past several years, the Group has experienced poor
underwriting results and adverse reserve development in all of
its lines of business. The Group has responded to these
developments by raising premium rates and reducing the volume
of unprofitable business, while at the same time attempting to
reduce its overhead.
Effective January 1, 2000, all assigned risk policy renewal
obligations were assigned to another insurance company. In
1999, a determination was made not to accept any applications
for new private passenger automobile business from certain
agents with the highest loss ratios. During the fourth
quarter of 2000, this determination was extended to include
the entire agency force. Existing policies of private
passenger automobile insurance will be either sold,
non-renewed or cancelled in accordance with New York insurance
law. If this book of business is not sold, it is expected
that the Group will continue to issue renewal policies over
the next several years as required by applicable insurance
law. The Group also announced that all statutory automobile
policies (public livery vehicles) would be non-renewed
effective March 1, 2001 due to poor underwriting results.
On March 1, 2001, the Group announced that, effective
immediately, it would no longer issue any new (as compared to
renewal) insurance policies in any lines of business and that
it has filed plans of orderly withdrawal with the New York
Insurance Department as required. Existing commercial lines
policies will be non-renewed or canceled in accordance with
New York insurance law or replaced by Tower Insurance Company
of New York or Tower Risk Management (collectively, "Tower")
under an agreement for the sale of the Group's renewal rights
(the "Tower Agreement"). Under the Tower Agreement, Tower
will buy the renewal rights for substantially all of the
Group's remaining lines of business, excluding private
passenger automobile and commercial automobile/garage, for a
fee based on the direct written premium actually renewed by
Tower. The amount of the fee is not expected to be material.
The Group will continue to be responsible for the remaining
term of existing policies and all claims incurred prior to the
expiration of these policies. For commercial lines, the Group
will thereafter have no renewal obligations for those
policies. Under New York insurance law, the Group is
obligated to offer renewals of homeowners, dwelling fire,
personal insurance coverage and personal umbrella for a
three-year policy period; however, the Tower Agreement
provides that Tower must offer replacements for these
policies. The closing of the transaction is subject to the
approval of the New York Insurance Department.
Certain of the lines of business included in the agreement
with Tower historically had acceptable loss ratios. However,
despite repeated attempts, the Group has not been able to
reduce its expenses sufficiently to be profitable with its
reduced volume of business. This has been due in part to
information systems and a personnel infrastructure built to
service multiple lines of property and casualty business where
the costs are more fixed than variable in nature, and a high
cost agency distribution channel. An additional investment of
both capital and management would have been required to
attempt to reduce the Group's cost structure to a level
commensurate with its book of business. In weighing the
potential returns against the risks inherent in that strategy,
the Group determined not to make the investment.
The Group is currently exploring its options for the future.
Assuming the Tower Agreement is consummated, the Group will
only have renewal obligations for remaining personal lines
insurance (primarily automobile) not replaced by Tower, the
remaining policy term of all existing policies and a claim
run-off operation. The Group may commence new property and
casualty insurance operations if a new business model with an
acceptable expense structure can be developed, enter into a
joint venture with another property and casualty insurance
operation, explore entering the claim services business or
commence a liquidation. There may be other options that the
Company will explore, but no assurance can be given at this
time as to what the ultimate plan will be.
The Group is rated "B+" (very good) by A.M. Best Company
("Best") and rated "BB-" (marginal) by Standards & Poors
Insurance Rating Services ("S&P"). Should the Group decide to
commence new property and casualty insurance operations or
enter into an insurance joint venture, its existing ratings
may affect its ability to pursue its plans. As with all
ratings, Best and S&P ratings are subject to change at any
time.
For the years ended December 31, 2000, 1999 and 1998 net
earned premiums for the Company were $30.9 million, $42.4
million and $67.5 million, respectively. During the year ended
December 31, 2000, 4% of net earned premiums of the Company
were derived from assigned risk business, 21% from commercial
automobile lines, 40% from other commercial lines and 35% from
personal lines. Substantially all of the Group's policies are
written in New York for a one-year period. The Group is
licensed in New York to write most lines of insurance that may
be written by a property and casualty insurer. Empire is also
licensed to write insurance in Connecticut, Massachusetts,
Missouri, New Hampshire and New Jersey.
On a quarterly basis, the Group reviews and adjusts its
estimated loss reserves for any changes in trends and actual
loss experience. Included in the Company's results for 2000
was approximately $15.9 million related to losses and loss
adjustment expenses ("LAE") from prior accident years. The
Group will continue to evaluate the adequacy of its loss
reserves and record future adjustments to its loss reserves as
appropriate.
Pooling Agreement
All insurance business written by the Company is subject to a
pooling agreement with Empire under which the Company and Empire
effectively operate as one company. The pooling agreement and
subsequent amendments were approved by the New York Insurance
Department. The Company operates under the same general management
as Empire and has full use of Empire's personnel, information
technology systems and facilities. As of December 31, 2000, Empire
and its subsidiaries had 335 full and part-time employees.
Currently, and for all periods presented, all premiums, losses, LAE
and other underwriting expenses are shared on the basis of 70% to
Empire and 30% to the Company.
Financial Information Relating to Business Segments
For all periods presented, the Company's operations are presented
in the following business segments:
(1) Small Business - includes commercial package products
for small businesses.
(2) Mid-Market - includes commercial automobile (including
medallion and radio-controlled livery vehicles), commercial
package and workers' compensation insurance for larger
accounts.
(3) Personal Lines - includes private passenger
automobile, homeowners and fire and allied insurance
coverages.
The following table presents business segment data, net of reinsurance, for each of
the three years ended December 31, 2000 (in thousands, except loss ratio information):
Premiums Premiums Losses and LAE Loss
Written Earned Incurred Ratio
2000
Personal Lines (1) $ 9,647 $ 12,099 $ 17,862 147.6%
Mid-Market 13,994 13,152 22,001 167.3%
Small Business 5,443 5,604 3,944 70.4%
Total $ 29,084 $ 30,855 $ 43,807 141.9%
1999
Personal Lines (1) $ 15,156 $ 22,404 $ 19,236 85.9%
Mid-Market 11,679 13,771 19,751 143.4%
Small Business 5,977 6,273 3,551 56.6%
Total $ 32,812 $ 42,448 $ 42,538 100.2%
1998
Personal Lines (1) $ 29,357 $ 39,251 $ 35,741 91.1%
Mid-Market 22,162 21,643 27,459 126.9%
Small Business 6,540 6,618 6,389 96.5%
Total $ 58,059 $ 67,512 $ 69,589 103.1%
(1) Includes assigned risk automobile business, which the Company no
longer participates in effective January 1, 2000.
[S]
For further information concerning Business Segments, see
Notes 8 and 12 of the Notes to Consolidated Financial Statements,
included elsewhere herein.
Combined Ratios
Set forth below is certain statistical information for the
Company prepared in accordance with generally accepted
accounting principles ("GAAP") and statutory accounting
principles ("SAP"), for the three years ended December 31,
2000. The Loss Ratio is the ratio of net incurred losses and
LAE to net premiums earned. The Expense Ratio is the ratio of
underwriting expenses (policy acquisition costs, commissions,
and a portion of administrative, general and other expenses
attributable to underwriting operations) to net premiums
written, if determined in accordance with SAP, or to net
premiums earned, if determined in accordance with GAAP. A
Combined Ratio below 100% indicates an underwriting profit and
a Combined Ratio above 100% indicates an underwriting loss.
The Combined Ratio does not include the effect of investment
income.
Years Ended December 31,
2000 1999 1998
Loss Ratio: (a)
GAAP 141.9% 100.2% 103.1%
SAP 141.9% 100.2% 103.1%
Industry (SAP) (b) N/A 78.8% 76.5%
Expense Ratio:
GAAP 51.2% 39.7% 26.3%
SAP 50.4% 45.0% 31.3%
Industry (SAP) (b) N/A 29.3% 29.5%
Combined Ratio: (c)
GAAP 193.1% 139.9% 129.4%
SAP 192.3% 145.2% 134.4%
Industry (SAP) (b) N/A 108.1% 106.0%
(a) Includes Loss and Loss Adjustment Expenses.
(b) Source: Best's Aggregates & Averages, Property/Casualty, 2000 Edition. Industry
Combined Ratios may not be fully comparable as a result of, among other things,
differences in geographical concentration and in the mix of property and casualty
insurance products.
(c) For 1998, the difference in the accounting treatment for curtailment gains relating
to defined benefit pension plans was the principal reason for the difference between
the GAAP Combined Ratio and the SAP Combined Ratio. Additionally, for all three years,
the difference relates to the accounting for certain costs which are treated differently
under SAP and GAAP. For further information about the Company's Combined Ratios see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
[S]
Reinsurance
The Company's maximum retained limit for all lines of business
was $0.3 million for 2000 and 1999. The Company's maximum
retained limit for 1998 was $0.5 million for workers'
compensation and $0.3 million for other property and casualty
lines. Additionally, the Company has entered into a property
catastrophe excess of loss treaty to protect against certain
losses. Its retention of lower level losses in this treaty is
$7.5 million for 2001, and was $7.5 million for 2000, 1999 and
1998.
Effective January 1, 1997 Empire entered into a quota share
reinsurance agreement with its subsidiary, Centurion. Under
this agreement, Empire assumes 50% up to July 1, 1997 and 75%
thereafter of the effective period premiums and losses of
Centurion and grants Centurion a ceding commission. Under the
pooling agreement, 70% of such business assumed will be
retained by Empire and 30% will be ceded to the Company.
Although reinsurance does not legally discharge an insurer
from its primary liability for the full amount of the policy
liability, it does make the assuming reinsurer liable to the
insurer to the extent of the reinsurance ceded. The Company's
reinsurance generally has been placed with certain of the
largest reinsurance companies, including (with their
respective Best ratings) General Reinsurance Corporation (A++)
and Zurich Reinsurance (NA), Inc. (A+). The Company believes
its reinsurers to be financially capable of meeting their
respective obligations. However, to the extent that any
reinsuring company is unable to meet its obligations, the
Company would be liable for the reinsured risks. The Company
has established reserves, which the Company believes are
adequate, for any nonrecoverable reinsurance.
Investments
Investment activities represent a significant part of the
Company's total income. Investments are managed by the
Company's investment advisors under the direction of, and upon
consultation with, the Company's investment committee.
The Company has a diversified investment portfolio of
securities, a substantial portion of which is rated
"investment grade" by established bond rating agencies or
issued or guaranteed by the U.S. Treasury or by governmental
agencies. A portion of the Company's invested assets
represent an investment in a limited partnership which invests
principally in convertible preferred stocks, convertible
long-term debt securities, limited partnerships, and common
stocks sold, but not yet purchased. At December 31, 2000,
1999 and 1998, the average yield of the Company's bond
portfolio was approximately 6.4%, 6.5% and 5.8%, respectively,
and the average maturity of the Company's bond portfolio for
2000, 1999 and 1998 was approximately 2.2 years, 2.6 years and
3.2 years, respectively.
Tax Sharing Agreement
The Company has been included in the consolidated federal
income tax returns of Leucadia since 1993. Under the terms of
the tax sharing agreement between Leucadia and the Company,
the Company computes its tax provision on a separate return
basis and is either charged its share of federal income tax
resulting from its taxable income or is credited for tax
benefits resulting from its losses to the extent it could use
the losses on a separate return basis.
Government Regulation
Insurance companies are subject to detailed regulation and
supervision in the states in which they transact business.
Such regulation pertains to matters such as approving policy
forms and various premium rates, minimum reserves and loss
ratio requirements, the type and amount of investments,
minimum capital and surplus requirements, granting and
revoking licenses to transact business, levels of operations
and regulating trade practices. Insurance companies are
required to file detailed annual reports with the supervising
agencies in each of the states in which they do business, and
are subject to examination by such agencies at any time.
Increased regulation of insurance companies at the state level
and new regulation at the federal level is possible, although
the Company cannot predict the nature or extent of any such
regulation or what impact it would have on the Company's
operations.
For additional information see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
In 1998, the National Association of Insurance Commissioners
("NAIC") adopted the Codification of Statutory
Accounting Principles ("Codification"), which replaces the
current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting as of January
1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current
statutory accounting in some areas. The New York Insurance
Department recently adopted the Codification guidance
(Regulation 172), effective January 1, 2001, but did not adopt
several key provisions of the guidance. The Company will
reflect the cumulative effect of the Codification guidance in
its statutory financial statements as a direct adjustment to
statutory surplus for the quarter ending March 31, 2001, to be
filed with the New York Insurance Department by May 15, 2001.
The Company is in the process of determining the potential
effects of the codification.
The Group is a member of state insurance funds, which provide
certain protection to policyholders of insolvent insurers
doing business in those states. Due to insolvencies of
certain insurers, the Group has been assessed certain amounts
which have not been material and are likely to be assessed
additional amounts by state insurance funds. The Company
believes that it has provided for all anticipated assessments
and that any additional assessments will not have a material
adverse effect on the Company's financial condition or results
of operations.
Competition
The insurance industry is a highly competitive industry, in
which many of the Company's competitors have substantially
greater financial resources, larger sales forces, more
widespread agency and broker relationships, endorsements from
affinity groups and more diversified lines of insurance
coverage. Additionally, federal administrative, legislative
and judicial activity has resulted in changes to federal
banking laws that increase the ability of national banks to
offer insurance products.
The Company believes that property and casualty insurers
generally compete on the basis of price, customer service,
consumer recognition, product design, product mix and
financial stability. The industry has historically been
cyclical in nature, with periods of less intense price
competition generating significant profits, followed by
periods of increased price competition resulting in reduced
profitability or loss. The current cycle of intense price
competition has continued for a longer period than in the
past, suggesting that the significant infusion of capital into
the industry in recent years, coupled with larger investment
returns has been, and may continue to be, a depressing
influence on policy rates. The profitability of the property
and casualty insurance industry is affected by many factors,
including rate competition, severity and frequency of claims
(including catastrophe losses), interest rates, state
regulation, court decisions and judicial climate, all of which
are outside the Company's control.
Loss and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted
(except for certain workers' compensation liabilities), and
LAE are determined using case-basis evaluations, statistical
analyses and estimates for salvage and subrogation recoverable
and represent estimates of the ultimate claim costs of all
unpaid losses and LAE. Liabilities include a provision for
losses that have occurred but have not yet been reported.
These estimates are subject to the effect of trends in future
claim severity and frequency experience. Adjustments to such
estimates are made from time to time due to changes in such
trends as well as changes in actual loss experience. These
adjustments are reflected in current earnings.
The Company relies upon standard actuarial ultimate loss
projection techniques to obtain estimates of liabilities for
losses and LAE. These projections include the extrapolation of
both losses paid and incurred by business line and accident
year and implicitly consider the impact of inflation and
claims settlement patterns upon ultimate claim costs based
upon historical patterns. In addition, methods based upon
average loss costs, reported claim counts and pure premiums
are reviewed in order to obtain a range of estimates for
setting the reserve levels. For further input, changes in
operations in pertinent areas including underwriting
standards, product mix, claims management and legal climate
are periodically reviewed.
In the following table, the liability for losses and LAE of
the Company, is reconciled for each of the three years ended
December 31, 2000. Included therein are current year data and
prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
2000 1999 1998
(In thousands)
Net SAP liability for losses and LAE,
at beginning of the year $113,602 $ 139,771 $ 145,260
Provision for losses and LAE for
claims occurring in the current year 27,880 36,524 56,698
Increase in estimated losses and LAE
for claims occurring in prior years 15,927 6,014 12,891
Total incurred losses and LAE 43,807 42,538 69,589
Loss and LAE payments for claims
occurring during:
Current year 8,920 12,382 19,203
Prior years 52,902 56,325 55,875
61,822 68,707 75,078
Net SAP liability for losses and LAE,
at end of year 95,587 113,602 139,771
Reinsurance recoverable 172,919 228,334 294,461
Liability for losses and LAE at
the end of year as reported in
the financial statements (GAAP) $ 268,506 $ 341,936 $ 434,232
[S]
The following table presents the development of balance sheet
liabilities for 1990 through 2000 for the Company. The
liability line at the top of the table indicates the estimated
liability for unpaid losses and LAE recorded at the balance
sheet date for each of the indicated years. The middle
section of the table shows the re-estimated amount of the
previously recorded liability based on experience as of the
end of each succeeding year. As more information becomes
available and claims are settled, the estimated liabilities
are adjusted upward or downward with the effect of decreasing
or increasing net income at the time of adjustment. The lower
section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of
each succeeding year
The "cumulative deficiency" represents the aggregate change in
the estimates over all prior years. For example, the initial
1990 liability estimate indicated on the table of $75,420,000
has been re-estimated during the course of the succeeding ten
years, resulting in a re-estimated liability at December 31,
2000 of $85,129,000 or a deficiency of $9,709,000. If the
re-estimated liability were less than the liability initially
established, a cumulative redundancy would be indicated.
In evaluating this information it should be noted that each
amount shown for "cumulative deficiency" includes the effects
of all changes in amounts for prior periods. For example, the
amount of the deficiency related to losses settled in 1994,
but incurred in 1990, will be included in the cumulative
deficiency amount for 1990, 1991, 1992 and 1993. This table
is not intended to and does not present accident or policy
year loss and LAE development data. Conditions and trends
that have affected development of the liability in the past
may not necessarily occur in the future. Accordingly, it would
not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
For further discussion of the Company's loss development
experience, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" of this
Report.
Analysis of Loss and Loss Adjustment Expenses Development
(In thousands)
Years ended
December 31, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Liability for Unpaid
Losses and Loss
Adjustment Expenses $75,420 $ 84,178 $ 96,712 $106,115 $ 121,923 $142,718 $ 143,494 $ 145,260 $ 139,771 $113,602 $95,587
Liability Re-
estimated as of:
One year later $74,844 $ 83,987 $ 96,516 $103,181 $ 132,189 $150,852 $ 151,798 $ 158,152 $ 145,785 $129,529 $ -
Two years later 73,538 83,341 97,208 112,176 140,620 160,686 163,378 163,609 162,692
Three years later 73,151 85,197 103,592 118,127 150,434 172,650 179,200 176,825
Four years later 74,190 88,928 108,430 124,375 160,542 182,318 184,693
Five years later 76,509 92,035 112,988 132,606 167,164 183,482
Six years later 78,392 95,273 118,446 137,669 166,893
Seven years later 80,040 99,467 121,715 137,462
Eight years later 83,670 101,505 121,383
Nine years later 84,981 101,276
Ten years later 85,129
Cumulative
Deficiency $(9,709) $(17,098) $(24,671) $(31,347) $ (44,970) $(40,764) $ (41,199) $ (31,565) $ (22,921)$(15,927)$ -
Cumulative Amount
of Liability
Paid Through:
One year later $23,681 $ 26,852 $ 33,903 $ 35,048 $ 45,789 $ 60,382 $ 56,475 $ 55,875 $ 56,325 $ 52,902 $ -
Two years later 38,067 44,989 54,615 59,701 80,911 95,190 94,062 93,714 97,887
Three years later 50,194 59,336 71,653 81,680 105,977 121,900 122,811 126,295
Four years later 58,830 69,955 85,689 97,917 124,645 141,259 146,697
Five years later 65,025 77,965 95,938 109,083 136,791 156,006
Six years later 69,568 83,886 102,416 116,929 146,283
Seven years later 72,683 88,139 107,246 123,022
Eight years later 75,932 91,364 111,097
Nine years later 78,103 93,862
Ten years later 79,863
Net Liability - End of year as shown above $ 106,115 $ 121,923 $ 142,718 $ 143,494 $ 145,260 $139,771 $113,602 $ 95,587
Reinsurance 184,718 219,676 257,161 262,593 272,266 294,461 228,334 172,919
Gross Liability - End of year
as shown above $ 290,833 $ 341,599 $ 399,879 $ 406,087 $ 417,526 $434,232 $341,936 $268,506
Net Re-Estimated Liability -
Latest $ 137,462 $ 166,893 $ 183,482 $ 184,693 $ 176,825 $162,692 $129,529
Re-estimated Reinsurance -
Latest 273,682 325,569 353,635 363,792 341,658 318,663 240,396
Gross Re-estimated Liability -
Latest $ 411,144 $ 492,462 $ 537,117 $ 548,485 $ 518,483 $481,355 $369,925
Gross Cumulative
Deficiency $(120,311) $(150,863) $(137,238) $(142,398)$(100,957) $(47,123) $(27,989)
Item 2. Properties
The Group has entered into a twenty year lease agreement which
expires in 2018, consisting of 286,510 square feet, in an
office building located at 335 Adams Street in Brooklyn, New
York, in which Leucadia has an equity interest. The Group
received certain incentives from both the City and State of
New York in connection with this lease, which will be
recognized over the term of the lease.
Empire has subleased 133,140 square feet of the office space
to its parent, Leucadia, at similar terms as in the original
lease. In 2000, Empire subleased an additional 64,340 square
feet of the office space to the Board of Education of the City
School District of the City of New York. Both sublease
agreements expire in 2018.
The Group also conducts limited operations from branch offices
located in Rochester, New York, Mineola, New York and Boston,
Massachusetts. The rental charged to the Company for these
facilities is prorated in accordance with the pooling
agreement described in "Pooling Agreement" under Item 1,
herein.
Item 3. Legal Proceedings
The Company is party to legal proceedings that are considered
to be either ordinary, routine litigation or incidental to its
business. Based on discussion with counsel, the Company does
not believe that such litigation will have a material effect
on its financial position, results of operations or cash
flows.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of shareholders
at the Company's 2000 Annual Meeting of Shareholders held on
October 16, 2000.
Number of Number of
a) Election of directors: Shares in favor Votes Withheld
[S]
Class I Directors, term expires 2003:
[S]
Ian M. Cumming 4,891,588 54,551
Thomas E. Mara 4,891,588 54,551
Joseph S. Steinberg 4,891,588 54,551
Daniel G. Stewart 4,891,588 54,551
Carmen M. Rivera 4,891,588 54,551
[S]
Class II Director, term expires in 2001:
[S]
H. E. Scruggs, Jr. 4,891,588 54,551
[S]
b) No other matter was voted upon at the meeting.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information
The Company's common stock trades on The NASDAQ National Stock
Market under the symbol "ALCI". The following table sets
forth, for the calendar quarters indicated, the high and low
closing trade price per common share as reported by the
National Association of Securities Dealers, Inc.
High
Low
1st Quarter 2001 $ 7.125 $ 5.031
(Through March 19, 2001)
1st Quarter 2000 9.750 5.875
2nd " " 9.250 6.875
3rd " " 11.500 8.000
4th " " 8.000 6.000
1st Quarter 1999 8.219 7.000
2nd " " 8.750 7.000
3rd " " 8.000 6.375
4th " " 7.063 6.375
[S]
(b) Holders
The number of shareholders of record of common shares at
December 31, 2000 was 471.
[S]
(c) Dividends
The Company has paid no dividends on its common shares since
1975. The New York Insurance Law prohibits New York domiciled
property and casualty companies from paying dividends except
out of earned surplus. Without the approval of the New York
Insurance Department, no New York domestic property/ casualty
insurer may declare or distribute any dividend to shareholders
which, together with any dividends declared or distributed by
it during the preceding twelve months, exceeds the lesser of
(1) 10% of surplus to policyholders as shown by its last
statutory annual statement or (2) one hundred percent of
adjusted net investment income during such period. At
December 31, 2000, $4,670,000 was available for distribution
of dividends. The Company does not presently anticipate
paying dividends in the near future.
Item 6. Selected Financial Data
The following selected financial data have been summarized
from the Company's consolidated financial statements and are
qualified in their entirety by reference to, and should be
read in conjunction with, such consolidated financial
statements and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" of this
Report:
Year ended December 31,
2000 1999 1998 1997 1996
(In thousands, except per share amounts)
Total Revenues $ 42,303 $55,662 $ 92,070 $102,624 $120,790
Net (Loss)/Income (a) $(30,800) $(3,731) $ 504 $ (83) $ 2,634
Basic and Diluted
(Loss)/Earnings Per share:
(Loss)/Income(a) $ (4.35) $ (0.53) $ 0.07 $ (0.01) $ 0.37
Item 6. Selected Financial Data, continued
a) Net (loss) income includes net securities (losses)/gains
net of applicable tax, as follows (in thousands, except per
share amounts):
(Losses)/Gains Per Share
2000 $ (213) $(0.03)
1999 (1,084) (0.15)
1998 3,951 0.56
1997 (125) (0.02)
1996 735 0.10
[S]
At December 31,
2000 1999 1998 1997 1996
(In thousands)
Total assets $372,284 $486,020 $605,704 $640,249 $653,730
Invested assets 163,873 205,246 234,039 271,736 272,992
Surplus note:
Face value 7,000 7,000 7,000 7,000 7,000
Accrued Interest 9,486 8,851 8,300 7,710 7,115
Common Shareholders'
Equity(a) 43,791 71,716 78,200 78,164 75,658
[S]
For the years ended December 31,
2000 1999 1998 1997 1996
GAAP Combined Ratio(b) 193.1% 139.9% 129.4% 119.3% 114.1%
SAP Combined Ratio (b) 192.3% 145.2% 134.4% 118.6% 107.5%
Industry SAP Combined
Ratio (c) N/A 108.1% 106.0% 101.6% 105.8%
Premium to Surplus
Ratio (d) 0.5x 0.5X 0.8X 1.1X 1.4X
[FN]
(a) Includes unrealized appreciation of approximately $0.6 million
in 2000, $0.5 million in 1998 and $0.9 million in 1997 and
unrealized depreciation of approximately $2.3 million in 1999
and $1.7 million 1996, all net of tax, on investments
classified as available for sale.
(b) For 1998, the difference in the accounting treatment for
curtailment gains relating to the defined benefit pension
plans was the principal reason for the difference between the
GAAP Combined Ratio and the SAP Combined Ratio. For 1996, a
change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal
reason for the difference between the GAAP Combined Ratio and
the SAP Combined Ratio. Additionally, for all years presented,
the difference relates to the accounting for certain costs,
which are treated differently under SAP and GAAP. For further
information about the Company's Combined Ratios, see Item 7,
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this report.
(c) Source: Best's Aggregates & Averages,
Property/Casualty, 2000 Edition. Industry Combined Ratios may
not be fully comparable as a result of, among other things,
differences in geographical concentration and in the mix
of property and casualty insurance products.
(d) Premium to Surplus Ratio was calculated by dividing annual
statutory net premiums written by statutory surplus at the end
of the year.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The purpose of this section is to discuss and analyze the
Company's financial condition, liquidity and capital resources
and results of operations. This analysis should be read in
conjunction with the financial statements and related notes
which appear elsewhere in this Report.
Liquidity and Capital Resources
In 2000 and 1999, net cash was used for operations as a result
of a decrease in premiums written and the payment of claims.
As discussed above, it is currently anticipated the Company's
premiums will continue to decline while the Company runs off
its claims liabilities. This is expected to result in a
continued net use of the Company's cash for operations over
the next several years.
At December 31, 2000 and 1999 the yield of the Company's fixed
maturities portfolio was 6.4% and 6.5%, respectively, with an
average maturity of 2.2 years and 2.6 years for 2000 and 1999,
respectively. Additionally, the Company maintains a
diversified investment portfolio of securities, of which at
December 31, 2000, approximately 66% of the fixed maturities
portfolio was invested in issues of the U.S. Treasury and its
governmental agencies with the remainder primarily invested in
investment grade corporate and industrial issues.
The Company maintains cash, short-term and readily marketable
securities and anticipates that the cash flow from investment
income, maturities and sales of short-term investments and
fixed maturities will be sufficient to satisfy its anticipated
cash needs. During 2000 and 1999, the Company sold certain
securities at a net realized capital loss to meet short-term
cash flow needs. The Company does not presently anticipate
paying dividends in the near future and believes it has
sufficient capital to meet its currently anticipated level of
operations.
Results of Operations
Net earned premium revenues of the Company were $30.9 million,
$42.4 million and $67.5 million for the years ended December
31, 2000, 1999 and 1998, respectively. While earned premiums
declined in almost all lines of business during 2000 and 1999,
the most significant reductions during 2000 were in assigned
risk automobile ($4.4 million) and voluntary private passenger
automobile ($4.4 million), and during 1999 were in assigned
risk automobile ($7.3 million), voluntary private passenger
automobile ($8.1 million) and commercial package policies
($3.7 million). Effective January 1, 2000, all policy renewal
obligations for assigned risk contracts were assigned to
another insurance company. However, the Company remains liable
for the claim settlement costs for assigned risk claims that
occurred during the policy term. The decline in voluntary
private passenger automobile resulted from tighter
underwriting standards, increased competition and the
Company's decision in 1999 to no longer accept new policies
from those agents who historically have had poor underwriting
results. The Company's termination of certain unprofitable
agents also adversely affected premium volume in other lines
of business.
During the fourth quarter of 2000, the Group announced that it
would no longer accept any new private passenger automobile
policies from any agents. Existing policies of private
passenger automobile insurance will be either sold,
non-renewed or cancelled in accordance with New York insurance
law. If this book of business is not sold, it is expected
that the Group will continue to issue renewal policies over
the next several years as required by applicable insurance
law. The Group also announced that all statutory automobile
policies (public livery vehicles) would be non-renewed
effective March 1, 2001, due to poor underwriting results.
On March 1, 2001, the Group announced that, effective
immediately, it would no longer issue any new (as compared to
renewal) insurance policies and that it has filed plans of
orderly withdrawal with the New York Insurance Department as
required. Existing commercial lines policies will be
non-renewed or canceled in accordance with New York insurance
law or replaced by Tower. The Group will continue to be
responsible for the remaining term of its existing policies
and all claims incurred prior to the expiration of these
policies. For commercial lines, the Group will thereafter
have no renewal obligations for those policies. Under New
York insurance law, the Group is obligated to offer renewals
of homeowners, dwelling fire, personal insurance coverage and
personal umbrella for a three-year policy period; however, the
Tower Agreement provides that Tower must offer replacements
for these policies. The closing of the transaction is subject
to the approval of the New York Insurance Department.
The NAIC has adopted model laws incorporating the concept of a
"risk based capital" ("RBC") requirement for insurance companies.
Generally, the RBC formula is designed to measure the adequacy
of an insurer's statutory capital in relation to the risks
inherent in its business. The RBC formula is used by the
states as an early warning tool to identify weakly capitalized
companies for the purpose of initiating regulatory action.
Although New York State has not adopted the RBC requirements
for property and casualty insurance companies, New York does
require that property and casualty insurers file the RBC
information with the New York Insurance Department ("the
Department"). The NAIC also has adopted various ratios for
insurance companies which, in addition to the RBC ratio, are
designed to serve as a tool to assist state regulators in
screening and analyzing the financial condition of insurance
companies operating in their respective states. The Company
and its parent had certain NAIC ratios outside of the
acceptable range of results for the year ended December 31,
2000.
In 2001, the Department completed its fieldwork for its
triennial examination of the statutory-basis financial
statements of the Company and its parent as of December 31,
1999 but has not as yet issued its report. However, the
Department has verbally informed the Company that its estimate
of the Company's required loss and loss adjustment expense
reserves as of December 31, 1999 was higher than the amount
recorded by the Company. The Department's estimate of loss
and loss adjustment expense reserves for accident years 1999
and prior is approximately $15,000,000 higher than the
Company's recorded reserves for such accident years as of
December 31, 2000. The Company and its parent are currently
discussing the results of the Department's reserve study with
them, and are working to reconcile the differences between the
two estimates. Based on the Company's and its parent's recent
discussions with the Department, and their decision to file
plans of orderly withdrawal from all lines of business, as
previously described, the Company believes that no material
adverse action will be taken by the Department at this time.
However, no assurance can be given that the Company and its
parent will not be required to increase their reserves or that
the Department will not take materially adverse regulatory
action in the future.
The Group is currently exploring its options for the future.
Assuming the Tower Agreement is consummated, the Group will
only have renewal obligations for remaining personal lines
insurance (primarily automobile) not replaced by Tower, the
remaining policy term of all existing policies and a claim
run-off operation. The Group may commence new property and
casualty insurance operations if a new business model with an
acceptable expense structure can be developed, enter into a
joint venture with another property and casualty insurance
operation, explore entering the claim services business or
commence a liquidation. There may be other options that the
Company will explore, but no assurance can be given at this
time as to what the ultimate plan will be.
The Company's combined ratios as determined under GAAP and SAP were as
follows:
Years Ended December 31,
2000 1999 1998
GAAP 193.1% 139.9% 129.4%
SAP 192.3% 145.2% 134.4%
[S]
The Company's combined ratios increased in 2000 primarily due
to unfavorable loss reserve development from prior accident
years, increased loss adjustment expenses for newly outsourced
claims and adverse development in loss adjustment expenses.
In addition, these ratios increased due to reduced service
fees, higher 2000 accident year loss ratios, higher severance
costs and overhead costs which, although lower, have not
declined commensurate with the reduced premium volume. The
Company's combined ratios increased in 1999 primarily due to
the reduction in premium volume at a rate greater than the
reduction in net underwriting and other costs. In addition,
in 1999, the expense ratios were adversely affected by the
reduction in service fees, increased expenditures related to
the installation of new information systems, providing
Internet access to agents and severance costs. Included in
the Company's results for 2000, 1999 and 1998 were $15.9
million $6.0 million and $12.9 million respectively, for
increases in estimated losses and loss adjustment expenses for
prior accident years.
During 2000, the Company experienced unfavorable development
principally in the 1996 through 1999 accident years in the
private passenger automobile line ($2.8 million), the
commercial automobile line ($1.9 million), the assigned risk
automobile line ($1.4 million) and the commercial package
policies line ($4.5 million). In addition, the Company
increased its estimate for loss adjustment expenses by $3.3
million as a result of the decision to outsource a significant
amount of claim handling functions in 2000. Claim files for
workers' compensation, automobile no-fault and automobile and
other liability claims were outsourced at a cost greater than
the reserves previously recorded to handle the claims
internally. The Group has outsourced almost two-thirds of its
claims. Currently, the Group is primarily handling complex
claims, first party claims and certain automobile liability
and general liability claims internally. Complex claims
generally consist of those that have potentially large
settlement exposure and are not expected to settle quickly.
The Company has also increased its reserve estimate for claims
handled internally.
During 1999, the Company experienced unfavorable development
due to an increase in severity of 1998 accident year losses in
the assigned risk automobile and voluntary private passenger
automobile lines, and 1996 accident year losses in certain
classes of the commercial automobile line. As a result, the
Company increased its reserves by $2.2 million for assigned
risk automobile, $1.5 million for voluntary private passenger
automobile and $1.4 million for commercial automobile lines.
During 1998, the Company reviewed the adequacy of the reserves
carried for its open claims' files, focusing on workers'
compensation, commercial auto and other commercial liability
lines of business. As part of the review, substantially all
open workers' compensation claim files were reviewed for every
accident year up to and including 1998. Additionally, during
1998, the Group reorganized the commercial auto claims
department. As part of this realignment, more complex claims
files were reviewed by the most experienced claims examiners
and assumptions regarding average claims severity and probable
ultimate losses were revised. Accordingly, reserves were
strengthened by $3.9 million for workers' compensation, $4.2
million for commercial automobile and $4.2 million for other
commercial liability lines of business.
As a consequence of its reserve increases, the Company has
reduced premiums and pre-tax profits to recognize reinsurance
premiums due for 1995 and prior years under retrospectively
rated reinsurance agreements. Such amounts totaled $1.4
million, $1.4 million and $0.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The Company
has not entered into retrospectively rated reinsurance
agreements after 1995.
For all lines of property and casualty insurance business, the
Company employs a variety of standard actuarial ultimate loss
projection techniques, statistical analyses and case-basis
evaluations to estimate its liability for unpaid losses. The
actuarial projections include an extrapolation of both losses
paid and incurred by business line and accident year and
implicitly consider the impact of inflation and claims
settlement patterns upon ultimate claim costs based upon
historical patterns. These estimates are performed quarterly
and consider any changes in trends and actual loss experience.
Any resulting change in the estimate of the liability for
unpaid losses, including those discussed above, is reflected
in current year earnings during the quarter the change in
estimate is identified.
The reserving process relies on the basic assumption that past
experience is an appropriate basis for predicting future
events. The probable effects of current developments, trends
and other relevant matters are also considered. Since the
establishment of loss reserves is affected by many factors,
some of which are outside the Company's control or are
affected by future conditions, reserving for property and
casualty claims is a complex and uncertain process requiring
the use of informed estimates and judgments. As additional
experience and other data become available and are reviewed,
the Company's estimates and judgments may be revised. While
the effect of any such changes in estimates could be material
to future results of operations, the Company does not expect
such changes to have a material effect on its liquidity or
financial condition.
In management's judgment, information currently available has
been appropriately considered in estimating the Company's loss
reserves. The Company will continue to evaluate the adequacy
of its loss reserves on a quarterly basis, incorporating any
future changes in trends and actual loss experience, and
record adjustments to its loss reserves as appropriate.
Investment income has decreased by approximately $1.0 million
or 8.2% in 2000 and decreased by approximately $2.1 million,
or 14.2% in 1999, primarily as a result of lower invested
assets due to claim payments and a decrease in premiums
written. During 2000 and 1999, the Company had realized
capital losses of $0.2 million and $1.7 million, respectively,
principally due to the sale of fixed maturities to satisfy
operating cash needs. During 1998, the Company recorded $6.1
million in realized capital gains principally on the sale of
fixed maturities, primarily U.S. Treasury Notes.
The combination of other underwriting expenses incurred and
the amortization of deferred policy acquisition costs
reflected a decrease of $3.1 million or 16.4% in 2000 and
approximately $2.2 million or 10.5% in 1999. The decrease in
both 2000 and 1999 primarily related to the decline in premium
revenue coupled with a reduction in operating expenses. 1998
included increased expenses relating to the move of the
Company's executive and administrative offices to Brooklyn,
New York and higher underwriting costs offset in part by a
$2.0 million pension curtailment gain.
Due to the uncertainty of future taxable income necessary for
realization of the deferred tax asset, a valuation allowance
has been provided as of December 31, 2000 on the total amount
of the deferred tax asset.
Impact of Inflation
The Company, as well as the property and casualty insurance
industry in general, is affected by inflation. With respect
to losses, the Company's claim severity is affected by the
impact of inflation on the cost of automobile repair parts,
medical costs and lost wages. The costs of adjusting
claims and other underwriting expenses have also been
affected by inflationary pressures on salaries and
employee benefits. The Company receives rate increases based
in part upon its experience as well as the industry's
experience. Accordingly, premium increases generally follow
the rate of inflation.
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking
statements pursuant to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may relate, but are not limited, to
projections of revenues, income or loss, capital expenditures,
fluctuations in insurance reserves, plans for growth and
future operations, competition and regulation as well as
assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in
this Report, the words "estimates", "expects", "anticipates",
"believes", "plans", "intends" and variations of such words
and similar expressions are intended to identify
forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or
underlying the forward-looking statements. The factors that
could cause actual results to differ materially from those
suggested by any such statements include, but are not limited
to, those discussed or identified from time to time in the
Company's public filings, including general economic and
market conditions, changes in domestic laws, regulations and
taxes, changes in competition and pricing environments,
regional or general changes in asset valuation, the occurrence
of significant natural disasters, the inability to reinsure
certain risks economically, the adequacy of loss reserves,
prevailing interest rate levels, weather related conditions
that may affect the Company's operations, consummation of the
Tower Agreement, the ability to attract and retain key
personnel, adverse selection through renewals of the Group's
policies, the Group's ability to develop an alternative
business model and changes in composition of the Company's
assets and liabilities through acquisitions or divestitures.
Undue reliance should not be placed on these forward-looking
statements, which are applicable only as of the date hereof.
The Company undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances
that arise after the date of this Report or to reflect the
occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The following includes "forward-looking statements" that
involve risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking
statements.
The Company's market risk arises principally from interest
rate risk related to its investment portfolio. The Company
does not enter into material derivative financial instrument
transactions.
The Company's investment portfolio is primarily classified as
available for sale, and consequently, is recorded on the
balance sheet at fair value with unrealized gains and losses
reflected in shareholders' equity. Included in the Company's
investment portfolio are fixed income securities, which
comprised approximately 77.1% of the Company's total
investment portfolio at December 31, 2000. These fixed income
securities are primarily rated "investment grade" or are U.S.
governmental agency issued or guaranteed obligations, although
limited investments in "non-rated" or rated less than
investment grade securities have been made from time to time.
The estimated weighted average remaining life of these fixed
income securities was approximately 2.2 years at December 31,
2000. The Company's fixed income securities, like all fixed
income instruments, are subject to interest rate risk and will
fall in value if market interest rates increase. At December
31, 1999, fixed income securities comprised approximately 80%
of the Company's investment portfolio and had an estimated
weighted average remaining life of 2.6 years. A portion of
the Company's invested assets represent an investment in a
limited partnership which invests principally in convertible
preferred stocks, convertible long-term debt securities,
limited partnerships, and common stocks sold, but not yet
purchased. Expected maturities will differ from contractual
maturities because the borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties. The Company manages the investment portfolio to
preserve principal, maintain a high level of quality, comply
with applicable insurance industry regulations and achieve an
acceptable rate of return. In addition, the Company considers
the duration of its insurance reserves in comparison with that
of its investments.
The following table provides information about the Company's
fixed income securities. The table presents principal cash
flows by expected maturity dates.
Expected Maturity Date
2001 2002 2003 2004 2005 Thereafter Total Fair Value
(Dollars in thousands)
Rate Sensitive Assets:
Available for Sale Fixed
Income Securities:
U.S. Government $30,494 $44,425 $ 328 - - $10,266 $85,513 $85,513
Weighted Average Interest Rate 5.58% 6.38% 7.88% - - 6.80% - -
Other Fixed Maturities:
Rated Investment Grade $ 3,558 $ 3,291 $10,202 $10,500 $12,724 $ - $40,275 $40,275
Weighted Average Interest Rate 6.87% 6.61% 6.72% 6.69% 6.80% - - -
Rated Less Than Investment
Grade/Not Rated - - - $ 50 $ 25 - $ 75 $ 75
Weighted Average Interest Rate - - - 5.50% 5.50% - - -
Held to Maturity Fixed Income
Securities:
U.S. Government - - $ 483 - - - $ 483 $ 483
Weighted Average Interest Rate - - 6.38% - - - - -
[S]
Item 8. Financial Statements and Supplementary Data
See page F1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to the Company's Charter and By-Laws, the Board of
Directors of the Company consists of 14 members divided into
three classes: Class I, Class II and Class III. Class I and
Class III consists of five directors and Class II consists of
four directors. Robert V. Toppi resigned from the Boards of
the Group in September 2000 and was replaced by H.E. Scruggs,
Jr. in September 2000. Carmen M. Rivera resigned from the
Boards of the Group in January 2001 and was replaced by Rocco
J. Nittoli in March 2001. Christopher J. Gruttemeyer was made
a Class III director of the Group in March 2001. One class of
directors is elected in each year for a three-year term. All
of the directors of the Company are also directors of Empire
and Centurion.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
H. E. Scruggs, Jr., 44, Principal Occupation - President, and Chief Executive
Director, President and Chief Officer of the Company and Empire since
Executive Officer September 2000. Chairman and Chief Executive Officer
of American Investment Bank, a Leucadia subsidiary,
since 1997 and Vice President of Leucadia since March
2000; Director of MK Gold Company ("MK Gold") (an
international precious metals mining company) since
March 2001. Member of the Utah Bar; Previously Vice
President of American Investment Bank from June 1995
to February 1997; Professor of political science at
Brigham Young University from 1991 to 1995; Chief of
Staff to the Governor of Utah from 1985 to 1991.
Class II Director since September 2000; current term
expires 2001.
Martin B. Bernstein, 67, Principal Occupation - President and
Director Director of Ponderosa Fibres of America, Inc.
(a pulp manufacturer for paper producers).
Class II Director since February 1988; current term
expires 2001.
Ian M. Cumming, 60, Principal Occupation - Presently and since June 1978,
Director Chairman of the Board and a Director of Leucadia.
Director of Skywest, Inc. (a Utah-based
regional air carrier) since June 1986.
Director of MK Gold since June 1995.
Director of HomeFed Corporation ("HomeFed"),
(a California real estate developer) since May 1999.
Class I Director since February 1988; current
term expires 2003.
James E. Jordan, 57, Principal Occupation - Private Investor.
Director Previously, President of The William Penn Corporation
from 1986 until 1997. Director of First Eagle SoGen
Mutual Funds and JZ Equity Partners PLC (a British
investment trust company).
Class III Director since 1997; current term
expires 2002.
Thomas E. Mara, 55, Principal Occupation - Presently and
Director since May 1980, Executive Vice President of Leucadia
and Treasurer of Leucadia since January 1993.
Class I Director since October 1994; current
term expires 2003.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Louis V. Siracusano, 54, Principal Occupation - Attorney with
Director McKenna, Fehringer, Siracusano &
Chianese (a law firm) for over eight years.
Class II Director since 1985; current term
expires 2001.
Joseph A. Orlando, 45, Principal Occupation - Chief Financial Officer
Director of Leucadia since April 1996 and Vice President
of Leucadia since January 1994.
Class III Director since 1998; current term
expires 2002.
Joseph S. Steinberg, 57, Principal Occupation - President of Leucadia
Director, Chairman of the Board since January 1979 and Director of Leucadia since
December 1978. Director of MK Gold since June
1995. Director of Jordan Industries, Inc., (a
holding company principally engaged in
manufacturing) since June 1988. Director of
HomeFed since August 1998.
Class I Director since February 1988;
current term expires 2003.
Daniel G. Stewart, 82, Principal Occupation - Independent
Director consulting actuary. Previously, Senior Vice
President of Mutual Benefit Life Insurance
Company from 1985 to November 1991.
Class I Director since 1980; current term
expires 2003.
Lucius Theus, 78, Principal Occupation - President, The U.S.
Director Associates (consultants in civic affairs, human
resources and business management) since 1989.
Principal and Director of the Wellness Group, Inc.
(a provider of health promotion programs) since 1989
Corporate Director, Civic Affairs of Allied
Corporation (a diversified industrial company) since
1979.
Class II Director since 1980; current term
expires 2001.
Rocco J. Nittoli, 42, Principal Occupation -Chief Operating Officer
Director, Chief Operating of the Company and Empire since February 2001,
Officer Senior Vice President & Chief Information Officer of
the Company and Empire from January 2000 to February 2001.
Vice President and Controller from September 1997 to
January 2000. Previously, Controller of Aegis Insurance
Services, Inc. from October 1995 to September 1997.
Class I Director since March 2001, current term
expires 2003.
Harry H. Wise, 62 Principal Occupation - President and
Director Director, H.W. Associates, Inc. (an investment
advisory firm). President and Director, Madison
Equity Capital Corp. (a sponsor of private investment
partnerships).
Class III Director since 1988; current term expires 2002.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Francis M. Colalucci, 56, Principal Occupation - Executive Vice President,
Director, Executive Vice Chief Financial Officer and Treasurer of the
President, Chief Financial Company and Empire since March 1999.
Officer and Treasurer Senior Vice President, Chief Financial Officer and
Treasurer since January 1996. Previously, Vice
President & Corporate Treasurer of Continental
Corporation (an insurance holding Company) from 1991
to January 1996.
Class III Director since October 1996; Current term
expires in 2002.
Christopher J. Gruttemeyer, 35, Principal Occupation - Vice President for the Company
Director, Vice President and Empire since December 2000. Assistant Vice President
from September 1999 to December 2000. Senior Financial
Analyst from December 1996 to September 1999. Internal
Auditor from September 1994 to December 1996. Previously,
Senior Accountant at Campos & Stratis, (a public accounting
firm) from March 1991 to September 1994.
Class III Director since March 2001; current term
expires in 2002.
Robert F. Boyle, 47, Principal Occupation - Senior Vice President, Mid-Market
Senior Vice President Division of the Company and Empire since March 1998. Vice
President, Underwriting from January 1997 to March 1998.
Previously, Northeast Regional Commercial Underwriting
Manager at Allstate Insurance Company from March 1988 to
January 1997.
Edward A. Hayes, 49, Principal Occupation - Senior Vice President,
Senior Vice President Claims for the Company and Empire since November 1999.
Previously, attorney with Hawkins, Feretic, Daly, Maroney &
Hayes (a law firm) from May 1997 to November 1999. Vice
President at Travelers Property Casualty Corporation from
February 1996 to May 1997. Attorney of Record and Managing
Attorney of Aetna Casualty & Surety Company's Staff Counsel
Office in New York City from July 1988 to February 1996.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain compensation
information for H.E. Scruggs, Jr. currently the President and
Chief Executive Officer ("CEO") of the Company and Robert V.
Toppi who was previously President and CEO of the Company,
the only executive officers whose compensation paid, or
accrued for, under the pooling arrangement exceeded $100,000
for the years ended December 31, 2000, 1999 and 1998.
Summary Compensation Table
All Other
Annual Compensation Compensation
Name and Principal
Position Salary Bonus
Year $ $ $
H. E. Scruggs, Jr. 2000 (a) (a) (a)
President & CEO
Robert V. Toppi 2000 (a) (a) (a)
President & CEO 1999 (a) (a) (a)
1998 (a) (a) (a)
[S]
[FN]
(a) Mr. Scruggs and Mr. Toppi received no compensation from the
Company. Messrs. Scruggs and Toppi are compensated directly by
Leucadia.
The Company does not directly remunerate directors. The
directors of the Company and Empire who are not officers or
employees of Empire and the Company were paid an annual
retainer of $5,000. In addition, eligible directors receive
$1,500 for each joint board meeting attended. For attendance
at a meeting of a committee of the joint board, such directors
receive $1,500 per meeting. In addition, each Chairperson of
a committee is entitled to $500 per annum. All fees paid to
such directors are shared in accordance with the pooling
agreement.
In 2000, Mr. Toppi retired as Director, President and CEO of
the Company and the Group. He was succeeded by Mr. Scruggs
who is President and CEO and a Director.
In 1998, Mr. Richard G. Petitt retired as Director, Chairman
of the Board, President and CEO of the Company and the Group.
He was succeeded by Mr. Toppi as President and CEO and a
Director. Mr. Steinberg succeeded Mr. Petitt as Chairman of
the Board.
Pension Plan
Effective January 1, 1999, Empire adopted a non-contributory
defined contribution plan (the "Plan"). The contributions,
ranging from 2% - 16% of employees' current pension eligible
compensation, are based on the age and service of the
employee. These contributions accumulate for participants on
a tax-deferred basis. Participants direct the investment of
their contributions to their accounts. Empire contributed
$682,000 and $1,145,000 to the Plan in 2000 and 1999,
respectively. In accordance with the pooling agreement, the
Company is obligated to provide 30% of Empire's contributions
to the Plan.
Prior to January 1, 1999, pensions for officers and employees
of the Company were provided under a non-contributory defined
benefit pension plan ("prior pension plan"). Any employee was
eligible for membership in the plan on January 1st or July 1st
of any plan year after which they had completed one full year
of service, consisting of a minimum of 1000 credited hours
with Empire, provided they had attained the age of 21 years by
or before such date. Members of the prior plan received a
basic pension if they worked until their normal retirement
date, which was the last day of the month in which they
attained 65 years of age with 5 years of, credited service.
Any member in the active employ of Empire may have elected
early retirement between 55 and 65. A member electing early
retirement must have had at least 10 years of service. A
monthly average of total compensation received over the
highest 5 consecutive plan or calendar years before retirement
was taken to compute benefits as follows:
1.30% of the first $833 per month of average pay, plus
1.75% of average pay over $833 per month.
The sum of these two credits was multiplied by the years of
credited service. The basic benefit amounts listed in the
table below were not subject to any deduction for Social
Security benefits or other offset amounts. The maximum benefit
payable under the prior pension plan was $96,400 per year.
Benefits accrued under the prior pension plan were frozen as
of December 31, 1998. The prior pension plan was merged with
the Leucadia pension plan effective January 1, 1999.
As a result of the curtailment of the pension benefits in
1998, the Group recognized a gain of $6,548,000. In
accordance with the pooling agreement, the Company's share of
the curtailment gain was 30%.
The amounts set forth in the following table show estimated
annual benefits upon retirement to which the Company
contributed 30% of such cost through the pooling agreement.
Highest
Five Year Average
Compensation at Years of Service
Retirement 10 15 20 25 30 35
$ 10,000 $ 1,300 $ 1,950 $ 2,600 $ 3,250 $ 3,900 $ 4,550
25,000 3,925 5,888 7,850 9,813 11,775 13,738
50,000 8,300 12,450 16,600 20,750 24,900 29,050
75,000 12,675 19,013 25,350 31,688 38,025 44,363
100,000 17,050 25,575 34,100 42,625 51,150 59,675
160,000 27,500 41,300 55,100 69,000 82,600 96,400
[S]
Salary Cap Restoration Plan
In 1994, Empire established a Salary Cap Restoration Plan
("SCRP") for certain corporate officers. Under the SCRP,
Empire provided these officers with an additional benefit, to
be paid in a lump-sum upon retirement, equal to the difference
between the actuarially determined lump-sum benefits, as
computed under the prior pension plan, of the officer's
highest five year average compensation (not to exceed
$320,000, adjusted for the cost-of-living) at retirement and
the current Internal Revenue Service maximum compensation
limit of $160,000. The SCRP was an unfunded plan. Along with
the prior pension plan, the benefits under SCRP were curtailed
as of December 31, 1998.
Employees' Savings Plan
Empire sponsors an Employees' Savings Plan (the "Savings
Plan"), under which each eligible employee may defer a portion
of his or her annual compensation, subject to limitations.
Empire contributes a matching amount, subject to certain
limits. Empire matches contributions equal to 50% of an
employee's contributions up to a maximum of 3% of the
employee's salary. Empire's contributions to the Savings Plan
were, $294,000, $452,000 and $420,000 in 2000, 1999 and 1998,
respectively. Under the pooling agreement, the Company is
obligated to provide 30% of Empire's contributions to the
Savings Plan.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 19,
2001 as to the Common Shares of the Company owned of record
and beneficially by each person who owns of record, or is
known by the Company to own beneficially, more than 5% of such
Common Shares.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent of
Owner Ownership Class
Empire Insurance Company 5,987,401 Common 84.6%
335 Adams Street Shares owned of
Brooklyn, N.Y. 11201 record
Baldwin Enterprises, Inc. 471,407 Common 6.7%
529 East South Temple Shares owned of
Salt Lake City, Utah 84102 record
[S]
As discussed in Item 1, "Business", Leucadia (and certain of
its wholly-owned subsidiaries) may be deemed a parent of
Empire and therefore of the Company as a result of its
indirect ownership of 100% of the outstanding common stock of
Empire.
Security Ownership of Management
The following table sets forth information concerning
beneficial ownership of the Company's common stock and the
equity securities of Leucadia by each director and by all
directors and officers of the Company as a group as of March
19, 2001.
Each holder shown exercises sole voting and sole investment
power of the shares shown opposite his or her name.
Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership
Class
Martin B. Bernstein - -
Robert F. Boyle - -
Francis M. Colalucci - -
Ian M. Cumming (1) - -
Christopher J. Gruttemeyer - -
Edward A. Hayes - -
James E. Jordan - -
Thomas E. Mara - -
Rocco J. Nittoli - -
Joseph A. Orlando - -
H.E. Scruggs, Jr. - -
Louis V. Siracusano - -
Joseph S. Steinberg (1) - -
Daniel G. Stewart - -
Lucius Theus - -
Harry H. Wise - -
Directors and Executive
Officers as a group - -
(22 persons) (2)
(1) Although neither Ian M. Cumming nor Joseph S. Steinberg
directly owns any shares of common stock of the Company, by
virtue of their respective interest of approximately 18.2% and
16.7% in Leucadia, each may be deemed to be the beneficial
owner of a proportionate number of the shares of common stock
of the Company beneficially owned by Leucadia through its
subsidiaries, Empire and Baldwin Enterprises, Inc.
(2) Aside from the beneficial ownership described in Note 1 to
this table, five directors and two officers beneficially own
common shares of Leucadia, which in the aggregate, represent
less than 1% of Leucadia's common stock.
Item 13. Certain Relationships and Related Transactions
See Item 1 of this report and Notes 1, 2, 3, 8, 9, 10 and 11
of Notes to Consolidated Financial Statements for information
relating to transactions and relationships between the Company
and its affiliates.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) Financial Statements and Schedule.
1. The following Financial Statements of Allcity Insurance
Company are included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000
and 1999
Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. The information for Schedules I, IV and V required to be filed
pursuant to Regulation S-X, Article 7 is contained in the
Notes to Consolidated Financial Statements and, therefore,
these schedules have been omitted. The information required
by Schedules III and IV of Article 7 is combined in Schedule
VI - Supplemental Insurance Information Concerning
Property/Casualty Insurance Operations. All other required
schedules are not applicable.
Schedule VI - Supplemental Insurance Information Concerning
Property/Casualty Insurance Operations for the years ended December
31, 2000, 1999 and 1998.
3. The exhibits required by Item 601 of Regulation S-K have
been filed herewith, see attached Exhibit
Index.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated December
20, 2000, which sets forth information under Item 5. Other
Events. and Item 7. Financial Statements and Exhibits.
(c) Exhibits Required by Item 601 of Regulation S-K.
See attached Exhibit Index.
(d) Financial Statements Required by Regulation S-X.
See Item 14(a).
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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.
ALLCITY INSURANCE COMPANY
April 2, 2001 By: /s/ Francis M. Colalucci
Francis M. Colalucci
Director, Executive Vice
President, CFO and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated and on the date set forth above.
/s/ H. E. Scruggs, Jr. /s/ Francis M. Colalucci
H. E. Scruggs, Jr. Francis M. Colalucci
Director, President & C.E.O. Director, Executive Vice
President, C.F.O. and Treasurer
/s/ Joseph S. Steinberg /s/ Martin B. Bernstein
Joseph S. Steinberg Martin B. Bernstein
Director, Chairman of the Board Director
/s/ Louis V. Siracusano /s/ Harry H. Wise
Louis V. Siracusano Harry H. Wise
Director Director
/s/ Daniel G. Stewart /s/ Thomas E. Mara
Daniel G. Stewart Thomas E. Mara
Director Director
/s/ Ian M. Cumming /s/ James E. Jordan
Ian M. Cumming James E. Jordan
Director Director
/s/ Lucius Theus /s/ Rocco J. Nittoli
Lucius Theus Rocco J. Nittoli
Director Director, Chief Operating
Officer
/s/ Joseph A. Orlando /s/ Christopher J. Gruttemeyer
Joseph A. Orlando Christopher J. Gruttemeyer
Director Director, Vice President
EXHIBIT INDEX
The following designated exhibits, as indicated below,
are either filed herewith (if indicated by an asterisk) or
have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and are incorporated herein by reference
to such filings. Reference is made to Item 8 of this Form
10-K for a listing of certain financial information and
statements incorporated by reference herein.
[S]
Exhibit Number Description of Document
[S]
3 Corporate charter, as amended, and by-laws,
as amended, of the Company (incorporated by
reference to Exhibit 3 of the Company's Annual
Report on Form 10-K for the year ended December
31, 1994).
10(a) Pooling Agreement, as amended through March
31, 1992 between Empire and the Company
(incorporated by reference to Exhibit 10(a)-20
of the Company's Form 8 Amendment No. 1 of its
Annual Report on Form 10-K for the year ended
December 31, 1981).
10(b) Centurion Agreement, made effective as of
August 21, 1987 by and between Empire and
the Company, and Centurion (incorporated by
reference to Exhibit 10(e) of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1987).
10(c) Empire Mutual Executive Deferred
Compensation Plan dated November 17, 1987
(incorporated by reference to Exhibit 10(f) of
the Company's Annual Report on Form 10-K for the
year ended December 31, 1987).
10(d) Empire Mutual Insurance Company Supplemental
Retirement Plan dated November 17, 1987
(incorporated by reference to Exhibit 10(g)
of the Company's Annual Report on Form 10-K for
the year ended December 31, 1987).
[S]
Exhibit Number Description of Document
[S]
10(e) Tax Allocation Agreement dated February 28,
1989 among the Company, PHLCORP, Inc., Empire,
Centurion, Empire Livery Services, Inc.,
Executroll Services Corporation, and Empall
Agency Incorporated. (incorporated by reference
to Exhibit 10(m) of the Company's Annual Report
on Form 10-K for the year ended December
31, 1988).
10(f) Empire Insurance Company Salary Cap Restoration
Plan dated May 26, 1994 (incorporated by
reference to Exhibit 10(i) of the Company's
Annual Report on Form 10-K for the December 31,
1994).
10(g) Quota Share Reinsurance Agreement between Empire
Insurance Company and Centurion Insurance
Company (incorporated by reference to Exhibit
10(i) of the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10(h) Lease agreement dated June 27, 1996 between
Empire Insurance Company and Brooklyn
Renaissance Plaza L.L.C., as Landlord, BRPII
L.L.C as sub-landlord (incorporated by
reference to Exhibit 10(a) of the Company's
quarterly report on Form 10-Q for the quarter
ended March 31, 1997).
10(i) Sublease agreement dated November 9, 2000
between Empire Insurance Company and The
New York City School Construction Authority.*
10(j) Transfer Agreement dated February 28, 2001
between Empire Insurance Company, Allcity
Insurance Company, Centurion Insurance Company
and Tower Risk Management Corporation and
Tower Insurance Company of New York.*
ITEM 8. Financial Statements and Supplementary Data Page
The following financial information is submitted herein:
Report of Independent Accountants F2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F3
Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998 F4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F6
Notes to Consolidated Financial Statements F7-F25
Financial Statement Schedule:
Schedule VI- Supplemental Insurance Information
Concerning Property/Casualty Insurance Operations for the
years ended December 31, 2000, 1999 and 1998 F26
- -F1-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Of Allcity Insurance Company:
In our opinion, the consolidated financial statements listed
in the index appearing under item 14(a)(1) of this Form 10-K
present fairly, in all material respects, the financial
position of Allcity Insurance Company and its subsidiary at
December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item
14(a)(2) of this Form 10-K presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial
statements. These financial statements and the financial
statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on
these financial statements and the financial statement
schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards
generally accepted in the United States of America which
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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 30, 2001
-F2-
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
December 31,
ASSETS 2000 1999
Investments:
Fixed maturities
Available for sale (amortized cost of
$118,833 in 2000 and $167,294 in 1999) $119,029 $163,495
Held to maturity (fair value
of $483 in 2000 and $476 in 1999) 486 492
Equity securities available for sale 375 255
Short-term 6,834 7,129
Other invested assets 37,149 33,875
TOTAL INVESTMENTS 163,873 205,246
Cash 77 644
Agents' balances, less allowance for
doubtful accounts ($1,770 in 2000 and
$1,812 in 1999) 5,773 6,115
Accrued investment income 2,329 3,041
Reinsurance balances receivable 174,629 230,193
Prepaid reinsurance premiums 17,748 22,282
Deferred policy acquisition costs 3,035 3,415
Deferred tax benefit - 14,438
Other assets 4,820 5,146
TOTAL ASSETS $372,284 $490,520
LIABILITIES
Unpaid losses $239,051 $307,075
Unpaid loss adjustment expenses 29,455 34,861
Unearned premiums 32,622 38,927
Due to affiliates 649 11,976
Reinsurance balances payable 1,505 717
Other liabilities 8,725 9,397
Surplus note 16,486 15,851
TOTAL LIABILITIES 328,493 418,804
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 2000 and 1999 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income/(loss)
net of deferred tax/(benefit) of $0 and
$(1,240) in 2000 and 1999, respectively 571 (2,304)
Retained earnings 26,810 57,610
TOTAL SHAREHOLDERS' EQUITY 43,791 71,716
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $372,284 $490,520
See Notes to Consolidated Financial Statements.
-F3-
CONSOLIDATED STATEMENTS OF OPERATIONS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share
and per share amounts)
Years Ended December 31,
2000 1999 1998
REVENUES
Premiums earned $30,855 $42,448 $67,512
Net investment income 11,443 12,466 14,523
Service fee income - 2,032 3,389
Net securities (losses)/gains (213) (1,668) 6,079
Other income 218 384 567
42,303 55,662 92,070
LOSSES AND EXPENSES
Losses 31,760 33,597 62,282
Loss adjustment expenses 12,047 8,941 7,307
Other underwriting expenses, less
deferrals of $7,413 in 2000, $7,398
in 1999 and $11,697 in 1998 8,009 9,547 7,705
Amortization of deferred policy
acquisition costs 7,793 9,348 13,411
Interest on surplus note 634 551 591
60,243 61,984 91,296
(LOSS)/INCOME BEFORE FEDERAL INCOME TAXES (17,940) (6,322) 774
FEDERAL INCOME TAXES
Current expense/(benefit) (338) ( 49) (1,031)
Deferred expense 13,198 (2,542) 1,301
12,860 (2,591) 270
NET (LOSS)/INCOME $(30,800) $(3,731) $ 504
Per share data, based on 7,078,625
average shares outstanding in 2000,
1999 and 1998
BASIC AND DILUTED(LOSS)/EARNINGS PER SHARE $(4.35) $ (0.53) $ 0.07
See Notes to Consolidated Financial Statements.
-F4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
For the years ended December 31, 2000, 1999 and 1998
(In thousands)
SHAREHOLDERS' EQUITY
Accumulated Total
Additional Other Share-
Common Stock Paid-In Comprehensive Retained holders'
Shares Amount Capital (Loss)/Income Earnings Equity_
Balance as of January 1, 1998 7,079 7,079 9,331 917 60,837 78,164
Comprehensive Income:
Net income for the year 504 504
Unrealized holding gains arising during
the period (net of deferred tax of $767) 1,425 1,425
Less reclassification of net securities
gains included in net income (net of
deferred tax of $1,019) (1,893) (1,893)
Comprehensive Income 36
Balance as of December 31, 1998 7,079 7,079 9,331 449 61,341 78,200
Comprehensive Loss:
Net loss for the year (3,731) (3,731)
Unrealized holding losses arising during
the period (net of deferred benefit of
$1,803) (3,349) (3,349)
Less reclassification of net securities
losses included in net loss (net of
deferred benefit of $321) 596 596
Comprehensive Loss (6,484)
Balance as of December 31, 1999 7,079 $7,079 $9,331 $(2,304) $57,610 $71,716
Comprehensive Loss:
Net loss for the year (30,800) (30,800)
Unrealized holding gains arising during
the period (net of deferred tax of
$1,240) 1,776 1,776
Less reclassification of net securities
losses included in net loss (net of
deferred tax of $0) 1,099 1,099
Comprehensive Loss (27,925)
Balance as of December 31, 2000 7,079 $7,079 $9,331 $ 571 $26,810 $43,791
See Notes to Consolidated Financial Statements
F5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
Years Ended December 31,
2000 1999 1998
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net(loss)/income $(30,800) $ (3,731) $ 504
Adjustments to reconcile net (loss)/income
to net cash used for operating
activities:
Provision for deferred tax expense 13,198 (2,542) 1,301
Amortization of deferred policy
acquisition costs 7,793 9,348 13,411
Provision for doubtful accounts (42) (5) 256
Net securities losses/(gains) 213 1,668 (6,079)
Policy acquisition costs incurred
and deferred (7,413) (7,398) (11,697)
Net change in:
Agents' balances 384 3,905 2,838
Reinsurance balances receivable 55,564 65,801 (22,714)
Prepaid reinsurance premiums 4,534 15,409 17,383
Unpaid losses and loss adjustment
expenses (73,430) (92,296) 16,706
Unearned premiums (6,305) (25,045) (26,835)
Due (from)and to affiliates (11,327) 15,674 (18,125)
Reinsurance balances payable 788 (168) (3,940)
Other, net 1,755 (2,000) (7,867)
NET CASH USED FOR OPERATING ACTIVITIES (45,088) (21,380) (44,858)
NET CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed maturities (23,245) (186,831) (246,375)
Net change in other invested assets (3,274) (2,429) (31,446)
Proceeds from sale of fixed maturities 67,560 181,863 323,177
Proceeds from maturities of fixed
maturities 3,185 15,974 15,466
Net change in short-term investments 295 13,057 (18,437)
NET CASH PROVIDED BY INVESTING ACTIVITIES 44,521 21,634 42,385
NET (DECREASE)/INCREASE IN CASH (567) 254 (2,473)
Cash at beginning of year 644 390 2,863
Cash at the end of year $ 77 $ 644 $ 390
Cash paid for federal income taxes $ 1,583 $ 2,872 $ 2,242
See Notes to Consolidated Financial Statements.
F6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1-ORGANIZATION
Allcity Insurance Company ("Allcity" or the "Company") is a
property and casualty insurer and includes the results of its
subsidiary, Empall Agency, Inc. ("Empall"). Empire Insurance
Company ("Empire"), a property and casualty insurer owns
approximately 84.6% of the outstanding common shares of the
Company and 100% of the outstanding common shares of Centurion
Insurance Company ("Centurion"). Empire's common shares are
100% owned and controlled, through subsidiaries, by Leucadia
National Corporation ("Leucadia"). Additionally, Leucadia
indirectly owns an additional 6.7% of the outstanding common
shares of the Company. The Company, Empire and Centurion are
sometimes hereinafter collectively referred to as the Group.
The property and casualty insurance business written by Empire
and Allcity is subject to a pooling agreement under which
premiums, losses, loss adjustment expenses and other
underwriting expenses, net of reinsurance, are shared on the
basis of 70% to Empire and 30% to Allcity. The pooling
percentages have been changed from time to time and may be
changed in the future subject to New York Insurance Department
approval. Allcity has no employees of its own. Empire
provides administrative services and 30% of the related
expenses are allocated to Allcity.
Historically, the Group has specialized in commercial and
personal property and casualty insurance business primarily in
the New York metropolitan area. The Group has offered
insurance products for vehicles (including medallion and
radio-controlled livery vehicles), general liability coverage,
property coverage (including mercantile and multi-family
residential real estate) and workers' compensation to
commercial accounts and private passenger automobile and
homeowners products to individuals. The business of the Group
is organized into three divisions: the Small Business
Division, the Personal Lines Division and the Mid-Market
Division. Each of these divisions has separate management
teams responsible for all underwriting decisions within their
divisions with the Small Business Division focusing on
commercial package products for small businesses; the Personal
Lines Division focusing on personal automobile and homeowners
insurance; and the Mid-Market Division focusing on commercial
automobile, commercial package and workers' compensation
insurance for larger accounts. Based on the Company's net
earned premiums for the year ended December 31, 2000,
approximately 39%, 43% and 18% of such premiums were for the
Personal Lines, Mid-Market and Small Business lines of
business, respectively.
During the past several years, the Group has experienced poor
underwriting results and adverse reserve development in all of
its lines of business. The Group has recently announced that
it will no longer accept any applications for new insurance
policies, has filed plans of orderly withdrawal with the New
York Insurance Department, has entered into an agreement to
sell its renewal rights to an unaffiliated insurance company
and made arrangements with the unaffiliated insurance company
to offer renewal policies in those lines of business (other
than private passenger automobile insurance) where New York
insurance law imposes a renewal obligation. Assuming this
agreement is consummated, the Group will only have renewal
obligations for remaining personal lines insurance (primarily
automobile) not replaced by the unaffiliated insurance
company, the remaining policy term of all existing policies
and a claim run-off operation.
F7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1-ORGANIZATION-CONTINUED
The National Association of Insurance Commissioners ("NAIC")
has adopted model laws incorporating the concept of a "risk
based capital" ("RBC") requirement for insurance companies.
Generally, the RBC formula is designed to measure the adequacy
of an insurer's statutory capital in relation to the risks
inherent in its business. The RBC formula is used by the
states as an early warning tool to identify weakly capitalized
companies for the purpose of initiating regulatory action.
Although New York State has not adopted the RBC requirements
for property and casualty insurance companies, New York does
require that property and casualty insurers file the RBC
information with the New York Insurance Department ("the
Department"). The NAIC also has adopted various ratios for
insurance companies which, in addition to the RBC ratio, are
designed to serve as a tool to assist state regulators in
screening and analyzing the financial condition of insurance
companies operating in their respective states. The Company
and its parent had certain NAIC ratios outside of the
acceptable range of results for the year ended December 31,
2000.
In 2001, the Department completed its fieldwork for its
triennial examination of the statutory-basis financial
statements of the Company and its parent as of December 31,
1999 but has not as yet issued its report. However, the
Department has verbally informed the Company that its estimate
of the Company's required loss and loss adjustment expense
reserves as of December 31, 1999 was higher than the amount
recorded by the Company. The Department's estimate of loss
and loss adjustment expense reserves for accident years 1999
and prior is approximately $15,000,000 higher than the
Company's recorded reserves for such accident years as of
December 31, 2000. The Company and its parent are currently
discussing the results of the Department's reserve study with
them, and are working to reconcile the differences between the
two estimates. Based on the Company's and its parent's recent
discussions with the Department, and their decision to file
plans of orderly withdrawal from all lines of business, as
previously described, the Company believes that no material
adverse action will be taken by the Department at this time.
However, no assurance can be given that the Company and its
parent will not be required to increase their reserves or that
the Department will not take materially adverse regulatory
action in the future.
The Group is currently exploring its options for the future.
The Group may commence new property and casualty insurance
operations if a new business model with an acceptable expense
structure can be developed, enter into a joint venture with
another property and casualty insurance operation, explore
entering the claim services business or commence a
liquidation. There may be other options that the Company will
explore, but no assurance can be given at this time as to what
the ultimate plan will be.
The Company and Empire are licensed to transact insurance in
the State of New York with Empire being additionally licensed
in Connecticut, Massachusetts, Missouri, New Hampshire and New
Jersey. Based on direct premiums written, approximately 6%, 6%
and 4% of the property and casualty business written by the
Group were from sources outside New York State for the years
ended December 31, 2000, 1999 and 1998, respectively.
F8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1-ORGANIZATION-CONTINUED
The Company and Empire distributed their products through
seven general agents, one of which was an Empire subsidiary,
and independent agents and brokers. Effective October 3, 2000,
Empire's wholly owned general agent sold its book of business
to an unrelated party. Empire's wholly-owned general agent was
its largest producer and generated approximately 8%, 12% and
12% of its total earned premium volume for the years ended
December 31, 2000, 1999 and 1998, respectively.
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Empall. The
preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the
reported amounts in the financial statements and disclosures
of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments: At acquisition, marketable debt and equity
securities are designated as either (i) "held to maturity"
and carried at amortized cost, (ii) "trading" and carried at
estimated fair value with differences between cost and
estimated fair value reflected in results of operations or
(iii) "available for sale" and carried at estimated fair
value, with differences between cost and estimated fair value
being reflected as a separate component of shareholders'
equity, net of taxes. Other invested assets, which are
designated as trading securities, represent an investment in a
limited partnership which invests principally in convertible
preferred stocks, convertible long-term debt securities,
limited partnerships, and common stocks sold, but not yet
purchased. Short-term investments are carried at cost which
approximates fair value. Estimated fair values are
principally based on quoted market prices.
At December 31, 2000 and 1999, investments in fixed maturities
on deposit with the New York Insurance Department, which the
Company has the intent and ability to hold to maturity, are
classified as "Investments held to maturity". Investment
income is reported when earned.
Net securities gains or losses on the sales of investments are
determined on a specific identification basis. Investments
with an impairment in value considered to be other than
temporary are written down to estimated net realizable values.
Unearned Premiums: Unearned premiums have been calculated
predominantly using the daily pro rata method.
Unpaid Losses and Loss Adjustment Expenses: Liabilities for
unpaid losses, which are not discounted (except for certain
workers' compensation liabilities), and loss adjustment
expenses ("LAE") are determined using case-basis evaluations,
statistical analyses for losses incurred but not reported and
estimates for salvage and subrogation recoverable and
represent estimates of the ultimate claim costs of all unpaid
losses and LAE. Liabilities include a provision for losses
that have occurred but have not yet been reported. These
estimates are subject to the effect of trends in future claim
severity and frequency experience. Adjustments to such
estimates are made from time to time due to changes in such
trends as well as changes in actual loss experience. These
adjustments are reflected in current earnings.
F9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Reinsurance: Unpaid losses, unpaid loss adjustment expenses
and unearned premiums are stated gross of reinsurance ceded.
Premiums written and earned, losses and LAE paid and incurred,
and other underwriting expenses are stated net of reinsurance
ceded.
Pension Cost: Empire funds actuarially determined pension
costs as currently accrued; 30% of such pension costs are
allocated to the Company.
Policy Acquisition Costs: Policy acquisition costs, which
consist of commissions, premium taxes and certain other
underwriting expenses (net of reinsurance allowances), are
deferred and amortized ratably over the terms of the related
policies. Deferred policy acquisition costs are limited to
their net realizable value after consideration of investment
income on the related premium. If recoverability of such costs
from future premiums and related investment income is not
anticipated, the amounts not considered recoverable are
charged to operations.
Participating Policies: Participating business on workers'
compensation lines constitutes approximately 1.3% of the
Company's policies in force and net premiums written. Amounts
transferred to the participating policyholders' funds are
determined by means of specific identification based upon
premium volume and loss experience. The amount of dividends
to be paid to participating policyholders is approved
quarterly by the Board of Directors. The amount of
policyholders' dividends paid on participating policies was
$59,000 $133,000 and $212,000 in 2000, 1999 and 1998,
respectively. Unpaid dividends to participating policyholders
are included as a liability in the consolidated balance
sheets.
Servicing Arrangements: Service fee income from assigned risk
business acquired through contractual arrangements with other
insurance companies was recognized as revenue and earned over
the life of the covered policies on a monthly pro-rata method.
Service fee income for the administrative services, including
underwriting, policy issuance, premium collection and claims
services, provided to the New York Public Auto Pool (the
"NYPAP") was recorded as a reduction to other underwriting and
loss adjustment expenses and is earned over the life of the
policies issued. The premiums and losses processed by the
Company on behalf of the NYPAP, which are not reflected in the
consolidated financial statements for the years ended December
31, are as follows (in thousands):
2000 1999 1998
Premiums Earned $ - $ - $ 4,091
Losses Incurred 231 (12,972) 23,543
Unpaid Losses 21,781 32,250 70,469
The premiums, losses and expenses of the business for which
the Company provides administrative services are reflected on
the financial statements of those insurance companies,
including the Company, in New York State which are required to
participate in the NYPAP. In its role as a servicing carrier,
the Company is liable only for the loss adjustment expenses
which are incurred to adjust and settle the claims processed
on behalf of the NYPAP. Liabilities for these loss adjustment
expenses are determined using case basis evaluations and
statistical analyses.
F10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Federal Income Taxes: The Company uses the liability method in
providing for income taxes. Under the liability method,
deferred income taxes are provided at the enacted tax rates
for differences between the financial statement carrying
amounts and tax bases of assets and liabilities and for net
operating loss carryforwards. A valuation allowance is
provided if tax loss carryforwards and deferred tax benefits
are not considered more likely than not to be realized.
Earnings Per Share: Earnings per share ("EPS") are based on
the weighted average number of common shares outstanding.
There were no outstanding common stock equivalents during
2000, 1999 and 1998 and therefore, basic and diluted EPS are
the same.
New Pronouncements: In June 1999, the Financial Accounting
Standards Board issued Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective date of FASB Statement No. 133
("SFAS 133")", which will be effective for fiscal years
beginning after June 15, 2000. Under SFAS 133, the Company
will have to reflect derivative financial instruments at fair
value. The Company has reviewed the impact of the
implementation of SFAS 133 and does not expect it to have a
material effect on the Company's financial position or results
of operations.
Presentation: Certain prior year amounts have been
reclassified to conform with the 2000 presentation.
NOTE 3-SURPLUS NOTE
The Company issued a surplus note to Empire in 1980. The
surplus note provides, among other things, for interest to be
accrued on the principal of the note based on a bank's prime
rate at the end of the current calendar quarter. Neither the
principal amount of the surplus note nor the accrued interest
may be paid, in whole or in part, without the consent of the
Superintendent of Insurance of the State of New York
("Superintendent") and must be repaid, in whole or in part,
when so ordered by the Superintendent
NOTE 4-INVESTMENTS
Investment income by source is summarized as follows:
Years Ended December 31,
2000 1999 1998
(In thousands)
Investment income:
Fixed maturities $ 8,077 $ 9,214 $12,702
Other invested assets 3,273 2,430 1,445
Short-term investments 329 1,025 715
11,679 12,669 14,862
Less: Investment expenses 236 203 339
NET INVESTMENT INCOME $11,443 $12,466 $14,523
F11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4-INVESTMENTS-CONTINUED
Investments at December 31, 2000 are summarized as follows:
Gross Unrealized Estimated
Amortized Appre- Depre- Fair
Cost ciation ciation Value
(In thousands)
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 69,432 $ 142 $ 268 $ 69,306
Mortgage-backed
securities 9,310 66 3 9,373
Foreign governments 3,696 66 - 3,762
All other corporate bonds 36,395 370 177 36,588
Total fixed maturities 118,833 644 448 119,029
Equity securities - 375 - 375
TOTAL INVESTMENTS
AVAILABLE FOR SALE 118,833 1,019 448 119,404
Held to maturity:
U.S. Treasury securities 486 - 3 483
TOTAL INVESTMENTS
HELD TO MATURITY 486 - 3 483
Short-term 6,834 - - 6,834
Other invested assets 37,149 - - 37,149
TOTAL INVESTMENTS $163,302 $1,019 $451 $163,870
Investments at December 31, 1999 are summarized as follows:
Gross Unrealized Estimated
Amortized Appre- Depre- Fair
Cost ciation ciation Value
(In thousands)
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $129,132 $ - $3,145 $125,987
Mortgage-backed
securities 7,622 18 87 7,553
Foreign governments 897 - 3 894
All other corporate bonds 29,643 51 633 29,061
Total fixed maturities 167,294 69 3,868 163,495
Equity securities - 255 - 255
TOTAL INVESTMENTS
AVAILABLE FOR SALE 167,294 324 3,868 163,750
Held to maturity:
U.S. Treasury securities 492 - 16 476
TOTAL INVESTMENTS
HELD TO MATURITY: 492 - 16 476
Short-term 7,129 - - 7,129
Other invested assets 33,875 - - 33,875
TOTAL INVESTMENTS $208,790 $ 324 $3,884 $205,230
F12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4-INVESTMENTS-CONTINUED
The amortized cost and estimated fair values of fixed maturities
(including short-term securities) at December 31, 2000 are shown as
follows (in thousands):
Amortized
Fair
Cost Value
Investments available for sale:
Due in one year or less $ 34,088 $ 34,060
Due after one year through five years 75,194 75,357
Due after five years through ten years 5,568 5,574
Thereafter 1,507 1,499
Sub total 116,357 116,490
Mortgage-backed securities 9,310 9,373
Sub total $125,667 $125,863
Investments held to maturity:
Due after one year through five years 486 483
TOTAL $126,153 $126,346
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
The Company sold certain fixed maturities classified as
available for sale during 2000, 1999 and 1998 and realized
gross capital gains of $661,000, $148,000 and $6,227,000,
respectively, and gross capital losses of $874,000, $1,820,000
and $91,000, respectively, before income taxes.
The changes in unrealized appreciation/(depreciation) on
investments available for sale were $4,115,000 and
($4,235,000) before taxes for the years ended December 31,
2000 and 1999, respectively.
As of December 31, 2000 and 1999, a security with an amortized
cost of approximately $486,000 and $492,000 respectively, was
on deposit with the New York Insurance Department.
During 1999 and 1998, the Company sold call options on certain
U.S. Treasury Notes and recognized investment gains and losses
of $4,000 and ($57,000), respectively.
F13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 5-STATUTORY INFORMATION
The following is a reconciliation of net loss and surplus as
reported on a statutory basis ("SAP") to net (loss)/income and
shareholders' equity as determined in conformity with GAAP
(in thousands):
Years Ended December 31,
2000 1999 1998
Statutory net loss $(16,694) $(4,174) $ (50)
Add (deduct):
Change in deferred policy acquisition costs (380) (1,950) (1,714)
Change in allowances for doubtful accounts 42 5 (256)
Policyholders' dividends 36 234 90
Sublease real estate commission 416 - -
Pension plan curtailment gain - - 1,964
Capitalized systems development costs (696) 582 1,440
Other postretirement benefits (41) 253 210
Current tax benefit 338 (688) 688
Deferred tax expense (13,198) 2,542 (1,301)
Interest on surplus note (634) (551) (591)
Other 11 16 24
GAAP $(30,800) $(3,731) $ 504
DECEMBER 31,
2000 1999
Statutory Shareholders' Equity and Surplus $53,707 $69,422
Add (deduct):
Deferred policy acquisition costs 3,035 3,415
Nonadmitted assets, less allowance
for doubtful accounts 250 907
Sublease real estate commission 416 -
Capitalized systems development costs 1,926 2,622
Provision for unauthorized reinsurance 110 110
Policyholders'dividends (30) (66)
Current tax payable - (338)
Deferred tax benefit - 14,438
Other postretirement benefits (45) (4)
Net unrealized appreciation/(depreciation)
on investments 196 (3,800)
Surplus note (16,486) (15,851)
Other 712 861
GAAP $43,791 $71,716
The Company has paid no dividends on its common shares since
1975. The New York Insurance Law prohibits New York domiciled
property and casualty companies from paying dividends except
out of earned surplus. Without the approval of the New York
Insurance Department, no New York domestic property/casualty
insurer may declare or distribute any dividend to shareholders
which, together with any dividends declared or distributed by
it during the preceding twelve months, exceeds the lesser of
(1) 10% of surplus to policyholders as shown by its last
statutory annual statement or (2) one hundred percent of
adjusted net investment income during such period. At
December 31, 2000, $4,670,000 was available for distribution
of dividends. The Company does not presently anticipate paying
dividends in the near future.
F14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 5-STATUTORY INFORMATION-CONTINUED
In 1998, the National Association of Insurance Comissioners
("NAIC") adopted the Codification of Statutory Accounting
Principles ("Codification"), which replaces the current
Accounting Practices and Procedures manual as the NAIC's
primary guidance on statutory accounting as of January 1,
2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current
statutory accounting in some areas. The New York Insurance
Department recently adopted the Codification guidance
(Regulation 172), effective January 1, 2001, but did not adopt
several key provisions of the guidance. The Company will
reflect the cumulative effect of the Codification guidance in
its statutory financial statements as a direct adjustment to
statutory surplus for the quarter ending March 31, 2001, to be
filed with the New York Insurance Department by May 15, 2001.
The Company is in the process of determining the potential
effects of the codification.
NOTE 6-AGENTS' BALANCES
Activity affecting the allowance for uncollectible agents'
balances for the years ended December 31, 2000, 1999 and 1998
is summarized as follows (in thousands):
Balance at January 1, 1998 $1,561
Provision 1,362
Charge-offs, net of recoveries (1,106)
Balance at December 31, 1998 1,817
Provision 1,130
Charge-offs, net of recoveries (1,135)
Balance at December 31, 1999 1,812
Provision 386
Charge-offs, net of recoveries (428)
Balance at December 31, 2000 $1,770
F15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 7-UNPAID LOSSES AND LAE
The Company has relied upon standard actuarial ultimate loss
projection techniques to obtain estimates of liabilities for
losses and LAE. These projections include the extrapolation
of both losses paid and incurred by business line and accident
year and implicitly consider the impact of inflation and
claims settlement patterns upon ultimate claim costs based
upon historical patterns. In addition, methods based upon
average loss costs, reported claim counts and pure premiums
are reviewed in order to obtain a range of estimates for
setting the reserve levels. For further input, changes in
operations in pertinent areas including underwriting
standards, product mix, claims management and legal climate
are periodically reviewed.
In the following table, the liability for losses and LAE are
reconciled for the three years ended December 31, 2000, 1999
and 1998. Included therein are current year data and prior
year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
2000 1999 1998
(In thousands)
(In thousands)
Net SAP liability for losses and LAE,
net of reinsurance, at beginning of year $113,602 $139,771 $145,260
Provision for losses and LAE for claims
occurring in the current year 27,880 36,524 56,698
Increase in estimated losses and LAE
for claims occurring in prior years 15,927 6,014 12,891
Total incurred losses and LAE 43,807 42,538 69,589
Loss and LAE payments for claims
occurring during:
Current year 8,920 12,382 19,203
Prior years 52,902 56,325 55,875
61,822 68,707 75,078
Net SAP liability for losses and LAE,
at end of year 95,587 113,602 139,771
Reinsurance recoverable 172,919 228,334 294,461
Liability for losses and LAE
at end of year as reported in
financial statements (GAAP) $268,506 $341,936 $434,232
During 2000, the Company experienced unfavorable development
principally in the 1996 through 1999 accident years in the
private passenger automobile line ($2.8 million), the
commercial automobile line ($1.9 million), the assigned risk
automobile line ($1.4 million) and the commercial package
policies line ($4.5 million). In addition, the Company
increased its estimate for loss adjustment expenses by $3.3
million as a result of the decision to outsource a significant
amount of claim handling functions in 2000. Claim files for
workers' compensation, automobile no-fault and automobile and
other liability claims were outsourced at a cost greater than
the reserves previously recorded to handle the claims
internally. The Group has outsourced almost two-thirds of its
claims. Currently, the Group is primarily handling complex
claims, first party claims and certain automobile liability
and general liability claims internally. Complex claims
generally consist of those that have potentially large
settlement exposure and are not expected to settle quickly.
The Company has also increased its reserve estimate for claims
handled internally.
F16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 7-UNPAID LOSSES AND LAE-CONTINUED
During 1999, the Company experienced unfavorable development
due to an increase in severity of 1998 accident year losses in
the assigned risk automobile and voluntary private passenger
automobile lines, and 1996 accident year losses in certain
classes of the commercial automobile line. As a result, the
Company increased its reserves by $2.2 million for assigned
risk automobile, $1.5 million for voluntary private passenger
automobile and $1.4 million for commercial automobile lines.
During 1998, the Company reviewed the adequacy of the reserves
carried for its open claims' files, focusing on workers'
compensation, commercial auto and other commercial liability
lines of business. As part of the review, substantially all
open workers' compensation claim files were reviewed for every
accident year up to and including 1998. Additionally, during
1998, the Group reorganized the commercial auto claims
department. As part of this realignment, more complex claims
files were reviewed by the most experienced claims examiners
and assumptions regarding average claims severity and probable
ultimate losses were revised. Accordingly, reserves were
strengthened by $3.9 million for workers' compensation, $4.2
million for commercial automobile and $4.2 million for other
commercial liability lines of business.
NOTE 8-REINSURANCE
The Company has purchased annuities with various life insurance
companies for a number of settled claims. The claimants have been
designated as payees; however, the Company has a contingent
liability of approximately $5.0 million which represents the
aggregate amount of settlements with the claimants, in the event of
the failure of the various life insurance companies to perform.
The Company has obtained reinsurance coverage to reduce its
risk of and exposure to large insurance claims and
catastrophes. The Company's maximum retained limit for all
lines of business was $0.3 million for 2000 and 1999. The
Company's maximum retained limit for 1998 was $0.5 million for
workers' compensation and $0.3 million for other property and
casualty lines of business. Additionally, the Company has
entered into a property catastrophe excess of loss treaty to
protect against certain losses. Its retention of lower level
losses under this treaty is $7.5 million for 2001, and was
$7.5 million for 2000, 1999 and 1998. Due to the geographic
concentration of its business, the Company believes
hurricanes, windstorms and civil disturbances are its most
significant exposures to catastrophic losses. Computer
modeling programs provided by independent consultants are used
to estimate exposure to such losses.
Although reinsurance does not legally discharge an insurer
from its primary liability for the full amount of the policy
liability, it does make the assuming reinsurer liable to the
insurer to the extent of the reinsurance ceded. The Company's
reinsurance generally has been placed with certain of the
largest reinsurance companies, including (with their
respective A.M Best & Co. ratings) General Reinsurance
Corporation (A++) and Zurich Reinsurance (NA), Inc. (A+). The
Company believes its reinsurers to be financially capable of
meeting their respective obligations. However, to the extent
that any reinsuring company is unable to meet its obligations,
the Company would be liable for the reinsured risks. The
Company has established reserves, which the Company believes
are adequate, for any nonrecoverable reinsurance.
F17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8-REINSURANCE-CONTINUED
Effective January 1, 1997 Empire entered into a quota share
reinsurance agreement with its subsidiary, Centurion. Under
this agreement, Empire assumes 50% up to July 1, 1997 and 75%
thereafter of the effective period premiums and losses of
Centurion and grants Centurion a ceding commission. Under the
pooling agreement, 70% of such business assumed will be
retained by Empire and 30% will be ceded to the Company.
Assets and insurance reserves at December 31, 2000 and 1999
(including $192.4 million and $252.5 million, respectively, of
reinsured amounts principally arising from the intercompany
pooling agreement with Empire) are as follows (in thousands):
Ceded to
Empire Others Total
As of December 31, 2000
Prepaid reinsurance premiums $ 17,452 $ 296 $ 17,748
Reinsurance balances receivable on:
Paid losses - 1,710 1,710
Unpaid losses 132,143 22,672 154,815
Unpaid loss adjustment expenses 18,104 - 18,104
Ceded to
Empire Others Total
As of December 31, 1999
Prepaid reinsurance premiums $ 22,071 $ 211 $ 22,282
Reinsurance balances receivable on:
Paid losses - 1,859 1,859
Unpaid losses 170,060 34,936 204,996
Unpaid loss adjustment expenses 19,009 4,329 23,338
An analysis of reinsurance premiums, losses, LAE and
commissions for the years ended December 31, 2000, 1999 and
1998 are summarized as follows (in thousands):
Direct Assumed Ceded Net
Empire Others Empire Others
2000
Premiums earned $ 56,407 $ 30,855 $(13) $ 52,868 $3,526 $30,855
Losses incurred 46,825 31,760 (303) 48,238 (1,716) 31,760
LAE incurred 9,453 12,047 (83) 13,296 (3,926) 12,047
Commissions incurred 8,317 5,175 (3) 7,512 802 5,175
Premiums written 49,893 29,084 (13) 46,268 3,612 29,084
Losses paid 112,872 49,604 80 102,405 10,547 49,604
LAE Paid 14,959 12,218 34 14,590 403 12,218
Unearned premiums(a) 25,207 14,874 20 24,931 296 14,874
Unpaid losses (a) 210,828 84,236 620 188,776 22,672 84,236
Unpaid LAE (a) 25,863 11,351 - 25,863 - 11,351
F18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8-REINSURANCE-CONTINUED
1999
Premiums earned $ 87,793 $ 42,448 $485 $ 81,528 $ 6,750 $42,448
Losses incurred 58,022 33,597 659 56,088 2,593 33,597
LAE incurred (6,302) 8,941 223 (6,316) 237 8,941
Commissions incurred 10,111 5,051 34 9,300 845 5,051
Premiums written 65,794 32,812 473 59,520 6,747 32,812
Losses paid 130,845 56,034 958 124,513 7,290 56,034
LAE Paid 13,289 12,673 107 12,853 543 12,673
Unearned premiums(a) 31,722 16,645 20 31,531 211 16,645
Unpaid losses (a) 276,875 102,080 1,003 242,942 34,936 102,080
Unpaid LAE (a) 31,369 11,522 116 27,156 4,329 11,522
1998
Premiums earned $142,065 $ 67,512 $100 $135,419 $ 6,746 $67,512
Losses incurred 173,235 62,282 409 155,446 18,198 62,282
LAE incurred 17,202 7,307 74 15,963 1,313 7,307
Commissions incurred 15,886 8,438 10 14,795 1,101 8,438
Premiums written 117,449 58,059 48 111,135 6,362 58,059
Losses paid 146,208 62,323 655 135,539 11,324 62,323
LAE Paid 15,576 12,755 74 15,157 493 12,755
(a) Amounts as reflected in the consolidated balance sheets
can be derived by adding together amounts for direct and
assumed and subtracting from this sum 30% of the amount ceded
to Empire. The Company remains primarily liable for amounts
ceded to reinsurers for unpaid losses, LAE and unearned
premiums to the extent that the assuming reinsuring companies
are unable to meet their obligations.
An analysis of the effect of reinsurance on premiums by business
segment for the years ended December 31, 2000, 1999 and 1998 are
summarized as follows (in thousands):
Percentage
Assumed Ceded of Amount
Direct from to Net Assumed
Amount Empire(a) Empire(b) Amount to Net
2000
Premiums written:
Personal Lines $10,654 $ 9,647 $ 10,654 $ 9,647 100.0%
Mid-Market 20,724 13,981 20,711 13,994 99.9%
Small Business 18,515 5,443 18,515 5,443 100.0%
Total $49,893 $29,071 $ 49,880 $29,084
1999
Premiums written:
Personal Lines $22,738 $15,629 $ 23,211 $15,156 103.0%
Mid-Market 22,706 11,679 22,706 11,679 100.0%
Small Business 20,350 5,977 20,350 5,977 100.0%
Total $65,794 $33,285 $ 66,267 $32,812
F19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8-REINSURANCE-CONTINUED
1998
Premiums written:
Personal Lines $ 56,222 $29,405 $ 56,270 $29,357 100.2%
Mid-Market 38,485 22,162 38,485 22,162 100.0%
Small Business 22,742 6,540 22,742 6,540 100.0%
Total $117,449 $58,107 $117,497 $58,059
(a)Includes $(13), $473 and $48 assumed from non-affiliates in
2000, 1999 and 1998, respectively, before the effects of the pooling
agreement described in Note 1.
(b)Includes $3,612, $6,747 and $6,362 ceded to non-affiliates
in 2000, 1999 and 1998, respectively, before the effects of the
pooling agreement described in Note 1.
NOTE 9-FEDERAL INCOME TAXES
The Company has been included in the consolidated federal
income tax returns of Leucadia since 1993. Under the terms of
the tax sharing agreement between Leucadia and the Company,
the Company computes its tax provision on a separate return
basis and is either charged its share of federal income tax
resulting from its taxable income or is credited for tax
benefits resulting from its losses to the extent it could use
the losses on a separate return basis.
The principal components of the deferred tax benefit at
December 31, 2000 and 1999 were as follows (in thousands):
2000 1999
Unpaid loss and loss adjustment
expense reserves $4,014 $5,192
Unearned premiums 1,041 1,162
Employee benefits and compensation 574 566
Interest accrued on surplus note 3,320 3,098
Allowance for doubtful accounts 620 636
Deferred policy acquisition costs (1,062) (1,195)
Pension plan curtailment gain (344) (688)
Unrealized appreciation/(depreciation)
on investments (200) 1,240
Investment in a limited partnership 476 297
Unamortized deferred income 681 708
Capitalized systems development costs (674) (918)
Tax loss carryforwards 10,068 4,500
Other, net (329) (160)
Deferred tax benefit 18,185 14,438
Valuation allowance (18,185) -
Total $ - $14,438
F20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 9-FEDERAL INCOME TAXES-CONTINUED
Due to the Company's recent announcement that it will no
longer accept any applications for new insurance policies and
its having entered into an agreement to sell its renewal
rights, there is uncertainty as to having future taxable
income necessary for realization of the deferred tax asset.
Accordingly, a valuation allowance was provided as of December
31, 2000 for the total amount of the deferred tax asset.
For the years 2000, 1999 and 1998, the difference between the
"expected" statutory federal income tax applicable to
continuing operations and the actual income tax expense is as
follows (in thousands):
2000 1999 1998
Expected federal income tax
(benefit)/expense $(6,279) $(2,213) $ 271
Establishment of deferred tax
valuation allowance 18,185 - -
Other 954 (378) (1)
Actual federal income tax
expense /(benefit) $12,860 $(2,591) $ 270
NOTE 10-PENSION PLAN AND POSTRETIREMENT BENEFITS
Effective January 1, 1999, Empire adopted a non-contributory
defined contribution plan. The contributions, ranging from 2%
- 16% of employees' current pension eligible compensation, are
based on age and service life of the employee. These
contributions accumulate for participants on a tax-deferred
basis. Participants direct the investment of the
contributions to their accounts. In accordance with the
pooling agreement, the Company shared 30% of the amount
contributed by the Group to the Plan ($682,000 and $1,145,000
in 2000 and 1999, respectively).
Prior to January 1, 1999, Empire had a trusteed
non-contributory defined benefit pension plan ("prior pension
plan") covering substantially all employees. The benefits
were based on years of credited service and the employees'
highest compensation during any five consecutive plan or
calendar years before retirement. Empire's policy was to fund
pension costs on a current basis using an aggregate method.
Benefits accrued under the prior pension plan were frozen as
of December 31, 1998. The prior pension plan was merged with
the Leucadia plan effective January 1, 1999. As a result
of the curtailment of the pension benefits in 1998, the Group
recognized a gain of $6,548,000. In accordance with the
pooling agreement, the Company's share of prepaid pension and
net periodic pension cost is 30% of the amounts reflected
above.
F21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10-PENSION PLAN AND POSTRETIREMENT BENEFITS-CONTINUED
The following table sets forth certain information, before the
effects of the pooling arrangements, relating to Empire's
prior pension plan for the year ended December 31, 1998 (in
thousands).
Components of net pension cost:
Service cost-benefits earned during the period $1,794
Interest cost on projected benefit obligation 1,906
Actual return on plan assets (1,637)
Deferred (loss) on plan assets (124)
Net amortization and deferral 145
NET PERIODIC PENSION COST $2,084
Discount rate 6.75%
Rate of increase in future compensation N/A
Long-term rate of return on plan assets 7.50%
Empire provides certain health care and life insurance
benefits for retired employees. During 1996, Empire amended
the eligibility requirement to only those employees who had at
least ten years of service and were at least 50 years of age
as of October 1, 1996. Prior to this amendment, substantially
all of Empire's employees were eligible for such benefits if
they reached normal or early retirement age while still
working for Empire. As a result of this amendment, the
accumulated postretirement benefit obligation was reduced by
approximately $7,602,000 which has been amortized over three
years. Those benefits are provided through an insurance
company whose premiums are based on the cost of benefits paid
during the year.
The following table sets forth certain information, before the
effects of the pooling arrangement, relating to Empire's
unfunded substantive plan for postretirement benefits (in
thousands):
2000 1999
Reconciliation of the benefit obligation
Accumulated postretirement obligation
at beginning of year $4,606 $5,574
Service cost 33 32
Interest cost 355 363
Actuarial (gain)/loss 239 (1,065)
Participant contributions 161 28
Benefits paid (net of contributions) (460) (326)
Accumulated postretirement obligation at
end of year $4,934 $ 4,606
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions (541) (799)
ACCRUED POSTRETIREMENT BENEFITS COST $(5,475) $(5,405)
Components of net postretirement benefits
2000 1999 1998
Service cost--benefits earned during the period $ 33 $ 32 $ 29
Interest cost on projected benefit obligation 355 363 370
Amortization of curtailment gain - (1,900) (2,533)
Net amortization and deferral (19) - -
PERIODIC POSTRETIREMENT BENEFITS COST/(INCOME) $ 369 $(1,505) $(2,134)
F22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10-PENSION PLAN AND POSTRETIREMENT BENEFITS-CONTINUED
In accordance with the pooling agreement, the Company's share
of accrued postretirement benefit cost and net periodic
postretirement benefit income is 30% of the amounts reflected
above and is included in other liabilities. In determining
the accumulated postretirement benefit obligation at December
31, 2000 and 1999, Empire utilized discount rates of 7.5% and
8%, respectively. The assumed health care cost trend rates
used in measuring the accumulated postretirement benefit
obligation were 10% for 2000 declining to an ultimate rate of
5% by 2010. If the health care cost trend rates were
increased by 1%, the accumulated postretirement benefit
obligation as of December 31, 2000 would have increased by
approximately $442,000 before the effects of the pooling
agreement. If the health care cost trend rates were decreased
by 1%, the accumulated postretirement benefit obligation as of
December 31, 2000 would have decreased by approximately
$382,000 before the effects of the pooling agreement. The
effect of a 1% increase or decrease on the estimated aggregate
of service and interest cost for 2000, 1999 and 1998 would be
immaterial.
In 1994, Empire established a Salary Cap Restoration Plan
("SCRP") for certain corporate officers. Under the SCRP,
Empire provided these officers with an additional benefit, to
be paid in a lump-sum upon retirement, equal to the difference
between the actuarially determined lump-sum benefits, as
computed under the prior pension plan, of the officer's
highest five year average compensation (not to exceed
$320,000, adjusted for the cost of living) at retirement and
the current Internal Revenue Service maximum compensation
limit of $160,000. The SCRP is an unfunded plan. In 2000,
1999 and 1998 Empire expensed $0, $98,000 and $74,000,
respectively. Along with the prior plan, the benefits under
SCRP were curtailed as of December 31, 1998. Under the
pooling arrangement, the Company is obligated to pay 30% of
the cost of the SCRP.
Empire sponsors an Employees' Savings Plan (the "Savings
Plan"), under which each eligible employee may defer a portion
of their annual compensation, subject to certain limits.
Empire matches contributions equal to 50% of the employee's
contributions up to a maximum of 3% of the employee's salary.
A participant may also contribute, from after-tax dollars, an
amount, not to exceed 10% of annual compensation. Empire's
contributions to the Savings Plan were $294,000, $452,000 and
$420,000 in 2000, 1999 and 1998, respectively. Under the
pooling agreement, the Company is obligated to provide 30% of
Empire's contributions to the Savings Plan.
NOTE 11-LEASES
The Group has entered into a twenty year lease agreement which
expires in 2018, consisting of 286,510 square feet, in an
office building located at 335 Adams Street in Brooklyn, New
York, in which Leucadia has an equity interest. The Group
received certain incentives from both the City and State of
New York in connection with this lease, which will be
recognized over the term of the lease.
Empire has subleased four floors consisting of 133,140 square
feet of the office space to its parent, Leucadia, at similar
terms as are in the original lease. An additional two floors
consisting of 64,340 square feet have been subleased to the
Board of Education of the City School District of the City of
New York.
F23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 11-LEASES-CONTINUED
Empire guaranteed the payment of lease rentals by a
wholly-owned subsidiary which relocated its offices in 1998 to
the new office building with Empire. In accordance with the
guarantee, in 1998, $2.0 million of a $2.3 million liability
for lease abandonment costs established by Empire in 1997 was
reversed upon release by the landlord from its obligation. The
remainder was paid in 1999. Under the pooling agreement, the
Company was obligated for 30% of this transaction.
Future minimum rentals, which exclude escalation amounts, on
non-cancelable leases in the aggregate for each of the next
five years and thereafter are as follows (in thousands):
Lease Sublease Net
2001 $ 4,906 $ 4,632 $ 274
2002 4,906 4,982 (76)
2003 5,029 5,039 (10)
2004 5,642 5,324 318
2005 5,642 5,324 318
Thereafter 85,751 77,187 8,564
Total $111,876 $102,488 $9,388
Rental expense for the Group for the years 2000, 1999 and 1998
was $3.8 million, $3.3 million and $3.3 million, respectively.
The Company is obligated to pay 30% of these rental charges in
accordance with the pooling agreement.
NOTE 12-BUSINESS SEGMENTS
Allcity operates in three business segments-Personal Lines,
Mid-Market and Small Business. Results by business segment for each
year ended December 31, 2000, 1999 and 1998 are summarized as follows
(in thousands):
Premiums Underwriting
Earned Gain(Loss)
2000
Personal Lines $12,099 $(11,414)
Mid-Market 13,152 (16,048)
Small Business 5,604 (1,292)
TOTAL FROM UNDERWRITING $30,855 $(28,754)
Net investment income, net securities losses,
other income and interest on surplus note 10,814
LOSS BEFORE FEDERAL INCOME TAXES $(17,940)
1999
Personal Lines $22,404 $ (3,974)
Mid-Market 13,771 (12,647)
Small Business 6,273 (332)
TOTAL FROM UNDERWRITING $42,448 $(16,953)
Net investment income, net securities losses,
other income and interest on surplus note 10,631
LOSS BEFORE FEDERAL INCOME TAXES $ (6,322)
1998
Personal Lines $39,251 $ (4,418)
Mid-Market 21,643 (14,598)
Small Business 6,618 (788)
TOTAL FROM UNDERWRITING $67,512 (19,804)
Net investment income, net securities gains,
other income and interest on surplus note 20,578
INCOME BEFORE FEDERAL INCOME TAXES $ 774
F24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 12-BUSINESS SEGMENTS-CONTINUED
Direct investment portfolios are not maintained for each
segment and accordingly, allocation of assets to each
segment is not performed.
Seven general agents produced approximately 30%, 33%, and
32% of Allcity's premiums for the years ended December 31,
2000, 1999 and 1998, respectively. All of Allcity's business
is conducted in the State of New York.
NOTE 13-FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's only material financial instruments are
investments for which the fair values are disclosed in Note
4 and the surplus note and short-term investments, for
which the carrying amounts approximate fair value.
NOTE 14-LITIGATION
The Company is a party to legal proceedings that are
considered to be either ordinary, routine litigation or
incidental to its business. Based on discussions with
counsel, the Company does not believe that such litigation
will have a material effect on its financial position,
results of operations or cash flows.
NOTE 15-RELATED PARTIES
See Notes 1, 2, 3, 8, 9, 10 and 11 regarding Allcity's
relationships with the Group and Leucadia.
NOTE 16-SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of
operations for 2000 and 1999 (in thousands, except per share
amounts):
2000
1st 2nd 3rd 4th
Total Revenues $11,299 $10,907 $10,925 $ 9,172
Net Income/(Loss) 287 (564) (3,120) (27,403)
Basic and Diluted Earnings/
(Loss) Per Share 0.04 (0.08) (0.44) (3.87)
1999
1st 2nd 3rd 4th
Total Revenues $17,390 $14,682 $12,353 $11,237
Net Income/(Loss) 87 (426) (314) (3,078)
Basic and Diluted Earnings/
(Loss) Per Share 0.01 (0.06) (0.04) (0.44)
See Notes 1, 7 and 9 for certain additional information concerning
results of operations for 2000.
F25
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY/ CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Col. K Col. L
Reserves Claims and Claim Amortiz- Paid
For Unpaid Adjustment Expenses ation of Claims
Deferred Claims Discount Incurred related to Deferred and Claim
Policy and Claim if any Net (1) (2) Policy Other Adjust-
Acquisition Adjustment Deducted Unearned Earned Investment Current Prior Acquisition Operating Premiums ment
Segment Costs Expenses in Col.C Premiums Premiums Income (b) Year Years Costs Expenses (b) Written Expenses
Year Ended
12/31/00:
Year ended
12/31/00:
Personal Lines $1,160 $ 72,672 $ 9,950 $12,099 $3,090 $11,086 $ 6,776 $3,008 $2,643 $ 9,647 $29,445
Mid - Market 1,290 166,278 239 13,430 13,152 6,866 12,893 9,108 3,355 3,844 13,994 27,256
Small Business 585 29,556 9,242 5,604 1,487 3,901 43 1,430 1,522 5,443 5,121
$3,035 $268,506 $ 239 $32,622 $30,855 $11,443 $27,880 $15,927 $7,793 $8,009 $29,084 $61,822
Year Ended
12/31/99:
Personal Lines $1,670 $105,219 $15,794 $22,404 $ 4,114 $21,000 $(1,764) $ 4,372 $2,769 $15,156 $32,634
Mid-market 1,118 200,278 $ 250 13,047 13,771 6,856 12,008 7,743 3,222 3,445 11,679 32,096
Small Business 627 36,439 10,086 6,273 1,496 3,516 35 1,754 1,301 5,977 3,977
$3,415 $341,936 $ 250 $38,927 $42,448 $12,466 $36,524 6,014 $ 9,348 $7,515 $32,812 $68,707
Year Ended
12/31/98:
Personal Lines $2,920 $182,447 $33,097 $39,251 $ 5,869 $35,142 $ 599 $ 7,340 $1,144 $29,357 $43,866
Mid-market 1,609 215,363 $ 307 19,797 21,643 7,500 17,081 10,378 4,441 3,292 22,162 26,692
Small Business 836 36,422 11,078 6,618 1,154 4,475 1,914 1,630 (120) 6,540 4,520
$5,365 $434,232 $ 307 $63,972 $67,512 $14,523 $56,698 $12,891 $13,411 $4,316 $58,059 $75,078
[FN]
(a) Liabilities for losses for certain long - term disability
payments under workers' compensation insurance are discounted
at a maximum of 6%. The liabilities discounted are deemed
insignificant and do not have a material effect on reported income.
(b) Allocations of Net Investment Income and Other Operating Expenses
are based on a number of assumptions and estimates and results would
change if different methods were applied. Other Operating Expenses
are reflected net of service fee income excluding other income and
interest on surplus note.
* Information required by Schedule III - Supplementary Insurance
Information has been incorporated within this schedule.
F26
EX-10
2
0002.txt
EXHIBIT - 10(i)
AGREEMENT OF SUBLEASE
AGREEMENT OF SUBLEASE, made as of the 9th day of November, 2000, by and
between EMPIRE INSURANCE COMPANY ("Sublessor"), an insurance company duly
licensed by the State of New York, having an office at 335 Adams Street,
Brooklyn, New York, and THE NEW YORK CITY SCHOOL CONSTRUCTION AUTHORITY
("Sublessee"), a public benefit corporation having an office at IDCNY
Center 1, 30-30 Thompson Avenue, Long Island City, New York 11101.
WITNESSETH:
WHEREAS, Sublessor is the holder of the lessees interest in, to, and
under a certain lease (the "Lease"), dated as of June 27, 1996, between
Brooklyn Renaissance Plaza LLC (as "Landlord"), BRP II LLC (as
"Sublandlord") and Sublessor (as "Tenant") covering the 24th through 32nd
Floors (Building levels 23-31) (the "Premises") as currently leased by
Sublessor in the building known as Brooklyn Renaissance Plaza in the
Borough of Brooklyn, located at 335 Adams Street, City of New York (the
"Building"); and
WHEREAS, pursuant to the Lease, Sublessor leased the 28th and 29th Floors
(Building levels 27 and 28) of the Building as more particularly described
in Exhibit "A" annexed hereto (the "Demised Premises"); and
WHEREAS, Sublessee desires to lease the Demised Premises from Sublessor,
and Sublessor has agreed to do so, on the terms and conditions and for
the term as hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties for themselves and, as permitted hereunder,
their successors and assigns, covenant and agree as follows:
1. Definitions. Capitalized terms used but not defined herein have the
respective meanings set forth in the Lease.
2. Demising Clause; Use of Demised Premises.
1
A. Sublessor does hereby lease to Sublessee and Sublessee does hereby
hire and take from Sublessor the Demised Premises for a term (the "Term")
commencing as of the the date on which this Sublease shall have been fully
executed by the parties hereto (the "Commencement Date") and ending on the
30th day of October, 2018 (the "Expiration Date") unless such term shall
sooner terminate as herein provided, subject to the terms, covenants and
conditions of this Sublease. This Sublease shall be deemed fully executed
by Sublessee when signed (with acknowledgement) by the President of the New
York City School Construction Authority or his authorized designee.
Notwithstanding the foregoing, in the event that Sublessee shall fail to
fully and completely execute and deliver this Sublease within seven (7)
days of Sublessors execution and delivery hereof, or if Sublessee shall
fail to cause this Sublease to be registered by the office of the New York
City Comptroller within thirty (30) days of Sublessors execution and
delivery, Sublessor shall in either event have the right unilaterally to
revoke and cancel this Sublease and the same shall be of no force or effect
whatsoever.
B. Sublessee is leasing the Demised Premises on behalf of the
New York City Board of Education which shall use and occupy the Demised
Premises as offices for its Division of Instructional and Information
Technology or for such other office purpose the Board of Education deems
appropriate consistent with a first-class office building and hotel/
conference facility, and shall not use or permit or suffer the use of the
Demised Premises for any other purpose.
3. Condition and Delivery of the Premises; Sublessees Alterations.
A. Sublessee acknowledges that, except as otherwise specifically provided
herein, neither Sublessor nor its agents have made any representations or
promises in respect of the Demised Premises. Sublessee will accept the
Demised Premises "as is", in their condition as of the Commencement Date.
Sublessor shall have no obligation to paint, decorate, prepare, alter or
perform any other work to prepare the Demised Premises for Sublessees
occupancy, and Sublessees taking of the Demised Premises shall be
conclusive evidence that the same were in good and satisfactory condition
at the time possession was taken.
B. Sublessor shall deliver, and Sublessee shall accept, possession of
that portion of the Demised Premises consisting of the 28th Floor on the
Commencement Date. Sublessor shall give notice to Sublessee of the date,
which shall in no event be later than March 31, 2001, on which that
portion of the Demised Premises consisting of the 29th Floor shall be
ready for occupancy by Sublessee, and Sublessor shall deliver and Sublessee
shall accept possession of the 29th Floor on that date. Notwithstanding
the foregoing, in the event that Sublessor, for whatever reason, fails to
deliver possession of the 29th Floor by March 31, 2001, Sublessee shall be
entitled to a credit against Base Rent on a per diem basis until Sublessor
2
shall deliver possession of the 29th Floor as follows: For each late day
after March 31 during the months of April and May 2001, 1.5 times the daily
Base Rent; for each late day during the months of June and July 2001, 1.6
times the daily Base Rent; for each late day during the months of August
and September 2001, 1.8 times the daily Base Rent and, thereafter, for each
late day, 2.0 times the daily Base Rent. In the event that Sublessor shall
have failed to give the foregoing notice of availability of the 29th Floor
on or before September 1, 2001, Sublessee shall have the option to cancel
and terminate this Sublease upon written notice to Sublessor, whereupon
Sublessor shall be released from any and all further obligations and
liabilities hereunder.
C. As part of the mutual consideration for this Sublease, Sublessor
hereby conveys to Sublessee, and Sublessee hereby accepts, title to all
items of furniture located within the Demised Premises as of the
Commencement Date and as more particularly described in Exhibit B hereto
(the "Furniture"). Sublessee accepts the Furniture "as is" and "where is"
in its then condition and assumes all responsibility for Sublessees use
or other disposition of the Furniture. Sublessor makes no representation
or warranty whatsoever as to the physical condition of the Furniture, but
Sublessor represents and warrants that Sublessor is the owner of the
Furniture free and clear of any prior liens or encumbrances.
D. Except as otherwise expressly provided herein, Sublessee shall be
solely responsible for any alteration work to be done in preparation for
or during its possession of the Demised Premises, and such alterations
shall only be undertaken and performed upon and in compliance with the
terms, covenants, conditions and consents of Section 7.2(C) of the Lease.
E. Notwithstanding the foregoing, (i) Sublessor shall cause to be
constructed at Sublesees sole cost and expense a computer/telephone
enclosure on the 28th Floor pursuant to Sublessees scope of work as
described in Exhibit C to be annexed hereto at a price to be agreed upon,
which enclosure shall be completed within thirty (30) days of the
Commencement Date (without penalty to Sublessor if such construction is
delayed for any reason other than Sublessors gross negligence); (ii)
further notwithstanding the foregoing, until such time as the 29th Floor
shall be ready for Sublessees occupancy, Sublessor shall, at Sublessors
expense, cause to be constructed a temporary enclosure of the internal
stairwell connecting the 28th and 29th Floors so as to preclude the use
thereof by the personnel of both Sublessor and Sublessee, and Sublessor
shall cause the same to be removed at Sublessors expense prior to
Sublessees taking possession of the 29th Floor as aforesaid.
3
4. Base Rent.
A. Sublessee shall pay to Sublessor a fixed annual rental at the rate of (i)
$2,702,280.00 for each of the first through fifth years of the Term, (ii)
$2,830,960.00 for each of the sixth through tenth years of the Term, and
(iii) $2,959,640.00 for each of the eleventh through eighteenth years of
the Term (the "Base Rent") for the Demised Premises, payable in arrears,
in equal monthly installments on the last day of each month beginning with
the month in which the Rent Commencement Date (as hereinafter defined) and
each month thereafter during the Term of this Sublease, without prior
demand therefore and without set-off or reduction whatsoever, except as
further provided below.
B. Sublessees obligation to pay rent shall commence on the "Rent
Commencement Date" in respect of each of the 28th and 29th Floors. The
Rent Commencement Date for the 28th Floor shall be the date which is
thirty (30) days after the Commencement Date, and the Base Rent and
Additional Charges (as hereinafter defined), if any, shall be pro-rated
to reflect Sublessees possession of one-half of the Demised Premises
until the date on which Sublessor shall deliver the 29th Floor to
Sublessee. The Rent Commencement Date for the 29th Floor shall be the
date which is forty (40) days from the date of Sublessors delivery of
said Floor pursuant and subject to the provisions of Section 3(B) hereof.
If the Rent Commencement Date shall not occur on the first day of a
calendar month, the monthly rent installment for such calendar month shall
be prorated on a per diem basis.
C. If the Base Rent or any Additional Charges (as hereinafter defined)
shall be or become uncollectible, reduced or required to be refunded by
virtue of any law, governmental order or regulation, or direction of any
public officer or body pursuant to law, Sublessee shall enter into such
agreement or agreements and take such other action (without additional
expense to Sublessee) as Sublessor may request, and as may be legally
permissible, to permit Sublessor to collect the maximum annual rent and
additional rent which may from time to time during the continuance of
such rent restriction be legally permissible, but not in excess of the
amounts of Base Rent or Additional Charges payable under this Sublease.
4
Upon the cessation of such rent restriction prior to the end of the Term
of this Sublease, (a) the annual rent and additional rent shall become
payable in the amount of the Base Rent and Additional Charges set forth in
this Sublease for the period from the date of such cessation to the end of
the Term, and (b) Sublessee shall pay to Sublessor, to the maximum extent
legally permissible, an amount equal to (i) the Base Rent and Additional
Charges which would have been paid pursuant to this Sublease, but for such
rent restriction, less (ii) the annual rent and additional rent paid by
Sublessee to Sublessor during the period that such rent restriction was in
effect.
5. Additional Charges Sublessee shall also pay to Sublessor, (i) for and
on account of each calendar year during the Term, commencing with calendar
year 2002, "Sublessees Proportionate Share" (which shall be deemed to be
22.45%) of the amount, if any, by which "Tenants Tax Reimbursement" and
"Tenants Operating Expense Payment", required to be paid by Sublessor to
Landlord pursuant to Section 3.3 of the Lease in respect of the Premises,
collectively, shall exceed the total of such amounts payable by Sublessor
for and on account of calendar year 2001; (ii) cleaning escalation charges
pursuant to Section 9(B) hereof; and (iii) from and after the Rent
Commencement Date, 100% of all other extra charges payable by Sublessor
under the Lease other than Possession Rent which are allocable solely to
the Demised Premises, including but not limited to any additional extra
charges by Landlord for cleaning, trash removal, overtime HVAC, guard
service, supplies and materials, freight elevator services, and construction
or construction related charges (collectively the "Additional Charges"),
all of which amounts shall be based on statements, bills or invoices of
Landlord, copies of which will be provided by Sublessor to Sublessee from
time to time upon request. Sublessee shall pay the Additional Charges to
Sublessor (i) together with the monthly payment of Base Rent if billed
with the Base Rent, or (ii) not later than forty-five (45) days after
receipt of Sublessors statement therefor if billed separately, which
statement shall be delivered monthly or in such intervals as Sublessor may
determine, provided, however, that Sublessee shall pay for any charges
described in clause (iii) of the foregoing sentence within forty-five (45)
days of receipt of Sublessors statement. Notwithstanding the foregoing,
Sublessor reserves the right to cause or seek to cause such special or
additional services as are billed by Landlord on an ad hoc basis to be
billed directly to Sublessee by Landlord insofar as the same pertain
solely to the Demised Premises. The remedies afforded Sublessor for the
non-payment of such Additional Charges by Sublessee shall be the same as
for non-payment of Base Rent.
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Incorporation of Lease.
A. Sublessee acknowledges it has read and examined the Lease, annexed
as Exhibit D hereto, and is fully familiar with the terms, covenants and
conditions on the Sublessors part, as Tenant, to be performed thereunder.
This Sublease is separate from and subject and subordinate to, and
Sublessee accepts this Sublease subject to, all of the terms, covenants
and conditions contained in the Lease and to the encumbrances and other
matters to which the Lease is or may be subject and subordinate. This
Sublease shall also be subject to, and Sublessee accepts this Sublease
also subject to, any additional and future amendments and supplements of
and to the Lease hereafter made between Landlord, BRP II LLC and Sublessor
to the extent that any such additional or future amendment or supplement
does not materially or adversely (i) affect the use or quiet enjoyment by
Sublessee of the Demised Premises in accordance with the terms of this
Sublease, (ii) increase the obligations of Sublessee under this Sublease,
or (iii) decrease the rights of Sublessee under this Sublease. Sublessor
represents and warrants that the terms and conditions of this Sublease do
not conflict with, violate or contravene the terms, covenants and
conditions of the Lease or of any superior lease or mortgage.
B. Except as otherwise provided in paragraph (D) of this Section 6 or
elsewhere in this Sublease, all of the terms, covenants and conditions
of the Lease (except such as by their nature or purport do not relate to
the Demised Premises or are inapplicable or inappropriate to the
subleasing of the Demised Premises pursuant to this Sublease or are
inconsistent with any of the provisions of this Sublease) are hereby
incorporated in and made part of this Sublease with the same force and
effect as though set forth at length herein, it being understood that
(i) references in the Lease to the "Premises" shall be deemed to refer to
the Demised Premises; (ii) references in the Lease to "Landlord" (other
than in provisions of the Lease pertaining to Landlords title or which
impose or relate to obligations of Landlord to comply with Governmental
Requirements, to indemnify, or to repair or restore, or to perform or
furnish work or services with respect to, the Demised Premises or the
Building) and to "Sublandlord" shall be deemed in each case to refer to
Sublessor under this Sublease; (iii) references in the Lease to "Tenant"
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shall be deemed to refer to Sublessee under this Sublease; (iv) where
reference is made in the Lease to "this Lease," such references shall be
deemed to be to this Sublease; (v) references in the Lease to the "Term"
shall be deemed to refer to the Term of this Sublease; (vi) references in
the Lease to "Base Annual Rent," "Possession Rent," "Services Rent" or
"Rent" shall be deemed to refer to the Base Rent and/or, as applicable,
Additional Charges payable under this Sublease (it being understood that
in no event shall the Additional Charges payable by Sublessee hereunder
exceed the charges set forth in Section 5 hereof); (vii) references in the
Lease to "Size of the Premises" shall be deemed to mean 64,340 square feet;
and (viii) references in the Lease to "Tenants Pro-Rata Share" shall be
deemed to mean Sublessees Proportionate Share under this Sublease.
C. (i) The rights and obligations created by the Lease and
incorporated by reference in this Sublease, which are conferred or imposed
upon Sublessor as Tenant thereunder, are hereby conferred and imposed upon
Sublessee to the extent that such rights and obligations relate to the
Demised Premises and to Sublessees use of the Common Areas, facilities
and services of the Building. Sublessee does hereby assume and agree to
be bound by and perform all the terms, covenants and conditions on the
Sublessors part (as Tenant under the Lease) to be performed under the
Lease with respect to the Demised Premises except as otherwise herein
specified. (ii) Sublessee shall indemnify and hold Sublessor harmless
from and against any claims, actions, liabilities, losses, damages, costs
and expenses asserted against or incurred by Sublessor by reason of the
failure of Sublessee to perform any obligation imposed upon Sublessee
pursuant to this Sublease or the Lease as incorporated herein or by reason
of the wrongful conduct or negligence of Sublessee, its employees,
contractors, agents or invitees. Sublessor shall indemnify and hold
Sublessee harmless from and against any claims, actions, liabilities,
losses, damages, costs and expenses asserted against or incurred by
Sublessee by reason of the failure of Sublessor to perform any obligation
imposed upon Sublessor pursuant to this Sublease or the Lease as
incorporated herein or by reason of the wrongful conduct or negligence of
Sublessor, its employees, contractors, agents or invitees. The provisions
of this paragraph (C) shall survive the expiration or earlier termination
of this Sublease.
D. For the purposes of this Sublease, the provisions of the Lease are
subject to the following further limitations, modifications and deletions:
(i) Section 3.3 of the Lease is incorporated into this Sublease for the
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limited purpose of setting forth and determining Sublessees obligation to
pay Additional Charges under this Sublease solely in respect of the Demised
Premises. Such incorporation shall not be deemed to impose any obligation
or liability whatsoever on Sublessee except as set forth herein; provided,
however, that Sublessee shall have no right to contest Landlords statements
of Operating Expenses or Taxes, which right is reserved to Sublessor subject,
however, to the provisions of Section 7(B) hereof.
(ii) (Repairs.) Section 7.1(C) of the Lease is incorporated to the
limited extent that Sublessor agrees fully to observe and comply with
Sublessors obligations set forth in said Section 7.1(C) to repair and
maintain the Demised Premises (or to cause the same to be repaired and
maintained) insofar as the same form a part of the Premises; provided,
however, that Sublessor shall have no obligation to repair or maintain the
furniture and fixtures, paint and wall coverings, carpet and floor coverings,
lamps, tubes, ballasts and starters in the lighting fixtures within the
Demised Premises, and provided further that Sublessor shall not be obligated
to do any work or perform any repairs occasioned by normal wear and tear or
arising from any act, misuse, omission or negligence of Sublessee or its
agents, employees or invitees. Sublessee may, at Sublessees option, perform
a given repair or maintenance function at Sublessors expense, the cost of
such repair or maintenance function in each case (other than emergencies) to
be agreed upon in advance. In the event that Sublessor shall fail to respond
to Sublessees request to perform repairs which Sublessor is obligated
hereunder to perform, Sublessee may perform same pursuant to Section 6.1(B)
or (C), as applicable, of the Lease as incorporated herein.
(iii) The following provisions of the Lease are not incorporated into this
Sublease: The entire preamble of the Lease; Article 2; Sections 3.1 and 3.2;
Section 4.1(A); Sections 5.7, 5.10 and 5.11(B) (provided that Sublessee shall
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be entitled to receive a credit against or abatement of Base Rent and
Additional Charges, and/or a credit or reimbursement of costs of authorized
"self-help", in the amount of such Rent or Services Rent abatement, or credit
or reimbursement, as to which Sublessor is entitled under the Lease and which
is attributable solely or proportionately to the Demised Premises); Section
6.1(A); Sections 6.5 through 6.9 inclusive; Sections 7.1(M)(i), 7.1(M)(ii)(z)
and 7.1(Q); Sections 7.3 and 7.4; Article 8 (except to the extent referred to
in Section 12 hereof); Section 9.3; Article 10; Article 11; Article 13;
Sections 14.1, 14.2, 14.18 and 14.19; Article 15, and all references to
Sections 15.1 and/or 15.2 wherever set forth in the Lease. The exclusion from
incorporation of any Lease provision as between Sublessor and Sublessee shall
not be construed to limit, restrict or impair the assignability pursuant to
Section 7(B) hereof of any right, claim or cause of action of Sublessor as
against Landlord under the Lease or the enforceability of such right, etc.
as assigned.
E. In the event Sublessee shall default in the full performance of any
of the terms, covenants and conditions on its part to be performed under
this Sublease (or the Lease, to the extent incorporated herein), then
Sublessor shall have the same rights and remedies with respect to such
default as are given to Landlord with respect to defaults by Sublessor as
Tenant under the Lease, all with the same force and effect as though the
provisions of the Lease with respect to defaults, and the rights and
remedies of Landlord in the event thereof, were set forth at length
herein, provided, however, that (i) the applicable cure period following
Sublessors notice of Sublessees default in the payment of Base Rent
and/or Additional Charges when due pursuant to Section 9.1(A) of the Lease
shall, for purposes of this Sublease, be nine (9) days rather than ten (10)
days; (ii) the applicable cure period following Sublessors notice of
Sublessees default in the observance or performance of any other term,
covenant or condition of the Sublease on Sublessees part to be observed
or performed pursuant to Section 9.1(B) of the Lease shall, for purposes of
this Sublease, be twenty-nine (29) days rather than thirty (30) days; (iii)
the applicable notice period for purposes of termination of the Sublease on
default pursuant to the conditional limitation set forth in Section 9.1(F)
of the Lease shall, for purposes of this Sublease, be twenty-nine (29) days
rather than thirty (30) days. Notwithstanding the foregoing, Sublessee
shall be permitted one grace period of seventy-five (75) days in respect
of the timely payment of Base Rent and Additional Charges due on account
of any one month during each calendar year of the Term without the same
constituting a default hereunder, provided, however, that the Late Charge
set forth in Section 13 hereof shall apply commencing on the forty-sixth
(46th) day of each such grace period in respect of all amounts of Base Rent
and Additional Charges due but unpaid as of said date until the same are
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paid in full. Said Late Charge shall remain applicable according to the
terms of Section 13 to all late payments not subject to the annual grace
period. Supplementing the provisions of Section 9.2 of the Lease as
incorporated herein, in the event Sublessor initiates an action(s) against
Sublessee for the payment of Base Rent, Additional Charges or any other
charges payable by Sublessee and Sublessor is successful in the prosecution
of such action through a judicial finding, then Sublessee will reimburse
Sublessor for Sublessors reasonable attorneys fees and disbursements in
prosecuting such action, which fees and expenses shall be paid to Sublessor
within forty-five (45) days of rendition of any bill or statement therefor.
The foregoing provision shall not apply to the first such successful action
initiated by Sublessor during the Term. If the Term shall have expired at
the time of making of such expenditures, the same shall be recoverable by
Sublessor as damages.
7. Landlords Services; Landlords Default; Sublessees Remedies.
A. So long as Sublessee is not in default hereunder, Sublessee shall
be entitled to receive all services to be rendered to the Sublessor under
the Lease insofar as such services pertain to the Demised Premises and
Sublessee shall be responsible for all charges relating thereto as
provided herein. Sublessor shall have no liability of any nature whatsoever
to Sublessee for Landlords failure to perform or render such services under
the Lease, and Sublessee shall not sue or make claim against Sublessor
therefor, and shall look solely to Landlord for all such services and shall
not, under any circumstances, seek to require Sublessor to perform any of
such services, nor shall Sublessee make any claim upon Sublessor or sue
Sublessor for any damages which may arise by reason of Landlords default
under the Lease, or Landlords negligence, whether by omission or
commission. If Landlord shall default in the performance or observance of
any of its agreements or obligations under the Lease, Sublessor shall have
no liability therefor to Sublessee and there shall not be in any event
construed to exist any corresponding obligation by Sublessor to Sublessee
for any such Landlord services or other obligations under this Sublease.
No such default of Landlord shall excuse Sublessee from the performance of
any of its obligations to be performed under this Sublease or entitle
Sublessee to terminate this Sublease or to reduce or abate or offset any of
the rents provided for in this Sublease except as otherwise specifically
provided in this Sublease. In furtherance of the foregoing, Sublessee does,
to the extent permitted by law, hereby waive any cause of action and any
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right to bring any action against Sublessor by reason of any act or
omission of Landlord. The foregoing notwithstanding, Sublessor shall
cooperate in all respects with Sublessee to obtain services or the
performance of Landlords obligations to be provided by Landlord under
the Lease and take all actions necessary with respect thereto provided,
however, that Sublessor shall not be required to undertake any litigation,
arbitration or other dispute resolution on behalf of Sublessee except
pursuant to the provisions of Section 7(B) hereof.
B. In the event that, (i) due to any material act or omission of
Landlord or to any other event or occurrence, in each case materially
and adversely affecting the Demised Premises and/or the permitted use
thereof; or (ii) due to any material violation of Landlords obligations
under the Lease, Sublessor shall have a claim, cause of action or right
to pursue any other remedy as against Landlord, including without
limitation under Sections 7.1(F) and 7.4 of the Lease, to the extent that
such claim, cause of action or remedy shall apply to the Demised Premises,
Sublessor shall, at the written request of Sublessee, forthwith assign to
Sublessee Sublessors right to procecute such claim, cause of action or
remedy and shall forthwith execute and deliver such forms of assignment as
may be reasonably requested by Sublessee for such purpose. The foregoing
agreement to assign pertains solely to the rights enumerated in this Section
7(B), shall in no event be construed as an assignment of the Lease, and shall
not apply to any right of set-off or payment to which Sublessor may be
specifically entitled pursuant to the Lease, as to which Sublessor retains all
right, title and interest. In the event that an arbitrator or court of
competent jurisdiction, as the case may be, shall dismiss or otherwise reject
a claim or cause of action brought by Sublessee as against Landlord pursuant
to this Section 7(B) on the grounds that the assignment made by Sublessor to
Sublessee is invalid or otherwise unenforceable, Sublessor agrees (x) to
prosecute said claim or cause of action in its own name, or (y) at Sublesses
election, voluntarily join such action or proceeding as Sublessee shall
commence or have commenced, in each case at Sublessees sole cost and expense
and with attorneys retained by Sublessee, provided that Sublessor shall have
to right to retain co-counsel of its choosing at Sublessors expense. In
either case, Sublessor shall have no liability or responsibility to
Sublessee for the outcome of such litigation or arbitration.
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8. Sublessees Default under Lease; Sublessors Right to Cure.
A. Sublessee agrees, with respect to the Demised Premises, to comply
with and remedy any default claimed by Landlord under the Lease and caused
by Sublessee, within the period allowed to Sublessor as Tenant under the
Lease minus one day, even if such time period is shorter than the period
otherwise allowed in the Lease. Sublessor agrees to forward to Sublessee,
by hand promptly upon receipt thereof by Sublessor, a copy of each notice
of default received by Sublessor in its capacity as Tenant under the Lease.
Sublessee agrees to forward to Sublessor, upon receipt thereof, copies of
any notices received by Sublessee with respect to the Demised Premises from
Landlord or from any governmental authorities.
B. If Sublessee shall default (beyond any applicable grace period) in
the performance of any of Sublessees obligations hereunder or under the
Lease as incorporated herein, Sublessor, without thereby waiving such
default, may, at Sublessors option, after ten (10) days notice to
Sublessee, perform the same for the account of Sublessee. If Sublessor
makes any expenditures or incurs any obligations for the payment of money
in connection with curing Sublessees defaults, such sums paid or
obligations incurred shall be paid by Sublessee to Sublessor as Additional
Charges within forty-five (45) days of rendition of Sublessors bill or
statement therefor.
9. Electricity. Sublessee agrees to contract for and pay directly to
the utility company servicing the Premises all charges for electricity
consumed by Sublessee in respect of the Demised Premises (including, but
not limited to, electricity for operating any portion of the HVAC system
such as air handlers located within the Demised Premises) as measured by
Sublessees meter. Sublessor shall have no responsibility for any charges
for electricity consumed at the Demised Premises by Sublessee nor any
liability for any failure or defect in the supply of electricity.
Sublessee shall pay all applicable sales and use taxes imposed by any
governmental authority upon the manufacture, sale, use, transmission,
distribution or other process necessary or incidental to the furnishing
of electric energy to the Demised Premises. If Landlord has paid such
applicable taxes and assessed Sublessor therefor, Sublessee shall reimburse
Sublessor for the full amount thereof insofar as the same pertain solely
to the Demised Premises on presentation of proof of payment.
Notwithstanding anything in this Section to the contrary, Sublessee
acknowledges that Landlord has installed or caused to have installed in
the Building a central electric and/or thermal HVAC facility operated by
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an independent contractor pursuant to an agreement with Landlord.
Sublessee agrees that it shall utilize the energy (whether electric or
thermal) generated or otherwise distributed through such facilities and
shall make all payments for the consumption of electric energy at the
Demised Premises directly to such operator. Notwithstanding the foregoing,
Sublessees obligation directly to contract and pay for electric and/or
thermal energy shall commence only upon the Rent Commencement Date for the
29th Floor. For and on account of the period beginning with the Rent
Commencement Date for the 28th Floor and ending with the Rent Commencement
Date for the 29th Floor, Sublessee shall pay to Sublessor, as billed,
fifty (50%) percent of the electric and/or thermal energy charges as billed
to Sublessor on account of the 28th and 29th Floors, which Sublessor
represents are metered together.
10. Indemnification and Insurance.
A. Sublessee agrees to indemnify and save harmless Sublessor against and
from any and all claims by or on behalf of any person(s), firm(s) or
corporations) arising from the conduct or management of, or from any work or
thing whatsoever done (other than by Sublessor or its agents or employees)
in and on the Demised Premises during the term of this Sublease, and to
indemnify and save harmless Sublessor against and from any and all claims
arising from any condition of the Demised Premises due to or arising from
any act or negligence of Sublessee or any of its agents, contractors,
servants, employees, licensees or invitees, and from and against all costs,
expenses and liabilities incurred in or in connection with any such claim or
claims or action or proceeding brought thereon; and, in case any action or
proceeding be brought against Sublessor by reason of any such claim,
Sublessee upon notice from Sublessor agrees to resist or defend such action
or proceeding and to employ counsel therefor reasonably satisfactory to
Sublessor. Sublessor accepts the Corporation Counsel of the City of New
York as satisfactory.
B. Sublessor agrees to indemnify and save harmless Sublessee against and
from any and all claims by or on behalf of any person(s), firm(s) or
corporations) arising from Sublessors conduct or management of, or from
any work or thing whatsoever done by Sublessor or its agents or employees
in and on the Demised Premises during the term of this Sublease, and to
indemnify and save harmless Sublessee against and from any and all claims
arising from any condition of the Demised Premises due to or arising from
any act or negligence of Sublessor or any of its agents, contractors,
servants, employees, licensees or invitees, and from and against all costs,
expenses and liabilities incurred in or in connection with any such claim
or claims or action or proceeding brought thereon; and, in case any action
or proceeding be brought against Sublessee by reason of any such claim,
Sublessor upon notice from Sublessee agrees to resist or defend such action
or proceeding and to employ counsel reasonably satisfactory to Sublessee.
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C. Sublessee agrees to secure and keep in force from and after the date
Sublessor shall deliver possession of the Demised Premises to Sublessee and
throughout the Term, at Sublessees own cost and expense, all insurance
required to be maintained by Sublessor as Tenant pursuant to Section 7.1(F)
and Section 7.2(C) of the Lease, and Sublessee shall deliver, as and when
required thereby, certificates of insurance in form and substance as
required pursuant to said Sections, including, without limitation, the
requirement that Sublessee shall secure and maintain comprehensive public
liability coverage in an amount not less than $5,000,000.00 per occurrence
and $5,000,000.00 aggregate for any policy year (subject to Sublessors
right to demand increased policy limits in Sublessors reasonable discretion)
in conformity with Section 14.14 of the Lease. Notwithstanding the
foregoing, so long as Sublessee is The New York City School Construction
Authority or the Board of Education of the City of New York, Sublessee may
self-insure in satisfaction of its obligations under this Section 10(B).
Further notwithstanding the foregoing, Sublessor agrees to cause Sublessee
to be named as an additional insured on Sublessees policy of contents
insurance in respect of Sublessees equipment and furniture (including
the furniture being conveyed herewith) located within the Demise Premises
up to a maximum total value of $2,000,000.00, it being understood and
agreed that in such event the "Waiver of Subrogation" provisions of Section
14.14 of the Lease as incorporated herein shall apply to any claim of
Sublessee against Sublessor (or, if applicable, against Landlord) which is
covered by said Section to the extent of the coverage which Sublessor is
providing to Sublessee as set forth above.
11. Assignment and Subletting. Sublessee shall not assign, sell,
mortgage, pledge or in any manner transfer this Sublease or any interest
therein, or sublet the Demised Premises or parts thereof, except in
accordance with the provisions of this Section 11. If Sublessee desires to
assign this Sublease or to sublet all or part of the Demised Premises and
shall have obtained a proposed assignee or subtenant upon terms satisfactory
to Sublessee, Sublessee shall submit to Sublessor in writing a request for
consent, together with: the name of the proposed assignee or subtenant; the
terms and conditions of the proposed assignment or subletting; the nature
and character of the business which the proposed assignee or subtenant
proposes to conduct in the Demised Premises; current financial statements
and banking and other references of such proposed assignee or subtenant;
in the case of a partial subletting, a plan of the Demised Premises which
sets forth in detail the area Sublessee proposes to sublet and the Floor
Space therein; and such other information concerning such proposed
assignment or subletting as Sublessor may reasonably request.
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A. Right of Recapture. If Sublessee desires to assign this Sublease or
sublet all or a portion of the Demised Premises to an entity other than
a permitted assignee pursuant to Section 11(K) hereof, Sublessor shall
have the right and option, which may be exercised within thirty (30) days
following Sublessors receipt of Sublessees request for Sublessors
consent and the documentation supporting such request (as set forth above),
to acquire the interest being assigned by Sublessee or to sublet the
Demised Premises (or a portion thereof) from Sublessee on the same terms
and conditions of such proposed assignment or subletting, as the case may
be.
B. Surrender. If Sublessor shall exercise its option as aforesaid,
Sublessee shall vacate and surrender: (i) the Demised Premises, in the
case of a proposed assignment or subletting of all or substantially all
of the Demised Premises; or (ii) the portion of the Demised Premises
affected in the case of a partial subletting, in the manner prescribed in
Section 7.1(L) of the Lease on or before the effective date of the
assignment or subletting to Sublessor, and Sublessees obligation to pay
Base Rent and Additional Charges shall cease (or be proportionately
decreased in the case of a partial recapture). From and after the
exercise of Sublessors option as aforesaid, Sublessor shall be free to
lease the recaptured space and/or other space leased by Sublessor to
Sublessees prospective assignee or subtenant.
C. Transfer of Beneficial Interest. If Sublessee is a corporation, any
sale, assignment, transfer, pledge or other disposition of Sublessees
capital stock (unless such stock is publicly traded over the counter or on
a national securities exchange) resulting in a change in the effective
voting control of Sublessee as it exists on the date hereof, or if
Sublessee is a partnership or limited liability company, any sale,
assignment, transfer, pledge or other disposition of a controlling interest
in such partnership or limited liability company, shall for all purposes
of this Sublease constitute an assignment of this Sublease and shall be
governed as such by the provisions of this Section 11.
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D. If Sublessor shall not exercise its option under Section 11(A) above,
and Sublessee shall not be in default under this Sublease, and the proposed
assignment or subletting shall not be a prohibited assignment or subletting
under this Section 11, then Sublessors consent to any such proposed
assignment or subletting shall not be unreasonably withheld or delayed
provided: (x) the proposed assignee or subtenant shall have a financial
standing, be of a character, be engaged in a business, and propose to use
the Demised Premises (or a portion thereof, in the event of a partial
subletting) in a manner, in keeping with the quality of a first-class office
building and hotel/conference facility; (y) the Demised Premises will
continue to be used in a manner consistent with a first-class office
building and hotel/conference facility; and (z) the business of the
proposed assignee or subtenant will be conducted in the Demised Premises
in a manner consistent with the character and reputation of a first-class
office building and hotel/conference facility; it being further understood
that Sublessor shall be deemed to have acted reasonably in withholding its
consent if (i) Sublessee is then in default of any of its obligations
under this Sublease; (ii) the proposed assignment or subletting is to a
Prohibited Person (as defined in the Ground Leases); (iii) the character
of the business to be conducted at the Demised Premises by the proposed
assignee or subtenant would materially increase the burden on existing
services to be supplied by Landlord under the Lease or would violate any
restrictions herein or in the Lease or Ground Leases relating to the use
or occupancy of the Demised Premises; or (iv) any of the conditions (x)
through (z) set forth above are not met.
E. If Sublessor shall grant its consent to a proposed assignment of this
Sublease or subletting of the Demised Premises of any part thereof, such
consent and the effectiveness of any such assignment or subletting shall
nevertheless be conditioned upon Sublessees complying with the following
conditions: (i) in the case of an assignment, the assignee shall duly
assume, directly for the benefit of Sublessor, all of the obligations of
Sublessee hereunder and shall cause a written assumption agreement (in form
reasonably satisfactory to Sublessor) to be delivered to Sublessor; (ii) in
the case of a subletting, the sublease shall expressly confirm that it is
and will remain subject and subordinate to this Sublease and any lease or
Mortgage to which this Sublease is subject or subordinate, that Sublessee
and the subtenant under the sublease shall, immediately upon request of
Sublessor, execute such documents as Sublessor shall request confirming the
same; and (iii) a duplicate original of the executed assignment and
assumption agreement or sublease, as the case may be, shall be delivered to
Sublessor prior to the effective date of any such assignment or subletting.
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F. Any assignment or subletting made in contravention of the provisions
of this Section 11 shall constitute a material breach of this Sublease.
Any such assignment or subletting shall not be binding upon Sublessor and,
at Sublessors option, may be treated as a nullity and of no force or
effect whatsoever against Sublessor.
G. No Waiver. Every permitted assignment of this Sublease or subletting
hereunder shall be expressly subject to the condition and restriction that
the assigned lease or sublease shall not be assigned, encumbered or
otherwise transferred or the subleased premises further sublet by the
sublessee in whole or in part, or any part of the Demised Premises used
or occupied by others, without first complying with the provisions of this
Section 11. Every subletting hereunder shall be subject to the express
condition, and by accepting a sublease hereunder each subtenant shall be
conclusively deemed to have agreed, that if this Sublease should be
terminated prior to the expiration date herein set forth or if Sublessor
shall succeed to Sublessees estate in the Demised Premises, then at
Sublessors election the subtenant shall attorn to and recognize Sublessor
as the subtenants lessor under the sublease, any provision of law to the
contrary notwithstanding; and the subtenant shall promptly execute and
deliver to Sublessor any instrument Sublessor may reasonably request to
evidence such attornment, and each subtenant shall conclusively be deemed
to have appointed Sublessor its attorney-in-fact to execute and deliver
any such certificate for and on behalf of such subtenant.
H. No Release. Notwithstanding any assignment of this Sublease or
subletting of all or a portion of the Demised Premises or the consent
of Sublessor thereto, the Sublessee herein named, and each immediate or
remote successor in interest of the Sublessee herein named, shall remain
liable, jointly and severally (with respect to Sublessee, as primary
obligor), with its assignee (including, without limitation, Sublessor if
Sublessor is its assignee), subtenant (including, without limitation,
Sublessor if Sublessor is its subtenant) and all subsequent assignees or
subtenants, for the performance of Sublessees obligations hereunder and,
without limiting the generality of the foregoing, shall remain fully and
directly responsible and liable to Sublessor for all acts and omissions on
the part of any assignee or subtenant in violation or breach of any of
Sublessees obligations under this Sublease. Without limiting the generality
of the foregoing, Sublessee acknowledges and agrees that it shall not be
released from any of its obligations under this Sublease upon any assignment
or sublease hereunder.
17
I. Alterations. Sublessee agrees that in connection with any assignment
or subletting hereunder, unless Sublessor shall have recaptured the Demised
Premises pursuant to Sections 11(A) and (B) above, Sublessee shall be
solely responsible for any alteration work to be done in connection
therewith, and such alterations shall only be permitted upon compliance
with the terms, covenants, conditions and consents of the Lease relating
to alterations.
J. Notwithstanding anything to the contrary contained herein, Sublessee,
provided it is not then in default, shall be permitted to assign this
Sublease (or, in respect of a space comprising less than all of the
Demised Premises, to sublet) to an agency or instrumentality of the City
or State of New York, provided that such agency or instrumentality is
reasonably acceptable to Sublessor as being similar in standing to that
of the New York City Board of Education, and that the proposed use shall
be in keeping with the quality, character and reputation of a first class
office building and hotel/conference facility, and Sublessor agrees in
that event not to exercise its right of recapture or unreasonably to
withhold or delay its consent to such assignment (or partial subletting).
In the event of such assignment (but not subletting), the agency or
instrumentality shall assume all of the obligations of Sublessee under
the Sublease and shall execute and deliver such documents evidencing
said assumption as Sublessor may reasonably request, and thereupon
Sublessee shall be released from its obligations hereunder. It is
understood and agreed that immediately upon the execution of this
Sublease, Sublessee, The New York City School Construction Authority,
shall assign all of its right, title and interest in and to this
Sublease to the New York City Board of Education, which shall assume
all rights and obligations as the new Sublessee hereunder, whereupon
the New York City School Construction Authority shall be released from
any and all obligations and liabilities hereunder.
12. Destruction; Condemnation.
A. If the Demised Premises are partially damaged and rendered
partially unusable by fire or other casualty, the damages thereto
(excluding to the property, equipment or improvements of Sublessee
or Sublessor) shall be repaired by and at the expense of Landlord
pursuant to Section 8.1 of the Lease, and the Base Rent and Additional
18
Charges hereunder shall be abated and apportioned (according to the part
of the Demised Premises which is usable) for any period during which
Sublessor shall be entitled to an abatement of Rent under the Lease
(even if the same shall apply solely to Services Rent) pursuant to
Section 8.1(B) of the Lease. If the Demised Premises are damaged and
rendered wholly unusable by fire or other casualty, and Landlord shall
repair and restore the Demised Premises pursuant to Section 8.1(C) of
the Lease, the Base Rent and Additional Charges shall be proportionately
paid up to the time of the casualty and thenceforth shall cease until
the obligation of Sublessor to pay Rent pursuant to said Section shall
resume. If the Demised Premises are rendered wholly unusable (whether
or not the Demised Premises are damaged in whole or in part) or if the
Building, the Garage Portion, the Hotel Portion or the Office Portion
shall be so damaged that Landlord, Sublandlord and/or Sublessor, as the
case may be, shall elect to terminate the Lease pursuant to Section 8.1(D)
thereof, this Sublease shall terminate and be of no further force or
effect as of the date which is one day prior to the date on which the
termination of the Lease shall be effective. Sublessor shall give written
notice of such termination to Sublessee not later than ten (10) days after
Sublessor shall have received or given notice of termination of the Lease.
Upon the date specified in Sublessors notice to Sublessee, the Term of
this Sublease shall expire as fully as if such date were the date set
forth above for the expiration of the Term, and Sublessee shall forthwith
quit, surrender and vacate the Demised Premises without prejudice, however,
to Sublessees obligations under the Sublease (as it existed prior to such
termination), and any Base Rent and Additional Charges owing shall be paid
up to the date of the casualty, and any payments of Base Rent or Additional
Charges made by Sublessee which were on account of a period subsequent to
such date shall be returned to Sublessee. If the Demised Premises are
rendered wholly unusable, and Landlord shall have failed to repair and
restore same within 365 days following the date of the casualty, Sublessee
shall have the right to cancel and terminate this Sublease on not less than
ten (10) days written notice to Sublessor served not later than thirty (30)
days after the expiration of such 365 day period. After any such casualty,
Sublessee shall cooperate with Landlords restoration by removing from the
Demised Premises as promptly as reasonably possible, all of Sublessees
salvageable property. Nothing contained herein shall relieve Sublessee
from liability that may exist as a result of damage from fire or other
casualty to the extent such liability may exceed the proceeds payable to
Sublessor under the policy or policies of insurance which Sublessor is
required to maintain under the terms of the Lease. Sublessor agrees to
obtain a waiver of subrogation from its insurance carrier(s) consistent
with the foregoing provision.
19
B. If all or substantially all of the Demised Premises or the means
of access thereto shall be acquired or condemned by eminent domain for
any public or quasi-public use or purpose, then, and in that event, the
Term of this Sublease shall cease and terminate from the date of title
vesting in such proceeding, and Sublessee shall have no claim for the
value of any unexpired term of this Sublease, and assigns to Sublessor
Sublessees entire interest in any such award. Sublessee shall have the
right to make an independent claim to the condemning authority for the
value of Sublessees moving expenses and personal property, trade fixtures
and equipment subject to such acquisition or condemnation, provided such
claim does not reduce Sublessors award. If less than substantially all
of the Demised Premises shall be so taken, this Sublease shall continue
in full force and effect, and the Base Rent, and Sublessees Proportionate
Share of Additional Charges, shall be adjusted to reflect such taking.
If all or any part of the Demised Premises shall be temporarily taken by
eminent domain, the Rent and Additional Charges shall be abated or
adjusted, as the case may be, during the period for which such temporary
taking shall remain in effect and in respect of the portion of the
Demised Premises affected thereby.
C. Sublessee shall not exercise any right it may have at law or in
equity to terminate this Sublease or claim a partial or total eviction
by reason of Landlords or Sublessors acts or omissions or any other
reason whatsoever unless it shall have first given thirty (30) days prior
written notice of such act or omission to Sublessor.
13. Late Charge. If, during the Term, Sublessee shall fail to make
any payment of Base Rent or Additional Charges within ten (10) days after
the same is first due and payable, Sublessee agrees to pay to Sublessor as
and for an agreed upon late charge (and not a penalty) on account of the
additional administrative, accounting and overhead costs attributable to
Sublessees delinquency, a percentage of such delinquent amount (the
"Late Rate") equal to the Late Rate then applicable to Sublessors
delinquency under Section 3.4 of the Lease.
20
14. Holdover Rent; Waiver of Redemption.
A. In the event Sublessee, or any Person claiming status through or on
behalf of Sublessee, remains in possession of the Demised Premises after
the expiration or earlier termination of this Sublease without the
execution of a new sublease or a direct lease with Sublessor, (i)
Sublessor shall be entitled to all of the rights and remedies which are
available to a Sublessor against a tenant holding over after the
expiration of a term and to such other rights and remedies as may be
provided for in this Sublease at law or in equity, and (ii) Sublessee, or
any Person holding under or through Sublessee, at the option of Sublessor,
shall be deemed to be occupying the Demised Premises as a tenant from
month to month, at a monthly rental equal to the lesser of (x) the then
market rent or (y) one and one-half (1 1/2) times the Base Rent, plus the
Additional Charges payable hereunder, subject to all of the other terms
of this Sublease insofar as the same may be applicable to a month-to-month
tenancy. For purposes of this Section, market rent shall be determined
by a real estate broker mutually acceptable to the parties or, at the option
of either party, by a majority vote of three real estate brokers selected
one each by each party and the third by agreement of the parties
respective brokers.
B. Sublessee, for itself and on behalf of any and all persons claiming
through or under Sublessee, including creditors of all kinds, does hereby
waive and surrender all right and privilege it or they or any of them might
have under or by reason of any present or future law, to redeem the Demised
Premises or to have a continuance of this Sublease for the term hereby
demised after being dispossessed or ejected therefrom by process of law or
equity or under the terms of this Sublease or after the termination of the
Term of this Sublease as herein provided.
15. Attornment.
A. Sublessee agrees that if by reason of default on the part of Landlord,
Sublandlord or Sublessor under any ground, superior or underlying lease or
any mortgage on the Building, land and/or improvements or on any such
ground, superior or underlying lease, a ground, superior or underlying
lessor or a mortgagee shall enter into and become possessed of the interest
of Sublessor in and to the Demised Premises, or the real property of which
the Demised Premises form a part, or any part or parts of such real
21
property, either through possession or foreclosure action or proceedings,
or through the issuance and delivery of a deed or a new lease of the
premises covered by the ground, superior or underlying lease, then, if
this Sublease is in full force and effect at such time, Sublessee shall
attorn to such lessor or such mortgagee, as its sublessor; in such event,
such lessor or mortgagee shall not be liable to Sublessee for any previous
defaults theretofore committed by Sublessor and no such default shall
give rise to any rights of offset or deduction against the Base Rent and
Additional Charges payable under this Sublease.
B. The provisions for attornment hereinbefore set forth shall not require
the execution of any further instrument. However, if any such lessor or
mortgagee to which Sublessee agrees to attorn, as aforesaid, requests a
further instrument reasonably expressing such attornment, Sublessee agrees
to execute the same promptly.
16. Broker. Each of the parties represents to the other that it has
dealt with no broker or finder with respect to this Sublease other than
Grubb & Ellis, and Sublessor shall be responsible for any commission
payable to such broker pursuant to separate agreement. Each of the
parties agrees to indemnify and hold the other harmless from and against
any and all loss, liability, damage, cost and expense which the other party
may incur or sustain in connection with any claim or action by any other
broker or finder that may be asserted against Sublessor or Sublessee, as
the case may be, as a result of any conversations, correspondence or other
dealings between such indemnifying party and such other broker or finder.
The indemnifying party shall control any litigation which may arise pursuant
to this paragraph.
17. Consents of Landlord and Sublessor. The provisions of the Lease
notwithstanding, and in addition thereto, with respect to any provision of
this Sublease (or the Lease, as incorporated herein) which provides, in
effect, that Sublessor shall not unreasonably withhold or unreasonably
delay any consent or approval, Sublessee shall in no event be entitled to
make, nor shall Sublessee claim, any money damages by way of set-off,
counterclaim or defense, based upon any claim or assertion by Sublessee
that Sublessor has unreasonably withheld or unreasonably delayed any
consent or approval; but Sublessees sole remedy shall be an action or
proceeding to enforce any such provision, or for specific performance,
injunction or declaratory judgment. In the event that Sublessee proposes
to undertake an act which, if performed by Sublessor, would require
Landlords consent or approval under the Lease, Sublessee shall not
proceed without first obtaining such consent. Sublessee shall, in each
such instance, submit a written request to Sublessor, together with all
information required under the Lease or as Landlord may otherwise request,
22
and Sublessor shall promptly forward such request to Landlord. Sublessor
shall have no liability whatsoever to Sublessee as a consequence of
Landlords denial of or failure to grant Sublessees request pursuant to
the Lease. Any applicable fees or expenses assessed by Landlord against
Sublessor pursuant to the terms of the Lease in respect of Sublessees
request shall be paid to Sublessor by Sublessee within thirty (30) days
of demand therefor as Additional Charges.
18. Due Authorization. As an inducement to Sublessor to execute this
Sublease, Sublessee represents and warrants to Sublessor, knowing that
Sublessor is relying thereon, that all applicable and necessary approvals
and authorizations have been obtained by Sublessee prior to its execution
and delivery of this Sublease such that the same constitutes a legally
binding and enforceable agreement as to Sublessee, subject only to
registration by the New York City Comptroller, which consent Sublessee
shall diligently pursue, and use good faith best efforts to obtain and
deliver.
19. Notices. All notices required by, or provided in connection with,
this Sublease shall be sent by certified mail, return receipt requested,
and personally delivered to the addressee at its address set forth below,
or such other address as either party may designate by notice as provided
herein, and notice shall be deemed effected three (3) days after such
delivery or such posting with the U.S. Postal Service.
To Sublessor: Empire Insurance Company
335 Adams Street
Brooklyn, NY 11201
Attn: Mr. Seven B. Isenburg
With a copy to: Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
Attn: Mr. Thomas E. Mara
And to: David R. Gilliatt, Esq.
470 Park Avenue South, 14th Floor
New York, NY 10016
23
To Sublessee: New York City Board of Education
110 Livingston Street
Brooklyn, NY 11201
Attn: Secretary
With a copy to: Chief Executive for School Facilities
28-11 Queens Plaza North
Long Island City, NY 11101
20. Entire Agreement. This Sublease and, to the extent incorporated
herein, the Lease, constitute the entire agreement between the parties
with respect to the subleasing of the Demised Premises. This Sublease may
not be changed, modified or discharged, nor may any provision hereof be
waived, except by an instrument in writing executed by the party against
whom enforcement of such waiver, change, modification or discharge is
sought.
21. Successors and Assigns. Except as herein otherwise specifically
provided, the terms, covenants, agreements and obligations contained in
this Sublease shall extend to, bind and inure to the benefit of the parties
hereto and their respective representatives, heirs, successors and permitted
assigns. Each covenant, agreement, obligation or other provision herein
contained shall be deemed and construed as a separate and independent
covenant of the party bound by, undertaking or making the same, not
dependent on any other provision of this Sublease unless otherwise
expressly provided.
22. Counterparts. This Sublease may be executed in two or more
counterparts, each of which shall be deemed an original.
23. Not an Offer. The submission of this Sublease to Sublessee shall
not be construed as an offer or an option, and Sublessee shall not have
any rights hereunder unless and until Sublessor shall execute an original
of this Sublease and deliver same to Sublessee.
24. Resolution. A true copy of the Certified Resolution of the
New York City Board of Education dated October 18, 2000 authorizing the
within Sublease is annexed as Exhibit E hereto.
25. Certificate of Occupancy. Notwithstanding anything to the contrary
contained herein, the Rent Commencement Date for the 28th Floor shall be
thirty (30) days after the date on which Sublessor obtains a temporary
certificate of occupancy for the Demise Premises (the "Certificate"). The
Rent Commencement Date for the 29th Floor shall be extended by the number
of days elapsed from the Commencement Date until the Certificate is
obtained. Sublessee shall have the unconditional right to cancel and
terminate this Sublease upon five (5) days written notice to Sublessor
if the Certificate shall not have issued within sixty (60) days of the
Commencement Date.
24
IN WITNESS WHEREOF, Sublessor and Sublessee have respectively signed
this Agreement of Sublease as of the date first hereinabove written.
EMPIRE INSURANCE COMPANY, THE NEW YORK CITY SCHOOL
Sublessor CONSTRUCTION AUTHORITY,
Sublessee
By: _______________________ By:____________________________
Name: Steven Isenburg Name: Milo Riverso
Title: Vice-President Title: President
Date: _____________ Date: ______________
APPROVED AS TO TERMS, APPROVED AS TO LEGAL
CONDITIONS AND DESCRIPTION SUFFICIENCY,
OF THE FACILITIES,
Board of Education of the Board of Education of the
City of New York City of New York
Division of School Facilities Office of legal Services
By: By:
Name: Name:
Title: Title:
Date: _____________ Date: _____________
[ACKNOWLEDGEMENTS FOLLOW]
25
STATE OF NEW YORK, COUNTY OF KINGS ss.:
On the ____ day of November, 2000 before me, the undersigned, personally
appeared STEVEN ISENBURG, personally known to me or proved to me on the
basis of satisfactory evidence to be the individual whose name is
subscribed to the within instrument and acknowledged to me that he
executed the same in his capacity, and that by his signature on the
instrument, the individual, or the person upon behalf of which the
individual acted, executed the instrument.
Notary Public
STATE OF NEW YORK, COUNTY OF QUEENS ss.:
On the ____ day of November, 2000 before me, the undersigned, personally
appeared MILO RIVERSO, personally known to me or proved to me on the
basis of satisfactory evidence to be the individual whose name is
subscribed to the within instrument and acknowledged to me that he executed
the same in his capacity, and that by his signature on the instrument,
the individual, or the person upon behalf of which the individual acted,
executed the instrument.
Notary Public
EX-10
3
0003.txt
EXHIBIT - 10(j)
TRANSFER AGREEMENT
By and Among
EMPIRE INSURANCE COMPANY
ALLCITY INSURANCE COMPANY
CENTURION INSURANCE COMPANY
TOWER RISK MANAGEMENT CORP.
and
TOWER INSURANCE COMPANY OF NEW YORK
Dated as of February 28, 2001
TRANSFER AGREEMENT
This TRANSFER AGREEMENT (this "Agreement"), dated as of February 28, 2001,
is entered into by and among Empire Insurance Company ("Empire"), a New
York domestic stock property/casualty company, Allcity Insurance Company
("Allcity"), a New York domestic stock property/casualty company and a
subsidiary of Empire, Centurion Insurance Company ("Centurion"), a New
York domestic stock property/casualty company and a wholly-owned
subsidiary of Empire (Empire, Allcity and Centurion, individually, a
"Transferor" and collectively, the "Transferors"), Tower Insurance
Company of New York ("Tower Insurance"), a New York domestic stock
property/casualty insurance company, and Tower Risk Management Corp.
("Tower Risk"), a licensed insurance agent in the State of New York
(Tower Insurance and Tower Risk, individually, a "Transferee" and
collectively, the "Transferees").
RECITALS:
WHEREAS, subject to the terms and conditions set forth herein,
Transferors desire to (i) non-renew all Insurance Contracts (as defined
below) that can be non-renewed by Transferors prior to August 1, 2001
(the "Non-Renewal Cutoff Date"), (ii) transfer to Transferees all of
Transferors' obligations to renew Insurance Contracts that cannot be
non-renewed by Transferors prior to the Non-Renewal Cutoff Date, and
(iii) facilitate the replacement of substantially all Insurance Contracts
by Replacement Contracts (as defined below) issued by Transferees; and
WHEREAS, subject to the terms and conditions set forth herein, Transferees
desire to (i) issue Replacement Contracts in replacement of substantially
all of the Insurance Contracts, (ii) assume Transferors' obligations to
renew Insurance Contracts that Transferors are unable to non-renew prior
to the Non-Renewal Cutoff Date, and (iii) appoint Transferors' producers
associated with the Insurance Contracts for Schedule A Policies and
Schedule C Policies (as defined below) as producers of Transferees;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants set forth herein, and in reliance upon the
representations, warranties, conditions and covenants contained herein,
and intending to be legally bound hereby and thereby, the parties hereto
do hereby agree as follows:
ARTICLE I
DEFINITIONS
Section I.1 Definitions. The following terms, when used in this Agreement,
shall have the meanings set forth herein. The terms defined below shall
be deemed to refer to the singular or plural as the context requires.
"Affiliate" of any Person shall mean another Person that directly or
indirectly controls, is controlled by, or is under common control with,
such first Person, where "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management policies of a Person, whether through the ownership of
voting securities, by contract, as trustee or executor, or otherwise.
"Agreement" shall mean this Transfer Agreement.
"Applicable Law" shall mean any applicable order, law, statute,
regulation, rule, pronouncement, ordinance, bulletin, writ,
injunction, directive, judgment, decree, principle of common law,
constitution or treaty enacted, promulgated, issued, enforced or
entered by any Governmental Entity applicable to the parties hereto,
or any of their respective businesses, properties or assets.
"Books and Records" shall mean, without limitation, the originals or
copies of all contracts, instruments, filings, customer lists, data and
databases (including, without limitation, data relating to customer
renewals and contract expirations and information concerning customer
identities, customer performance, marketing and rating methodology),
lists of all agents and brokers, administrative and pricing manuals,
records (including, without limitation, claim records, sales records,
underwriting records, financial records, compliance records and tax
records), and other materials relating to the Insurance Contracts,
whether or not (i) in the possession of Transferors or their Affiliates
or (ii) stored in hardcopy form or on magnetic, optical or other media.
"Business" shall mean the business conducted by Transferors in marketing,
issuing and administering the Insurance Contracts.
"Business Customer" shall mean any customer of the Business.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in New York are permitted or
obligated by law to be closed for regular banking business.
"Closing" shall have the meaning set forth in Section 2.4.
"Closing Date" shall have the meaning set forth in Section 2.4.
"Damages" shall mean any and all monetary damages, liabilities, fines,
fees, penalties, interest obligations, deficiencies, losses, costs
and/or expenses (including reasonable fees and expenses of attorneys,
accountants, actuaries and other experts).
"Department" shall mean the New York Insurance Department.
"Employee" or "Employees" shall have the meaning set forth in
Section 5.10.
"First Payment" shall have the meaning set forth in Section 2.2(c).
"First Year Premium" shall mean all premiums, fees and other amounts
payable to the issuer of a Replacement Contract with respect to the
first twelve (12) months that such Replacement Contract is in force.
"Governmental Entity" shall mean any foreign, domestic, federal,
territorial, state or local U.S. or non-U.S. governmental authority,
quasi-governmental authority, instrumentality, court or government,
self-regulatory organization, commission, tribunal or organization
or any political or other subdivision, department, branch or
representative of any of the foregoing.
"Indemnified Party" shall have the meaning set forth in Section
6.3(a).
"Indemnifying Party" shall have the meaning set forth in Section
6.3(a).
"Initial Filings" shall mean those rate and form filings described
on Schedule 1.1(e).
"Insurance Contract" shall mean any policy, contract, endorsement,
rider or similar instrument or agreement of the kind described on
Schedules 1.1(a), 1.1(b) or 1.1(c), issued at any time by Transferors
that has not expired or otherwise terminated on or prior to the
Closing Date.
"Insurer Affiliate" shall mean an Affiliate that is an insurance
company.
"Knowledge" as to any of the Transferors or Transferees, shall mean
the actual knowledge after due inquiry of any executive officer or
director of any Transferor or Transferee, as applicable.
"Liability" or "Liabilities" shall mean any liability, obligation,
expense, claim or cause of action (of any kind or nature whatsoever,
whether absolute, accrued, contingent or other, and whether known or
unknown) of a Person.
"Lien" shall mean any mortgage, pledge, lien, encumbrance, charge,
adverse claim (whether pending or, to the Knowledge of the Person
against whom the adverse claim is being asserted, threatened) or
restriction of any kind affecting title or resulting in an
encumbrance against property, real or personal, tangible or
intangible, or a security interest of any kind, including, without
limitation, any conditional sale or other title retention agreement,
any right of first refusal, any lease in the nature thereof and any
filing of or agreement to give any financing statement under the
Uniform Commercial Code (or equivalent statute) of any jurisdiction
(other than a financing statement which is filed or given solely to
protect the interest of a lessor).
"Material Adverse Effect" shall mean a material adverse effect on the
liabilities, results of operation or condition (financial or otherwise)
of a Person or its business; provided, however, that the following shall
be excluded from the definition of Material Adverse Effect and from any
determination as to whether a Material Adverse Effect has occurred or
may occur: (i) the effects of changes affecting the property and
casualty insurance industry generally; and (ii) any adverse change
resulting from the announcement of the transactions contemplated by
this Agreement or the identity of Transferees.
"Non-Renewal Cutoff Date" shall have the meaning set forth in the
Recitals hereto.
"Non-Replaced Contract" shall mean any Insurance Contract with
respect to which either (i) Transferees elect not to offer a
Replacement Contract in accordance with Section 2.3(a) of this
Agreement or (ii) the owner thereof elects to have such Insurance
Contract renewed by Transferors or replaced by another insurer in
lieu of purchasing a Replacement Contract.
"Offeree" shall have the meaning set forth in Section 2.3(c).
"Permit" shall have the meaning set forth in Section 3.6(b).
"Person" shall mean an individual, corporation, partnership,
association, joint stock company, limited liability company,
Governmental Entity, trust, joint venture, labor union, estate,
unincorporated organization or other entity.
"Producers" shall mean each agent, broker and other producer that
is (i) appointed as such by Transferors as of the Closing Date,
(ii) involved in the marketing, sale or distribution of Insurance
Contracts, or (iii) terminated by Transferors prior to the Closing
Date but still associated with active Insurance Contracts.
"Replacement Business" shall mean the business conducted by
Transferees in marketing, issuing, renewing and administering
the Replacement Contracts.
"Replacement Contract" shall mean any policy, contract, endorsement,
rider or similar instrument or agreement issued or caused to be
issued by Transferees or any Affiliate thereof in replacement of an
Insurance Contract or issued to a Business Customer within twelve
(12) months after the expiration, non-renewal, cancellation or other
termination of an Insurance Contract.
"Representative" shall mean, with respect to any Person, such Person's
officers, directors, employees, affiliates, agents and representatives
(including, without limitation, any investment banker, financial advisor,
accountant, actuary, appraiser, analyst, consultant, legal counsel,
agent, representative or expert retained by or acting on behalf of
such Person or any of its subsidiaries).
"Revised Filings" shall mean those rate and form filings described on
Schedule 1.1(f).
"Schedule A Policies" shall mean those Insurance Contracts issued by
Transferors of the kinds listed on Schedule 1.1(a).
"Schedule B Policies" shall mean those Insurance Contracts issued by
Transferors of the kinds listed on Schedule 1.1(b).
"Schedule C Policies" shall mean those Insurance Contracts issued by
Transferors of the kinds listed on Schedule 1.1(c).
"Signing Payment" shall have the meaning set forth in Section 2.2(a).
"Taxes" shall mean all taxes, charges, duties, fees, levies or other
similar assessments or Liabilities, including, without limitation,
all net and gross income, gross receipts, ad valorem, premium, excise,
real property, personal property, windfall profit, sales, use, transfer,
license, withholding, employment, payroll, profit, estimated, severance,
stamp, occupation, value added, registration, environmental, workers
compensation, social security and franchise taxes imposed by the United
States Internal Revenue Service or any taxing authority (whether domestic
or foreign, including, without limitation, any state, county, local or
foreign government or any subdivision or taxing agency thereof (including
a United States possession)); and such term shall include any interest,
fines, penalties, assessments or additions to tax relating to, resulting
from, attributable to, or incurred in connection with any such tax or
any contest or dispute thereof.
"Tax Return" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendments thereof.
"Termination Date" shall mean the date upon which this Agreement is
terminated pursuant to Section 10.1.
"Third-party Claim" shall have the meaning set forth in Section 6.3(a).
"Transferee" and "Transferees" shall have the meanings set forth in
the introduction to this Agreement.
"Transferee Indemnitees" shall mean Transferees, any Affiliates of
Transferees, and any officers, directors, employees, agents or other
representatives of Transferees or of any Affiliate of Transferees.
"Transferor" and "Transferors" shall have the meanings set forth in the
introduction to this Agreement.
"Transferor Indemnitees" shall mean Transferors, any Affiliates of
Transferors, and any officers, directors, employees, agents or other
representatives of Transferors or of any Affiliate of Transferors.
"Transfer Order" shall have the meaning set forth in Section 9.4.
"Transferred Employee" shall have the meaning set forth in Section
5.10.
"Withdrawal Plan" shall mean the filing that must be submitted to the
Department pursuant to Section 3425 of the New York Insurance Law and
New York Insurance Regulation 154 in connection with Transferors'
cessation of writing and issuing the Schedule A Policies and the
Schedule C Policies.
Section 1.2 Interpretation. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement.
Consequently, in the event that an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties hereto, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the
authorship of any provision of this Agreement.
Section 1.3 References. When a reference is made in this Agreement
to a Section or ARTICLE, such reference shall be to a section or
article of this Agreement unless otherwise clearly indicated to the
contrary. Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words
"without limitation." The words "hereof," "herein" and "herewith" and
words of similar import shall, unless otherwise stated, be construed to
refer to this Agreement as a whole and not to any particular provision
of this Agreement. The meaning assigned to each term used in this
Agreement shall be equally applicable to both the singular and the
plural forms of such term, and words denoting any gender shall include
all genders. Where a word or phrase is defined herein, each of its other
grammatical forms shall have a corresponding meaning.
ARTICLE II
ASSIGNMENT AND REPLACEMENT
Section 2.1 Replacement; Assignment and Assumption of Renewal
Obligations. Subject to the terms and conditions, and in reliance
upon the representations and warranties, set forth in this Agreement,
(i) Transferors agree to use commercially reasonable efforts to assist
Transferees, and Transferees desire that Transferors provide such
assistance, to cause all Business Customers to replace their Insurance
Contracts with Replacement Contracts and (ii) Transferees agree to
assume from Transferors, and Transferors agree to assign to Transferees,
all of Transferors' obligations to renew (or refrain from non-renewing)
any and all Insurance Contracts with respect to which a Replacement
Contract is issued.
Section 2.2 Consideration.
(a) On the date hereof, Transferees shall pay to Transferors, and
Transferors shall accept and acknowledge receipt from Transferees of,
an amount equal to $150,000 (the "Signing Payment") representing an
advance payment of fees payable by Transferees pursuant to Section
2.2(b) and (c) below.
(b) Transferees shall pay to Transferors, in respect of each
Replacement Contract that is issued (including, without limitation,
Replacement Contracts issued in accordance with Section 2.3(a) or
2.3(e) of this Agreement), a one time fee equal to three percent
(3%) of the First Year Premium of such Replacement Contract collected
by or on behalf of any Transferee at any time. Such fee shall be paid
in accordance with Section 2.2(c) below.
(c) Within forty-five (45) calendar days after the last day of the
calendar quarter of the date of this Agreement, Transferees shall pay
to Transferors an amount of cash equal to three percent (3%) of the
First Year Premiums collected by or on behalf of any Transferee during
that calendar quarter (the "First Payment"), less the Signing Payment.
If the Signing Payment is greater than the First Payment, then no actual
payment is required, and the amount by which the Signing Payment exceeds
the First Payment shall be applied toward payments due in each succeeding
calendar quarter until such excess has been eliminated. Within forty
- -five (45) calendar days after the final day of each succeeding calendar
quarter, Transferees shall pay to Transferors an amount of cash equal to
three (3%) of the First Year Premiums collected by or on behalf of any
Transferee during such calendar quarter.
(d) All payments pursuant to this Section 2.2 shall be paid by
Transferees to an account of Empire designated by Transferors for the
benefit of the applicable Transferor, by wire transfer of immediately
available funds.
(e) At or prior to the time each payment under Section 2.2(c) is made,
Transferees shall provide to Transferors quarterly statements providing
information reasonably sufficient to calculate the amount of such payments,
including, without limitation, the number of Replacement Policies issued
during that quarter and the amount of First Year Premium written and
collected during that quarter. Such quarterly statements shall be (i)
in a form reasonably satisfactory to Transferors, (ii) certified as
accurate and complete and (iii) executed by an executive officer of
Transferees.
(f) Upon reasonable notice and during normal business hours,
Transferors shall be entitled to review and audit any and all books
and records of Transferees or its Affiliates (i) used in preparation
of the quarterly statements described in Section 2.2(e) above and/or
(ii) relating to issuance of Replacement Contracts (including, without
limitation, with respect to Offerees (as defined below), policies issued,
and terms thereof) and calculation of First Year Premium.
Section 2.3 Issuance of Replacement Policies.
(a) As promptly as practicable following the Closing Date,
Transferees shall offer to sell Replacement Contracts to all Persons who
hold Insurance Contracts (subject to Section 2.3(b) below).
Notwithstanding anything in this Agreement to the contrary, Transferees'
obligations under this Section 2.3(a) shall commence on the Closing Date
and continue until such time as Transferors are no longer obligated under
Applicable Law (including without limitation Section 3425 of the New York
Insurance Law) and the terms of such Insurance Contracts to keep such
Insurance Contracts in force. All such Replacement Contracts offered
pursuant to Section 2.3(b)(i) below shall have terms (including without
limitation scope of coverage, exclusions, conditions, termination and
premium) no less favorable to the holder thereof than the Insurance
Contracts, subject to the Initial Filings and the Revised Filings.
Transferees shall issue such Replacement Contracts to any offeree
thereof subject to the subsequent collection of the premium therefore
and the satisfaction of conditions to issuance specified in such
Replacement Contracts, which conditions shall be no less favorable to
the policyholder than the conditions to issuance contained within the
Insurance Contracts being replaced, subject to the Initial Filings and
the Revised Filings.
(b) Transferees shall be obligated to offer and sell Replacement
Contracts in accordance with Section 2.3(a) above only with respect to
the following Insurance Contracts:
(i) one hundred percent (100%) of the following Insurance Contracts:
all Schedule A Policies and Schedule C Policies that Transferors are
precluded by Applicable Law (including without limitation Section 3425
of the New York Insurance Law) from non-renewing prior to the Non-Renewal
Cutoff Date (it being understood and agreed that Transferees' obligations
to offer and sell Replacement Contracts with respect to such Insurance
Contracts shall continue after the Non-Renewal Cutoff Date in accordance
with the second sentence of Section 2.3(a) above);
(ii) at least ninety-five percent (95%) of all Schedule A Policies
(including without limitation both those Schedule A Policies described
in clause (i) above and those Schedule A Policies that Transferors are
permitted to non-renew prior to the Non-Renewal Cutoff Date under
Applicable Law); and
(iii) at least fifty percent (50%) of all Schedule B Policies.
(c) Transferees shall not be obligated to issue any Replacement
Contract to any offeree under Section 2.3(a) above (each, an "Offeree")
that rejects Transferees' offer to sell such Offeree a Replacement
Contract. Notwithstanding the foregoing, Transferees shall continue to
offer to sell Replacement Contracts in accordance with Section 2.3(a)
above to any such Offeree so long as Transferors are obligated under
Applicable Law (including without limitation Section 3425 of the New
York Insurance Law) and the terms of such Offeree's Insurance Contract(s)
to keep such Offeree's Insurance Contract(s) in force. The parties
hereto shall use commercially reasonable efforts to cause any such
Offeree to accept Transferees' offer described above.
(d) Transferees shall not be obligated to issue any Replacement
Contract to any Offeree that fails to meet the conditions for issuance
of a Replacement Contract (which conditions shall be as limited by
Section 2.3(a) above). Notwithstanding the foregoing, Transferees shall
issue Replacement Contracts to any such Offeree that subsequently
satisfies such conditions for issuance. The parties hereto shall use
commercially reasonable efforts to assist any such Offeree to meet such
conditions of issuance.
(e) Nothing in this Agreement shall preclude (i) Transferees from
offering to sell, selling and issuing Replacement Contracts to Business
Customers prior to the Closing Date or (ii) Transferors from selling,
assigning or otherwise transferring (or offering or otherwise attempting
to do any of the foregoing) the Non-Replaced Contracts (or any renewal
rights or obligations related thereto) to any person at any time.
Section 2.4 The Closing.
(a) The closing of the transaction contemplated by this Agreement
(the "Closing") shall take place at the offices of Stroock & Stroock &
Lavan LLP, 180 Maiden Lane, New York, NY 10038, at 10:00 a.m., local
time, on the later of (i) the second Business Day following the
satisfaction or waiver of the last remaining condition set forth in
ARTICLE VIII and ARTICLE IX hereof or (ii) such other date as Transferees
and Transferors may agree upon in writing (the "Closing Date").
(b) At the Closing, each party hereto shall deliver to the other such
documents and instruments required to be delivered by such party under
the terms of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TRANSFERORS
Transferors represent and warrant to Transferees that:
Section 3.1 Corporate Existence and Power. Each Transferor (i)
has been duly incorporated, is validly existing and is in good standing
under the laws of the State of New York, (ii) has all corporate powers
required to carry on its business as now conducted, and (iii) has all
material governmental licenses, authorizations, permits, consents and
approvals required to carry on its business as now conducted. No
Transferor is in violation of any of the provisions of its charter or
bylaws with respect to the conduct of the Business.
Section 3.2 Corporate Authorization. The execution, delivery and,
subject to the receipt of the approvals referred to in Section 3.3,
performance by Transferors of this Agreement are within their respective
powers and have been duly authorized by all necessary corporate action on
the part of Transferors. This Agreement when fully executed by all other
parties hereto constitutes a valid and legally binding agreement,
enforceable against each party hereto in accordance with its terms,
subject to (i) bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium and other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and the rights of
creditors of insurance companies generally and (ii) general principles
of equity (regardless of whether considered in a proceeding at law or
in equity).
Section 3.3 Governmental Authorization. The execution, delivery
and performance by Transferors of this Agreement require no action by or
in respect of, or filing with, any Governmental Entity on the part of
Transferors or any Affiliate thereof other than: (i) approvals or
filings under Applicable Law, including the Withdrawal Filing and
obtaining the Transfer Order; (ii) filings and notices not required to
be made or given until after the Closing Date, including the Initial
Filings and the Revised Filings, and (iii) any such other action or
filing not contemplated in clauses (i) and (ii) as to which the failure
to make or obtain would not, individually or in the aggregate,
materially impair the ability of Transferors to conduct the Business.
Section 3.4 Non-Contravention. The execution, delivery and
performance by Transferors of this Agreement does not and will not
(i) violate the charter or bylaws of any Transferor, (ii) assuming
compliance with the filings, notices, approvals and other matters
referred to in Section 3.3, violate any Applicable Law, or (iii) require
any consent or other action by any Person under, constitute a default
under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of Transferors or to a loss of
any benefit to which Transferors are entitled under any Insurance
Contract, material reinsurance agreement, any material agreement or any
other instrument binding upon Transferors, or any license, franchise,
permit or other similar authorization held by Transferors that is
material to the Business.
Section 3.5 Compliance with Laws. Transferors have not received
any written notice since January 1, 2000 from any Governmental Entity
alleging any material violation of any Applicable Law in the conduct of
the Business or directing any of the Transferors to take any remedial
action with respect to such Applicable Law. To the Knowledge of
Transferors, there are no presently existing circumstances that could
reasonably be expected to result in any violation of any Applicable
Law relating to the Business that would have a Material Adverse Effect.
Section 3.6 Regulatory Filings.
(a) The Business is being conducted in compliance in all material
respects with all Applicable Laws, including, without limitation, all
insurance laws, ordinances, rules, regulations, decrees and orders of
any Governmental Entity, except where the failure to do so would not
have a Material Adverse Effect.
(b) Transferors have all permits and insurance and other licenses,
franchises, approvals, authorizations, exemptions, classifications,
certificates, registrations and similar documents necessary to their
conduct of the Business (each, a "Permit") as it is currently conducted
in each jurisdiction in which the Transferors require such Permits,
except where the failure to have such a Permit would not have a Material
Adverse Effect. The Business has been and is being conducted in
compliance in all material respects with all such Permits. All such
Permits are in full force and effect, and there is no proceeding or
investigation pending or, to the Knowledge of Transferors, threatened
which would reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, modification, suspension or restriction of
any Permit material to the Transferors' ability to conduct the Business.
Transferors are not operating under any agreement or understanding with
the regulatory authority of any state which in any way materially
restricts their authority to conduct the Business or requires
Transferors to take, or refrain from taking, any action relating to the
conduct of the Business otherwise permitted by Applicable Law.
(c) All Insurance Contracts issued or sold by the Transferors since
January 1, 1998 are, in all material respects, on forms approved by the
insurance regulatory authority of the jurisdiction where issued or sold
or have been filed with and not objected to by such authority within
the period provided for objection, and have been filed or registered as
required with all other applicable Governmental Entities. All Insurance
Contracts issued or sold by Transferors since January 1, 1998 complied
in all material respects as to form, when issued or sold, with the
provisions of Applicable Law. All the premium rates required to be
filed with or approved by insurance regulatory authorities since
January 1, 1998 have, in all material respects, been so filed or
approved or not objected to within the period provided for objection,
and all premiums charged conform in all material respects thereto.
Section 3.7 No Brokers. No broker, finder or other similar agent
has represented Transferors or acted for or on behalf of any Transferor
in connection with the transactions contemplated hereby in such a manner
as to give rise to any valid claim or demand against Transferees for a
brokerage commission, finder's fee or other similar payment.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TRANSFEREE
Transferees represent and warrant to Transferors that:
Section 4.1 Corporate Existence and Power. Each Transferee is a
corporation duly organized, validly existing and in good standing under
the laws of the state of New York and has the corporate power and
authority to own, lease and operate its assets and to carry on its
business as it is now being conducted.
Section 4.2 Corporate Authorization. The execution, delivery and,
subject to the receipt of the approvals referred to in Section 4.3,
performance by Transferees of this Agreement are within their respective
powers and have been duly authorized by all necessary corporate action
on the part of Transferees. This Agreement when fully executed by all
other parties hereto constitutes a valid and legally binding agreement,
enforceable against each party hereto in accordance with its terms,
subject to (i) bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium and other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and the rights of
creditors of insurance companies generally and (ii) general principles
of equity (regardless of whether considered in a proceeding at law or
in equity).
Section 4.3 Governmental Authorization. The execution, delivery
and performance by Transferees of this Agreement require no action by or
in respect of, or filing with, any Governmental Entity on the part of
Transferees or any Affiliate thereof other than: (i) approvals or
filings under Applicable Law, (ii) filings and notices not required to
be made or given until after the Closing Date, including the Initial
Filings and the Revised Filings, and (iii) any such other action or filing
not contemplated in clauses (i) and (ii) as to which the failure to make
or obtain would not, individually or in the aggregate, materially
impair the ability of Transferees to conduct the Business or to
otherwise consummate the transactions contemplated by this Agreement.
Section 4.4 Non-Contravention. The execution, delivery and
performance by Transferees of this Agreement does not and will not
(i) violate the charter or bylaws of any Transferee, (ii) assuming
compliance with the filings, notices, approvals and other matters
referred to in Section 4.3, violate any Applicable Law, or (iii)
require any consent or other action by any Person under, constitute a
default under, or give rise to any right of termination, cancellation
or acceleration of any right or obligation of Transferees or to a loss
of any benefit to which Transferees are entitled under any Insurance
Contract, material reinsurance agreement, any material agreement or any
other instrument binding upon Transferees, or any license, franchise,
permit or other similar authorization held by Transferees that is
material to the Business.
Section 4.5 Licenses and Permits. Each Transferee has all Permits
necessary to perform its obligations under this Agreement. All such
Permits are valid and in full force and effect, and no Transferee is
operating under any agreement or understanding with any Governmental
Entity which restricts its authority to do business or requires
Transferees to take, or refrain from taking, any action relating to the
conduct of the Business otherwise permitted by Applicable Law. No
material violations exist in respect of any such Permit and no
investigation or proceeding is pending or, to the Knowledge of
Transferees, threatened that would reasonably be expected to result in
the revocation, amendment, failure to renew, limitation, modification,
suspension or revocation of any such Permit and, to the Knowledge of
Transferees, there is no reasonable basis for the assertion of any such
violation or the institution of any such proceeding or investigation.
Section 4.6 No Brokers. No broker, finder or other similar agent
has represented Transferees or acted for or on behalf of Transferees in
connection with the transactions contemplated hereby in such a manner as
to give rise to any valid claim or demand against Transferors for a
brokerage commission, finder's fee or other similar payment.
Section 4.7 Rating. Tower Insurance is rated "B+" by A.M. Best
Company, Inc. To Transferees' Knowledge, A.M. Best Company, Inc. has
not threatened to lower such rating within the eighteen (18) months
preceding the date hereof.
Section 4.8 Reinsurance. Attached hereto as Schedule 4.8 is a
true and complete schedule of all reinsurance arrangements to which
Transferees are a party that will reinsure the obligations of
Transferees under the Replacement Contracts as of the Closing Date,
including the names and A.M. Best ratings of the reinsurers parties
thereto. Transferees may revise the terms of the reinsurance treaty
provided that such revision does not materially impair its right to
perform its obligations under this Agreement.
ARTICLE V
COVENANTS
Section 5.1 Full and Complete Access.
(a) Transferors shall afford Transferees full and complete access
to all Books and Records relating to the Business; contracts and
financial statements relating to the Business; projections, facilities,
personnel, business plans, work papers involved in or related to the
Business; and financial and other data pertaining to the Business,
including, but not limited to, accurate and complete copies of all
in-force Insurance Contracts; underwriting, claim, loss prevention or
engineering files, renewal and Producer lists; actuarial reviews; loss
runs pertaining to the Business; and descriptions of the compensation
and of responsibilities of the Employees. Transferors shall furnish
promptly to Transferees copies of such materials as Transferees shall
request.
(b) Transferors shall afford Transferees full and complete access to
all of their records relating to Producers, and shall furnish promptly
to Transferees copies of such records as Transferees shall request, for
the purpose of assisting Transferees in appointing such Producers.
Transferors shall use commercially reasonable efforts to obtain any
consents necessary for access to all records relating to Producers.
Transferees covenant and agree that they shall not use such records in
a manner that would cause Transferors to be in material breach of any
contract with any Producers.
(c) Transferees shall afford Transferors full and complete access to
all books, records, contracts and financial statements in respect of
the Replacement Business; projections, facilities, personnel, business
plans and work papers involved in or related to the Replacement
Business; and financial and other data pertaining to the Replacement
Business, including, but not limited to, accurate and complete copies
of all in-force Replacement Contracts; underwriting, claim, loss
prevention or engineering files, renewal and Producer lists; actuarial
reviews; loss runs pertaining to the Replacement Contracts; and
descriptions of the compensation and of responsibilities of the
Employees. Transferees shall furnish promptly to Transferors copies
of such materials as Transferors shall request.
Section 5.2 Expenses. Except as otherwise specifically provided in this
Agreement, the parties to this Agreement shall bear their respective
expenses incurred in connection with the preparation, execution and
performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby. Transferors and Transferees shall be
jointly and equally responsible for any costs associated with copying
the Books and Records transferred to Transferees pursuant to this
Agreement.
Section 5.3 Cooperation and Commercially Reasonable Efforts.
(a) Transferors and Transferees shall cooperate, take all reasonable
steps necessary or desirable, and proceed diligently and in good faith
and use their respective commercially reasonable efforts to obtain, as
promptly as practicable, (i) all approvals and consents required of any
Person under all contracts to which any Transferor is a party (including
without limitation all contracts involving Producers) to consummate the
transactions contemplated hereby, and (ii) all approvals, authorizations
and clearances of governmental and regulatory authorities required to
consummate the transactions contemplated hereby, including without
limitation the Transfer Order and approval of the Department with respect
to the Withdrawal Plan, the Initial Filings and, in the event that the
Initial Filings are disapproved by the Department, the Revised Filings.
Transferors and Transferees shall provide such other information and
communications to such governmental and regulatory authorities as any
party to this Agreement or such authorities may reasonably request.
The duties of Transferors and Transferees include without limitation
those duties listed on Schedule 5.3(a) hereto.
Transferees and Transferors will keep each other informed on a current
basis of the status of the matters described above. It is expressly
understood by the parties hereto that each party hereto shall use
commercially reasonable efforts to ensure that Representatives of both
the Transferees and Transferors shall have the right to attend, but not
participate in, any hearing, proceeding, meeting, conference or similar
event before or with a Governmental Entity or other organization relating
to this Agreement. In furtherance of the foregoing, Transferees and
Transferors shall provide each other reasonable advance notice of any
such hearing, proceeding, meeting, conference or similar event.
(b) Following the Closing, Transferees and Transferors shall provide
reasonable assistance to each other with the investigation of, response
to or defense of any suit, action or proceeding with a third-party
(subject to the provisions of ARTICLE VI) that relates to the Insurance
Contracts or Replacement Contracts (including, without limitation, making
employees of Transferees and Transferors reasonably available, at the
requesting party's expense, in connection with the investigation of,
response to or defense of any such claims).
(c) Transferees and Transferors shall cooperate fully in effecting the
replacement of insurance contracts with Replacement Contracts, which
cooperation shall include, without limitation, each party's periodically
furnishing the other parties hereto information concerning the status of
its respective filings with insurance regulatory authorities. Without
limiting the generality of the foregoing, Transferees shall use all
commercially reasonable efforts to cause the Business Customers to purchase
Replacement Contracts in replacement of their Insurance Contracts in a
manner consistent with the requirements of the Transfer Order.
(d) Transferors and Transferees shall prepare and send to the Business
Customers and Producers, as applicable, letters substantially in the form
set forth in Schedule 5.3(d) attached hereto.
Section 5.4 Notices of Certain Events. Each party shall promptly notify
the other party of:
(a) any notice or other communication received from any Person alleging
that the consent of such Person is or may be required in connection with
the transactions contemplated by this Agreement;
(b) any notice or other communication received relating to the
transactions contemplated by this Agreement and any other significant
notices or other communications from any Governmental Entity; and
(c) any actions, suits, claims (other than claims under Insurance
Contracts in the ordinary course of the Business consistent in all
material respects with past practice), investigations or proceedings
commenced or, to such party's Knowledge, threatened against, relating
to or involving or otherwise affecting such party that relates to the
Business, or that relates to the consummation of a transaction
contemplated by this Agreement.
Section 5.5 Licenses and Permits; Regulatory Compliance.
(a) Transferees will use commercially reasonable efforts to obtain
all Permits and other approvals (and to make all filings) necessary to
enable them to write the Replacement Contracts and to perform their
obligations under this Agreement.
(b) Transferees and Transferors shall, and shall cause their respective
Affiliates and use commercially reasonable efforts to cause their
respective Representatives to, comply in all material respects with all
Applicable Laws relating to their conduct in performing their obligations
under this Agreement.
(c) Transferors will be responsible, at their sole cost and expense,
for all non-renewal and cancellation notifications and other requirements
under Applicable Law with respect to Insurance Contracts, but in no event
shall Transferors be responsible for such notifications and requirements
with respect to Replacement Contracts or any renewal or extension thereof.
Transferees and Transferors agree to cooperate with each other with respect
to the timing and content of Transferors' non-renewal and cancellation
notifications to Business Customers in order to facilitate Transferors'
fulfillment of their legal obligations with respect to Business Customers.
The form, substance and timing of all such notifications shall be
acceptable to Transferors in their sole discretion.
Section 5.6 Use of Names. Except as contemplated by this Agreement,
neither party to this Agreement shall have any right to use, nor shall
any such party use, any corporate name or acronym of the other party
hereto or any of such other party's Affiliates in any jurisdiction, or
any other name, term or identification that suggests, simulates or is
otherwise confusing due to its similarity to the foregoing.
Section 5.7 Relationships with Producers and Holders of Insurance
Contracts.
(a) Transferees, with Transferors' consent, which consent will not be
unreasonably withheld, may make any communications with Producers and
Business Customers as they deem reasonably necessary or appropriate for
the purpose of carrying out Transferees' obligations with respect to the
sale and issuance of Replacement Contracts under this Agreement.
(b) Transferees shall use all commercially reasonable efforts to appoint
as producers of Transferees all of the current Producers of the Schedule A
Policies and the Schedule C Policies. Transferors will cooperate with and
assist Transferees throughout the appointment process.
(c) With respect to all Replacement Contracts issued or caused to be
issued by Transferees pursuant to this Agreement in respect of Schedule
A Policies and Schedule C Policies, and for a period of one (1) year
following the date of appointment of a Producer as a producer of
Transferees, Transferees agree that they shall pay commissions to
Producers in accordance with the commission schedules and at the same
or better commission rates as those in use by Transferors as of the
Closing Date (as attached hereto as Schedule 5.7(c)), but excluding any
amounts payable under Transferors' Agency Profit Sharing Agreement.
(d) Notwithstanding anything to the contrary contained in this
Agreement, this Agreement shall not limit the ability of Transferors:
(i) to engage in conduct necessary or appropriate to withdraw from any
line of business; (ii) to handle and defend claims with and otherwise
provide policyholder services to Business Customers or third-party
plaintiffs; and (iii) to engage in lines of insurance business other
than the lines of insurance business of the Schedule A Policies,
Schedule B Policies and Schedule C Policies.
(e) Transferors shall cooperate with Transferees to ensure that
Business Customers, suppliers, reinsurers, regulatory bodies, agents,
brokers, producers, distributors, lessors, employees, business
associates and other relevant Persons involved with the Insurance
Contracts are notified to the extent appropriate concerning the
transactions contemplated hereby. The expenses of Transferors incurred
in connection therewith shall be borne equally by Transferors and
Transferees.
Section 5.8 Confidentiality. Each party hereto (all Transferors, on
the one hand, and both Transferees, on the other hand, each to be
considered to be one party for purposes of this Section 5.8) will hold,
will cause its respective Affiliates to hold, and will use commercially
reasonable efforts to cause its respective Representatives to hold, in
strict confidence from any Person (other than any such Affiliates or
Representatives), except with the prior written consent of the other
party or unless compelled to disclose by judicial or administrative
process (including without limitation in connection with obtaining the
necessary approvals of this Agreement and the transactions contemplated
hereby of governmental or regulatory authorities) or by other
requirements of Applicable Law, all documents and information
concerning the other party or any of its Affiliates furnished to it
by the other party or such other party's Representatives in connection
with this Agreement or the transactions contemplated hereby, except to
the extent that such documents or information can be shown to have been
(a) previously known by the party receiving such documents or
information, (b) in the public domain (either prior to or after the
furnishing of such documents or information hereunder) through no fault
of such receiving party or (c) later acquired by the receiving party
from another source if the receiving party is not aware that such source
is under an obligation or duty to another party hereto to keep such
documents and information confidential; provided, that following the
Closing the foregoing restrictions will not apply to Transferees' use
of documents and information concerning the Business furnished by
Transferors hereunder to the extent necessary to comply with
Transferees' obligations under this Agreement, and provided, that
Transferees shall accord such information the same protection that
Transferees afford comparable information of Transferees'.
Section 5.9 Further Assurances. Transferors and Transferees shall use
commercially reasonable efforts to take, or cause to be taken, all
actions or do, or cause to be done, all things or execute any documents
necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement. Transferors and Transferees
shall execute any additional documents, instruments or conveyances and
make any filings of any kind which may be reasonably necessary to carry
out any of the provisions of this Agreement.
Section 5.10 Employees.
(a) Attached hereto as Schedule 5.10(a) is a list of employees of
Transferors currently employed in the Business (an "Employee" or the
"Employees," as the context requires). For purposes of the preceding
sentence, the term "Employee" shall include (i) each employee who is
actively employed on the date hereof and (ii) each employee who is not
physically at work on such day solely because he is on employer-approved
sick leave, short-term disability leave, vacation leave, maternity leave,
paid time off, or leave under the Family and Medical Leave Act of 1993,
but shall not include any person who on the date hereof is on long-term
disability leave. Prior to March 12, 2001, Transferees shall advise
Transferors of the Employees to whom it is considering offering
employment, and prior to April 15, 2001, Transferees shall offer
employment to such Employees as it shall determine in its sole
discretion, on terms no less favorable with respect to compensation and
incentives than those provided by the Transferees to their own
employees. Each such Employee who transfers to employment with
Transferees pursuant to the provisions hereof is referred to herein as
a "Transferred Employee" and each Employee described in clause (ii) of
the first section of this Section 5.10(a) who commences employment with
Transferees at any time after the Closing Date shall become a Transferred
Employee on the date such employee commences active employment with one
or more Transferees (and each reference to the Closing Date in this
Section 5.10 shall, with respect to any person who becomes a Transferred
Employee after the Closing Date, refer to the date such person becomes a
Transferred Employee).
(b) Transferees will have no responsibility or liability whatsoever
for compensation, severance or employee benefits matters relating to
(i) pre-Closing matters, or (ii) post-Closing matters relating to
Transferors' employees who have not been extended offers of employment
by Transferees or who have rejected Transferees' offers of employment.
(c) Transferees shall provide Transferred Employees severance
benefits in accordance with the severance policy of Transferors which is
generally applicable to such Transferred Employees. Transferees shall
give Transferred Employees service credit, for purposes of determining
the level of benefits under such severance policy, for the Transferred
Employees' service with Transferors to the same extent recognized by
Transferors immediately prior to the Closing Date.
Section 5.11 Specific Performance. If any party hereto commits a
breach, or is about to commit a breach, of any of the provisions of
Section 5.6, each of the other parties hereto shall have the right to
have the provisions of such Section specifically enforced by any court
having equity jurisdiction, whether by injunction or otherwise, it being
acknowledged and agreed that any such breach or threatened breach may
cause irreparable injury to each of the non-breaching parties and that
money damages may not provide an adequate remedy to such parties. In
addition, in connection with each such Section, each of the parties
hereto may take all such other actions and remedies available to it under
law or in equity and shall be entitled to such damages as it can show it
has sustained by reason of such breach.
Section 5.12 Preparation of Materials to be Distributed. From and
after the date hereof, the parties hereto shall cooperate and take all
actions necessary to prepare materials for distribution to Business
Customers (i) describing Transferors' withdrawal from the personal lines
insurance business in the State of New York, including Transferors'
intention to non-renew all Insurance Contracts and (ii) describing
Transferees' assumption of offering Replacement Contracts for sale to
such Business Customers (the "Transfer Materials"). Such materials
shall be in form and substance reasonably acceptable to the parties
hereto and designed to facilitate receipt of the Transfer Order and
approval of the Department with respect to the Withdrawal Plan.
Section 5.13 Net Written Premium to Surplus Ratio. Until such
time as Transferees have satisfied their obligations under Section 2.3
of this Agreement, Tower Insurance shall at all times maintain net
written premium to surplus ratio (as reported on quarterly and annual
financial statements filed with the Department) of below 1.5 to 1.
Section 5.14 Non-compete. Transferors shall not use the Books
and Records to sell or market insurance products of the same type as
the Insurance Contracts to the Business Customers (other than those
Business Customers who are not issued Replacement Contracts by
Transferees) for a period of two (2) years following the Closing Date.
Section 5.15 Rate Filings. In the event that the Department
disapproves any or all of the Initial Filings or the Revised Filings,
Transferees shall offer Replacement Contracts (to the extent that
Transferees have approved products comparable in coverage to the
Insurance Contracts) at Transferors' current rates unless and until
new rates on Replacement Contracts are approved by the Department.
ARTICLE VI
SURVIVAL; INDEMNIFICATION
Section 6.1 Survival. The representations and warranties of the
parties hereto contained in this Agreement shall survive the Closing
until twelve (12) months after the Closing Date, whereupon they shall
expire, and all claims for breach of said representations and
warranties shall be deemed waived unless the non-breaching party
notifies the breaching party of the matters constituting such breach
prior to the expiration of said twelve (12) month period.
Section 6.2 Indemnification.
(a) Subject to Section 6.1, Section 6.2(c), Section 6.4 and Section
6.5 hereof, Transferors shall jointly and severally indemnify, defend
and hold harmless Transferee Indemnitees for any and all Damages
resulting or arising from or relating to:
(i) any breach by Transferors of any representation, warranty,
covenant or agreement made by Transferors in this Agreement;
(ii) Transferors' conduct in marketing, selling, or administering
the Insurance Contracts; and
(iii) the Insurance Contracts and Non-Replaced Contracts.
(b) Subject to Section 6.1, Section 6.2(c), Section 6.4 and Section
6.5 hereof, Transferees shall jointly and severally indemnify, defend
and hold harmless Transferor Indemnitees for any and all Damages
resulting or arising from or relating to:
(i) any breach by Transferees of any representation, warranty, covenant
or agreement made by Transferees in this Agreement;
(ii) Transferees' conduct in marketing, selling or administering the
Replacement Contracts;
(iii) Transferees' conduct in effecting the replacement of Insurance
Contracts with Replacement Contracts, including without limitation,
as a result of written or oral communication by Transferee Indemnitees
with Business Customers concerning such replacement or the terms and
conditions of the Replacement Contracts; and
(iv) the Replacement Contracts.
(c) No claim by an Indemnified Party for indemnification under this
Agreement may be made unless and until such Indemnified Party has
incurred Damages in excess of $25,000 in the aggregate that would, but
for this paragraph, be indemnifiable under this Agreement, at which time,
all amounts of Damages (including such $25,000) may be claimed and
recovered as provided in this Agreement. Transferors, collectively,
shall not be liable for indemnification claims under this Agreement in
an amount in excess of $3,000,000 in the aggregate. Transferees,
collectively, shall not be liable for indemnification claims under this
Agreement in an amount in excess of $5,000,000 in the aggregate.
(d) Required payments by any Indemnifying Party (as hereinafter defined)
pursuant to this ARTICLE VI shall be limited to the amount of any Damages
that remains after deducting therefrom (i) any insurance proceeds
recoverable by any Indemnified Party (less any increase in premium
specifically related to the incurrence of such Damages) and (ii) any
indemnity, contribution or other similar payment recoverable by any
Indemnified Party from any third-party, in each case with respect to
such Damages. The Indemnified Party shall use commercially reasonable
efforts to collect all such insurance proceeds and indemnity,
contribution and other similar payments.
Section 6.3 Procedures for Third-party Claims.
(a) The party seeking indemnification under Section 6.2 (the
"Indemnified Party") agrees to give prompt notice (in accordance with
Section 7.11) to the party against whom indemnity is sought (the
"Indemnifying Party") of the assertion by a third-party of any claim,
or the commencement of any suit, action or proceeding in respect of
which indemnity may be sought under Section 6.2 (the "Third-party
Claims"). Such notice referred to in the preceding sentence shall state
the relevant facts and include therewith relevant documents and a
statement in reasonable detail as to the basis for the indemnification
sought. The failure by any Indemnified Party so to notify the
Indemnifying Party shall not relieve any Indemnifying Party from any
liability which it may have to such Indemnified Party with respect to any
claim made pursuant to this Section 6.3, except to the extent such failure
shall actually prejudice an Indemnifying Party. In the event of the
assertion of any claim or the commencement of any suit, action or
proceeding in respect of which indemnity would be sought by the
Indemnified Party but for the fact that the notice of such claim, suit,
action or proceeding was sent to the Indemnifying Party, the
Indemnifying Party shall give prompt notice to the Indemnified Party
of such claim, suit, action or proceeding.
(b) Upon receipt of notice from the Indemnified Party pursuant to
Section 6.3(a), the Indemnifying Party will have the right to, subject
to the provisions of Section 6.3(c), assume the defense and control of
such Third-party Claims. In the event the Indemnifying Party assumes
the defense of a Third-party Claim, the Indemnified Party shall have
the right but not the obligation to participate in the defense of such
Third-party Claim with its own counsel and at its own expense (except
as provided in Section 6.3(c)) and the Indemnifying Party will
cooperate with the Indemnified Party. Any election by an Indemnifying
Party not to assume the defense of a Third-party Claim must be received
by the Indemnified Party reasonably promptly following its receipt of
the Indemnified Party's notice delivered pursuant to Section 6.3(a).
If the Indemnifying Party elects to assume the defense of a Third-party
Claim, the Indemnifying Party shall select counsel reasonably acceptable
to the Indemnified Party; shall take all steps necessary in the defense
or settlement of such Third-party Claims; and shall at all times
diligently and promptly pursue the resolution of such Third-party
Claims. The Indemnified Party shall, and shall cause each of its
Affiliates and shall use commercially reasonable efforts to cause its
respective Representatives to, cooperate fully with the Indemnifying
Party in the defense of any Third-party Claim defended by the
Indemnifying Party.
(c) The Indemnifying Party shall be authorized to consent to a
settlement of, or the entry of any judgment arising from, any Third-
party Claim as to which the Indemnifying Party has assumed the defense
in accordance with the terms of Section 6.3(b), without the consent of
any Indemnified Party, but only to the extent that such settlement or
entry of judgment: (i) provides solely for the payment of money by the
Indemnifying Party; (ii) provides a complete release of any Indemnified
Party potentially affected by such Third-party Claim from all matters
that were or could have been asserted in connection with such claim;
(iii) requires no admission or acknowledgment of fault or liability by
the Indemnified Party or any Affiliate thereof and (iv) does not impair
the ability of the Indemnified Party to conduct its business. Except
as provided in the foregoing sentence, settlement or consent to entry
of judgment shall require the prior approval of the Indemnified Party,
such approval not to be unreasonably withheld, delayed or conditioned.
Section 6.4 Procedures for Direct Claims. In the event any
Indemnified Party shall have a claim for indemnity against any
Indemnifying Party that does not involve a Third-party Claim, the
Indemnified Party shall deliver notice of such claim with reasonable
promptness to the Indemnifying Party. Such notice referred to in the
preceding sentence shall state the relevant facts and include therewith
relevant documents and a statement in reasonable detail as to the basis
for the indemnification sought. The failure by any Indemnified Party
so to notify the Indemnifying Party shall not relieve the Indemnifying
Party from any Liability that it may have to such Indemnified Party
with respect to any claim made pursuant to this Section 6.4, it being
understood that notices for claims in respect of a breach of a
representation or warranty must be delivered prior to the expiration of
the survival period for such representation or warranty.
Section 6.5 Exclusive Remedy. The parties hereto expressly
acknowledge that (i) the provisions of Section 5.11 hereof and this
ARTICLE VI shall be the sole and exclusive remedy for Damages caused
as a result of breaches of the representations, warranties and
covenants contained in this Agreement and (ii) no Indemnifying Party
shall be liable for punitive or treble Damages in connection with any
action, suit or proceeding brought by Transferees against one or more
Transferor or by one or more Transferor against Transferees.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Entire Agreement. This Agreement, including all
Schedules and Exhibits attached hereto or thereto, constitute the
entire contract between the parties and there are no understandings
other than as expressed in this Agreement. All Schedules and Exhibits
hereto are expressly made a part of this Agreement as fully as though
completely set forth herein. Any amendment or modification hereto shall
be null and void unless made by amendment to this Agreement and, as
applicable, signed by the parties affected by such amendment.
Section 7.2 Binding Effect. This Agreement is and shall apply to,
and inure to the benefit of and be binding upon and enforceable against,
each party hereto and its successors and permitted assigns (including,
without limitation, any subsequent direct or indirect shareholder of
Transferors).
Section 7.3 No Third-Party Beneficiaries. Nothing in this
Agreement is intended or shall be construed to give any person, other
than the parties hereto, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein,
unless otherwise expressly provided herein.
Section 7.4 Setoff. Each of Transferors and Transferees agrees
that it shall have the right to set-off any payment due pursuant to
this Agreement or any other agreement, arrangement, understanding or
obligation between Transferors, on the one hand, and Transferees, on
the other hand, against any other payment to be made pursuant to this
Agreement, or any other agreement, arrangement, understanding or
obligation between Transferors, on the one hand, and Transferees, on
the other hand.
Section 7.5 Invalidity. Unless the invalidity or
unenforceability of any provision or portion thereof frustrates the
intent of the parties or the purpose of this Agreement, such
invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions or portions thereof. In the
event that any such provision or portion thereof shall be declared
unenforceable by a court of competent jurisdiction, such other
provision or portion thereof, to the extent declared unenforceable,
shall be stricken. However, in the event any such other provision or
portion thereof shall be declared unenforceable due to its scope,
breadth or duration, then it shall be modified to the scope, breadth
or duration permitted by law and shall continue to be fully enforceable
as so modified.
Section 7.6 Governing Law. This Agreement shall be deemed to have
been made under and governed by the laws of New York, without regard to
New York choice of law rules.
Section 7.7 Jurisdiction. Each of the parties hereto irrevocably
and unconditionally submits to the exclusive jurisdiction of The United
States District Court for the Southern District of New York or, if such
court does not have jurisdiction, New York State Supreme Court in the
borough of Manhattan, for purposes of enforcing this Agreement. The
parties shall take such actions as are within their control to cause
any matter contemplated hereby to be assigned to the Commercial
Division of the Supreme Court. In any such action, suit or other
proceeding, each of the parties hereto irrevocably and unconditionally
waives and agrees not to assert by way of motion, as a defense or
otherwise, any claims that it is not subject to the jurisdiction of the
above court, that such action or suit is brought in an inconvenient
forum or that the venue of such action, suit or other proceeding is
improper. Each of the parties hereto also agrees that any final and
unappealable judgment against a party hereto in connection with any
action, suit or other proceeding shall be conclusive and binding on
such party and that such award or judgment may be enforced in any court
of competent jurisdiction, either within or outside of the United
States. A certified or exemplified copy of such award or judgment shall
be conclusive evidence of the fact and amount of such award or
judgment. Without limiting the foregoing, each party agrees that service
of process on such party as provided in Section 7.11 shall be deemed
effective service of process on such party.
Section 7.8 Waiver of Jury Trial. Each of the Parties hereto
hereby irrevocably waives any and all right to trial by jury in any
legal proceeding arising out of or related to this Agreement or the
transactions contemplated hereby.
Section 7.9 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. This
Agreement shall become effective when one or more counterparts have
been signed by each party hereto and delivered to the other parties
hereto.
Section 7.10 Headings. The headings in this Agreement are for the
convenience of reference only and shall not affect its interpretations.
Section 7.11 Notices. All notices and other communications under
this Agreement shall be in writing and shall be delivered personally,
sent by facsimile transmission or sent by overnight courier or certified,
registered or express mail, postage prepaid. Any such notice or other
communication shall be deemed given: (i) upon actual delivery if
presented personally or sent by facsimile transmission, (ii) one (1)
Business Day following delivery to an overnight courier or (iii) three
(3) Business Days following deposit in the United States mail, if sent
by certified, registered or express mail, postage prepaid, in each case
to the following addresses:
(a) If to Transferees:
Tower Insurance Company of New York
120 Broadway
14th Floor
New York, NY 10271
Attn: Michael H. Lee
Facsimile No.: (212) 271-5492
With concurrent copies, which shall not constitute notice, to:
McLaughlin & Stern, LLP
260 Madison Avenue
New York, NY 10016
Attn: Steven Schuster, Esq.
Facsimile No.: (212) 448-0066
(b) If to Transferors:
Empire Insurance Group
335 Adams Street
Brooklyn, New York 1120
Attn: Rocco Nittoli
Facsimile No.: (718) 422-4429
With concurrent copies, which shall not constitute notice, to:
Leucadia National Corporation
200 East South Temple
Salt Lake City, Utah 84111
Attn: H.E. Scruggs
Facsimile No.: (801) 297-1765
and
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038
Attn: Donald D. Gabay, Esq.
Facsimile No.: (212) 806-6006
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF TRANSFEREES
The obligations of Transferees hereunder are subject to the fulfillment,
at or before the Closing, of each of the following conditions (all or
any of which may be waived in whole or in part by Transferees, except
for Section 8.4). Transferors shall use their reasonable best efforts
to fulfill, at or before the Closing, such of the following conditions
(or portions thereof) over which they have any control.
Section 8.1 Representations and Warranties. The representations
and warranties of the Transferors contained in this Agreement shall
have been true and correct as of the Closing Date with the same effect
as though such representations and warranties had been made at and as of
such date, except (i) that any such representations and warranties that
are given as of a specified date and relate solely to a specified date or
period shall be true and correct only as of such date or period and (ii)
to the extent any breach thereof, individually or when aggregated with all
such breaches, has not and would not reasonably be expected to have a
material adverse effect on the validity or enforceability of this
Agreement, the ability of the Transferees to perform its obligations
under this Agreement, or a Material Adverse Effect.
Section 8.2 Performance. Transferors shall have performed and
complied with, in all material respects, all agreements, covenants,
obligations, and conditions required by this Agreement to be so performed
or complied with by Transferors (as appropriate) at or before the Closing.
Section 8.3 Officer's Certificates. Transferors shall have
delivered to Transferees a certificate, dated the Closing Date and
executed by an executive officer of Empire, certifying as to the
fulfillment by Transferors of the conditions (or portions thereof) over
which it has control set forth in Section 8.1 and Section 8.2 hereof.
In addition, Transferors shall have delivered to Transferees a
certificate, dated the Closing Date and executed by the secretary or any
assistant secretary of Transferors, certifying that Transferors have duly
and validly taken all corporate action necessary to authorize its
execution and delivery of this Agreement and the performance of its
obligations under this Agreement.
Section 8.4 Rate and Form Filings. Transferees shall have
received an approval in form and substance reasonably acceptable to
Transferees from the Department with respect to the Initial Filings
or, if the Department disapproves the Initial Filings, the Revised
Filings.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF TRANSFERORS
The obligations of Transferors hereunder are subject to the fulfillment,
at or before the Closing, of each of the following conditions (all or
any of which may be waived in whole or in part by Transferors, except
for Section 9.4 and Section 9.5). Transferees shall use their
reasonable best efforts to fulfill, at or before the Closing, such of
the following conditions (or portions thereof) over which it has any
control.
Section 9.1 Representations and Warranties. The representations
and warranties of Transferees contained in this Agreement shall have been
true and correct as of the Closing Date with the same effect as though
such representations and warranties had been made at and as of such date,
except (i) that any such representations and warranties that are given as
of a specified date and relate solely to a specified date or period shall
be true and correct only as of such date or period and (ii) to the extent
any breach thereof, individually or when aggregated with all such breaches,
has not and would not reasonably be expected to have a material adverse
effect on the validity or enforceability of this Agreement, the ability of
the Transferors to perform its obligations under this Agreement, or a
Material Adverse Effect.
Section 9.2 Performance. Transferees shall have performed and
complied with, in all material respects, all agreements, covenants,
obligations, and conditions required by this Agreement to be so performed
or complied with by Transferees at or before the Closing.
Section 9.3 Officer's Certificates. Transferees shall have
delivered to Transferors a certificate, dated the Closing Date and
executed by an executive officer of Tower Insurance, certifying as to the
fulfillment of the conditions set forth in Section 9.1 and Section 9.2
hereof. In addition, Transferees shall have delivered to Transferors a
certificate, dated the Closing Date and executed by the secretary or any
assistant secretary of Transferees, certifying that Transferees have duly
and validly taken all corporate action necessary to authorize its
execution and delivery of this Agreement and the performance of its
obligations under this Agreement.
Section 9.4 Transfer Order; Withdrawal Plan. Transferors shall
have obtained the approval of the Department, in form and substance
acceptable to Transferors in their sole discretion (the "Transfer Order"),
as to (i) the assumption by Transferees of Transferors' obligations to
renew the Insurance Contracts under Applicable Law, including without
limitation Section 3425 of the New York Insurance Law, and (ii) the
resulting satisfaction and release of Transferors' obligations to renew
the Insurance Contracts under Applicable Law, including without
limitation Section 3425 of the New York Insurance Law. All conditions
to the effectiveness of the Transfer Order (including without limitation
filing with and approval by the Department of all Replacement Contract
forms and rates that had not been filed and approved as of the date
hereof) shall have been satisfied or waived in writing by the
Department. The Withdrawal Plan shall have been approved by the
Department if such approval is required by the Department.
Section 9.5 Rate and Form Filings. Transferors shall have
received an approval in form and substance reasonably acceptable to
Transferors from the Department with respect to the Initial Filings or,
if the Department disapproves the Initial Filings, the Revised Filings.
ARTICLE X
TERMINATION
Section 10.1 Termination. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned:
(a) at any time before the Closing by written agreement of
Transferors and Transferees;
(b) at any time before the Closing by Transferors if any of the
covenants set forth in ARTICLE V shall have been breached in any
material respect, and such breach has not been cured or eliminated
within thirty (30) days after notice thereof has been given to
Transferees; provided that at the time of such termination Transferors
have not breached any of the representations and warranties set forth
in ARTICLE III nor failed to satisfy, perform, or comply with any of
the covenants set forth in ARTICLE V hereof required to be complied
with as of such date, in any material respect;
(c) at any time before the Closing by Transferees if any of the
covenants set forth in ARTICLE V shall have been breached in any
material respect, and such breach has not been cured or eliminated
within thirty (30) days after notice thereof has been given to
Transferors; provided that at the time of such termination Transferees
have neither breached any of the representations and warranties set
forth in ARTICLE IV nor failed to satisfy, perform, or comply with any
of the covenants set forth in ARTICLE V hereof required to be complied
with as of such date, in any material respect; or
(d) at any time after September 1, 2001 by Transferors or Transferees
if the transactions contemplated by this Agreement have not been
consummated on or before such date and such failure to consummate is
not caused by a breach of this Agreement by the party electing to
terminate pursuant to this Section 10.1.
Section 10.2 No Termination if in Breach. Transferors may not terminate
this Agreement pursuant to Section 10.1(d) hereof if Transferors are,
at the time of such attempted termination, in material breach of any of
its respective representations, warranties, covenants, or agreements
under this Agreement. Transferees may not terminate this Agreement
pursuant to Section 10.1(d) hereof if Transferees are, at the time of
such attempted termination, in material breach of any of their
representations, warranties, covenants, or agreements under this
Agreement.
Section 10.3 Effect of Termination. If this Agreement is validly
terminated pursuant to Section 10.1 hereof, this Agreement shall
become null and void except that:
(a) Transferors shall promptly refund the Signing Payment to
Transferees;
(b) Transferees shall pay all payments due Transferors pursuant to
Section 2.2 of this Agreement in respect of any Replacement Contract
issued prior to the Termination Date;
(c) after the Termination Date, Transferees shall have the right to
actively solicit Business Customers for the purpose of issuing or
causing to be issued Replacement Contracts with Producers who have
been appointed by Transferees as of the date hereof; however,
Transferees shall pay Transferors a reduced Percentage Payment equal
to 1% of the First Year Premium in the manner set forth in Section 2.2
of this Agreement with respect to Producers who have not been appointed
by Transferees as of the date hereof; and
(d) no party hereto will be relieved of any Liability for Damages that
such party may have to the other parties by reason of such party's breach
of this Agreement (or any representation, warranty, covenant, or agreement
included herein).
Section 10.4 Provisions Surviving Termination. In the event of any
expiration, termination, or cancellation of this Agreement, the provisions
hereof which by their terms are intended to continue and survive, shall so
continue and survive, including, but not limited to, the provisions of
Section 2.2 and Section 5.8 and this ARTICLE X.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of Transferees and Transferors as of the
date first above written.
EMPIRE INSURANCE COMPANY
By:
Name:
Title:
ALLCITY INSURANCE COMPANY
By:
Name:
Title:
CENTURION INSURANCE COMPANY
By:
Name:
Title:
TOWER INSURANCE COMPANY OF NEW YORK
By:
Name:
Title:
TOWER RISK MANAGEMENT CORP.
By:
Name:
Title:
ARTICLE I DEFINITIONS 2
Section 1.1 Definitions 2
Section 1.2 Interpretation 6
Section 1.3 References 6
ARTICLE II ASSIGNMENT AND REPLACEMENT 7
Section 2.1 Replacement; Assignment and Assumption of Renewal
Obligations 7
Section 2.2 Consideration 7
Section 2.3 Issuance of Replacement Policies 8
Section 2.4 The Closing 9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF TRANSFERORS 10
Section 3.1 Corporate Existence and Power 10
Section 3.2 Corporate Authorization 10
Section 3.3 Governmental Authorization 10
Section 3.4 Non-Contravention 10
Section 3.5 Compliance with Laws 11
Section 3.6 Regulatory Filings 11
Section 3.7 No Brokers 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TRANSFEREE 12
Section 4.1 Corporate Existence and Power 12
Section 4.2 Corporate Authorization 12
Section 4.3 Governmental Authorization 12
Section 4.4 Non-Contravention 13
Section 4.5 Licenses and Permits 13
Section 4.6 No Brokers 13
Section 4.7 Rating 13
Section 4.8 Reinsurance 13
ARTICLE V COVENANTS 14
Section 5.1 Full and Complete Access 14
Section 5.2 Expenses 14
Section 5.3 Cooperation and Commercially Reasonable Efforts 15
Section 5.4 Notices of Certain Events 16
Section 5.5 Licenses and Permits; Regulatory Compliance 16
Section 5.6 Use of Names 16
Section 5.7 Relationships with Producers and Holders of Insurance
Contracts 17
Section 5.8 Confidentiality 17
Section 5.9 Further Assurances 18
Section 5.10 Employees 18
Section 5.11 Specific Performance 19
Section 5.12 Preparation of Materials to be Distributed 19
Section 5.13 Net Written Premium to Surplus Ratio 20
Section 5.14 Non-compete 20
Section 5.15 Rate Filings 20
ARTICLE VI SURVIVAL; INDEMNIFICATION 20
Section 6.1 Survival 20
Section 6.2 Indemnification 20
Section 6.3 Procedures for Third-party Claims 21
Section 6.4 Procedures for Direct Claims 22
Section 6.5 Exclusive Remedy 23
ARTICLE VII MISCELLANEOUS PROVISIONS 23
Section 7.1 Entire Agreement 23
Section 7.2 Binding Effect 23
Section 7.3 No Third-Party Beneficiaries 23
Section 7.4 Setoff 23
Section 7.5 Invalidity 24
Section 7.6 Governing Law 24
Section 7.7 Jurisdiction 24
Section 7.8 Waiver of Jury Trial 24
Section 7.9 Counterparts 24
Section 7.10 Headings 25
Section 7.11 Notices 25
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF TRANSFEREES 26
Section 8.1 Representations and Warranties 26
Section 8.2 Performance 26
Section 8.3 Officer's Certificates 27
Section 8.4 Rate and Form Filings 27
ARTICLE IX CONDITIONS TO OBLIGATIONS OF TRANSFERORS 27
Section 9.1 Representations and Warranties 27
Section 9.2 Performance 27
Section 9.3 Officer's Certificates 27
Section 9.4 Transfer Order; Withdrawal Plan 28
Section 9.5 Rate and Form Filings 28
ARTICLE X TERMINATION 28
Section 10.1 Termination 28
Section 10.2 No Termination if in Breach 29
Section 10.3 Effect of Termination 29
Section 10.4 Provisions Surviving Termination 30
INDEX OF SCHEDULES
Schedule 1.1(a) - Schedule A Policies
Schedule 1.1(b) - Schedule B Policies
Schedule 1.1(c) - Schedule C Policies
Schedule 1.1(e) - Initial Filings
Schedule 1.1(f) - Revised Filings
Schedule 4.8 - Reinsurance
Schedule 5.3(a) - Duties of Transferors and Transferees
Schedule 5.3(d) - Transferors' and Transferees' Letters
Schedule 5.7(c) - Empire Insurance Group Commissions as of
12/31/00
Schedule 5.10(a) - Employees
Schedule 1.1(a)
Schedule A Policies
Homeowners
Dwelling Fire Policies
TOP 3 & 4 Family Owner-Occupied
TOP 3 & 4 Family Owner-Occupied with an HO-4 (contents written on
the owner's dwelling)
Schedule 1.1(b)
Schedule B Policies
TOP (Commercial BOP) product - Other than dwellings of four (4) units
or less.
Commercial Package Policies - Other than those CPP policies in
Schedule 1.1(c)
Commercial Fire Policies
Commercial Umbrella Policies
Workers' Compensation Policies
Schedule 1.1(c)
Schedule C Policies
TOP 3 & 4 Family non-owner-occupied
CPP 3-4 Family (only those that are considered Personal Lines)
Personal Stand Alone Liability (PIC)
Personal Umbrella
Schedule 1.1(e)
Initial Filings
1 Transferees will expand the eligibility of the Dwelling Fire Product
so that it may write 3 & 4 family owner-occupied and owner-occupied with
contents business. Transferees will withdraw the current Underwriting
Rating Bureau ("URB") Landlord Package Program product.
2 Transferees will expand the eligibility of the Business Owners
Product ("BOP") to write three-and four-family non-owner-occupied
dwellings business.
3 Transferors will withdraw the current Total Owners Protection
("TOP") filing which calls for a fifteen percent (15%) rate increase.
Transferors will instead file the following rate revisions:
3 & 4 family owner-occupied without contents +14%
3 & 4 family owner-occupied with contents +20%
3 & 4 family non-owner-occupied +30%
Commercial BOP + 0%
Transferees' initial rates for the expanded Dwelling Fire Product and
expanded BOP product will be based on Transferors' rates with the rate
increase indicated above.
4 Personal Insurance Coverage ("PIC") Product: Transferees will
subscribe to the Insurance Services Office, Inc. for Stand Alone
Dwelling Liability. Transferees will file Transferors' rates, rules
and a Declaration Page for this product. Transferors will continue
to non-renew all eligible policies. Transferees will file a rate
increase for the PIC (Stand Alone Liability) Product, which will take
effect in the second year of the policy period.
5 Personal Umbrella: Transferees will file Transferors' form
Declaration Page and Rating Rules.
6 Transferees will increase Homeowners Product rates to close the
gap between Transferees' Homeowners Product and Transferors' Product.
The rate increase will represent an overall rate increase of five
percent (5%). Transferees' standard tier will increase nine percent
(9%) while the preferred tier will increase approximately five percent
(5%). Transferees' rates will still be between zero to twenty-five
percent (0 - 25%) lower than Transferors' and represent an average
decrease of ten to fifteen percent (10 - 15%).
7 Transferees will increase their Dwelling Fire Product rates to close
the gap between Transferees' Dwelling Fire Product rates and
Transferors' Dwelling Fire Product rates. The rate increase will
represent an overall rate increase of approximately six (6%). The
increase will be for frame construction in Richmond, Bronx and
Manhattan counties. Transferees also will increase premium for
Liability Endorsement by approximately forty percent (40%) or about
thirty dollars ($30). Transferees' rates should be between zero and
fifteen percent (0-15%) lower than Transferors' rates with an average
decrease around seven percent (7%).
8 Transferors and Transferees will review renter's and condominium
policies (HO4 & HO6) to determine whether a rate filing can be made
to ensure that Transferees' rate levels will be similar to
Transferors'. Without a rate adjustment, Transferors will still have
to honor the three (3) year policy period because Transferees' rate
level is higher.
Schedule 1.1(f)
Revised Filings
1. Transferors will file a flat fifteen percent (15%) rate increase
to their TOP product similar to their Initial Filing, which was
withdrawn. Transferees will lower rates on the Initial Filing so that
the rate level will be the same. If this occur, Transferees reserve
the right to revise the percentage of Insurance Contracts as to which
Transferees must offer Replacement Contracts pursuant to Sections 2.3(b)
(ii) and 2.3(b)(iii), but in no event may Transferees alter their
obligations under Section 2.3(b)(i) in any manner.
2. If the expanded Dwelling Fire Product or Business Owner Program
is not approved, Transferees will modify the URB Landlord Package Program
to write 3 & 4 family dwellings whether they are owner-occupied, owner-
occupied with contents, or non-owner-occupied.
Schedule 4.8
Reinsurance
Tower Insurance has entered into the following reinsurance arrangement
for all in force, new and renewal business incepting after January 1,
2001:
Type: 85% Quota Share Reinsurance
Line of Business: Fire, Allied Lines, Homeowners, Commercial Multi-
peril, Workers' Compensation, General Liability,
Automobile Liability and Physical Damage
Limit: $500,000
Reinsurer: PXRE Reinsurance Company, Best rating - A
Share: 100%
Type: First Multiline Excess of Loss Reinsurance
Line of Business: Fire, Allied Lines, Homeowners, Commercial Multi-
peril, Workers' Compensation, General Liability,
Automobile Liability and Physical Damage
Limit: $500,000
Retention: $500,000
Reinsurers: American Re, Best Rating - A++; Scor Reinsurance
Company, Best Rating- A+
Share: 50% each
Type: Second Multiline Excess of Loss Reinsurance
Line of Business: Fire, Allied Lines, Homeowners, Commercial Multi-
peril, Workers' Compensation, General Liability,
Automobile Liability and Physical Damage
Limit: $1,000,000
Retention: $1,000,000
Reinsurers: American Re, Best Rating - A++
Share: 100%
Facultative reinsurance will be purchased on any property with limits
in excess of $2,000,000.
Type: WC Excess of Loss Reinsurance
Line of Business: Workers' Compensation
Limit: $18,000,000
Retention: $2,000,000
Reinsurers: Various
Share: 100%
Type: Catastrophe Excess of Loss Reinsurance
Line of Business: Property
Limit: $2,650,000
Retention: $350,000
Reinsurers: Folksamerica and various others
Share: 100%
Catastrophe placement renews July 1, 2001
Schedule 5.3(a)
Duties of Transferors and Transferees
Transferors' Duties
1 Transferors shall provide Transferees with a Monthly Renewal Report
(based on the specifications provided) one hundred twenty (120) days
prior to the first day of the expiration month of the policy for
Schedule A Policies, Schedule B Policies and Schedule C Policies,
until completion of the transfer obligations outlined in Section
2.3(a) of the Agreement.
In addition, Transferors shall notify Transferees of all transaction
types listed below prior to the expiration of the policy and within
forty-eight (48) hours of receipt of such transaction or request (by
facsimile or mail):
A new claim on a policy with no claims history
An endorsement request affecting the renewal term of the policy
Cancellation transactions - finalization of non-pay cancellation
and insured's request cancellation
Any other relevant correspondence received from an agent or insured
2 Based on Transferees' non-renewal criteria for those 3rd year eligible
policies, subject to the provisions of Section 2.3(b)(ii), Transferors
shall non-renew selected Schedule A Policies forty-five to sixty (45-60)
days prior to the expiration of such policy.
3 Transferors shall non-renew Schedule C Policies forty-five to sixty
(45-60) days prior to the expiration of the policy for those 3rd year
eligible policies.
4 Transferors shall non-renew all Schedule B Policies no more than
sixty to seventy (60-70) days prior to the expiration of the policy.
The non-renewal notice must include a letter jointly drafted by
Transferors and Transferees.
5 Transferors shall provide Transferees with access to the policy files
of the Insurance Contracts, including agent correspondence,
applications, inspection reports, recommendation compliances and
anti-arson applications via access to the POINT Policy Management
System ("POINT"), or its comparable replacement, as well as archives,
microfiche, and imaging for a period of eighteen (18) months from the
date of this Agreement.
6 At Transferees' expense, Transferors shall allow Transferees to set up
T1 line connectivity from Transferees' office to Transferors' office
for access to POINT, or its comparable replacement, for a period of
eighteen (18) months from the date of this Agreement.
7 Transferors shall provide Transferees with a copy of Insurance Contract
policy declarations, schedules and endorsement forms one hundred twenty
(120) days prior to the first day of the expiration month of the policy
by expiration month, until completion of the transfer obligations
outlined in Section 2.3(a) of the Agreement, for all policies except for
those policies non-renewed in Duties 2 and 3 above.
8 Transferors shall provide Transferees with a listing of the names and
addresses, in Microsoft Excel format, of all of Transferors' agents and
sub-brokers by March 1, 2001.
9 As an exception to Duties 1 and 7 above, Transferors shall meet the
following deadlines:
- Wednesday, February 28, 2001, for Schedule B renewal policies
expiring May 15 - May 31
- Wednesday, March 7, 2001, for Schedule B, Homeowners and Dwelling
Fire renewal policies expiring in June
- Thursday, March 15, 2001, for Schedule B, Homeowners and Dwelling
Fire renewal policies expiring in July
Transferees' Duties
1 Transferees shall provide Transferors with the following Monthly
Renewal Report specifications:
Policy Number
Agent
Named Insured
Policy Expiration Date
Line of Business
Expiring Premium
Risk Address
Risk City & State
Risk Zip Code
Business Description
Loss Ratio
Number of Claims
2 Transferees shall provide Transferors with non-renewal criteria for
3rd year policies for the following lines of business:
- Homeowners
- Personal Fire
- Personal TOP 3-4 family owner occupied and owner occupied with
contents
- Personal TOP 3-4 family non-owner occupied
- Personal CPP 3-4 family
3 Transferees shall use best efforts to provide Replacement Contracts to
Business Customers not less than fifty (50) days prior to expiration of
current policy for Schedule A Policies and Schedule C Policies,
excluding those policies that are non-renewed in accordance with
Transferors' Duties 2 and 3. Notwithstanding the foregoing,
Transferors shall provide such Replacement Contracts not less than
thirty (30) days prior to expiration of such policies other than TOP
policies, unless the Department objects, and not less than fifty (50)
days for TOP policies.
Transferees shall offer to sell such Replacement Contracts as promptly as
practicable following the Closing Date, but no later than the following
dates (provided that Transferors meet their obligations to provide
necessary policy data):
- Tuesday, May 15, 2001 for all Schedule B policies
- Sunday, July 1, 2001 for Homeowners and Dwelling Fire policies
- Wednesday, August 1, 2001 for TOP 3-4 family, CPP 3-4 family,
Personal Stand Alone Liability (PIC), and Personal Umbrella policies
4 Transferees shall set up and maintain T1 line connectivity to
Transferors' office.
5 Transferees shall jointly draft a letter with Transferors to be
attached and mailed with Commercial Lines non-renewal notices.
6 Transferees shall execute a non-disclosure agreement with Computer
Sciences Corporation with respect to POINT.
Schedule 5.3(d)
Transferors' and Transferees' Letters
Transferors' Letters to Business Customers and Producers
Personal Lines (Schedule Policies A and Schedule C Policies)
Business Customers who are offered a Schedule A Policies or Schedule C
Policies, in accordance with Section 2.3, will receive one of four
letters from the Transferors:
1. Year 1 and Year 2 policies: Total Owners Protection ("TOP")
Negative enrollment provision: Yes
Same or lower rates: No (subject to rate revision filed by
Transferor)
2. Year 1 and Year 2 policies: Other than TOP
Negative enrollment provision: Yes
Same or lower rates: Yes
3. Year 3 policies: TOP
Negative enrollment provision: No
Same or lower rates: No (subject to rate revision filed by
Transferor)
4. Year 3 policies: Other than TOP
Negative enrollment provision: No
Same or lower rates: Yes
Draft letters are attached as a part of this Schedule. The final
letters, which are to be mutually agreed upon by Transferors and
Transferees, shall include identical or substantially similar
language/intent.
Commercial Lines (Schedule B)
Empire will non-renew all Schedule B Policies in accordance with
Schedule 5.3 (Transferor and Transferee Obligations). A letter will
accompany the non-renewal notice, and will be the same for each
policyholder.
5. All Schedule B Policies
Negative enrollment provision: No (not required on commercial
lines)
Same or lower rates: No (not required)
A draft of this letter is attached as a part of this Schedule. The
final letter, which is to be mutually agreed upon by Transferors and
Transferees, shall include identical or substantially similar
language/intent.
6. Producer Letter
Transferors' draft letter to producers is also attached as Letter #6.
The final letter will be identical or substantially similar to
Letter #6.
Transferees will also send letters of announcement to Producers and to
policyholders. Although these letters are not included as a separate
schedule, they must be mutually agreed upon by Transferors and
Transferees.
Personal Lines (Schedule A Policies and Schedule C Policies)
Letter #1: Year 1 and Year 2 Policyholders: TOP
(Address and Policy Number)
Dear Policyholder:
Introducing Tower Insurance Company of New York
Shortly, you will be receiving a new insurance policy from Tower
Insurance Company of New York. Your new policy will be offered as a
replacement to your existing policy with Empire Insurance Group.
Due to a series of ratings downgrades which will make us an
unacceptable insurer to most mortgage lenders, financial losses, and
a large number of customer complaints, Empire has made the decision to
no longer accept new business or renew existing business. Tower has
agreed to provide this replacement coverage to our customers who have
an existing policy with Empire. We believe this is the best way to
minimize disruption in the insurance market and inconvenience to you.
Our goal, as your insurance provider, is to give you the opportunity
to maintain protection from financial loss. The new policy will
provide similar coverage to that provided under your previous policy
with Empire Insurance Group. The premium charged for your new policy
will also reflect a rate increase previously filed by Empire with New
York Department of Insurance.
Your Agent
You have the same insurance agent. Empire and Tower believe that your
insurance needs are best served by an independent businessperson in
your community. As an insurance professional, your agent's first
concern is proper insurance protection for you and your family. Upon
receipt of your policy we encourage you to review the new terms and
conditions with your agent.
Continuity of Coverage
We are pleased to announce Tower's agreement to provide continued
insurance coverage to you, so that you are not affected and your
coverage is not interrupted by Empire's decisions regarding its
future.
However, New York state law requires us to make an offer of renewal
to you in the Empire Insurance Group for a statutory period, which
in your case is one to two years. If you wish to learn more about
this right, please contact your agent. If your agent is unavailable,
you may contact us directly at (718)422 4000.
Thank you for your patronage as an Empire customer.
Cordially,
Rocco Nittoli
Chief Operating Officer
Personal Lines (Schedule A Policies and Schedule C Policies)
Letter #2: Year 1 and Year 2 Policyholders: Other than TOP
(Address and Policy Number)
Dear Policyholder:
Introducing Tower Insurance Company of New York
Shortly, you will be receiving a new insurance policy from Tower
Insurance Company of New York. Your new policy will be offered as a
replacement to your existing policy with Empire Insurance Group.
Due to a series of ratings downgrades which will make us an
unacceptable insurer to most mortgage lenders, financial losses, and a
large number of customer complaints, Empire has made the decision to no
longer accept new business or renew existing business. Tower has agreed
to provide this replacement coverage to our customers who have an
existing policy with Empire. We believe this is the best way to
minimize disruption in the insurance market and inconvenience to you.
Our goal, as your insurance provider, is to give you the opportunity to
maintain protection from financial loss. The new policy duplicates the
coverages provided under your previous policy with Empire Insurance
Group. The premium charged for your new policy should be the same or
lower as the premium charged for your current policy.
Your Agent
You have the same insurance agent. Empire and Tower believe that your
insurance needs are best served by an independent businessperson in
your community. As an insurance professional, your agent's first
concern is proper insurance protection for you and your family.
Continuity of Coverage
We are pleased to announce Tower's agreement to provide continued
insurance coverage to you, so that you are not affected and your
coverage is not interrupted by Empire's decisions regarding its
future.
However, New York state law requires us to make an offer of renewal
to you in the Empire Insurance Group for a statutory period, which in
your case is one to two years. If you wish to learn more about this
right, please contact your agent. If your agent is unavailable, you
may contact us directly at (718)422 4000.
Thank you for your patronage as an Empire customer.
Cordially,
Rocco Nittoli
Chief Operating Officer
Personal Lines (Schedule A Policies and Schedule C Policies)
Letter #3: Year 3 Policyholders: TOP
(Address and Policy Number)
Dear Policyholder:
Introducing Tower Insurance Company of New York
Shortly, you will be receiving a new insurance policy from Tower
Insurance Company of New York. Your new policy will be offered as a
replacement to your existing policy with Empire Insurance Group.
Due to a series of ratings downgrades which will make us an
unacceptable insurer to most mortgage lenders, financial losses, and
a large number of customer complaints, Empire has made the decision to
no longer accept new business or renew existing business. Tower has
agreed to provide this replacement coverage to our customers who have
an existing policy with Empire. We believe this is the best way to
minimize disruption in the insurance market and inconvenience to you.
Our goal, as your insurance provider, is to give you the opportunity to
maintain protection from financial loss. The new policy will provide
similar coverage to that provided under your previous policy with
Empire Insurance Group. The premium charged for your new policy will
also reflect a rate increase previously filed by Empire with New York
Department of Insurance.
Your Agent
You have the same insurance agent. Empire and Tower believe that your
insurance needs are best served by an independent businessperson in
your community. As an insurance professional, your agent's first
concern is proper insurance protection for you and your family. Upon
receipt of your policy we encourage you to review the new terms and
conditions with your agent.
Continuity of Coverage
We are pleased to announce Tower's agreement to provide continued
insurance coverage to you, so that you are not affected and your
coverage is not interrupted by Empire's decisions regarding its
future. If you have any questions, please contact your agent. If
your agent is unavailable, you may contact us directly at(718)422-4000.
Thank you for your patronage as an Empire customer.
Cordially,
Rocco Nittoli
Chief Operating Officer
Personal Lines (Schedule A Policies and Schedule C Policies)
Letter #4: Year 3 Policyholders: Other than TOP
(Address and Policy Number)
Dear Policyholder:
Introducing Tower Insurance Company of New York
Shortly, you will be receiving a new insurance policy from Tower
Insurance Company of New York. Your new policy will be offered as a
replacement to your existing policy with Empire Insurance Group.
Due to a series of ratings downgrades which will make us an
unacceptable insurer to most mortgage lenders, financial losses, and
a large number of customer complaints, Empire has made the decision to
no longer accept new business or renew existing business. Tower has
agreed to provide this replacement coverage to our customers who have
an existing policy with Empire. We believe this is the best way to
minimize disruption in the insurance market and inconvenience to you.
Our goal, as your insurance provider, is to give you the opportunity
to maintain protection from financial loss. The new policy duplicates
the coverages provided under your previous policy with Empire
Insurance Group. The premium charged for your new policy should be the
same or lower as the premium charged for your current policy for the
same coverages.
Your Agent
You have the same insurance agent. Empire and Tower believe that your
insurance needs are best served by an independent businessperson in
your community. As an insurance professional, your agent's first
concern is proper insurance protection for you and your family.
Continuity of Coverage
We are pleased to announce Tower's agreement to provide continued
insurance coverage to you, so that you are not affected and your
coverage is not interrupted by Empire's decisions regarding its
future. If you have any questions, please contact your agent. If your
agent is unavailable, you may contact us directly at (718)422 4000.
Thank you for your patronage as an Empire customer.
Cordially,
Rocco Nittoli
Chief Operating Officer
Commercial Lines (Schedule B Policies)
Letter #5: All Schedule B Policies
(Address and Policy Number)
Dear Policyholder:
Effective March 1, 2001, Empire Insurance Company, Allcity Insurance
Company and Centurion Insurance Company, (collectively referred to
as "Empire Group") are no longer accepting new insurance applications
and will begin non-renewing existing policies effective May 15, 2001.
Accordingly, please find enclosed a non-renewal notice for your policy
with the Empire Group. Our goal, as your insurance provider, is to
give you the opportunity to maintain protection from financial loss.
As such, we are pleased to announce our agreement with Tower Insurance
Company of New York ("Tower Insurance") and Tower Risk Management
Corp. ("TRM") to provide continuous coverage for those policies that
meet their underwriting and pricing guidelines.
Tower Insurance is a property and casualty insurance company in New
York with a "B+" rating from A.M. Best. TRM is a managing general
agency located in New York City that provides underwriting and claims
services on behalf of Diamond State Insurance Company rated "A+" by
A.M. Best, State National Insurance Company, rated "A" by A. M. Best
and Legion Insurance Company rated "A-" by A.M. Best. Tower Insurance
and TRM are both owned by Tower Group Companies, an insurance holding
company, with headquarters at 120 Broadway, New York, New York.
Tower Insurance and TRM are evaluating your current policy history,
and you may receive a new policy within thirty days of your policy
expiration date. Upon receipt of the policy, we encourage you to
review the new terms and conditions with your insurance agent. If
you do not receive a policy from Tower Group, please contact your
agent for assistance. As an insurance professional, your agent's
primary concern is proper insurance protection for your business.
He or she is aware of the Empire Group's agreement with Tower
Insurance and TRM and is available to respond to your questions.
Thank you for your patronage as an Empire customer.
Very truly yours,
Rocco Nittoli
Chief Operating Officer
LETTER #6 TO ALL PRODUCERS
February 28, 2001
To Our Producers:
Last December, upon announcing Empire's exit from auto lines, we
expressed our desire and intention to continue to write Homeowners,
Fire, and remaining commercial lines insurance (TOP, CPP, and Workers'
Compensation). This has proven a greater challenge than anticipated.
Soon after sending our December letter, Standard & Poors issued a
ratings downgrade to "BB-" and other rating agencies began their
respective reviews. As you are aware, this raises questions about our
ability to insure most property with a mortgage. Furthermore, agents
were understandably disappointed with our announcement, and to make
matters worse fourth quarter loss development was quite severe. All
indications suggested that we were no longer in a position to ask
you to send us your profitable business.
Effective immediately, Empire Insurance Company, Allcity Insurance
Company and Centurion Insurance Company will no longer accept new
applications or binders for any lines except Homeowners pending New
York Insurance Department approval of Empire's plan for withdrawal
from that line. Existing policies will be non-renewed or canceled in
accordance with New York insurance law. If you have a pending binder
or application that you bound within five (5) business days of the
date of this letter we will consider it under current underwriting
guidelines. New business processing and inquiry functions will no
longer be available through ACE (Agency Connection to Empire)
software after March 31, 2001. The Empireinsurance.com website will
remain accessible to you.
Now, for a piece of good news. We promised in December to do our best
to find a buyer for as many of our lines as possible. We have finalized
an agreement with the Tower Insurance Company of New York and Tower
Risk Management whereby they have committed to serve as the replacement
carriers for Empire's personal lines (other than auto) and for many of
our commercial lines. Details of this agreement are included as an
attachment to this letter. Clearly, this is the best way to minimize
market disruption and any inconvenience to you and your insureds. We
are working closely with the Insurance Department and Tower to make
this transition as seamless as possible. We expect to be successful.
We have filed plans of orderly withdrawal for all of our lines of
business where such plans are required. We have met with the Insurance
Department, so they are fully aware of the actions we are taking.
The steps required to exit lines of business have been time consuming
and expensive. Part of the reason we have been slow to explain our
plans - aside from the obvious reason that we have been wrestling to
determine what we should do - is the desire to keep the Insurance
Department informed and to avoid issuing announcements that would
needlessly damage the policyholder surplus, the company, our
shareholders, our agents or our insureds. We needed to be careful,
even if it meant aggravating some of our agents. We apologize for
not being able to communicate with you earlier. We have been told
by a number of other carriers that they are watching the treatment
we receive from agents as well as regulators with great interest. I
hope all of us can concentrate on finding the most productive and
fair course of action possible.
As part of our commitment to honor our claims obligations, we are
strengthening our claim operation. Among other benefits, this action
will result in more efficient claims handling and a more aggressive
approach to fighting fraud.
Will we be able or inclined to reemerge in the New York market some day?
We hope so. Meanwhile, we are able to offer some mitigation of market
disruption through our agreement with Tower.
We are mindful of the hardship and aggravation these decisions may cause
you. These are not moves we have made lightly. We apologize for any
inconvenience these actions may cause to your organization or to your
insureds.
Cordially,
H.E. Scruggs
President & CEO
Attachment: Summary Agreement with Tower Insurance Company of New York
SUMMARY OF EMPIRE AGREEMENT WITH
TOWER INSURANCE COMPANY OF NEW YORK
To minimize disruption to our policyholders, to the insurance marketplace
and to our producers, Empire has reached an agreement with Tower Insurance
Company of New York ("Tower Insurance") and Tower Risk Management ("TRM")
to provide replacement coverage effective May 15, 2001 for certain non-auto
related commercial lines products and effective on or before August 1, 2001
for certain non-auto related personal lines products. Tower and TRM have
also agreed to provide producer appointment for all of Empire's producers
for the aforementioned personal lines renewal business and to other Empire
producers for new business who meet their producer appointment guidelines.
Tower Insurance is a property and casualty insurance company admitted in
New York with a "B+" rating from A.M. Best. TRM is a managing general
agency located in New York City that provides underwriting and claims
services on behalf of Diamond State Insurance Company and United National
Insurance Company, both rated "A+" by A.M. Best, State National Insurance
Company, rated "A" by A. M. Best and Legion Insurance Company and Legion
Indemnity Company, both rated "A-" by A.M. Best. Tower Insurance and
TRM are both owned by Tower Group Companies, an insurance holding company,
with its headquarters at 120 Broadway, New York, New York.
You will be receiving, a letter from Tower Group Companies outlining their
procedure for replacing the renewal policies for the following products:
1. Personal Lines: Homeowners, Dwelling Fire and Owner and Non-owner-
Occupied 3 & 4 family dwelling TOP policies, Personal Umbrella, Personal
Insurance Coverage. This agreement is subject to the approval of the New
York Insurance Department.
2. Commercial Lines: TOP policies with commercial insurance coverage,
CPP, mono-line commercial fire, commercial umbrella, workers compensation
policies. Tower will individually underwrite these risks subject to their
underwriting and pricing guidelines.
Please refer to the letter from Tower Group Companies to provide you with
further guidance on the replacement procedure. We will also send a letter
to the policyholders, in a form approved by the New York Insurance
Department, outlining our decision to exit from the lines of business
described above and our agreement with Tower Insurance and TRM.
Representatives from Tower Insurance and TRM will be in contact with you
shortly to make the appropriate arrangements and to provide you with
specific details.
Thank you for your cooperation and courtesy.
Transferees' Letters to Business Customers and Producers
Producer A
February 27, 2001
Re: Transfer of business from Empire Insurance Company, Allcity
Insurance Company and Centurion Insurance Company (collectively
referred to as "Empire Group") to Tower Insurance Company of New York
("Tower Insurance') and Tower Risk Management Corp. ("TRM")
Dear Producer:
We are pleased to announce that our subsidiary companies, Tower Insurance
and TRM, have entered into an agreement with Empire Group to replace
Empire Group's renewal policies in the manner described below. You will
receive a letter from Empire Group confirming this agreement with us.
In accordance with our agreement with Empire and with the attached
Transfer Schedule, we have agreed to replace the policies in force with
Empire at their expiration dates in the manner set forth below:
1. Personal lines business:
a. Applicable to Homeowners, Dwelling Fire and Owner-Occupied 3 & 4
family dwelling TOP policies:
Tower Insurance will provide replacement coverage on substantially all of
these products at similar rates and forms to those previously offered by
Empire. Owner occupied 3 and 4 dwelling rates will reflect a rate increase
previously filed by Empire due to unfavorable loss experience.
b. Applicable to Personal Umbrella, Personal Insurance Coverage (PIC)
and Non-Owner Occupied 3 & 4 Dwelling Policies:
Tower Insurance will provide replacement coverage for those products that
Empire cannot non-renew in accordance with applicable New York
Cancellation/Non-Renewal laws. The rates and forms for personal umbrella
and PIC coverages offered by Tower would be similar to those previously
offered by Empire. Non-owner occupied 3 and 4 dwelling rates will reflect
a rate increase previously filed by Empire due to unfavorable loss
experience.
Replacement policies will be mailed in accordance with our normal renewal
processing service standards for all personal lines business that is not
non-renewed. Generally, policies are mailed at least forty-five (45) days
prior to the expiration date.
2. Commercial Lines Business (TOP policies with commercial insurance
coverage, CPP, mono-line commercial fire, commercial umbrella, and workers
compensation policies):
Tower Insurance and Tower Risk Management will provide replacement coverage
on this business subject to our underwriting and pricing guidelines, which
may include changes in terms and conditions for certain policyholders.
Although we anticipate that we will offer replacement coverage to a
significant portion of Commercial Lines Policyholders, we will
individually underwrite these risks. For this reason, Empire will non-
renew all Commercial Lines Policies in accordance with State
Cancellation/Non-Renewal laws. The non-renewal notice will be sent along
with a letter to the policyholders stating that Tower and TRM will offer
replacement policies based upon our underwriting and pricing guidelines.
We will mail those policies that we agree to replace in accordance with
our normal renewal processing service standards. Generally, renewal
policies are mailed thirty to sixty (30-60) days prior to the expiration
date of the policy. In addition, to further assist you with this transfer
process, beginning with Empire's June renewal policies, we will send you a
monthly list providing you with the status of your Empire renewal policies.
Any products not mentioned in this letter will either be non-renewed or
addressed in the manner described by Empire Group through its own
correspondence to you.
In addition to the replacement of the Empire Group's renewal policies as
outlined above, effective immediately, we will accept any new business
submissions for Personal Line Business described in paragraph 1.a. and
Commercial Line Business described in paragraph 2. above that you have
been previously submitting to Empire. Furthermore, in an effort to
minimize market disruption, we will also waive our right to cancel during
the first (60) days of the effective date for any reason and limit our
right of cancellation only for statutory reasons. Please refer to the
attached schedule for specific guidance on rate, coverage and billing
for each product included as Personal and Commercial Lines Business.
Finally, we agree to pay the commission presently in force between Empire
Group and you for Personal Lines renewal business described above for a
period of twelve (12) months excluding any contingency or profit-sharing
agreements. Thereafter, we agree to pay the commission based on the
commission schedule annexed to your Brokerage Agreement with us.
Commercial Lines business described above will also be paid in accordance
with your existing Brokerage Agreement with us.
If you agree with the transfer process outlined above, we would like you
to sign below to acknowledge your agreement and return this letter on or
before March 15, 2001. If you do not accept the terms of the transfer
process, we will offer replacement policies directly to the policyholders
for Personal and Commercial Lines Business, as we are required to do so
pursuant to the terms of our agreement with Empire Group.
Our Business Development personnel and underwriters will be in contact
with you shortly to review the content of this letter and answer any
questions that you may have about the transfer process, our company and
any other related subject matter. Should you have any questions prior
to us contacting you, please feel free to contact our Business Development
personnel mentioned below.
Contact Person Tel. # E-Mail
Helen Lee, Senior Vice President, Business Development
212-655-2015 hlee@twrgrp.com
Paul Russo, Assistant Vice President, Business Development
212-655-2088 prusso@twrgrp.com
Patricia Browne, Business Development Representative
212-655-2013 pbrowne@twrgrp.com
Angelo Miele, Business Development Representative
212-655-2042 amiele@twrgrp.com
Veronica Ferreira, Business Development Coordinator
212-655-2154 vferreira@twrgrp.com
We look forward to working closely with you to make this transfer process
a success.
Very truly yours,
Michael H. Lee
President
Accepted and Agreed to this
______ day of _____________, 2001
_______________________________________________
Name of Broker
By: ___________________________________________
Producer B
February 27, 2001
Re: Transfer of business from Empire Insurance Company, Allcity Insurance
Company and Centurion Insurance Company (collectively referred to as
"Empire Group") to Tower Insurance Company of New York ("Tower Insurance")
and Tower Risk Management Corp. ("TRM")
Dear Producer:
We are pleased to announce that our subsidiary companies, Tower Insurance
and TRM, have entered into an agreement with Empire Group to replace
Empire Group's renewal policies in the manner described below. You will
receive a letter from Empire Group confirming this agreement with us.
Tower Insurance is a property and casualty insurance company admitted in
New York with a "B+" rating from A.M. Best. TRM is a managing general
agency located in New York City that provides underwriting and claims
services on behalf of Diamond State Insurance Company and United National
Insurance Company, both rated "A+" by A.M. Best, State National Insurance
Company, rated "A" by A. M. Best and Legion Insurance Company and Legion
Indemnity Company, both rated "A-" by A.M. Best. Tower and TRM are both
owned by Tower Group Companies, an insurance holding company, with its
headquarters in downtown New York City at 120 Broadway, New York, N.Y.
We have enclosed a brochure with this letter to provide you with
information on our organization.
In accordance with our agreement with Empire and with the attached
Transfer Schedule, we have agreed to replace the policies in force with
Empire at their expiration dates in the manner set forth below:
1. Personal lines business:
a. Applicable to Homeowners, Dwelling Fire and Owner-Occupied 3 & 4
family dwelling TOP policies:
Tower Insurance will provide replacement coverage on substantially all
of these products at similar rates and forms to those previously offered
by Empire. Owner occupied 3 and 4 dwelling rates will reflect a rate
increase previously filed by Empire due to unfavorable loss experience.
b. Applicable to Personal Umbrella, Personal Insurance Coverage (PIC)
and Non-Owner Occupied 3 & 4 Dwelling Policies:
Tower Insurance will provide replacement coverage for those products that
Empire cannot non-renew in accordance with the applicable New York
Cancellation/Non-Renewal laws. The rates and forms for personal umbrella
and PIC coverages offered by Tower would be similar to those previously
offered by Empire. Non-owner occupied 3 and 4 dwelling rates will reflect
a rate increase previously filed by Empire due to unfavorable loss
experience.
Replacement policies will be mailed in accordance with our normal renewal
processing service standards for all personal lines business that is not
non-renewed. Generally policies are mailed at least forty-five (45) days
prior to the expiration date.
2. Commercial Lines Business (TOP policies with commercial insurance
coverage, CPP, mono-line commercial fire, commercial umbrella, and
workers compensation policies):
Tower Insurance and Tower Risk Management will provide replacement
coverage on this business subject to our underwriting and pricing
guidelines, which may include changes in terms and conditions for certain
policyholders. Although we anticipate that we will offer replacement
coverage to a significant portion of Commercial Lines Policyholders, we
will individually underwrite these risks. For this reason, Empire will
non-renew all Commercial Lines Policies in accordance with State
Cancellation/Non-Renewal laws. The non-renewal notice will be sent along
with a letter to the policyholders stating that Tower and TRM will offer
replacement policies based upon our underwriting and pricing guidelines.
We will mail those policies that we agree to replace in accordance with
our normal renewal processing service standards. Generally, renewal
policies are mailed thirty to sixty (30-60) days prior to the expiration
date of the policy. In addition, to further assist you with this transfer
process, beginning with Empire's June renewal policies, we will send you
a monthly list providing you with the status of your Empire renewal
policies.
Any products not mentioned in this letter will either be non-renewed or
addressed in the manner described by Empire Group through its own
correspondence to you.
In an effort to minimize market disruption, we will also waive our right
to cancel during the first (60) days of the effective date for any reason
and limit our right of cancellation only for statutory reasons. Please
refer to the attached schedule for specific guidance on rate, coverage
and billing for each product included as Personal and Commercial Lines
Business. Finally, we agree to pay the commission presently in force
between Empire Group and you for Personal Lines renewal business described
above for a period of twelve (12) months excluding any contingency or
profit-sharing agreements. Thereafter, we agree to pay the commission
based on the commission schedule annexed to your Brokerage Agreement with
us. Commercial Lines business described above will also be paid in
accordance with the Commission Schedule annexed to your Brokerage
Agreement.
In order to replace the Personal and Commercial Lines business described
above you must be appointed as a producer for Tower Insurance and Tower
Risk Management. For this reason, we are enclosing our producer
questionnaire and brokerage agreement for your review. In addition to
the replacement of the Empire's renewal policies, your Brokerage Agreement
also authorizes you to place new business for Personal Lines Business
described in paragraph 1a and Commercial Lines Business described in
paragraph 2 above. If you agree with the transfer process outlined above,
we would like you to sign below to acknowledge your agreement and return
this letter along with the completed questionnaire and executed brokerage
agreement on or before March 15, 2001. If you do not accept the terms of
the transfer process, we will offer replacement policies directly to the
policyholders for Personal Lines Business as we are required to do so
pursuant to the terms of our agreement with Empire Group.
Our Business Development personnel and underwriters will be in contact
with you shortly to review the content of this letter and answer any
questions that you may have about the transfer process, our company and
any other related subject matter. Should you have any questions prior
to us contacting you, please feel free to contact our Business
Development personnel mentioned below.
Contact Person Tel. # E-Mail
Helen Lee, Senior Vice President, Business Development
212-655-2015 hlee@twrgrp.com
Paul Russo, Assistant Vice President, Business Development
212-655-2088 prusso@twrgrp.com
Patricia Browne, Business Development Representative
212-655-2013 pbrowne@twrgrp.com
Angelo Miele, Business Development Representative
212-655-2042 amiele@twrgrp.com
Veronica Ferreira, Business Development Coordinator
212-655-2154 vferreira@twrgrp.com
We look forward to working closely with you to make this transfer
process a success.
Very truly yours,
Michael H. Lee
President
Accepted and Agreed to this
______ day of _____________, 2001
_______________________________________________
Name of Broker
By: ___________________________________________
Producer C
February 27, 2001
Re: Transfer of business from Empire Insurance Company, Allcity
Insurance Company and Centurion Insurance Company (collectively referred
to as "Empire Group") to Tower Insurance Company of New York ("Tower
Insurance") and Tower Risk Management Corp. ("TRM")
Dear Producer:
We are pleased to announce that our subsidiary companies, Tower Insurance
and TRM, have entered into an agreement with Empire Group to replace
Empire Group's renewal policies in the manner described below. You will
receive a letter from Empire Group confirming this agreement with us.
Tower Insurance is a property and casualty insurance company admitted in
New York with a "B+" rating from A.M. Best. TRM is a managing general
agency located in New York City that provides underwriting and claims
services on behalf of Diamond State Insurance Company and United National
Insurance Company, both rated "A+" by A.M. Best, State National Insurance
Company, rated "A" by A. M. Best and Legion Insurance Company and Legion
Indemnity Company, both rated "A-" by A.M. Best. Tower and TRM are both
owned by Tower Group Companies, an insurance holding company, with its
headquarters in downtown New York City at 120 Broadway, New York, N.Y.
We have enclosed a brochure with this letter to provide you with
information on our organization.
In accordance with our agreement with Empire and with the attached
Transfer Schedule, we have agreed to replace the policies in force with
Empire at their expiration dates in the manner set forth below:
1. Personal lines business:
a. Applicable to Homeowners, Dwelling Fire and Owner-Occupied 3 & 4
family dwelling TOP policies:
Tower Insurance will provide replacement coverage on substantially all of
these products at similar rates and forms to those previously offered by
Empire. Owner occupied 3 and 4 dwelling rates will reflect a rate increase
previously filed by Empire due to unfavorable loss experience.
b. Applicable to Personal Umbrella, Personal Insurance Coverage (PIC)
and Non-Owner Occupied 3 & 4 Dwelling Policies:
Tower Insurance will provide replacement coverage for those products that
Empire cannot non-renew in accordance with the applicable New York
Cancellation/Non-Renewal laws. The rates and forms for personal umbrella
and PIC coverages offered by Tower would be similar to those previously
offered by Empire. Non-owner occupied 3 and 4 dwelling rates will reflect
a rate increase previously filed by Empire due to unfavorable loss
experience.
Replacement policies will be mailed in accordance with our normal renewal
processing service standards for all personal lines business that is not
non-renewed. Generally policies are mailed at least forty-five (45) days
prior to the expiration date.
2. Commercial Lines Business (TOP policies with commercial insurance
coverage, CPP, mono-line commercial fire, commercial umbrella, and
workers compensation policies):
Tower Insurance and Tower Risk Management will provide replacement
coverage on this business subject to our underwriting and pricing
guidelines, which may include changes in terms and conditions for certain
policyholders. Although we anticipate that we will offer replacement
coverage to a significant portion of Commercial Lines Policyholders, we
will individually underwrite these risks. For this reason, Empire will
non-renew all Commercial Lines Policies in accordance with State
Cancellation/Non-Renewal laws. The non-renewal notice will be sent along
with a letter to the policyholders stating that Tower and TRM will offer
replacement policies based upon our underwriting and pricing guidelines.
We will mail those policies that we agree to replace in accordance with
our normal renewal processing service standards. Generally, renewal
policies are mailed thirty to sixty (30-60) days prior to the expiration
date of the policy. In addition, to further assist you with this transfer
process, beginning with Empire's June renewal policies, we will send you a
monthly list providing you with the status of your Empire renewal policies.
Any products not mentioned in this letter will either be non-renewed or
addressed in the manner described by Empire Group through its own
correspondence to you.
In an effort to minimize market disruption, we will also waive our right
to cancel during the first (60) days of the effective date for any reason
and limit our right of cancellation only for statutory reasons. Please
refer to the attached schedule for specific guidance on rate, coverage
and billing for each product included as Personal and Commercial Lines
Business. Finally, we agree to pay the commission presently in force
between Empire Group and you for Personal Lines renewal business described
above for a period of twelve (12) months excluding any contingency or
profit-sharing agreements. Thereafter, we agree to pay the commission
based on the commission schedule annexed to your Brokerage Agreement with
us. Commercial Lines business described above will also be paid in
accordance with the Commission Schedule annexed to your Brokerage
Agreement.
In order to replace the Personal and Commercial Lines business described
above you must be appointed as a producer for Tower Insurance and Tower
Risk Management. For this reason, we are enclosing our producer
questionnaire and brokerage agreement for your review. Upon our receipt
of the completed questionnaire, we will consider expanding your authority
to include writing new business with us. If you agree with the transfer
process outlined above, we would like you to sign below to acknowledge
your agreement and return this letter along with the completed
questionnaire and executed brokerage agreement on or before March 15,
2001. If you do not accept the terms of the transfer process, we will
offer replacement policies directly to the policyholders for Personal
Lines Business, as we are required to do so pursuant to the terms of
our agreement with Empire Group.
Our Business Development personnel and underwriters will be in contact
with you shortly to review the content of this letter and answer any
questions that you may have about the transfer process, our company
and any other related subject matter. Should you have any questions
prior to us contacting you, please feel free to contact our Business
Development personnel mentioned below.
Contact Person Tel. # E-Mail
Helen Lee, Senior Vice President, Business Development
212-655-2015 hlee@twrgrp.com
Paul Russo, Assistant Vice President, Business Development
212-655-2088 prusso@twrgrp.com
Patricia Browne, Business Development Representative
212-655-2013 pbrowne@twrgrp.com
Angelo Miele, Business Development Representative
212-655-2042 amiele@twrgrp.com
Veronica Ferreira, Business Development Coordinator
212-655-2154 vferreira@twrgrp.com
We look forward to working closely with you to make this transfer
process a success.
Very truly yours,
Michael H. Lee
President
Accepted and Agreed to this
______ day of _____________, 2001
_______________________________________________
Name of Broker
By: ___________________________________________
Schedule 5.10(a)
Employees
The following individuals may be interviewed for eventual positions with
Transferees. Some may be released to Transferees immediately, others as
business winds down at Transferors. In all cases, Transferees will
obtain permission from Transferors before making an offer to a specific
individual.
Name Area of Responsibility Position
Christina Lin CPP and WC Underwriter
Jackie Goeller CPP and WC Underwriter
Joe Cicale CPP and WC Marketing
John Sikorski CPP and TOP Loss Control Manager
Maryann Oles Commercial Lines Clerical
Tom McNamara Commercial Auto Underwriting Manager
Mohammad Sarif Commercial Auto Underwriter
Luisa Scotti Commercial Lines Audit
Silvia Rivera Statutory Auto Underwriter
Cathy Isacson Statutory Auto Underwriting Manager
Laura Chiodini Homeowners Underwriter
Ethel McNeal Homeowners Underwriter
Samuel DelValle Homeowners Underwriter
Luann Smith Homeowners Underwriter
Lisa Richardson Homeowners Assistant Underwriter
Denise McCollin Homeowners Assistant Underwriter
Lettisha Teasley Homeowners Assistant Underwriter
Melinda McCall Homeowners Assistant Underwriter
Anna Guzman Homeowners Clerical
Pam Ballier TOP Underwriter
Maureen Coleman TOP Underwriter
Lemene Vilfort TOP Underwriter
EX-27
4
0004.txt
7
12-MOS
DEC-31-2000
DEC-31-2000
119,029
486
483
375
0
0
163,873
77
174,629
3,035
372,284
268,506
32,622
0
0
0
0
0
7,079
36,712
372,284
30,855
11,443
(213)
218
43,807
7,793
8,009
(17,940)
12,860
(30,800)
0
0
0
(30,800)
$ (4.35)
$ (4.35)
341,936
27,880
15,927
8,920
52,902
268,506
15,927