424(B)(3)
|
|
|
PROSPECTUS
SUPPLEMENT NO. 2 (To Prospectus dated May 1, 2007) |
|
Filed Pursuant to Rule 424(b)(3) Registration No. 333-135464 |
$500,000,000
Allied World Assurance Company Holdings, Ltd
7.50% Senior Notes due 2016
This
Prospectus Supplement No. 2 supplements the Market-Making Prospectus,
dated May 1, 2007, relating to the public offering of the issuers 7.50% senior
notes due 2016, which closed on July 26, 2006. Goldman, Sachs & Co. is
continuing to make a market in the senior notes pursuant to the Market-Making
Prospectus.
This
Prospectus Supplement No. 2 is comprised of a quarterly report
on Form 10-Q filed with the SEC on May 11, 2007.
You
should read this Prospectus Supplement No. 2 in conjunction with the
Market-Making Prospectus. This Prospectus Supplement No. 2 updates information
in the Market-Making Prospectus and, accordingly, to the extent inconsistent,
the information in this Prospectus Supplement No. 2 supersedes the information
contained in the Market-Making Prospectus.
Before you invest in the issuers senior notes, you should read the
Market-Making Prospectus and other documents the issuer has filed with the SEC
for more complete information about the issuer and an investment in its senior
notes. You may get these documents for free by visiting EDGAR on the SEC
Website at www.sec.gov. Alternatively, you may obtain a copy of the
Market-Making Prospectus by calling Goldman, Sachs & Co. toll-free at
1-866-471-2526.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement is truthful and complete. Any representation to the
contrary is a criminal offense.
The date of this Prospectus
Supplement No. 2 is May 11, 2007.
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended:
March 31, 2007
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number:
001-32938
ALLIED WORLD ASSURANCE COMPANY
HOLDINGS, LTD
(Exact Name of Registrant as
Specified in Its Charter)
|
|
|
Bermuda
|
|
98-0481737
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
27 Richmond Road, Pembroke HM 08, Bermuda
(Address of Principal Executive
Offices and Zip Code)
(441) 278-5400
(Registrants Telephone
Number, Including Area Code)
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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of outstanding common shares, par value
$0.03 per share, of Allied World Assurance Company
Holdings, Ltd as of May 8, 2007 was 60,393,442.
TABLE OF CONTENTS
PART I
FINANCIAL
INFORMATION
|
|
Item 1.
|
Financial
Statements.
|
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
as of
March 31, 2007 and December 31, 2006
(Expressed in thousands of United States dollars, except share
and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS:
|
Fixed maturity investments
available for sale, at fair value (amortized cost: 2007:
$5,392,983; 2006: $5,188,379)
|
|
$
|
5,407,813
|
|
|
$
|
5,177,812
|
|
Other invested assets available for
sale, at fair value (cost: 2007: $246,500; 2006: $245,657)
|
|
|
263,993
|
|
|
|
262,557
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
5,671,806
|
|
|
|
5,440,369
|
|
Cash and cash equivalents
|
|
|
288,284
|
|
|
|
366,817
|
|
Restricted cash
|
|
|
200,813
|
|
|
|
138,223
|
|
Securities lending collateral
|
|
|
534,774
|
|
|
|
304,742
|
|
Insurance balances receivable
|
|
|
400,231
|
|
|
|
304,261
|
|
Prepaid reinsurance
|
|
|
154,461
|
|
|
|
159,719
|
|
Reinsurance recoverable
|
|
|
668,050
|
|
|
|
689,105
|
|
Accrued investment income
|
|
|
44,171
|
|
|
|
51,112
|
|
Deferred acquisition costs
|
|
|
107,465
|
|
|
|
100,326
|
|
Intangible assets
|
|
|
3,920
|
|
|
|
3,920
|
|
Balances receivable on sale of
investments
|
|
|
25,239
|
|
|
|
16,545
|
|
Net deferred tax assets
|
|
|
5,259
|
|
|
|
5,094
|
|
Other assets
|
|
|
44,934
|
|
|
|
40,347
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,149,407
|
|
|
$
|
7,620,580
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
Reserve for losses and loss expenses
|
|
$
|
3,663,224
|
|
|
$
|
3,636,997
|
|
Unearned premiums
|
|
|
879,817
|
|
|
|
813,797
|
|
Unearned ceding commissions
|
|
|
25,352
|
|
|
|
23,914
|
|
Reinsurance balances payable
|
|
|
112,731
|
|
|
|
82,212
|
|
Securities lending payable
|
|
|
534,774
|
|
|
|
304,742
|
|
Balances due on purchase of
investments
|
|
|
46,517
|
|
|
|
|
|
Dividends payable
|
|
|
9,052
|
|
|
|
|
|
Senior notes
|
|
|
498,602
|
|
|
|
498,577
|
|
Accounts payable and accrued
liabilities
|
|
|
23,360
|
|
|
|
40,257
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
5,793,429
|
|
|
$
|
5,400,496
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common shares, par value
$0.03 per share, issued and outstanding 2007:
60,390,269 shares and 2006: 60,287,696 shares
|
|
|
1,812
|
|
|
|
1,809
|
|
Additional paid-in capital
|
|
|
1,828,612
|
|
|
|
1,822,607
|
|
Retained earnings
|
|
|
494,073
|
|
|
|
389,204
|
|
Accumulated other comprehensive
income:
|
|
|
|
|
|
|
|
|
net unrealized gains on
investments, net of tax
|
|
|
31,481
|
|
|
|
6,464
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,355,978
|
|
|
|
2,220,084
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
8,149,407
|
|
|
$
|
7,620,580
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
1
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for
the three months ended March 31, 2007 and 2006
(Expressed in thousands of United States dollars, except
share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
438,406
|
|
|
$
|
498,120
|
|
Premiums ceded
|
|
|
(80,562
|
)
|
|
|
(70,617
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
357,844
|
|
|
|
427,503
|
|
Change in unearned premiums
|
|
|
(71,278
|
)
|
|
|
(118,560
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
286,566
|
|
|
|
308,943
|
|
Net investment income
|
|
|
72,648
|
|
|
|
62,001
|
|
Net realized investment losses
|
|
|
(6,484
|
)
|
|
|
(5,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
352,730
|
|
|
|
365,708
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
|
165,995
|
|
|
|
205,960
|
|
Acquisition costs
|
|
|
29,196
|
|
|
|
36,472
|
|
General and administrative expenses
|
|
|
33,203
|
|
|
|
20,322
|
|
Interest expense
|
|
|
9,374
|
|
|
|
6,451
|
|
Foreign exchange loss
|
|
|
32
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,800
|
|
|
|
269,750
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
114,930
|
|
|
|
95,958
|
|
Income tax expense (recovery)
|
|
|
1,009
|
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
113,921
|
|
|
|
98,121
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
investments arising during the period net of applicable deferred
income tax (expense) recovery 2007: ($817); 2006: $344
|
|
|
18,533
|
|
|
|
(44,716
|
)
|
Reclassification adjustment for
net realized losses included in net income
|
|
|
6,484
|
|
|
|
5,236
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
25,017
|
|
|
|
(39,480
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
138,938
|
|
|
$
|
58,641
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.89
|
|
|
$
|
1.96
|
|
Diluted earnings per share
|
|
$
|
1.83
|
|
|
$
|
1.94
|
|
Weighted average common shares
outstanding
|
|
|
60,333,209
|
|
|
|
50,162,842
|
|
Weighted average common shares and
common share equivalents outstanding
|
|
|
62,207,941
|
|
|
|
50,485,556
|
|
Dividends declared per share
|
|
$
|
0.15
|
|
|
$
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
2
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
for the
three months ended March 31, 2007 and 2006
(Expressed in thousands of United States dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Share
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Total
|
|
|
December 31, 2006
|
|
$
|
1,809
|
|
|
$
|
1,822,607
|
|
|
$
|
6,464
|
|
|
$
|
389,204
|
|
|
$
|
2,220,084
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,921
|
|
|
|
113,921
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,052
|
)
|
|
|
(9,052
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
25,017
|
|
|
|
|
|
|
|
25,017
|
|
Stock compensation
|
|
|
3
|
|
|
|
6,005
|
|
|
|
|
|
|
|
|
|
|
|
6,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
$
|
1,812
|
|
|
$
|
1,828,612
|
|
|
$
|
31,481
|
|
|
$
|
494,073
|
|
|
$
|
2,355,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
|
|
|
|
Share
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit)
|
|
|
Total
|
|
|
December 31, 2005
|
|
$
|
1,505
|
|
|
$
|
1,488,860
|
|
|
$
|
(25,508
|
)
|
|
$
|
(44,591
|
)
|
|
$
|
1,420,266
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,121
|
|
|
|
98,121
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(39,480
|
)
|
|
|
|
|
|
|
(39,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
$
|
1,505
|
|
|
$
|
1,488,860
|
|
|
$
|
(64,988
|
)
|
|
$
|
53,530
|
|
|
$
|
1,478,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
3
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for
the three months ended March 31, 2007 and 2006
(Expressed in thousands of United States dollars)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,921
|
|
|
$
|
98,121
|
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Net realized (gains) losses on
sales of investments
|
|
|
(2,898
|
)
|
|
|
5,236
|
|
Net realized losses for
other-than-temporary
impairment charges on investments
|
|
|
9,382
|
|
|
|
|
|
Amortization of premiums net of
accrual of discounts on fixed maturities
|
|
|
(88
|
)
|
|
|
5,221
|
|
Amortization and depreciation of
fixed assets
|
|
|
2,075
|
|
|
|
665
|
|
Deferred income taxes
|
|
|
(244
|
)
|
|
|
6
|
|
Stock compensation expense
|
|
|
6,316
|
|
|
|
407
|
|
Debt issuance expense
|
|
|
|
|
|
|
49
|
|
Amortization of discount and
expenses on senior notes
|
|
|
104
|
|
|
|
|
|
Cash settlements on interest rate
swaps
|
|
|
|
|
|
|
6,356
|
|
Mark to market on interest rate
swaps
|
|
|
|
|
|
|
(5,917
|
)
|
Insurance balances receivable
|
|
|
(95,970
|
)
|
|
|
(92,278
|
)
|
Prepaid reinsurance
|
|
|
5,258
|
|
|
|
6,002
|
|
Reinsurance recoverable
|
|
|
21,055
|
|
|
|
52,297
|
|
Accrued investment income
|
|
|
6,941
|
|
|
|
10,001
|
|
Deferred acquisition costs
|
|
|
(7,139
|
)
|
|
|
(13,232
|
)
|
Net deferred tax assets
|
|
|
79
|
|
|
|
(2,531
|
)
|
Other assets
|
|
|
(1,984
|
)
|
|
|
6,087
|
|
Reserve for losses and loss expenses
|
|
|
26,227
|
|
|
|
15,597
|
|
Unearned premiums
|
|
|
66,020
|
|
|
|
112,559
|
|
Unearned ceding commissions
|
|
|
1,438
|
|
|
|
(1,637
|
)
|
Reinsurance balances payable
|
|
|
30,519
|
|
|
|
(7,234
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(23,214
|
)
|
|
|
(8,677
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
157,798
|
|
|
|
187,098
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity
investments
|
|
|
(866,584
|
)
|
|
|
(2,086,409
|
)
|
Purchases of other invested assets
|
|
|
(3,873
|
)
|
|
|
(117,055
|
)
|
Sales of fixed maturity investments
|
|
|
698,521
|
|
|
|
1,887,952
|
|
Sales of other invested assets
|
|
|
2,976
|
|
|
|
158,871
|
|
Purchase of fixed assets
|
|
|
(4,929
|
)
|
|
|
(1,079
|
)
|
Change in restricted cash
|
|
|
(62,590
|
)
|
|
|
(13,373
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(236,479
|
)
|
|
|
(171,093
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
foreign currency cash
|
|
|
148
|
|
|
|
215
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(78,533
|
)
|
|
|
16,220
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
|
366,817
|
|
|
|
172,379
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
|
$
|
288,284
|
|
|
$
|
188,599
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Cash paid for
income taxes
|
|
$
|
1,600
|
|
|
$
|
|
|
Cash paid for
interest expense
|
|
|
19,271
|
|
|
|
6,395
|
|
Change in balance
receivable on sale of investments
|
|
|
(8,694
|
)
|
|
|
2,409
|
|
Change in balance
payable on purchase of investments
|
|
|
46,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
4
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed
in thousands of United States dollars, except share and per
share amounts)
Allied World Assurance Company Holdings, Ltd
(Holdings) was incorporated in Bermuda on
November 13, 2001. Holdings, through its wholly-owned
subsidiaries (collectively, the Company), provides
property and casualty insurance and reinsurance on a worldwide
basis.
On July 11, 2006, the Company sold 8,800,000 common shares
in its initial public offering (IPO) at a public
offering price of $34.00 per share. On July 19, 2006,
the Company sold an additional 1,320,000 common shares at
$34.00 per share in connection with the exercise in full by
the underwriters of their over-allotment option. In connection
with the IPO, a
1-for-3
reverse stock split of the Companys common shares was
consummated on July 7, 2006. All share and per share
amounts related to common shares, warrants, options and
restricted stock units (RSUs) included in these
consolidated financial statements and footnotes have been
restated to reflect the reverse stock split. The reverse stock
split has been retroactively applied to the Companys
consolidated financial statements.
|
|
2.
|
BASIS OF
PREPARATION AND CONSOLIDATION
|
These condensed consolidated financial statements include the
accounts of Holdings and its subsidiaries and have been prepared
in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) for
interim financial information and with Article 10 of
Regulation S-X
as promulgated by the U.S. Securities and Exchange
Commission (SEC). Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP
for complete financial statements. In the opinion of management,
these unaudited condensed consolidated financial statements
reflect all adjustments that are normal and recurring in nature
and necessary for a fair presentation of financial position and
results of operations as of the end of and for the periods
presented. The results of operations for any interim period are
not necessarily indicative of the results for a full year.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The significant
estimates reflected in the Companys financial statements
include, but are not limited to:
|
|
|
|
|
The premium estimates for certain reinsurance agreements,
|
|
|
|
Recoverability of deferred acquisition costs,
|
|
|
|
The reserve for losses and loss expenses,
|
|
|
|
Valuation of ceded reinsurance recoverables, and
|
|
|
|
Determination of
other-than-temporary
impairment of investments.
|
Intercompany accounts and transactions have been eliminated on
consolidation, and all entities meeting consolidation
requirements have been included in the consolidation. Certain
reclassifications have been made to the prior periods
amounts to conform to the current periods presentation.
These unaudited condensed consolidated financial statements,
including these notes, should be read in conjunction with the
Companys audited consolidated financials statements, and
related notes thereto, included in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2006.
5
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
3.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (FAS) No. 157, Fair Value
Measurements (FAS 157). This statement
defines fair value, establishes a framework for measuring fair
value under U.S. GAAP, and expands disclosures about fair
value measurements. FAS 157 applies under other accounting
pronouncements that require or permit fair value measurements.
FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company has determined
that FAS 157 will not have a material impact on its
financial statements upon its adoption for the Companys
fiscal year beginning January 1, 2008.
In February 2007, the FASB issued FAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (FAS 159). FAS 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This
statement is expected to expand the use of fair value
measurement, which is consistent with the FASBs long-term
measurement objectives for accounting for financial instruments.
The fair value option established will permit all entities to
choose to measure eligible items at fair value at a specified
election dates. An entity shall record unrealized gains and
losses on items for which the fair value option has been elected
through net income in the statement of operations at each
subsequent reporting date. This statement is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007. The Company is currently
evaluating the provisions of FAS 159 and its potential
impact on future financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 prescribes detailed
guidance for the financial statement recognition, measurement
and disclosure of uncertain tax positions recognized in an
enterprises financial statements in accordance with FASB
Statement 109, Accounting for Income Taxes. Tax
positions must meet a more-likely-than-not recognition threshold
at the effective date to be recognized upon the adoption of
FIN 48 and in subsequent periods. The Company adopted the
provisions FIN 48 on January 1, 2007. The adoption of
FIN 48 did not have an effect on the Companys results
of operations or financial condition as of March 31, 2007.
The Company regularly reviews the carrying value of its
investments to determine if a decline in value is considered to
be other than temporary. This review involves consideration of
several factors including: (i) the significance of the
decline in value and the resulting unrealized loss position;
(ii) the time period for which there has been a significant
decline in value; (iii) an analysis of the issuer of the
investment, including its liquidity, business prospects and
overall financial position; and (iv) the Companys
intent and ability to hold the investment for a sufficient
period of time for the value to recover. The identification of
potentially impaired investments involves significant management
judgment that includes the determination of their fair value and
the assessment of whether any decline in value is other than
temporary. If the decline in value is determined to be other
than temporary, then the Company records a realized loss in the
statement of operations in the period that it is determined.
As of March 31, 2007, the unrealized losses from the
securities held in the Companys investment portfolio were
primarily the result of rising interest rates. Following the
Companys review of the securities in its investment
portfolio, 302 securities were considered to be
other-than-temporarily
impaired for the three months ended March 31, 2007.
Consequently, the Company recorded an
other-than-temporary
impairment charge, within net realized investment losses on the
condensed consolidated statement of operations, of $9,382
6
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
4.
|
INVESTMENTS (continued)
|
for the three months ended March 31, 2007. There were no
similar charges recognized during the three months ended
March 31, 2006.
The following table summarizes the market value of those
investments in an unrealized loss position for periods less than
and greater than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Less than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government agencies
|
|
$
|
45,583
|
|
|
$
|
(133
|
)
|
|
$
|
381,989
|
|
|
$
|
(2,961
|
)
|
Non U.S. Government and
Government agencies
|
|
|
56,940
|
|
|
|
(1,097
|
)
|
|
|
51,330
|
|
|
|
(620
|
)
|
Corporate
|
|
|
260,511
|
|
|
|
(1,090
|
)
|
|
|
545,902
|
|
|
|
(3,115
|
)
|
Mortgage backed
|
|
|
315,546
|
|
|
|
(1,815
|
)
|
|
|
856,533
|
|
|
|
(6,243
|
)
|
Asset backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,580
|
|
|
$
|
(4,135
|
)
|
|
$
|
1,835,754
|
|
|
$
|
(12,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government agencies
|
|
$
|
201,929
|
|
|
$
|
(3,159
|
)
|
|
$
|
338,072
|
|
|
$
|
(6,645
|
)
|
Non U.S. Government and
Government agencies
|
|
|
3,383
|
|
|
|
(72
|
)
|
|
|
515
|
|
|
|
(9
|
)
|
Corporate
|
|
|
277,561
|
|
|
|
(2,726
|
)
|
|
|
316,526
|
|
|
|
(4,527
|
)
|
Mortgage backed
|
|
|
192,018
|
|
|
|
(1,661
|
)
|
|
|
389,761
|
|
|
|
(4,121
|
)
|
Asset backed
|
|
|
|
|
|
|
|
|
|
|
107,049
|
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
674,891
|
|
|
$
|
(7,618
|
)
|
|
$
|
1,151,923
|
|
|
$
|
(15,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,353,471
|
|
|
$
|
(11,753
|
)
|
|
$
|
2,987,677
|
|
|
$
|
(28,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
DEBT AND
FINANCING ARRANGEMENTS
|
On July 21, 2006, the Company issued $500,000 aggregate
principal amount of 7.50% Senior Notes due August 1,
2016 (Senior Notes), with interest on the Senior
Notes payable on August 1 and February 1 of each year,
commencing on February 1, 2007. The Senior Notes were
offered by the underwriters at a price of 99.707% of their
principal amount, providing an effective yield to investors of
7.542%. The Company used a portion of the proceeds from the
Senior Notes to repay the outstanding amount of the existing
credit agreement as well as to provide additional capital to its
subsidiaries and for other general corporate purposes. As of
March 31, 2007, the fair value of the Senior Notes as
published by Bloomberg was 108.77% of their principal amount,
providing an effective yield of 6.24%.
The Senior Notes can be redeemed by the Company prior to
maturity subject to payment of a make-whole premium.
The Company has no current expectations of calling the Senior
Notes prior to maturity. The Senior Notes contain certain
covenants that include: (i) limitations on liens on stock
of designated subsidiaries; (ii) limitation as to the
disposition of stock of designated subsidiaries; and
(iii) limitations on mergers, amalgamations, consolidations
or sale of assets.
7
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
5.
|
DEBT AND
FINANCING ARRANGEMENTS (continued)
|
Events of default include: (i) the default in the payment
of any interest or principal on any outstanding notes, and the
continuance of such default for a period of 30 days;
(ii) the default in the performance, or breach, of any of
the covenants in the indenture (other than a covenant added
solely for the benefit of another series of debt securities) and
continuance of such default or breach for a period of
60 days after the Company has received written notice
specifying such default or breach; and (iii) certain events
of bankruptcy, insolvency or reorganization. Where an event of
default occurs and is continuing, either the trustee of the
Senior Notes or the holders of not less than 25% in principal
amount of the Senior Notes may have the right to declare that
all unpaid principal amounts and accrued interest then
outstanding be due and payable immediately.
Certain subsidiaries of Holdings file U.S. federal income
tax returns and various U.S. states income tax returns, as
well as income tax returns in the United Kingdom
(U.K.) and Ireland. Holdings Bermuda
subsidiaries currently do not file tax returns in Bermuda. The
tax years open to examination by the U.S. Internal Revenue
Service for the U.S. subsidiaries are the fiscal years from
2003 to the present. The tax years open to examination by the
Inland Revenue for the U.K. branches are fiscal years from 2005
to the present. The Company began operations in Ireland with the
incorporation of Allied World Assurance Company (Europe) Limited
on September 25, 2002, and remains subject to examinations
by the Irish Revenue Commissioners for all years since the date
of incorporation. To the best of the Companys knowledge,
there are no examinations pending by the U.S. Internal
Revenue Service, the Inland Revenue or the Irish Revenue
Commissioners.
On January 1, 2007, the Company adopted the provisions of
FIN 48. As a result of the implementation of FIN 48,
the Company did not record any unrecognized tax benefits or
expenses. Management has deemed all material tax provisions to
have a greater than 50% likelihood of being sustained based on
technical merits if challenged. The Company has not recorded any
interest or penalties during the three-month periods ended
March 31, 2007 and 2006 and has not accrued any payment of
interest and penalties at March 31, 2007 and
December 31, 2006.
The Company does not expect any material unrecognized tax
benefits within 12 months of January 1, 2007.
a) Authorized
shares
The authorized share capital of the Company as of March 31,
2007 and December 31, 2006 was $10,000.
On July 11, 2006, the Company sold 8,800,000 common shares
in the IPO at a public offering price of $34.00 per share.
On July 19, 2006, the Company sold an additional 1,320,000
common shares at $34.00 per share in connection with the
exercise in full by the underwriters of their over-allotment
option. In connection with the IPO, a
1-for-3
reverse stock split of the Companys common shares was
consummated on July 7, 2006.
The issued share capital consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Common shares issued and fully
paid, par value $0.03 per share
|
|
|
60,390,269
|
|
|
|
60,287,696
|
|
|
|
|
|
|
|
|
|
|
Share capital at end of period
|
|
$
|
1,812
|
|
|
$
|
1,809
|
|
|
|
|
|
|
|
|
|
|
8
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
7.
|
SHAREHOLDERS
EQUITY (continued)
|
a) Authorized
shares (continued)
As of March 31, 2007, there were outstanding 31,319,784
voting common shares and 29,070,485 non-voting common shares.
b) Dividends
In March 2007, the Company declared a quarterly dividend of
$0.15 per common share payable on April 5, 2007 to
shareholders of record on March 20, 2007. The total
dividend payable amounted to $9,052 and has been included in the
condensed consolidated balance sheets.
|
|
8.
|
EMPLOYEE
BENEFIT PLANS
|
a) Employee
option plan
In 2001, the Company implemented the Allied World Assurance
Company Holdings, Ltd 2001 Employee Warrant Plan, which, after
Holdings special general meeting of shareholders on
June 9, 2006 and its IPO on July 11, 2006, was amended
and restated and renamed the Allied World Assurance Company
Holdings, Ltd Amended and Restated 2001 Employee Stock Option
Plan (the Plan). The Plan was converted into a stock
option plan as part of the IPO and the warrants that were
previously granted thereunder were converted to options and
remain outstanding with the same exercise price and vesting
period. Under the Plan, up to 2,000,000 common shares of
Holdings may be issued. These options are exercisable in certain
limited conditions, expire after 10 years, and generally
vest pro-rata over four years from the date of grant. During the
period from November 13, 2001 to December 31, 2002,
the exercise price of the options issued was $24.27 per
share, after giving effect to the extraordinary dividend
described below. The exercise prices of options issued
subsequent to December 31, 2002 and prior to the IPO were
based on the per share book value of the Company. In accordance
with the Plan, the exercise prices of the options issued prior
to the declaration of the extraordinary dividend in March 2005
were reduced by the per share value of the dividend declared.
The exercise price of options issued subsequent to the IPO are
determined by the compensation committee of the Board of
Directors but shall not be less than 100% of the fair market
value of the common shares of Holdings on the date the option
award is granted.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Outstanding at beginning of period
|
|
|
1,195,990
|
|
|
|
1,036,322
|
|
Granted
|
|
|
233,650
|
|
|
|
179,328
|
|
Exercised
|
|
|
(113,039
|
)
|
|
|
(10,118
|
)
|
Forfeited
|
|
|
(12,169
|
)
|
|
|
(9,542
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,304,432
|
|
|
|
1,195,990
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price
per option
|
|
$
|
30.60
|
|
|
$
|
27.59
|
|
9
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
8.
|
EMPLOYEE
BENEFIT PLANS (continued)
|
a) Employee
option plan (continued)
The following table summarizes the exercise prices for
outstanding employee stock options as of March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Intrinsic Value
|
|
|
|
Options
|
|
|
Remaining
|
|
|
Options
|
|
|
on Options
|
|
Exercise Price Range
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
|
Exercisable
|
|
|
$23.61 - $26.94
|
|
|
456,083
|
|
|
|
5.21
|
|
|
|
450,914
|
|
|
|
8,352
|
|
$28.08 - $31.47
|
|
|
416,536
|
|
|
|
7.88
|
|
|
|
187,376
|
|
|
|
2,491
|
|
$31.77 - $35.01
|
|
|
192,663
|
|
|
|
7.93
|
|
|
|
80,710
|
|
|
|
809
|
|
$41.00 - $43.61
|
|
|
239,150
|
|
|
|
9.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,304,432
|
|
|
|
|
|
|
|
719,000
|
|
|
|
11,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the second quarter of 2006, the calculation of the
compensation expense associated with the options had been made
by reference to the book value per share of the Company as of
the end of each period, and was deemed to be the difference
between such book value per share and the exercise price of the
individual options. The book value of the Company approximated
its fair value. The fair value of each option granted was
determined at June 30, 2006 using the Black-Scholes
option-pricing model. Although the IPO was subsequent to
June 30, 2006, the best estimate of the fair value of the
common shares at that time was the IPO price of $34.00 per
share. This amount was used in the model for June 30, 2006,
and the Plan was accounted for as a liability plan
in accordance with FAS No. 123(R),Share Based
Payment (FAS 123(R)).
The combined amendment to the Plan and the IPO constituted a
modification to the Plan in accordance with
FAS 123(R). Accordingly, the options outstanding at the
time of the IPO were revalued using the Black-Scholes
option-pricing model. The amendment to the Plan qualifies it as
an equity plan in accordance with FAS 123(R)
and as such, associated liabilities at the time of the
modification have been, and future compensation expenses will
be, included in additional paid-in capital on the consolidated
balance sheets.
Assumptions used in the option-pricing model for the options
revalued at the time of the IPO, and for those issued subsequent
to the IPO are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
|
Options Revalued
|
|
|
Options Granted After
|
|
|
During the Three
|
|
|
|
as Part of the IPO
|
|
|
the IPO and Prior to
|
|
|
Months Ended
|
|
|
|
July 11, 2006
|
|
|
December 31, 2006
|
|
|
March 31, 2007
|
|
|
Expected term of option
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Weighted average risk-free
interest rate
|
|
|
5.11
|
%
|
|
|
4.64
|
%
|
|
|
4.60
|
%
|
Expected volatility
|
|
|
23.44
|
%
|
|
|
23.68
|
%
|
|
|
23.14
|
%
|
Dividend yield
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
Weighted average fair value on
grant date
|
|
|
$11.08
|
|
|
|
$11.34
|
|
|
|
$12.08
|
|
There is limited historical data available for the Company to
base the expected term of the options. As these options are
considered to have standard characteristics, the Company has
used the simplified method to determine the expected life as set
forth in the SECs Staff Accounting Bulletin 107.
Likewise, as the Company became a public company in July 2006,
there is limited historical data available to it on which to
base the volatility of its common shares. As such, the Company
used the average of five volatility statistics from comparable
companies in order to derive the volatility values above. The
Company has assumed a nil
10
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
8.
|
EMPLOYEE
BENEFIT PLANS (continued)
|
a) Employee
option plan (continued)
forfeiture rate in determining the compensation expense. This
assumption implies that all outstanding options are expected to
fully vest over the vesting periods.
Compensation costs of $689 and nil relating to the options have
been included in general and administrative expenses in the
Companys condensed consolidated statements of operations
for the three months ended March 31, 2007 and 2006,
respectively. As of March 31, 2007 and December 31,
2006, the Company recorded in additional paid-in capital on the
condensed consolidated balance sheets an amount of $9,794 and
$9,349, respectively, in connection with all options granted.
As of March 31, 2007, there was remaining $6,221 of total
unrecognized compensation costs related to non-vested options
granted under the Plan. These costs are expected to be
recognized over a weighted-average period of 1.7 years. The
total intrinsic value of options exercised during the three
months ended March 31, 2007 was $2,050.
b) Stock
incentive plan
On February 19, 2004, the Company implemented the Allied
World Assurance Holdings, Ltd 2004 Stock Incentive Plan which,
after Holdings special general meeting of shareholders on
June 9, 2006 and the IPO on July 11, 2006, was amended
and restated and renamed the Allied World Assurance Company
Holdings, Ltd Amended and Restated 2004 Stock Incentive Plan
(the Stock Incentive Plan). The Stock Incentive Plan
provides for grants of restricted stock, RSUs, dividend
equivalent rights and other equity-based awards. A total of
2,000,000 common shares may be issued under the Stock Incentive
Plan. To date only RSUs have been granted. These RSUs generally
vest in the fourth or fifth year from the original grant date,
or pro-rata over four years from the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Outstanding RSUs at beginning of
period
|
|
|
704,372
|
|
|
|
127,163
|
|
RSUs granted
|
|
|
186,558
|
|
|
|
586,708
|
|
RSUs fully vested
|
|
|
(33,957
|
)
|
|
|
(1,666
|
)
|
RSUs forfeited
|
|
|
(19,917
|
)
|
|
|
(7,833
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding RSUs at end of period
|
|
|
837,056
|
|
|
|
704,372
|
|
|
|
|
|
|
|
|
|
|
For those RSUs outstanding at the time of the amendment, the
modification to the Stock Incentive Plan required a revaluation
of the RSUs based on the fair market value of the common shares
at the time of the IPO. The vesting period remained the same.
The compensation expense for the RSUs on a going-forward basis
is based on the fair market value per common share of the
Company as of the respective grant dates and is recognized over
the vesting period. The modification of the Stock Incentive Plan
changed the accounting from a liability plan to an equity plan
in accordance with FAS 123(R). As such, all accumulated
amounts due under the Stock Incentive Plan were transferred to
additional paid-in capital on the consolidated balance sheet.
Compensation costs of $1,987 and $407 relating to the issuance
of the RSUs have been recognized in the Companys
consolidated statements of operations for the three months ended
March 31, 2007 and 2006, respectively.
As of March 31, 2007 and December 31, 2006, the
Company has recorded $6,952 and $5,031, respectively, in
additional paid-in capital on the consolidated balance sheets in
connection with the RSUs awarded. As of March 31, 2007,
there was remaining $24,345 of total unrecognized compensation
costs
11
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
8.
|
EMPLOYEE
BENEFIT PLANS (continued)
|
b) Stock
incentive plan (continued)
related to non-vested RSUs awarded. These costs are expected to
be recognized over a weighted-average period of 3.2 years.
c) Long-term
incentive plan
On May 22, 2006, the Company implemented the Long-Term
Incentive Plan (LTIP), which provides for
performance based equity awards to key employees in order to
promote the long-term growth and profitability of the Company.
Each award represents the right to receive a number of common
shares in the future, based upon the achievement of established
performance criteria during the applicable three-year
performance period. A total of 2,000,000 common shares may be
issued under the LTIP. To date, 590,834 of these performance
based equity awards have been granted. The awards granted in
2007 and 2006 will vest after the fiscal year ending
December 31, 2009 and 2008, respectively, in accordance
with the terms and performance conditions of the LTIP.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Outstanding LTIP awards at
beginning of period
|
|
|
228,334
|
|
|
|
|
|
LTIP awards granted
|
|
|
382,500
|
|
|
|
228,334
|
|
LTIP awards subjected to
accelerated vesting
|
|
|
(20,000
|
)
|
|
|
|
|
LTIP awards forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding LTIP awards at end of
period
|
|
|
590,834
|
|
|
|
228,334
|
|
|
|
|
|
|
|
|
|
|
Compensation expense of $3,640 and nil has been recognized in
the Companys consolidated financial statements for the
three months ended March 31, 2007 and 2006, respectively.
The compensation expense for the LTIP is based on the fair
market value of the Companys common shares at the time of
grant. For 2006, the Companys IPO price per share of
$34.00 was used. The LTIP is deemed to be an equity plan and as
such, $7,522 and $3,882 has been included in additional paid-in
capital on the condensed consolidated balance sheets as of
March 31, 2007 and December 31, 2006, respectively. As
of March 31, 2007, there was remaining $29,024 of total
unrecognized compensation costs related to non-vested LTIP
awards. These costs are expected to be recognized over a
weighted-average period of 2.4 years.
In calculating the compensation expense, and in the
determination of share equivalents for the purpose of
calculating diluted earnings per share, it is estimated that the
maximum performance goals as set by the LTIP are likely to be
achieved over the performance period. The performance period for
the LTIP awards issued in 2007 and 2006 is defined as the three
consecutive fiscal-year period beginning January 1, 2007
and 2006, respectively. The expense is recognized over the
performance period.
12
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
The following table sets forth the comparison of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,921
|
|
|
$
|
98,121
|
|
Weighted average common shares
outstanding
|
|
|
60,333,209
|
|
|
|
50,162,842
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.89
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,921
|
|
|
$
|
98,121
|
|
Weighted average common shares
outstanding
|
|
|
60,333,209
|
|
|
|
50,162,842
|
|
Share equivalents:
|
|
|
|
|
|
|
|
|
Warrants and options
|
|
|
1,366,365
|
|
|
|
109,267
|
|
Restricted stock units
|
|
|
316,544
|
|
|
|
213,447
|
|
LTIP awards
|
|
|
191,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
common share equivalents outstanding diluted
|
|
|
62,207,941
|
|
|
|
50,485,556
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.83
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31, 2007, 215,650
employee stock options were considered antidilutive and were
therefore excluded from the calculation of the diluted earnings
per share. For the
three-month
period ended March 31, 2006, all common share equivalents,
consisting of warrants issued to certain of the Companys
founding shareholders and stock option, RSU and LTIP awards,
were considered dilutive and have been included in the
calculation of the diluted earnings per share.
On or about November 8, 2005, the Company received a Civil
Investigative Demand (CID) from the Antitrust and
Civil Medicaid Fraud Division of the Office of the Attorney
General of Texas relating to an investigation into (1) the
possibility of restraint of trade in one or more markets within
the State of Texas arising out of our business relationships
with American International Group, Inc. (AIG) and
The Chubb Corporation (Chubb), and (2) certain
insurance and insurance brokerage practices, including those
relating to contingent commissions and false quotes, which are
also the subject of industry-wide investigations and class
action litigation. The CID also sought information regarding
(i) contingent commission, placement service or other
agreements that the Company may have had with brokers or
producers, and (ii) the possibility of the provision of any
non-competitive
bids by the Company in connection with the placement of
insurance. In April 2007, the Company reached a settlement of
all matters under investigation by the Antitrust and Civil
Medicaid Fraud Division of the Office of the Attorney General of
Texas. This settlement amounted to $2,100 which had been
reserved for and included in general and administrative expenses
in the consolidated statement of operations and comprehensive
income for the year ended December 31, 2006. This amount
was paid to the State of Texas on April 16, 2007.
13
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
10.
|
LEGAL
PROCEEDINGS (continued)
|
On April 4, 2006, a complaint was filed in the
U.S. District Court for the Northern District of Georgia
(Atlanta Division) by a group of several corporations and
certain of their related entities in an action entitled New
Cingular Wireless Headquarters, LLC et al, as plaintiffs,
against certain defendants, including Marsh & McLennan
Companies, Inc., Marsh Inc. and Aon Corporation, in their
capacities as insurance brokers, and 78 insurers, including
Holdings insurance subsidiary in Bermuda, Allied World
Assurance Company, Ltd.
The action generally relates to broker defendants
placement of insurance contracts for plaintiffs with the 78
insurer defendants. Plaintiffs maintain that the defendants used
a variety of illegal schemes and practices designed to, among
other things, allocate customers, rig bids for insurance
products and raise the prices of insurance products paid by the
plaintiffs. In addition, plaintiffs allege that the broker
defendants steered policyholders business to preferred
insurer defendants. Plaintiffs claim that as a result of these
practices, policyholders either paid more for insurance products
or received less beneficial terms than the competitive market
would have charged. The eight counts in the complaint allege,
among other things, (i) unreasonable restraints of trade
and conspiracy in violation of the Sherman Act,
(ii) violations of the Racketeer Influenced and Corrupt
Organizations Act, or RICO, (iii) that broker defendants
breached their fiduciary duties to plaintiffs, (iv) that
insurer defendants participated in and induced this alleged
breach of fiduciary duty, (v) unjust enrichment,
(vi) common law fraud by broker defendants and
(vii) statutory and consumer fraud under the laws of
certain U.S. states. Plaintiffs seek equitable and legal
remedies, including injunctive relief, unquantified
consequential and punitive damages, and treble damages under the
Sherman Act and RICO. On October 16, 2006, the Judicial
Panel on Multidistrict Litigation ordered that the litigation be
transferred to the U.S. District Court for the District of
New Jersey for inclusion in the coordinated or consolidated
pretrial proceedings occurring in that court. Neither Allied
World Assurance Company, Ltd nor any of the other defendants
have responded to the complaint. Written discovery has begun but
has not been completed. As a result of the court granting
motions to dismiss in the related putative class action
proceeding, prosecution of this case is currently stayed pending
the courts analysis of any amended pleading filed by the
class action plaintiffs. While this matter is in an early stage,
and it is not possible to predict its outcome, the Company does
not currently believe that the outcome will have a material
adverse effect on the Companys operations or financial
position.
The determination of reportable segments is based on how senior
management monitors the Companys underwriting operations.
The Company measures the results of its underwriting operations
under three major business categories, namely property
insurance, casualty insurance and reinsurance. All product lines
fall within these classifications.
The property segment includes the insurance of physical property
and energy-related risks. These risks generally relate to
tangible assets and are considered short-tail in
that the time from a claim being advised to the date when the
claim is settled is relatively short. The casualty segment
includes the insurance of general liability risks, professional
liability risks and healthcare risks. Such risks are
long-tail in nature since the emergence and
settlement of a claim can take place many years after the policy
period has expired. The reinsurance segment includes any
reinsurance of other companies in the insurance and reinsurance
industries. The Company writes reinsurance on both a treaty and
facultative basis.
Responsibility and accountability for the results of
underwriting operations are assigned by major line of business
on a worldwide basis. Because the Company does not manage its
assets by segment, investment income, interest expense and total
assets are not allocated to individual reportable segments.
14
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
11.
|
SEGMENT
INFORMATION (continued)
|
Management measures results for each segment on the basis of the
loss and loss expense ratio, acquisition cost
ratio, general and administrative expense
ratio and the combined ratio. The loss
and loss expense ratio is derived by dividing net losses
and loss expenses by net premiums earned. The acquisition
cost ratio is derived by dividing acquisition costs by net
premiums earned. The general and administrative expense
ratio is derived by dividing general and administrative
expenses by net premiums earned. The combined ratio
is the sum of the loss and loss expense ratio, the acquisition
cost ratio and the general and administrative expense ratio.
The following table provides a summary of the segment results
for the three months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
Property
|
|
|
Casualty
|
|
|
Reinsurance
|
|
|
Total
|
|
|
Gross premiums written
|
|
$
|
101,865
|
|
|
$
|
125,189
|
|
|
$
|
211,352
|
|
|
$
|
438,406
|
|
Net premiums written
|
|
|
46,132
|
|
|
|
100,645
|
|
|
|
211,067
|
|
|
|
357,844
|
|
Net premiums earned
|
|
|
44,491
|
|
|
|
124,409
|
|
|
|
117,666
|
|
|
|
286,566
|
|
Net losses and loss expenses
|
|
|
(6,865
|
)
|
|
|
(90,367
|
)
|
|
|
(68,763
|
)
|
|
|
(165,995
|
)
|
Acquisition costs
|
|
|
(332
|
)
|
|
|
(6,038
|
)
|
|
|
(22,826
|
)
|
|
|
(29,196
|
)
|
General and administrative expenses
|
|
|
(7,757
|
)
|
|
|
(15,307
|
)
|
|
|
(10,139
|
)
|
|
|
(33,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
29,537
|
|
|
|
12,697
|
|
|
|
15,938
|
|
|
|
58,172
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,648
|
|
Net realized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,484
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,374
|
)
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
15.4
|
%
|
|
|
72.6
|
%
|
|
|
58.4
|
%
|
|
|
57.9
|
%
|
Acquisition cost ratio
|
|
|
0.8
|
%
|
|
|
4.9
|
%
|
|
|
19.4
|
%
|
|
|
10.2
|
%
|
General and administrative expense
ratio
|
|
|
17.4
|
%
|
|
|
12.3
|
%
|
|
|
8.6
|
%
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
33.6
|
%
|
|
|
89.8
|
%
|
|
|
86.4
|
%
|
|
|
79.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Expressed
in thousands of United States dollars, except share and per
share amounts)
|
|
11.
|
SEGMENT
INFORMATION (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
Property
|
|
|
Casualty
|
|
|
Reinsurance
|
|
|
Total
|
|
|
Gross premiums written
|
|
$
|
119,819
|
|
|
$
|
130,494
|
|
|
$
|
247,807
|
|
|
$
|
498,120
|
|
Net premiums written
|
|
|
67,197
|
|
|
|
114,194
|
|
|
|
246,112
|
|
|
|
427,503
|
|
Net premiums earned
|
|
|
49,102
|
|
|
|
131,982
|
|
|
|
127,859
|
|
|
|
308,943
|
|
Net losses and loss expenses
|
|
|
(33,319
|
)
|
|
|
(97,603
|
)
|
|
|
(75,038
|
)
|
|
|
(205,960
|
)
|
Acquisition costs
|
|
|
1,481
|
|
|
|
(9,319
|
)
|
|
|
(28,634
|
)
|
|
|
(36,472
|
)
|
General and administrative expenses
|
|
|
(5,115
|
)
|
|
|
(9,862
|
)
|
|
|
(5,345
|
)
|
|
|
(20,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
12,149
|
|
|
|
15,198
|
|
|
|
18,842
|
|
|
|
46,189
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,001
|
|
Net realized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,236
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,451
|
)
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
67.9
|
%
|
|
|
73.9
|
%
|
|
|
58.7
|
%
|
|
|
66.7
|
%
|
Acquisition cost ratio
|
|
|
(3.0
|
)%
|
|
|
7.1
|
%
|
|
|
22.4
|
%
|
|
|
11.8
|
%
|
General and administrative expense
ratio
|
|
|
10.4
|
%
|
|
|
7.5
|
%
|
|
|
4.2
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
75.3
|
%
|
|
|
88.5
|
%
|
|
|
85.3
|
%
|
|
|
85.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows an analysis of the Companys net
premiums written by geographic location of the Companys
subsidiaries for the three months ended March 31, 2007 and
2006. All inter-company premiums have been eliminated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Bermuda
|
|
$
|
290,602
|
|
|
$
|
356,390
|
|
United States
|
|
|
22,910
|
|
|
|
22,051
|
|
Europe
|
|
|
44,332
|
|
|
|
49,062
|
|
|
|
|
|
|
|
|
|
|
Total net premium written
|
|
$
|
357,844
|
|
|
$
|
427,503
|
|
|
|
|
|
|
|
|
|
|
On May 8, 2007, the Company declared a quarterly dividend
of $0.15 per common share, payable on June 14, 2007 to
shareholders of record on May 29, 2007.
16
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this
Form 10-Q.
References in this
Form 10-Q
to the terms we, us, our,
our company, the company or other
similar terms mean the consolidated operations of Allied World
Assurance Company Holdings, Ltd and its subsidiaries, unless the
context requires otherwise. References in this
Form 10-Q
to the term Holdings means Allied World Assurance
Company Holdings, Ltd only.
Note on
Forward-Looking Statement
This
Form 10-Q
and other publicly available documents may include, and our
officers and representatives may from time to time make,
projections concerning financial information and statements
concerning future economic performance and events, plans and
objectives relating to management, operations, products and
services, and assumptions underlying these projections and
statements. These projections and statements are forward-looking
statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are not historical facts but
instead represent only our belief regarding future events, many
of which, by their nature, are inherently uncertain and outside
our control. These projections and statements may address, among
other things, our strategy for growth, product development,
financial results and reserves. Actual results and financial
condition may differ, possibly materially, from these
projections and statements and therefore you should not place
undue reliance on them. Factors that could cause our actual
results to differ, possibly materially, from those in the
specific projections and statements are discussed throughout
this Managements Discussion and Analysis of Financial
Condition and Results of Operations and in Risk
Factors in Item 1A. of Part I of our 2006 Annual
Report on
Form 10-K
filed with the U.S. Securities and Exchange Commission
(SEC) on March 19, 2007. We are under no
obligation (and expressly disclaim any such obligation) to
update or revise any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result
of new information, future developments or otherwise.
Overview
Our
Business
We write a diversified portfolio of property and casualty
insurance and reinsurance lines of business internationally
through our insurance subsidiaries or branches based in Bermuda,
the United States, Ireland and the United Kingdom. We manage our
business through three operating segments: property, casualty
and reinsurance. As of March 31, 2007, we had
$8.1 billion of total assets, $2.4 billion of
shareholders equity and $2.9 billion of total
capital, which includes shareholders equity and senior
notes.
During the first three months of 2007, we have seen rate
declines and increased competition across all of our operating
segments. Increased competition results from increased capacity
in the insurance and reinsurance marketplaces. We believe the
trend of increased capacity and decreasing rates will continue
during the remainder of 2007. We continue to be selective in the
policies and reinsurance contracts we underwrite. As such, our
consolidated gross premiums written decreased
$59.7 million, or 12.0%, for the three months ended
March 31, 2007 compared to the three months ended
March 31, 2006. We capitalized on growth opportunities
provided by our U.S. distribution platform, which partially
offset the decline in gross premiums written. During the three
months ended March 31, 2007, gross premiums written by our
U.S. subsidiaries increased by $8.4 million or 34.7%
compared to the three months ended March 31, 2006. Our net
income for the three months ended March 31, 2007 increased
$15.8 million, or 16.1%, to $113.9 million for the
three months ended March 31, 2007 compared to
$98.1 million for the three months ended March 31,
2006. Net income for the three months ended March 31, 2007
included net investment income of $72.6 million compared to
$62.0 million for the three months ended March 31,
2006.
Our direct insurance business (consisting of our property and
casualty segments) grew to 51.8% of our business mix on a gross
premiums written basis, compared to 50.3% for the three months
ended March 31, 2006. Our property, casualty and
reinsurance segments made up 23.2%, 28.6% and 48.2%,
respectively, of
17
gross premiums written for the three months ended March 31,
2007 compared to 24.1%, 26.2% and 49.7%, respectively, for the
three months ended March 31, 2006.
Relevant
Factors
Revenues
We derive our revenues primarily from premiums on our insurance
policies and reinsurance contracts, net of any reinsurance or
retrocessional coverage purchased. Insurance and reinsurance
premiums are a function of the amounts and types of policies and
contracts we write, as well as prevailing market prices. Our
prices are determined before our ultimate costs, which may
extend far into the future, are known. In addition, our revenues
include income generated from our investment portfolio,
consisting of net investment income and net realized gains or
losses. Our investment portfolio is currently comprised
primarily of fixed maturity investments, the income from which
is a function of the amount of invested assets and relevant
interest rates.
Expenses
Our expenses consist largely of net losses and loss expenses,
acquisition costs and general and administrative expenses. Net
losses and loss expenses are comprised of paid losses and
reserves for losses less recoveries from reinsurers. Losses and
loss expense reserves are estimated by management and reflect
our best estimate of ultimate losses and costs arising during
the reporting period and revisions of prior period estimates. In
accordance with accounting principles generally accepted in the
United States of America, we reserve for catastrophic losses as
soon as the loss event is known to have occurred. Acquisition
costs consist principally of commissions and brokerage fees that
are typically a percentage of the premiums on insurance policies
or reinsurance contracts written, net of any commissions
received by us on risks ceded to reinsurers. General and
administrative expenses include personnel expenses including
stock-based compensation charges, rent expense, professional
fees, information technology costs and other general operating
expenses. We are experiencing increases in general and
administrative expenses resulting from additional staff,
increased stock-based compensation expense, increased rent
expense for our new Bermuda premises and additional amortization
expense for building-related and infrastructure expenditures. We
believe this trend will continue during the remainder of 2007.
Critical
Accounting Policies
It is important to understand our accounting policies in order
to understand our financial position and results of operations.
Our condensed consolidated financial statements reflect
determinations that are inherently subjective in nature and
require management to make assumptions and best estimates to
determine the reported values. If events or other factors cause
actual results to differ materially from managements
underlying assumptions or estimates, there could be a material
adverse effect on our financial condition or results of
operations. We believe that some of the more critical judgments
in the areas of accounting estimates and assumptions that affect
our financial condition and results of operations are related to
reserves for losses and loss expenses, reinsurance recoverables,
premiums and acquisition costs and
other-than-temporary
impairment of investments. For a detailed discussion of our
critical accounting policies, please refer to our Annual Report
on
Form 10-K
for the year ended December 31, 2006 filed with the SEC.
There were no material changes in the application of our
critical accounting estimates subsequent to that report.
18
Results
of Operations
The following table sets forth our selected consolidated
statement of operations data for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Gross premiums written
|
|
$
|
438.4
|
|
|
$
|
498.1
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
357.8
|
|
|
|
427.5
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
286.6
|
|
|
|
308.9
|
|
Net investment income
|
|
|
72.6
|
|
|
|
62.0
|
|
Net realized investment (losses)
|
|
|
(6.5
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
352.7
|
|
|
$
|
365.7
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
$
|
166.0
|
|
|
$
|
206.0
|
|
Acquisition costs
|
|
|
29.2
|
|
|
|
36.5
|
|
General and administrative expenses
|
|
|
33.2
|
|
|
|
20.3
|
|
Interest expense
|
|
|
9.4
|
|
|
|
6.5
|
|
Foreign exchange loss
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237.8
|
|
|
$
|
269.8
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
114.9
|
|
|
$
|
95.9
|
|
Income tax expense (recovery)
|
|
|
1.0
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113.9
|
|
|
$
|
98.1
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
57.9
|
%
|
|
|
66.7
|
%
|
Acquisition cost ratio
|
|
|
10.2
|
|
|
|
11.8
|
|
General and administrative expense
ratio
|
|
|
11.6
|
|
|
|
6.6
|
|
Expense ratio
|
|
|
21.8
|
|
|
|
18.4
|
|
Combined ratio
|
|
|
79.7
|
|
|
|
85.1
|
|
Comparison
of Three Months Ended March 31, 2007 and 2006
Premiums
Gross premiums written decreased by $59.7 million, or
12.0%, for the three months ended March 31, 2007 compared
to the three months ended March 31, 2006. The decrease was
primarily the result of a reduction in the amount of upward
adjustments to premium estimates for our reinsurance segment,
non-renewal of business that did not meet our underwriting
requirements (which included pricing
and/or
policy terms and conditions) and increased competition and
decreasing rates for new and renewal business. This was most
noticeable for our Bermuda operating subsidiary where gross
premiums written decreased $63.9 million, or 16.1%, from
$398.1 million for the three months ended March 31,
2006 to $334.2 million for the three months ended
March 31, 2007. Net adjustments on estimated premiums
resulted in a reduction in gross premiums written of
approximately $1.1 million during the three months ended
March 31, 2007 compared to a net increase of approximately
$36.7 million for the three months ended March 31,
2006. Net adjustments on estimated premiums related to treaties
written in prior periods. As our historical experience develops,
we may have fewer or smaller adjustments to our estimated
premiums. European gross premiums written also decreased by
$4.2 million, or 5.5%, primarily due to non-renewal of
business that did not meet our underwriting requirements (which
included pricing
and/or
policy terms and conditions). The decrease in gross premiums
written from our Bermuda and European operating subsidiaries was
19
partially offset by new business written and an increase in
gross premiums written for our U.S. operating subsidiaries
of $8.4 million, or 34.7%, from $24.2 million for the
three months ended March 31, 2006 to $32.6 million for
the three months ended March 31, 2007. The increase in
gross premiums written for our U.S. operations was a result
of increased marketing efforts and additional staff in our
expanded U.S. platform.
We employ a regional distribution strategy in the United States
via wholesalers and brokers targeting middle-market clients. We
believe that this business will be complementary to our current
casualty and property direct insurance business produced through
Bermuda and European markets, which primarily focus on
underwriting risks for Fortune 1000 and large multi-national
clients with complex insurance needs. The table below
illustrates our gross premiums written by geographic location
for the three months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
Bermuda
|
|
$
|
334.2
|
|
|
$
|
398.1
|
|
|
$
|
(63.9
|
)
|
|
|
(16.1
|
)%
|
Europe
|
|
|
71.6
|
|
|
|
75.8
|
|
|
|
(4.2
|
)
|
|
|
(5.5
|
)
|
United States
|
|
|
32.6
|
|
|
|
24.2
|
|
|
|
8.4
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
438.4
|
|
|
$
|
498.1
|
|
|
$
|
(59.7
|
)
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written decreased by $69.7 million, or 16.3%,
for the three months ended March 31, 2007 compared to the
three months ended March 31, 2006, a higher percentage
decrease than that of gross premiums written. The difference
between gross and net premiums written is the cost to us of
purchasing reinsurance, both on a proportional and a
non-proportional basis, including the cost of property
catastrophe reinsurance coverage. We ceded 18.4% of gross
premiums written for the three months ended March 31, 2007
compared to 14.2% for the same period in 2006. In our property
segment, we ceded 54.7% of gross premiums written for the three
months ended March 31, 2007 compared to 43.9% for the three
months ended March 31, 2006. In our casualty segment, we
ceded 19.6% of gross premiums written for the three months ended
March 31, 2007 compared to 12.5% for the three months ended
March 31, 2006. We have increased the amount we ceded as we
have been able to obtain adequate protection at cost-effective
levels and in order to reduce the overall volatility of our
insurance operations.
Net premiums earned decreased by $22.3 million, or 7.2%,
for the three months ended March 31, 2007 compared to the
three months ended March 31, 2006 as a result of lower net
premiums written. Net premiums earned for the three months ended
March 31, 2007 was reduced by $10.5 million due to the
cost of our property catastrophe reinsurance protection compared
to $4.5 million during the three months ended
March 31, 2006. The reduction in the amount of upward
adjustments to premium estimates for our reinsurance segment
also caused net premiums earned to decrease. Since adjustments
on estimated premiums relate to prior years treaties, a
larger portion of the associated premiums written are earned.
The percentage decrease in net premiums earned was lower than
that of net premiums written due to the continued earning of
higher net premiums that were written prior to the three months
ended March 31, 2007.
We evaluate our business by segment, distinguishing between
property insurance, casualty insurance and reinsurance. The
following chart illustrates the mix of our business on a gross
premiums written basis and net premiums earned basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
|
Premiums
|
|
|
Premiums
|
|
|
|
Written
|
|
|
Earned
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Property
|
|
|
23.2
|
%
|
|
|
24.1
|
%
|
|
|
15.5
|
%
|
|
|
15.9
|
%
|
Casualty
|
|
|
28.6
|
|
|
|
26.2
|
|
|
|
43.4
|
|
|
|
42.7
|
|
Reinsurance
|
|
|
48.2
|
|
|
|
49.7
|
|
|
|
41.1
|
|
|
|
41.4
|
|
20
The increase in the percentage of casualty gross premiums
written reflects the continued growth of our
U.S. operations, where casualty gross premiums written
increased by $3.8 million, or 19.9%. The percentage of
property net premiums earned was considerably less than for
gross premiums written because we cede a larger portion of our
property business compared to casualty and reinsurance.
Net
Investment Income and Realized Gains/Losses
Our invested assets are managed by two investment mangers
affiliated with The Goldman Sachs Group, Inc., one of our
principal shareholders. We also have investments in one hedge
fund managed by a subsidiary of American International Group,
Inc. (AIG). Our primary investment objective is the
preservation of capital. A secondary objective is obtaining
returns commensurate with a benchmark, primarily defined as 35%
of the Lehman U.S. Government Intermediate Index, 40% of
the Lehman Corp. 1-5 year A3/A- or Higher Index and 25% of
the Lehman Securitized Index. We adopted this benchmark
effective January 1, 2006.
Investment income is principally derived from interest and
dividends earned on investments, partially offset by investment
management fees and fees paid to our custodian bank. Net
investment income earned during the three months ended
March 31, 2007 was $72.6 million, compared to
$62.0 million during the three months ended March 31,
2006. The $10.6 million, or 17.2%, increase was primarily
the result of an approximate 21.7% increase in average aggregate
invested assets from March 31, 2006 to March 31, 2007.
Our aggregate invested assets grew due to positive operating
cash flows, as well as the proceeds received from our initial
public offering in July 2006. Offsetting this increase was a
reduction in income from our hedge fund investments. We received
an annual dividend of $2.1 million and $8.4 million
from an investment in a high-yield bond fund during the
three-month period ended March 31, 2007 and 2006,
respectively. In addition, during the three months ended
March 31, 2006, we received distributions of approximately
$3.9 million in
dividends-in-kind
from three of our hedge funds based on the final 2005 asset
values. Effective January 1, 2006, our class of shares or
the rights and preferences of our class of shares changed, and
as a result, we no longer receive dividends from these hedge
funds. Investment management fees of $1.4 million and
$1.2 million were incurred during the three months ended
March 31, 2007 and 2006, respectively.
The annualized period book yield of the investment portfolio for
the three months ended March 31, 2007 and 2006 was 4.7% and
4.3%, respectively. The increase in yield was primarily the
result of increases in prevailing market interest rates over the
past year. We continue to maintain a conservative investment
posture. As of March 31, 2007, approximately 99% of our
fixed income investments (which included individually held
securities and securities held in a high-yield bond fund)
consisted of investment grade securities. The average credit
rating of our fixed income portfolio was AA as rated by
Standard & Poors and Aa2 as rated by
Moodys Investors Service, with an average duration of
approximately 2.9 years as of March 31, 2007.
The following table shows the components of net realized
investment (losses).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Net (loss) on fixed income
investments
|
|
$
|
(6.5
|
)
|
|
$
|
(5.7
|
)
|
Net gain on interest rate swaps
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses)
|
|
$
|
(6.5
|
)
|
|
$
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007, the net loss
on fixed income investments included a write-down of
approximately $9.4 million related to declines in the
market value of securities in our available for sale portfolio
which were considered to be other than temporary. The declines
in market value on these securities were solely due to changes
in interest rates. During the three months ended March 31,
2006, no declines in the market value of investments were
considered to be other than temporary.
21
Net
Losses and Loss Expenses
Net losses and loss expenses incurred comprise three main
components:
|
|
|
|
|
losses paid, which are actual cash payments to insureds, net of
recoveries from reinsurers;
|
|
|
|
outstanding loss or case reserves, which represent
managements best estimate of the likely settlement amount
for known claims, less the portion that can be recovered from
reinsurers; and
|
|
|
|
IBNR reserves, which are reserves established by us for claims
that are not yet reported but can reasonably be expected to have
occurred based on industry information, managements
experience and actuarial evaluation. The portion recoverable
from reinsurers is deducted from the gross estimated loss.
|
Net losses and loss expenses decreased by $40.0 million, or
19.4%, to $166.0 million for the three months ended
March 31, 2007 from $206.0 million for the three
months ended March 31, 2006. The primary reasons for the
reduction in these expenses were favorable prior year loss
development and lower earned premiums during the three months
ended March 31, 2007 compared to the three months ended
March 31, 2006. Because our net exposures tend to vary with
net premiums earned, lower net premiums earned will reduce the
ultimate loss reserve amount, and therefore, reduce the loss and
loss expenses incurred. We were not exposed to any significant
catastrophes during the three months ended March 31, 2007
and 2006. We have incurred approximately $3.7 million of
reported losses, net of reinsurance from Windstorm Kyrill during
the three months ended March 31, 2007. We expect that our
ultimate total losses from Windstorm Kyrill will not exceed
$10.0 million, net of reinsurance recoverable.
We recorded net favorable development related to prior years of
approximately $26.1 million and nil during the three months
ended March 31, 2007 and 2006, respectively. The following
is a breakdown of the major factors contributing to the net
favorable development for the three months ended March 31,
2007:
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|
|
|
|
Net favorable development of $13.3 million, excluding
catastrophes, for our property segment was primarily the result
of general property business actual loss emergence being lower
than the initial expected loss emergence for the 2006 accident
year.
|
|
|
|
Net favorable development of $12.6 million related to
Hurricanes Katrina, Rita and Wilma. As of March 31, 2007,
we estimated our net losses related to Hurricanes Katrina, Rita
and Wilma to be $443.4 million, which was a reduction from
our original estimate of $456.0 million.
|
|
|
|
Net favorable development of $1.0 million primarily due to
additional recoveries under our property catastrophe reinsurance
protection related to Hurricane Frances.
|
|
|
|
Net unfavorable development of $0.7 million for our
casualty segment, which included net unfavorable development of
$27.8 million for accident years 2002 and 2005 due to a
higher incidence of reported losses in our 2002 professional
liability business and our 2005 general casualty business. This
was offset by net favorable development of $27.1 million in
our general casualty, professional liability and healthcare
business due to actual loss emergence being lower than the
initial expected loss emergence for the 2003 and 2004 accident
years.
|
We have estimated our net losses from catastrophes based on
actuarial analysis of claims information received to date,
industry modeling and discussions with individual insureds and
reinsureds. Accordingly, actual losses may vary from those
estimated and will be adjusted in the period in which further
information becomes available.
The loss and loss expense ratio for the three months ended
March 31, 2007 was 57.9%, compared to 66.7% for the three
months ended March 31, 2006. Net favorable development
recognized in the three months ended March 31, 2007 reduced
the loss and loss expense ratio by 9.1 percentage points.
Thus, the loss and loss expense ratio related to the current
periods business was 67.0%. Comparatively, no prior year
loss development was recognized for the three months ended
March 31, 2006, thus the loss and loss expense ratio of
66.7% related solely to that periods business.
22
The following table shows the components of the decrease in net
losses and loss expenses of $40.0 million for the three
months ended March 31, 2007 from the three months ended
March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Dollar
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Net losses paid
|
|
$
|
119.2
|
|
|
$
|
138.4
|
|
|
$
|
(19.2
|
)
|
Net change in reported case
reserves
|
|
|
(21.0
|
)
|
|
|
(11.8
|
)
|
|
|
(9.2
|
)
|
Net change in IBNR
|
|
|
67.8
|
|
|
|
79.4
|
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
$
|
166.0
|
|
|
$
|
206.0
|
|
|
$
|
(40.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses paid have decreased $19.2 million, or 13.9%, to
$119.2 million for the three months ended March 31,
2007 primarily due to lower claim payments relating to the 2004
and 2005 windstorms than the amount paid during the three months
ended March 31, 2006. During the three months ended
March 31, 2007, $35.4 million of net losses were paid
in relation to the 2004 and 2005 windstorms compared to
$85.4 million during the three months ended March 31,
2006. During the three months ended March 31, 2007, we
recovered $9.4 million on our property catastrophe
reinsurance protection in relation to losses paid as a result of
Hurricanes Katrina and Rita compared to $17.2 million for
the three months ended March 31, 2006.
The decrease in reported case reserves was due to continued
payments on the 2004 and 2005 windstorms during the three months
ended March 31, 2007.
The decrease in IBNR for the three months ended March 31,
2007 as compared to the three months ended March 31, 2006
was primarily due to net favorable loss development and a
reduction in business written.
The table below is a reconciliation of the beginning and ending
reserves for losses and loss expenses for the three months ended
March 31, 2007 and 2006. Losses incurred and paid are
reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Net reserves for losses and loss
expenses, January 1
|
|
$
|
2,947.9
|
|
|
$
|
2,689.1
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
192.2
|
|
|
|
206.0
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
(12.6
|
)
|
|
|
|
|
Prior period property catastrophe
|
|
|
(13.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
166.0
|
|
|
$
|
206.0
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
0.8
|
|
|
|
0.9
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
83.0
|
|
|
|
52.1
|
|
Prior period property catastrophe
|
|
|
35.4
|
|
|
|
85.4
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
$
|
119.2
|
|
|
$
|
138.4
|
|
Foreign exchange revaluation
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss
expenses, March 31
|
|
|
2,995.1
|
|
|
|
2,756.9
|
|
Losses and loss expenses
recoverable
|
|
|
668.1
|
|
|
|
664.0
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
expenses, March 31
|
|
$
|
3,663.2
|
|
|
$
|
3,420.9
|
|
23
Acquisition
Costs
Acquisition costs are comprised of commissions, brokerage fees
and insurance taxes. Commissions and brokerage fees are usually
calculated as a percentage of premiums and depend on the market
and line of business. Acquisition costs are reported after
(1) deducting commissions received on ceded reinsurance,
(2) deducting the part of acquisition costs relating to
unearned premiums and (3) including the amortization of
previously deferred acquisition costs.
Acquisition costs were $29.2 million for the three months
ended March 31, 2007 compared to $36.5 million for the
three months ended March 31, 2006. Acquisition costs as a
percentage of net premiums earned were 10.2% for the three
months ended March 31, 2007, compared to 11.8% for the same
period in 2006. The decrease in this rate was primarily due to
an increase in ceded premiums, which increased our ceding
commissions, during the three months ended March 31, 2007
compared to the same period in 2006, as well as a reduction in
the commissions paid to IPCRe Underwriting Services Limited
(IPCUSL) as our underwriting agency agreement with
them was terminated in December 2006.
General
and Administrative Expenses
General and administrative expenses increased by
$12.9 million, or 63.5%, for the three months ended
March 31, 2007 compared to the same period in 2006. The
following is a breakdown of the major factors contributing to
the increase:
|
|
|
|
|
Salary and employee welfare costs increased approximately
$9.2 million. This included stock-based compensation costs
incurred of $6.3 million for the three months ended
March 31, 2007 compared to $0.4 million for the three
months ended March 31, 2006. We also increased the number
of staff by approximately 20%.
|
|
|
|
Rent and amortization of leaseholds and furniture and fixtures
increased by approximately $1.2 million due to our new
offices in Bermuda and Boston.
|
|
|
|
Information technology costs increased by approximately
$1.1 million due to the amortization of hardware and
software as well as consulting costs required as part of the
development of our technological infrastructure.
|
Our general and administrative expense ratio was 11.6% for the
three months ended March 31, 2007, which was higher than
6.6% for the three months ended March 31, 2006, primarily
as a result of personnel and building and related expenses
increasing relative to declining net premiums earned.
Our expense ratio was 21.8% for the three months ended
March 31, 2007 compared to 18.4% for the three months ended
March 31, 2006. The increase resulted primarily from
increased general and administrative expenses, offset by a
decrease in our acquisition costs.
Interest
Expense
Interest expense increased $2.9 million, or 44.6%, to
$9.4 million for the three months ended March 31, 2007
from $6.5 million for the three months ended March 31,
2006. Interest expense incurred during the three months ended
March 31, 2007 represented one quarter of the annual
interest expense on the senior notes, which bear interest at an
annual rate of 7.50%.
Interest expense for the three months ended March 31, 2006
related to our $500.0 million seven-year term loan secured
in March 2005. This loan was repaid in full during the three
months ended September 30, 2006, using a portion of the
proceeds from both our initial public offering
(IPO), including the exercise in full by the
underwriters of their over-allotment option, and the issuance of
$500.0 million aggregate principal amount of senior notes.
Interest on the term loan was based on LIBOR plus an applicable
margin.
24
Net
Income
Net income for the three months ended March 31, 2007 was
$113.9 million compared to net income of $98.1 million
for the three months ended March 31, 2006. The increase was
primarily the result of favorable prior year loss development,
as well as increased net investment income, which more than
offset the reduction in net premiums earned. Net income for the
three months ended March 31, 2007 included a small net
foreign exchange loss and income tax expense of
$1.0 million. Net income for the three months ended
March 31, 2006 included a net foreign exchange loss of
$0.5 million and an income tax recovery of
$2.2 million.
Underwriting
Results by Operating Segments
Our company is organized into three operating segments:
Property Segment. Our property segment
includes the insurance of physical property and business
interruption coverage for commercial property and energy-related
risks. We write solely commercial coverages and focus on the
insurance of primary risk layers. This means that we are
typically part of the first group of insurers that cover a loss
up to a specified limit.
Casualty Segment. Our casualty segment
specializes in insurance products providing coverage for general
and product liability, professional liability and healthcare
liability risks. We focus primarily on insurance of excess
layers, where we insure the second
and/or
subsequent layers of a policy above the primary layer. Our
direct casualty underwriters provide a variety of specialty
insurance casualty products to large and complex organizations
around the world.
Reinsurance Segment. Our reinsurance segment
includes the reinsurance of property, general casualty,
professional liability, specialty lines and property catastrophe
coverages written by other insurance companies. We presently
write reinsurance on both a treaty and a facultative basis,
targeting several niche reinsurance markets including
professional liability lines, specialty casualty, property for
U.S. regional insurers, accident and health and to a lesser
extent marine and aviation lines.
Management measures results for each segment on the basis of the
loss and loss expense ratio, acquisition cost
ratio, general and administrative expense
ratio, expense ratio (acquisition cost ratio
and general and administrative expense ratio combined) and the
combined ratio. Because we do not manage our assets
by segment, investment income, interest expense and total assets
are not allocated to individual reportable segments. General and
administrative expenses are allocated to segments based on
various factors, including staff count and each segments
proportional share of gross premiums written.
25
Property
Segment
The following table summarizes the underwriting results and
associated ratios for the property segment for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
101.9
|
|
|
$
|
119.8
|
|
Net premiums written
|
|
|
46.1
|
|
|
|
67.2
|
|
Net premiums earned
|
|
|
44.5
|
|
|
|
49.1
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
$
|
6.8
|
|
|
$
|
33.3
|
|
Acquisition costs
|
|
|
0.3
|
|
|
|
(1.5
|
)
|
General and administrative expenses
|
|
|
7.8
|
|
|
|
5.1
|
|
Underwriting income
|
|
|
29.6
|
|
|
|
12.2
|
|
Ratios
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
15.4
|
%
|
|
|
67.9
|
%
|
Acquisition cost ratio
|
|
|
0.8
|
|
|
|
(3.0
|
)
|
General and administrative expense
ratio
|
|
|
17.4
|
|
|
|
10.4
|
|
Expense ratio
|
|
|
18.2
|
|
|
|
7.4
|
|
Combined ratio
|
|
|
33.6
|
|
|
|
75.3
|
|
Comparison
of Three Months Ended March 31, 2007 and 2006
Premiums. Gross premiums written were
$101.9 million for the three months ended March 31,
2007 compared to $119.8 million for the three months ended
March 31, 2006, a decrease of $17.9 million, or 14.9%.
The decrease in gross premiums written was primarily the result
of a reduction in the volume of our energy business due to
reduced exposures taken in response to market conditions. Gross
premiums written for our energy business decreased
$13.0 million for the three months ended March 31,
2007 compared to the three months ended March 31, 2006. The
amount of general property business written decreased primarily
due to the non-renewal of business that did not meet our
underwriting requirements (which included pricing
and/or
policy terms and conditions) and increased competition for new
and renewal business, partially offset by new business. Our
U.S. offices increased gross premiums written by
$4.6 million, or 87.0%, as we gained recognition in our
selected markets.
Net premiums written decreased by $21.1 million, or 31.4%,
a higher percentage decrease than that of gross premiums
written. This was primarily the result of increasing the
percentage of premiums ceded on our general property treaty from
35% to 55%. Overall, we ceded 54.7% of gross premiums written
for the three months ended March 31, 2007 compared to 43.9%
for the three months ended March 31, 2006. Net premiums
earned decreased $4.6 million, or 9.4%, to
$44.5 million for the three months ended March 31,
2007 from $49.1 million for the three months ended
March 31, 2006. Net premiums earned for the three months
ended March 31, 2007 were reduced by $10.5 million due
to the cost of our property catastrophe reinsurance protection
compared to $1.6 million during the three months ended
March 31, 2006. The increase in the cost of our property
catastrophe reinsurance protection was due to market rate
increases resulting from 2004 and 2005 windstorms and changes in
the level of coverage obtained, as well as internal changes in
the structure of the program. We renewed our property
catastrophe reinsurance treaty effective May 1, 2007 and
have increased our retention on the treaty with the
strengthening of our capital base and with the increased
reinsurance cessions on our other property reinsurance treaties.
The increased retention as well as improved rates on the
property catastrophe treaty will result in an annual deposit
premium that is approximately $23 million less than the
prior treaty year. The overall percentage decrease in net
premiums earned was lower
26
than that of net premiums written due to the continued earning
of higher net premiums written prior to the three months ended
March 31, 2007.
Net losses and loss expenses. Net losses and
loss expenses decreased by $26.5 million, or 79.6%, to
$6.8 million for the three months ended March 31, 2007
from $33.3 million for the three months ended
March 31, 2006. The decrease in net losses and loss
expenses was primarily the result of net favorable development
on prior year reserves.
Overall, our property segment recorded net favorable development
of $25.7 million during the three months ended
March 31, 2007 compared to net unfavorable development of
$2.5 million for the three months ended March 31,
2006. The $25.7 million of net favorable development
included the following:
|
|
|
|
|
Net favorable development of $13.3 million, primarily as a
result of actual loss emergence for the general property
business written in our Bermuda and U.S. offices being
lower than the initial expected loss emergence for the 2006
accident year.
|
|
|
|
Net favorable development of $8.7 million for Hurricanes
Katrina, Rita and Wilma.
|
|
|
|
Net favorable development of $3.7 million related to the
2004 windstorms.
|
The loss and loss expense ratio for the three months ended
March 31, 2007 was 15.4% compared to 67.9% for the three
months ended March 31, 2006. Net favorable development
recognized in the three months ended March 31, 2007 reduced
the loss and loss expense ratio by 57.7 percentage points.
Thus, the loss and loss expense ratio related to the current
periods business was 73.1%. In comparison, net unfavorable
development recognized in the three months ended March 31,
2006 increased the loss and loss expense ratio by
5.1 percentage points. Costs incurred in relation to our
property catastrophe reinsurance protection on an earned basis
were approximately $8.9 million greater in the three months
ended March 31, 2007 than for the same period in 2006. The
higher charge in 2007 resulted in lower net premiums earned and,
thus, increased the loss and loss expense ratio.
Net paid losses for the three months ended March 31, 2007
and 2006 were $49.7 million and $51.9 million,
respectively. During the three months ended March 31, 2007,
approximately $23.5 million of net losses were paid in
relation to the 2004 and 2005 catastrophic windstorms compared
to approximately $22.4 million during the three months
ended March 31, 2006.
27
The table below is a reconciliation of the beginning and ending
reserves for losses and loss expenses for the three months ended
March 31, 2007 and 2006. Losses incurred and paid are
reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Net reserves for losses and loss
expenses, January 1
|
|
$
|
423.9
|
|
|
$
|
543.7
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
32.5
|
|
|
|
30.8
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
(13.3
|
)
|
|
|
|
|
Prior period property catastrophe
|
|
|
(12.4
|
)
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
6.8
|
|
|
$
|
33.3
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
0.8
|
|
|
|
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
25.4
|
|
|
|
29.5
|
|
Prior period property catastrophe
|
|
|
23.5
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
$
|
49.7
|
|
|
$
|
51.9
|
|
Foreign exchange revaluation
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss
expenses, March 31
|
|
|
381.4
|
|
|
|
525.3
|
|
Losses and loss expenses
recoverable
|
|
|
433.4
|
|
|
|
465.6
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
expenses, March 31
|
|
$
|
814.8
|
|
|
$
|
990.9
|
|
Acquisition costs. Acquisition costs increased
to $0.3 million for the three months ended March 31,
2007 from negative $1.5 million for the three months ended
March 31, 2006. The negative cost represented ceding
commissions received on ceded premiums in excess of the
brokerage fees and commissions paid on gross premiums written.
The acquisition cost ratio increased to 0.8% for the three
months ended March 31, 2007 from negative 3.0% for the same
period in 2006 primarily as a result of lower ceding commissions
earned on reinsurance we purchased. The factors that will
determine the amount of acquisition costs going forward are the
amount of brokerage fees and commissions incurred on policies we
write less ceding commissions earned on reinsurance we purchase.
We normally negotiate our reinsurance treaties on an annual
basis, so the ceding commission rates and amounts ceded will
vary from renewal period to renewal period.
General and administrative expenses. General
and administrative expenses increased to $7.8 million for
the three months ended March 31, 2007 from
$5.1 million for the three months ended March 31,
2006. The increase in general and administrative expenses was
attributable to increased salary and employee welfare costs,
including stock-based compensation, increased building-related
costs and higher costs associated with information technology.
The increase in the general and administrative expense ratio
from 10.4% for the three months ended March 31, 2006 to
17.4% for the same period in 2007 was the result of increased
personnel costs, including stock-based compensation expenses,
and increased costs due to the continued expansion of our
U.S. distribution platform, while net premiums earned
declined.
28
Casualty
Segment
The following table summarizes the underwriting results and
associated ratios for the casualty segment for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
125.2
|
|
|
$
|
130.5
|
|
Net premiums written
|
|
|
100.6
|
|
|
|
114.2
|
|
Net premiums earned
|
|
|
124.4
|
|
|
|
132.0
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
$
|
90.4
|
|
|
$
|
97.6
|
|
Acquisition cost
|
|
|
6.0
|
|
|
|
9.3
|
|
General and administrative expenses
|
|
|
15.3
|
|
|
|
9.9
|
|
Underwriting income
|
|
|
12.7
|
|
|
|
15.2
|
|
Ratios
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
72.6
|
%
|
|
|
73.9
|
%
|
Acquisition cost ratio
|
|
|
4.9
|
|
|
|
7.1
|
|
General and administrative expense
ratio
|
|
|
12.3
|
|
|
|
7.5
|
|
Expense ratio
|
|
|
17.2
|
|
|
|
14.6
|
|
Combined ratio
|
|
|
89.8
|
|
|
|
88.5
|
|
Comparison
of Three Months Ended March 31, 2007 and 2006
Premiums. Gross premiums written decreased
$5.3 million, or 4.1%, for the three months ended
March 31, 2007 compared to the same period in 2006. This
decrease was primarily due to the non-renewal of business that
did not meet our underwriting requirements (which included
pricing
and/or
policy terms and conditions) and rate decreases from increased
competition for new and renewal business. This was most
noticeable for our Bermuda operations where gross premiums
written decreased $10.7 million, or 13.1%. This reduction
was partially offset by new business written and an increase in
the amount of business written through our U.S. offices as
a result of the continued buildup of staff and increased
marketing efforts. During the three-month period ended
March 31, 2007, gross premiums written in our four
U.S. offices totaled approximately $22.7 million
compared to $19.0 million in the prior period.
Net premiums written decreased $13.6 million, or 11.9%,
from $114.2 million for the three months ended
March 31, 2006 to $100.6 million for the three months
ended March 31, 2007. The decrease in net premiums written
was greater than the decrease in gross premiums written. This
was due to an increase in reinsurance purchased on our casualty
business for the three months ended March 31, 2007 compared
to the same period in 2006. We ceded 19.6% of gross premiums
written for the three months ended March 31, 2007 compared
to 12.5% for the three months ended March 31, 2006. We
increased the percentage ceded on our general casualty business
and also began to cede a portion of our healthcare business, on
a proportional basis, during the three months ended
March 31, 2007. We expect to continue to cede more business
as we have established a treaty for a portion of our
professional liability business effective as of April 1,
2007. Net premiums earned decreased $7.6 million, or 5.8%.
The percentage decrease was lower than that of net premiums
written due to the continued earning of higher net premiums that
were written prior to the three months ended March 31, 2007.
Net losses and loss expenses. Net losses and
loss expenses decreased to $90.4 million for the three
months ended March 31, 2007 from $97.6 million for the
three months ended March 31, 2006 primarily due to the
reduction in net premiums earned. Overall, our casualty segment
recorded net unfavorable development
29
of $0.7 million during the three months ended
March 31, 2007 compared to nil for the three months ended
March 31, 2006. The $0.7 million net unfavorable
development included the following:
|
|
|
|
|
Net unfavorable loss development of $13.6 million and
$14.2 million for accident years 2002 and 2005,
respectively. We have seen an increase in reported loss activity
for 2002 professional liability and 2005 general casualty
business written by our Bermuda subsidiary, and thus have
increased our reserves for the increased loss activity.
|
|
|
|
Net favorable loss development of $17.3 million and
$9.8 million for accident years 2003 and 2004,
respectively. For our general casualty, professional liability
and healthcare lines of business, actual loss emergence has been
lower than the initial expected loss emergence for these
accident years.
|
The net unfavorable development recognized increased the loss
and loss expense ratio by 0.6 percentage points for the
three months ended March 31, 2007. Thus, the loss and loss
expense ratio related to the current periods business was
72.0% for the three months ended March 31, 2007.
Comparatively, no prior year loss development was recognized
during the three months ended March 31, 2006, so the loss
and loss expense ratio of 73.9% related to that periods
business. The decline in the current period loss ratio reflects
lower than expected ultimate losses on professional liability
and healthcare business due to favorable results in recent years.
Net paid losses for the three months ended March 31, 2007
and 2006 were $23.2 million and $36.4 million,
respectively. The net paid losses for the three months ended
March 31, 2006 included $25.0 million for a general
liability loss that occurred during Hurricane Katrina.
The table below is a reconciliation of the beginning and ending
reserves for losses and loss expenses for the three months ended
March 31, 2007 and 2006. Losses incurred and paid are
reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Net reserves for losses and loss
expenses, January 1
|
|
$
|
1,691.2
|
|
|
$
|
1,419.1
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
89.7
|
|
|
|
97.6
|
|
Current period catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
0.7
|
|
|
|
|
|
Prior period catastrophe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
90.4
|
|
|
$
|
97.6
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
|
|
|
|
|
|
Current period catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
23.2
|
|
|
|
11.4
|
|
Prior period catastrophe
|
|
|
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
$
|
23.2
|
|
|
$
|
36.4
|
|
Foreign exchange revaluation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss
expenses, March 31
|
|
|
1,758.4
|
|
|
|
1,480.3
|
|
Losses and loss expenses
recoverable
|
|
|
201.5
|
|
|
|
142.4
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
expenses, March 31
|
|
$
|
1,959.9
|
|
|
$
|
1,622.7
|
|
Acquisition costs. Acquisition costs decreased
$3.3 million, or 35.5%, to $6.0 million for the three
months ended March 31, 2007 from $9.3 million for the
three months ended March 31, 2006. The decrease
30
was primarily related to an increase in ceding commission income
as we have increased the amount of reinsurance purchased on our
general casualty business and began to cede a portion of our
healthcare business.
General and administrative expenses. General
and administrative expenses increased from $9.9 million to
$15.3 million for the three months ended March 31,
2006 and 2007, respectively. The 2.6 percentage point
increase in the expense ratio from 14.6% for the three months
ended March 31, 2006 to 17.2% for the same period in 2007
was primarily a result of increased personnel costs, including
stock-based compensation expense, increased building-related
costs, higher costs associated with information technology and
increased costs due to the continued expansion of our
U.S. distribution platform, while net premiums earned
declined.
Reinsurance
Segment
The following table summarizes the underwriting results and
associated ratios for the reinsurance segment for the three
months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
211.3
|
|
|
$
|
247.8
|
|
Net premiums written
|
|
|
211.1
|
|
|
|
246.1
|
|
Net premiums earned
|
|
|
117.7
|
|
|
|
127.9
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
$
|
68.8
|
|
|
$
|
75.0
|
|
Acquisition costs
|
|
|
22.8
|
|
|
|
28.6
|
|
General and administrative expenses
|
|
|
10.2
|
|
|
|
5.3
|
|
Underwriting income
|
|
|
15.9
|
|
|
|
19.0
|
|
Ratios
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
58.4
|
%
|
|
|
58.7
|
%
|
Acquisition cost ratio
|
|
|
19.4
|
|
|
|
22.4
|
|
General and administrative expense
ratio
|
|
|
8.6
|
|
|
|
4.2
|
|
Expense ratio
|
|
|
28.0
|
|
|
|
26.6
|
|
Combined ratio
|
|
|
86.4
|
|
|
|
85.3
|
|
Comparison
of Three Months Ended March 31, 2007 and 2006
Premiums. Gross premiums written were
$211.3 million for the three months ended March 31,
2007 compared to $247.8 million for the three months ended
March 31, 2006, a decrease of $36.5 million, or 14.7%.
The decrease in gross premiums written for our reinsurance
segment was primarily due to a reduction in the amount of upward
adjustments on estimated premiums and non-renewal of business
that did not meet our underwriting requirements (which included
pricing
and/or
policy terms and conditions). Net adjustments on estimated
premium resulted in a reduction of gross premiums written of
approximately $1.1 million during the three months ended
March 31, 2007 compared to a net increase of approximately
$36.7 million for the three months ended March 31,
2006. As our historical experience develops, we may have fewer
or smaller adjustments to our estimated premiums. Also causing a
decrease in gross premiums written was the fact that we did not
renew certain treaties during the three months ended
March 31, 2007. These reductions in gross premiums written
were partially offset by new business written and an increase in
our share on other treaties where the pricing and terms remained
attractive. For the three months ended March 31, 2007,
84.6% of gross premiums written related to casualty risks and
15.4% related to property risks versus 76.4% related to casualty
risks and 23.6% related to property risks for the three months
ended March 31, 2006.
Net premiums written decreased by $35.0 million, or 14.2%,
which is consistent with the decrease in gross premiums written.
Net premiums earned decreased $10.2 million, or 8.0%, as a
result of lower net
31
premiums written, including the reduction in the amount of
upward adjustments to premium estimates. Since adjustments on
estimated premiums relate to prior years treaties, a
larger portion of the associated premiums written are earned.
Premiums related to our reinsurance business earn at a slower
rate than those related to our direct insurance business. Direct
insurance premiums typically earn ratably over the term of a
policy. Reinsurance premiums under a proportional contract are
typically earned over the same period as the underlying
policies, or risks, covered by the contract. As a result, the
earning pattern of a proportional contract may extend up to
24 months, reflecting the inception dates of the underlying
policies. Property catastrophe premiums and premiums for other
treaties written on a losses occurring basis earn ratably over
the term of the reinsurance contract.
Net losses and loss expenses. Net losses and
loss expenses decreased from $75.0 million for the three
months ended March 31, 2006 to $68.8 million for the
three months ended March 31, 2007. The decrease in net
losses and loss expenses was primarily due to lower earned
premiums in the current period compared to the prior period. We
recorded net favorable development of approximately
$1.2 million during the three months ended March 31,
2007, which included net favorable loss development of
approximately $3.9 million related to Hurricanes Katrina
and Rita offset by net unfavorable loss development related to
the 2004 windstorms of approximately $2.7 million.
Comparatively, net favorable reserve development of
approximately $2.5 million related to Hurricanes Katrina,
Rita and Wilma was recognized in the three months ended
March 31, 2006.
The loss and loss expense ratio for the three months ended
March 31, 2007 was 58.4%, compared to 58.7% for the three
months ended March 31, 2006. Net favorable development
recognized in the three months ended March 31, 2007 reduced
the loss and loss expense ratio by 1.0 percentage point.
Thus, the loss and loss expense ratio related to the current
periods business was 59.4%. In comparison, net favorable
loss development recognized in the three months ended
March 31, 2006 reduced the loss and loss expense ratio by
1.9 percentage points. Thus, the loss and loss expense
ratio related to that periods business was 60.6%.
Net paid losses were $46.3 million for the three months
ended March 31, 2007 compared to $50.0 million for the
three months ended March 31, 2006. The decrease reflects
lower net losses paid in relation to the 2004 and 2005
windstorms from $38.0 million for the three months ended
March 31, 2006 to $11.9 million for the three months
ended March 31, 2007. This was partially offset by an
increase in our non-catastrophe net paid losses, particularly in
the casualty reinsurance lines where the net losses paid
increased by approximately $14.8 million. The increase in
net paid losses reflects the maturation of this longer-tailed
casualty business.
32
The table below is a reconciliation of the beginning and ending
reserves for losses and loss expenses for the three-month
periods ended March 31, 2007 and 2006. Losses incurred and
paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Net reserves for losses and loss
expenses, January 1
|
|
$
|
832.8
|
|
|
$
|
726.3
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
70.0
|
|
|
|
77.5
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
|
|
|
|
|
|
Prior period property catastrophe
|
|
|
(1.2
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
68.8
|
|
|
$
|
75.0
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current period non-catastrophe
|
|
|
|
|
|
|
0.9
|
|
Current period property catastrophe
|
|
|
|
|
|
|
|
|
Prior period non-catastrophe
|
|
|
34.4
|
|
|
|
11.1
|
|
Prior period property catastrophe
|
|
|
11.9
|
|
|
|
38.0
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
$
|
46.3
|
|
|
$
|
50.0
|
|
Foreign exchange revaluation
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss
expenses, March 31
|
|
|
855.3
|
|
|
|
751.3
|
|
Losses and loss expenses
recoverable
|
|
|
33.2
|
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
expenses, March 31
|
|
$
|
888.5
|
|
|
$
|
807.3
|
|
Acquisition costs. Acquisition costs decreased
$5.8 million to $22.8 million for the three months
ended March 31, 2007 from $28.6 million for the three
months ended March 31, 2006 primarily as a result of the
related decrease in net premiums earned. The acquisition cost
ratio of 19.4% for the three-month period ended March 31,
2007 was lower than the 22.4% acquisition cost ratio for the
three-month period ended March 31, 2006 primarily due to
more contracts written on an excess of loss basis than on a
proportional basis. Excess of loss reinsurance contracts
typically charge lower acquisition costs than proportional
reinsurance contracts. The acquisition cost ratio also decreased
because we no longer pay a 6.5% override commission to IPCUSL as
the underwriting agency agreement with IPCUSL was terminated in
December 2006.
General and administrative expenses. General
and administrative expenses increased to $10.2 million for
the three months ended March 31, 2007 from
$5.3 million for the three months ended March 31,
2006. The increase was primarily the result of increased stock
compensation costs, other personnel costs, building and related
expenses and information technology costs.
33
Reserves
for Losses and Loss Expenses
Reserves for losses and loss expenses as of March 31, 2007
and December 31, 2006 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
Casualty
|
|
|
Reinsurance
|
|
|
Total
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Case reserves
|
|
$
|
504.3
|
|
|
$
|
562.2
|
|
|
$
|
182.9
|
|
|
$
|
175.0
|
|
|
$
|
206.1
|
|
|
$
|
198.0
|
|
|
$
|
893.3
|
|
|
$
|
935.2
|
|
IBNR
|
|
|
310.5
|
|
|
|
330.1
|
|
|
|
1,777.0
|
|
|
|
1,698.8
|
|
|
|
682.4
|
|
|
|
672.9
|
|
|
|
2,769.9
|
|
|
|
2,701.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss
expenses
|
|
|
814.8
|
|
|
|
892.3
|
|
|
|
1,959.9
|
|
|
|
1,873.8
|
|
|
|
888.5
|
|
|
|
870.9
|
|
|
|
3,663.2
|
|
|
|
3,637.0
|
|
Reinsurance recoverables
|
|
|
(433.4
|
)
|
|
|
(468.4
|
)
|
|
|
(201.5
|
)
|
|
|
(182.6
|
)
|
|
|
(33.2
|
)
|
|
|
(38.1
|
)
|
|
|
(668.1
|
)
|
|
|
(689.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss
expenses
|
|
$
|
381.4
|
|
|
$
|
423.9
|
|
|
$
|
1,758.4
|
|
|
$
|
1,691.2
|
|
|
$
|
855.3
|
|
|
$
|
832.8
|
|
|
$
|
2,995.1
|
|
|
$
|
2,947.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We participate in certain lines of business where claims may not
be reported for many years. Accordingly, management does not
solely rely upon reported claims on these lines for estimating
ultimate liabilities. As such, we also use statistical and
actuarial methods to estimate ultimate expected losses and loss
expenses. Loss reserves do not represent an exact calculation of
liability. Rather, loss reserves are estimates of what we expect
the ultimate resolution and administration of claims will cost.
These estimates are based on various factors including
underwriters expectations about loss experience, actuarial
analysis, comparisons with the results of industry benchmarks
and loss experience to date. Loss reserve estimates are refined
as experience develops and as claims are reported and resolved.
Establishing an appropriate level of loss reserves is an
inherently uncertain process. Ultimate losses and loss expenses
may differ from our reserves, possibly by material amounts.
The following tables provide our ranges of loss and loss expense
reserve estimates by business segment as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Losses and Loss Expenses
|
|
|
|
Gross of Reinsurance Recoverable(1)
|
|
|
|
Carried
|
|
|
Low
|
|
|
High
|
|
|
|
Reserves
|
|
|
Estimate
|
|
|
Estimate
|
|
|
|
($ in millions)
|
|
|
Property
|
|
$
|
814.8
|
|
|
$
|
645.6
|
|
|
$
|
932.5
|
|
Casualty
|
|
|
1,959.9
|
|
|
|
1,461.1
|
|
|
|
2,261.0
|
|
Reinsurance
|
|
|
888.5
|
|
|
|
609.2
|
|
|
|
1,041.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Losses and Loss Expenses
|
|
|
|
Net of Reinsurance Recoverable(1)
|
|
|
|
Carried
|
|
|
Low
|
|
|
High
|
|
|
|
Reserves
|
|
|
Estimate
|
|
|
Estimate
|
|
|
|
($ in millions)
|
|
|
Property
|
|
$
|
381.4
|
|
|
$
|
295.3
|
|
|
$
|
444.1
|
|
Casualty
|
|
|
1,758.4
|
|
|
|
1,311.5
|
|
|
|
2,030.7
|
|
Reinsurance
|
|
|
855.3
|
|
|
|
573.0
|
|
|
|
996.6
|
|
|
|
|
(1) |
|
For statistical reasons, it is not appropriate to add together
the ranges of each business segment in an effort to determine
the low and high range around the consolidated loss reserves. |
Our range for each business segment was determined by utilizing
multiple actuarial loss reserving methods along with various
assumptions of reporting patterns and expected loss ratios by
loss year. The various outcomes of these techniques were
combined to determine a reasonable range of required loss and
loss expense reserves.
34
Our selection of the actual carried reserves has typically been
above the midpoint of the range. We believe that we should be
conservative in our reserving practices due to the lengthy
reporting patterns and relatively large limits of net liability
for any one risk of our direct excess casualty business and of
our casualty reinsurance business. Thus, due to this uncertainty
regarding estimates for reserve for losses and loss expenses, we
have historically carried our consolidated reserve for losses
and loss expenses, net of reinsurance recoverable, 4% to 11%
above the midpoint of the low and high estimates for the
consolidated net loss and loss expenses. These long-tail lines
of business include our entire casualty segment, as well as the
general casualty, professional liability, facultative casualty
and the international casualty components of our reinsurance
segment. We believe that relying on the more conservative
actuarial indications for these lines of business is prudent for
a relatively new company. For a discussion of loss and loss
expense reserve estimate, please see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Reserve for Losses and Loss Expenses in our Annual Report
on
Form 10-K
filed with the SEC on March 19, 2007.
Reinsurance
Recoverable
The following table illustrates our reinsurance recoverable as
of March 31, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable
|
|
|
|
As of
|
|
|
As of
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Ceded case reserves
|
|
$
|
282.2
|
|
|
$
|
303.9
|
|
Ceded IBNR reserves
|
|
|
385.9
|
|
|
|
385.2
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
|
$
|
668.1
|
|
|
$
|
689.1
|
|
|
|
|
|
|
|
|
|
|
We remain obligated for amounts ceded in the event our
reinsurers do not meet their obligations. Accordingly, we have
evaluated the reinsurers that are providing reinsurance
protection to us and will continue to monitor their credit
ratings and financial stability. We generally have the right to
terminate our treaty reinsurance contracts at any time, upon
prior written notice to the reinsurer, under specified
circumstances, including the assignment to the reinsurer by
A.M. Best of a financial strength rating of less than
A−. Approximately 96% of ceded case reserves
as of March 31, 2007 were recoverable from reinsurers who
had an A.M. Best rating of A− or higher.
Liquidity
and Capital Resources
General
As of March 31, 2007, our shareholders equity was
$2.4 billion, a 6.1% increase compared to $2.2 billion
as of December 31, 2006. The increase was a result of net
income for the three-month period ended March 31, 2007 of
$113.9 million, and an unrealized net increase of
$25.0 million in the market value of our investments, net
of deferred taxes, recorded in shareholders equity. The
increase in the net unrealized gains was the result of other
than temporary write-downs of $9.4 million due solely to
changes in interest rates, which decreased the gross unrealized
loss on our portfolio, as well as changes in market interest
rates for the rest of our fixed-income portfolio.
Holdings is a holding company and transacts no business of its
own. Cash flows to Holdings may comprise dividends, advances and
loans from its subsidiary companies.
Restrictions
and Specific Requirements
The jurisdictions in which our insurance subsidiaries are
licensed to write business impose regulations requiring
companies to maintain or meet various defined statutory ratios,
including solvency and liquidity requirements. Some
jurisdictions also place restrictions on the declaration and
payment of dividends and other distributions.
35
Holdings is a holding company, and it is therefore reliant on
receiving dividends and other permitted distributions from its
subsidiaries to make principal, interest and dividend payments
on its senior notes and common shares.
The payment of dividends from Holdings Bermuda domiciled
subsidiaries is, under certain circumstances, limited under
Bermuda law, which requires these Bermuda subsidiaries of
Holdings to maintain certain measures of solvency and liquidity.
Holdings U.S. domiciled subsidiaries are subject to
significant regulatory restrictions limiting their ability to
declare and pay dividends. In particular, payments of dividends
by Allied World Assurance Company (U.S.) Inc. and Newmarket
Underwriters Insurance Company are subject to restrictions on
statutory surplus pursuant to Delaware law and New Hampshire
law, respectively. Both states require prior regulatory approval
of any payment of extraordinary dividends. The inability of the
subsidiaries of Holdings to pay dividends and other permitted
distributions could have a material adverse effect on its cash
requirements and ability to make principal, interest and
dividend payments on its senior notes and common shares.
Holdings insurance subsidiary in Bermuda, Allied World
Assurance Company, Ltd, is neither licensed nor admitted as an
insurer, nor is it accredited as a reinsurer, in any
jurisdiction in the United States. As a result, it is required
to post collateral security with respect to any reinsurance
liabilities it assumes from ceding insurers domiciled in the
United States in order for U.S. ceding companies to obtain
credit on their U.S. statutory financial statements with
respect to insurance liabilities ceded to them. Under applicable
statutory provisions, the security arrangements may be in the
form of letters of credit, reinsurance trusts maintained by
trustees or funds-withheld arrangements where assets are held by
the ceding company.
At this time, Allied World Assurance Company, Ltd uses trust
accounts primarily to meet security requirements for
inter-company and certain related-party reinsurance
transactions. We also have cash and cash equivalents and
investments on deposit with various state or government
insurance departments or pledged in favor of ceding companies in
order to comply with relevant insurance regulations. As of
March 31, 2007, total trust account deposits were
$712.6 million compared to $697.1 million as of
December 31, 2006. In addition, Allied World Assurance
Company, Ltd has access to up to $1 billion in letters of
credit under secured letter of credit facilities with Citibank
Europe plc. and Barclays Bank, PLC. These facilities are used to
provide security to reinsureds and are collateralized by us, at
least to the extent of letters of credit outstanding at any
given time. As of March 31, 2007 and December 31,
2006, there were outstanding letters of credit totaling
$834.3 million and $832.3 million, respectively, under
the two facilities. Collateral committed to support the letter
of credit facilities was $1,013.1 million as of
March 31, 2007, compared to $993.9 million as of
December 31, 2006.
Security arrangements with ceding insurers may subject our
assets to security interests or require that a portion of our
assets be pledged to, or otherwise held by, third parties. Both
of our letter of credit facilities are fully collateralized by
assets held in custodial accounts at Mellon Bank held for the
benefit of Barclays Bank, PLC and Citibank Europe plc. Although
the investment income derived from our assets while held in
trust accrues to our benefit, the investment of these assets is
governed by the terms of the letter of credit facilities or the
investment regulations of the state or territory of domicile of
the ceding insurer, which may be more restrictive than the
investment regulations applicable to us under Bermuda law. The
restrictions may result in lower investment yields on these
assets, which may adversely affect our profitability.
In January 2005, we initiated a securities lending program
whereby the securities we own that are included in fixed
maturity investments available for sale are loaned to third
parties, primarily brokerage firms, for a short period of time
through a lending agent. We maintain control over the securities
we lend and can recall them at any time for any reason. We
receive amounts equal to all interest and dividends associated
with the loaned securities and receive a fee from the borrower
for the temporary use of the securities. Collateral in the form
of cash is required initially at a minimum rate of 102% of the
market value of the loaned securities and may not decrease below
100% of the market value of the loaned securities before
additional collateral is required. We had $523.7 million
and $298.3 million in securities on loan as of
March 31, 2007 and December 31, 2006, respectively,
with collateral held against such loaned securities amounting to
$534.8 million and $304.7 million, respectively.
36
We believe that restrictions on liquidity resulting from
restrictions on the payments of dividends by our subsidiary
companies or from assets committed in trust accounts or to
collateralize the letter of credit facilities or by our
securities lending program will not have a material impact on
our ability to carry out our normal business activities,
including interest and dividend payments on our senior notes and
common shares.
Sources
and Uses of Funds
Our sources of funds primarily consist of premium receipts net
of commissions, investment income, net proceeds from the
issuance of common shares and senior notes, proceeds from debt
financing and proceeds from sales and redemption of investments.
Cash is used primarily to pay losses and loss expenses, purchase
reinsurance, pay general and administrative expenses and taxes
and pay dividends and interest, with the remainder made
available to our investment managers for investment in
accordance with our investment policy.
Cash flows from operations for the three months ended
March 31, 2007 were $157.8 million compared to
$187.1 million for the three months ended March 31,
2006. The decrease in cash flows from operations was primarily
due to lower net premiums written during the three months ended
March 31, 2007 compared to the three months ended
March 31, 2006, offset by increased investment income.
Investing cash flows consist primarily of proceeds on the sale
of investments and payments for investments acquired. We used
$236.5 million in net cash for investing activities during
the three months ended March 31, 2007 compared to
$171.1 million during the three months ended March 31,
2006.
There were no financing cash flows for the three months ended
March 31, 2007 and 2006.
Over the next two years, we expect to pay approximately
$152 million in claims related to Hurricanes Katrina, Rita
and Wilma and approximately $20 million in claims relating
to the 2004 hurricanes and typhoons, net of reinsurance
recoverable. On May 8, 2007, our board of directors
declared a quarterly dividend of $0.15 per share, or
approximately $9.0 million in aggregate, payable on
June 14, 2007 to the shareholders of record as of
May 29, 2007. We expect our operating cash flows, together
with our existing capital base, to be sufficient to meet these
requirements and to operate our business. Our funds are
primarily invested in liquid, high-grade fixed income
securities. As of March 31, 2007 and December 31,
2006, including a high-yield bond fund, 99% of our fixed income
portfolio consisted of investment grade securities. As of
March 31, 2007 and December 31, 2006, net accumulated
unrealized gains, net of income taxes, were $31.5 million
and $6.5 million, respectively. This change reflected both
movements in interest rates and the recognition of approximately
$9.4 million of realized losses on securities that were
considered to be impaired on an
other-than-temporary-basis
because of changes in interest rates. The maturity distribution
of our fixed income portfolio (on a market value basis) as of
March 31, 2007 and December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Due in one year or less
|
|
$
|
200.7
|
|
|
$
|
146.6
|
|
Due after one year through five
years
|
|
|
2,402.3
|
|
|
|
2,461.6
|
|
Due after five years through ten
years
|
|
|
575.5
|
|
|
|
335.3
|
|
Due after ten years
|
|
|
103.5
|
|
|
|
172.0
|
|
Mortgage-backed
|
|
|
1,897.1
|
|
|
|
1,823.9
|
|
Asset-backed
|
|
|
228.7
|
|
|
|
238.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,407.8
|
|
|
$
|
5,177.8
|
|
|
|
|
|
|
|
|
|
|
We do not believe that inflation has had a material effect on
our consolidated results of operations. The potential exists,
after a catastrophe loss, for the development of inflationary
pressures in a local economy. The effects of inflation are
considered implicitly in pricing. Loss reserves are established
to recognize likely loss settlements at the date payment is
made. Those reserves inherently recognize the effects of
inflation. The actual effects of inflation on our results cannot
be accurately known, however, until claims are ultimately
resolved.
37
Financial
Strength Ratings
Financial strength ratings and senior unsecured debt ratings
represent the opinions of rating agencies on our capacity to
meet our obligations. Some of our reinsurance treaties contain
special funding and termination clauses that are triggered in
the event that we or one of our subsidiaries is downgraded by
one of the major rating agencies to levels specified in the
treaties, or our capital is significantly reduced. If such an
event were to happen, we would be required, in certain
instances, to post collateral in the form of letters of credit
and/or trust
accounts against existing outstanding losses, if any, related to
the treaty. In a limited number of instances, the subject
treaties could be cancelled retroactively or commuted by the
cedant and might affect our ability to write business.
The following were our financial strength ratings as of
May 1, 2007:
|
|
|
A.M. Best
Moodys
Standard & Poors
|
|
A/stable
A2/stable*
A−/stable
|
|
|
|
* |
|
Moodys financial strength ratings are for the
companys Bermuda and U.S. operating subsidiaries. |
The following were our senior unsecured debt ratings as of
May 1, 2007:
|
|
|
A.M. Best
Moodys
Standard & Poors
|
|
bbb/stable
Baa1/stable
BBB/stable
|
Long-Term
Debt
On March 30, 2005, we borrowed $500.0 million under a
credit agreement, dated as of that date, by and among the
company, Bank of America, N. A., as administrative agent,
Wachovia Bank, National Association, as syndication agent, and a
syndicate of other banks. The loan carried a floating rate of
interest, which was based on the Federal Funds Rate, prime rate
or LIBOR plus an applicable margin, and had a final maturity on
March 30, 2012. On April 21, 2005, we entered into
certain interest rate swaps in order to fix the interest cost of
the floating rate borrowing. These swaps were terminated with an
effective date of June 30, 2006, resulting in cash proceeds
of approximately $5.9 million. As of July 26, 2006,
this debt was fully repaid using a portion of the net proceeds
from both our IPO, including the exercise in full by the
underwriters of their over-allotment option, and our senior
notes offering.
On July 21, 2006, we issued $500.0 million aggregate
principal amount of 7.50% senior notes due August 1,
2016, with interest payable August 1 and February 1 each
year, commencing February 1, 2007. We can redeem the senior
notes prior to maturity, subject to payment of a
make-whole premium, however, we currently have no
intention of redeeming the notes. The senior notes include
certain covenants that include:
|
|
|
|
|
Limitation on liens on stock of designated subsidiaries;
|
|
|
|
Limitation as to the disposition of stock of designated
subsidiaries; and
|
|
|
|
Limitations on mergers, amalgamations, consolidations or sale of
assets.
|
Off-Balance
Sheet Arrangements
As of March 31, 2007, we did not have any off-balance sheet
arrangements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
We believe that we are principally exposed to three types of
market risk: interest rate risk, credit risk and currency risk.
The fixed income securities in our investment portfolio are
subject to interest rate risk. Any change in interest rates has
a direct effect on the market values of fixed income securities.
As interest rates rise, the market values fall, and vice versa.
We estimate that an immediate adverse parallel shift in the
U.S. Treasury
38
yield curve of 200 basis points would cause an aggregate
decrease in the market value of our investment portfolio
(excluding cash and cash equivalents) of approximately
$334 million, or 5.9%, on our portfolio valued at
approximately $5.7 billion as of March 31, 2007, as
set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shift in Basis Points
|
|
|
|
−200
|
|
|
−100
|
|
|
−50
|
|
|
0
|
|
|
+50
|
|
|
+100
|
|
|
+200
|
|
|
|
($ in millions)
|
|
|
Total market value
|
|
$
|
6,005.6
|
|
|
$
|
5,838.6
|
|
|
$
|
5,755.1
|
|
|
$
|
5,671.8
|
|
|
$
|
5,588.2
|
|
|
$
|
5,504.7
|
|
|
$
|
5,337.8
|
|
Market value change from base
|
|
|
333.8
|
|
|
|
166.8
|
|
|
|
83.3
|
|
|
|
0
|
|
|
|
(83.6
|
)
|
|
|
(167.1
|
)
|
|
|
(334.0
|
)
|
Change in unrealized appreciation
|
|
|
333.8
|
|
|
|
166.8
|
|
|
|
83.3
|
|
|
|
0
|
|
|
|
(83.6
|
)
|
|
|
(167.1
|
)
|
|
|
(334.0
|
)
|
As a holder of fixed income securities, we also have exposure to
credit risk. In an effort to minimize this risk, our investment
guidelines have been defined to ensure that the assets held are
well diversified and are primarily high-quality securities. As
of March 31, 2007, approximately 99% of our fixed income
investments (which includes individually held securities and
securities held in a high-yield bond fund) consisted of
investment grade securities. We were not exposed to any
significant concentrations of credit risk.
As of March 31, 2007, we held $1,897.1 million, or
30.8%, of our aggregate invested assets in mortgage-backed
securities. These assets are exposed to prepayment risk, which
occurs when holders of individual mortgages increase the
frequency with which they prepay the outstanding principal
before the maturity date to refinance at a lower interest rate
cost. Given the proportion that these securities comprise of the
overall portfolio, and the current interest rate environment,
prepayment risk is not considered significant at this time.
We have invested $200 million in four hedge funds, the
market value of which as of March 31, 2007 was
$230.0 million. Investments in hedge funds involve certain
risks related to, among other things, the illiquid nature of the
fund shares, the limited operating history of the fund, as well
as risks associated with the strategies employed by the managers
of the funds. The funds objectives are generally to seek
attractive long-term returns with lower volatility by investing
in a range of diversified investment strategies. As our reserves
and capital continue to build, we may consider additional
investments in these or other alternative investments.
The U.S. dollar is our reporting currency and the
functional currency of all of our operating subsidiaries. We
enter into insurance and reinsurance contracts where the
premiums receivable and losses payable are denominated in
currencies other than the U.S. dollar. In addition, we
maintain a portion of our investments and liabilities in
currencies other than the U.S. dollar, primarily Euro,
British Sterling and the Canadian dollar. Assets in
non-U.S. currencies
are generally converted into U.S. dollars at the time of
receipt. When we incur a liability in a
non-U.S. currency,
we carry such liability on our books in the original currency.
These liabilities are converted from the
non-U.S. currency
to U.S. dollars at the time of payment. As a result, we
have an exposure to foreign currency risk resulting from
fluctuations in exchange rates.
As of March 31, 2007 and December 31, 2006, 1.6% of
our aggregate invested assets were denominated in currencies
other than the U.S. dollar. Of our business written in the
three months ended March 31, 2007 and 2006, approximately
17% was written in currencies other than the U.S. dollar.
Of our business written in the year ended December 31,
2006, approximately 15% was written in currencies other than the
U.S. dollar. With the increasing exposure from our
expansion in Europe, we developed a hedging strategy during 2004
in order to minimize the potential loss of value caused by
currency fluctuations. Thus, a hedging program was implemented
in the second quarter of 2004 using foreign currency forward
contract derivatives that expire in 90 days.
39
Our foreign exchange (losses) for the three months ended
March 31, 2007 and 2006 and the year ended
December 31, 2006 are set forth in the chart below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Realized exchange (losses) gains
|
|
$
|
(0.5
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
1.4
|
|
Unrealized exchange gains (losses)
|
|
|
0.5
|
|
|
|
(0.4
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (losses)
|
|
$
|
(0.0
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 4.
|
Controls
and Procedures.
|
In connection with the preparation of this quarterly report, our
management has performed an evaluation, with the participation
of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)) as of March 31, 2007. Disclosure controls and
procedures are designed to ensure that information required to
be disclosed in reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified by SEC rules and forms and that such
information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial
Officer, to allow for timely decisions regarding required
disclosures. Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of
March 31, 2007, our companys disclosure controls and
procedures were effective. We are a non-accelerated filer and
will not be subject to the internal control reporting and
disclosure requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 until our Annual Report on
Form 10-K
for the fiscal year 2007. As such, we are not required to
disclose any material changes in our companys internal
control over financial reporting until we are subject to these
requirements, in accordance with the guidance from the Division
of Corporation Finance and Office of the Chief Accountant of the
SEC contained in Question 9 of the release captioned Frequently
Asked Questions (revised October 6, 2004).
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
On or about November 8, 2005, we received a Civil
Investigative Demand (CID) from the Antitrust and
Civil Medicaid Fraud Division of the Office of the Attorney
General of Texas relating to an investigation into (1) the
possibility of restraint of trade in one or more markets within
the State of Texas arising out of our business relationships
with AIG and The Chubb Corporation, and (2) certain
insurance and insurance brokerage practices, including those
relating to contingent commissions and false quotes, which are
also the subject of industry-wide investigations and class
action litigation. The CID sought information regarding
(i) contingent commission, placement service or other
agreements that we may have had with brokers or producers, and
(ii) the possibility of the provision of any
non-competitive bids by us in connection with the placement of
insurance. On April 12, 2007, we reached a settlement of
all matters under investigation by the Antitrust and Civil
Medicaid Fraud Division of the Office of the Attorney General of
Texas in connection with this investigation. The settlement
resulted in a charge of $2.1 million, which was previously
reserved by us during the fourth quarter of 2006. In connection
with the settlement, we entered into an Agreed Final Judgment
and Stipulated Injunction with the State of Texas, pursuant to
which we do not admit liability and deny the allegations made by
the State of Texas. Specifically, we deny that any of our
activities in the State of Texas violated antitrust laws,
insurance laws or any other laws. Nevertheless, to avoid the
uncertainty and expense of protracted litigation, we agreed to
enter into the Agreed Final Judgment and Stipulated Injunction
and settle these matters with the Attorney General of Texas. The
outcome of this investigation may form a
40
basis for investigations, civil litigation or enforcement
proceedings by other state regulators, by policyholders or by
other private parties, or other voluntary settlements that could
have a negative effect on us.
On April 4, 2006, a complaint was filed in the
U.S. District Court for the Northern District of Georgia
(Atlanta Division) by a group of several corporations and
certain of their related entities in an action entitled New
Cingular Wireless Headquarters, LLC et al, as plaintiffs,
against certain defendants, including Marsh & McLennan
Companies, Inc., Marsh Inc. and Aon Corporation, in their
capacities as insurance brokers, and 78 insurers, including our
insurance subsidiary in Bermuda, Allied World Assurance Company,
Ltd.
The action generally relates to broker defendants
placement of insurance contracts for plaintiffs with the 78
insurer defendants. Plaintiffs maintain that the defendants used
a variety of illegal schemes and practices designed to, among
other things, allocate customers, rig bids for insurance
products and raise the prices of insurance products paid by the
plaintiffs. In addition, plaintiffs allege that the broker
defendants steered policyholders business to preferred
insurer defendants. Plaintiffs claim that as a result of these
practices, policyholders either paid more for insurance products
or received less beneficial terms than the competitive market
would have charged. The eight counts in the complaint allege,
among other things, (i) unreasonable restraints of trade
and conspiracy in violation of the Sherman Act,
(ii) violations of the Racketeer Influenced and Corrupt
Organizations Act, or RICO, (iii) that broker defendants
breached their fiduciary duties to plaintiffs, (iv) that
insurer defendants participated in and induced this alleged
breach of fiduciary duty, (v) unjust enrichment,
(vi) common law fraud by broker defendants and
(vii) statutory and consumer fraud under the laws of
certain U.S. states. Plaintiffs seek equitable and legal
remedies, including injunctive relief, unquantified
consequential and punitive damages, and treble damages under the
Sherman Act and RICO. On October 16, 2006, the Judicial
Panel on Multidistrict Litigation ordered that the litigation be
transferred to the U.S. District Court for the District of
New Jersey for inclusion in the coordinated or consolidated
pretrial proceedings occurring in that court. Neither Allied
World Assurance Company, Ltd nor any of the other defendants
have responded to the complaint. Written discovery has begun but
has not been completed. As a result of the court granting
motions to dismiss in the related putative class action
proceeding, prosecution of this case is currently stayed pending
the courts analysis of any amended pleading filed by the
class action plaintiffs. While this matter is in an early stage,
and it is not possible to predict its outcome, the company does
not currently believe that the outcome will have a material
adverse effect on the companys operations or financial
position.
We may become involved in various claims and legal proceedings
that arise in the normal course of our business, which are not
likely to have a material adverse effect on our results of
operations.
Our business is subject to a number of risks, including those
identified in Item 1A. of Part I of our 2006 Annual
Report on
Form 10-K
filed with the SEC, that could have a material effect on our
business, results of operations, financial condition
and/or
liquidity and that could cause our operating results to vary
significantly from period to period. The risks described in our
Annual Report on
Form 10-K
are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial also could have a material effect on our
business, results of operations, financial condition
and/or
liquidity.
|
|
Item 2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds.
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
41
|
|
Item 5.
|
Other
Information.
|
None.
Item 6. Exhibits.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1(1)
|
|
Contract of Employment by and
between Allied World Assurance Company (Europe) Limited and John
Redmond.
|
|
10
|
.2(2)
|
|
Insurance Letters of
Credit Master Agreement, dated February 28,
2007, by and among Allied World Assurance Company, Ltd, Citibank
N.A. and Citibank Europe plc.
|
|
10
|
.3(2)
|
|
Pledge Agreement, dated as of
February 28, 2007, by and between Allied World Assurance
Company, Ltd and Citibank Europe plc.
|
|
10
|
.4(2)
|
|
Account Control Agreement,
dated March 5, 2007, by and among Citibank Europe plc, as
secured party; Allied World Assurance Company, Ltd, as pledgor;
and Mellon Bank, N.A.
|
|
10
|
.5(3)
|
|
Retirement and Consulting
Agreement, dated effective as of March 31, 2007, by and
between Allied World Assurance Company Holdings, Ltd and G.
William Davis, Jr.
|
|
10
|
.6
|
|
Form of Casualty Variable Quota
Share Reinsurance Agreement, effective as of March 1, 2007,
among Allied World Assurance Company, Ltd, Allied World
Assurance Company (Europe) Limited, Allied World Assurance
Company (Reinsurance) Limited, Allied World Company (U.S.) Inc.,
Newmarket Underwriters Insurance Company and Harbor Point
Services, Inc. on behalf of Federal Insurance Company.
|
|
10
|
.7
|
|
Healthcare Liability Quota Share
Reinsurance Contract, effective January 1, 2007, among
Allied World Assurance Company, Ltd, Allied World Assurance
Company (U.S.) Inc., Newmarket Underwriters Insurance Company,
Allied World Assurance Company (Europe) Limited, Allied World
Assurance Company (Reinsurance) Limited and Transatlantic
Reinsurance Company and the other subscribing reinsurers.
|
|
31
|
.1
|
|
Certification by Chief Executive
Officer, as required by Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31
|
.2
|
|
Certification by Chief Financial
Officer, as required by Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.1*
|
|
Certification by Chief Executive
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.2*
|
|
Certification by Chief Financial
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on January 16, 2007. |
|
(2) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on March 6, 2007. |
|
(3) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on March 23, 2007. |
|
|
|
|
|
Management contract or compensatory plan, contract or
arrangement. |
|
* |
|
These certifications are being furnished solely pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350,
chapter 63 of title 18 United States Code) and are not
being filed as part of this report. |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
ALLIED WORLD ASSURANCE COMPANY
HOLDINGS, LTD
|
|
|
|
Dated: May 10, 2007
|
|
/s/
Scott A. Carmilani
Name: Scott
A. Carmilani
Title: President and Chief Executive Officer
|
|
|
|
Dated: May 10, 2007
|
|
/s/
Joan H. Dillard
Name: Joan
H. Dillard
Title: Senior Vice President and Chief Financial Officer
|
43
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1(1)
|
|
Contract of Employment by and
between Allied World Assurance Company (Europe) Limited and John
Redmond.
|
|
10
|
.2(2)
|
|
Insurance Letters of
Credit Master Agreement, dated February 28,
2007, by and among Allied World Assurance Company, Ltd, Citibank
N.A. and Citibank Europe plc.
|
|
10
|
.3(2)
|
|
Pledge Agreement, dated as of
February 28, 2007, by and between Allied World Assurance
Company, Ltd and Citibank Europe plc.
|
|
10
|
.4(2)
|
|
Account Control Agreement,
dated March 5, 2007, by and among Citibank Europe plc, as
secured party; Allied World Assurance Company, Ltd, as pledgor;
and Mellon Bank, N.A.
|
|
10
|
.5(3)
|
|
Retirement and Consulting
Agreement, dated effective as of March 31, 2007, by and
between Allied World Assurance Company Holdings, Ltd and G.
William Davis, Jr.
|
|
10
|
.6
|
|
Form of Casualty Variable Quota
Share Reinsurance Agreement, effective as of March 1, 2007,
among Allied World Assurance Company, Ltd, Allied World
Assurance Company (Europe) Limited, Allied World Assurance
Company (Reinsurance) Limited, Allied World Company (U.S.) Inc.,
Newmarket Underwriters Insurance Company and Harbor Point
Services, Inc. on behalf of Federal Insurance Company.
|
|
10
|
.7
|
|
Healthcare Liability Quota Share
Reinsurance Contract, effective January 1, 2007, among
Allied World Assurance Company, Ltd, Allied World Assurance
Company (U.S.) Inc., Newmarket Underwriters Insurance Company,
Allied World Assurance Company (Europe) Limited, Allied World
Assurance Company (Reinsurance) Limited and Transatlantic
Reinsurance Company and the other subscribing reinsurers.
|
|
31
|
.1
|
|
Certification by Chief Executive
Officer, as required by Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31
|
.2
|
|
Certification by Chief Financial
Officer, as required by Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
.1*
|
|
Certification by Chief Executive
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
.2*
|
|
Certification by Chief Financial
Officer, as required by Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
(1) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on January 16, 2007. |
|
(2) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on March 6, 2007. |
|
(3) |
|
Incorporated by reference to the Current Report on
Form 8-K
of Allied World Assurance Company Holdings, Ltd, filed with the
SEC on March 23, 2007. |
|
|
|
|
|
Management contract or compensatory plan, contract or
arrangement. |
|
* |
|
These certifications are being furnished solely pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350,
chapter 63 of title 18 United States Code) and are not
being filed as part of this report. |
Exhibit 10.6
CASUALTY VARIABLE QUOTA SHARE REINSURANCE AGREEMENT
|
|
|
|
|
ARTICLE |
|
PAGE |
PREAMBLE |
|
|
2 |
|
DEFINITIONS ARTICLE |
|
|
2 |
|
REINSURANCE COVERAGE ARTICLE |
|
|
7 |
|
FOLLOW THE FORTUNES ARTICLE |
|
|
9 |
|
TERM ARTICLE |
|
|
10 |
|
SPECIAL TERMINATION OR SETTLEMENT ARTICLE |
|
|
11 |
|
TERRITORY ARTICLE |
|
|
13 |
|
EXCLUSIONS ARTICLE |
|
|
14 |
|
REINSURANCE PREMIUM AND CEDING COMMISSION ARTICLE |
|
|
22 |
|
OTHER REINSURANCE ARTICLE |
|
|
22 |
|
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS OF LIMITS LIABILITY |
|
|
|
|
ARTICLE |
|
|
22 |
|
REPORTS AND REMITTANCES ARTICLE |
|
|
23 |
|
LOSS SETTLEMENTS ARTICLE |
|
|
25 |
|
OFFSET ARTICLE |
|
|
25 |
|
SALVAGE AND SUBROGATION ARTICLE |
|
|
25 |
|
DELAYS, ERRORS, OR OMISSIONS ARTICLE |
|
|
26 |
|
ENTIRE AGREEMENT, INTERPRETATION ARTICLE |
|
|
26 |
|
ACCESS TO RECORDS ARTICLE |
|
|
26 |
|
CONFIDENTIALITY ARTICLE |
|
|
27 |
|
INSOLVENCY ARTICLE |
|
|
27 |
|
ARBITRATION ARTICLE |
|
|
28 |
|
GOVERNING LAW ARTICLE |
|
|
30 |
|
CURRENCY REVALUATION AND FOREIGN EXCHANGE ARTICLE |
|
|
31 |
|
SERVICE OF SUIT ARTICLE |
|
|
33 |
|
AGENCY ARTICLE |
|
|
34 |
|
INTERMEDIARY ARTICLE |
|
|
34 |
|
RESERVES AND FUNDING ARTICLE |
|
|
35 |
|
TAXES ARTICLE |
|
|
37 |
|
FEDERAL EXCISE TAX ARTICLE |
|
|
37 |
|
SURVIVAL ARTICLE |
|
|
37 |
|
1
CASUALTY VARIABLE QUOTA SHARE REINSURANCE AGREEMENT
(Words and phrases that appear in bold print have special meanings that are defined
either in the DEFINITIONS ARTICLE or in the text of this agreement.)
PREAMBLE
This agreement is made and entered into by and between:
ALLIED WORLD ASSURANCE COMPANY, LTD, a Bermuda corporation;
ALLIED WORLD ASSURANCE COMPANY (EUROPE) LIMITED, an Ireland corporation; ALLIED WORLD ASSURANCE
COMPANY (REINSURANCE) LIMITED, an Ireland corporation;
ALLIED WORLD ASSURANCE COMPANY (U.S.) INC., a Delaware corporation; and/or NEWMARKET UNDERWRITERS
INSURANCE COMPANY, a New Hampshire corporation;
(hereinafter collectively referred to as the company and wherever the word company is used in
this agreement, such term shall be held to include any and/or all of the subsidiary or affiliated
companies that are or may hereafter come under the ownership, management and/or control of the
company, provided that notice be given to the reinsurer of any such subsidiary or affiliate
companies that may hereafter come under the ownership, management and/or control of the company as
soon as practicable)
of the one part; and the various reinsurers as identified by the INTERESTS AND LIABILITIES
AGREEMENTS attaching to and forming a part of this agreement (hereinafter referred to individually
as the reinsurer and collectively as the reinsurers") of the other part.
The parties hereto agree as hereinbelow, in consideration of the mutual covenants contained in the
following Articles and upon the terms and conditions set forth therein:
DEFINITIONS ARTICLE
The following terms, wherever used in this agreement, will have the meanings set forth herein, and
will be deemed to refer to the singular, plural, or otherwise inflected forms of such terms, as the
context requires:
A. |
|
Advertising liability and advertising injury have the same meanings that they do in the
companys policy. |
B. |
|
Agreement means this contract of reinsurance, any exclusion clauses as may be referenced in
the Exclusions Article and the INTERESTS AND LIABILITIES AGREEMENTS attached hereto as well as
any written amendment to this agreement that has been by signed by both the company and the
reinsurer. |
2
C. Automobile has the same meaning that it does in the companys policy.
D. Bodily injury has the same meaning that it does in the companys policy.
E. |
|
Critical auto parts means brakes and component parts, alternators, engines and engine
control parts, clutch sets, axles/joints, fuel/gas tanks and component parts, ignition parts,
shocks/struts, steering/suspensions, transmissions/gearboxes, wheels/tires, seatbelts, door
latches, and airbags. |
F. Date of loss means:
|
1. |
|
The date of the occurrence or accident as determined by a policy responding to the loss
if the policy was issued on an occurrence basis; |
|
|
2. |
|
The date the claim is made as determined by a policy responding to the loss if the
policy was issued on a claims-made basis; or |
|
|
3. |
|
The date the occurrence is reported as determined by a policy responding to the loss if
the policy is issued on an occurrences-reported basis. |
The date of any claim made under a claims-made policy, or occurrence reported under a
occurrences-reported policy will be deemed to be the date as determined under the terms of the
policy, except that the date of any claim made or occurrence reported under a Basic Extended
Reporting Period, Supplemental Extended Reporting Period or Discovery Period provided by such a
policy will be deemed to be the termination date of the policy.
G. |
|
Declaratory judgment expense means all expenses incurred by the company in direct
connection with declaratory judgment actions brought to determine the companys policy
obligations that are allocable to specific policies and claims subject to this agreement.
Declaratory judgment expense will be deemed to have been incurred by the company on the date
of loss. |
H. |
|
Extended reporting period and discovery period mean a specific time period after a
policys termination date within which claims may be made or occurrences may be reported
(under a policy written on a claims-made or occurrences-reported basis) with respect to
occurrences happening between the policys retroactive date, if any, and the termination date
of that policy. |
I. |
|
Ethical pharmaceutical means the specific dosage(s) of a pharmaceutical or drug dispensable
only directly by or upon prescription of a physician or other practitioner licensed by law to
administer such pharmaceutical or drug. |
J. |
|
Incidental with respect to any premises, operations, products, activities or work of an
original insured means premises, operations, products, activities or work that generate 10.00%
or less of such insureds total revenues for the 12-month period that immediately precedes the
effective or renewal date of the policy written for such insured. |
3
K. |
|
Industrial aid aircraft and industrial aid aircraft use have the same meanings that they
do in the companys policy. |
L. Incidental medical malpractice includes:
|
1. |
|
Any liability, loss, cost or expense arising out of emergency first aid provided by any
original insured that is not principally engaged in the provision of emergency medical
services. |
|
|
2. |
|
Any liability, loss, cost or expense arising out of medical, surgical, dental, x-ray,
nursing or chiropractic services or care provided to any person, including the furnishing
of drugs in connection therewith, by any original insured that is not principally engaged
in the provision of such medical care or services. |
M. |
|
Insureds products has the same meaning that it does in the companys policy. |
N. |
|
Integrated occurrence or batch occurrence have the same meaning that they do in the
companys policy, if applicable. |
O. Joint venture has the same meaning that it does in the companys policy.
P. Loss adjustment expense includes:
|
1. |
|
All expenses incurred by the company in the investigation, appraisal, adjustment,
litigation and/or defense of claims under policies reinsured hereunder, including salaries
and expenses of the companys field employees and salaried adjusters who have no
administrative duties; |
|
|
2. |
|
Charges or expenses incurred through the use of third party claim services or technical
services; |
|
|
3. |
|
Expenses of the companys officials incurred in connection with the loss; |
|
|
4. |
|
Court costs; |
|
|
5. |
|
Interest accrued prior to final judgment, if included as part of expense on reinsured
policies; and |
|
|
6. |
|
Interest accrued after final judgment; and |
|
|
7. |
|
Declaratory judgment expense. |
The reinsurers liability for loss adjustment expense will be in addition to its limit of
liability for ultimate net loss under this agreement as set forth in the REINSURANCE COVERAGE
ARTICLE (except as respects any such expense that is included in the definition of ultimate net
loss as set forth below).
4
The reinsurer will bear its pro rata share of all loss adjustment expense, and the reinsurer
will, on the other hand, benefit proportionately from all reductions of loss adjustment expense
by salvage, compromise or otherwise.
Loss adjustment expense does not include salaries of the companys officials and regular office
employees and office expenses of the company.
Q. |
|
Low-rise residential construction operations mean the construction of: |
|
1. |
|
Homes; |
|
|
2. |
|
Town homes; |
|
|
3. |
|
Residential apartment buildings; or |
|
|
4. |
|
Residential condominium buildings; |
that are under three stories in height.
R. |
|
Net subject written premium means the gross written premium of the company for the policies
reinsured hereunder, including any premium paid by original insureds in respect of any
extended reporting periods or discovery periods and any reinstatement premium payable by the
original insureds, less returned premium for cancellations, premium audits and reductions, and
less premium for inuring reinsurance as set forth in the OTHER REINSURANCE ARTICLE. |
S. |
|
Occurrence has the same meaning that it does in the companys policy. If a policy has an
each accident, each wrongful act, each common cause, each disease, each location,
each claim, each employee or each offense limit of liability, then occurrence as used in
this agreement will have the same meaning as an accident, wrongful act, common cause,
disease, location, claim, employee, or offense in such policy with respect to such
limit of liability. |
T. |
|
Personal injury and personal and advertising injury have the same meanings that they do
in the companys policy. |
U. |
|
Policy means any policy, binder, contract, or agreement of insurance or reinsurance. Where
the company has issued two or more ceded policies covering the same original named insured, or
group of original named insureds, at different attachment points, then such policies will be
deemed to be a single policy hereunder. |
|
|
|
The maximum policy period for subject business will be: |
|
1. |
|
12 months plus odd time, not to exceed eighteen (18) months in all, for all policies
other than those described in paragraph 2. below; and |
|
|
2. |
|
60 months plus odd time, not to exceed 66 months in all, for all policies written to
insure a specific construction project or series of construction projects; |
5
|
a. |
|
That the limitation in 1. above will not apply to policies issued for policy periods of
greater than 18 months if they can be re-priced and re-underwritten without limitation,
other than such limitations as are described in c) below, at the expiration of each annual
period during the policy period. The commencement of each subsequent annual period will be
considered a separate renewal for purposes of this agreement; |
|
|
b. |
|
In determining whether a policy has exceeded the maximum policy period, the policy
period of such policy will not include any: |
|
1. |
|
Extended reporting periods (whether basic, supplemental or both); |
|
|
2. |
|
Discovery period(s); or |
|
|
3. |
|
Products-completed operations extensions or extensions for maintenance defects liability; |
|
|
|
|
That are provided under the terms and conditions of that policy; and |
|
c. |
|
If the company is limited or prevented by statute, regulation, or judicial decision
from re-pricing, re-underwriting, cancelling, or non-renewing a policy, then the maximum
policy period will be extended until the first renewal date when the company can lawfully
re-price, re-underwrite, cancel or non-renew such policy. |
Any products-completed operations extension provided under a policy that is reinsured hereunder
will commence at the end of the policy period of such policy and will not extend beyond the
greatest amount of time allowed under:
|
(1) |
|
The longest applicable statute of repose (including any applicable extensions thereof);
or |
|
|
(2) |
|
The longest applicable statute of limitations (including any applicable extensions
thereof). |
V. Pollutants has the same meaning that it does in the companys policy.
W. Products-completed operations hazard has the same meaning that it does in the companys
policy.
X. Property damage has the same meaning that it does in the companys policy.
Y. |
|
Renewal or renewed will include any policy with a policy period of one year or less that
is renewed at its expiration or anniversary date as well as any policy that is issued for more
than one year, but which can be re-priced and re-underwritten at the expiration of each annual
period during its policy period. |
6
Z. |
|
Satisfactory proof of loss means reasonable evidence of amounts paid or payable by the
company in any settlement, compromise or adjustment of loss made by the company. |
AA. |
|
Ultimate net loss means the amount of any settlement, award, or judgment paid by the
company, or for which the company has become liable to pay, including interest accrued prior
to the final judgment, if such interest erodes the applicable limit of liability of the
companys policy. All recoveries, salvages and subrogations that are actually recovered and
all inuring reinsurance, whether recovered or not, will be deducted from the amount of the
ultimate net loss. Ultimate net loss does not include: |
|
1. |
|
Any element of loss adjustment expense, unless that element of loss adjustment expense
erodes the applicable limit of liability of the companys policy; |
|
|
2. |
|
Extra contractual obligations; or |
|
|
3. |
|
Excess of limits liability. |
REINSURANCE COVERAGE ARTICLE
The company will cede to the reinsurer, and the reinsurer will accept a quota share percentage of
the interests and liabilities of all policies classified by the company as:
EXCESS GENERAL CASUALTY INSURANCE.
Said quota share cession will be based on the original limits and initial attachment point of each
policy as set forth in the below Sections A, B, and C.
SECTION A
(This Section A is not applicable to policies written through Allied World Assurance Company (U.S.)
Inc. or Newmarket Underwriters Insurance Company.)
As respects policies with original limits up to and including $25,000,000, 25,000,000, or
£15,000,000 each occurrence, the reinsurers will accept a 100% quota share participation. The
limit of liability to the reinsurers for ultimate net loss will not exceed $25,000,000,
25,000,000, or £15,000,000, each occurrence each policy, subject to any reinstatement or any
aggregate provisions (or both) in the policy, plus their proportionate share of loss adjustment
expense (payable whether or not the company has paid or has become liable to pay any ultimate net
loss under its policy), and any extra contractual obligations and excess of limits liability not
included within the above limit, subject to the provisions of the EXTRA CONTRACTUAL OBLIGATIONS AND
EXCESS LIMITS LIABILTY ARTICLE.
All policies subject to this Section A will be written above a minimum initial attachment point of
$10,000,000, 10,000,000, or £10,000,000.
The company will retain a 75% share in each policy, each occurrence subject to this Section A net
and unreinsured, except as provided in the OTHER REINSURANCE ARTICLE.
7
SECTION B
(This Section B is not applicable to policies written through Allied World Assurance Company (U.S.)
Inc. or Newmarket Underwriters Insurance Company.)
|
1. |
|
As respects policies with original limits in excess of $25,000,000, 25,000,000, or
£15,000,000 each occurrence, the company will cede to the reinsurers a variable quota share
cession, which will be calculated individually with respect to each policy. The variable
quota share ceded percentage as used in this Section B will be calculated according to the
following formula: For policies issued in U.S. Dollars, Euros or United Kingdom Pounds
Sterling, the formula is: |
|
a. |
|
The amount of the policys total original limit in excess of
$25,000,000, 25,000,000 or £15,000,000 |
|
|
b. |
|
Divided by the policys total original policy limit |
|
|
c. |
|
Equals the policys variable quota share ceded percentage. |
|
2. |
|
As respects policies issued in currency other than U.S. Dollars, Euros or United
Kingdom Pounds Sterling, the policys total original limit will be converted into U.S.
Dollars in accordance with the CURRENCY REVALUATION AND FOREIGN EXCHANGE ARTICLE, and the
calculation described in 1. above will apply to such policy as if it had been initially
written with limits in U.S. Dollars. |
The limit of liability to the reinsurers for ultimate net loss will not exceed $25,000,000 or
25,000,000 or £15,000,000 each occurrence under each policy, subject to any reinstatement or
any aggregate provisions (or both) in the companys policy, plus their proportionate share of loss
adjustment expense (payable whether or not the company has paid or has become liable to pay any
ultimate net loss under its policy), and any extra contractual obligations and excess of limits
liability not included within the above limit, subject to the provisions of the EXTRA CONTRACTUAL
OBLIGATIONS AND EXCESS LIMITS LIABILITY ARTICLE.
All policies subject to this Section B will be written above a minimum initial attachment point of
$25,000,000, 25,000,000, or £15,000,000.
The company will retain a 100% share, less the cession to reinsurers (as calculated above in this
Section B) in each policy subject to this Section net and unreinsured, except as provided in the
OTHER REINSURANCE ARTICLE.
SECTION C
(This Section C is applicable only to policies written through Allied World Assurance Company
(U.S.) Inc. or Newmarket Underwriters Insurance Company.)
As respects policies with original limits up to and including $25,000,000 each occurrence, the
reinsurers will accept a 100% quota share participation. The limit of liability to the reinsurers
for ultimate net loss will not exceed $25,000,000 each occurrence under each policy, subject to any
reinstatement or any aggregate provisions (or both) in the companys policy, plus their
proportionate share of loss adjustment expense (payable whether or not the company has paid or has
become liable to pay any ultimate net loss under its policy), and any extra contractual
8
obligations and excess of limits liability not included within the above limit, subject to the
provisions of the EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY ARTICLE.
All policies that provide coverage for original named insureds that are principally engaged in the
construction of real property and that are subject to this Section C will be written above a
minimum initial attachment point of $10,000,000. All other policies subject to this Section C will
be written above a minimum initial attachment point of $5,000,000.
The company will retain a 72% share in each policy, each occurrence subject to this Section C net
and unreinsured, except as provided in the OTHER REINSURANCE ARTICLE.
APPLICABLE TO SECTIONS A, B AND C ABOVE
The application of amounts in U.S. Dollars, Euros, or United Kingdom Pounds Sterling above will be
subject to Paragraph V. of the CURRENCY REVALUATION AND FOREIGN EXCHANGE ARTICLE.
If the companys policy recognizes any:
1. |
|
Erosion of its initial attachment point due to payment of claims by underlying insurance and
drops down; or |
2. |
|
Reduction in its stated attachment point due to any provisions in any underlying insurance
with respect to any joint venture; |
then the minimum initial attachment points specified in Sections A, B, and C above will likewise
recognize any such erosion or reduction and be eroded or reduced to the same extent.
Should any loss involve this agreement, the obligation of the reinsurers in Sections A, B, and C
above will be reinstated immediately and automatically as to any subsequent loss for the full
amount of reinsurance as set forth above.
FOLLOW THE FORTUNES ARTICLE
The reinsurers liability will attach simultaneously with that of the company and will be subject
in all respects to the same terms, conditions, interpretations, waivers, modifications,
alterations, and cancellations as the respective policies of the company, the true intent of this
agreement being that the reinsurer will follow the fortunes of the company, subject to the terms,
conditions and limits of this agreement.
Nothing will in any manner create any obligations or establish any rights against the reinsurer in
favor of any third parties or any persons not parties to this agreement.
9
TERM ARTICLE
This agreement applies to all policies written or renewed with effective dates during the 12-month
term extending from March 1st, 2007, 12:01 a.m. standard time to March 1st,
2008, 12:01 a.m. standard time.
Standard time is as determined by the companys policy.
This agreement will expire on a run-off basis, and the reinsurer will remain liable for all losses
under policies in force until their expiration or renewal dates, whichever comes first.
Additionally, the reinsurer will remain liable during any extended reporting period or discovery
period that an original insured may elect to invoke on a claims-made or occurrence-reported policy
that is written or renewed with an effective date during the term of this agreement. In
conformance with state regulations, the obligations of the reinsurer under this agreement as
respects all claims-made or occurrence-reported policies will extend to the reinstatement of any
aggregate limits as may be afforded by any extended reporting period or discovery period provision
of such policies. The reinsurer will receive its share of any premium applicable to said extended
reporting period or discovery period, which will be considered fully earned by the reinsurer on the
last in-force day of the companys policy period.
Alternatively, the company may elect that the expiration or termination of this agreement
be effected on a cut-off basis, and in the event that the company elects a cut-off
expiration or termination:
1. |
|
The reinsurer will not be liable for any losses with a date of loss on or after the
date of expiration or termination of this agreement; and |
2. |
|
The reinsurer will return immediately to the company the unearned portion of the net
subject written premium less ceding commission as of the date of expiration or
termination of this agreement, computed on a pro-rata basis. |
Should expiration or termination take place on a cut-off basis, any aggregate limits of liability
to the reinsurers under this agreement will be prorated as of the date of expiration or termination
in the same proportion that the earned net subject written premium bears to the total net subject
written premium for all policies as of that date.
In the event that policies subject to this agreement are written in a jurisdiction where
cancellation, renewal, or nonrenewal of coverage is regulated by the insurance authorities, and the
company is bound by statute or regulation of said jurisdiction or by a judicial decision to
continue coverage after the expiration or termination date of this agreement, then the reinsurer
will remain liable on any policies continuing such coverage (and will receive any premium collected
there for) until the first date when the company can lawfully cancel or nonrenew said policies.
If, however, the company notifies the reinsurer in writing that it has decided to hold the business
net and for its own account, then the reinsurer will not be liable for longer than the run-off
period set forth above.
10
Notwithstanding the expiration or termination of this agreement (or any reinsurers percentage
participation hereon) as hereinabove provided, the provisions of this agreement will continue to
apply to all obligations and liabilities of the parties incurred hereunder to the end that all such
obligations and liabilities will be fully performed and discharged.
SPECIAL TERMINATION OR SETTLEMENT ARTICLE
(Applicable separately as between the company and each participating reinsurer)
Section I
A. |
|
The company may terminate this agreement forthwith in the event that: |
|
1. |
|
The reinsurer ceases writing reinsurance; |
|
|
2. |
|
The reinsurer at any time: |
|
a. |
|
Has a Standard & Poors (S&P) Insurer Financial Strength Rating of lower than
A-; or |
|
|
b. |
|
Ceases to have any S&P Insurer Financial Strength Rating (or has a designation
of not rated or NR) after having had an S&P rating at or after the inception of
this agreement; |
|
3. |
|
The reinsurer at any time: |
|
a. |
|
Has an A.M. Bests Financial Strength Rating of lower than A-; or |
|
|
b. |
|
Ceases to have any A.M. Bests Financial Strength Rating (or has a designation
of not rated or NR) after having had an A.M. Bests Financial Strength Rating at or
after the inception of this agreement; |
|
4. |
|
Over any period not exceeding twelve months, the policyholders surplus of the
reinsurer, as reported in such financial statements of the reinsurer as designated by the
company, drops by 20% or more; or |
|
|
5. |
|
As respects each reinsurer domiciled in the United States of America only, upon
application of the NAIC Insurance Regulatory Information System (IRIS) tests to the
reinsurers most recent statutory Annual Statement (which the reinsurer hereby agrees to
furnish to the company upon request), it is found that four or more of the reinsurers IRIS
financial ratio values are outside of the usual range established in the IRIS system. |
B. |
|
Termination under Section I A. above will be effected by written notice. The company will
elect whether the termination will be on a run-off basis or a commutation with an immediate
settlement of all present and future obligations under this agreement. If the company
initially elects a run-off basis, within 15 calendar days after receiving notice of the |
11
|
|
companys election, the reinsurer will secure all such obligations through a trust account or a
clean, unconditional, irrevocable, and evergreen letter of credit from a financial institution
acceptable to the company. However, even if such security is requested by the company or
provided by the reinsurer, the company will retain the right to require an immediate settlement
of all present and future obligations at any subsequent date. |
Section II
A. |
|
After the expiration (if there is no Special Termination as governed by Section I above) of
this agreement, if the reinsurer has any remaining present or future obligations to the
company and any of the five events described in paragraph A. of Section I should occur, the
company may require: |
|
1. |
|
An immediate settlement of all present and future obligations under this agreement; or |
|
|
2. |
|
The reinsurer to secure all such obligations through a trust account or a clean,
unconditional, irrevocable, and evergreen letter of credit from a financial institution
acceptable to the company. |
B. |
|
If the company initially requires security under Paragraph A. 2. of this Section, it will
notify the reinsurer in writing and the reinsurer will provide such trust account or letter of
credit within 15 calendar days. However, even if such security is requested by the company or
provided by the reinsurer, it is agreed that the company will retain the right to require an
immediate settlement of all present and future obligations at any subsequent date. |
Section III
A. |
|
For purposes of this Article, all present and future obligations means outstanding ultimate
net loss, extra contractual obligations, excess of limits liability and loss adjustment
expense [including reserves for incurred-but-not-reported ultimate net loss and loss
adjustment expense (hereinafter IBNR)], return of unearned net subject written premium, and
all other present or future balances, obligations, or amounts due the company under this
agreement. |
B. |
|
In no event will this Article be construed to limit the amount of, or the rights and
obligations of the parties with respect to, any security withheld or required in accordance
with the RESERVES AND FUNDING ARTICLE hereof (if applicable). |
C. |
|
In the event of an immediate settlement of all present and future obligations, upon receipt
of final payment, the company and the reinsurer will execute a full and final commutation and
mutual release of their respective liabilities under the agreement. |
12
D. |
|
When requested by either party an appraisal of IBNR will be made by a panel of three
disinterested actuaries to be selected as follows: |
|
1. |
|
The company, or the reinsurer, may request in writing to the other party that any
differences in the estimated amount of IBNR be settled by a panel of three actuaries, one
to be chosen by each party and the third by the two so chosen. |
|
|
2. |
|
If the other party refuses or neglects to appoint an actuary within 10 calendar days
after the companys or reinsurers request in writing that the differences be settled by a
panel of three actuaries, the other party may appoint two actuaries. |
|
|
3. |
|
If the two actuaries fail to agree on the selection of a third actuary within 10
calendar days of their appointment, each of them will name two, of whom the other will
decline one, and the decision will be made by drawing lots. All the actuaries will be
regularly engaged in the valuation of excess general liability insurance claims, and each
will be a Fellow of the Casualty Actuarial Society. None of the actuaries will be under the
control of either party to this agreement. |
|
|
4. |
|
Each party will submit its case to the actuary it selected within 10 calendar days of
the appointment of the third actuary. The decision in writing of any two actuaries, when
filed with the parties hereto, will be final and binding on both parties. The expense of
the actuaries and of the commutation will be equally divided between the two parties. Said
appraisal will take place in Hamilton, Bermuda unless some other place is mutually agreed
upon by the company and the reinsurer. |
|
|
5. |
|
Any appraisal rendered pursuant to this subparagraph D. will not be subject to
arbitration, and either party to this agreement may proceed to a court of competent
jurisdiction to initiate an action to enforce such an appraisal. |
E. |
|
All demands, requests and notices pursuant to this Article will be given in writing and given
by hand, prepaid express courier, airmail or telecopier properly addressed to the appropriate
party and will be deemed as having been effected only upon actual receipt. |
F. |
|
Settlements under this Article will be adjusted for net present value. The discount rate used
for determining net present value will be the current yield of a United States Treasury 2-year
note as quoted in the Wall Street Journal on the nearest working day prior to the date the
commutation is executed. |
G. |
|
In the event of any conflict between this Article and any other Article of this agreement,
the terms of this Article will control. |
TERRITORY ARTICLE
The territorial scope of this agreement will follow that of the companys policies.
13
EXCLUSIONS ARTICLE
I. |
|
With respect to policies otherwise subject to Sections A, B or C of the REINSURANCE COVERAGE
ARTICLE, this agreement does not apply to and specifically excludes the following: |
|
A. |
|
Liability assumed by the company under treaty reinsurance; provided, however, that this
exclusion does not apply to policies subject to an inter-company pooling reinsurance
agreement among the parties comprising the company hereunder. |
|
|
B. |
|
Loss or liability excluded by the Insolvency Funds Exclusion Clause, as attached to
this agreement. |
|
|
C. |
|
Loss or liability excluded by the following clauses, which are attached to this
Agreement: |
|
1. |
|
Nuclear Incident Exclusion ClauseLiabilityReinsurance (U.S.A.); |
|
|
2. |
|
Nuclear Incident Exclusion ClauseLiabilityReinsurance (Canada); |
|
|
3. |
|
Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994), (Worldwide
Excluding U.S.A. and Canada), (Includes Japanese Amendment); |
|
|
4. |
|
Nuclear Incident Exclusion ClausePhysical DamageReinsurance (U.S.A.); |
|
|
5. |
|
Nuclear Incident Exclusion ClausePhysical DamageReinsurance (Canada); |
|
|
6. |
|
Nuclear Incident Exclusion ClausePhysical Damage and Liability (Boiler and
Machinery Policies)Reinsurance (U.S.A.); and |
|
|
7. |
|
Nuclear Incident Exclusion ClausePhysical Damage and Liability (Boiler and
Machinery Policies)Reinsurance (Canada). |
D. |
|
Loss caused directly, or indirectly, by war, whether or not declared, civil war,
insurrection, rebellion or revolution or any act or condition incidental to any of the
foregoing. If a policy contains, or follows as in the case of a follow-form policy, any war
or terrorism exclusion that incorporates any provision(s) in conflict with any provision(s)
of this exclusion, then the provision(s) of the companys policy will supersede the
conflicting provision(s) of this exclusion. This exclusion will not be more limiting than
any war or terrorism exclusion contained in, or followed by, any policy issued by the
company. |
E. |
|
Costs incurred for the withdrawal, inspection, repair, recall, return, replacement, or
disposal of an original named insureds products or work. |
|
|
Except with respect to policies issued to original named insureds that are principally
engaged in the manufacture of automobiles or critical auto parts, this exclusion does not
apply to liability, loss, cost or expense incurred for the withdrawal, inspection, repair,
recall, return, replacement, or disposal of products or work of a party other than an
original named insured of which the original named insureds products or work forms a part. |
14
F. |
|
An integrated occurrence or batch occurrence; provided, however, that this exclusion
applies only with respect to loss or liability arising out of the insureds products or the
products-completed operations hazard and only with respect to policies issued to original
named insureds that are principally engaged in the manufacture of automobiles or critical
auto parts. |
G. |
|
Business classified by the company as: |
|
1. |
|
Directors and Officers Liability; |
|
|
2. |
|
Surety; |
|
|
3. |
|
Fidelity Insurance; |
|
|
4. |
|
Credit Insurance; |
|
|
5. |
|
Financial Guarantee Insurance; |
|
|
6. |
|
Insolvency Insurance; |
|
|
7. |
|
Environmental Impairment Liability; |
|
|
8. |
|
Employment Practices Liability; or |
|
|
9. |
|
Pure Financial Loss Insurance; |
H. |
|
Aviation Liability, unless such coverage pertains to an incidental part of the original
insureds overall operations. Additionally, Aircraft Products Liability will not be
covered when the policy is issued to an original named insured whose primary business is
the manufacture of aircraft, aircraft engines, or aircraft propellers. This exclusion does
not apply to: |
|
1. |
|
Fuel or other fluids and lubricants utilized for aircraft; |
|
|
2. |
|
Any aviation liability arising out of aircraft that an original insured leases
to others if such insured is not principally engaged in the manufacture of aircraft,
aircraft engines or aircraft propellers or in the carrying of passengers aboard
aircraft for a fee. |
|
|
3. |
|
Industrial aid aircraft or industrial aid aircraft use or incidental aircraft
use or aviation liability. |
If a policy contains, or follows as in the case of a follow-form policy, any aviation
liability or aircraft exclusion that incorporates any provision(s) in conflict with any
provision(s) of this exclusion, then the provision(s) of the companys policy will supersede
the conflicting provision(s) of this exclusion. This exclusion will not be more limiting
than any aviation liability or aircraft exclusion contained in, or followed by, any policy
issued by the company.
15
I. |
|
Errors and omissions (E&O) or professional liability coverage; provided, however, that
this exclusion does not apply to: |
|
a. |
|
Bodily injury; |
|
|
b. |
|
Property damage; |
|
|
c. |
|
Personal injury; |
|
|
d. |
|
Advertising liability (or advertising injury or personal and
advertising injury); or |
|
|
e. |
|
Extra contractual obligations, excess of limits liability, or any loss
adjustment expense associated with 1. a. through 1. d. above, |
regardless of whether or not such extra contractual obligations, excess of limits
liability, loss adjustment expense, liability, injury, or damage results directly, or
indirectly, or is caused in whole, or in part, by any act, misfeasance, malfeasance,
breach of duty, error, or omission of the insured that is of a professional nature;
|
2. |
|
Druggists or Pharmacists Professional Liability; |
|
|
3. |
|
Employee Benefits Liability; |
|
|
4. |
|
Incidental medical malpractice; or |
|
|
5. |
|
Incidental professional exposure. |
|
|
If a policy contains, or follows as in the case of a follow-form policy, any E&O or
professional liability exclusion that incorporates any provision(s) in conflict with any
provision(s) of this exclusion, then the provision(s) of the companys policy will supersede
the conflicting provision(s) of this exclusion. This exclusion will not be more limiting
than any E&O or professional liability exclusion contained in, or followed by, any policy
issued by the company. |
|
J. |
|
Loss or liability directly resulting from the rendering, or failure to render, the
following professional services: |
|
|
|
Medical, surgical, dental, x-ray, nursing or chiropractic services or care provided to any
person, including the furnishing of drugs, in connection therewith. |
|
|
|
This exclusion will not apply to: |
|
1. |
|
Druggists or Pharmacists Professional Liability; or |
|
|
2. |
|
Incidental medical malpractice. |
16
|
|
If a policy contains, or follows as in the case of a follow-form policy, any medical
malpractice exclusion that incorporates any provision(s) in conflict with any provision(s)
of this exclusion, then the provision(s) of the companys policy shall supersede the
conflicting provision(s) of this exclusion. This exclusion will not be more limiting than
any medical malpractice exclusion contained in, or followed by, any policy issued by the
company. |
|
K. |
|
Loss or liability arising out of a multi-year policy. The term multi-year policy as
used herein means a policy issued for a policy period greater than the maximum policy
period as specified under the DEFINITIONS ARTICLE. |
|
L. |
|
Business derived directly as a member of any pool, association, or syndicate. |
|
M. |
|
Asbestos, except as respects such coverage as may be provided by the XL 004 policy form
(or similar provisions of other occurrence-reported or claims-made forms). |
|
N. |
|
1. Loss or liability arising out of the actual, alleged or threatened discharge,
dispersal, seepage, migration, release or escape of methyl tertiary-butyl ether (MTBE)
pollutants, but only with respect to policies issued to original insureds that are engaged
in the:
|
|
(a) |
|
Refining or manufacturing of MTBE; |
|
|
(b) |
|
Refining of petroleum products; or |
|
|
(c) |
|
Blending of MTBE with other petroleum products; |
|
(i) |
|
This exclusion does not apply to persons or organizations that qualify
as additional insureds under policies issued to original insureds that are not
engaged in any of the operations described in 1. through 3. above. |
|
|
(ii) |
|
As respects liability or alleged liability arising out of an actual,
alleged or threatened discharge, dispersal, seepage, migration, release or escape
of both MTBE and other pollutants, coverage hereon will not be excluded for that
portion of such liability or alleged liability which arises out of pollutants that
are not MTBE. |
|
2. |
|
If a policy contains, or follows as in the case of a follow-form policy, any
MTBE or fuel oxygenates exclusion that incorporates any provision(s) in conflict with
any provision(s) of this exclusion, then the provision(s) of the companys policy will
supersede the conflicting provision(s) of this exclusion. This exclusion will not be
more limiting than any MTBE or fuel oxygenates exclusion contained in, or followed by,
any policy issued by the company. |
17
|
3. |
|
However, solely with respect to bodily injury or property damage arising out of
the insureds products or the products-completed operations hazard, if any MTBE or fuel
oxygenates exclusion contained in, or followed by, the companys policy does not
exclude a gradual discharge of MTBE pollutants, then: |
|
(a) |
|
The provisions of paragraph 2. above will not apply to such coverage as
may be allowed for such gradual discharge of MTBE pollutants by the companys
policy; and |
|
|
(b) |
|
The provisions of paragraph 1. above will apply to such gradual
discharge of MTBE pollutants, notwithstanding that such provisions may be in
conflict with the provisions of any MTBE or fuel oxygenates exclusion contained in,
or followed by, the companys policy. |
As used in this exclusion:
Discharge has the same meaning that it does in the companys policy or, if such term is
not used in the companys policy, has the same meaning as whatever equivalent term(s)
is(are) used in the companys policy such as dispersal, release, seepage, migration,
release or escape.
A discharge will not be considered a gradual discharge if:
|
(a) |
|
The original insured is aware of it within 20 days following its
commencement and if the original insured gives the company notice of such discharge
within 80 days following its commencement; or |
|
|
(b) |
|
Such discharge results from a covered pollution peril or named
peril (as such terms are defined in the companys policy) or such perils as are
listed or covered in the companys policy. |
II. |
|
With respect to policies that are otherwise subject to Sections B or C of the REINSURANCE
COVERAGE ARTICLE and issued to original named insureds that are ethical pharmaceutical
manufacturers, this agreement does not apply to and specifically excludes bodily injury or
property damage arising out of the insureds products or the products-completed operations
hazard. However, this exclusion does not apply to: |
|
A. |
|
Nutraceutical companies; |
|
|
B. |
|
Over-the-counter (non-ethical) drug companies; or |
|
|
C. |
|
Diversified manufacturers whose ethical pharmaceutical revenues are less than 20.00% of
total corporate revenues for the 12-month period that immediately precedes the effective or
renewal date of the policy. |
18
III. |
|
With respect to policies otherwise subject to Section C of the REINSURANCE COVERAGE ARTICLE,
this agreement does not apply to and specifically excludes the following: |
|
A. |
|
Bodily injury or property damage that directly results from the following premises or
operations; provided, however, that this exclusion does not apply to such bodily injury or
property damage that arises out of the insureds products or that is included in the
products-completed operations hazard: |
|
1. |
|
Demolition operations when written as such, but this exclusion does not apply
to any mining or quarrying operations or any blasting operations of original insureds
whose primary business is not demolition operations; |
|
|
2. |
|
Fraternity premises when written as such, but this exclusion does not apply to
any educational institution that is found liable for its oversight (or failure thereof)
of the premises, operations, or conduct of fraternities; |
|
|
3. |
|
Ship-building; ship repair yards, or dry dock operations; |
|
|
4. |
|
Amusement parks, carnivals, or automobile racing events when written as such,
but this exclusion does not apply to original insureds that do not operate such events
or premises, but do: |
|
a. |
|
Promote, market, or advertise such events or premises; |
|
|
b. |
|
Use such events or premises in their promotional, marketing, or
advertising activities; or |
|
|
c. |
|
Sell or give away tickets to such events or premises; |
|
5. |
|
Airports, but only as respects loss or liability that directly results from the
ownership, maintenance, or use of aircraft or from flight operations; |
|
|
6. |
|
Construction of subways, tunnels, or dams, but this exclusion does not apply to
the construction of: |
|
a. |
|
A dam that has an embankment less than 20 feet in height or a reservoir
capacity less than 100 acre-feet; |
|
|
b. |
|
A pool or impoundment; or |
|
|
c. |
|
A pond; |
|
7. |
|
The application of insecticides or pesticides within a building, but this
exclusion does not apply to an original insured that owns, occupies, rents, leases, or
uses such a building; |
|
|
8. |
|
Underground mining operations, but this exclusion does not apply to surface
mining or quarrying operations; or |
|
|
9. |
|
Low-rise residential construction operations; |
Provided, however, that if:
|
(1) |
|
A policy contains, or follows as in the case of a follow-form policy, an
exclusion of any of the premises or operations (or both) listed above; and |
|
|
(2) |
|
Such exclusion incorporates any provision(s) in conflict with any provision(s)
of this exclusion A.; |
19
|
|
|
Then the provision(s) of companys policy will supersede the conflicting provision(s) of
this exclusion A. with respect to such premises or operations (or both). This exclusion A.
will not be more limiting than any exclusion of such premises or operations (or both) listed
above, which is contained in, or followed by, any policy issued by the company. |
|
|
|
|
This exclusion A. will not apply to any original insured that performs work or operations
at, or incidental to, any of the premises or operations excluded above unless such insured
is also principally engaged in the ownership of such premises or the performance of such
work or operations excluded above. |
|
|
B. |
|
Bodily injury or property damage included in the products-completed operations hazard,
but only if such bodily injury or property damage directly results from the manufacturing
of: |
|
1. |
|
Automobiles or motorcycles; |
|
|
2. |
|
Springboards or trampolines; |
|
|
3. |
|
Helmets intended to be used in athletic events or athletic activities; |
|
|
4. |
|
Underground storage tanks intended to be used for the storage of petroleum
products; |
|
|
5. |
|
Firearms or guns; |
|
|
6. |
|
Paints containing lead; |
|
|
7. |
|
Fireworks; |
|
|
8. |
|
Medical devices intended to be used for implantation into humans; |
|
|
9. |
|
Cell phones; |
|
|
10. |
|
Smoke detectors; |
|
|
11. |
|
NutraSweet or saccharin intended to be used in food or beverage products for
human consumption, but this exclusion does not apply to an original insured who
handles, sells, or distributes food or beverage products intended for human consumption
that contain NutraSweet or saccharin, unless such insured is principally engaged in the
manufacturing of NutraSweet or saccharin; |
|
|
12. |
|
Latex gloves; |
|
|
13. |
|
Rides intended for use in amusement parks; |
|
|
14. |
|
Tobacco products, but this exclusion does not apply injury or damage due to a
fire caused by lighted tobacco products; |
|
|
15. |
|
Diving boards or diving towers; |
|
|
16. |
|
Insecticides, pesticides or herbicides; |
|
|
17. |
|
Manganese welding rods; or |
|
|
18. |
|
Explosives or nitroglycerine, celluloid, pyroxlin, or other explosive
substances intended for use in explosives; |
Provided, however, that if:
|
(1) |
|
A policy contains, or follows as in the case of a follow-form policy, an
exclusion of any of the products or completed operations (or both) listed above; and |
|
|
(2) |
|
Such exclusion incorporates any provision(s) in conflict with any provision(s)
of this exclusion B.; |
20
Then the provision(s) of the companys policy will supersede the conflicting provision(s) of
this exclusion B. with respect to such products or completed operations (or both) listed
above. This exclusion B. will not be more limiting than any exclusion of such products or
completed operations (or both) listed above, which is contained in, or followed by, any
policy issued by the company.
Except as noted above, this exclusion B. will not apply to any original insured that
produces, manufactures or assembles any component parts, subassemblies, chemicals,
materials, or substances used in any of the products or completed operations listed above
unless such insured is also principally engaged in the final production, manufacturing, or
assembly of such product(s) or the performance of such completed operations listed above.
The exclusions enumerated in III. above will not apply to incidental premises, operations,
products, activities or work of the original insured.
Should the company, by reason of an inadvertent act, error, or omission, be bound to afford
coverage excluded hereunder or should an existing insured extend its premises, operations,
products, activities or work to include exposures excluded hereunder, the reinsurer will
temporarily waive such exclusions. Such waiver, however, will not apply to exclusions I.A., I.B.,
I.C., I.G.2. through I.G.6., I.L. or I.M. of this Article. The duration of said waiver will not
extend beyond the time that notice of such exposure has been received by a member of the executive
or managerial staff of the companys office having underwriting authority in the class of business
involved, plus the minimum time period required thereafter for the company to terminate such
coverage. If the company is prevented from canceling said policy within such period by applicable
statute or regulation, then such policy will be covered hereunder until the earliest date on which
the company may cancel.
The company may submit in writing to the reinsurer, for special acceptance hereunder, policy(ies)
that would otherwise not be covered by this agreement. If said policy(ies) is/are accepted in
writing by the reinsurer, it/they will be subject to the terms and conditions of this agreement for
that reinsurers percentage participation hereon, except as such terms and conditions are modified
by such acceptance. Recognizing the urgent nature of these communications, the reinsurer agrees to
respond forthwith to such requests. Silence on the part of the reinsurer after five business days
from its receipt of a request for special acceptance will be deemed constructive concurrence with
the companys election to cede to this agreement the policy(ies) that is/are the subject of the
request. Any policies special accepted under reinsurance agreements that precede this agreement
will be automatically covered hereunder. Further, should reinsurers become a party to this
agreement subsequent to the acceptance of any policies not normally covered hereunder, they will
automatically accept such policies as being a part of this agreement.
21
REINSURANCE PREMIUM AND CEDING COMMISSION ARTICLE
The company will cede to the reinsurer the reinsurers quota share percentage (as specified for
such reinsurer in the INTERESTS AND LIABILITIES AGREEMENTS attaching to and forming a part of this
agreement) of the net subject written premium on all policies written or renewed with an effective
date on or after the effective date of this agreement, less a flat ceding commission on the net
subject written premium ceded as follows:
|
|
|
Section A:
|
|
Flat rate of 25% of net subject written premium. |
|
|
|
Section B:
|
|
Flat rate of 23.5% of net subject written premium. |
|
|
|
Section C:
|
|
Flat rate of 22.5% of net subject written premium. |
The flat ceding commission will include premium taxes of all kinds, local board assessments, and
all other expenses and charges whatsoever based on the premium for policies ceded under this
agreement, except for Federal Excise Tax as described in the FEDERAL EXCISE TAX ARTICLE.
OTHER REINSURANCE ARTICLE
The company may purchase the following treaty reinsurance on its retentions (as set forth in the
REINSURANCE COVERAGE ARTICLE):
A. |
|
Inter-company pooling reinsurance agreements among the parties comprising the company; and |
|
B. |
|
Aggregate excess of loss reinsurance written on an each-occurrence (a.k.a. clash) basis. |
The premium paid for such treaty reinsurance will not be deducted from the net subject written
premium hereon; likewise, recoveries under such reinsurance will inure to the sole benefit of the
company.
Additionally, the company may purchase facultative reinsurance on any policy for which it deems
such purchase advisable, and the premium for that portion of the companys policy reinsured
elsewhere will be deducted from the net subject written premium, and such facultative reinsurance
(if any) will inure to the benefit of this agreement.
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS OF LIMITS LIABILITY ARTICLE
This agreement will extend to cover any claims-related extra contractual obligations or excess of
limits liability (or both) arising because of, but not limited to, the following:
A. |
|
Failure of the company to agree to settle a claim within the policy limits or to provide a
defense against such claims. |
22
B. |
|
Actual or alleged bad faith, fraud, or negligence in investigating or handling a claim or in
rejecting an offer of settlement. |
C. |
|
Negligence or breach of duty in the preparation of the defense or the conduct of a trial or
the preparation or prosecution of any appeal or subrogation (or both) or any subsequent action
resulting therefrom. |
Extra contractual obligations as used in this agreement means those liabilities not covered under
any other provision of this agreement for which the company is liable to its insured or a
third-party claimant, or that the company paid as its share of a claims-related extra contractual
obligation awarded against one or more of its co-insurers.
Excess of limits liability as used in this agreement will mean any amount for which the company
would have been contractually liable to pay had it not been for the limits of the companys policy.
There will be no recovery hereunder where the extra contractual obligations or excess of limits
liability (or both) have been incurred due to fraud committed by a member of the board of directors
or a duly elected corporate officer of the company, acting individually, collectively, or in
collusion with a member of the board of directors, a duly elected corporate officer, or a partner
of any other corporation, partnership, or organization involved in the defense or settlement of a
claim on behalf of the company.
The date on which any extra contractual obligations or excess of limits liability (or both) is
incurred by the company will be deemed, in all circumstances, to be the date of loss under the
companys policy. In no event will the reinsurers total liability for extra contractual
obligations or excess of limits liability (or both) exceed the following limits with respect to any
one occurrence, which limits are in addition to such reinsurers limits of liability, as set forth
in the REINSURANCE COVERAGE ARTICLE, with respect to ultimate net loss arising out of such
occurrence.
1. |
|
The reinsurers share, if applicable, of the Section A limit; |
|
2. |
|
The reinsurers share, if applicable, of the maximum possible limit under Section B.; or |
|
3. |
|
The reinsurers share, if applicable, of the Section C limit; |
The limitations set forth above in this paragraph apply to their respective Sections of the
REINSURANCE COVERAGE ARTICLE.
REPORTS AND REMITTANCES ARTICLE
A. |
|
Within 75 calendar days after the close of each month, as respects all policies subject to
this agreement that are underwritten by the companys London offices, and within 45 calendar
days after the close of each month, as respects all other policies subject to this agreement, |
23
|
|
the company will furnish the reinsurer with a report summarizing the premium ceded less return
premium and ceding commission, ultimate net loss paid, loss adjustment expense paid, extra
contractual obligations paid, excess of limits liability paid, monies recovered, and net balance
due either party. Said monthly reports will also include the following information for each
policy subject to this agreement that is written or renewed during the month: |
|
1. |
|
First named insured; |
|
|
2. |
|
Policy effective date; |
|
|
3. |
|
Policy expiration date; |
|
|
4. |
|
Policy limits; |
|
|
5. |
|
Policy attachment point(s); |
|
|
6. |
|
Policy premium; |
|
|
7. |
|
Premium ceded to reinsurers; |
|
|
8. |
|
Paid ultimate net loss; |
|
|
9. |
|
Reserves for outstanding ultimate net loss; |
|
|
10. |
|
Paid loss adjustment expense; and |
|
|
11. |
|
Reserves for outstanding loss adjustment expense. |
|
|
Amounts due the reinsurer will accompany said reports. Except with respect to amounts due under
paragraph C. of this Article, any balances due the company will be paid within 45 calendar days
after the company has furnished the reinsurer with the report. |
|
B. |
|
Semi-annually the company will provide the reinsurer with a report listing all claims subject
to this agreement to which the company has assigned the claim code of D, P, or R. Such
reports will be valued as of June 30th and December 31st, respectively,
and will contain with respect to each claim listed the following information: |
|
1. |
|
First named insured; |
|
|
2. |
|
Policy effective date; |
|
|
3. |
|
Date of loss; |
|
|
4. |
|
Date of report; |
|
|
5. |
|
Amount paid; |
|
|
6. |
|
Amount reserved; |
|
|
7. |
|
Status of claim (i.e., whether open or closed); and |
|
|
8. |
|
Claim code. |
|
|
In addition, the company will furnish the reinsurer with such other information as may be
required by the reinsurer for completion of its NAIC interim and/or annual statements. |
|
C. |
|
If the amount due the company for the sum of ultimate net loss, loss adjustment expense,
extra contractual obligations, or excess of limits liability (whether individually or
collectively) recoverable under this agreement for any one occurrence is in excess of: |
|
1. |
|
$1,500,000 with respect to policies subject to Section A of the REINSURANCE COVERAGE
ARTICLE; |
24
|
2. |
|
$5,000,000 with respect to policies subject to Section B of the REINSURANCE COVERAGE
ARTICLE; or |
|
|
3. |
|
$1,500,000 with respect to policies subject to Section C of the REINSURANCE COVERAGE
ARTICLE; |
the reinsurer will, upon the companys demand and its receipt of satisfactory proofs of loss (as
defined in the LOSS SETTLEMENTS ARTICLE), remit the amount due the company within five business
days.
LOSS SETTLEMENTS ARTICLE
The reinsurer agrees to abide by all settlements made by the company whether under strict policy
conditions or by way of compromise including settlements involving disputed interpretations of
policy terms and/or coverage. All settlements, compromises, and adjustments made by the company,
whether involving coverage issues or otherwise, will be binding on the reinsurer in proportion to
its percentage participation. Such settlements, compromises, or adjustments will be considered
satisfactory proofs of loss, and amounts falling to the share of the reinsurer will be payable to
the company, subject to the provisions of the REPORTS AND REMITTANCES ARTICLE and the LOSS
SETTLEMENTS ARTICLE.
The company will likewise at its sole discretion commence, continue, defend, compromise, settle, or
withdraw from actions, suits, or proceedings and generally do all such matters and things relating
to any claim or loss as in its judgment may be beneficial or expedient, and the reinsurer will be
liable for its share of all payments made and costs and expenses incurred in connection therewith
or in taking legal advice therefore (including those which are the result of actions or disputes
between original insured(s) and the company).
OFFSET ARTICLE
The company or the reinsurer have and may exercise, at any time and from time to time, the right to
offset any balance or balances whether on account of premiums or on account of losses or otherwise,
due from one party to the other party hereto, under the terms and within the subject matter of this
agreement, and any predecessor and successor agreements of this agreement.
In the event of an insolvency of a party hereto, offset shall only be allowed in accordance with
the provisions of Section 7427 of the Insurance Law of the State of New York.
SALVAGE AND SUBROGATION ARTICLE
The reinsurer will be credited with its proportionate share of salvage or subrogation (or both) in
respect of claims and settlements under this agreement, less its share of recovery expense. Unless
the company and the reinsurer agree to the contrary, the company will enforce its right
25
to salvage or subrogation (or both) and will prosecute all claims arising out of such right.
Should the company refuse or neglect to enforce this right, the reinsurer is hereby empowered and
authorized to institute appropriate action in the name of the company.
The reinsurer will benefit proportionately from all reductions of ultimate net loss by salvage,
compromise or otherwise. If the amount recovered exceeds the recovery expense, such expense will
be borne by each party in proportion to its benefit from the recovery. If the recovery expense
exceeds the amount recovered, the amount recovered (if any) will be applied to the reimbursement of
recovery expense and the remaining expense will be borne by each party in proportion to its
liability for the loss before recovery was attempted.
Notwithstanding anything to the contrary in this agreement, if the reinsurers initiate an action to
secure salvage and/or subrogation in the name of the company, and there is no such recovery, or if
the amount recovered is insufficient to cover the expenses incurred in pursuing salvage and/or
subrogation, the reinsurers initiating such action will be jointly and severally liable for 100% of
such excess expense. Further, said reinsurers will be jointly and severally liable for 100% of any
damages to the company, including reimbursement of any compensatory or punitive damages (or both)
resulting from the action.
DELAYS, ERRORS, OR OMISSIONS ARTICLE
Any inadvertent delay, omission, or error will not relieve either party hereto from any liability,
which would attach to it hereunder if such delay, omission or error had not been made, provided
such delay, omission, or error is rectified immediately upon discovery.
ENTIRE AGREEMENT, INTERPRETATION ARTICLE
This agreement represents the entire agreement between the company and the reinsurers with respect
to business covered hereunder. There are no understandings between the parties other than as
expressed in this agreement. All prior agreements, understandings and representations made by the
company and the reinsurers are superseded by this agreement. Any change or modification of this
agreement will be documented by an amendment of this agreement, signed by the parties to the
agreement.
ACCESS TO RECORDS ARTICLE
The reinsurer or its duly designated representatives will have, upon providing reasonable advance
notice to the company, access to the companys underwriting, accounting, or claim files, other than
proprietary or privileged communications, pertaining to the subject matter of this agreement during
the period that this agreement is in force and subsequent to its expiration or termination until
all claims are closed. If any amount is overdue from a reinsurer to the company for any reason,
other than a disputed payment, the reinsurer will have such access to records only upon payment of
such overdue amounts to the company or by placing the overdue
26
amounts in a trust or an escrow account acceptable by the company, pending resolution of the
dispute. The reinsurer may, at its own expense, reasonably make copies of such books and records
and in such event agrees to pay the companys reasonable expenses (including staff and other
overhead costs) in procuring such copies.
If the reinsurer makes any inspection of the companys claim files under this agreement and, as a
result of the inspection the claim is contested or disputed, the reinsurer will provide the
company, at the companys request, a summary of any reports completed by the reinsurers personnel
or by third parties on behalf of the reinsurer outlining the findings of the inspection and
identifying the reasons for contesting or disputing the subject claim. The reinsurer will provide
to the company a copy of any such reports within 15 days of the companys request for same.
Nothing in this Article requires the company to maintain or make available any document for a
period longer than that required under the companys document retention policies or procedures.
CONFIDENTIALITY ARTICLE
All terms and conditions of this agreement and any materials provided in the course of inspection
will be kept confidential by the reinsurer as against third parties, unless the disclosure is
required pursuant to process of law or unless the disclosure is to the reinsurers
retrocessionaires, financial auditors, or governing regulatory bodies. Disclosing or using this
information for any purpose beyond the scope of this agreement, or beyond the exceptions set forth
above, is expressly forbidden without the prior consent of the company.
INSOLVENCY ARTICLE
(This Article will apply severally to each reinsured company referenced within the definition of
the company in the Preamble to this agreement. Further, this Article and the laws of the
domiciliary state will apply in the event of the insolvency of any company intended to be covered
hereunder. In the event of a conflict between any provision of this Article and the laws of the
domiciliary state of any company intended to be covered hereunder, that domiciliary states laws
will prevail.)
A. |
|
In the event of the insolvency of the company, this reinsurance will be payable directly to
the company, or to its liquidator, receiver, conservator or statutory successor, immediately
upon demand on the basis of the liability of the company without diminution because of the
insolvency of the company or because the liquidator, receiver, conservator or statutory
successor of the company has failed to pay all or a portion of any claim. It is agreed,
however, that the liquidator, receiver, conservator or statutory successor of the company will
give written notice to the reinsurer of the pendency of a claim against the company, which
would involve a possible liability on the part of the reinsurer, indicating the policy or bond
reinsured, within a reasonable time after such claim is filed in the conservation or
liquidation proceeding or in the receivership. It is further agreed that during the pendency
of such claim the reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding |
27
|
|
where such claim is to be adjudicated, any defense or defenses that it may deem available to the
company or its liquidator, receiver, conservator, or statutory successor. The expense thus
incurred by the reinsurer will be chargeable, subject to the approval of the Court, against the
company as part of the expense of conservation or liquidation to the extent of a pro rata share
of the benefit, which may accrue to the company solely as a result of the defense undertaken by
the reinsurer. |
B. |
|
Where two or more of the reinsurers are involved in the same claim and a majority in interest
elects to interpose defense to such claim, the expense will be apportioned in accordance with
the terms of the agreement as though such expense had been incurred by the company. |
C. |
|
The reinsurance will be payable by the reinsurer to the company or to its liquidator,
receiver, conservator, or statutory successor, except as provided by Section 4118(a) (1) (A)
and 1114 (c) of the New York Insurance Law or except (a) where the agreement specifically
provides another payee of such reinsurance in the event of the insolvency of the company or
(b) where the reinsurer with the consent of the original insured or insureds has voluntarily
assumed such policy obligations of the company as direct obligations of the reinsurer to the
payees under such policies and in substitution for the obligations of the company to the
payees. Then, and in that event only, the company, with the prior approval of the certificate
of assumption on New York risks by the Superintendent of Insurance of the State of New York,
is entirely released from its obligation and the reinsurer will pay any loss directly to
payees under such policy. |
D. |
|
Notwithstanding paragraphs A., B., and C., where the company is authorized under the
Insurance Companies Act (Canada) to insure risks in Canada, in the event of the insolvency of
the company, reinsurance payable in respect of the insurance business in Canada of the company
will be payable to the Chief Agent in Canada of the company or to the liquidator, receiver,
conservator or statutory successor appointed in Canada in respect of the insurance business in
Canada of the company without diminution because of the insolvency of the company or because
the company or a liquidator, receiver, conservator or statutory successor of the company has
failed to pay all or any portion of any claim. All other terms and conditions of paragraphs
A., B., and C. remain in effect and apply to this paragraph D., which will prevail if there is
a conflict or inconsistency. |
ARBITRATION ARTICLE
A. |
|
As a condition precedent to any right of action under this agreement, any and all disputes
arising under or relating to this agreement, including its formation and validity, will be
finally and fully determined in Hamilton, Bermuda under the provisions of The Bermuda
International Conciliation and Arbitration Act of 1993 (exclusive of the Conciliation Part of
such Act), as may be amended and supplemented, by a Board composed of three arbitrators to be
selected for each controversy as follows: |
In the event of a dispute, controversy or claim, any party may notify the other party or parties
to such dispute, controversy or claim of its desire to arbitrate the matter, and at the time of
28
such notification the party desiring arbitration will notify any other party or parties of the
name of the arbitrator selected by it. The other party who has been so notified will within 30
calendar days thereafter select an arbitrator and notify the party desiring arbitration of the
name of such second arbitrator. If the party notified of a desire for arbitration will fail or
refuse to nominate the second arbitrator within 30 calendar days following receipt of such
notification, the party who first served notice of a desire to arbitrate will, within an
additional period of 30 calendar days, apply to the Supreme Court of Bermuda for the appointment
of a second arbitrator and in such a case the arbitrator appointed by such court will be deemed
to have been nominated by the party or parties who failed to select the second arbitrator. The
two arbitrators, chosen as above provided, will within 30 calendar days after the appointment of
the second arbitrator choose a third arbitrator. In the event of the failure of the first two
arbitrators to agree on a third arbitrator within said 30 calendar day period, the third
arbitrator will be drawn automatically utilizing the Dow Jones Industrial Average on the third
working day after both names have been chosen in writing. A Dow Jones Industrial Average ending
in an even number before the decimal point will be deemed to be the selection of the claimants
name and the Dow Jones Industrial Average ending in an odd number before the decimal point will
be deemed to be the selection of the respondents name. The three arbitrators will decide by
majority. The umpire will also act as Chair of the Tribunal and, in the event that no majority
can be reached, the verdict of the umpire will prevail.
B. |
|
All claims, demands, denials of claims and notices pursuant to this Article will be given in
writing and given by hand, prepaid express courier, airmail or telecopier properly addressed
to the appropriate party and will be deemed as having been effected only upon actual receipt. |
C. |
|
The Board of Arbitration will fix, by a notice in writing to the parties involved, a
reasonable time and place for the hearing and may prescribe reasonable rules and regulations
governing the course and conduct of the arbitration proceeding, including without limitation
discovery by the parties. The Board will be relieved of all judicial formality and will not
be bound by the strict rules of procedure evidence. The Board will interpret this agreement
as if it were an honorable engagement rather than as merely a legal obligation. |
D. |
|
The Board will, within 90 calendar days following the conclusion of the hearing, render its
decision on the matter or matters in controversy in writing and will cause a copy thereof to
be served on all the parties thereto. In case the Board fails to reach a unanimous decision,
the decision of the majority of the members of the Board will be deemed to be the decision of
the Board. Such decision will be a complete defense to any attempted appeal or litigation of
such decision of the Board of Arbitration by, any court or other body to the fullest extent
permitted by applicable law. |
E. |
|
Any order as to the costs of the arbitration will be in the sole discretion of the Board, who
may direct to whom and by whom and in what manner they will be paid. |
F. |
|
All awards made by the Arbitration Board will be final and no right of appeal will lie from
any award rendered by the Arbitration Board. The parties agree that the Supreme Court of
Bermuda: (i) will not grant leave to appeal any award based upon a question of law arising out
of the award; (ii) will not grant leave to make an application with respect to an award; |
29
(iii) and will not assume jurisdiction upon any application by a party to determine any issue of
law arising in the course of the arbitration proceeding.
All awards made by the Arbitration Board may be enforced in the same manner as a judgment or
order from the Supreme Court of Bermuda and judgment may be entered pursuant to the terms of the
award by leave from the Supreme Court of Bermuda.
G. |
|
If the company and more than one reinsurer are involved in the same dispute(s) or
difference(s) arising out of this agreement, and the company requests consolidated arbitration
with those reinsurers in an initial notice of arbitration or response, then those reinsurers
will constitute and act as one party for purposes of the arbitration and thus will select a
single party-appointed arbitrator among them. If the company requests consolidation in its
notice of arbitration, then both parties will elect their party-appointed arbitrators within
45 calendar days of the commencement of the arbitration proceeding. If the company requests
consolidation in its response, then (i) that response will be appended to the companys notice
of arbitration to the additional reinsurer(s) joined in the proceeding, (ii) any arbitral
appointment made before that response will be of no effect, and (iii) the reinsurers will
select their arbitrator within 45 calendar days of their receipt of those pleadings. For
purposes of this paragraph, any instance in which two or more of the reinsurers have not paid
their proportional shares of the same balance claimed due by the company will be deemed to
involve the same dispute(s) or difference(s) arising out of this Agreement. Communications
will be made by the company to each of the reinsurers constituting one party. Nothing in this
paragraph will impair the rights of reinsurers to assert several rather than joint defenses or
claims, change their liability under this agreement from several to joint, or impair their
rights to retain separate counsel in connection with the arbitration. |
H. |
|
Unless prohibited by law, the Supreme Court of Bermuda will have exclusive jurisdiction over
any and all court proceedings that either party may initiate in connection with the
arbitration, including proceedings to compel, stay, or enjoin arbitration or to confirm,
vacate, modify, or correct an arbitration award. |
GOVERNING LAW ARTICLE
This agreement, and any dispute, controversy, or claim arising out of or relating to this
agreement, will be governed by and construed according to the laws of the State of New York, except
with regard to:
A. |
|
The payment of punitive damages; and |
|
B. |
|
The procedural law required under the ARBITRATION ARTICLE of this agreement, |
which will be construed in accordance with the laws of Bermuda.
30
Notwithstanding the foregoing, as to rules regarding credit for reinsurance, the rules of all
applicable states or other jurisdictions will pertain thereto.
CURRENCY REVALUATION AND FOREIGN EXCHANGE ARTICLE
I. |
|
It is understood and agreed that any original limit(s) or original sub-limit(s) of liability,
underlying limit(s) or attachment point(s) of a policy in currencies other than United States
of America (U.S.) Dollars, Euros, or United Kingdom Pounds Sterling will be converted into
its(their) U.S. dollar equivalent(s) using the same rate of exchange used by the company when
such policy was entered by the company into its own books of account. In the event that there
is a subsequent change in the parity value of the U.S. dollar (from that used by the company
when such policy was entered by the company into its own books of account) which results in: |
|
A. |
|
The reinsurers maximum limit of liability for such policy (as specified in the
REINSURANCE COVERAGE ARTICLE) being exceeded; |
|
|
B. |
|
Such policy being subject to Section A instead of Section B of this agreement (or
subject to Section B instead of Section A of this agreement); |
|
|
C. |
|
Any minimum initial attachment point threshold in U.S. Dollars, which is required by
the REINSURANCE COVERAGE ARTICLE in order for such policy to be reinsured hereunder, not
being met; or |
|
|
D. |
|
A change in the companys retained percentage under the provisions of B. of the
REINSURANCE COVERAGE ARTICLE (if applicable); |
|
1. |
|
In the case of A. above, the company will be held covered for such excess limit; |
|
|
2. |
|
In the case of B. above, the companys policy will remain subject to the section of
this agreement that applied based on the exchange rate that was used by the company when
such policy was entered by the company into its own books of account; and |
|
|
3. |
|
In the case of C. above, the required minimum initial attachment point threshold will
be deemed to have been met for such policy to be reinsured hereunder; |
|
|
4. |
|
In the case of D. above, the companys retention under the provisions of Section B of
the REINSURANCE COVERAGE ARTICLE (if applicable) will be deemed unchanged from what it was
when such policy was entered by the company into its own books of account; |
31
|
|
until the next renewal of the policy, at which time: |
|
a. |
|
The warranted reinsurers maximum U.S. dollar limit of liability; |
|
|
b. |
|
Section A or Section B under the REINSURANCE COVERAGE ARTICLE of this agreement; |
|
|
c. |
|
The minimum initial attachment point threshold in U.S. Dollars, which is required by
the REINSURANCE COVERAGE ARTICLE in order for such policy to be reinsured hereunder; and |
|
|
d. |
|
The companys retention under provisions of Section B. of the REINSURANCE COVERAGE
ARTICLE (if applicable); |
|
|
will apply to such policy based on the exchange rate used by the company when such renewal is
entered by the company into its own books of account. |
II. |
|
All amounts due to either the company or the reinsurer under this
agreement will be paid in United States of America (U.S.) Dollars
subject to paragraphs III. and IV. below. |
|
III. |
|
Net subject written premium, as well as any subsequent adjustments
thereto, collected or returned by the company in other than U.S.
Dollars will be paid to, or by, the reinsurer in U.S. Dollars at the
same rates of exchange at which the company entered such transaction
into its own books of account. |
|
IV. |
|
Amounts due the company for ultimate net loss, loss adjustment
expense, extra contractual obligations, or excess of limits liability
hereunder in other than U.S. Dollars will be converted into U.S.
Dollars at the same rates of exchange at which the company entered
the payment(s) of such loss into its own books of account. |
|
V. |
|
The sign $ in this agreement refers to United States of America (U.S.) Dollars. The sign
refers to Euros, the currency of the European Union. The sign £ refers to United
Kingdom Pounds Sterling. For the purposes of determining the manner in which policies are to
be ceded to this agreement, the limits and attachment points set forth in this agreement that
are to apply to a subject policy, based upon said policys issuing company, attachment point
and limit, will be those limits and attachment points stated in the currency(ies) in which the
policy is issued; however, in the event a policy is issued with limits or attachment points
(or both) in a currency other than one of those set forth in this subparagraph V., such limit
and attachment point will be converted to U.S. Dollars and said policy will be ceded as if it
were originally written in U.S. Dollars. |
32
SERVICE OF SUIT ARTICLE
(This Article is not intended to conflict with or override the parties obligation to arbitrate
their disputes in accordance with the ARBITRATION ARTICLE.)
A. |
|
This paragraph A. applies: |
|
1. |
|
Only to policies that are subject to Section A or Section B of the REINSURANCE COVERAGE
ARTICLE; and |
|
|
2. |
|
To a reinsurer unauthorized in any jurisdiction that has authority over the company and
in which a subject suit has been instituted. |
|
|
In the event any reinsurer hereon fails to pay any amount claimed due hereunder, such reinsurer,
at the request of the company, will submit to the jurisdiction of a court of competent
jurisdiction within England or Bermuda and will comply with all requirements necessary to give
that court jurisdiction. |
B. |
|
This paragraph B. applies: |
|
1. |
|
Only to policies that are subject to Section C of the REINSURANCE COVERAGE ARTICLE; and |
|
|
2. |
|
To a reinsurer either: |
|
a. |
|
Domiciled outside the United States of America; or |
|
|
b. |
|
Unauthorized in any state, territory or district of the United States of
America that has jurisdiction over the company and in which a subject suit has been
instituted. |
In the event of the failure of any reinsurer hereon to pay any amount claimed to be due
hereunder, such reinsurer, at the request of the company, will submit to the jurisdiction of a
court of competent jurisdiction within the United States. Nothing in this Article constitutes or
should be understood to constitute a waiver of the reinsurers right to commence an action in
any court of competent jurisdiction in the United States, to remove an action to a United States
District Court, or to seek a transfer of a case to another court as permitted by the laws of the
United States or of any state in the United States. The reinsurer, once the appropriate court
is accepted by the reinsurer or is determined by removal, transfer, or otherwise, as provided
for above, will comply with all requirements necessary to give said court jurisdiction. In any
suit instituted against it upon this agreement, the reinsurer will abide by the final decision
of such court or of any appellate court in the event of an appeal.
Service of process in such suit may be made upon Mendes and Mount, LLP, 750 Seventh Avenue, New
York, New York 10019-6829, when such suit is instituted in the state of New York; Mendes and
Mount, LLP, 725 South Figueroa, 19th Floor, Los Angeles, California 90017-5524, when such suit
is instituted in the state of California; either of the foregoing if
33
the suit is not instituted in New York or California; or another party as specifically
designated in the INTERESTS AND LIABILITIES AGREEMENT for such reinsurer.
However, if another party is so designated, the reinsurer in question recognizes that the laws
of the states of New York and California require that service be made on a law firm located in
the respective state if a suit is instituted in that state, so that if the party designated
above is not located in California as respects a suit instituted in California, or New York as
respects a suit instituted in New York, the applicable office of Mendes and Mount stipulated
above must be used for service of suit unless the provisions of the final paragraph of this
Article apply.
The agent for service of process is authorized and directed to accept service of process on
behalf of the reinsurer in any such suit and/or upon the request of the company to give a
written undertaking to the company that they will enter a general appearance upon the
reinsurers behalf in the event such a suit is instituted.
Further, pursuant to any statute of any state, territory, or district of the United States that
makes provision therefor, the reinsurer hereby designates the Superintendent, Commissioner, or
Director of Insurance or other officer specified for that purpose in the statute, or the
successor or successors in office, as its true and lawful attorney upon whom may be served any
lawful process in any action, suit, or proceeding instituted by or on behalf of the company or
any beneficiary hereunder arising out of this agreement, and hereby designates the above named
as the person to whom the said officer is authorized to mail such process or a true copy
thereof.
AGENCY ARTICLE
For purposes of sending and receiving notices and payments required by this agreement, the
reinsured company that is set forth first in the definition of company in the Preamble to this
agreement will be deemed the agent of all other reinsured companies referenced in the Preamble. In
no event, however, will any reinsured company be deemed the agent of another with respect to the
terms of the INSOLVENCY ARTICLE.
INTERMEDIARY ARTICLE
Aon Re Inc., an Illinois corporation, or one of its affiliated corporations duly licensed as a
reinsurance intermediary, is hereby recognized as the intermediary negotiating this agreement for
all policies reinsured hereunder. All communications relating to this agreement will be
transmitted to the company or the reinsurers through the intermediary. Payments by the company to
the intermediary will be deemed payment to the reinsurers. Payments by the reinsurers to the
intermediary will be deemed payment to the company only to the extent that such payments are
actually received by the company.
34
RESERVES AND FUNDING ARTICLE
A. |
|
As respects policies subject to Section C of the REINSURANCE COVERAGE ARTICLE only, this
Article applies to the reinsurer in the event that the company is unable to recognize a
statutory credit in any state having jurisdiction over the companys reserves as respects said
reinsurers obligations hereunder. |
|
B. |
|
As regards policies issued by the company coming within the scope of this agreement, the
company agrees that when it will file with the insurance regulatory authority or set up on its
books reserves for unearned premium, losses, and loss adjustment expense reinsured hereunder,
which it will be required by law to set up, it will forward to the reinsurer a statement
showing the proportion of such reserves which is applicable to the reinsurer. The reinsurer
hereby agrees to fund such reserves in respect of: |
|
1. |
|
Unearned premium; |
|
|
2. |
|
Known outstanding losses that have been reported to the reinsurer and loss adjustment
expense relating thereto; |
|
|
3. |
|
Losses and loss adjustment expense paid by the company but not recovered from the
reinsurer; plus |
|
|
4. |
|
Reserves, including incurred-but-not-reported (IBNR) reserves as determined by the
company, for losses and loss adjustment expense relating thereto; |
All of which are hereinafter referred to as reinsurers obligations, by funds withheld, cash
advances, a letter of credit, or a trust. The reinsurer will have the option of determining the
method of funding provided it is acceptable to the insurance regulatory authorities having
jurisdiction over the companys reserves.
C. |
|
When funding by a letter of credit, the reinsurer will apply for and secure timely delivery
to the company of a clean, irrevocable and unconditional letter of credit issued by a bank and
containing provisions acceptable to the company and any insurance regulatory authorities
having jurisdiction over the company in an amount equal to the reinsurers obligations. Such
letter of credit will be issued for a period of not less than one year and will be
automatically extended for one year from its date of expiration or any future expiration date
unless 30 calendar days (60 calendar days where required by insurance regulatory authorities)
prior to the expiration date of such letter of credit the issuing bank notifies the company by
certified or registered mail that the issuing bank elects not to consider the letter of credit
extended for any additional period. |
35
D. |
|
The reinsurer and company agree that the letters of credit provided by the reinsurer pursuant
to the provisions of this agreement may be drawn upon at any time, notwithstanding any other
provision of this agreement, and be utilized by the company or any successor, by operation of
law, of the company including, without limitation, any liquidator, rehabilitator, receiver, or
conservator of the company for the following purposes, unless otherwise provided for in a
separate trust agreement: |
|
1. |
|
To reimburse the company for the reinsurers obligations, the payment of which is due
under the terms of this agreement and which has not been otherwise paid; |
|
|
2. |
|
To make refund of any sum which is in excess of the actual amount required to pay the
reinsurers obligations under this agreement; |
|
|
3. |
|
To fund an account with the company for the reinsurers obligations. Such cash deposit
will be held in an interest-bearing account separate from the companys other assets, and
interest thereon not in excess of the prime rate will accrue to the benefit of the
reinsurer. |
|
|
4. |
|
If prior to any expiration date the issuing bank has sent notice that it elects not to
consider the letter of credit extended for any additional period. |
|
|
|
|
This subparagraph 4. will only apply if the reinsurer has failed to replace the expiring
letter of credit at least 15 calendar days prior its expiration with an irrevocable and
unconditional, letter of credit issued by another bank and containing provisions acceptable
to the company and any insurance regulatory authorities having jurisdiction over the company
in an amount equal to the reinsurers obligations of said reserves. |
E. |
|
In the event the amount drawn by the company on any letter of credit is in excess of the
actual amount required for D.1., D.2. or D.4. above, the company will promptly return to the
reinsurer the excess amount so drawn. All of the foregoing will be applied without diminution
because of insolvency on the part of the company or the reinsurer. |
|
F. |
|
The issuing bank will have no responsibility whatsoever in connection with the propriety of
withdrawals made by the company or the disposition of funds withdrawn, except to ensure that
withdrawals are made only upon the order of properly authorized representatives of the
company. |
|
G. |
|
At annual intervals, or more frequently as agreed but never more frequently than quarterly,
the company will prepare a specific statement of the reinsurers obligations, for the sole
purpose of amending the letter of credit, in the following manner: |
|
1. |
|
If the statement shows that the reinsurers obligations exceed the balance of credit as
of the statement date, the reinsurer will, within 30 calendar days after receipt of notice
of such excess, secure delivery to the company of an amendment to the letter of credit
increasing the amount of credit by the amount of such difference; |
36
|
2. |
|
If, however, the statement shows that the reinsurers obligations are less than the
balance of credit as of the statement date, the company will, within thirty (30) calendar
days after receipt of written request from the reinsurer, release such excess credit by
agreeing to secure an amendment to the letter of credit reducing the amount of credit
available by the amount of such excess credit. |
TAXES ARTICLE
The company will pay all taxes (except Federal Excise Tax) on premiums reported to the reinsurers
on this Agreement.
FEDERAL EXCISE TAX ARTICLE
(This Article is applicable to those reinsurers, excepting Underwriters at Lloyds London and other
reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.)
Only as respects policies subject to Section C of the REINSURANCE COVERAGE ARTICLE, the reinsurers
will allow the company to deduct, for the purpose of paying Federal Excise Tax, the applicable
percentage of any premium payable hereon (as imposed under Section 4371 of the Internal Revenue
Service Code) to the extent such premium is subject to such tax. In the event of any return of
such premium, the reinsurers will deduct the aforesaid percentage from the return premium payable
hereon and the company or its agent will recover such tax from the United States Government.
SURVIVAL ARTICLE
All Articles of this agreement will survive the termination of this agreement until all obligations
between the company and the reinsurers have been finally settled.
37
Exhibit 10.7
Healthcare Liability Quota Share
Reinsurance Contract
Effective: January 1, 2007
issued to
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) Inc.
Wilmington, Delaware
Newmarket Underwriters Insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
(hereinafter referred to collectively as the Company)
by
The Subscribing Reinsurer(s) Executing
the Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the Reinsurer)
Wherever the word Company is used in this Contract, such term shall be held to include any or all
of the affiliated or subsidiary companies that are or may hereafter come under common control,
ownership and/or management, provided that notice be given to the Reinsurer of any such affiliated
or subsidiary companies that may hereafter come under common control, ownership and/or management
of the Company. For purposes of this Contract, an affiliated company shall be a company in which
at least a 50.0% ownership interest is held by one or any combination of the following: Allied
World Assurance Company, Ltd; Allied World Assurance Company (U.S.) Inc.; Newmarket Underwriters
Insurance Company; Allied World Assurance Company (Europe) Limited; or Allied World Assurance
Company (Reinsurance) Limited.
Article I Classes of Business Reinsured
A. |
|
By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer
obligates itself to accept quota share reinsurance of the Companys net liability under
policies incepting, renewing or having an anniversary date on or after the effective date
hereof, and classified by the Company as follows: |
|
1. |
|
Coverage A: Healthcare Liability business written by the Company in Bermuda with
policy limits greater than $10,000,000 each occurrence, each insured; and |
|
2. |
|
Coverage B: Healthcare Liability business written by the Company in the United
States of America. |
B. |
|
It is understood that, as respects policies written on a claims made basis, the Company may
issue prior acts coverages and extended reporting coverage endorsements. |
C. |
|
The liability of the Reinsurer with respect to each cession hereunder shall commence
obligatorily and simultaneously with that of the Company, subject to the terms, conditions and
limitations hereinafter set forth. |
Article II Commencement and Term
A. |
|
This Contract is effective at 12:01 A.M., Standard Time, January 1, 2007, (as defined in the
Companys policies) in respect of policies incepting, renewing or having an anniversary date
on and after that time and date and shall remain in full force and effect until
12:01 A.M., Standard Time, January 1, 2008. |
B. |
|
At termination or expiration, the Reinsurer shall remain liable for all losses under policies
in force until their expiration, anniversary or renewal. |
C. |
|
Notwithstanding the foregoing, at termination or expiration of this Contract, at the
Companys sole option, the Company will have the option to cut off this Contract and the
Reinsurer shall incur no liability for losses occurring or claims made (as applicable)
subsequent to the date of termination or expiration. Should the Company exercise this cutoff
option, the Reinsurer shall return all unearned premium as of the date of termination or
expiration less any ceding commission previously allowed thereon with respect to policies in
force as of the date of termination or expiration. |
D. |
|
Notwithstanding any other provisions herein, the Reinsurer shall remain liable in respect of
all liabilities under policies where the Company is obligated by applicable law or regulatory
requirements to continue coverage under such policies until the Company is no longer obligated
to do so. |
E. |
|
Should this Contract be terminated or expire while a loss covered hereunder is in progress,
the Reinsurer shall be responsible for the loss in progress in the same manner and to the same
extent it would have been responsible had the Contract expired the day following the
conclusion of the loss in progress. |
Article III Special Termination
A. |
|
The Company may terminate a Subscribing Reinsurers percentage share in this Contract on a
cutoff basis at any time by giving written notice to the Subscribing Reinsurer by certified
mail with 30 days notice, return receipt requested, in the event of any of the following
circumstances: |
|
1. |
|
The Subscribing Reinsurer ceases underwriting operations; or |
|
2. |
|
A State Insurance Department or other legal authority orders the Subscribing
Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under
regulatory supervision; or |
|
|
3. |
|
The Subscribing Reinsurer has become insolvent or has been placed into
liquidation or receivership (whether voluntary or involuntary), or there has been
instituted against it proceedings for the appointment of a receiver, liquidator,
rehabilitator, conservator, trustee in bankruptcy, or other agent known by whatever
name, to take possession of its assets or control of its operations; or |
|
|
4. |
|
The Subscribing Reinsurers surplus has been reduced by
20.0% of the amount of
surplus at the inception of this Contract, or if the Subscribing Reinsurer has lost any
part of, or has reduced, its paid-up capital; or |
|
|
5. |
|
The Subscribing Reinsurer has merged with or has become acquired or controlled by
any company, corporation or unaffiliated individual(s) not controlling the Subscribing
Reinsurers operations at the inception of this Contract; or |
|
|
6. |
|
The Subscribing Reinsurer has reinsured its entire liability under this Contract
without the other partys prior written consent; or |
|
|
7. |
|
The Subscribing Reinsurer has been assigned an A.M. Bests rating of less than
A- (a Standard & Poors Insurance Solvency International rating of less than BBS
will apply as respects alien Subscribing Reinsurers other than Underwriting Members of
Lloyds, London, and a Standard & Poors Lloyds Syndicate Stability rating of less than
three crowns will apply as respects Underwriting Members of Lloyds, London). |
B. |
|
The Company will have the option to commute the Subscribing Reinsurers liability for
losses on policies covered by this Contract as of the effective date of termination. In the
event the Company and the Subscribing Reinsurer cannot agree on the capitalized value of the
Subscribing Reinsurers liability under such policies, they will appoint an actuary and/or
appraiser to assess such liability and will share equally any expense of the actuary and/or
appraiser. If the Company and the Subscribing Reinsurer cannot agree on an actuary and/or
appraiser, the Company and the Subscribing Reinsurer will each nominate three individuals, of
whom the other party will decline two, and the final decision will be made by drawing lots.
Payment by the Subscribing Reinsurer of the amount of liability ascertained will constitute a
complete and final release of the Subscribing Reinsurer with respect to its liability under
this Contract. |
Article IV Territory (BRMA 51D)
This Contract shall be worldwide in its geographical scope.
Article V Exclusions
A. |
|
This Contract does not apply to and specifically excludes the following: |
|
1. |
|
Nuclear risks as defined in the Nuclear Incident Exclusion Clause Liability
Reinsurance (U.S.A.), the Nuclear Incident Exclusion Clause Liability Reinsurance |
Page 3
|
|
|
(Canada) and the Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide
Excluding U.S.A. & Canada) attached to and forming part of this Contract. |
|
|
2. |
|
All liability of the Company arising by contract, operation of law, or otherwise,
from its participation or membership, whether voluntary or involuntary, in any insolvency
fund. Insolvency fund includes any guaranty fund, insolvency fund, plan, pool,
association, fund or other arrangement, however denominated, established or governed,
which provides for any assessment of or payment or assumption by the Company of part or
all of any claim, debt, charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent, or which
is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in
whole or in part. |
|
|
3. |
|
Loss or damage caused by or resulting from war, invasion, hostilities, acts of
foreign enemies, civil war, rebellion, insurrection, military or usurped power, or
martial law or confiscation by order of any government or public authority, but this
exclusion shall not apply to loss or damage covered under a standard policy with a
standard War Exclusion Clause. |
|
|
4. |
|
Multi-year policies, but not excluding policies with terms of one year plus odd time. |
|
|
5. |
|
Policies with rate guarantees. |
B. |
|
If the Company is bound, without the knowledge and contrary to the instructions of the
Companys supervisory underwriting personnel, on any business falling within the scope of one
or more of the exclusions set forth in paragraph A, the exclusion shall be suspended with
respect to such business until 30 days after an underwriting supervisor of the Company
acquires knowledge thereof. |
Article VI Special Acceptances
A. |
|
Any reinsurance falling within the scope of one or more of the exclusions set forth in
paragraph A of the Exclusions Article that is specially accepted by the Reinsurer from the
Company shall be covered under this Contract and be subject to the terms hereof, except as
such terms shall be modified by the special acceptance. Any Subscribing Reinsurer shall be
deemed to have agreed to a special acceptance if it has not responded to the Companys special
acceptance request within five business days after receiving the applicable underwriting
information. |
|
B. |
|
As respects business written by the Company in Bermuda, the Company may request a special
acceptance for policies with attachment points less than or equal to $10,000,000 that: |
|
1. |
|
Are classified by the Company as Tier 4 or Tier 5; and/or |
|
|
2. |
|
Have bed counts of more than 1,500; |
|
|
for those policies with limits greater than $15,000,000 but less than or equal to $25,000,000.
Any reinsurance falling within the scope of this paragraph B that is specially accepted by the
Reinsurer from the Company shall be covered under this Contract and be subject to the terms
hereof, except as such terms shall be modified by the special |
Page 4
|
|
acceptance. It is hereby understood and agreed that the Reinsurer has specially accepted the
Hospital for Special Surgery and VHA Risk Retention Group policies as of the effective date
of this Contract. |
Article VII Reinsurance Coverage
A. |
|
Coverage A: As respects business subject to this Contract described in subparagraph 1 of
paragraph A of the Classes of Business Reinsured Article, the Company shall cede to the
Reinsurer and the Reinsurer agrees to accept 100% of the Companys net liability; however, the
liability of the Reinsurer shall not exceed the following: |
|
1. |
|
As respects policies with attachment points equal to or greater than $5,000,000 and
less than or equal to $10,000,000 that: |
|
a. |
|
Are classified by the Company as Tier 4 or Tier 5; and/or |
|
|
b. |
|
Have bed counts of more than 1,500; |
|
|
|
$15,000,000 each loss, each policy (exclusive of loss in excess of policy limits, extra
contractual obligations and loss adjustment expense), unless otherwise specially accepted
in accordance with the provisions of paragraph B of the Special Acceptances Article; |
|
|
2. |
|
As respects all other policies subject to this Coverage A, $25,000,000 each loss,
each policy (exclusive of loss in excess of policy limits, extra contractual obligations
and loss adjustment expense). |
B. |
|
Coverage B: As respects business subject to this Contract described in subparagraph 2 of
paragraph A of the Classes of Business Reinsured Article, the Company shall cede to the
Reinsurer and the Reinsurer agrees to accept 100% of the Companys net liability; however, the
liability of the Reinsurer shall not exceed $15,000,000 each loss, each policy (exclusive of
loss in excess of policy limits, extra contractual obligations and loss adjustment expense). |
|
C. |
|
It is understood and agreed that loss in excess of policy limits, extra contractual
obligations and loss adjustment expense, as defined herein, will be considered part of the
Companys net liability and be subject to the provisions of paragraphs A and B above, but
the liability of the Reinsurer for loss in excess of policy limits, extra contractual
obligations and loss adjustment expense shall be in addition to the limits of liability set
forth therein. |
|
D. |
|
The Company shall retain, net and underinsured, at least a 60.0% part of 100% share in the
interests and liabilities of the Reinsurer hereunder. |
Article VIII Definitions
A. |
|
Net liability as used herein shall be defined as the Companys gross liability
remaining after actual recoveries made from inuring reinsurance. |
Page 5
B. |
|
The following shall apply as respects loss in excess of policy limits and extra contractual
obligations, as defined herein: |
|
1. |
|
In the event the Company pays or is held liable to pay an amount of loss in excess
of its policy limit, but otherwise within the terms of its policy (hereinafter called
loss in excess of policy limits) or any punitive, exemplary, compensatory or
consequential damages, other than loss in excess of policy limits (hereinafter called
extra contractual obligations) because of alleged or actual bad faith, negligence or
fraud on its part in rejecting an offer of settlement within policy limits, or in the
preparation of the defense or in the trial of an action against its insured or reinsured
or in the preparation or prosecution of an appeal consequent upon such an action, or in
otherwise handling a claim under a policy subject to this Contract, the loss in excess of
policy limits and/or the extra contractual obligations shall be added to the Companys
loss, if any, under the policy involved, and the sum thereof shall be subject to the
provisions of the Reinsurance Coverage Article. However, for the purposes of this
Contract, the sum of any loss in excess of policy limits and extra contractual
obligations shall not exceed the following as respects any one loss, any one policy: |
|
a. |
|
$15,000,000 as respects policies subject to Coverage A of the Reinsurance
Coverage Article with attachment points equal to or greater than $5,000,000 and less
or equal to $10,000,000 that: |
|
i. |
|
Are classified by the Company as Tier 4 or Tier 5; and/or |
|
|
ii. |
|
Have bed counts of more than 1,500; |
|
|
|
unless otherwise specially accepted in accordance with the provisions of
paragraph B of the Special Acceptances Article; |
|
|
b. |
|
$25,000,000 as respects all other policies subject to Coverage
A of the Reinsurance Coverage Article; or |
|
|
c. |
|
$15,000,000 as respects policies subject to Coverage B of the
Reinsurance Coverage Article. |
|
2. |
|
An extra contractual obligation shall be deemed to have occurred on the same date
as the loss covered or alleged to be covered under the policy. |
|
|
3. |
|
Notwithstanding anything stated herein, this Contract shall not apply to any loss
in excess of policy limits or any extra contractual obligation incurred by the Company as
a result of any fraudulent and/or criminal act by any officer or director of the Company
acting individually or collectively or in collusion with any individual or corporation or
any other organization or party involved in the presentation, defense or settlement of
any claim covered hereunder. |
|
|
4. |
|
Recoveries from any form of insurance or reinsurance which protects the Company
against claims the subject matter of this paragraph shall inure to the benefit of this
Contract. |
C. |
|
Loss adjustment expense as used herein shall be defined as all expenses incurred by the
Company in connection with a specific claim, including litigation expenses, interest on
judgments and declaratory judgment expenses or other legal expenses and costs incurred |
Page 6
|
|
in connection with coverage questions and legal actions connected thereto, but not
including office expenses or salaries of the Companys regular employees. |
|
D. |
|
Declaratory judgment expense as used herein shall mean all expenses incurred by the Company
in connection with declaratory judgment actions brought to determine the Companys policy
obligations that are allocable to specific policies and claims subject to this Contract.
Declaratory judgment expense shall be deemed to have been fully incurred by the Company on the
date of the actual or alleged loss under the Companys policy giving rise to the action. |
|
E. |
|
Gross written premium as used herein shall be defined as the original gross written
premiums of the Company for the classes of business reinsured hereunder, less return
premiums and less premiums ceded for reinsurance which inures to the benefit of this
Contract and facultative reinsurance, if any. |
|
F. |
|
Policy as used herein shall be defined as policies, contracts and binders of insurance or
reinsurance issued by the Company. In the event the Company issues multiple policies to any
one insured, for the purposes of this Contract a policy shall be defined as each insureds per
claim, per occurrence or aggregate (if applicable) limit (or sum of per claim, per occurrence
of aggregate limits in the case of policies written on a layered basis) applying to the same
insured interest under the Companys original policy or policies. The Company shall be the
sole judge as to what constitutes: each original insured, policy, insured interest and each
per claim, per occurrence or aggregate limit under its original policy or policies. |
Article IX Savings Clause
(Applicable only if the Subscribing Reinsurer is domiciled in the State of New York): In no
event shall coverage for extra contractual obligations be provided to the extent that such coverage
is not permitted under New York law.
Article X Other Reinsurance
The Company shall be at liberty to effect specific reinsurance either for its net retention
or the common account of itself and the Reinsurer.
Article XI Claims and Loss Adjustment Expense
A. |
|
Losses shall be reported by the Company in summary form as hereinafter provided. Further,
the Company shall notify the Reinsurer whenever a claim involves a fatality, amputation,
spinal cord damage, brain damage, blindness, extensive burns or multiple fractures, regardless
of liability. The Reinsurer shall have the right to participate, at its own expense, in the
defense of any claim or suit or proceeding involving this reinsurance. |
|
B. |
|
All loss settlements made by the Company, whether under strict policy conditions or by way of
compromise, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as
the case may be, its proportion of each such settlement in accordance with the Reports and
Remittances Article. It is agreed, however, that if the Reinsurers share of any loss is equal
to or greater than $2,500,000 as respects Coverage A of the Reinsurance |
Page 7
|
|
Coverage Article or $500,000 as respects Coverage B of the Reinsurance Coverage Article, the
Reinsurer will pay its share of said loss as promptly as possible after receipt of reasonable
evidence of the amount paid by the Company. |
|
C. |
|
In the event of a claim under a policy subject hereto, the Reinsurer shall be liable for
its proportionate share of loss adjustment expense incurred by the Company in connection
therewith and shall be credited with its proportionate share of any recoveries of such
expense. |
Article XII Salvage and Subrogation
The Reinsurer shall be credited with its proportionate share of salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and
employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or
making such recovery) on account of claims and settlements involving reinsurance hereunder. The
Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part
of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such
rights.
Article XIII Original Conditions (BRMA 37B)
A. |
|
All reinsurance under this Contract shall be subject to the same rates, terms,
conditions, waivers and interpretations, and to the same modifications and alterations as the
respective policies of the Company. However, in no event shall this be construed in any way to
provide coverage outside the terms and conditions set forth in this Contract. The Reinsurer
shall be credited with its exact proportion of the original premiums received by the Company,
prior to disbursement of any dividends, but after deduction of premiums, if any, ceded by the
Company for inuring reinsurance. |
|
B. |
|
Nothing herein shall in any manner create any obligations or establish any rights against the
Reinsurer in favor of any third party or any persons not parties to this Contract. |
Article XIV Follow the Fortunes
The Reinsurers liability shall be subject to the same rates, terms, conditions, waivers and
interpretations, and to the same modifications and alterations as the respective policies of the
Company, and will attach simultaneously with that of the Company, the true intent of this Contract
being that the Reinsurer follow the fortunes of the Company in respect of the policies reinsured
under this Contract. Nothing will in any manner create any obligations or establish any rights
against the Reinsurer in favor of any third parties or any persons not party to this Contract,
except as provided by the Insolvency Article.
Article XV Commission (BRMA 10A)
A. |
|
The Reinsurer shall allow the Company a 24.25% commission on all premiums ceded to the
Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return
premiums at the same rate. |
Page 8
B. |
|
It is expressly agreed that the ceding commission allowed the Company includes provision
for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature,
except loss adjustment expense. |
Article XVI Reports and Remittances
A. |
|
Within 30 days after the end of each month, the Company shall report to the Reinsurer: |
|
1. |
|
Ceded gross written premium for the month; |
|
|
2. |
|
Commission thereon; |
|
|
3. |
|
Ceded losses and loss adjustment expense paid during the month (net of any
recoveries during the month under the cash call provisions of the Claims and Loss
Adjustment Expense Article). |
|
|
The positive balance of (1) less (2) less (3) shall be remitted by the Company with its report.
Any balance shown to be due the Company shall be remitted by the Reinsurer as promptly as
possible after receipt and verification of the Companys report. |
|
B. |
|
Within 30 days after the end of each month, the Company shall provide the Reinsurer with a
bordereau statement of policies subject to this Contract for underwriting purposes, setting
forth the following: |
|
1. |
|
Account name; |
|
|
2. |
|
Location; |
|
|
3. |
|
Premium; |
|
|
4. |
|
Limit; |
|
|
5. |
|
Attachment point; |
|
|
6. |
|
Self-insured retention data; |
|
|
7. |
|
Aggregate coverage indication; |
|
|
8. |
|
Batch/integrated occurrence coverage indication; |
|
|
9. |
|
Percentage rate change from the prior year; |
|
|
10. |
|
Premium deviation from actuarial indication; |
|
|
11. |
|
For renewal policies, the information set forth in subparagraphs 1 through 8 above
for the expiring policy. |
Page 9
C. |
|
Within 60 days after the end of each calendar quarter, the Company shall report
to the Reinsurer the following: |
|
1. |
|
The ceded unearned premiums and ceded outstanding loss
reserves as of the end of the quarter; |
|
|
2. |
|
A list of all claims subject to this Contract coded by the Company as C, D,
P and R as of the end of the quarter; |
|
|
3. |
|
Open and closed claim activity by the Companys designation during the quarter; |
|
|
4. |
|
Any upward movement of the severity designation of any claims subject to
this Contract coded by the Company as C, D, P and R, to be reported on a
segregated basis. |
D. |
|
Annually, the Company shall furnish the Reinsurer with such information as the Reinsurer may
require to complete its Annual Convention Statement. |
Article XVII Late Payments
A. |
|
The provisions of this Article shall not be implemented unless specifically invoked,
in writing, by one of the parties to this Contract. |
|
B. |
|
In the event any premium, loss or other payment due either party is not received by the
intermediary named in the Intermediary Article (BRMA 23A) (hereinafter referred to as the
Intermediary) by the payment due date, the party to whom payment is due may, by notifying
the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to
pay, an interest penalty on the amount past due calculated for each such payment on the last
business day of each month as follows: |
|
1. |
|
The number of full days which have expired since the due date or the last monthly
calculation, whichever the lesser; times |
|
|
2. |
|
1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall
Street Journal on the first business day of the month for which the calculation is made;
times |
|
|
3. |
|
The amount past due, including accrued interest. |
|
|
It is agreed that interest shall accumulate until payment of the original amount due plus
interest penalties have been received by the Intermediary. |
|
C. |
|
The establishment of the due date shall, for purposes of this Article, be determined as follows: |
|
1. |
|
As respects any routine payment, adjustment or return due either party, the due
date shall be as provided for in the applicable section of this Contract. In the event a
due date is not specifically stated for a given payment, it shall be deemed due 30 days
after the date of transmittal by the Intermediary of the initial billing for each such
payment. |
Page 10
|
2. |
|
As respects a cash call made in accordance with the last sentence of
paragraph B of the Claims and Loss Adjustment Expense Article, payment shall be deemed
due 30 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If
such loss or claim payment is not received within the 30 days, interest will accrue on
the payment or amount overdue in accordance with paragraph B above, from the date the
proof of loss or demand for payment was transmitted to the Reinsurer. |
|
|
3. |
|
As respects any payment, adjustment or return due either party not otherwise
provided for in subparagraphs 1 and 2 of this paragraph, the due date shall be deemed as
30 days following transmittal of written notification that the provisions of this
Article have been invoked. |
|
|
For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon
receipt by the Intermediary. |
|
D. |
|
Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from
contesting the validity of any claim, or from participating in the defense of any claim or
suit, or prohibiting either party from contesting the validity of any payment or from
initiating any arbitration or other proceeding in accordance with the provisions of this
Contract. If the debtor party prevails in arbitration or other proceeding, then any interest
penalties due hereunder on the amount in dispute shall be null and void. If the debtor party
loses in such proceeding, then the interest penalty on the amount determined to be due
hereunder shall be calculated in accordance with the provisions set forth above unless
otherwise determined by such proceedings. If a debtor party advances payment of any amount it
is contesting, and proves to be correct in its contestation, either in whole or in part, the
other party shall reimburse the debtor party for any such excess payment made plus interest on
the excess amount calculated in accordance with this Article. |
|
E. |
|
Interest penalties arising out of the application of this Article that are $100 or less from
any party shall be waived unless there is a pattern of late payments consisting of three or
more items over the course of any 12-month period. |
Article XVIII Offset
Each party hereto shall have, and may exercise at any time and from time to time, the right
to offset any and all balances due from a party to the other arising under this Contract. In the
event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the
provisions of any applicable law governing offset entitlement.
Article XIX Access to Records
The Reinsurer or its duly appointed representative shall have, upon providing reasonable
advance notice to the Company, access to the Companys books and records pertaining to the business
covered during the period that this Contract is in force and subsequent to its termination or
expiration until all claims are closed. The Reinsurers right to inspect premium books and premium
records will terminate five years after the termination or expiration of this Contract.
Notwithstanding the provisions of the preceding, if undisputed balances due from the Reinsurer
under this Contract have not been paid for the two most recent reported three-month periods or if
any undisputed cash call is outstanding, the Reinsurer shall not have access to any of the
Companys records relating to this Contract without the specific consent of the Company.
Page 11
Article XX Confidentiality
A. |
|
For a period of five years following the termination or expiration of this Contract, the
Reinsurer undertakes to treat the terms of this Contract (and any confidential, proprietary
information relating thereto provided in writing by the Company, whether directly or through
an authorized agent) (hereinafter called the Confidential Information) as confidential.
Confidential Information shall not include documents, information or data which the Reinsurer
can show: (1) is publicly known or has become publicly known through no unauthorized act of
the receiving party, (2) has been rightfully received from a third person without obligation
of confidentiality, or (3) was known by the Reinsurer prior to the placement of this Contract
without an obligation of confidentiality or is independently developed by the receiving party
without reliance on the Confidential Information. |
|
B. |
|
Absent the written consent of the Company, the Reinsurer will not disclose any Confidential
Information to any third parties, including any affiliated companies, except: (1) when
required by retrocessionaires subject to the business ceded to this Contract, (2) when
required by applicable law or regulation or by legal process, or (3) when required by external
actuaries, auditors or counsel in the normal course of business. |
|
C. |
|
Notwithstanding the above, in the event the receiving party is required by court order, other
legal process or any regulatory authority to release or disclose any or all of the
Confidential Information, the receiving party agrees to provide the other party with written
notice of same at least 10 days prior to such release or disclosure and to use its
commercially reasonable best efforts to assist such party (at such partys cost) in
maintaining the confidentiality provided for in this Article. |
|
D. |
|
The provisions of this Article shall extend to the officers, directors and employees of the
Reinsurer, and shall be binding upon their successors and assigns. |
|
E. |
|
Except as expressly set forth above, the parties agree and acknowledge that this Article is
not intended to restrict or limit the conduct of the other partys current or proposed
business. |
Article XXI Errors and Omissions
Any inadvertent delay, omission or error shall not relieve either party hereto from any
liability which would attach to it hereunder if such delay, omission or error had not been made,
provided such omission or error is rectified immediately upon discovery.
Article XXII Currency (BRMA 12A)
A. |
|
Whenever the word Dollars or the $ sign appears in this Contract, they shall be construed
to mean United States Dollars and all transactions under this Contract shall be in United
States Dollars. |
|
B. |
|
Amounts paid or received by the Company in any other currency shall be converted to United
States Dollars at the rate of exchange at the date such transaction is entered on the books of
the Company. |
Page 12
Article XXIII Currency Revaluation
It is agreed that underwriting to contractual limits will be done in terms of United States
(U.S.) dollar equivalent on the basis of exchange rates in effect at the time of inception of new
or renewal business or at the time an addition to an existing risk takes place. In the event there
is a reduction in parity value of the U.S. dollar from that existing at the time the risk was
written which results in the contractual limits being exceeded, the Company shall be held covered
for such excess until next renewal of the risk, at which time underwriting will then conform to the
contractual U.S. dollar limits in effect at the time.
Article XXIV Taxes (BRMA 50C)
In consideration of the terms under which this Contract is issued, the Company will not claim a
deduction in respect of the premium hereon when making tax returns, other than income or profits
tax returns, to any state or territory of the United States of America, the District of Columbia or
Canada.
Article XXV Federal Excise Tax
A. |
|
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax 1.0%
of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. |
|
B. |
|
In the event of any return of premium becoming due hereunder the Reinsurer will deduct 1.0%
from the amount of the return and the Company or its agent should take steps to recover the
Tax from the United States Government. |
Article XXVI Security
A. |
|
If required by any applicable law, regulation or regulatory authority, or as otherwise
provided in a master reinsurance security agreement between the Company and any reinsurer
hereunder (such agreement to be incorporated by reference herein, but only as between the
parties to such an agreement), the Reinsurer shall secure its Obligations to the Company
hereunder through one or more of the following methods, which the Reinsurer shall select at
its option: |
|
1. |
|
Funds withheld: funds otherwise due to the Reinsurer under this Contract that are
subject to withdrawal, transfer or substitution solely by the Company and held under its
exclusive control; |
|
|
2. |
|
Letters of credit: one or more clean, irrevocable and unconditional evergreen
letters of credit issued by a bank or banks acceptable to the Company in its sole
discretion that meet the requirements of any applicable law, regulation or regulatory
authority, and, in any event, would permit the Company and all members of its
intercompany pool, if any, to take credit for reinsurance in their respective states of
domicile assuming the Reinsurer were an unauthorized reinsurer in such states; or |
Page 13
|
3. |
|
Reinsurance trust account: funds deposited pursuant to a trust agreement in form and
substance, and with a third party trustee, in each case satisfactory to the Company in
its sole discretion that meets the requirements of any applicable law, regulation or
regulatory authority, and, in any event, would permit the Company and all members of its
intercompany pool, if any, to take credit for reinsurance in their respective states of
domicile assuming the Reinsurer were an unauthorized reinsurer in such states. (With
respect to Lloyds Syndicates, the Company agrees that the Lloyds U.S. Credit for
Reinsurance Trust Fund is, in form and substance, and with a third party trustee,
satisfactory to the Company for purposes of this provision; and that paragraph E shall
not apply to such syndicates where the requirements of the Lloyds U.S. Credit for
Reinsurance Trust Fund have been met.) |
|
|
In the event that the Reinsurer at any time fails to meet its security obligations as set forth
in this Article, the Company shall be entitled to hold back, as funds withheld, any amounts
otherwise due to the Reinsurer under this Contract or any other agreement between the Company
and the Reinsurer. |
|
B. |
|
The term Obligations shall mean the Reinsurers share of 100%, or any higher percentage
required by any applicable law, regulation or regulatory authority, of: (1) losses and loss
adjustment expenses paid by the Company, but not recovered from the Reinsurer; |
|
(2) |
|
reserves for losses and loss adjustment expenses reported and outstanding; |
|
|
(3) |
|
reserves for losses and loss adjustment expenses incurred but not reported; and |
|
|
(4) |
|
unearned premium. |
C. |
|
The security required under this Article shall be adjusted by the Company periodically, but
not more frequently than quarterly. |
|
D. |
|
Notwithstanding any other provision of this Contract, any letters of credit may be drawn upon
and/or assets in any reinsurance trust account may be withdrawn by the Company at anytime: (1)
to reimburse the Company for the Reinsurers share of returned premiums upon policy
cancellation; (2) to reimburse the Company for the Reinsurers share of surrenders and
benefits or losses paid by the Company; (3) to pay any other amount the Company claims is due
under this Contract; (4) in the event that the Company receives notice of nonrenewal of any
letter of credit or termination of any trust agreement; or (5) as funds withheld for the
Reinsurers Obligations under this Contract. Additionally, any funds withheld may be applied
as respects items (1) through (4) above. |
|
E. |
|
Prior to depositing any assets into a reinsurance trust account, the Reinsurer shall execute
assignments or endorsements in blank, or transfer legal title of such assets to the trustee,
so that the Company, or the trustee upon the Companys direction, may negotiate any such
assets without the consent or signature of the Reinsurer or any other entity. Notwithstanding
the composition of assets in any trust account, all settlements of account between the Company
and the Reinsurer shall be in cash or its equivalent. |
|
F. |
|
Unless the Reinsurer shall be in default of any provision of this Contract, simple interest
shall be credited to the Reinsurer on funds withheld each time the Obligations are adjusted at
the one-year LIBOR rate for U.S. Dollars then in effect. |
|
G. |
|
The Company may, at its discretion, require payment of any sum in default instead of
resorting to any security held, and it shall be no defense to any such claim that the
Company might have had recourse to any such security. |
Page 14
H. |
|
For purposes of this Article, any applicable law, regulation or regulatory authority
shall include but not be limited to all laws and regulations affecting the ability of the
Company and all members of its intercompany pool, if any, to take credit for reinsurance, and
all laws and regulations applicable to foreign branches of the Company. |
|
I. |
|
This Article shall survive the expiration or termination of this Contract. |
Article XXVII Insolvency
A. |
|
In the event of the insolvency of the one or more of the reinsured companies, this
reinsurance shall be payable directly to the company, or to its liquidator, receiver,
conservator or statutory successor immediately upon demand on the basis of the liability of
the company without diminution because of the insolvency of the company or because the
liquidator, receiver, conservator or statutory successor of the company has failed to pay all
or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator
or statutory successor of the company shall give written notice to the Reinsurer of the
pendency of a claim against the company which would involve a possible liability on the part
of the Reinsurer, indicating the policy or bond reinsured, within a reasonable time after such
claim is filed in the conservation or liquidation proceeding or in the receivership. It is
further agreed that during the pendency of such claim the Reinsurer may investigate such claim
and interpose, at its own expense, in the proceeding where such claim is to be adjudicated,
any defense or defenses that it may deem available to the company or its liquidator, receiver,
conservator, or statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the company as part of the expense
of conservation or liquidation to the extent of a pro rata share of the benefit which may
accrue to the company solely as a result of the defense undertaken by the Reinsurer. |
|
B. |
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Where two or more Reinsurers are involved in the same claim and a majority in interest elect
to interpose defense to such claim, the expense shall be apportioned in accordance with the
terms of the Contract as though such expense had been incurred by the company. |
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C. |
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The reinsurance shall be payable by the Reinsurer to the company or to its liquidator,
receiver, conservator, or statutory successor, except (1) where this Contract specifically
provides another payee of such reinsurance in the event of the insolvency of the company, or
(2) where the Reinsurer with the consent of the direct insured or insured have voluntarily
assumed such policy obligations of the company as direct obligations of the Reinsurer to the
payees under such policies and in substitution for the obligations of the company to the
payees. |
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D. |
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Notwithstanding paragraphs A, B and C, where the company is authorized under the Insurance
Companies Act (Canada) to insure in Canada risks, in the event of the insolvency of the
company, reinsurance payable in respect of the insurance business in Canada of the company
shall be payable to the Chief Agent in Canada of the company or to the liquidator, receiver,
conservator or statutory successor appointed in Canada in respect of the insurance business in
Canada of the company without diminution because of the insolvency of the company or because
the company or a liquidator, receiver, conservator or statutory successor of the company has
failed to pay all or any portion of any claim. All other terms and conditions of paragraphs A,
B and C remain in effect and apply to this paragraph D which shall prevail if there is a
conflict or inconsistency. |
Page 15
Article XXVIII Arbitration
A. |
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Any and all disputes arising under or relating to this Contract, including its formation
and validity, will be finally and fully determined in Hamilton, Bermuda under the provisions
of The Bermuda International Conciliation and Arbitration Act of 1993 (exclusive of the
Conciliation Part of such Act), as may be amended and supplemented, by a Board composed of
three arbitrators to be selected for each controversy as follows: |
In the event of a dispute, controversy or claim, any party may notify the other party or
parties to such dispute, controversy or claim of its desire to arbitrate the matter, and
at the time of such notification the party desiring arbitration will notify any other
party or parties of the name of the arbitrator selected by it. The other party who has
been so notified will within 30 calendar days thereafter select an arbitrator and notify
the party desiring arbitration of the name of such second arbitrator. If the party
notified of a desire for arbitration will fail or refuse to nominate the second
arbitrator within 30 calendar days following receipt of such notification, the party who
first served notice of a desire to arbitrate will, within an additional period of 30
calendar days, apply to the Supreme Court of Bermuda for the appointment of a second
arbitrator and in such a case the arbitrator appointed by such court will be deemed to
have been nominated by the party or parties who failed to select the second arbitrator.
The two arbitrators, chosen as above provided, will within 30 calendar days after the
appointment of the second arbitrator choose a third arbitrator. In the event of the
failure of the first two arbitrators to agree on a third arbitrator within said 30
calendar day period, the third arbitrator will be drawn automatically utilizing the Dow
Jones Industrial Average on the third working day after both names have been chosen in
writing. A Dow Jones Industrial Average ending in an even number before the decimal point
will be deemed to be the selection of the claimants name and the Dow Jones Industrial
Average ending in an odd number before the decimal point will be deemed to be the
selection of the respondents name. For purposes of this paragraph, zero shall be
considered an even number. The three arbitrators will decide by majority. The umpire will
also act as Chair of the Tribunal and, in the event that no majority can be reached, the
verdict of the umpire will prevail.
B. |
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All claims, demands, denials of claims and notices pursuant to this Article will be given in
writing and given by hand, prepaid express courier, airmail or telecopier properly addressed
to the appropriate party and will be deemed as having been effected only upon actual receipt. |
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C. |
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The Board of Arbitration will fix, by a notice in writing to the parties involved, a
reasonable time and place for the hearing and may prescribe reasonable rules and regulations
governing the course and conduct of the arbitration proceeding, including without limitation
discovery by the parties. The Board will be relieved of all judicial formality and will not be
bound by the strict rules of procedure evidence. The Board will interpret this Contract as if
it were an honorable engagement rather than as merely a legal obligation. |
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D. |
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The Board will, within 90 calendar days following the conclusion of the hearing, render its
decision on the matter or matters in controversy in writing and will cause a copy thereof to
be served on all the parties thereto. In case the Board fails to reach a unanimous decision,
the decision of the majority of the members of the Board will be deemed to be the decision of
the Board. Such decision will be a complete defense to any attempted appeal or |
Page 16
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litigation of such decision of the Board of Arbitration by, any court or other body to
the fullest extent permitted by applicable law. |
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E. |
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Any order as to the costs of the arbitration will be in the sole discretion of the Board, who
may direct to whom and by whom and in what manner they will be paid. |
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F. |
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All awards made by the Arbitration Board will be final and no right of appeal will lie from
any award rendered by the Arbitration Board. The parties agree that the Supreme Court of
Bermuda: (1) will not grant leave to appeal any award based upon a question of law arising out
of the award; (2) will not grant leave to make an application with respect to an award; (3)
and will not assume jurisdiction upon any application by a party to determine any issue of law
arising in the course of the arbitration proceeding. |
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All awards made by the Arbitration Board may be enforced in the same manner as a judgment
or order from the Supreme Court of Bermuda and judgment may be entered pursuant to the
terms of the award by leave from the Supreme Court of Bermuda. |
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G. |
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If the Company and more than one reinsurer are involved in the same dispute(s) or
difference(s) arising out of this Contract, and the Company requests consolidated arbitration
with those reinsurers in an initial notice of arbitration or response, then those reinsurers
will constitute and act as one party for purposes of the arbitration and thus will select a
single party-appointed arbitrator among them. If the Company requests consolidation in its
notice of arbitration, then both parties will elect their party-appointed arbitrators within
45 calendar days of the commencement of the arbitration proceeding. If the Company requests
consolidation in its response, then (1) that response will be appended to the Companys notice
of arbitration to the additional reinsurer(s) joined in the proceeding, (2) any arbitral
appointment made before that response will be of no effect, and (3) the reinsurers will select
their arbitrator within 45 calendar days of their receipt of those pleadings. For purposes of
this paragraph, any instance in which two or more of the reinsurers have not paid their
proportional shares of the same balance claimed due by the Company will be deemed to involve
the same dispute(s) or difference(s) arising out of this Contract. Communications will be made
by the Company to each of the reinsurers constituting one party. Nothing in this paragraph
will impair the rights of reinsurers to assert several rather than joint defenses or claims,
change their liability under this Contract from several to joint, or impair their rights to
retain separate counsel in connection with the arbitration. |
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H. |
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Unless prohibited by law, the Supreme Court of Bermuda will have exclusive jurisdiction
over any and all court proceedings that either party may initiate in connection with the
arbitration, including proceedings to compel, stay, or enjoin arbitration or to confirm,
vacate, modify, or correct an arbitration award. |
Article XXIX Service of Suit
This Article will not be read to conflict with or override the obligations of the parties to
arbitrate their disputes as provided for in the Arbitration Article. This Article is intended as an
aid to compelling arbitration or enforcing such arbitration or arbitral award, not as an
alternative to the Arbitration Article for resolving disputes arising out of this Contract.
It is agreed that, in the event the Reinsurer fails to pay any amount claimed to be due hereunder,
the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court
Page 17
of competent jurisdiction within Bermuda and will comply with all requirements of this
jurisdiction; and all matters arising hereunder shall be determined in accordance with the law and
practice of Bermuda. Nothing in this Article constitutes or should be understood to constitute a
waiver of the Reinsurers rights to commence an action in any court of competent jurisdiction in
Bermuda.
Article XXX Agency Agreement
If more than one reinsured company is named as a party to this Contract, the first named
company shall be deemed the agent of the other reinsured companies for purposes of sending or
receiving notices required by the terms and conditions of this Contract, and for purposes of
remitting or receiving any monies due any party.
Article XXXI Governing Law (BRMA 71B)
This Contract shall be governed by and construed in accordance with the laws of the State of
New York.
Article XXXII Severability
If any provision of this Contract shall be rendered illegal or unenforceable by the laws,
regulations or public policy of any applicable jurisdiction, such provision shall be considered
void in such jurisdiction, but this shall not affect the validity or enforceability of any other
provision of this Contract or the enforceability of such provision in any other jurisdiction.
Article XXXIII Other Terms and Conditions
A. |
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Assignment |
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This Contract shall be binding upon and inure to the benefit of the Company and the Reinsurer
and their respective successors and assigns provided, however, this Contract may not be
assigned by either party without the prior written consent of the other, which consent may be
withheld by either party at its sole discretion. This paragraph shall not be construed to
preclude the appointment by the Company of an agent to manage and collect reinsurance
recoverable on behalf of the Company. |
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B. |
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Entire Agreement |
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This Contract shall constitute the entire agreement between the parties with respect to
the Business Covered hereunder. There are no understandings between the parties other than as
expressed in this Contract. Any change or modification of this Contract shall be null and void
unless signed by both the Company and the Reinsurer as an amendment to this Contract or as
otherwise clearly and unambiguously agreed to by all affected parties by an exchange of
documentation. |
Page 18
C. |
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Headings |
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The headings preceding the text of the articles and paragraphs of this Contract shall not
affect the meaning, interpretation, construction or effect of this Contract. |
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D. |
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Waiver |
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The failure of the Company or the Reinsurer to insist on strict compliance with this Contract
or to exercise any right or remedy shall not constitute a waiver of any rights contained in
this Contract nor stop the parties from thereafter demanding full and complete compliance nor
prevent the parties form exercising any remedy. |
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E. |
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Notices |
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For purposes of sending and receiving notices and payments required by this Contract other than
in respect of the Service of Suit Article and the Security Article herein, the reinsured
company that is set forth first in the Company is deemed the agent of all other reinsured
companies referenced herein. In no event, however, shall any reinsured company be deemed the
agent of another with respect to the terms of the Insolvency Article. |
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F. |
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Special Conditions |
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It is hereby deemed that the Company will not write policies subject to this Contract with
minimum premium rates per million dollars of limit less than those stated in the Companys
current underwriting guidelines. |
Article XXXIV Intermediary (BRMA 23A)
Benfield Inc. is hereby recognized as the Intermediary negotiating this Contract for all
business hereunder. All communications (including but not limited to notices, statements, premium,
return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements)
relating thereto shall be transmitted to the Company or the Reinsurer through Benfield Inc.
Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer.
Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company
only to the extent that such payments are actually received by the Company.
Signed for an on behalf of the Company in the Signing Pages attached hereto.
Page 19
Signing Page
to the
Healthcare Liability Quota Share
Reinsurance Contract
Effective: January 1, 2007
issued to
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) inc.
Wilmington, Delaware
Newmarket Underwriters Insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
In Witness Whereof, the Company by its duly authorized representatives has executed this Contract
as of the dates undermentioned at:
Hamilton,
Bermuda, this 13th day of April in the year 2007.
/s/ Frank N. DOrazio
Allied World Assurance
Company, Ltd
Page 20
Signing Page
to the
Healthcare Liability Quota Share
Reinsurance Contract
Effective: January 1, 2007
issued to
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) Inc.
Wilmington, Delaware
Newmarket Underwriters insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
In Witness Whereof, the Company by its duly authorized representatives has executed this Contract
as of the dates undermentioned at:
NY, NY, this 13 day of April in the year 2007.
/s/
Susan Morgan
Allied World Assurance
Company (U.S.) Inc.
Newmarket Underwriters Insurance Company
Page 21
Signing Page
to the
Healthcare Liability Quota Share
Reinsurance Contract
Effective: January 1, 2007
issued to
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) Inc.
Wilmington, Delaware
Newmarket Underwriters Insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
In Witness Whereof, the Company by its duly authorized representatives has executed this
Contract as of the dates undermentioned at:
, , this 16 day of April in the year 2007.
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/s/ John Redmond
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Allied World Assurance Company (Europe) Limited |
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Allied World Assurance Company (Reinsurance) Limited |
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Signing Page
to the
Interests and Liabilities Agreement
of
Transatlantic Reinsurance Company
New York, New York
with respect to the
Healthcare Liability Quota Share
Reinsurance Contract
Effective: January 1, 2007
issued to and duly executed by
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) Inc.
Wilmington, Delaware
Newmarket Underwriters Insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
In Witness Whereof, the Company by its duly authorized representative has executed this Agreement
as of the date undermentioned at:
Hamilton, BERMUDA, this 13th day of April in the year 2007.
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/s/ Frank N. DOrazio
Allied World Assurance Company, Ltd
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Signing Page
to the
Interests and Liabilities Agreement
of
Transatlantic Reinsurance Company
New York, New York
with respect to the
Healthcare Liability Quota Share
Reinsurance Contract
Effective:
January 1, 2007
issued to and duly executed by
Allied World Assurance Company, Ltd
Hamilton, Bermuda
Allied World Assurance Company (U.S.) Inc.
Wilmington, Delaware
Newmarket Underwriters Insurance Company
Concord, New Hampshire
Allied World Assurance Company (Europe) Limited
Dublin, Ireland
Allied World Assurance Company (Reinsurance) Limited
Dublin, Ireland
and any or all of the affiliated or subsidiary insurance companies
that are or may hereafter come under
common control, ownership and/or management
In Witness Whereof, the Company by its duly authorized representative has executed this Agreement
as of the date undermentioned at:
Hamilton,
BERMUDA, this
13th day of April in the year 2007.
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/s/ Frank N. DOrazio
Allied World Assurance Company, Ltd
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