October 4, 1996
Swiss Reinsurance America Corporation
237 Park Avenue
New York, NY 10017
Re: Certain Reinsurance Arrangements
Gentlemen:
As of the date of this Agreement, Swiss Reinsurance America Corporation
("Swiss Re") is purchasing $5,000,000 of Series A Cumulative Voting Preferred
Stock and Class A Warrants of Home State Holdings, Inc. (the "Company")
pursuant to that certain Securities Purchase Agreement of even date herewith
(the "Purchase Agreement") by and among Swiss Re, Reliance Insurance Company and
the Company. In connection with such purchase, the parties desire to enter into
and deliver this Agreement.
Each of the Company and Swiss Re, intending to be legally bound, hereby
agrees as follows (capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Purchase Agreement):
1. Undertaking to Renew Reinsurance Agreements. Appended hereto as
Exhibit A are copies of the Reinsurance Binders (collectively, the
"Reinsurance Binder") being entered into on the date hereof by Swiss Re,
the Company and the various Insurance Subsidiaries named therein reflecting
Swiss Re's agreement to reinsure certain classes of property and casualty
insurance business underwritten by various of the Insurance Subsidiaries,
such reinsurance representing not less than 50% of the Company's aggregate
ceded property and casualty excess of loss reinsurance programs. The
Company acknowledges and agrees that, pursuant to the Reinsurance Binder,
Swiss Re is and shall be the lead reinsurer (having set the terms and
conditions, and written the language, of the reinsurance treaties evidenced
by the Reinsurance Binder) on the Company's property and casualty excess of
loss reinsurance programs, and at no time that Swiss Re holds any of the
Preferred Stock or the Warrants shall the Company (subject to agreement of
the renewal terms of the reinsurance coverage as hereinbelow contemplated)
negotiate or seek to negotiate with any other reinsurer to provide
reinsurance coverage in an amount (or, if greater, a percentage) in excess
of that being provided by Swiss Re with respect to the Company's ceded
property and casualty excess of loss reinsurance programs as more fully
described in the Reinsurance Binder.
Effective for the calendar year commencing January 1, 1998 and for
each year subsequent thereto (each a "Coverage Year"), for so long as Swiss
Re owns any of the Preferred Stock or the Warrants: (i) the Company will
cause the Insurance Subsidiaries to, and the Insurance Subsidiaries will,
annually renew those reinsurance agreements entered into pursuant to the
Reinsurance Binder hereinbefore referenced, with the renewal terms of such
reinsurance agreements (A) computed on the same or similar basis as those
underlying the 1997 reinsurance agreements, varying with loss ratio,
expenses and otherwise constituting for and reasonable terms (provided,
however, in assessing whether the renewal terms are "reasonable", multiple
factors, including without limitation the credit rating of Swiss Re and
Swiss Re's claims paying ability as historically demonstrated, shall be
taken into account) and (B) allowing for adjustments in limits and
retention levels and otherwise to take into consideration business and
financial developments or plans of the Company and changing market
conditions, and (ii) Swiss Re shall retain, in each and every Coverage Year
subsequent to 1997, its position (subject to renewal of the reinsurance
agreements as herein contemplated) as the reinsurer which sets the terms
and conditions, and writes the language, of the reinsurance treaties with
respect to the Company's ceded property and casualty excess of loss
reinsurance programs as described in the Reinsurance Binder. In furtherance
of the foregoing, each of Swiss Re, the Company and each of the Insurance
Subsidiaries agrees to negotiate in good faith, from year to year, terms of
renewal of the reinsurance agreements entered into pursuant to the
Reinsurance Binder.
2. Redemption of Preferred Stock: Appointment of Actuary.
Notwithstanding the foregoing, in the event the Insurance Subsidiaries are
unable, or fail, to agree with Swiss Re by November 15, 1997 and by
November 15 of each calendar year thereafter on the terms and conditions of
renewal of the reinsurance agreements applicable to the next succeeding
Coverage Year, Swiss Re, at its option, shall have the right to:
(a) require the Company to redeem all of the shares of the
Preferred Stock held by Swiss Re at a redemption price per share equal
to 102.5% of the Preferred Liquidation Value (as defined in the
Certificate of Designations of the Company filed with the Secretary of
State of Delaware on the date hereof), plus accrued and unpaid
dividends thereon, if any, whether or not earned or declared, and
otherwise exercise the rights available to a holder of the Preferred
Stock upon the occurrence of a Redemption Event (as defined in the
Certificate of Designations), or
(b) refer the matter to a nationally recognized actuarial firm
mutually acceptable to Swiss Re, the Company and the Insurance
Subsidiaries (the "Actuary"), which Actuary shall determine, prior to
January 1 of the applicable
forthcoming Coverage Year, the terms and conditions for Swiss Re's
reinsurance coverage of the Insurance Subsidiaries' insured risks for
that forthcoming Coverage Year, based on information and proposals
submitted to the Actuary by the Insurance Subsidiaries and by Swiss
Re.
(i) In the event Swiss Re, the Company and the Insurance
Subsidiaries are unable to agree by the November 20 prior to the next
succeeding Coverage Year on the identity of the Actuary, the Actuary
shall be Allan M. Kaufman of Milliman & Robertson or, if Mr. Kaufman
shall at such time not be a partner of Milliman & Robertson, then such
other partner as may be designated by the managing partner of Milliman
& Robertson's New York office.
(ii) In making the determination of terms and conditions for
Swiss Re's reinsurance renewal coverage for the Insurance Subsidiaries
(the "Actuarial Determination"), the Actuary shall apply a computation
utilizing the same, or as substantially similar to the same as
possible, basis underlying the 1997 reinsurance agreements, such basis
varying with loss ratio, expenses and otherwise containing fair and
reasonable terms for the reinsurance proposed for cession to Swiss Re
by the Insurance Subsidiaries, based upon proposals of the Insurance
Subsidiaries and Swiss Re. The costs for the Actuarial Determination
shall be paid equally by the Company and the Insurance Subsidiaries on
the one hand and by Swiss Re on the other hand.
(iii) In the event Swiss Re, in its sole discretion, is not
satisfied with the terms and conditions proposed by the Actuary as set
forth in the Actuarial Determination, Swiss Re shall have the right to
reject the selected terms and conditions for Swiss Re's reinsurance
coverage for the Insurance Subsidiaries for that forthcoming Coverage
Year, and not assume the reinsurance coverage for the Insurance
Subsidiaries that would have been ceded by the Insurance Subsidiaries
pursuant to the selected terms and conditions for that reinsurance
coverage provided by the Acturial Determination. Under such
circumstances, Swiss Re also may elect to (but need not) exercise its
option to require the Company to redeem all of the shares of the
Preferred Stock held by Swiss Re as set forth in this Section 2.
(iv) If Swiss Re elects to accept the terms and conditions for
Swiss Re's reinsurance coverage for the Insurance Subsidiaries for the
forthcoming Coverage Year as proposed by the Actuary in the Actuarial
Determination, the Actuarial Determination of the Actuary shall be
final and binding on both the Insurance Subsidiaries on the one hand
and Swiss Re on the other hand.
3. Assignment. This Agreement shall be binding upon and inure to the
benefit of Swiss Re, the Company and the Insurance Subsidiaries and their
respective successors and assigns; provided, however, Swiss Re may assign
this Agreement to any affiliate of Swiss Re.
4. Entire Agreement. This Agreement supersedes any and all prior
agreements, whether written or oral, among Swiss Re, the Company and the
Insurance Subsidiaries with respect to the subject matter hereof, and this
Agreement, along with the Purchase Agreement and all exhibits, schedules
and agreements contemplated therein, constitute the full and complete
agreement among the parties with respect thereto. No amendment to this
Agreement shall be effective unless set forth in a writing executed by all
parties to this Agreement.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York, without
regard to the conflicts of laws provisions thereof.
6. No Waiver. The failure of Swiss Re, the Company or the Insurance
Subsidiaries to insist on strict compliance with the provisions of this
Agreement or to exercise any right or remedy shall not constitute a waiver
of any rights contained herein nor estop the parties from demanding full
and complete compliance herewith nor prevent the parties from exercising a
remedy in the future.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one instrument.
To acknowledge your agreement to the foregoing, please execute this
Agreement in the space provided below, whereupon it shall constitute a binding
agreement among the parties hereto.
Very truly yours,
HOME STATE HOLDINGS, INC.
(a Delaware corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Acting President
HOME STATE INSURANCE COMPANY
(A New Jersey corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
NEW YORK MERCHANT BAKERS
INSURANCE COMPANY
(A New York corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
PINNACLE INSURANCE COMPANY
(A Georgia corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
QUAKER CITY INSURANCE COMPANY
(A Pennsylvania corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
WESTBROOK INSURANCE COMPANY
(A Connecticut corporation)
BY: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
ACCEPTED AND AGREED TO:
SWISS REINSURANCE AMERICA
CORPORATION
BY: /s/ Thomas L. Forsyth
-----------------------------
Name: Thomas L. Forsyth
Title: Senior Vice President and
General Counsel