EXHIBIT 10(GG)
STOP LOSS REINSURANCE AGREEMENT
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(HEREINAFTER REFERRED TO AS THE "AGREEMENT")
BETWEEN
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
MILBANK INSURANCE COMPANY
FARMERS CASUALTY INSURANCE COMPANY
AND
STATE AUTO INSURANCE COMPANY
(HEREINAFTER COLLECTIVELY REFERRED TO AS THE "COMPANY")
AND
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
(HEREINAFTER COLLECTIVELY REFERRED TO AS THE "REINSURER")
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ARTICLE I
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BUSINESS COVERED:
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The Reinsurer shall indemnify the Company for the amounts incurred
by the Company as set forth in the Reinsuring Clause under any and
all policies, contracts, binders and other evidence of insurance and
reinsurance, oral or written (hereinafter referred to as "Policies")
that are in force as of the inception date hereof or issued or
renewed thereafter by the Company. However, the reinsurance provided
herein shall apply only to the net business written by the Company
which is reinsured through the Reinsurance Pooling Agreement amended
and restated as of January 1, 2000, and as may be amended from time
to time (the "State Auto Pooling Agreement"), among the foregoing
insurers and State Automobile Mutual Insurance Company ("State Auto
Mutual" or the Reinsurer) and Midwest Security Insurance Company
("Midwest Security"). The business written by State Auto Mutual,
Midwest Security and the Company that is reinsured under the State
Auto Pooling Agreement is sometimes hereafter referred to as the
"State Auto Pooled Business".
ARTICLE II
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EXCLUSIONS:
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This Agreement shall not reinsure the Company's liability from any
of the following:
1. Insolvency Fund Exclusion Clause (see Exhibit A attached and
incorporated).
2. War Risk Exclusion Clause (see Exhibit B attached and
incorporated).
3. Nuclear Incident Exclusion Clauses - Physical Damage -
Reinsurance - U.S.A. and Canada (see Exhibits C and D attached
and incorporated).
ARTICLE III
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TERM:
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The term of this Agreement commences at 12:01 a.m. Eastern Time,
October 1, 2001 and shall expire at 12:01 a.m. Eastern Time,
January 1, 2004.
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ARTICLE IV
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REINSURING CLAUSE:
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In the event the Incurred Loss Ratio (as defined below) of the State
Auto Pooled Business in the calendar quarter during the term of this
Agreement for which the computation is being made exceeds 70.75%,
after the application of the State Auto Pooling Agreement and any
other applicable reinsurance, that amount in excess of 70.75%
multiplied by Earned Premium shall be deemed a Net Underwriting Loss
for the State Auto Pooled Business, for such calendar quarter. In
the event of a Net Underwriting Loss for the State Auto Pooled
Business, then the Reinsurer shall be obligated to pay to the
Company an amount equal to 27% of the Net Underwriting Loss.
Notwithstanding the foregoing, the Reinsurer's obligation ceases
when the Incurred Loss Ratio of the State Auto Pooled Business,
after the application of the State Auto Pooling Agreement and any
other applicable reinsurance, exceeds 80% for the calendar quarter
for which the computation is being made and in such case, the
Reinsurer's payment obligation shall be limited to 27% of the Net
Underwriting Loss which would have resulted if the Incurred Loss
Ratio of the State Auto Pooled Business for such calendar quarter
had been 80%.
It is understood and agreed that the Incurred Loss Ratio means the
figure resulting from the following calculation: paid losses plus
paid loss adjustment expense of every kind and nature, plus
(outstanding losses at the end of the calendar quarter minus
outstanding losses at the beginning of the calendar quarter) divided
by Earned Premium during that calendar quarter. It is further
understood and agreed that outstanding losses, as used above, means
all case and IBNR Bulk Reserves relating to the State Auto Pooled
Business. It is understood and agreed that Earned Premium means
written premium plus (unearned premium at the beginning of the
calendar quarter minus unearned premium at the end of the quarter).
ARTICLE V
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CLAW BACK PROVISION:
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In the event the Incurred Loss Ratio for the State Auto Pooled
Business in the calendar quarter during the term of this Agreement
for which the computation is being made is less than 69.25%, after
the application of the State Auto Pooling Agreement and any other
applicable reinsurance, that amount less than 69.25% multiplied by
Earned Premium shall be deemed a Net Underwriting Gain for such
calendar quarter. In the event of a Net Underwriting Gain, the
Company shall be obligated to pay to the Reinsurer an amount equal
to 27% of the Net Underwriting Gain. Notwithstanding the foregoing,
the Company's obligation to pay the Reinsurer
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ceases when the Incurred Loss Ratio of the State Auto Pooled
Business, after the application of the State Auto Pooling Agreement
and any other applicable reinsurance, is less than 60% for the
calendar quarter for which the computation is being made and in such
case the Company's payment obligation shall be limited to 27% of the
Net Underwriting Gain which would have resulted if the Incurred Loss
Ratio for the State Auto Pooled Business for such calendar quarter
had been 60%.
ARTICLE VI
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NET RETAINED LINES:
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This Agreement applies to only that portion of any Policy which the
Company retains net for its own account and in calculating the
amount of any loss hereunder. In computing the amount or amounts in
excess of which this Agreement attaches, only loss or losses in
respect of that portion of any Policy which the Company retains net
for its own account shall be included.
The amount of the Reinsurer's liability hereunder in respect of any
loss shall not be increased by reason of the inability of the
Company to collect from any other reinsurer, whether specific or
general, any amounts which may have become due whether such
inability arises from the insolvency of such other reinsurer or
otherwise.
ARTICLE VII
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REPORTS AND REMITTANCES
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Company shall provide the Reinsurer with all necessary data
respecting premiums and losses, including reserves thereon, on forms
mutually acceptable to the Company and the Reinsurer.
Within 30 days following the end of each calendar quarter, the
Company shall provide the Reinsurer with detailed report showing the
amount of each of the following, for the calendar quarter.
1. Incurred Loss Ratio for the State Auto Pooled Business, after the
application of the State Auto Pooling Agreement and any other
applicable reinsurance.
2. Calculation of the Net Underwriting Loss or the Net Underwriting
Gain, as the case may be.
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3. Computation of amounts due to or from the Reinsurer as per
Article IV and Article V of this Agreement.
The debtor party shall pay amounts due from the account within 15
days after receipt of the account. State Auto Property and Casualty
Insurance Company shall apportion among the Company in accordance
with each such company's Respective Percentage (as defined in the
State Auto Pooling Agreement) the amounts paid to the Company by the
Reinsurer or paid by the Company to the Reinsurer.
ARTICLE VIII
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OFFSET:
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The Company and the Reinsurer, each at its option, may offset any
balance or balances, whether on account of premiums, claims and
losses, loss expenses or salvages due from one party to the other
under this Agreement; provided, however, that in the event of the
insolvency of a party hereto, offsets shall only be allowed in
accordance with applicable statutes and regulations.
ARTICLE IX
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ACCESS TO RECORDS:
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The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect
through its designated representatives, during the term of this
Agreement and thereafter, all books, records and papers of the
Company in connection with any reinsurance hereunder, or the subject
matter hereof.
ARTICLE X
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ERRORS ANDS OMISSIONS:
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Any inadvertent delay, omission or error shall not be held to
relieve either party hereto from any liability which would attach to
either party if such delay, omission or error had not been made,
provided such delay, omission or error is rectified as soon as
practicable after discovery.
ARTICLE XI
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TAXES:
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In consideration of the terms under which this Agreement is issued,
the Company undertakes not to claim any deduction of the premium
hereon when making Canadian tax returns, or when making tax returns,
other than income or profits tax returns, to any state or territory
of the United States of America or to the District of Columbia.
ARTICLE XII
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INSOLVENCY:
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The reinsurance under this Agreement shall be payable by the
Reinsurer on the basis of the liability of one or more of the
Companies under the Policy or Policies reinsured without diminution
because of the insolvency of one or more of the Companies reinsured
or because the liquidator, receiver, conservator or statutory
successor of the Company(ies) has failed to pay all or a portion of
any claim.
In the event of the insolvency of one or more of the Companies
reinsured, the liquidator, receiver, conservator or statutory
successor of the Company(ies) shall give written notice to the
Reinsurer of the pendency of a claim against the insolvent
Company(ies) on the Policy or Policies reinsured within a reasonable
time after such claim is filed in the insolvency proceeding and
during the pendency of such claim the Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where
such claim is to be adjudicated any defense or defenses which it may
deem available to the Company(ies) or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurer shall be chargeable subject to court approval against the
insolvent Company(ies) as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to
the Company(ies) solely as a result of the defense undertaken by the
Reinsurer.
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 this
Agreement as though such expense had been incurred by the
Company(ies).
In the event of the insolvency of one or more of the Companies
reinsured, the reinsurance under this Agreement shall be payable by
the Reinsurer directly to the Company(ies) or to the liquidator,
receiver, conservator or statutory successor, except as provided by
subsection (A) of section 4118 of the Insurance Law of New York or
except where (I) the Agreement specifies another payee of such
Reinsurance in the
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event of the insolvency of the Company(ies) and (II) the Reinsurer,
with the consent of the direct insureds and, with the prior approval
of the Superintendent of Insurance of New York to the certificate of
assumption issued to New York direct insureds, has assumed such
Policy obligations of the Company(ies) as its direct obligations to
the payees under such policies, in substitution for the obligations
of the Company(ies) to such payees.
ARTICLE XIII
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ARBITRATION:
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If any irreconcilable differences shall arise between the parties to
this Agreement, either before or after its termination, with
reference to the interpretation of this Agreement or the rights of
either party with respect to any transactions under this Agreement,
including the formation or validity thereof, the dispute shall be
referred to three (3) arbitrators as a condition precedent to any
right of action arising under this Agreement. The arbitrators shall
be active or retired disinterested officers of insurance or
reinsurance companies or Lloyd's Underwriters other than the parties
or their affiliates. One arbitrator shall be chosen by each party
and the third by the two so chosen. If either party refuses or
neglects to appoint an arbitrator within thirty (30) days after the
receipt of written notice from the other party requesting it to do
so, the requesting party may nominate two (2) arbitrators who shall
choose the third.
In the event the arbitrators do not agree on the selection of the
third arbitrator within thirty (30) days after both arbitrators have
been named, the Company shall petition the American Arbitration
Association to appoint the third arbitrator. If the American
Arbitration Association fails to appoint the third arbitrator within
thirty (30) days after it has been requested to do so, either party
may request a justice of a court of general jurisdiction of the
state in which the arbitration is to be held, to appoint an officer
or retired officer of an insurance or reinsurance company or Lloyd's
Underwriter as the third arbitrator. In the event both parties
request the appointment of the third arbitrator, the third
arbitrator shall be the soonest named in writing by the justice of
the court.
Each party shall submit its case to the arbitrators within thirty
(30) days of the appointment of the arbitrators. The arbitrators
shall consider this Agreement an honorable engagement rather than
merely a legal obligation; they are relieved of all judicial
formalities and may abstain from following the strict rules of law.
The decision of a majority of the arbitrators shall be final and
binding on both the Company and the Reinsurer. Judgment may be
entered upon the award of the arbitrators in any court having
jurisdiction.
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Each party shall bear the fee and expenses of its own arbitrator,
one half of the fee and the expenses of the third arbitrator and one
half of the other expenses of the arbitration. In the event both
arbitrators are chosen by one party, the fees of the arbitrators
shall be equally divided between the parties.
Any such arbitration shall take place in Columbus, Ohio unless some
other location is mutually agreed upon by the parties.
ARTICLE XIV
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GOVERNING LAW:
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This Agreement shall be governed as to performance, administration
and interpretation by the laws of the State of Ohio, exclusive of
the rules with respect to conflicts of law.
ARTICLE XV
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SEVERABILITY
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If any provision of this Agreement should be invalid under
applicable laws, the latter shall control but only to the extent of
the conflict without affecting the remaining provisions of this
Agreement.
ARTICLE XVI
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CONDITIONS PRECEDENT
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This Agreement shall be deemed effective as of October 1, 2001
upon receipt (or deemed receipt) of all necessary regulatory
approvals, the approval of the Special Independent Committee of the
Board of Directors of State Auto Mutual and the approval of the
Special Independent Committee of the Board of Directors of State
Auto Financial Corporation and the effectiveness (including the
receipt or deemed receipt of any required regulatory approvals) of
the Third Amendment to the State Auto Pooling Agreement and
Amendment No. 2 to the Management and Operations Agreement dated
January 1, 2000. Unless and until all such regulatory approvals are
received or deemed received, this Agreement shall not bind the
parties hereto. If such Amendment No. 2 or the Third Amendment does
not become concurrently effective
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as of October 1, 2001 at 12:00 am, Columbus, Ohio time, then this
Agreement shall be deemed null and void.
In Witness Whereof, by their signatures hereon, the parties hereto
do hereby confirm their agreement to the foregoing.
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxx
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Xxxxxx X. Xxxxx, President
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxx
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Xxxxxx X. Xxxxx, President
STATE AUTO INSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxx
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Xxxxxx X. Xxxxx, President
MILBANK INSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxx
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Xxxxxx X. Xxxxx, President
FARMERS CASUALTY INSURANCE COMPANY
By /s/ Xxxxxx X. Xxxxx
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Xxxxxx X. Xxxxx, Chairman
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