Document:

Exhibit 10.17

 

Interests and Liabilities Agreement

(hereinafter referred to as the “Agreement”)

 

to the

 

Quota Share Reinsurance Contract

(hereinafter referred to as the “Contract”)

 

It is hereby mutually agreed by

 

Coast National Insurance Company (“Coast
National”)

Anaheim, California

 

Security National Insurance Company
(“Security National”)

Davie, Florida

 

Bristol West Insurance Company (“Bristol”)

Philadelphia, Pennsylvania

and

Bristol West Casualty Insurance Company
(“Bristol”)

Independence, Ohio

(hereinafter together referred to as the
“Subscribing Company”)

 

and

 

National Union Fire Insurance Company of
Pittsburgh, Pa.

Harrisburg, Pennsylvania

(hereinafter referred to as the “Subscribing
Reinsurer”)

 

Under the terms of the Agreement attached hereto, the Subscribing
Reinsurer shall have a 100% participation in the interest and liabilities of
the Reinsurer described in the attached Agreement; provided, however, that the
Subscribing Company shall have the option to elect to reduce such participation
percentage to not less than 80% by giving prior written notice to the
Subscribing Reinsurer on or before September 30, 2004.  Any such election shall be irrevocable.

 

Such participants shall be several and not joint with the participation
of other subscribing reinsurers, and under no circumstances shall the
Subscribing Reinsurer participate in the interests and liabilities, if any, of
the other subscribing reinsurers in said Agreement.

 

This Agreement shall commence at 12:01 a.m. Eastern Standard Time,
January 1, 2005.  It shall remain
in effect until 11:59 p.m. December 31, 2006, unless terminated in
accordance with the provisions of the attached Agreement.

 

 

In Witness Whereof,
the parties hereto have caused this Interests and Liabilities Agreement to be
signed in duplicate by their duly authorized representatives.

 

In Independence, Ohio, this 12 day of August in the
year 2004.

 

 

	
  /s/ Alexis Oster, Corporate Counsel

  	
   

  
	
   

  	
  Coast National Insurance Company

  of Anaheim, California

  
			

 

 

In Independence, Ohio, this 12 day of August in the
year 2004.

 

 

	
  /s/ Alexis Oster, Corporate Counsel

  	
   

  
	
   

  	
  Security National Insurance Company

  of Davie, Florida

  
			

 

 

In Independence, Ohio, this 12 day of August in the
year 2004.

 

 

	
  /s/ Alexis Oster, Corporate Counsel

  	
   

  
	
   

  	
  Bristol West Insurance Company

  of Philadelphia, Pennsylvania

  
			

 

 

In Independence, Ohio, this 12 day of August in the
year 2004.

 

 

	
  /s/ Alexis Oster, Corporate Counsel

  	
   

  
	
   

  	
  Bristol West Casualty Insurance Company

  of Independence, Ohio

  
			

 

 

In New York, New York, this 11 day of August in the
year 2004.

 

 

	
  /s/ Robert J. Coords, Attorney-in Fact

  	
   

  
	
   

  	
  National Union Fire Insurance Company of

  Pittsburgh, Pa.

  of Harrisburg, Pennsylvania

  
			

 

 

COAST NATIONAL INSURANCE COMPANY

SECURITY NATIONAL INSURANCE COMPANY

BRISTOL WEST INSURANCE COMPANY

BRISTOL WEST CASUALTY INSURANCE COMPANY

 

QUOTA SHARE REINSURANCE
AGREEMENT

 

Effective: January 1, 2005

 

TABLE OF CONTENTS

 

	
  ARTICLE

  	
   

  	
  SUBJECT

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I

  	
   

  	
   

  	
  Business
  Covered

  	
   

  	
  1

  
	
  II

  	
   

  	
   

  	
  Term
  and Termination

  	
   

  	
  1

  
	
  III

  	
   

  	
   

  	
  Quota
  Share Participation

  	
   

  	
  1

  
	
  IV

  	
   

  	
   

  	
  Territory

  	
   

  	
  1

  
	
  V

  	
   

  	
   

  	
  Premium

  	
   

  	
  2

  
	
  VI

  	
   

  	
   

  	
  Limit
  of Liability

  	
   

  	
  2

  
	
  VII

  	
   

  	
   

  	
  Ceding
  Commission

  	
   

  	
  2

  
	
  VIII

  	
   

  	
   

  	
  Fee
  Income

  	
   

  	
  3

  
	
  IX

  	
   

  	
   

  	
  Commutation

  	
   

  	
  3

  
	
  X

  	
   

  	
   

  	
  Experience
  Account Balance

  	
   

  	
  3

  
	
  XI

  	
   

  	
   

  	
  Reports
  and Remittances

  	
   

  	
  3

  
	
  XII

  	
   

  	
   

  	
  Offset

  	
   

  	
  4

  
	
  XIII

  	
   

  	
   

  	
  Agency/Combined
  Results

  	
   

  	
  4

  
	
  XIV

  	
   

  	
   

  	
  Maximum
  Subject Net Premium

  	
   

  	
  4

  
	
  XV

  	
   

  	
   

  	
  Cancellation
  for Non-Payment

  	
   

  	
  5

  
	
  XVI

  	
   

  	
   

  	
  Cancellation
  for Change in Control

  	
   

  	
  5

  
	
  XVII

  	
   

  	
   

  	
  Special
  Termination

  	
   

  	
  6

  
	
  XVIII

  	
   

  	
   

  	
  Exclusions

  	
   

  	
  6

  
	
  XIX

  	
   

  	
   

  	
  Definitions

  	
   

  	
  7

  
	
  XX

  	
   

  	
   

  	
  Loss
  Settlements

  	
   

  	
  7

  
	
  XXI

  	
   

  	
   

  	
  Net
  Retained Lines Clause

  	
   

  	
  8

  
	
  XXII

  	
   

  	
   

  	
  No
  Third Party Rights

  	
   

  	
  8

  
	
  XXIII

  	
   

  	
   

  	
  Errors
  or Omissions

  	
   

  	
  8

  
	
  XXIV

  	
   

  	
   

  	
  Insolvency
  Clause

  	
   

  	
  8

  
	
  XXV

  	
   

  	
   

  	
  ECO
  and Excess Limits Liability

  	
   

  	
  9

  
	
  XXVI

  	
   

  	
   

  	
  Access
  to Records

  	
   

  	
  9

  
	
  XXVII

  	
   

  	
   

  	
  Arbitration

  	
   

  	
  9

  
	
  XXVIII

  	
   

  	
   

  	
  Governing
  Law

  	
   

  	
  10

  
	
  XXIX

  	
   

  	
   

  	
  Entire
  Agreement/Interpretation

  	
   

  	
  10

  

 

 

QUOTA SHARE REINSURANCE AGREEMENT

 

between

 

COAST NATIONAL INSURANCE COMPANY (“Coast
National”), a California domestic company, 

SECURITY NATIONAL INSURANCE COMPANY (“Security National”), a Florida domestic
company,

BRISTOL WEST INSURANCE COMPANY (“Bristol”), a Pennsylvania domestic company,

BRISTOL WEST CASUALTY INSURANCE COMPANY (“Bristol”) an Ohio domestic company,

(hereinafter called the “Company”)

 

and

 

THE PARTICIPANTS SUBSCRIBING TO THE
RESPECTIVE

INTERESTS AND LIABILITIES AGREEMENTS TO WHICH THIS AGREEMENT

IS ATTACHED

(hereinafter called the “Reinsurer”)

 

ARTICLE I

 

BUSINESS COVERED

 

The Reinsurer hereby reinsures, subject to the limits and terms and
conditions contained herein;

 

A Quota Share
Percentage of the Company’s paid Ultimate Net Loss (“UNL”) of Loss Occurrences
on Policies attaching during the Term of this Agreement for Non-standard Auto
business (“Policies”).  

 

ARTICLE II

 

TERM AND TERMINATION

 

This Agreement
shall commence at 12:01 a.m. Eastern Standard Time, January 1, 2005.  It shall remain in effect until 11:59 p.m.
December 31, 2006.

 

ARTICLE III

 

QUOTA SHARE PARTICIPATION

 

The Company has the option to cede from 5% to 30% for Policies
attaching during Underwriting Years 2005 and 2006.  The Company shall notify the Reinsurer of the actual percentage,
in writing, no later then 30 Business Days before January 1, 2005, with
respect to Underwriting Year 2005 and January 1, 2006, with respect to
Underwriting Year 2006.  In the event
the Company fails to notify the Reinsurer, as provided herein, the Quota Share
Percentage shall be 15%.

 

ARTICLE IV

 

TERRITORY

 

This Agreement covers policies on risks located in the states of the
United States in which the Company was writing business as of the effective
date of this Agreement.  This Agreement
will cover risks located in  future new
states entered into by the Company, as listed on the attached schedule for
2005 and 2006.  The Company shall notify
the Reinsurer and secure written consent from the Reinsurer of any changes to
the attached schedule.  Such consent
shall not be unreasonably withheld.

 

1

 

ARTICLE V

 

PREMIUM

 

The Company shall
pay the Reinsurer its Quota Share Percentage of the Company’s Subject Net
Premium written for the Business Covered hereinafter referred to as the “Ceded
Premium.” Throughout this Agreement, the currency to be used is U.S. dollars.

 

ARTICLE VI

 

LIMIT OF LIABILITY

 

The maximum amount
recoverable for any one Underwriting Year shall be 150% of the Ceded Premium
for that Underwriting Year subject to the third paragraph of this Article.

 

The maximum amount
recoverable for a Catastrophic Loss Occurrence shall be the Quota Share
Percentage applicable of the product of .5% times the Subject Net Premium
written for the Underwriting Year in which the loss occurred.  The maximum amount recoverable for the
aggregate of Catastrophic Loss Occurrences shall be the Quota Share Percentage
applicable of the product of .4% times the Subject Net Premium written for the
term of this Agreement.  For the
avoidance of doubt, Terrorist Event shall be deemed a Catastrophic Loss
Occurrence.

 

Subject to the
foregoing, the Reinsurer’s  liability
shall be limited to  107% of the
aggregate Ceded Premium for the term of this Agreement.

 

ARTICLE VII

 

CEDING COMMISSION

 

The Company shall
receive a commission equal to 38% of Ceded Premium.  This ceding commission is intended to cover  all acquisition costs, taxes and all other
expenses of the Company,  except loss
and loss adjustment expense.  If
the  Loss Ratio as of the end of any
calendar quarter ending on or after December 31, 2005 is greater than 72%,
the Ceding Commission shall decrease by 1% for each 1% increase in the Loss
Ratio over the 72% threshold; provided that the Ceding Commission shall not
decrease below  23% pursuant to this
paragraph.  If the  Loss Ratio as of the end of any calendar
quarter ending on or after the commutation of this Agreement in accordance with
Article IX is less than 72%, the Ceding Commission shall increase by 1%
for each 1% decrease in the Loss Ratio under the 72% threshold.  In the event the Ceding Commission decreases
pursuant to this Article, the Company shall return to the Reinsurer the excess
portion of Ceding Commission previously paid by the Reinsurer on the date of
delivery of the next Loss Report.  In
the event the Ceding Commission rate increases pursuant to this Article, the
Reinsurer shall pay to the Company the additional Ceding Commission on the date
of Commutation.

 

Effective on the
commencement of any calendar quarter, by giving 30 Business Days prior written
notice, the Company has the option to increase or decrease the percent of
Ceding Commission.  In such event the
Fee Income percentage is increased or decreased by the same amount.

 

On or after
December 31, 2007, if the Experience Account Balance is less than
$10,000,000, the Ceding Commission shall immediately be reduced to the minimum
ceding commission of  23%, unless there
has been a Commutation in accordance with Article IX.

 

2

 

ARTICLE VIII

 

FEE INCOME

 

On the date that
the Ceded Premium is paid hereunder the Company shall pay the Reinsurer an
amount equal to 13% of Ceded Premium, or the percent applicable of Ceded
Premium if changed in accordance with the Ceding Commission Article.  For the avoidance of doubt this Fee Income
is not a part of Ceded Premium.

 

ARTICLE IX

 

COMMUTATION

 

The Company may,
at its sole option, commute this Agreement on or after December 31, 2006,
or on the first or last business day of any month thereafter, by giving the
Reinsurer 30 Business Days prior written notice.  In such event, within 45 Business Days of Commutation the
Reinsurer shall pay the Company a Profit Commission equal to the Experience
Account Balance as of the end of the prior month, if positive.  Such payment shall be made within 45
Business Days of the commutation date. 
Upon payment of the Profit Commission the Company shall fully and
finally release the Reinsurer from all past, present or future liabilities
under this Agreement.  

 

ARTICLE X

 

EXPERIENCE ACCOUNT
BALANCE

 

At the end of each
calendar quarter, the Reinsurer shall calculate and report to the Company an
Experience Account Balance as follows:

 

(a) Ceded Earned Premium paid; plus

(b) Fee Income paid; less

(c )Ceding Commission; less

(d) Reinsurer’s Margin; less

(e) Ultimate Net Loss paid by the Reinsurer hereunder.

 

ARTICLE XI

 

REPORTS AND
REMITTANCES

 

Within 30 Business
Days following the end of each calendar month, the Company shall provide a
written report (the “Loss Report”) to the Reinsurer, which shall include the
following data, in the aggregate as well as by each Relevant Company named:

 

1.  Subject Net Premium written
and earned for the month.

2.  Cumulative Subject Net
Premium written and earned.

3.  Ceded Net Premium written
and earned for the month.

4.  Cumulative Ceded Net Premium
written and earned.

5.  Ceded Ultimate Net Loss paid
by the Company during the quarter, separating Allocated Loss Adjustment Expense
and Unallocated Loss Adjustment Expense.

 

3

 

6.  Ceded Cumulative Ultimate
Net Loss paid by the Company, separating Allocated Loss Adjustment Expense and
Unallocated Loss Adjustment Expense.

 

7.  Ceded Ultimate Net Loss
outstanding including incurred but not reported amounts, separating Allocated
Loss Adjustment Expense and Unallocated Loss Adjustment Expense.

 

8.  Ceded unearned premium.

 

The Company shall
pay the Ceded Earned Premium, net of Ceding Commission, plus Fee Income,
simultaneous with the sending of the Loss Report.  Except as otherwise provided in Article VII, the Reinsurer
shall pay any net amounts owed hereunder within 30 Business Days of receiving
the Loss Report.

 

In the event of
late payments on any of the foregoing by either party interest shall accrue at
an effective annual yield of 6% for the overdue period (the “Interest”).

 

Within 30 Business
Days following the end of each calendar quarter, the Company shall provide a
written report to the Reinsurer that shall include actuarial data as mutually
agreed.

 

ARTICLE XII

 

OFFSET

 

Each party hereto
shall have, and may exercise at any time and from time to time, the right to
offset any undisputed balance or balances, whether on account of premiums or on
account of losses, due from such party to the other (or, if more than one, any
other) party hereto under this Agreement and may offset the same against any
undisputed balance or balances due to the former from the latter under the
same  reinsurance agreement between
them, and the party asserting the right of offset shall have and may exercise
such right whether any undisputed balance or balances due to such party from
the other are on account of premiums or on account of losses and regardless of
the capacity, whether as assuming insurer or as ceding insurer, in which each
party acted under the agreement. 

 

For the avoidance
of doubt the Reinsurer’s liability shall be reduced by any amounts owed to the
Reinsurer by any Relevant Company.

 

ARTICLE XIII

 

AGENCY/COMBINED
RESULTS

 

It is agreed that
Coast National shall be the agent for the Company authorized to receive any
payments due the Company and/or any communication relating to this
Agreement.  Any payments made to Coast
National by the Reinsurer or communications given to Coast National by the
Reinsurer shall discharge the Reinsurer as to all Relevant Companies in this
Agreement.  All calculations, including
but not limited to, Limit of Liability, Experience Account Balance shall be on
the combined sum of all Relevant Companies that are included as Company. 

 

ARTICLE XIV

 

MAXIMUM SUBJECT
NET PREMIUM

 

It is agreed that
the maximum Subject Net Premium written for the Company for Underwriting Years
2005 and 2006 shall equal $925,000,000 and $1,100,000,000 respectively. 

 

It is agreed that
the maximum Subject Net Premium written in the state of California for
Underwriting Years 2005 and 2006 shall equal $550,000,000 and $650,000,000
respectively.

 

4

 

It is agreed that
the maximum Subject Net Premium written in the state of Florida for
Underwriting Years 2005 and 2006 shall equal $150,000,000 and $200,000,000
respectively.

 

It is agreed that
the maximum Subject Net Premium written in the state of Texas for Underwriting
Years 2005 and 2006 shall equal $50,000,000 and $100,000,000 respectively.

 

If at any time the
Company estimates that the maximum Subject Net Premium, as heretofore itemized,
will be exceeded they may request a revision in writing and the Reinsurer shall
respond to that request in writing, within 30 days, with its approval or
denial.  However, this request cannot be
made for any Underwriting Year prior to the year of the request of change.  Such approval shall not be unreasonably
withheld.

 

In the event the
aforementioned maximum Subject Net Premiums written for any individual
Underwriting Year are exceeded, the Quota Share Percentage applicable shall be
the quotient of (1) the product of (A) the Quota Share Percentage otherwise
applicable times (B) the maximum Subject Net Premium written, divided by (2)
the Subject Net Premium written.

 

ARTICLE XV

 

CANCELLATION FOR
NON-PAYMENT

 

If the Company
fails to pay Ceded Earned Premium when due to the Reinsurer, the Reinsurer
shall promptly notify the Company in writing of the balance due.  If the Company fails to remit payment within
thirty (30) Business Days including interest at a rate of 6% per annum on the
balance, then the Reinsurer shall have the right to cancel the Agreement on a
run-off basis for Policies attaching prior to cancellation and the Limit of
Liability shall be reduced to Ceded Premium paid, plus Fee Income paid, net of
Ceding Commission, less Reinsurer’s Margin, effective on the last day for which
payment was received.  

 

ARTICLE XVI

 

CANCELLATION FOR
CHANGE IN CONTROL

 

In the event of a
Change in Control , the Reinsurer or the Company has the option to cancel
coverage for the Relevant Company at the end of the calendar quarter in which
the Change in Control occurred, or any subsequent quarter, on a cut-off
basis.  For the avoidance of doubt, in
the event of such cancellation, the Reinsurer shall have no further liability
under or related to this Agreement to the Relevant Company after the
cancellation date.  For purposes of this
Agreement, Change of Control means any of the following: (i) the failure at any
time of Bristol West Holdings, Inc. (“Holdings”) to legally and beneficially
own and control 100% of the issued and outstanding shares of capital stock of
each Company or the failure at any time of Holdings to have the ability to
elect all of the boards of directors of each Company; or (ii) any person (other
than Kohlberg Kravis Roberts & Co. and Bristol West Associates LLC), either
individually or acting in concert with one or more other persons, shall have
acquired beneficial ownership, directly or indirectly, of securities of
Holdings (or other securities convertible into such securities) representing 51%
or more of the combined voting power of all securities of Holdings entitled to
vote in the election of members of the board of directors of Holdings.

 

Furthermore, in
the event this option is elected and after the cut-off of business for the
Relevant Company or Relevant Companies, the combined surplus of the remaining
Companies would be less than 50% of the combined surplus of all Relevant
Companies as of December 31, 2004, the Reinsurer or the Companies has the
option to cancel the entire Agreement, at the end of such quarter or any
subsequent quarter, on a cut-off basis. 
For the avoidance of doubt, in the event of such cancellation, the
Reinsurer shall have no further liability under or related to this Agreement to
the Company.  In such event within 45 Business
Days of such cancellation, the Reinsurer shall pay the Company a Profit
Commission equal to the positive Experience Account Balance, as of the end of
the prior month, if any.

 

5

 

ARTICLE XVII

 

SPECIAL
TERMINATION

 

1. This Agreement
shall automatically terminate without the need for any action by any party
hereto in the event that any other party should at any time become insolvent,
or suffer any impairment of contributed capital, or file a petition in
bankruptcy, or enter liquidation, rehabilitation, or voluntary supervision, or
have a receiver appointed.

 

2. The Reinsurer
may terminate this Agreement effective December 31, 2005 if the accident
year 2005 loss ratio for that portion of the business that is covered and ceded
to the Reinsurer under this Agreement, measured as of September 30, 2005,
is greater than 82%.  If the Reinsurer
elects to exercise this option, it will notify the Company on or before December 1,
2005.  In the event the Company does not
agree with such loss ratio calculation, it will notify the Reinsurer within 5
days of receipt of the Notice of Cancellation of its desire to have an
independent actuary, appointed jointly, to determine the loss ratio.  In the event the independent actuary’s
calculation of such loss ratio is less than or equal to 82% the cancellation
notice shall be rescinded.  As used in
this paragraph only, the term “loss ratio” shall be based upon losses paid and
outstanding, and shall include Allocated Loss Adjustment Expenses, Unallocated
Loss Adjustment Expenses and incurred but not reported amounts.

 

3. The Reinsurer
may terminate this Agreement in the event the Company’s combined Policyholders
Surplus, as reported in their annual or quarterly statement in accordance with
statutory accounting policies and procedures, falls below 70% of the Company’s
combined Policyholders Surplus as of December 31, 2004.  However, in the event the Company’s combined
Policyholders Surplus increases to 80% of the Company’s combined Policyholders
Surplus as of December 31, 2004 prior to the effective date of
cancellation, the cancellation notice shall be rescinded.

 

4.  If termination is effective under paragraph
3, 30 Business Days notice shall be given. 
For termination under either paragraph 1, 2 or 3, the Reinsurer has the
option to run-off or cut off the in-force business.  In the event the Reinsurer elects to cut off the in-force
business it shall return the unearned Ceded Premium, net of Ceding Commission,
minus the net unpaid portion of the unearned Ceded Premium and it shall not be
liable for any losses occurring after the effective date of cancellation.

 

ARTICLE XVIII

 

EXCLUSIONS

 

A. Any loss or
liability accruing to the Company directly or indirectly from any insurance
written by or through and Pool or Association including Pools or Associations
in which membership by the Company is required under any statutes or
regulations (other than assigned risk automobile plans). 

 

B.  War Risks as excluded by War Risk Exclusion
Clauses appearing in original policies.

 

C.  Assumed Reinsurance of any kind, except
policies written in Texas on County Mutual paper and reinsured by a Relevant
Company.

 

D.  Business excluded by the attached Nuclear
Incident Exclusion Clauses.

 

E.  All liability of the Company arising, by
contract, operation of law, or otherwise, from its participation or membership,
whether voluntary or involuntary, in any insolvency fund.  “Insolvency fund” includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
howsoever denominated, established or governed, which provides for any
assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors
or assigns,

 

6

 

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. 

 

ARTICLE XIX

 

DEFINITIONS

 

Allocated Loss
Adjustment Expense and Unallocated Loss Adjustment Expense shall be in
accordance with statutory accounting rules, as described in the NAIC Annual
Statement Instruction and other relevant publications.

 

Business Day shall
mean any day other than a
Saturday, Sunday or day on which banking institutions in the City of New York
are authorized by law or other governmental action to close.

 

Catastrophic Loss
Occurrence shall mean a loss from the same occurrence involving more than one risk.

 

Loss Ratio shall
mean the Company’s ceded Ultimate Net Loss plus incurred but not reported
divided by the ceded Subject Net Premium on the Business Covered.  This calculation shall be in the aggregate
from inception and not for each individual Underwriting Year. 

 

Reinsurer’s Margin
shall mean 3% of Ceded Premium.

 

Relevant Company
shall mean an individual company named as part of Company.

 

Subject Net
Premiums shall mean the premium charged the insured, net of return premium, on
the Business Covered.  The Reinsurer
understands that the current operating procedures of the Company results in
less than 1% of Subject Net Premiums being uncollectible.  In the event that the Company’s operating
procedures produce uncollectible premium, the amount of uncollectible premium
shall not exceed 2% of the otherwise Subject Net Premiums.

 

Ultimate Net Loss
shall mean losses paid and outstanding and shall include Allocated Loss
Adjustment Expenses, plus Unallocated Loss Adjustment Expenses subject to a
limit of 10% of Ceded Premium, plus 80% of the Reinsurer’s Quota Share
Percentage of the first $3,000,000 of Extra Contractual Obligations and or
Excess Limits Liability.

 

Underwriting Year
shall mean the 12-month period from January 1 until December 31, both
days inclusive.  For the avoidance of
doubt, all premiums on all Policies attaching during such period and the loss
liability on those Policies shall be included for purposes of any calculation
hereunder related to any Underwriting Year.

 

The definition of
occurrence shall mean a numbered catastrophe by ISO’s Property Claim Services
(PCS) , and also  shall include a
Terrorist Event as defined in the Schedule A attached.

 

ARTICLE XX

 

LOSS SETTLEMENTS

 

The Company alone and at its full discretion shall adjust, settle or
compromise all claims and losses.  All
such adjustments, settlements, and compromises, including ex gratia payments,
shall be binding on the Reinsurer in proportion to its participation.  Ex gratia payments include only those
payments made to settle a loss or claim covered under the Company’s underlying
insurance policy for purposes of avoiding the costs of a lawsuit. Under no
circumstances will the Company make a payment for a claim or loss not covered
under the Company’s underlying insurance policy. The Company shall likewise at
its sole discretion commence, continue, defend, compromise, settle or withdraw
from actions, suits or proceedings and

 

7

 

generally do all such matters and things relating to any claim or loss
as in its judgment may be beneficial or expedient, and all payments made and
costs and expenses incurred in connection therewith or in taking legal advice
therefore.  The Reinsurer shall receive
credit for their pro-rata share of all salvage and subrogation received by the
Company.  In the event the Company shall
fail or neglect to do so, the Reinsurer is hereby authorized and empowered to
bring any appropriate action in the name of the Company to enforce any rights
of subrogation.

 

ARTICLE XXI

 

NET RETAINED LINES
CLAUSE

 

This Agreement
applies only to that portion of any insurance or reinsurance which the company
retains net for its own account.

 

ARTICLE XXII

 

NO THIRD PARTY
RIGHTS

 

No parties, other
than the Company and the Reinsurer, shall have any rights under this Agreement
unless specifically stated herein.

 

ARTICLE XXIII

 

ERRORS OR
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 delay, omission or error is rectified
immediately upon discovery. 

 

ARTICLE XXIV

 

INSOLVENCY CLAUSE

 

In the event
of  insolvency  and the appointment of a conservator, liquidator, or statutory
successor of the Companythe portion of any risk or obligation assumed by the
Reinsurer  shall be payable  to the conservator,  liquidator, 
or statutory successor  on the
basis of claims allowed against the insolvent Company by any court of competent
jurisdiction or by any conservator, liquidator, or statutory successor of the
Company having the authority to allow such claims,  without diminution because of that insolvency , or because the
conservator, liquidator, or statutory successor  has failed to pay all or a portion of any claims.  It is agreed, however, that the conservator,
liquidator,  or statutory successor of
the Company shall give written notice to the Reinsurers of the pendency of a
claim against the Company which would involve a possible liability on the part
of the Reinsurers, 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 Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that they may deem
available to the Company or its conservator, liquidator,  or statutory successor.  The expense thus incurred by the Reinsurers
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 Reinsurers.

 

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 Agreement as though such expense had been incurred by the
Company.

 

8

 

ARTICLE XXV

 

EXTRA CONTRACTUAL
OBLIGATIONS AND EXCESS LIMITS LIABILITY

 

This Agreement
will extend to cover any claims-related extra contractual obligations and/or
excess limits liability arising because of, but not limited to, the following:

 

A.  Failure of the Company to
agree to pay a claim within the policy limits or to provide a defense against
such claims.

 

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 and/or subrogation and/or any subsequent action
resulting therefrom.

 

“Extra contractual
obligation” as used in this Agreement will mean 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 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 reinsured policy.

 

There will be no
recovery hereunder where the extra contractual obligation or excess limits
liability has been incurred due to fraud committed by a member of the board of
directors or a corporate officer of the Company, acting individually,
collectively, or in collusion with a member of the board of directors, a
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 obligation and/or excess limits liability is incurred by
the Company will be deemed, in all circumstances, to be the date of the
original loss.  Nothing in this
Article will be construed to create a separate or distinct loss apart from
the original covered loss that gave rise to the extra contractual obligations
and/or excess limits liability discussed in the preceding paragraphs.  The Reinsurers’ liability as respects extra
contractual obligations and/or excess limits liability under the Agreement will
be in addition to the indemnification coverage set. 

 

ARTICLE XXVI

 

ACCESS TO RECORDS

 

The Reinsurer or
its designated representative shall have access to the books and records of the
Company at all reasonable times for the purpose of obtaining information, which
pertains in any way to this reinsurance. 
This clause shall survive termination of this Agreement.

 

ARTICLE XXVII

 

ARBITRATION

 

As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance, or breach of this Contract,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators.  Notice
requesting arbitration will be in writing and sent certified or registered
mail, return receipt requested.

 

9

 

Each party shall choose one arbitrator and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing.  If either party
fails to appoint the arbitrator within thirty (30) days after being requested
to do so by the other party, the latter, after ten (10) days notice by
certified or registered mail of its intention to do so, may appoint the second
arbitrator.

 

If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the third arbitrator will be
chosen by ARIAS US.  All arbitrators
shall be disinterested active or former executives officers of insurance or
reinsurance companies or Underwriters at Lloyd’s London.

 

Within thirty (30) days after notice of appointment of all arbitrators,
the panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for hearings. 
The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence.  Unless the panel agrees otherwise, the arbitration will take
place in New York, but the venue may be changed when deemed by the panel to be
to be in the best interest of the arbitration proceeding.  The decision rendered by a majority of the
arbitrators shall be final and binding on both parties.  The panel shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
business as promptly as possible following the termination of the
hearings.  Judgment upon the award may
be entered in any court having jurisdiction thereof.

 

Each
party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator.  The remaining costs of the arbitration shall
be divided equally between the parties.

 

If
more than one reinsurer is involved in the same dispute, all such reinsurers
shall constitute and act as one party for purposes of this clause, and
communications shall be made by the Company to each of the reinsurers
constituting the one party provided, however, that nothing therein shall impair
the rights of such reinsures to assert several rather than joint defenses or
claims, nor be construed as changing the liability of the reinsurers under the
terms of this contract from several to joint.

 

ARTICLE XXVIII

 

GOVERNING LAW

 

This Agreement shall
be interpreted and governed by the laws of New York without regard to that
jurisdiction’s rules with respect to conflicts of laws.

 

ARTICLE XXIX

 

ENTIRE
AGREEMENT/INTERPRETATION

 

With respect to
the business being reinsured hereunder, “i” this Agreement constitutes the
entire agreement between the parties, and “ii” there are no understandings or
agreements between the parties other than those expressed in this
Agreement.  Any change to or
modification of this Agreement will be made by written amendment to this
Agreement and signed by the parties hereto.

 

This Agreement is
between sophisticated parties, each of which has reviewed the Agreement and is
fully knowledgeable about its terms and conditions.  The parties therefore agree that this Agreement shall be
construed without regard to the authorship of the language and without any
presumption or rule of construction in favor of either of them.

 

10Exhibit 10.6

 

BALLANTYNE OF OMAHA, INC.

EXECUTIVE OFFICERS

PERFORMANCE BONUS COMPENSATION PLAN

 

I.                                         INTRODUCTION.

 

Ballantyne of Omaha, Inc.’s Executive Officers Performance Bonus
Compensation Plan (“Plan”) is designed to incentivize Ballantyne Executive Officers
to maximize shareholder value, and allow the Executive Officers to share in the
increased value through a bonus pool. 
The Plan is designed to reward the Company’s Executive Officers with a
larger bonus pool as the Company’s return on equity increases.

 

II.                                     COMPENSATION  PLAN.

 

Return on Equity Thresholds.

 

	
  Allocation

  Percentage

  	
   

  	
  Pre-Bonus, Pretax Income to Book Value

  	
   

  
	
  2004

  	
   

  	
  2005**

  	
   

  	
  2006**

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  0% Allocation

  	
   

  	
  <11.5%

  	
   

  	
  <15%

  	
   

  	
  <17%

  	
   

  
	
  2.25% Allocation*

  	
   

  	
  11.5% to 13%

  	
   

  	
  N/A

  	
   

  	
  N/A

  	
   

  
	
  4.50% Allocation

  	
   

  	
  13% to 14.99%

  	
   

  	
  15% to 17%

  	
   

  	
  17% to 19%

  	
   

  
	
  5.85% Allocation

  	
   

  	
  15% to 16.99%

  	
   

  	
  17% to 19%

  	
   

  	
  19% to 21%

  	
   

  
	
  6.75% Allocation

  	
   

  	
  17% or >

  	
   

  	
  >19%

  	
   

  	
  >21%

  	
   

  

 

*2.25% allocation is for 2004 only

 

** 2005 and 2006 percentages are set forth for illustrative purposes
only, and are subject to change.

 

III.                                 ALLOCATION
OF BONUS POOLS TO INDIVIDUAL PARTICIPANTS.

 

1.                                       General
Allocation.  The amount of the bonus
pool to be awarded will be based on the outcome of the financial goals,
achievement of specific goals and objectives by the Executive Officers.  The bonus pool will be allocated to the
Executive Officers based on 70% salary and 30% on achievement of specific goals
and objectives.  Any Executive Officer
who is determined to have achieved all of their goals and objectives for the
applicable year shall receive their pro rata share of the 30% based on their
salary in relation to the total of all of the Executive Officers salaries.  An Executive Officer may receive less than
their pro rata share if it is determined that they have not met all of their
goals and objectives.  Any portion not
awarded to any Executive Officer will be returned to the Company.

 

1

 

2.                                       Specific Allocation.  The Chief Executive Officer in consultation
with the Compensation Committee shall establish the specific goals and
objectives for the Executive Officers. 
The Chief Executive Officer shall review with each Executive Officer
their specific goals and objectives for the coming year.  The Compensation Committee will, with input
from the Chief Executive Officer, determine the extent to which each Executive
Officer has achieved their goals and objectives for the year and whether each
such Executive Officer will, at the end of the year, receive all or a portion
of the 30% which should be allocated to each Executive Officer.  The decision of the Compensation Committee
shall be conclusive.

 

IV.           EXAMPLE OF
PERFORMANCE BONUS COMPENSATION PLAN.

 

	
  Beginning Equity (12/31/03)

  	
   

  	
  $

  	
  29,508,491

  	
   

  
	
  Pre-Bonus, Pretax Income (2004 Budget)

  	
   

  	
  $

  	
  3,926,793

  	
   

  

 

Potential Pools:

 

	
   

  	
   

  	
  Scenario I

  	
   

  	
  Scenario II

  	
   

  	
  Scenario III

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Achieved

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage of Budgeted Pretax Income

  	
   

  	
  87.0

  	
  %

  	
  100.0

  	
  %

  	
  115.0

  	
  %

  
	
  Pre-Bonus, Pretax Income Achieved

  	
   

  	
  $

  	
  3,416,310

  	
   

  	
  $

  	
  3,926,793

  	
   

  	
  $

  	
  4,515,812

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bonus
  Threshold Achieved

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Pretax Income to Beginning Equity

  	
   

  	
  11.6

  	
  %

  	
  13.3

  	
  %

  	
  15.3

  	
  %

  
	
  Allocation to Bonus Pool

  	
   

  	
  2.25

  	
  %

  	
  4.50

  	
  %

  	
  5.85

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bonus
  Pool

  	
   

  	
  $

  	
  76,867

  	
   

  	
  $

  	
  176,706

  	
   

  	
  $

  	
  264,175

  	
   

  

 

V.                                     COMPUTATION.

 

Computation of the amount to be included in the Executive Officers
Performance Bonus Compensation Plan shall be made by the Company
contemporaneously with approval of the Company’s financial statements by its
public accounting firm, and shall be paid within 15 days from the date the
Company makes such determination.  Any
question, difference or dispute with reference to the computation of the bonus
pool shall be resolved by the public accounting firm then employed by the
Company to audit its books for the applicable period involved, and his
determination shall be final and conclusive upon all parties.

 

VI.                                 TAXES
AND WITHHOLDING.

 

Bonus payouts under this Plan are taxable in the year in which
received.  Taxes and other withholding
will be withheld in accordance with applicable laws.

 

2

 

VII.                             TERMINATION
OF EMPLOYMENT.

 

Ballantyne’s achievement of its return equity threshold depends upon
the combined contribution of all Executive Officers throughout the year, and
their contribution to Ballantyne’s success is, therefore, not complete until
the year is complete.  Executive Officers
whose employment is terminated for any reason, voluntary or involuntary, prior
to the last day of the fiscal year are not eligible to receive any bonus payout
under this Plan.

 

VIII.                         BALLANTYNE’S
RIGHT TO MODIFY THE PLAN.

 

Ballantyne, through its Compensation Committee, reserves the right to
amend or modify any of the terms or conditions of the Plan at any time within
ninety (90) days after the end of any fiscal year.  Said amendment or modification shall be
applicable effective as of January 1st of the year in which the
amendment or modification takes place.

 

IX.                                PLAN
IS NOT A CONTRACT OF EMPLOYMENT.

 

Nothing in this Plan should be construed as a contract of employment
for any Executive Officer, an amendment to any current contract of employment
that an Executive Officer may have, or any assurance of continued employment
for any given period of time.

 

X.                                    REVOCATION
OF PRIOR PLAN.

 

The Ballantyne of Omaha, Inc. Key Employee Bonus Plan is hereby
revoked.

 

3

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