Annual Report 2011 - SNL Financial

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Annual Report 2011 - SNL Financial

17. Commitments and Contingencies

AIG Arbitration

On September 6, 2011, the Company served a written demand (the “Arbitration Demand”) initiating arbitration

proceedings against various AIG Companies under 24 reinsurance treaties pursuant to which the Company reinsured AIG

Companies for certain pollution liability risks related to underground storage tanks for the policy years 1990 through 1999 (the

“Treaties”). The Treaties were cancelled by the Eastern Re in 1999. In the Arbitration Demand, the Company seeks an award

from the arbitration panel compelling AIG Companies to permit the Company to audit the books and records of AIG Companies

relevant to the Treaties, among other reasons, to enable the Company to examine the bases for certain paid losses and loss

reserves ceded by AIG Companies to Eastern Re under the Treaties. The Company believes that the Treaties permit such an

audit (and the Company’s prior requests have been denied by AIG Companies).

On October 3, 2011, AIG Companies responded to the Arbitration Demand by advising that they will seek an award

from the arbitration panel of approximately $1.9 million plus future amounts that may become due under the Treaties before

the final hearing in the arbitration. Both the Company and AIG Companies seek attorney’s fees and costs in the arbitration.

At this stage of the proceedings, both the Company and AIG Companies have appointed arbitrators. The parties are

currently in the process of attempting to select an umpire.

While the Company believes it has adequately reserved the claims at issue in the arbitration, and that it is entitled to the

relief it requested in the arbitration, it is reasonably possible that the final outcome of the arbitration could go against the

Company.

Lease Commitments

The Company’s corporate headquarters are located at 25 Race Avenue in Lancaster, Pennsylvania. The Company leases

its home office building under a 15-year, non-cancelable operating lease through February 2017. The annual base rent is

subject to an annual increase based upon the consumer price index at the end of each preceding calendar year. In addition to

the base rent, the Company is responsible for its proportionate share of expenses related to the building including, but not

limited to, utilities, maintenance, real estate taxes, and insurance. The Company has a 5% interest in the limited partnership

that owns the building.

The Company maintains regional offices in North Carolina, Indiana, Tennessee and Wexford, Pennsylvania and leases

office space in each of these locations under multi-year operating leases.

Minimum monthly lease commitments for the remainder of the office lease terms are as follows (in thousands):

2012 ....................................................................... $1,314

2013 ....................................................................... 1,226

2014 ....................................................................... 1,216

2015 ....................................................................... 1,182

2016 ....................................................................... 1,172

2017 thereafter ............................................................... 137

Total ................................................................... $6,247

Rent expense totaled $1,214, $918, and $1,084 for the years ended December 31, 2011, 2010 and 2009, respectively.

18. Related Party Transactions

The Company has an agreement with Alliance Impairment Management, Inc. (“AIM”), which provides case

management services to certain of the Company’s insurance subsidiaries. For the years ended December 31, 2011, 2010, and

2009, the Company paid fees to AIM totaling approximately $3,700, $3,200 and $2,600, respectively. Bruce Eckert, the

Company’s Vice Chairman (Chief Executive Officer as of December 31, 2010), is an investor in AIM.

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