AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 2003
REGISTRATION NO. 333-108857
AMENDMENT NO. 1 TO
UNITED NATIONAL GROUP, LTD.
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS 6399 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
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P.O. BOX 908GT
COPIES TO:
ELLIOTT V. STEIN, ESQ. PHYLLIS G. KORFF, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ SKADDEN, ARPS, SLATE,
51 WEST 52ND STREET MEAGHER & FLOM LLP
NEW YORK, NY 10019 FOUR TIMES SQUARE
(212) 403-1000 NEW YORK, NY 10036
FACSIMILE: (212) 403-2000 (212) 735-3000
FACSIMILE: (212) 735-2000
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If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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Class A common shares, $0.0001 par value per share.......... $175,000,000 $14,158(3)
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(1) Includes Class A common shares, if any, that may be sold pursuant to the underwriters' overallotment option.
(2) Estimated solely for the purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2003
PROSPECTUS
SHARES
[UNITED NATIONAL GROUP LOGO]
UNITED NATIONAL GROUP, LTD.
CLASS A COMMON SHARES
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This offering is the initial public offering of Class A common shares of United National Group. Prior to this offering there has been no public market for our Class A common shares. All of the Class A common shares are being sold by United National Group. We have two classes of common shares outstanding, Class A common shares and Class B common shares. Each Class A common share is entitled to one vote, while each Class B common share is entitled to ten votes. In addition, each Class B common share is convertible into one Class A common share.
We currently expect the initial public offering price of our Class A common shares to be between $ and $ per share. We have applied to have our Class A common shares approved for quotation on the Nasdaq National Market under the symbol "UNGL."
PER SHARE TOTAL
--------- -----
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to United National Group......... $ $
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The underwriters may also purchase up to an additional Class A common shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC DOWLING & PARTNERS SECURITIES, LLC
FOX-PITT, KELTON KEEFE, BRUYETTE & WOODS, INC.
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The date of this prospectus is , 2003.
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TABLE OF CONTENTS
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 8
Cautionary Note Regarding Forward-Looking Statements........ 29
Use of Proceeds............................................. 30
Dividend Policy............................................. 30
Capitalization.............................................. 31
Dilution.................................................... 32
Pro Forma Financial Information............................. 33
Selected Historical Financial Data.......................... 38
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 40
Industry Background and Trends.............................. 60
Business.................................................... 63
Regulation.................................................. 82
Management.................................................. 90
Principal Shareholders...................................... 102
Our Relationship with Fox Paine & Company................... 106
Certain Relationships and Related Transactions.............. 109
Description of Share Capital................................ 111
Shares Eligible for Future Sale............................. 119
Material Tax Considerations................................. 121
Underwriting................................................ 134
Legal Matters............................................... 137
Experts..................................................... 137
Where You Can Find More Information......................... 137
Enforceability of Civil Liabilities Under United States
Federal Securities Laws and Other Matters................. 137
Index to Financial Statements............................... F-1
Glossary of Selected Insurance Terms........................ G-1
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In this prospectus, unless the context requires otherwise: (1) "United National Group" refers to United National Group, Ltd., an exempted company incorporated with limited liability under the laws of the Cayman Islands; (2) "we," "us" and "our" refer to United National Group and its subsidiaries as a whole; (3) our "U.S. Operations" refers to the insurance and related operations conducted by American Insurance Service, Inc., and its subsidiaries, including American Insurance Adjustment Agency, Inc., Diamond State Insurance Company, J.H. Ferguson & Associates, LLC, United National Casualty Insurance Company, United National Insurance Company and United National Specialty Insurance Company; (4) our "U.S. Insurance Subsidiaries" refers to United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company and United National Casualty Insurance Company; (5) "U.N. Barbados" refers to Wind River Insurance Company (Barbados), Ltd.; (6) "U.N. Bermuda" refers to Wind River Insurance Company (Bermuda), Ltd.; (7) our "Non-U.S. Operations" refers to the insurance and reinsurance and related operations of U.N. Barbados and U.N. Bermuda; (8) "Fox Paine & Company" refers to Fox Paine & Company, LLC and affiliated investment funds; (9) our articles of association refers to our articles of association as they will be amended and restated immediately prior to completion of this offering; and (10) "$" or "dollars" refers to U.S. dollars.
SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. While we have highlighted what we believe to be the most important information about us and this offering in this summary, this summary does not contain all of the information you should consider before investing in our Class A common shares. You should read this entire prospectus carefully, including "Risk Factors," "Cautionary Note Regarding Forward-Looking Statements" and the consolidated financial statements and accompanying notes beginning on page F-1 for a more complete understanding of our business and this offering before investing in our Class A common shares. We have included a glossary of insurance terms that are used in this prospectus beginning on page G-1.
OUR BUSINESS
United National Group is a holding company formed on August 27, 2003 under the laws of the Cayman Islands to acquire our U.S. Operations.
Through our U.S. Operations we are a leading specialty property and casualty insurer with a 43-year history of operating in the specialty insurance markets. In 2002, United National Insurance Company was the sixth largest excess and surplus lines, or "E&S," insurance company according to Business Insurance, and we were the 11th largest E&S insurance group according to A.M. Best, in each case on the basis of direct premiums written. Our Non-U.S. Operations, which consist of recently formed Barbados-based and Bermuda-based insurance companies, are expected to begin offering insurance and reinsurance products to third parties and reinsurance to our U.S. Operations in the near future.
We write specialty insurance products that are designed to meet the specific needs of targeted niche insurance markets. These niche markets are typically well-defined, homogeneous groups of insureds to which, due to some particular risk exposure, standard market insurers do not offer insurance coverage. Examples of products that we write for these markets include property and casualty insurance for social service agencies, insurance for equine mortality risks and insurance for vacant property risks. We believe that our specialty insurance product focus and niche market strategy have enabled us to outperform the property and casualty industry as a whole. For example, our combined ratio, based on our statutory financial statements and calculated as an unweighted average, was 13.8 percentage points better than that of the property and casualty industry as a whole over the past 20 years, based on data from A.M. Best.
Our financial goal is to provide a superior return to our shareholders by achieving underwriting profits and by steadily increasing our shareholders' equity over the long term. We have produced a 95.4% combined ratio, based on our statutory financial statements and calculated as an unweighted average, over the last 20 years, and we have reported an underwriting profit, based on our statutory financial statements, in 19 of the past 20 years.
Our U.S. Insurance Subsidiaries currently are rated "A" (Excellent) by
A.M. Best, which assigns ratings to each insurance company transacting business
in the United States. "A" (Excellent) is the third highest rating of sixteen
rating categories.
ACQUISITION OF OUR U.S. OPERATIONS
On September 5, 2003, Fox Paine & Company made a capital contribution of $240.0 million to us, in exchange for 10.0 million Class B common shares and 14.0 million Series A preferred shares, and we acquired Wind River Investment Corporation, the holding company for our U.S. Operations, from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania.
To effect this acquisition, we used $100.0 million of this $240.0 million capital contribution to purchase a portion of the common stock of Wind River Investment Corporation held by the Ball family trusts. We purchased the remainder with consideration consisting of 2.5 million Class A common shares, 3.5 million Series A preferred shares and senior notes issued by Wind River Investment Corporation having an aggregate principal amount of approximately $72.8 million. Of the remaining $140.0 million
contributed to us, we then contributed $80.0 million to our U.S. Operations, used $43.5 million to capitalize our Non-U.S. Operations and will use the remaining $16.5 million to fund fees and expenses incurred in connection with the acquisition. See "Our Relationship with Fox Paine & Company."
For a chart showing our organizational structure, see "Business -- Corporate Organization."
OUR COMPETITIVE STRENGTHS
We believe certain characteristics distinguish us from our competitors, including:
- ESTABLISHED REPUTATION IN THE SPECIALTY INSURANCE INDUSTRY. We were founded in 1960 and have a 43-year operating history in the E&S and specialty admitted insurance markets.
- EXPERIENCED MANAGEMENT TEAM. Our experienced management team has an average of over 22 years of experience in the insurance industry and has been with us for an average of 15 years.
- EXTENSIVE SPECIALIZED NICHE UNDERWRITING CAPABILITIES. We have an experienced, focused underwriting organization of 63 dedicated underwriting professionals, which has contributed to a 95.4% combined ratio, based on our statutory financial statements and calculated as an unweighted average, over the past 20 years.
- WELL-ESTABLISHED PROCESSES AND PROCEDURES. We have developed critical, customized processes and procedures that enable us to underwrite and analyze the results of our business and capitalize quickly on business opportunities.
- STRONG MARKET RELATIONSHIPS. We have strong, longstanding relationships with our reinsurers and with our professional general agencies, which extend 17 years on average for our ten largest reinsurers and eight years on average across all of our general agency relationships.
- BALANCE SHEET STRENGTH. We maintain conservative underwriting and investment policies that we believe have enabled us to maintain at least an "A" (Excellent) rating or better from A.M. Best for 17 consecutive years.
OUR STRATEGY
Our financial goal is to provide a superior return to our shareholders by achieving underwriting profits and through steadily increasing our shareholders' equity over the long term. We intend to reach our goal by:
- MAINTAINING A LEADERSHIP ROLE IN THE E&S AND SPECIALTY ADMITTED MARKETS. We intend to continue to focus on the needs of the E&S and specialty admitted markets by developing customized insurance products, using sophisticated underwriting solutions and providing predictable and helpful customer service.
- FOCUSING ON SPECIFIC NICHE MARKETS IN WHICH WE HAVE DEMONSTRATED UNDERWRITING EXPERTISE. Our depth of experience across a diverse set of niche markets provides a competitive advantage that we believe enables us to generate superior profitability.
- OPPORTUNISTICALLY MANAGING A DIVERSE PRODUCT PORTFOLIO. In order to enhance underwriting profitability, we are increasing our retention in certain products with respect to which we believe we have superior underwriting expertise and where we have identified improving market conditions.
- MAINTAINING A CONSERVATIVE BALANCE SHEET AND A STRONG A.M. BEST RATING. We intend to remain conservative in our underwriting, reinsurance buying and investment practices and to use extensive modeling techniques to protect our current position with the rating agencies, particularly A.M. Best.
- BUILDING SHAREHOLDER VALUE. By growing underwriting profits through our disciplined approach and conservatively managing our investment portfolio, we intend to grow shareholders' equity over the long term.
RECENT TRENDS IN OUR INDUSTRY
The property and casualty insurance industry has historically been a cyclical industry. We believe that during the 1990s the property and casualty insurance industry maintained excess underwriting capacity. As a result, the industry suffered from lower pricing, less favorable policy terms and conditions, less stringent underwriting standards and reduced profitability. Significant catastrophic losses in 1999 and a subsequent contraction of underwriting capacity led to price increases and policy terms and conditions more favorable to insurers in 2000.
We believe that these trends continued and accelerated in 2001 when the property and casualty insurance industry experienced a severe dislocation as a result of an unprecedented impairment of capital, causing a substantial contraction in industry underwriting capacity. These factors have resulted in a general environment of rate increases and conservative risk selection. In this environment, rates tend to increase, coverage terms become more restrictive and a significant volume of premium moves from the standard property and casualty insurance market into the specialty insurance market. Growth in direct premiums written for the E&S market has increased from 9.8% in 2000 to 35.7% in 2001 and 61.7% in 2002, according to data from A.M. Best.
Consistent with the trends witnessed in the broader property and casualty market, during 2001 and 2002, our rate increases on renewal business across all segments approximated 23% and 30%, respectively. Through September 30, 2003, our rate increases on renewal business approximated 27%, which rates we will earn over the period of time in which the policies are in force, generally the next 12 months. We cannot assure you, however, that these favorable trends will continue or that these rate increases can be sustained.
RISKS RELATING TO AN INVESTMENT IN OUR CLASS A COMMON SHARES
Before investing in our Class A common shares, you should take into account the following risks related to such an investment:
- If actual claims payments exceed our reserves for losses and loss adjustment expenses, our financial condition and results of operations could be adversely affected.
- Our U.S. Insurance Subsidiaries are rated "A" (Excellent) by A.M. Best, the third highest rating, and a decline in this rating could adversely affect our position in the insurance market, make it more difficult to market our insurance products and cause premiums and earnings to decrease.
- We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and as a result, we could experience losses.
- Our investment performance may suffer as a result of adverse capital market developments or other factors, which would in turn adversely affect our financial condition and results of operations.
- Because we are dependent on key executives, the loss of any of these executives or our inability to retain other key personnel could adversely affect our business.
- Our holding company structure, as well as regulatory and other constraints, limit our ability to pay dividends and make other payments.
- Prior to this offering, there has been no public trading market for our Class A common shares, and you cannot be certain that an active trading market or a specific share price will be established.
- If the Internal Revenue Service were to challenge successfully the expected U.S. federal tax consequences attendant to our operations or to an investment in Class A common shares, or if expected U.S. federal tax consequences were affected by a change in law, these developments may have a material adverse effect on our operations and your investment.
Our principal executive offices are located at Walker House, 87 Mary Street, P.O. Box 908GT, George Town, Grand Cayman, Cayman Islands, and our telephone number is (345) 949-0100.
THIS OFFERING
Class A common shares offered
by us......................... shares
Overallotment option offered
by us......................... shares
Common shares to be
outstanding after this
offering:
Class A common shares........ shares
Class B common shares........ ________ shares
Total......................... ________ shares
________
Use of proceeds............... We intend to use up to $150.0 million of the
net proceeds from this offering to redeem all
of our 15.0 million outstanding Series A
preferred shares, which are currently held by
Fox Paine & Company and the Ball family trusts.
The redemption price for each Series A
preferred share is currently $11.825, which
represents 110% of the sum of the current
liquidation preference per Series A preferred
share, which is $10.00, plus accrued but unpaid
dividends of $0.75 per Series A preferred
share. Of this redemption price, we will pay
$10.00 in cash, and we will pay the remainder
in Class A common shares, valued at the initial
public offering price. We intend to use any
remaining net proceeds for general corporate
purposes, including to capitalize our Non-U.S.
Operations. See "Use of Proceeds."
Voting rights................. On all matters submitted for a vote of
shareholders, each Class A common share is
entitled to one vote, and each Class B common
share is entitled to ten votes, subject, in
each case, to the adjustments described under
"Description of Share Capital -- Voting
Adjustments."
Other common share rights..... With the exception of voting and conversion
rights, Class A common shares and Class B
common shares have identical rights. See
"Description of Share Capital -- Common
Shares."
Dividend policy............... We do not anticipate paying any cash dividends
on any class of our common shares in the
foreseeable future. We currently intend to
retain any future earnings to fund the
development and growth of our business. See
"Dividend Policy."
Proposed Nasdaq National Market
symbol........................ We have applied to have our Class A common
shares approved for quotation on the Nasdaq
National Market under the symbol "UNGL."
Risk factors.................. See "Risk Factors" and other information
included in this prospectus for a discussion of
factors that you should carefully consider
before investing in our Class A common shares.
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Unless we specifically state otherwise, all information in this prospectus assumes that the underwriters do not exercise their overallotment option. If the underwriters exercise their overallotment option in full, an additional shares of Class A common stock will be outstanding following completion of this offering.
The number of Class A common shares outstanding after this offering also excludes 2.0 million Class A common shares issuable under our share incentive plan, of which options to purchase 1,138,574 Class A common shares at a weighted average exercise price of $9.21 per share had been issued as of September 30, 2003, and warrants to purchase 55,000 Class A common shares at an exercise price of $10.00 per share.
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data for United National Group and, for periods prior to September 5, 2003, Wind River Investment Corporation, which is considered United National Group's predecessor for accounting purposes. This summary financial data is derived from the consolidated financial statements and accompanying notes of Wind River Investment Corporation and United National Group included elsewhere in this prospectus. You should read this summary historical financial data together with the consolidated financial statements and accompanying notes of Wind River Investment Corporation and United National Group and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
PREDECESSOR SUCCESSOR
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FOR THE FOR THE
PREDECESSOR FOR THE PERIOD FROM PERIOD FROM
---------------------------------------------------- NINE MONTHS JANUARY 1, SEPTEMBER 6,
FOR THE YEARS ENDED DECEMBER 31, ENDED 2003 TO 2003 TO
---------------------------------------------------- SEPTEMBER 30, SEPTEMBER 5, SEPTEMBER 30,
1998 1999 2000 2001 2002 2002 2003 2003
-------- -------- -------- -------- -------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Gross premiums written...... $296,426 $357,605 $453,464 $670,520 $793,083 $680,817 $510,623 $33,190
======== ======== ======== ======== ======== ======== ======== =======
Net premiums written........ $ 94,547 $117,883 $127,572 $169,310 $172,689 $171,047 $139,116 $ 9,692
======== ======== ======== ======== ======== ======== ======== =======
Net premiums earned......... $ 95,740 $103,455 $136,931 $150,336 $162,763 $157,557 $128,254 $10,687
Investment income........... 22,628 24,637 28,578 24,491 24,595 18,131 15,733 1,347
Investment expenses......... (4,778) (4,969) (6,088) (5,138) (6,910) (5,163) (2,444) (555)
-------- -------- -------- -------- -------- -------- -------- -------
Investment income, net...... 17,850 19,668 22,490 19,353 17,685 12,968 13,289 792
-------- -------- -------
Net realized investment
gains (losses)............ 3,556 (5,210) 593 (12,719) (11,702) (15,039) 5,589 (718)
-------- -------- -------- -------- -------- -------- -------- -------
Total revenues............ 117,146 117,913 160,014 156,970 168,746 155,486 147,132 10,761
Net losses and loss
adjustment expenses(1).... 67,002 76,257 113,151 128,338 201,750 143,187 84,885 7,349
Acquisition costs and other
underwriting expenses..... 15,584 11,913 14,999 15,867 18,938 14,339 30,543 4,587
Provision for doubtful
reinsurance
receivables(3)(4)......... -- -- -- -- 44,000 -- 1,750 --
Other operating expenses.... 2,399 2,112 2,918 2,220 5,874 2,436 288 124
Interest expense............ 922 589 322 77 115 676 46 249
-------- -------- -------- -------- -------- -------- -------- -------
Income (loss) before
income taxes............ 31,239 27,042 28,624 10,468 (101,931) (5,152) 29,620 (1,548)
Income tax expense
(benefit)................. 6,751 6,252 5,883 295 (40,520) (5,333) 6,850 (1,106)
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss) before
equity in net income
(loss) of
partnerships............ 24,488 20,790 22,741 10,173 (61,411) 181 22,770 (442)
Equity in net earnings of
partnerships.............. -- -- -- 664 (252) (995) 1,834 258
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss) before
extraordinary gain...... 24,488 20,970 22,741 10,837 (61,663) (814) 24,604 (184)
Extraordinary gain.......... -- -- -- -- -- -- -- 46,424
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss)......... $ 24,488 $ 20,790 $ 22,741 $ 10,837 $(61,663) $ (814) $ 24,604 $46,240
======== ======== ======== ======== ======== ======== ======== =======
INSURANCE OPERATING RATIOS:
Net losses and loss
adjustment expenses
ratio(1)(2)............... 70.0% 73.7% 82.6% 85.3% 124.0% 90.9% 66.2% 68.8%
Underwriting expense
ratio(3)(4)(5)............ 16.3 11.5 11.0 10.6 38.6 9.1 25.2 42.9
-------- -------- -------- -------- -------- -------- -------- -------
Combined ratio(4)(6)(7)..... 86.3% 85.2% 93.6% 95.9% 162.6% 100.0% 91.4% 111.7%
======== ======== ======== ======== ======== ======== ======== =======
Net/gross premiums
written................... 31.9% 33.0% 28.1% 25.3% 21.8% 25.1% 27.2% 29.2%
======== ======== ======== ======== ======== ======== ======== =======
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AS OF AS OF SEPTEMBER 30, 2003
DECEMBER 31, ---------------------------
2002 ACTUAL AS ADJUSTED(8)
------------ ---------- --------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Total investments and cash and cash equivalents............. $ 611,129 $ 800,169 $
Reinsurance receivables, net of allowance................... 1,743,524 1,785,213
Total assets................................................ 2,685,620 2,834,919
Unpaid losses and loss adjustment expenses.................. 2,004,422 2,085,658
Total shareholders' equity.................................. $ 268,637 $ 356,914 $
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(1) In 2002, we increased our net loss reserves relative to accident years 2001 and prior by $47.8 million primarily due to higher than anticipated losses in the multi-peril and other liability lines of business and by $23.6 million due to the conclusion of an arbitration proceeding. The net losses and loss adjustment expenses ratio increased by 43.9 percentage points in 2002 due to this $71.4 million increase in net loss reserves.
(2) Our loss ratio for the period from September 6, 2003 to September 30, 2003 includes a 9.7 percentage point increase attributable to a $1.7 million reduction in earned premium due to purchase accounting.
(3) We established an allowance for doubtful reinsurance receivables in 2002, which resulted in a 27.0 percentage point increase in our 2002 underwriting expense ratio.
(4) Our underwriting expense ratio and our combined ratio for the period January 1, 2003 to September 5, 2003 includes a 4.4 percentage point increase attributable to a $3.8 million expense for stock appreciation rights and retention payments made to certain key executives upon completion of the acquisition and a $1.8 million allowance for doubtful reinsurance receivables.
(5) Our underwriting expense ratio for the period September 6, 2003 to September 30, 2003 includes a 14.1 percentage point increase attributable to the following: (a) a $1.7 million reduction in earned premium due to purchase accounting; (b) $0.6 million of organizational costs; and (c) $0.4 million of deferred compensation option expense.
(6) Our 2002 combined ratio includes a 43.9 percentage point increase attributable to our $71.4 million reserve strengthening and a 27.0 percentage point increase attributable to establishment of a $44.0 million allowance for doubtful reinsurance receivables.
(7) Our combined ratio for the period from September 6, 2003 to September 30, 2003 includes a 23.8 percentage point increase attributable to our $1.7 million reduction in earned premium, $0.6 million of organizational costs and $0.4 million of deferred compensation option expense.
(8) The as adjusted financial data reflects the sale of Class A common shares in this offering at an initial public offering price of $ per Class A common share (the midpoint of the estimated range set forth on the cover page of this prospectus) and the application of the net proceeds from this offering as described under "Use of Proceeds," including the redemption of the Series A preferred shares in accordance with their terms.
RISK FACTORS
You should carefully consider the risks described below and all other information contained in this prospectus before investing in our Class A common shares, including the consolidated financial statements and accompanying notes. The risks and uncertainties described below are those we believe to be material, but they are not the only ones we face. If any of the following risks, or other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur, our business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected. In that event, the trading price of our Class A common shares could decline, and you could lose part or all of your investment.
Some of the statements regarding risk factors below and elsewhere in this prospectus may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us specifically and the insurance and reinsurance sectors in general, both as to underwriting and investment matters. Statements that include words such as "expect," "intend," "plan," "believe," "project," "anticipate," "seek," "will" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
IF ACTUAL CLAIMS PAYMENTS EXCEED OUR RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Our success depends upon our ability to accurately assess the risks associated with the insurance policies that we write. We establish reserves to cover our estimated liability for the payment of all losses and loss adjustment expenses incurred with respect to premiums earned on the insurance policies that we write. Reserves do not represent an exact calculation of liability. Rather, reserves are estimates of what we expect to be the ultimate cost of resolution and administration of claims under the insurance policies that we write. These estimates are based upon actuarial and statistical projections, our assessment of currently available data, as well as estimates and assumptions as to future trends in claims severity and frequency, judicial theories of liability and other factors. We continually refine our reserve estimates in an ongoing process as experience develops and claims are reported and settled. Our insurance subsidiaries obtain an annual statement of opinion from an independent actuarial firm on these reserves.
Establishing an appropriate level of reserves is an inherently uncertain process. The following factors may have a substantial impact on our future actual losses and loss adjustment expenses experience:
- the amounts of claims payments;
- the expenses that we incur in resolving claims;
- legislative and judicial developments; and
- changes in economic conditions, including the effect of inflation.
For example, as industry practices and legal, judicial, social and other conditions change, unexpected and unintended exposures related to claims and coverage may emerge. Recent examples include claims relating to mold, asbestos and construction defects, as well as larger settlements and jury awards against professionals and corporate directors and officers. In addition, there is a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigations relating to claims-handling, insurance sales practices and other practices. These exposures may either extend coverage beyond our underwriting intent or increase the number or size of claims. As a result, such developments could cause our level of reserves to be inadequate.
Actual losses and loss adjustment expenses we incur under insurance policies that we write may be different from the amount of reserves we establish, and to the extent that actual losses and loss adjustment expenses exceed our expectations and the reserves reflected on our financial statements, we will be required to immediately reflect those changes by increasing our reserves. In addition, government regulators could require that we increase our reserves if they determine that our reserves were understated in the past. When we increase reserves, our pre-tax income for the period in which we do so will decrease by a corresponding amount. For example, during 2002, we increased our net loss reserves relative to accident years 2001 and prior by $47.8 million primarily due to higher than anticipated losses in the multi-peril and other liability lines of business and by $23.6 million due to the conclusion of an arbitration proceeding with a reinsurer regarding losses incurred in 1993 and 1994. In addition to having an effect on reserves and pre-tax income, increasing or "strengthening" reserves causes a reduction in our insurance companies' surplus and could cause a downgrading of the rating of our insurance company subsidiaries. Such a downgrade could, in turn, adversely affect our ability to sell insurance policies.
OUR U.S. INSURANCE SUBSIDIARIES ARE RATED "A" (EXCELLENT) BY A.M. BEST, THE THIRD HIGHEST RATING, AND A DECLINE IN THIS RATING COULD ADVERSELY AFFECT OUR POSITION IN THE INSURANCE MARKET, MAKE IT MORE DIFFICULT TO MARKET OUR INSURANCE PRODUCTS AND CAUSE OUR PREMIUMS AND EARNINGS TO DECREASE.
Ratings have become an increasingly important factor in establishing the competitive position for insurance companies. A.M. Best ratings currently range from "A++" (Superior) to "F" (In Liquidation), with a total of 16 separate ratings categories. A.M. Best currently assigns each of our U.S. insurance subsidiaries a financial strength rating of "A" (Excellent), the third highest of their 16 rating categories. The objective of A.M. Best's rating system is to provide potential policyholders an opinion of an insurer's financial strength and its ability to meet ongoing obligations, including paying claims. These ratings reflect A.M. Best's analysis of our insurance subsidiaries' balance sheet, financial position, capitalization and management. These ratings are not an evaluation of, nor are they directed to, investors in our Class A common shares and are not a recommendation to buy, sell or hold our Class A common shares. Publications of A.M. Best indicate that companies are assigned "A" (Excellent) ratings if, in A.M. Best's opinion, they have demonstrated excellent overall performance when compared with the standards established by A.M. Best and have demonstrated a strong ability to meet their obligations to policyholders. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best.
In June 2003, our U.S. Insurance Subsidiaries were downgraded from "A+" (Superior) to "A" (Excellent) by A.M. Best primarily due to our increase in reserves during 2002. If the rating of any of our U.S. insurance subsidiaries is further reduced from its current level by A.M. Best, our competitive position in the insurance industry would suffer, and it would be more difficult for us to market our insurance products. A downgrade could result in a significant reduction in the number of insurance contracts we write and in a substantial loss of business, as such business could move to other competitors with higher ratings, thus causing premiums and earnings to decrease.
WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION IF AT ALL, AND AS A RESULT, WE COULD EXPERIENCE LOSSES.
We cede significant amounts of gross premiums written to reinsurers under reinsurance contracts. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not relieve us of our liability to our policyholders. Upon payment of claims, we will bill our reinsurers for their share of such claims. Our reinsurers may not pay the reinsurance receivables that they owe to us or they may not pay such receivables on a timely basis. If our reinsurers fail to pay us or fail to pay us on a timely basis, our financial results would be adversely affected. Lack of reinsurer liquidity, perceived improper underwriting or claim handling by us, and other factors could cause a reinsurer not to pay. Since January 1, 2000, we have experienced two losses resulting from the failure of reinsurers to pay reinsurance receivables. In October 2002, we concluded an arbitration with a reinsurer relating to reinsurance contracts written in 1993 and 1994. The result of this arbitration reduced 2002 pre-tax net income by $20.6 million.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Special Note Regarding 2002." In addition, in April 2001, in recognition of the impaired financial condition of one reinsurer, we entered into a commutation agreement with that reinsurer. That commutation resulted in a $5.0 million reduction in 2001 pre-tax net income.
As of September 30, 2003, we had $1,785.2 million of reinsurance receivables. As of September 30, 2003, $646.4 million of collateral was held in trust to support our reinsurance receivables. Our reinsurance receivables, net of collateral held, were $1,138.8 million as of September 30, 2003. We also had $118.9 million of prepaid reinsurance premiums as of September 30, 2003. As of September 30, 2003, our largest reinsurer represented approximately 37.4% of our outstanding reinsurance receivables, or $678.8 million, and our second largest reinsurer represented approximately 20.2% of our outstanding reinsurance receivables, or $377.3 million. See "Business -- Reinsurance."
OUR INVESTMENT PERFORMANCE MAY SUFFER AS A RESULT OF ADVERSE CAPITAL MARKET DEVELOPMENTS OR OTHER FACTORS, WHICH WOULD IN TURN ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. For the nine months ended September 30, 2003, our income derived from invested assets, including net realized gains of $4.9 million, was $19.0 million, or 67.5% of our pre-tax income. For 2002, our income derived from invested assets was $6.0 million, including net realized losses of $11.7 million, and we had a pre-tax loss of $101.9 million. Our operating results are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. The fair value of fixed income investments can fluctuate depending on changes in interest rates. Generally, the fair market value of these investments has an inverse relationship with changes in interest rates, while net investment income earned by us from future investments in fixed income securities will generally increase or decrease with interest rates. Additionally, with respect to certain of our investments, we are subject to pre-payment or reinvestment risk.
With respect to our longer-term liabilities, we strive to structure our investments in a manner that recognizes our liquidity needs for our future liabilities. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our general and specific liability profile. However, if our liquidity needs or general and specific liability profile unexpectedly changes, we may not be successful in continuing to structure our investment portfolio in that manner. To the extent that we are unsuccessful in correlating our investment portfolio with our expected liabilities, we may be forced to liquidate our investments at times and prices that are not optimal, which could have a material adverse affect on the performance of our investment portfolio. We refer to this risk as liquidity risk.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. Our mitigation efforts include maintaining a high quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. A significant portion of the investment portfolio matures each year, allowing for reinvestment at current market rates. The portfolio is actively managed, and trades are made to balance our exposure to interest rates. However, a significant increase in interest rates could have a material adverse effect on the market value of our fixed income investments.
We also have an equity portfolio that represented approximately 4.3% of our total investments and cash and cash equivalents portfolio, as of September 30, 2003. The performance of our equity portfolio is dependent upon a number of factors, including many of the same factors that affect the performance of our fixed income investments, although those factors sometimes have the opposite effect on performance as to the equity portfolio. The equity markets as a whole have performed negatively in recent years, and if such performance continues, the value of our equity portfolio could decline.
BECAUSE WE ARE DEPENDENT ON KEY EXECUTIVES, THE LOSS OF ANY OF THESE EXECUTIVES OR OUR INABILITY TO RETAIN OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success substantially depends upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are only a limited number of available qualified executives in the business lines in which we compete. Although we are not aware of any planned departures, we rely substantially upon the services of Seth D. Freudberg, President and Chief Executive Officer of our U.S. Operations, Richard S. March, Senior Vice President and General Counsel of our U.S. Operations, Kevin L. Tate, our Chief Financial Officer and Senior Vice President and Chief Financial Officer of our U.S. Operations, Robert Cohen, Senior Vice President -- Marketing of our U.S. Operations, William F. Schmidt, Senior Vice President and Chief Underwriting Officer of our U.S. Operations and Jonathan P. Ritz, Senior Vice President -- Ceded Reinsurance of our U.S. Operations. Each of Messrs. Freudberg, March, Tate, Cohen, Schmidt and Ritz has an employment agreement with us. The loss of any of their services or the services of other members of our management team or the inability to attract and retain other talented personnel could impede the further implementation of our business strategy, which could have a material adverse effect on our business. We do not currently maintain key man life insurance policies with respect to any of our employees.
SINCE WE DEPEND ON PROFESSIONAL GENERAL AGENCIES FOR A SIGNIFICANT PORTION OF OUR REVENUE, A LOSS OF ANY ONE OF THEM COULD ADVERSELY AFFECT US.
We distribute the insurance products of our U.S. Operations through our wholly-owned subsidiary, J.H. Ferguson, and a group of 51 professional general agencies that have limited quoting and binding authority. For the nine months ended September 30, 2003, our top five agencies, including J.H. Ferguson, four of which market more than one specific product, represent approximately 51% of our net premiums written. Excluding the net premiums written attributable to J.H. Ferguson, the remaining top four general agencies accounted for approximately 41% of our net premiums written. No one general agency accounted for more than 12% of our net premiums written. A loss of all or substantially all the business produced by one or more of these general agencies could have an adverse effect on our business and results of operations.
IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING COMMITMENTS.
As part of our overall strategy of risk and capacity management, we purchase reinsurance for a significant amount of risk underwritten by our insurance subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or obtain new reinsurance facilities, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite.
WE HAVE ONLY RECENTLY FORMED OUR NON-U.S. OPERATIONS, AND WE MAY NOT BE SUCCESSFUL IN EXECUTING OUR BUSINESS PLAN FOR THESE OPERATIONS.
U.N. Barbados was formed on August 18, 2003, and U.N. Bermuda was formed on October 20, 2003. Neither U.N. Barbados nor U.N. Bermuda has any operating or financial history, and we have yet to begin conducting operations through U.N. Barbados or U.N. Bermuda. While we intend to begin offering insurance and reinsurance products to third parties that are substantially similar to those products offered by our U.S. Operations and providing reinsurance to our U.S. Operations in the near term, we may be unsuccessful in executing our business plan. In order to execute our business plan for our Non-U.S. Operations, we will need to hire qualified insurance professionals for our Non-U.S. Operations and obtain from U.S. state regulators approvals and eligibilities to write E&S business. We will also need
to establish the market relationships, procedures and controls in order for our Non-U.S. Operations to operate effectively and profitably. We may be unable to do so, and if we fail to execute on our business plan for our Non-U.S. Operations or if the business written by our Non-U.S. Operations generates losses, it would prevent us from realizing the tax efficiencies that our Non-U.S. Operations might otherwise provide.
Neither U.N. Barbados nor U.N. Bermuda is currently rated by A.M. Best. While we intend to apply for a rating from A.M. Best for U.N. Barbados and U.N. Bermuda, we may not receive a satisfactory rating. If we fail to receive a satisfactory rating from A.M. Best, it would be difficult for U.N. Barbados and U.N. Bermuda to effectively sell insurance policies to third parties.
OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE INDUSTRY.
Historically, the results of companies in the property and casualty insurance industry have been subject to significant fluctuations and uncertainties. The industry's profitability can be affected significantly by:
- competition;
- capital capacity;
- rising levels of actual costs that are not foreseen by companies at the time they price their products;
- volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;
- changes in loss reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers' liability develop; and
- fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may affect the ultimate payout of losses.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. The property and casualty insurance industry historically is cyclical in nature. These fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition.
WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESS THAT COULD CAUSE DEMAND FOR OUR PRODUCTS TO FALL AND ADVERSELY AFFECT OUR PROFITABILITY.
We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Our competitors include, among others: American International Group, Berkshire Hathaway, Great American Insurance Group, HCC Insurance Holdings, Inc., Markel Corporation, Nationwide Insurance, Penn-America Group, Philadelphia Consolidated Group, RLI Corporation and W.R. Berkley Corporation. Some of our competitors have greater financial and marketing resources than we do. Our profitability could be adversely affected if we lose business to competitors offering similar or better products at or below our prices.
A number of recent, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include:
- the enactment of the Gramm-Leach-Bliley Act of 1999, which permits financial services companies such as banks and brokerage firms to engage in the insurance business;
- an influx of new capital as a result of the formation of new insurers in the marketplace and as existing companies attempt to expand their business as a result of better pricing or terms; and
- legislative mandates for insurers to provide certain types of coverage in areas where existing insurers do business, such as the mandated terrorism coverage in the Terrorism Risk Insurance Act of 2002, could eliminate the opportunities to write those coverages.
These developments could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance capacity. In that event, recent favorable industry trends that have reduced insurance and reinsurance supply and increased demand could be reversed and may negatively influence our ability to maintain or increase rates. Accordingly, these developments could have an adverse effect on our earnings.
Further, insurance or risk-linked securities, derivatives and other non-traditional risk transfer mechanisms and vehicles are being developed and offered by other parties, including non-insurance company entities, which could impact the demand for traditional insurance.
New competition from these developments could cause the demand for insurance to fall or the expense of customer acquisition and retention to increase, either of which could have a material adverse effect on our growth and profitability.
OUR GENERAL AGENCIES TYPICALLY PAY THE INSURANCE PREMIUMS ON BUSINESS THEY HAVE BOUND TO US ON A MONTHLY BASIS. THIS ACCUMULATION OF BALANCES DUE TO US EXPOSES US TO A CREDIT RISK.
Insurance premiums generally flow from the insured to their retail broker, then into a trust account controlled by our professional general agencies. Our general agencies are typically required to forward funds, net of commissions, to us following the end of each month. Consequently, we assume a degree of credit risk on these balances that have been paid by the insured but have yet to reach us.
AS A PROPERTY AND CASUALTY INSURER, WE COULD FACE LOSSES FROM TERRORISM AND POLITICAL UNREST.
We may have exposure to losses resulting from acts of terrorism and political instability. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that we consider unattractive, direct insurers, like our insurance company subsidiaries, might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, we, in our capacity as a primary insurer, would have a significant gap in our reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. These risks are inherently unpredictable, although recent events may lead to increased frequency and severity. It is difficult to predict occurrence of such events with statistical certainty or to estimate the amount of loss per occurrence they will generate.
BECAUSE WE PROVIDE OUR PROFESSIONAL GENERAL AGENCIES WITH LIMITED QUOTING AND BINDING AUTHORITY, IF ANY OF THEM FAIL TO COMPLY WITH OUR PRE-ESTABLISHED GUIDELINES, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We distribute the products of our U.S. Operations through our wholly-owned subsidiary, J.H. Ferguson, as well as a group of 51 professional general agencies that have limited quoting and binding authority; therefore, these agencies can bind certain risks without our initial approval. If any of these professional general agencies fail to comply with our underwriting guidelines and the terms of their appointment, we could be bound on a particular risk or number of risks that were not anticipated when we developed the product offering. Such actions could adversely affect our results of operations.
For example, in 2000 we learned that one of our general agencies had issued, outside of its authority, certain "facultative reinsurance policies." We now face claims for losses allegedly covered by these "facultative reinsurance policies." See "Business -- Legal Proceedings."
OUR HOLDING COMPANY STRUCTURE AND REGULATORY CONSTRAINTS LIMIT OUR ABILITY TO RECEIVE DIVIDENDS FROM OUR SUBSIDIARIES IN ORDER TO MEET OUR CASH REQUIREMENTS.
United National Group is a holding company and, as such, has no substantial operations of its own or assets other than its ownership of the shares of its direct and indirect subsidiaries. Dividends and other permitted distributions from insurance subsidiaries are expected to be United National Group's sole source of funds to meet ongoing cash requirements, including debt service payments and other expenses. The laws and regulations of Barbados, including, but not limited to Barbados insurance regulation, restrict the declaration and payment of dividends and the making of distributions by U.N. Barbados unless certain regulatory requirements are met. Specifically, in order for U.N. Barbados to pay dividends to United National Group, it will be required to have sufficient assets to meet minimum solvency requirements following such dividend. See "Regulation -- Barbados." Any dividends that United National Group receives from its subsidiaries must pass through U.N. Barbados. The inability of U.N. Barbados to pay dividends to United National Group in an amount sufficient to enable United National Group to meet its cash requirements at the holding company level could have a material adverse effect on its operations. In addition, our other insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See "Regulation."
Bermuda law does not permit payment of dividends or distributions of contributed surplus by a company if there are reasonable grounds for believing that the company, after the payment is made, would be unable to pay its liabilities as they become due, or the realizable value of the company's assets would be less, as a result of the payment, than the aggregate of its liabilities and its issued share capital and share premium accounts. Furthermore, pursuant to the Bermuda Insurance Act 1978, an insurance company is prohibited from declaring or paying a dividend during the financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. See "Regulation -- Bermuda."
For 2003, the maximum amount of distributions that we might receive from our subsidiaries under applicable law and regulations and without prior regulatory approval is approximately $22.9 million.
BECAUSE WE ARE HEAVILY REGULATED BY THE U.S. STATES IN WHICH WE OPERATE, WE MAY BE LIMITED IN THE WAY WE OPERATE.
We are subject to extensive supervision and regulation in the U.S. states in which our insurance company subsidiaries operate. This is particularly true in those states in which our insurance subsidiaries are licensed, as opposed to those states where our insurance subsidiaries write business on a surplus lines basis. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance policyholders and not our investors. The extent of regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of regulation covers, among other things:
- standards of solvency, including risk-based capital measurements;
- restrictions on the nature, quality and concentration of investments;
- restrictions on the types of terms that we can include in the insurance policies we offer;
- restrictions on the way rates are developed and the premiums we may charge;
- standards for the manner in which general agencies may be appointed;
- certain required methods of accounting;
- reserves for unearned premiums, losses and other purposes; and
- potential assessments for the provision of funds necessary for the settlement of covered claims under certain insurance policies provided by impaired, insolvent or failed insurance companies. In light of several recent significant property and casualty insurance company insolvencies, it is likely that assessments we pay will increase.
The statutes or the state insurance department regulations may affect the cost or demand for our products and may impede us from obtaining rate increases or taking other actions we might wish to take to increase our profitability. Further, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. Also, regulatory authorities have discretion to grant, renew or revoke licenses and approvals subject to the applicable state statutes and appeal process. If we do not have the requisite licenses and approvals (including in some states the requisite secretary of state registration) or do not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.
In recent years, the U.S. insurance regulatory framework has come under increased federal scrutiny, and in an effort to forestall federal intervention some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, the National Association of Insurance Commissioners, or "NAIC," which is an association of the insurance commissioners of all 50 states and the District of Columbia, and state insurance regulators regularly reexamine existing laws and regulations. Changes in these laws and regulations or the interpretation of these laws and regulations could have a material adverse effect on our business.
As an example of increased federal involvement in insurance issues, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the Federal Terrorism Risk Insurance Act of 2002 was enacted to ensure the availability of insurance coverage for defined terrorist acts in the United States. This law establishes a federal assistance program through the end of 2005 to aid the commercial property and casualty insurance industry in covering claims related to future terrorism related losses and regulates the terms of insurance relating to terrorism coverage. This law could adversely affect our business by increasing underwriting capacity for our competitors as well as by requiring that we offer coverage for terrorist acts.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE THAT MAY NOT BE AVAILABLE OR ONLY AVAILABLE ON UNFAVORABLE TERMS.
Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that we need to raise additional funds, any equity or debt financing for this purpose, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of the Class A common shares offered hereby. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.
RISKS RELATED TO THIS OFFERING AND
OWNERSHIP OF OUR CLASS A COMMON SHARES
REGULATORY AND OTHER CONSTRAINTS LIMIT OUR ABILITY TO PAY DIVIDENDS AND MAKE OTHER PAYMENTS.
United National Group is subject to Cayman Islands regulatory constraints that will affect its ability to pay dividends on its common shares and make other payments. In addition, there are provisions
in the senior notes issued by one of our subsidiaries, which notes we have guaranteed, that prevent us from paying dividends on or redeeming any of our common shares prior to repayment of these senior notes.
Our four operating insurance subsidiaries domiciled in the United States are each subject to state regulatory restraints that affect those subsidiaries' ability to pay dividends and to make other payments. We are subject to the insurance holding company laws of Indiana, Pennsylvania and Wisconsin.
Under Indiana law, Diamond State Insurance Company and United National Casualty Insurance Company may not pay any dividend or make any distribution of cash or other property in any 12-month period unless certain tests regarding their policyholders surplus and net income are met. In addition, Indiana does not permit a domestic insurer to declare or pay a dividend except out of earned surplus unless otherwise approved by the Indiana commissioner of insurance before the dividend is paid. See "Regulation -- State Dividend Limitations."
Under Pennsylvania law, United National Insurance Company may not pay any dividend or make any distribution in any 12-month period unless certain tests regarding its policyholders surplus and net income are met. In addition, Pennsylvania does not permit a domestic insurer to declare or pay a dividend except out of unassigned funds (surplus) unless otherwise approved by the Pennsylvania commissioner of insurance before the dividend is paid. Furthermore, no dividend or other distribution may be declared or paid by a Pennsylvania insurance company that would reduce its total capital and surplus to an amount that is less than the amount required by the Pennsylvania Insurance Department for the kind or kinds of business that it is authorized to transact. See "Regulation -- State Dividend Limitations."
Under Wisconsin law, United National Specialty Insurance Company may not pay any dividend or make any distribution of cash or other property in any 12-month period unless certain tests regarding its policyholders surplus and net income are met. Additionally, under Wisconsin law, all authorizations of distributions to shareholders, other than stock dividends, must be reported to the commissioner in writing and no payment may be made until at least 30 days after such report. See "Regulation -- State Dividend Limitations."
The dividend limitations imposed by the state laws are based on the statutory financial results of our respective U.S. Insurance Subsidiaries determined by using statutory accounting practices that differ in certain respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP. These differences include, among other items, deferred acquisition costs, deferred income taxes, required investment reserves and surplus notes.
YOUR INTERESTS AS A HOLDER OF CLASS A COMMON SHARES MAY CONFLICT WITH THE INTERESTS OF OUR CONTROLLING SHAREHOLDER.
Fox Paine & Company beneficially owns shares having 88.3% of our total voting power. After this offering, Fox Paine & Company will beneficially own shares having % of our total voting power. The percentage of our total voting power that Fox Paine & Company may exercise is greater than the percentage of our total shares that Fox Paine & Company beneficially owns because Fox Paine & Company beneficially owns a large number of Class B common shares, which have ten votes per share as opposed to Class A common shares, which have one vote per share. The Class A common shares and the Class B common shares generally vote together as a single class on matters presented to our shareholders. Based on the ownership structure of the affiliates of Fox Paine & Company that own these shares, it is not expected that these affiliates will be subject to the voting restriction contained in our articles of association following completion of this offering. As a result, Fox Paine & Company has and will continue to have control over the outcome of certain matters requiring shareholder approval, including the power to, among other things:
- amend our memorandum or articles of association;
- prevent schemes of arrangement of our subsidiaries' assets; and
- approve redemption of the common shares as described under "Description of Share Capital -- Common Shares -- Redemption."
Fox Paine & Company will also be able to prevent or cause a change of control relating to us. Fox Paine & Company's control over us and our subsidiaries, and its ability to prevent or cause a change of control relating to us, may delay or prevent a change of control, or cause a change of control to occur at a time when it is not favored by other shareholders. As a result, the trading price of our Class A common shares could be adversely affected.
In addition, we have agreed to pay Fox Paine & Company and an affiliate of the Ball family trusts annual management fees totaling $1.5 million, in addition to an initial management fee of $12.0 million already paid only to Fox Paine & Company. See "Our Relationship with Fox Paine & Company."
Fox Paine & Company may in the future make significant investments in other insurance or reinsurance companies. Some of these companies may compete with us or with our subsidiaries. Fox Paine & Company is not obligated to advise us of any investment or business opportunities of which they are aware, and they are not prohibited or restricted from competing with us or our subsidiaries.
OUR CONTROLLING SHAREHOLDER HAS THE CONTRACTUAL RIGHT TO NOMINATE A MAJORITY OF THE MEMBERS OF OUR BOARD OF DIRECTORS.
Under the terms of a shareholders agreement among us, Fox Paine & Company and the Ball family trusts, Fox Paine & Company has the contractual right to nominate a majority of the members of our Board of Directors. See "Management" and "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition." Our Board of Directors, in turn, and subject to its fiduciary duties under Cayman Islands law, appoints the members of our senior management, who also have fiduciary duties to us. As a result, Fox Paine & Company effectively has the ability to control the appointment of the members of our senior management and to prevent any changes in senior management that shareholders, or that other members of our Board of Directors, may deem advisable. Currently, four directors serve on our Board of Directors who were appointed by Fox Paine & Company: Messrs. Saul A. Fox, W. Dexter Paine, III, Troy W. Thacker and Angelos J. Dassios. Following completion of this offering, as part of the expansion of our Board of Directors, we will appoint one additional member designated by Fox Paine & Company, Mr. Robert N. Lowe, Jr.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC TRADING MARKET FOR OUR CLASS A COMMON SHARES, AND YOU CANNOT BE CERTAIN THAT AN ACTIVE TRADING MARKET OR A SPECIFIC SHARE PRICE WILL BE ESTABLISHED.
Currently, and at all times prior to this offering, there is no public trading market for our common shares and, as a result, we cannot predict whether an active trading market will develop and continue upon completion of this offering or if the market price of our Class A common shares will decline below the initial public offering price. We intend to apply for our Class A common shares to be quoted on the Nasdaq National Market under the symbol "UNGL." The initial public offering price per Class A common share will be determined by agreement among us and the representatives of the underwriters and may not be indicative of the trading price of our Class A common shares after this offering. The trading price of our Class A common shares may decline for many reasons, some of which are beyond our control, including among others:
- quarterly variations in our results of operations;
- changes in expectations as to our future results of operations, including financial estimates by securities analysts and investors;
- announcements by third parties of claims against us;
- changes in law and regulation;
- results of operations that vary from those expected by securities analysts and investors; and
- future sales of Class A common shares.
In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. As a result, the trading price of our Class A common shares may be below the initial public offering price.
FUTURE SALES OF CLASS A COMMON SHARES MAY AFFECT THE TRADING PRICE OF OUR CLASS A COMMON SHARES.
We cannot predict what effect, if any, future sales of our Class A common shares, or the availability of Class A common shares for future sale, will have on the trading price of our Class A common shares. Sales of substantial amounts of our Class A common shares in the public market following this offering, or the perception that such sales could occur, could adversely affect the trading price of our Class A common shares and may make it more difficult for you to sell your Class A common shares at a time and price that you deem appropriate. See "Description of Share Capital" and "Shares Eligible for Future Sale" for further information regarding circumstances under which additional Class A common shares may be sold. Upon completion of this offering, we will have Class A common shares outstanding, Class B common shares outstanding and an additional Class A common shares will be issuable upon the full exercise or conversion of outstanding vested options and warrants. If the underwriters' overallotment option is exercised, an additional Class A common shares will be outstanding. Of these shares, the Class A common shares sold in this offering will be freely transferable, except for any shares sold to our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining shares will be "restricted securities" subject to the volume limitations and the other conditions of Rule 144.
We, our directors, officers, certain of our existing shareholders and those persons who purchase Class A common shares through the reserved share program discussed later in this prospectus have agreed for a period of 180 days after the date of this prospectus, that with limited exceptions we and they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters (which consent with respect to the reserved share program will not be granted for any sales during the first 90 days of such lock-up), directly or indirectly, offer to sell, sell or otherwise dispose of any of our Class A common shares. Upon the consummation of this offering, certain existing shareholders and their transferees will have the right to require us to register under the Securities Act the sale into the public markets of their Class A common shares, subject to the 180-day lock-up agreements. Upon the effectiveness of any such registration statement, all shares covered by that registration statement may be sold into the public markets. In addition, following the consummation of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register Class A common shares issued or reserved for issuance under our stock incentive plan. Subject to the exercise of issued and outstanding options, shares registered under the registration statement on Form S-8 may be sold into the public markets after the expiration of the 180-day lock-up agreements.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON ANY OF OUR COMMON SHARES.
We have never declared or paid any cash dividends on our common shares. We intend to retain our earnings, if any, to finance the development and expansion of our business, and, therefore, we do not expect to pay any cash dividends on any of our common shares in the foreseeable future. As a result, capital appreciation, if any, on our common shares will be your sole source of gain for the foreseeable future. In addition, there are regulatory and other constraints that could prevent us from paying dividends in any event. See "-- Regulatory and other constraints limit our ability to pay dividends and make other payments."
PUBLIC INVESTORS MAY SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.
The initial public offering price per Class A common share may be higher than our net book value per share. In connection with redemption of the Series A preferred shares, we will also issue up to
an additional Class A common shares as payment of the accrued and unpaid dividends on the Series A preferred shares and the applicable redemption premium. See "Description of Share Capital -- Preferred Shares -- Series A Preferred Shares -- Redemption." Accordingly, if you purchase Class A common shares in this offering, you will suffer immediate and substantial dilution of your investment. Based upon the issuance and sale of Class A common shares, you will incur immediate dilution of approximately $ in the net book value per Class A common share if you purchase Class A common shares in this offering. In addition, if funds sufficient to repurchase all of our outstanding Series A preferred shares are not raised in this offering, the remaining outstanding Series A preferred shares not repurchased may be converted into Class A common shares, thereby further diluting your investment.
THERE ARE PROVISIONS IN OUR ARTICLES OF ASSOCIATION THAT MAY REDUCE OR INCREASE THE VOTING RIGHTS OF OUR CLASS A COMMON SHARES.
Our articles of association generally provide that shareholders have one vote for each Class A common share and ten votes for each Class B common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, pursuant to a mechanism specified in our articles of association, the voting rights exercisable by a shareholder may be limited so that certain persons or groups are not deemed to hold 9.5% or more of the voting power conferred by our common shares. The votes that could be cast by a shareholder but for these restrictions will be allocated to the other shareholders. In addition, our Board of Directors may limit a shareholder's exercise of voting rights where it deems necessary to do so to avoid adverse tax, legal or regulatory consequences.
Under these provisions, certain shareholders may have the right to exercise their voting rights limited to less than one vote per share, while other shareholders may have the right to exercise their voting rights increased to more than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of certain shareholders that would not otherwise be subject to the limitation by virtue of their direct share ownership. Our articles of association provide that shareholders will be notified of the applicable voting power exercisable with respect to their common shares prior to any vote to be taken by the shareholders. See "Description of Share Capital -- Voting Rights."
As a result of any reallocation of votes, a shareholder's voting rights might increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such shareholder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934.
We also have the authority under our articles of association to request information from any shareholder for the purpose of determining whether a shareholder's voting rights are to be reallocated pursuant to the articles of association. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate the shareholder's voting rights.
THERE ARE PROVISIONS IN OUR ARTICLES OF ASSOCIATION THAT MAY RESTRICT THE ABILITY TO TRANSFER COMMON SHARES AND THAT MAY REQUIRE SHAREHOLDERS TO SELL THEIR COMMON SHARES.
Our Board of Directors may decline to register a transfer of any common shares (1) if it appears to our Board of Directors, in their sole and reasonable discretion, that as a result of such transfer, after taking account of the limitations on voting rights in our articles of association, that any non-de minimis adverse tax, regulatory or legal consequences may occur to us, to any of our subsidiaries or to any of our shareholders or (2) if, subject to any applicable requirements of the Nasdaq National Market, a written opinion has not been provided by counsel supporting the legality of the transaction under the U.S. securities laws or if any required governmental approvals have not been obtained.
Our articles of association also provide that if our Board of Directors determines that share ownership by a person may result in non-de minimis adverse tax, legal or regulatory consequences to us, to any of our subsidiaries or to any of our shareholders, we have the option but not the obligation to require
such shareholders to sell for fair market value to us, or to a third party to whom we have assigned that right to repurchase shares, the minimum number of common shares that is necessary to eliminate the non-de minimis adverse tax, legal or regulatory consequence. See "Description of Share Capital -- Articles of Association -- Acquisition of Class A Common Shares by United National Group."
YOU MAY BE REQUIRED TO INDEMNIFY US FOR ANY TAX LIABILITY THAT RESULTS FROM YOUR ACTS.
Our articles of association provide certain protections against adverse
tax consequences to us resulting from laws that apply to our shareholders. If a
shareholder's death or non-payment of any tax or duty payable by the
shareholder, or any other act involving the shareholder, causes any adverse tax
consequences to us, (1) the shareholder (or his executor or administrator) is
required to indemnify us against any tax liability that we incur as a result,
(2) we will have a lien on any dividends or any other distributions payable to
the shareholder by us to the extent of the tax liability and (3) if any amounts
not covered by our lien on dividends and distributions are owed to us by the
shareholder as a result of our tax liability, we have the right to refuse to
register any transfer of the shareholder's shares.
THERE ARE REGULATORY LIMITATIONS ON THE OWNERSHIP AND TRANSFER OF OUR COMMON SHARES.
State laws in the United States require prior notices or regulatory agency approval of changes in control of an insurer or its holding company. The insurance laws of the States of Pennsylvania, Indiana and Wisconsin, where our U.S. insurance companies are domiciled, provide that no corporation or other person except an authorized insurer may acquire control of a domestic insurance or reinsurance company unless it has given notice to such company and obtained prior written approval of the relevant insurance regulatory authorities. Any purchaser of 10% or more of our aggregate outstanding voting power could become subject to such regulations and could be required to file certain notices and reports with the applicable regulatory authorities prior to such acquisition.
HOLDERS OF THE CLASS A COMMON SHARES MAY FACE DIFFICULTIES IN PROTECTING THEIR INTERESTS BECAUSE WE ARE INCORPORATED UNDER CAYMAN ISLANDS LAW.
Following this offering, our corporate affairs will be governed by our amended and restated memorandum and articles of association, by the Companies Law (2003 Revision) and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty in protecting your interests in the face of actions by our management, directors or controlling shareholder than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.
Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights. This may make it more difficult for you to assess the value of any consideration you may receive in connection with a business combination transaction or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.
Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of the company. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This fact may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the Board of Directors.
PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND CAYMAN ISLANDS CORPORATE LAW MAY IMPEDE A TAKEOVER, WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR CLASS A COMMON SHARES.
Our articles of association permit our Board of Directors to issue preferred shares from time to time, with such rights and preferences as they consider appropriate. Our Board of Directors could authorize the issuance of preferred shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.
Unlike many jurisdictions in the United States, Cayman Islands law does not provide for mergers as that expression is understood under corporate law in the United States. Although, Cayman Islands law does have statutory provisions that provide for the reconstruction and amalgamation of companies, which are commonly referred to in the Cayman Islands as "schemes of arrangement." The procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders' meeting by each class of shareholders, in each case, by a majority of the number of holders of each class of a company's shares that are present and voting (either in person or by proxy) at such a meeting, which holders must also represent 75% in value of such class issued that are present and voting (either in person or by proxy) at such meeting (excluding the shares owned by the parties to the scheme of arrangement).
The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect the creditors' interests. Furthermore, the Grand Court will only approve a scheme of arrangement if it is satisfied that:
- the statutory provisions as to majority vote have been complied with;
- the shareholders have been fairly represented at the meeting in question;
- the scheme of arrangement is such as a businessman would reasonably approve; and
- the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
YOUR CLASS A COMMON SHARES MAY BE REDEEMED OR REPURCHASED IN CONNECTION WITH A BUSINESS COMBINATION TRANSACTION.
Our articles of association provide that we may redeem or repurchase Class A common shares upon the approval by our Board of Directors of, and adoption by our shareholders of an ordinary resolution approving, an agreement relating to a business combination transaction involving us. Relevant business combinations would include those effected by stock purchase or any other means, after which any person or entity (other than Fox Paine & Company and its affiliates) would have a majority of the votes represented by our issued and outstanding shares. We have included this provision in our articles of association because Cayman Islands law does not provide for any statutory merger.
Our articles of association do not specify the type or amount of consideration that you would receive in such a redemption or repurchase, and you will not have any appraisal or similar rights in such an event. The consideration to be received by holders of Class A common shares from such a redemption or repurchase due to a business combination transaction will be dependent upon the terms of the agreement that was approved by our Board of Directors and shareholders. These terms would be specified in the materials furnished to holders of Class A common shares under the proxy rules in connection with the shareholder approval necessary to effect such a business combination. Our articles of association do not require that the consideration to be received by holders of Class A common shares and Class B common
shares be identical, and as a result holders of Class B common shares may receive different consideration than holders of Class A common shares.
Because Fox Paine & Company has the right to appoint a majority of our Board of Directors and holds a majority of our total outstanding voting power, Fox Paine & Company could cause your shares to be redeemed or repurchased without any action from any other shareholder. As a result, you could be forced to redeem or sell your Class A common shares at a time when you have not elected to sell or for consideration that you consider to be inadequate.
AS A HOLDER OF THE CLASS A COMMON SHARES, YOU MAY HAVE DIFFICULTY OBTAINING OR ENFORCING A JUDGMENT AGAINST US BECAUSE WE ARE INCORPORATED UNDER THE LAWS OF THE CAYMAN ISLANDS.
Because we are a Cayman Islands company, there is uncertainty as to whether the Grand Court of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in the Cayman Islands against us predicated upon the securities laws of the United States or any state thereof.
We are incorporated as an exempted company with limited liability under the laws of the Cayman Islands. A significant amount of our assets are located outside of the United States. As a result, it may be difficult for persons purchasing the Class A common shares to effect service of process within the United States upon us or to enforce judgments against us or judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States.
We have been advised by our Cayman Islands counsel, Walkers, that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will, based on the principle that a judgment by a competent foreign court will impose upon the judgment debtor an obligation to pay the sum for which judgment has been given, recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner, and is not of a kind, the enforcement of which is contrary to the public policy of the Cayman Islands. There is doubt, however, as to whether the courts of the Cayman Islands will, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature.
A Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.
RISKS RELATED TO TAXATION
WE MAY BECOME SUBJECT TO TAXES IN THE CAYMAN ISLANDS, BARBADOS OR BERMUDA IN THE FUTURE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND YOUR INVESTMENT.
United National Group has been incorporated under the laws of the Cayman Islands as an exempted company and, as such, obtained an undertaking on September 2, 2003 from the Governor in Council of the Cayman Islands substantially that, for a period of 20 years from the date of such undertaking, no law that is enacted in the Cayman Islands imposing any tax to be levied on profit or income or gains or appreciation shall apply to us and no such tax and no tax in the nature of estate duty or inheritance tax will be payable, either directly or by way of withholding, on our common shares. This undertaking would not, however, prevent the imposition of taxes on any person ordinarily resident in the Cayman Islands or any company in respect of its ownership of real property or leasehold interests in the Cayman Islands. See "Material Tax Considerations -- Taxation of United National Group and
Subsidiaries -- Cayman Islands." Given the limited duration of the undertaking, we cannot be certain that we will not be subject to Cayman Islands tax after the expiration of the 20-year period.
U.N. Barbados was incorporated under the laws of Barbados on August 18, 2003. We have applied for a guarantee from the Barbados Minister of Finance to the effect that, for a period of 15 years from the date of such guarantee, U.N. Barbados will be entitled to benefits and exemptions from taxation as set forth in current law. In addition, under such a guarantee, if at any time during such 15-year period, the laws are amended to provide tax rates or exemptions that are more favorable than under current law, U.N. Barbados would be entitled to those rates or exemptions for the remainder of such 15-year period. See "Material Tax Considerations -- Taxation of United National Group and Subsidiaries -- Barbados." Given the limited duration of any guarantee that we may receive, we cannot be certain that we will not be subject to Barbados tax after the expiration of the 15-year period.
U.N. Bermuda was formed on October 20, 2003. We have applied for an assurance from the Bermuda Minister of Finance, under the Bermuda Exempted Undertakings Tax Protection Act 1966, as amended, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to U.N. Bermuda or any of its operations, shares, debentures or other obligations through March 28, 2016. See "Material Tax Considerations -- Taxation of United National Group and its Subsidiaries -- Bermuda." Given the limited duration of any assurance that we may receive, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.
Following the expiration of the periods described above, we may become subject to taxes in the Cayman Islands, Barbados or Bermuda, which may have a material adverse effect on our results of operations and your investment.
UNITED NATIONAL GROUP, U.N. BARBADOS OR U.N. BERMUDA MAY BE SUBJECT TO U.S. TAX THAT MAY HAVE A MATERIAL ADVERSE EFFECT ON UNITED NATIONAL GROUP'S, U.N. BARBADOS' OR U.N. BERMUDA'S RESULTS OF OPERATIONS AND YOUR INVESTMENT.
United National Group is a Cayman Islands company, U.N. Barbados is a Barbados company and U.N. Bermuda is a Bermuda company. Although we have not commenced any business operations outside of the United States, we intend to manage our business in a manner designed to reduce the risk that United National Group, U.N. Barbados and U.N. Bermuda will be treated as engaged in a U.S. trade or business for U.S. federal income tax purposes. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States, we cannot be certain that the U.S. Internal Revenue Service will not contend successfully that United National Group, U.N. Barbados or U.N. Bermuda is or will be engaged in a trade or business in the United States. If United National Group, U.N. Barbados or U.N. Bermuda were considered to be engaged in a business in the United States, we could be subject to U.S. corporate income and branch profits taxes on the portion of our earnings effectively connected to such U.S. business, in which case our results of operations and your investment could be materially adversely affected. See "Material Tax Considerations -- Taxation of United National Group and its Subsidiaries -- United States."
United National Group or its non-U.S. subsidiaries might be subject to U.S. tax or any of its U.S. subsidiaries might be subject to additional U.S. tax on a portion of its income (which in the case of a non-U.S. subsidiary would only include income from U.S. sources and foreign source income to the extent it is effectively connected with a U.S. trade or business) if United National Group or such subsidiary is considered a personal holding company, or "PHC," for U.S. federal income tax purposes. This status will depend on whether more than 50% of the value of our shares could be deemed to be owned (pursuant to certain constructive ownership rules) by five or fewer individuals (including as individuals for this purpose certain entities such as certain tax-exempt organizations and pension funds) and whether 60% or more of United National Group's income, or the income of any of its subsidiaries, as determined for U.S. federal income tax purposes, consists of "personal holding company income." We believe that five or fewer
individuals or tax-exempt organizations will be treated as owning more than 50% of the value of our shares. Consequently, United National Group or one or more of its subsidiaries could become PHCs, depending on whether we or any of our subsidiaries satisfy the PHC gross income test. As a result, we intend to manage our business to reduce the possibility that each of us will meet the 60% income threshold. If we or any of our subsidiaries is or were to become a PHC in a given taxable year, such company would be subject to PHC tax on its "undistributed personal holding company income." There can be no assurance that United National Group and each of its subsidiaries are not or will not become a PHC immediately following this offering or in the future because of various factors including factual uncertainties regarding the application of the PHC rules, the makeup of our shareholder base and other circumstances that affect the application of the PHC rules to us and our subsidiaries. Additionally, we cannot be certain that the amount of U.S. tax that would be imposed if United National Group or any of our subsidiaries were a PHC would be immaterial. See "Material Tax Considerations -- Taxation of United National Group and Subsidiaries -- United States -- Personal Holding Companies."
IF YOU ACQUIRE 10% OR MORE OF UNITED NATIONAL GROUP'S SHARES, YOU MAY BE SUBJECT TO TAXATION UNDER THE "CONTROLLED FOREIGN CORPORATION," OR "CFC" RULES.
Each "10% U.S. Shareholder" of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the CFC directly or indirectly through foreign entities on the last day of the CFC's taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income," even if the subpart F income is not distributed. A foreign corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through foreign entities or by attribution by application of the constructive ownership rules (i.e., "constructively") of section 958(b) of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the "Code") more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation or more than 50% of the total value of all stock of such corporation. A "10% U.S. Shareholder" is a U.S. Person (as defined in "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation") who owns (directly, indirectly through foreign entities or constructively) at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. For purposes of taking into account insurance income, which is a category of subpart F income, the term CFC also includes a foreign insurance company in which more than 25% of the total combined voting power of all classes of voting stock (or more than 25% of the total value of all classes of stock) is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks.
As a result of the attribution and constructive ownership rules described above, we believe that United National Group, U.N. Barbados and U.N. Bermuda are CFCs. That status as a CFC does not cause United National Group, U.N. Barbados or U.N. Bermuda to be subject to U.S. federal income tax. Such status also has no adverse U.S. federal income tax consequences for any U.S. Person that is not a 10% U.S. Shareholder. We believe that because of the anticipated dispersion of our share ownership, provisions in our organizational documents that limit voting power (these provisions are described in "Description of Share Capital") and other factors, no U.S. Person that acquires shares of United National Group in this offering directly or indirectly through one or more foreign entities and that did not own (directly, indirectly through foreign entities, or constructively) shares of United National Group prior to this offering should be treated as owning (directly, indirectly through foreign entities or constructively) 10% or more of the total voting power of all classes of shares of United National Group, U.N. Barbados or U.N. Bermuda. It is possible, however, that the IRS could challenge the effectiveness of these provisions, and that a court would sustain such a challenge, which would result in a 10% U.S. Shareholder including in its gross income its pro rata share of the subpart F income of United National Group, U.N. Barbados and U.N. Bermuda on a current basis. See "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation -- Classification of United National Group, U.N. Barbados or U.N. Bermuda as Controlled Foreign Corporations."
U.S. PERSONS THAT HOLD CLASS A COMMON SHARES MAY BE SUBJECT TO U.S. INCOME
TAXATION AT ORDINARY INCOME TAX RATES ON THEIR PROPORTIONATE SHARE OF OUR "RELATED PARTY INSURANCE INCOME," OR "RPII."
If the RPII of U.N. Barbados or U.N. Bermuda were to equal or exceed 20% of such company's gross insurance income in any taxable year and direct or indirect insureds (and persons related to such insureds) own (or are treated as owning directly or indirectly through entities) 20% or more of the voting power or value of United National Group, then a U.S. Person that owns shares of United National Group (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person's pro rata share of U.N. Barbados' or U.N. Bermuda's RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. Persons at that date regardless of whether such income is distributed. The amount of RPII earned by U.N. Barbados or U.N. Bermuda (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of shares of United National Group or any person related to such holder) will depend on a number of factors, including the geographic distribution of the business and the identity of persons directly or indirectly insured or reinsured by U.N. Barbados or U.N. Bermuda. We do not expect the gross RPII of U.N. Barbados or U.N. Bermuda in the foreseeable future to equal or exceed 20% of such company's gross insurance income, but we cannot be certain that this will be the case because some of the factors that determine the extent of RPII may be beyond our control.
U.S. PERSONS THAT DISPOSE OF CLASS A COMMON SHARES MAY BE SUBJECT TO U.S. INCOME TAXATION AT ORDINARY INCOME TAX RATES ON A PORTION OF THEIR GAIN, IF ANY.
The RPII rules provide that if a U.S. Person disposes of shares in a foreign insurance corporation in which U.S. Persons own 25% or more of the shares (even if the amount of RPII is less than 20% of the corporation's gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as ordinary income to the extent of the holder's share of the corporation's undistributed earnings and profits that were accumulated during the period that the holder owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such a holder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the holder. These RPII rules should not apply to dispositions of Class A common shares in United National Group because United National Group will not itself be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts, or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application thereof to us, U.N. Barbados and U.N. Bermuda is uncertain. See "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation -- The RPII CFC Provisions."
U.S. PERSONS THAT HOLD CLASS A COMMON SHARES WILL BE SUBJECT TO ADVERSE TAX CONSEQUENCES IF UNITED NATIONAL GROUP CONSIDERED TO BE A PASSIVE FOREIGN INVESTMENT COMPANY, OR "PFIC," FOR U.S. FEDERAL INCOME TAX PURPOSES.
We believe that United National Group is not, has not been, and we currently do not expect United National Group to become, a PFIC for U.S. federal income tax purposes. We cannot assure you, however, that United National Group will not be deemed a PFIC by the IRS. A foreign corporation will be considered a PFIC for U.S. federal income tax purposes during a given year if (1) 75% or more of its gross income constitutes "passive income" (i.e., interest, dividends and other investment income) or (2) 50% or more of its assets produce passive income. However, passive income generally does not include income derived in the active conduct of an insurance business by a corporation that is predominantly
engaged in an insurance business, provided that the foreign corporation does not maintain financial reserves in excess of the reasonable needs of its insurance business, and look-through rules apply to treat a foreign corporation as earning the income and owning the assets of any other corporation in which it owns at least 25% of the value of the stock. If United National Group were considered a PFIC, it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation, including subjecting the investor to a greater tax liability than might otherwise apply (in the event of the sale at a gain of, or receipt of an "excess distribution" with respect to, its shares of United National Group) and subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed (in the event of a "qualified electing fund election" or "mark-to-market" election). There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance would have on an investor that is subject to U.S. federal income taxation. See "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation -- Passive Foreign Investment Companies."
U.S. PERSONS THAT HOLD CLASS A COMMON SHARES WILL BE SUBJECT TO ADVERSE TAX CONSEQUENCES IF UNITED NATIONAL GROUP, U.N. BARBADOS OR U.N. BERMUDA IS CONSIDERED TO BE A FOREIGN PERSONAL HOLDING COMPANY, OR "FPHC," FOR U.S. FEDERAL INCOME TAX PURPOSES.
United National Group, U.N. Barbados or U.N. Bermuda could be considered to be an FPHC for U.S. federal income tax purposes if more than 50% of our shares could be deemed to be owned by five or fewer individuals who are citizens or residents of the United States, and 60% or more of United National Group's income, of U.N. Barbados' income or of U.N. Bermuda's income, consists of "foreign personal holding company income," as determined for U.S. federal income tax purposes. We believe that five or fewer individuals may be treated as owning more than 50% of the voting power or the value of our shares. Consequently, United National Group, U.N. Barbados or U.N. Bermuda could be or become an FPHC, depending on whether any of those companies satisfies the FPHC gross income test. As a result, we intend to monitor the income of United National Group, U.N. Barbados and U.N. Bermuda to reduce the possibility that any of those companies will meet the 60% income threshold. However, because of unknown factors including factual uncertainties regarding the application of the FPHC rules, the makeup of our shareholder base and other circumstances that affect the application of the FPHC rules to us and our subsidiaries, we cannot be certain that any of United National Group, U.N. Barbados or U.N. Bermuda will not be considered an FPHC. If United National Group, U.N. Barbados or U.N. Bermuda were considered an FPHC it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation, including imputing to such investor a portion of the "undistributed foreign personal holding company income" (as defined for U.S. federal income tax purposes) of such entity. Such income would be taxable as a dividend even if no distribution were made and should not be eligible for a reduced rate of tax under recently enacted legislation with respect to dividends paid before 2009. In addition, if United National Group were considered an FPHC in the tax year next preceding the date of death of any U.S. individual owning Class A common shares, such individual's heirs or estate would not be entitled to a "step-up" in the basis of the Class A common shares that might otherwise be available under U.S. federal income tax laws. See "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation-Foreign Personal Holding Companies."
U.S. TAX-EXEMPT ORGANIZATIONS THAT OWN OUR CLASS A COMMON SHARES MAY RECOGNIZE UNRELATED BUSINESS TAXABLE INCOME.
A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our insurance income is allocated to the organization. In general, insurance income will be allocated to a U.S. tax-exempt organization if either United National Group, U.N. Barbados or U.N. Bermuda is a CFC and the tax-exempt shareholder is a 10% U.S. Shareholder or there is RPII and certain exceptions do not apply. Although we do not believe that any U.S. Persons should be allocated such insurance income, we cannot be certain that this will be the case. See "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation -- Classification of United National Group, U.N. Barbados or
U.N. Bermuda as Controlled Foreign Corporations" and "Material Tax Considerations -- Taxation of Shareholders -- United States Taxation -- The RPII CFC Provisions." Potential U.S. tax-exempt investors are advised to consult their own tax advisors.
CHANGES IN U.S. FEDERAL INCOME TAX LAW COULD MATERIALLY ADVERSELY AFFECT AN INVESTMENT IN OUR CLASS A COMMON SHARES.
Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. In this regard, legislation has been introduced that includes a provision that permits the IRS to reallocate or re-characterize items of income, deduction or certain other items related to a reinsurance agreement between related parties to reflect the proper source, character and amount for each item (in contrast to current law, which only refers to source and character). While there are no currently pending legislative proposals that, if enacted, would have a material adverse effect on us or our shareholders, it is possible that broader based legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders.
Additionally, the U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the United States, or is a PFIC or whether U.S. Persons would be required to include in their gross income the subpart F income or the RPII of a CFC are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to insurance companies and the regulations regarding RPII are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. We cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect.
THE IMPACT OF THE CAYMAN ISLANDS' AND BERMUDA'S LETTERS OF COMMITMENT OR OTHER CONCESSIONS TO THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT TO ELIMINATE HARMFUL TAX PRACTICES IS UNCERTAIN AND COULD ADVERSELY AFFECT OUR TAX STATUS IN THE CAYMAN ISLANDS OR BERMUDA.
The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD's report dated April 18, 2002, the Cayman Islands and Bermuda were not listed as uncooperative tax haven jurisdictions because each had previously committed itself to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes. Barbados was not included in the list because it has longstanding information exchange arrangements with other countries, which have been found by its treaty partners to operate in an effective manner.
THERE IS A RISK THAT DIVIDENDS AND INTEREST PAID TO U.N. BARBADOS BY OUR U.S. SUBSIDIARIES MAY NOT BE ELIGIBLE FOR BENEFITS UNDER THE U.S.-BARBADOS INCOME TAX TREATY.
UN Holdings II, Inc. is a Delaware corporation wholly owned by U.N. Barbados. Under U.S. federal income tax law, dividends and interest paid by a U.S. corporation to a non-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between Barbados and the United States, or the "Barbados Treaty," reduces the rate of withholding tax on interest payments to 5% and on dividends to 15%, or 5% if the shareholder owns 10% or more of the company's voting stock. Were the IRS to successfully contend that U.N. Barbados is not eligible for benefits under the Barbados Treaty, dividends and interest paid to U.N. Barbados from U.S. companies would be subject to the 30% withholding tax. Such tax may be applied retroactively to all previous tax years for which the statute of limitations has not expired, with interest and penalties. Such a result may have a material adverse effect on our financial condition and results of operations.
THE UNITED STATES COULD OVERRIDE OR RENEGOTIATE THE INCOME TAX TREATY BETWEEN THE UNITED STATES AND BARBADOS.
Legislation has been introduced in the U.S. Congress that would override the Barbados Treaty. We cannot predict whether this proposed legislation or other similar legislation will be enacted. In addition, a recent press release by the U.S. Treasury Department indicates that the United States and Barbados are currently discussing revisions to the Barbados Treaty and that concluding these revisions is a matter of priority for both governments. Accordingly, no assurances can be given as to the availability of benefits under the Barbados Treaty in future years.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Industry Background and Trends," "Business" and elsewhere in this prospectus may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us specifically and the insurance and reinsurance sectors in general, both as to underwriting and investment matters. Statements that include the words "expect," "intend," "plan," "believe," "project," "anticipate," "seek," "will" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:
- ineffectiveness of our business strategy due to changes in current or future market conditions;
- the effects of competitors' pricing policies, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products;
- greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices have anticipated;
- decreased level of demand for our insurance products or increased competition due to an increase in capacity of property and casualty insurers;
- our ability to implement our business plan for our Non-U.S.
Operations;
- the inability to obtain or maintain financial strength or claims-paying ratings by one or more of our U.S. Insurance Subsidiaries;
- United National Group, U.N. Barbados or U.N. Bermuda becoming subject to income taxes in the United States;
- judicial decisions;
- changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers;
- acceptance of our products and services, including new products and services;
- changes in the availability, cost or quality of reinsurance or a deterioration of the claims-paying ability of reinsurers who have payment obligations to us;
- the effect of acts of terrorism;
- the effects of terrorist-related insurance legislation and laws;
- loss of key personnel;
- political stability of the Cayman Islands;
- changes in accounting policies or practices; and
- changes in general economic conditions, including inflation and other factors that could affect our investment portfolio.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
USE OF PROCEEDS
We estimate the net proceeds from this offering will be approximately $ million, based on an assumed initial public offering price of $ , the midpoint of the estimated range set forth on the cover page of this prospectus, and after deducting the underwriting discount and our estimated offering expenses of $ million. If the underwriters exercise their overallotment option in full, we estimate our net proceeds will be approximately $ million.
We intend to use up to $150.0 million of these net proceeds to redeem all of our 15.0 million outstanding Series A preferred shares, which are currently held by Fox Paine & Company and the Ball family trusts. The redemption price for each Series A preferred share is currently $11.825, which represents 110% of the sum of the current liquidation preference per Series A preferred share, which is $10.00, plus accrued but unpaid dividends of $0.75 per Series A preferred share. Of this redemption price, we will pay $10.00 in cash, and we will pay the remainder in Class A common shares, valued at the initial public offering price. We will use any remaining proceeds for general corporate purposes, including to capitalize our Non-U.S. Operations.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on any class of our common shares in the foreseeable future. We currently intend to retain any future earnings to fund the development and growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, prospects and other factors our Board of Directors deems relevant.
We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of U.N. Barbados, U.N. Bermuda and our U.S. Insurance Subsidiaries to pay dividends. U.N. Barbados, U.N. Bermuda and our U.S. Insurance Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See "Risk Factors -- Regulatory and other constraints limit our ability to pay dividends and make other payments."
For 2003, the maximum amount of distributions that our subsidiaries could pay to us under applicable laws and regulations without prior regulatory approval is approximately $22.9 million.
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2003:
- on an actual basis; and
- on an as adjusted basis to reflect the sale of Class A common shares in this offering at an initial public offering price of $ per Class A common share, the midpoint of the estimated range set forth on the cover page of this prospectus, and the application of the net proceeds from this offering as described under "Use of Proceeds."
You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and accompanying notes included elsewhere in this prospectus.
ACTUAL AS ADJUSTED
(DOLLARS IN THOUSANDS) -------- -----------
Senior notes(1)............................................. $ 72,848 $72,848
Subordinated company-obligated mandatory redeemable
preferred security of subsidiary holding solely junior
subordinated securities................................... 10,000
Shareholders' equity:
Share capital (authorized 900,000,000 common shares, par
value $0.0001; issued and outstanding: 2,698,750 Class
A common shares and 12,687,500 Class B common shares
actual; Class A common shares and 12,687,500
Class B common shares as adjusted)(2).................. 1
Share capital (authorized 100,000,000 preferred shares,
par value $0.0001; issued and outstanding: 15,000,000
Series A preferred shares actual; and 0 as adjusted)... 2
Additional paid in capital................................ 315,107
Accumulated other comprehensive income.................... 8,689
Retained earnings......................................... 33,115
-------- -------
Total shareholders' equity.................................. $356,914
-------- -------
Total capitalization........................................ $439,762 $
======== =======
|
(1) Senior notes in an aggregate principal amount of approximately $72.8 million were issued to the Ball family trusts as described under "Our Relationship with Fox Paine & Company." These senior notes bear interest at a rate of 5.0% per annum, payable in cash or in kind, and mature on September 5, 2015, subject to mandatory prepayment under certain conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Capital Resources."
(2) The number of shares shown to be outstanding excludes 1,138,574 Class A common shares that may be issued pursuant to options that had been granted as of the acquisition date at a weighted average exercise price of $9.21 per share, and 861,426 additional Class A common shares available for future issuance under our stock option incentive plan and warrants to purchase an aggregate of 55,000 Class A common shares at an exercise price of $10.00 per share.
DILUTION
As of September 30, 2003, our net tangible book value was $356.9 million, or $11.75 per Class A common share, based on 30,386,250 Class A common shares outstanding (assuming full conversion of the Class B common shares and Series A preferred shares). As used below, "net tangible book value" per Class A common share represents the excess of our total consolidated tangible assets over our total consolidated liabilities, divided by the number of Class A common shares outstanding (assuming full conversion of the Class B common shares and Series A preferred shares) and without giving effect to this offering. After giving effect to the sale and issuance of Class A common shares in this offering at an initial public offering price of $ per share (the mid-point of the estimated range set forth on the cover page of this prospectus), after deducting the underwriting discount and our estimated offering expenses and the application of the net proceeds of this offering as described under "Use of Proceeds" and together with the issuance of Class A common shares in connection with the redemption of the Series A preferred shares, our net tangible book value as of September 30, 2003 would have been approximately $ million or $ per Class A common share. This amount represents an immediate increase of $ per Class A common share to the existing shareholders and an immediate dilution of $ per Class A common share to investors purchasing Class A common shares in this offering. The following table illustrates this dilution:
Assumed initial public offering price per Class A common share.......................................... $ Net tangible book value per Class A common share as of September 30, 2003............................... Increase in net tangible book value per Class A common share attributable to this offering.......... Net tangible book value per Class A common share after this offering......................................... Dilution per Class A common share to new investors..... $ |
If the underwriters exercise their overallotment option in full, dilution per Class A common share to new investors will be $ per Class A common share.
The following table summarizes, as of September 30, 2003, the difference between the number of our Class A common shares purchased prior to this offering (assuming full conversion of our Class B common shares and our Series A preferred shares), the total consideration paid and the average price per common share paid by our existing shareholders and new investors, after giving effect to the issuance of Class A common shares in this offering and after the application of the net proceeds from this offering as described under "Use of Proceeds":
CLASS A COMMON
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % PER SHARE
---------------------- ---------- ----- --------- ------- -------------
Existing shareholders................... 30,386,250 % 301,988 % $9.94
New investors...........................
---------- ----- ------- ----- -----
Total.............................. 100.0% 100.0% $
========== ===== ======= ===== =====
|
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is based on available information and on assumptions we believe are reasonable. The following unaudited pro forma financial information is not indicative of our consolidated results of operations had these transactions been completed on the dates assumed, and does not in any way represent a projection or forecast of our consolidated results of operations for or as of any future period or date.
You should read the following unaudited pro forma financial information in conjunction with the consolidated financial statements and the accompanying notes of United National Group ("Successor") and Wind River Investment Corporation ("Predecessor") and the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
The unaudited pro forma information gives effect to:
- the capitalization of United National Group by Fox Paine & Company;
- the acquisition of Wind River Investment Corporation by United National Group; and
- the issuance of 198,750 Class A common shares to certain executives of United National Group;
in each case, as if such transactions were completed at the beginning of the applicable period.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
POST- PRO FORMA
HISTORICAL ACQUISITION POST-OFFERING
YEAR ENDED PURCHASE YEAR ENDED YEAR ENDED
DECEMBER 31, ACCOUNTING DECEMBER 31, DECEMBER 31,
2002 ADJUSTMENTS 2002 2002
------------ ----------- ------------ -------------
REVENUES:
Gross premiums written...................... $ 793,083 $ -- $ 793,083 $ 793,083
========= ======== ========= =========
Net premiums written........................ $ 172,689 $ -- $ 172,689 $ 172,689
========= ======== ========= =========
Net premiums earned......................... 162,763 (11,583)(a) 151,180 151,180
Net investment income....................... 17,685 (1,391)(b) 16,294 16,294
Net realized investment (losses)............ (11,702) -- (11,702) (11,702)
--------- -------- --------- ---------
Total revenues............................ 168,746 (12,974) 155,772 155,772
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses..... 201,750 -- 201,750 201,750
Acquisition costs and other underwriting
expenses.................................. 18,938 (6,809)(c) 7,290 7,290
(4,839)(d)
Provision for doubtful reinsurance
receivables............................... 44,000 -- 44,000 44,000
Other operating expenses.................... 5,874 -- 5,874 5,874
Interest expense............................ 115 3,640(e) 3,755 3,755
--------- -------- --------- ---------
Income (loss) before income taxes........... (101,931) (4,966) (106,897) (106,897)
Income tax (benefit)........................ (40,520) (1,738)(f) (42,258) (42,258)
--------- -------- --------- ---------
Net loss before equity in net loss of
partnerships........................... (61,411) (3,228) (64,639) (64,639)
Equity in net earnings of partnerships...... (252) -- (252) (252)
--------- -------- --------- ---------
Net (loss) before extraordinary gain...... $ (61,663) $ (3,228) $ (64,891) $ (64,891)
========= ======== ========= =========
PER SHARE DATA:
Weighted-average common shares
outstanding............................... 100
Weighted-average share equivalents
outstanding............................... --
--------- ---------
Weighted average share and share equivalents
outstanding............................... 100
--------- ---------
Basic earnings per share before
extraordinary gain........................ (610,630) $
========= =========
Diluted earnings per share before
extraordinary gain........................ $(610,630) $
========= =========
|
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
HISTORICAL PURCHASE POST-ACQUISITION POST-OFFERING
NINE MONTHS ENDED ACCOUNTING NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 ADJUSTMENTS SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
REVENUES: ------------------ ----------- ------------------ ------------------
Gross premiums written.......... $ 543,813 $ -- $ 543,813 $ 543,813
========= ======== ========= =========
Net premiums written............ $ 148,808 $ -- $ 148,808 $ 148,808
========= ======== ========= =========
Net premiums earned............. 138,941 (7,870)(a) 131,071 131,071
Net investment income........... 14,081 (945)(b) 13,136 13,136
Net realized investment gains... 4,871 -- 4,871 4,871
--------- -------- --------- ---------
Total revenues................ 157,893 (8,815) 149,078 149,078
LOSSES AND EXPENSES:
Net losses and loss adjustment
expenses...................... 92,234 -- 92,234 92,234
Acquisition costs and other
underwriting expenses......... 35,130 (4,626)(c) 27,216 27,216
(3,288)(d)
Provision for doubtful
reinsurance receivables....... 1,750 -- 1,750 1,750
Other operating expenses........ 412 -- 412 412
Interest expense................ 295 2,473(e) 2,768 2,768
--------- -------- --------- ---------
Income before income taxes...... 28,072 (3,374) 24,698 24,698
Income tax expense.............. 5,744 (1,181)(f) 4,563 4,563
--------- -------- --------- ---------
Net income before equity in
net income of
partnerships............... 22,328 (2,193) 20,135 20,135
Equity in net income of
partnerships.................. 2,092 -- 2,092 2,092
--------- -------- --------- ---------
Net income before
extraordinary gain......... $ 24,420 $ (2,193) $ 22,227 $ 22,227
========= ======== ========= =========
PER SHARE DATA:
Weighted-average common shares
outstanding................... 100
Weighted-average share
equivalents outstanding.......
--------- ---------
Weighted-average shares and
share equivalents
outstanding................... 100
--------- ---------
Basic earnings per share before
extraordinary gain............ $ 244,200 $
========= =========
Diluted earnings per share
before extraordinary gain..... $ 244,200 $
========= =========
|
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma condensed consolidated statements of operations reflect amounts contained in the unaudited historical financial statements of Wind River Investment Corporation, United National Group's predecessor, for the year ended December 31, 2002 and the combined statements of operations of Wind River Investment Corporation and United National Group for the nine months ended September 30, 2003. United National Group acquired 100% of the issued and outstanding voting stock of Wind River Investment Corporation. The following adjustments have been reflected in the unaudited pro forma condensed consolidated statements of operations as if the purchase occurred at the beginning of each period:
(a) For the year ended December 31, 2002 and the nine months ended September 30, 2003, Wind River Investment Corporation reduced gross premiums earned by $79.9 million and $54.3 million and ceded premiums earned by $68.3 million and $46.4 million, respectively, to reflect the proportionate reduction of unearned premiums on the unaudited condensed consolidated balance sheet. This resulted in a decrease to net premiums earned of $11.6 million and $7.9 million for the year ended December 31, 2002 and the nine months ended September 30, 2003, respectively.
(b) Wind River Investment Corporation recalculated the net amortization/accretion of the premium/discount on its fixed maturity investments as if the cost basis of the securities had been adjusted to the estimated fair values of the securities at the beginning of each period. For the purpose of this calculation, the change in the market yield was estimated based on the amount of net unrealized gains on fixed maturity investments at the date of acquisition, amortized over the estimated average life of the portfolio (5 years). This adjustment resulted in a decrease in net investment income of $1.4 million and $0.9 million, for the year ended December 31, 2002 and the nine months ended September 30, 2003, respectively.
(c) Acquisition costs and other underwriting expenses were adjusted to exclude amortization of deferred acquisition costs written off on the unaudited pro forma condensed consolidated balance sheet as of September 30, 2003. For the year ended December 31, 2002 and the nine months ended September 30, 2003, acquisition costs and other underwriting expenses were reduced by $6.8 million and $4.6 million, respectively, as a result of this adjustment.
(d) Acquisition costs and other underwriting expenses were adjusted to exclude depreciation and amortization of certain assets, such as furniture and equipment and prepaid expenses, that were eliminated on the unaudited pro forma condensed consolidated balance sheet as of September 30, 2003. For the year ended December 31, 2002 and the nine months ended September 30, 2003, acquisition costs and other underwriting expenses were reduced by $4.8 million and $3.2 million, respectively, as a result of this adjustment.
(e) The $72.8 million note issued by Wind River Investment Corporation to the Ball family trusts in connection with the acquisition bears interest at an annual rate of 5.0%. For the year ended December 31, 2002 and the nine months ended September 30, 2003, respectively, the unaudited pro forma condensed consolidated statements of operations have been adjusted to reflect additional interest expense of $3.6 million and $2.5 million, respectively.
(f) The $1.7 million increase to the income tax benefit for the year ended December 31, 2002 and the $1.2 million reduction of income tax expense for the nine months ended September 30, 2003 represents the tax effect of the adjustments reflected in the unaudited pro forma condensed consolidated statements of operations.
OTHER ITEMS
Prior to the acquisition, Wind River Investment Corporation had an executive stock appreciation rights plan. Concurrent with the acquisition, the stock appreciation rights plan was settled and terminated.
Until the date of acquisition, Wind River Investment Corporation participated in a defined benefit pension plan. Subsequent to the acquisition, Wind River Investment Corporation's participation in the plan was discontinued. Concurrently, United National Group's 401(k) plan was enhanced to increase employer contributions from 50% of the first 6% of wages contributed by the participant to 75% of the first 6% of wages contributed by the participant. Additionally, Wind River Investment Corporation will make a contribution of 1% of wages for all employees even if the employee elects not to contribute to the 401(k) plan. United National Group also implemented a new health and welfare plan for its employees in connection with the acquisition. These changes are not expected to materially alter United National Group's expenses in future periods.
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data for United National Group and, for periods prior to September 5, 2003, Wind River Investment Corporation, which is considered United National Group's predecessor for accounting purposes. This selected financial data is derived from the consolidated financial statements and accompanying notes of Wind River Investment Corporation and United National Group included elsewhere in this prospectus. You should read this selected historical financial data together with the consolidated financial statements and accompanying notes of Wind River Investment Corporation and United National Group and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
PREDECESSOR
-------------
PREDECESSOR FOR THE
-------------------------------------------------------------- NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- SEPTEMBER 30,
1998 1999 2000 2001 2002 2002
---------- ---------- ---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Gross premiums written......................... $ 296,426 $ 357,605 $ 453,464 $ 670,520 $ 793,083 $ 680,817
========== ========== ========== ========== ========== ==========
Net premiums written........................... $ 94,547 $ 117,883 $ 127,572 $ 169,310 $ 172,689 $ 171,047
========== ========== ========== ========== ========== ==========
Net premiums earned............................ $ 95,740 $ 103,455 $ 136,931 $ 150,336 $ 162,763 $ 157,557
Investment income.............................. 22,628 24,637 28,578 24,491 24,595 18,131
Investment expenses............................ (4,778) (4,969) (6,088) (5,138) (6,910) (5,163)
---------- ---------- ---------- ---------- ---------- ----------
Investment income, net......................... 17,850 19,668 22,490 19,353 17,685 12,968
----------
Net realized investment gains (losses)......... 3,556 (5,210) 593 (12,719) (11,702) (15,039)
---------- ---------- ---------- ---------- ---------- ----------
Total revenues.............................. 117,146 117,913 160,014 156,970 168,746 155,486
Net losses and loss adjustment expenses(1)..... 67,002 76,257 113,151 128,338 201,750 143,187
Acquisition costs and other underwriting
expenses...................................... 15,584 11,913 14,999 15,867 18,938 14,339
Provision for doubtful reinsurance
receivables(3)(4)............................. -- -- -- -- 44,000 --
Other operating expenses....................... 2,399 2,112 2,918 2,220 5,874 2,436
Interest expense............................... 922 589 322 77 115 676
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes........... 31,239 27,042 28,624 10,468 (101,931) (5,152)
Income tax expense (benefit)................... 6,751 6,252 5,883 295 (40,520) (5,333)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships............. 24,488 20,790 22,741 10,173 (61,411) 181
Equity in net income (loss) of partnerships.... -- -- -- 664 (252) (995)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before extraordinary
gain...................................... 24,488 20,970 22,741 10,837 (61,663) (814)
Extraordinary gain............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ 24,488 $ 20,790 $ 22,741 $ 10,837 $ (61,663) $ (814)
========== ========== ========== ========== ========== ==========
INSURANCE OPERATING RATIOS:
Net losses and loss adjustment expenses
ratio(1)(2)................................... 70.0% 73.7% 82.6% 85.3% 124.0% 90.9%
Underwriting expense ratio(3)(4)(5)............ 16.3 11.5 11.0 10.6 38.6 9.1
---------- ---------- ---------- ---------- ---------- ----------
Combined ratio(4)(6)(7)........................ 86.3% 85.2% 93.6% 95.9% 162.6% 100.0%
========== ========== ========== ========== ========== ==========
Net/gross premiums written..................... 31.9% 33.0% 28.1% 25.3% 21.8% 25.1%
========== ========== ========== ========== ========== ==========
FINANCIAL POSITION AS OF LAST DAY OF PERIOD:
Total investments and cash and cash
equivalents................................... $ 444,417 $ 423,397 $ 483,435 $ 516,408 $ 611,129 $ 588,759
Reinsurance receivables, net of allowance...... 598,086 648,189 694,766 799,066 1,743,524 847,031
Total assets................................... 1,234,549 1,365,754 1,376,528 1,575,754 2,685,620 1,753,908
Unpaid losses and loss adjustment expenses..... 802,692 805,717 800,630 907,357 2,004,422 994,368
Total shareholders' equity..................... $ 277,733 $ 285,064 $ 315,343 $ 324,844 $ 268,637 $ 332,432
PREDECESSOR SUCCESSOR
------------ -------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 6,
2003 TO 2003 TO
SEPTEMBER 5, SEPTEMBER 30,
2003 2003
------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Gross premiums written......................... $ 510,623 $ 33,190
========== ==========
Net premiums written........................... $ 139,116 $ 9,692
========== ==========
Net premiums earned............................ $ 128,254 $ 10,687
Investment income.............................. 15,733 1,347
Investment expenses............................ (2,444) (555)
---------- ----------
Investment income, net......................... 13,289 792
---------- ----------
Net realized investment gains (losses)......... 5,589 (718)
---------- ----------
Total revenues.............................. 147,132 10,761
Net losses and loss adjustment expenses(1)..... 84,885 7,349
Acquisition costs and other underwriting
expenses...................................... 30,543 4,587
Provision for doubtful reinsurance
receivables(3)(4)............................. 1,750 --
Other operating expenses....................... 288 124
Interest expense............................... 46 249
---------- ----------
Income (loss) before income taxes........... 29,620 (1,548)
Income tax expense (benefit)................... 6,850 (1,106)
---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships............. 22,770 (442)
Equity in net income (loss) of partnerships.... 1,834 258
---------- ----------
Net income (loss) before extraordinary
gain...................................... 24,604 (184)
Extraordinary gain............................. -- 46,424
---------- ----------
Net income (loss)........................... $ 24,604 $ 46,240
========== ==========
INSURANCE OPERATING RATIOS:
Net losses and loss adjustment expenses
ratio(1)(2)................................... 66.2% 68.8%
Underwriting expense ratio(3)(4)(5)............ 25.2 42.9
---------- ----------
Combined ratio(4)(6)(7)........................ 91.4% 111.7%
========== ==========
Net/gross premiums written..................... 27.2% 29.2%
========== ==========
FINANCIAL POSITION AS OF LAST DAY OF PERIOD:
Total investments and cash and cash
equivalents................................... $ 667,836 $ 800,169
Reinsurance receivables, net of allowance...... 1,843,667 1,785,213
Total assets................................... 2,837,545 2,834,919
Unpaid losses and loss adjustment expenses..... 2,120,594 2,085,658
Total shareholders' equity..................... $ 296,917 $ 356,914
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(1) In 2002, we increased our net loss reserves relative to accident years 2001 and prior by $47.8 million primarily due to higher than anticipated losses in the multi-peril and other liability lines of business and by $23.6 million due to the conclusion of an arbitration proceeding. The net loss and loss adjustment expense ratio increased by 43.9 percentage points in 2002 due to this $71.4 million increase in net loss reserves.
(2) Our loss ratio for the period September 6, 2003 to September 30, 2003 includes a 9.7 percentage point increase attributable to a $1.7 million reduction in earned premium due to purchase accounting.
(3) We established an allowance for doubtful reinsurance receivables in 2002, which resulted in a 27.0 percentage point increase in our 2002 underwriting expense ratio.
(4) Our underwriting expense ratio for the period from January 1, 2003 to September 5, 2003 includes a 4.4 percentage point increase attributable to a $3.8 million expense for stock appreciation rights and retention payments made to certain key executives upon completion of the acquisition and a $1.8 million allowance for doubtful reinsurance receivables.
(5) Our underwriting expense ratio for the period from September 6, 2003 to September 30, 2003 includes a 14.1 percentage point increase attributable to the following: (a) a $1.7 million reduction in earned premium due to purchase accounting; (b) $0.6 million of organizational costs; and (c) $0.4 million of deferred compensation option expense.
(6) Our 2002 combined ratio includes a 43.9 percentage point increase attributable to our $71.4 million reserve strengthening and a 27.0 percentage point increase attributable to establishment of a $44.0 million allowance for doubtful reinsurance receivables.
(7) Our combined ratio for the period September 6, 2003 to September 30, 2003 includes a 23.8 percentage point increase in our ratio attributable to our $1.7 million reduction in earned premium, $0.6 million of organizational costs and $0.4 million of deferred compensation option expense.
MANAGEMENT'S 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 the consolidated financial statements and accompanying notes of Wind River Investment Corporation and United National Group included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" for more information. You should review "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
OVERVIEW
Our results of operations are affected by the following business and accounting factors and critical accounting policies:
REVENUES
We derive our revenues primarily from premiums paid on insurance policies that we write and from income generated by our investment portfolio, net of fees paid for investment management and investment accounting services. The amount of insurance premiums that we receive is a function of the amount and type of policies we write, as well as of prevailing market prices.
EXPENSES
Our expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, other operating expenses and interest and other investment expenses. Losses and loss adjustment expenses 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. We record losses and loss adjustment expenses based on an actuarial analysis of the estimated losses we expect to be reported on insurance policies written. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition expenses consist principally of commissions that are typically a percentage of the premiums on insurance policies written, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses. Other operating expenses are comprised primarily of management fees paid to affiliates of our shareholders. Interest expense consists of interest paid on funds held on behalf of others.
CRITICAL ACCOUNTING POLICIES
INVESTMENTS
Fair values
The carrying amount for our investments approximates their estimated fair value. We measure the fair value of investments in our fixed income and equity portfolios based upon quoted market prices. We also hold investments in several limited partnerships, which were valued at $44.7 million as of September 30, 2003. Several of these partnerships invest solely in securities that are publicly traded and are valued at the net asset value as reported by the investment manager. As of September 30, 2003, the limited partnership portfolio included $18.4 million in securities for which there is no readily available independent market price. The estimated fair value of such securities is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period.
Classification of Investments
Prior to the September 5, 2003 acquisition of our U.S. Operations, our equity portfolio and our convertible bond portfolio were treated as trading securities, and as such, any change in market value was recorded on our income statement. Subsequent to the date of acquisition, all securities will be designated as available for sale, and any change in market value will be included in other comprehensive income in shareholders' equity and, accordingly, have no effect on net income except for investment market declines deemed to be other than temporary.
Other Than Temporary Impairment
We regularly perform various analytical procedures with respect to our investments, including identifying any security the fair value of which is below its cost. Upon identification of such securities, we perform a detailed review for all securities meeting predetermined thresholds, to determine whether such decline is other than temporary. If we determine a decline in value to be other than temporary based upon this detailed review, or if a decline in value for an investment has persisted for 12 continuous months, or if the value of the investment has been 20% or more below cost for six continuous months or more, or significant declines in value for shorter periods of time, we evaluate the security to determine whether the cost basis of the security should be written down to its fair value. The factors we consider in reaching the conclusion that a decline below cost is other than temporary include among others, whether the issuer is in financial distress; the investment is secured; a significant credit rating action occurred; scheduled interest payments were delayed or missed and changes in laws or regulations have impacted an issuer or industry. We include the amount of any write-down in earnings as a realized loss in the period in which the impairment arose.
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses ($2,004.4 million and $2,085.7 million, gross of reinsurance; $260.8 million and $286.7 million, net of reinsurance, as of December 31, 2002 and September 30, 2003, respectively) reflects our best estimate for future amounts needed to pay losses and related adjustment expenses and the impact of our reinsurance coverages with respect to insured events. The process of establishing the liability for property and casualty unpaid losses and loss adjustment expenses is a complex process, requiring the use of informed estimates and judgments. This liability includes an amount determined on the basis of claim adjusters' evaluations with respect to insured events that occurred and an amount for losses incurred that have not been reported to us. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of the loss to us.
The total liability for net unpaid loss and loss adjustment expense includes both reported and incurred but not reported, or "IBNR," reserves. IBNR reserves are calculated using standard actuarial methods. The reviews and documentation are completed in accordance with professional actuarial standards. A point estimate is developed around which an actuarial range is built. As of September 30, 2003, the upper limit of the range is 9.9% above the recorded net liability for unpaid losses and loss adjustment expenses and the lower limit is 7.7% below the recorded amount.
The method for determining our liability for unpaid losses and loss adjustment expenses includes, among other things, reviewing past loss experience and considering other factors such as legal, social and economic developments. We regularly review and update the methods of making such estimates and establishing the resulting liabilities and we make any resulting adjustment in the accounting period in which the adjustment arose.
The significant uncertainties relating to environmental and asbestos claims on insurance policies written are discussed under "Business -- Reserves For Unpaid Losses and Loss Adjustment Expenses."
We had 263 asbestos claims outstanding as of September 30, 2003. For the year ended December 31, 2002, we had 220 claims outstanding compared with 379 asbestos claims outstanding at December 31, 2001 and 617 asbestos claims outstanding as of December 31, 2000. For the nine months ended September 30, 2003, 194 claims were opened and 151 claims were closed. In 2002, 179 claims were opened and 338 claims were closed. In 2001, 149 claims were opened and 387 claims were closed. In 2000, 239 claims were opened and 241 claims were closed. Indemnity payments per claim have varied over time due primarily to variations in insureds, policy terms and types of claims. Payments for asbestos claims were $0.3 million for the nine months ended September 30, 2003. Payments for asbestos claims were $0.5 million, $0.3 million and $0.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same.
Significant uncertainty remains as to our ultimate liability relating to asbestos-related claims due to such factors as the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims as well as the increase in the volume of claims by plaintiffs who claim exposure but who have no symptoms of asbestos-related disease and an increase in claims filed under the non-aggregate premises or operations section of general liability policies. There is also the possibility of federal legislation that would address the asbestos problem.
During 2002 we increased the liability for unpaid losses and loss adjustment expenses by $71.4 million. The following sets forth the distribution of the $71.4 million charge among segments as well as the liability for unpaid losses and loss adjustment expenses as of December 31, 2001, December 31, 2002 and September 30, 2003.
SPECIALTY
E&S ADMITTED REINSURANCE(1) TOTAL
(DOLLARS IN THOUSANDS) -------- --------- -------------- --------
Composition of 2002 charge...................... $ 60,854 $10,569 -- $ 71,423
Liability for unpaid loss and loss adjustment
expense as of:
December 31, 2001............................. 123,440 33,347 -- 156,787
December 31, 2002............................. 203,856 56,961 260,817
September 30, 2003............................ $217,283 $69,451 -- $286,734
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(1) There was no liability for unpaid losses and loss adjustment expenses for the reinsurance segment as of December 31, 2001, 2002 or September 30, 2003 because our reinsurance business was commuted prior to December 31, 2001 and we thereafter de-emphasized this business.
The $71.4 million charge for accident years 2001 and prior by accident year and segment are as follows:
SPECIALTY
ACCIDENT YEAR E&S ADMITTED REINSURANCE(1) TOTAL
------------- ------- --------- -------------- -------
(DOLLARS IN THOUSANDS
2001.............................................. $10,971 $ 5,303 $ -- $16,274
2000.............................................. 13,559 4,238 -- 17,797
1999.............................................. 6,813 1,579 -- 8,392
1998.............................................. 7,239 422 -- 7,661
1997 and prior(1)................................. 22,272 (973) -- 21,299
------- ------- ----- -------
Total............................................. $60,854 $10,569 $ -- $71,423
======= ======= ===== =======
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(1) Includes $23.6 million for accident year 1994 related to a 2002 rescission with one of our reinsurers.
As is discussed in greater detail in "-- Special Note Regarding 2002," faster than expected loss development in the second through fourth quarters of 2002 resulted in our retaining an independent actuarial firm to perform an extensive study of our reserves.
The key changes in the assumptions underlying the 2002 actuarial study as compared with assumptions used in prior years included:
- The majority of all casualty business was previously segregated into two distinct groups for purposes of performing actuarial analyses. However, there are products within these two groupings that have distinctly different expected loss development patterns. Therefore, we decided to further segregate the business into smaller groups that would be reviewed separately.
- Losses and loss adjustment expenses were estimated on a combined basis as compared to the prior practice of segregating each for purposes of review.
- Loss development on a gross of reinsurance basis was measured independent of loss development on a net of reinsurance basis, as compared to the prior practice of measuring loss development net of reinsurance as a basis for calculating loss development gross of reinsurance.
- Environmental and asbestos exposure claims were analyzed separately from claims from other lines of business having long periods of loss development because of the inherent difficulties in estimating reserves for these claims, as compared to the prior practice of analyzing claims from environmental and asbestos exposure in aggregate with other such long-tail lines of business.
RECOVERABILITY OF REINSURANCE RECEIVABLES
We regularly review the collectibility of our reinsurance receivables, and we include adjustments resulting from this review in earnings in the period in which the adjustment arises. As of December 31, 2002, we had $1,743.5 million of reinsurance receivables, net of an allowance of $47.4 million for doubtful reinsurance receivables, and $196.2 million of prepaid reinsurance premiums.
As of September 30, 2003, we had total reinsurance receivables of $1,883.7 million, which were carried at $1,785.2 million. The carrying value of these reinsurance receivables is net of a $98.5 million reduction recorded upon our acquisition of Wind River Investment Corporation. This reduction represented the effect of:
- discounting the reinsurance receivables balance;
- applying a risk margin to the reinsurance receivables balance; and
- reducing gross reinsurance receivables by $49.1 million, the amount equal to Wind River Investment Corporation's estimate of potentially uncollectible reinsurance receivables as of September 5, 2003, the acquisition date.
As of September 30, 2003, we also had $118.9 million of prepaid reinsurance premiums.
DEFERRED ACQUISITION COSTS AND FUTURE SERVICING COSTS
Our cost of acquiring new and renewal insurance and reinsurance contracts is capitalized as deferred acquisition costs and amortized over the period in which the related premiums are earned. The ceding commissions earned from reinsurers are deferred as future servicing costs and amortized over the period in which the related premiums are earned. Deferred acquisition costs and future servicing costs are netted in the accompanying consolidated financial statements. The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs, which are directly related to and vary with the production of business. The method followed in computing such amounts limits them to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned.
REALIZABILITY OF DEFERRED TAX ASSETS
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We believe that it is more likely than not that the results of future operations will generate sufficient income to realize our deferred tax assets.
SPECIAL NOTE REGARDING 2002
In 2002 several matters had a significant effect on our results of operations. The following is a description of these matters:
- We perform annual underwriting reviews on all our products. During 2002, as part of this annual review process, and as a result of reviews of our net loss reserves described in the next bullet point, we terminated a number of products as a result of factors such as unsatisfactory underwriting results and the absence of reinsurance capacity at pricing levels acceptable to us. During the first six months of 2002, we terminated nine products within our four product classes, of which eight were excess and surplus, or "E&S," lines and one was specialty admitted. During the six months ended December 31, 2002, we terminated an additional five products, of which four were E&S lines and one was specialty admitted. While the following had no impact on 2002 net income, 13 additional products were terminated during the first six months of 2003, of which nine were E&S lines and four were specialty admitted. Gross premiums written relative to those terminated products were $320.4 million in 2002 and $107.5 million for the nine months ended September 30, 2003 and net premiums written relative to those terminated products were $37.1 million in 2002 and $13.1 million for the nine months ended September 30, 2003.
- We perform quarterly reviews of our net loss reserves. As a result of our review of net loss reserves during the second and third quarters of 2002, we noted what appeared to be faster than expected development of known incurred losses relative to several recent accident years. This resulted in our strengthening our net loss reserves by a total of $3.3 and $4.6 million, in the second and third quarters of 2002, respectively. Furthermore, a review of our net loss reserves performed in the fourth quarter of 2002 indicated the possible need for additional reserve strengthening. To more fully evaluate the adequacy of our loss reserves, we subsequently retained an independent actuarial firm to perform an extensive study of our loss reserves. As a result of the independent actuarial study, we increased our loss reserves for accident years 2001 and prior, inclusive of the $7.9 million strengthening noted above, by $47.8 million with the increase relating primarily to accident years 1997 through 2001. We
subsequently retained this independent actuarial firm to be our opining actuary, replacing the independent actuarial firm that had previously been used.
- As a result of our loss experience and our expectations concerning future losses on policies written during and after 1997, we identified specific sources of business written during those periods that we expected to be unprofitable. We have taken what we believe to be appropriate steps to discontinue writing additional business from these sources.
- Our subsidiary, United National Insurance Company, was involved in an arbitration proceeding with Riunione Adriatica Di Sicurta, or "RAS," which had acted as our reinsurer relative to certain of our products written in 1993 and 1994. RAS was seeking to rescind the reinsurance agreement, prohibit us from drawing down on available lines of credit and demanding repayment of funds previously paid. On October 1, 2002, the arbitration panel issued an order holding RAS liable for a majority of the total amount in dispute. RAS was also ordered to pay interest at a rate of 4.0% compounded annually with respect to balances due. The panel further ordered a portion of the reinsurance agreement with RAS to be rescinded. RAS was released from all future liabilities or responsibilities to us with respect to the rescinded portion of the reinsurance agreement. This rescission, in total, had a $20.6 million detrimental effect on pre-tax net income. We increased losses and loss adjustment expenses by $23.6 million as a result of the rescission.
- In the fourth quarter of 2002, we recorded a $44.0 million pre-tax charge for an allowance for doubtful reinsurance receivables. This allowance relates to a group of reinsurers, the ratings of many of which were downgraded by A.M. Best in 2002. In addition, the reinsurance receivables from these reinsurers increased during 2002, primarily as a result of the reserve strengthening recorded in 2002 and its effect on our reinsurance receivables.
- We experienced net realized investment losses of $11.7 million.
OUR BUSINESS SEGMENTS
We have three reporting business segments: E&S, specialty admitted and reinsurance.
- Our E&S segment focuses on writing insurance for hard-to-place risks and risks that standard admitted insurers specifically choose not to write.
- Our specialty admitted segment focuses on writing insurance for risks that are unique and hard to place in the standard market, but that for marketing and regulatory reasons, must remain with an admitted insurance company.
- Our reinsurance segment includes assumed business written in support of a select group of direct writing reinsurers. The underwriting exposure under this segment has been commuted. We did not write any of this business in 2002 or in the nine-month period ended September 30, 2003.
We evaluate segment performance based on gross and net premiums written, net premiums earned and net losses and loss adjustment expenses. The following table sets forth an analysis of financial data for our segments during the periods indicated:
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- -------------------
2000 2001 2002 2002 2003
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
Gross premiums written:
E&S................................... $260,730 $398,308 $543,998 $446,071 $380,624
Specialty admitted.................... 130,734 210,212 249,085 200,746 163,189
Reinsurance(1)........................ 62,000 62,000 -- 34,000 --
-------- -------- -------- -------- --------
Gross premiums written............. $453,464 $670,520 $793,083 $680,817 $543,813
======== ======== ======== ======== ========
Net premiums written:
E&S................................... $ 40,663 $ 68,226 $112,110 $ 92,270 $ 88,832
Specialty admitted.................... 24,909 39,084 60,579 44,777 59,976
Reinsurance........................... 62,000 62,000 -- 34,000 --
-------- -------- -------- -------- --------
Net premiums written............... $127,572 $169,310 $172,689 $171,047 $148,808
======== ======== ======== ======== ========
Net premiums earned:
E&S................................... $ 40,504 $ 59,004 $101,474 $ 77,274 $ 84,437
Specialty admitted.................... 25,677 36,582 53,039 38,033 54,504
Reinsurance........................... 70,750 54,750 8,250 42,250 --
-------- -------- -------- -------- --------
Net premiums earned................ $136,931 $150,336 $162,763 $157,557 $138,941
======== ======== ======== ======== ========
Net losses and loss adjustment expenses:
E&S................................... $ 24,613 $ 43,880 $140,943 $ 73,799 $ 55,405
Specialty admitted.................... 18,408 29,075 52,556 27,138 36,829
Reinsurance........................... 70,130 55,383 8,251 42,250 --
-------- -------- -------- -------- --------
Net losses and loss adjustment
expenses......................... $113,151 $128,338 $201,750 $143,187 $ 92,234
======== ======== ======== ======== ========
Total net losses and loss adjustment
expense ratios:
E&S................................... 60.8% 74.4% 138.9% 95.5% 65.6%
Specialty admitted.................... 71.7 79.5 99.1 71.4 67.6
Reinsurance........................... 99.1 101.2 100.0 100.0 --
-------- -------- -------- -------- --------
Net losses and loss adjustment
expense ratio.................... 82.6% 85.3% 124.0% 90.9% 66.4%
======== ======== ======== ======== ========
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(1) For the nine months ended September 30, 2002, we recorded $34.0 million of reinsurance gross premiums written. Our treaty subsequently was amended to reduce the amount of premiums written in 2002 to zero.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Premiums
Gross premiums written, which represent the amount received or to be received for insurance policies written without reduction for acquisition costs, reinsurance costs or other deductions, were
$543.8 million for the nine months ended September 30, 2003, compared with $680.8 million for the nine months ended September 30, 2002, a decrease of $137.0 million or 20.1%. A further breakdown of gross premiums written is as follows:
- E&S gross premiums written were $380.6 million for the nine months ended September 30, 2003, compared with $446.1 million for the nine months ended September 30, 2002, a decrease of $65.5 million or 14.7%. This decrease primarily resulted from the termination of 12 products within our four product classes during 2002 and nine products during the nine months ended September 30, 2003, offset by rate increases on other products. E&S gross premiums written relative to the terminated products were $60.9 million for the nine months ended September 30, 2003.
- Specialty admitted gross premiums written were $163.2 million for the nine months ended September 30, 2003, compared with $200.7 million for the nine months ended September 30, 2002, a decrease of $37.5 million or 18.7%. The decrease in specialty admitted gross premiums written was primarily the result of the termination of two products during 2002 and four products during the first nine months ended September 30, 2003, offset by rate increases on other products. Specialty admitted gross premiums written relative to the terminated products were $46.6 million for the nine months ended September 30, 2003.
- There were no reinsurance gross premiums written for the nine months ended September 30, 2003, compared with $34.0 million for the nine months ended September 30, 2002. The decrease in reinsurance gross premiums written was the result of the non-renewal of our reinsurance treaty in 2002.
Net premiums written, which equal gross premiums written less ceded premiums written, were $148.8 million for the nine months ended September 30, 2003, compared with $171.0 million for the nine months ended September 30, 2002, a decrease of $22.2 million or 13.0%. The ratio of net premiums written to gross premiums written increased to 27.4% for the nine months ended September 30, 2003, from 25.1% for the nine months ended September 30, 2002. A further breakdown of net premiums written is as follows:
- E&S net premiums written were $88.8 million for the nine months ended September 30, 2003, compared with $92.3 million for the nine months ended September 30, 2002, a decrease of $3.5 million or 3.8%. The ratio of net premiums written to gross premiums written was 23.3% for the nine months ended September 30, 2003, compared with 20.7% for the nine months ended September 30, 2002. The decrease in net premiums written was primarily due to net premiums written associated with the terminated products previously mentioned largely offset by rate increases relative to products where our retention is high. E&S net premiums written relative to products terminated in 2002 and subsequently were $6.1 million for the nine months ended September 30, 2003.
- Specialty admitted net premiums written were $60.0 million for the nine months ended September 30, 2003, compared with $44.8 million for the nine months ended September 30, 2002, an increase of $15.2 million or 33.9%. The ratio of net premiums written to gross premiums written was 36.8% for the nine months ended September 30, 2003, compared with 22.3% for the nine months ended September 30, 2002. The increase in net premiums written relates to growth in products within our specific specialty, property and general liability product classes and rate increases in other products, slightly offset by the terminated products previously mentioned. Specialty admitted net premiums written relative to products terminated in 2002 and subsequently were $7.0 million for the nine months ended September 30, 2003.
- There were no reinsurance net premiums written for the nine months ended September 30, 2003, compared with $34.0 million for the nine months ended September 30, 2002. The
decrease in reinsurance net premiums earned is consistent with the decrease in gross premiums written.
Net premiums earned were $138.9 million for the nine months ended September 30, 2003, compared with $157.6 million for the nine months ended September 30, 2002, a decrease of $18.7 million or 11.9%. A further breakdown of net premiums earned is as follows:
- E&S net premiums earned were $84.4 million for the nine months ended September 30, 2003, compared with $77.3 million for the nine months ended September 30, 2002, an increase of $7.1 million or 9.2%. The increase in net premiums earned was due to the previously mentioned rate increases, which were greater than the increase in net premiums written due to the impact of the product terminations previously mentioned.
- Specialty admitted net premiums earned were $54.5 million for the nine months ended September 30, 2003, compared with $38.0 million for the nine months ended September 30, 2002, an increase of $16.5 million or 43.4%. This increase is primarily due to the previously mentioned growth in products within our specific specialty, property and general liability product classes and rate increases on other products, offset slightly by terminated products.
- There were no reinsurance net premiums earned for the nine months ended September 30, 2003, compared with $42.3 million for the nine months ended September 30, 2002. The decrease in net premiums earned for reinsurance was consistent with the decrease in net premiums written.
Net Investment Income
Gross investment income, excluding realized gains and losses, was $17.1 million for the nine months ended September 30, 2003, compared with $18.1 million for the nine months ended September 30, 2002, a decrease of $1.0 million or 5.5%. The decrease was primarily due to a decrease in the average yield on fixed income investments and lower interest rates on overnight cash balances, partially offset by growth in cash and invested assets. Cash and invested assets grew to $800.2 million as of September 30, 2003, from $588.8 million as of September 30, 2002, an increase of $211.4 million or 35.9%. The growth in the investment portfolio was due to net cash flows provided from operating activities. The average duration of our fixed income investments approximated 4.4 years as of September 30, 2003, compared with 5.0 years as of September 30, 2002. Our book yield on our fixed income investments was 4.11% at September 30, 2003, compared with 5.25% at September 30, 2002.
Investment expenses were $3.0 million for the nine months ended September 30, 2003, compared with $5.2 million for the nine months ended September 30, 2002, a decrease of $2.2 million or 42.3%. The decrease was due to a reduction in investment management fees paid.
Net Realized Investment Gain (Loss)
Net realized investment gains were $4.9 million for the nine months ended September 30, 2003, compared with a $15.0 million net realized investment loss for the nine months ended September 30, 2002. The net investment gain for the current period consists of net gains of $6.3 million relative to our equity portfolio, a net loss on fixed income investments of $0.5 million and $0.9 million of net losses relative to other invested assets. The nine months ended September 30, 2002 included a $16.4 million loss on our equity portfolio and a $1.4 million gain on our fixed income investments.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses were $92.2 million for the nine months ended September 30, 2003, compared with $143.2 million for the nine months ended September 30, 2002, a decrease of $51.0 million or 35.6%. The loss ratio for the nine months ended September 30, 2003, was 66.4% compared with 90.9% for the nine months ended September 30, 2002. The loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. This improvement was
attributable to continuing rate increases and the termination of several unprofitable products in 2002 and 2003. A further breakdown of losses incurred is as follows:
- E&S net losses and loss adjustment expenses were $55.4 million for the nine months ended September 30, 2003, compared with $73.8 million for the nine months ended September 30, 2002. The loss ratio was 65.6% for the nine months ended in September 30, 2003, compared with 95.5% for the nine months ended September 30, 2002. The improvement in the loss ratio is a result of the previously mentioned rate increases. The 2002 loss ratio included the reserve strengthening recognized in the second and third quarters of 2002.
- Specialty admitted net losses and loss adjustment expenses were $36.8 million for the nine months ended September 30, 2003, compared with $27.1 million for the nine months ended September 30, 2002. The loss ratio for the nine months ended September 30, 2003, was 67.6% compared with 71.4% for the nine months ended September 30, 2002. The improvement in the loss ratio was a result of the previously mentioned rate increases, and the 2002 loss ratio included the reserve strengthening recognized in the second and third quarters of 2002.
- There was no reinsurance net losses and loss adjustment expenses for the nine months ended September 30, 2003, due to the non-renewal of this business, compared with $42.3 million for the nine months ended September 30, 2002.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $35.1 million for the nine months ended September 30, 2003, compared with $14.3 million for the nine months ended September 30, 2002, an increase of $20.8 million. This increase primarily can be attributed to a $15.4 million increase in acquisition costs and $5.4 million increase in other underwriting expenses. A further analysis of acquisition costs and other underwriting expenses is as follows:
- The $15.4 million increase in acquisition costs was primarily the result of a reduction in ceding commission of $38.0 million partially offset by a decrease in direct commission of $29.0 million. Contingent commission expense increased $7.2 million due to favorable loss experience. The reduction in ceding commission income was a result of both a decrease in gross premiums written combined with an increase in our level of retention. The reduction in direct commission was consistent with the reduction in gross premiums written. While increased retentions have the impact of increasing acquisition costs, our underwriting profit nonetheless increased based upon our loss experience.
- The $5.4 million increase in other underwriting expenses was primarily due to payments made to our executive officers in settlement of certain stock appreciation rights and for retention payments relating to services in connection with the closing of the acquisition. See "Management -- Executive Compensation."
We recorded a charge for an allowance for doubtful reinsurance receivables of $1.8 million for the nine months ended September 30, 2003.
Expense and Combined Ratios
Our expense ratio, which is calculated by dividing the sum of acquisition costs and other underwriting expenses by premiums earned, was 26.5% for the nine months ended September 30, 2003, compared with 9.1% for the nine months ended September 30, 2002, as a result of the above mentioned changes to commissions and other underwriting expenses. However, as discussed above, our underwriting profit increased due to the improved loss experience. Part of our strategy is to continue to retain a high percentage of our premiums. To the extent that we are able to accomplish this, we expect the net commission component of our expense ratio to increase.
Our combined ratio was 92.9% for the nine months ended September 30, 2003, compared with 100.0% for the nine months ended September 30, 2002. This improvement was primarily a result of an increase in our level of premium retention combined with an improvement in the loss experience.
Other Operating Expenses
Other operating expenses were $0.4 million for the nine months ended September 30, 2003, compared with $2.4 million for the nine months ended September 30, 2002, a decrease of $2.0 million or 83.3%. The decrease can be attributed to the reduction of management fees paid to The AMC Group L.P. during 2003.
Income Tax Expense
Income tax expense was $5.7 million for the nine months ended September 30, 2003, compared with $5.3 million of tax benefit for the nine months ended September 30, 2002, an increase of $11.0 million. Our effective tax rates for the nine months ended September 30, 2003 and 2002 were 20.5% and 103.5%, respectively. The effective rates differed from the 35.0% U.S. statutory rate principally due to investments in tax-exempt securities. We earned $13.3 million and $11.8 million in tax-exempt interest for the nine months ended September 30, 2003 and 2002, respectively. In addition, we achieved a higher level of taxable income in 2003 due to an underwriting income increase to $9.8 million for the nine months ended September 2003, from $0.0 million during the nine months ended September 30, 2002.
The factors described above resulted in net income before equity in net earnings of partnerships of $68.8 million for the nine months ended September 30, 2003, compared with $0.2 million for the nine months ended September 30, 2002, an increase of $68.6 million.
Equity in Net Earnings of Partnerships
Equity in net earnings of partnerships was $2.1 million for the nine months ended September 30, 2003, compared with a loss of $1.0 million for the nine months ended September 30, 2002. The gain is largely attributable to the performance of our investment in a limited partnership.
Extraordinary Gain
The extraordinary gain of $46.4 million for the nine months ended September 30, 2003 resulted from the acquisition of Wind River Investment Corporation.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Premiums
Gross premiums written were $793.1 million for 2002 compared with $670.5 million for 2001, an increase of $122.6 million or 18.3%. A further breakdown of gross premiums written is as follows:
- E&S gross premiums written were $544.0 million for 2002, compared with $398.3 million for 2001, an increase of $145.7 million or 36.6%. The increase in E&S gross premiums written was the result of rate increases and of new business reflected in our 2002 writings offset slightly by the 14 products within our four product classes terminated in 2002. Gross premiums written relative to products terminated in 2002 and subsequently were $212.1 million for 2002.
- Specialty admitted gross premiums written were $249.1 million for 2002, compared with $210.2 million for 2001, an increase of $38.9 million or 18.5%. The increase in specialty admitted gross premiums written resulted from a combination of rate increases offset by the two products terminated in 2002. Gross premiums written relative to the products terminated in 2002 and subsequently were $108.3 million for 2002.
- There were no reinsurance gross premiums written in 2002, compared with $62.0 million in 2001. The decrease in reinsurance gross premiums written was the result of the non-renewal of our reinsurance treaty in 2002.
Net premiums written were $172.7 million for 2002 compared with $169.3 million for 2001, an increase of $3.4 million or 2.0%. The ratio of net premiums written to gross premiums written was 21.8% for 2002 as compared with 25.2% for 2001. A further breakdown of net premiums written is as follows:
- E&S net premiums written were $112.1 million for 2002, compared with $68.2 million for 2001, an increase of $43.9 million or 64.4%. The ratio of net premiums written to gross premiums written was 20.6% for 2002, compared with 17.1% for 2001. The increase in net premiums written was due to the increase in gross premiums written and our increasing our retention relative to individual products, slightly offset by the products terminated in 2002. Net premiums written relative to E&S products terminated in 2002 and subsequently were $25.9 million in 2002.
- Specialty admitted net premiums written were $60.6 million for 2002, compared with $39.1 million for 2001, an increase of $21.5 million or 55.0%. The ratio of net premiums written to gross premiums written was 24.3% for 2002, compared with 18.6% for 2001. The increase in net premiums written was primarily due to an $11.0 million increase in retention relative to a specific product combined with our increasing retentions relative to additional products and rate increases, slightly offset by terminated products. Net premiums written relative to specialty admitted products terminated in 2002 and subsequently were $11.2 million in 2002.
- There were no reinsurance net premiums written for 2002, compared with $62.0 million for 2001. The decrease in reinsurance net premiums written was consistent with the decrease in gross premiums written.
Net premiums earned were $162.8 million for 2002, compared with $150.3 million for 2001, an increase of $12.5 million or 8.3%. A further breakdown of net premiums earned is as follows:
- E&S net premiums earned were $101.5 million for 2002, compared with $59.0 million for 2001, an increase of $42.5 million or 72.0%. This increase is primarily due to the previously mentioned increased retentions relative to individual products and rate increases, which increased gross and net written premiums.
- Specialty admitted net premiums earned were $53.0 million for 2002, compared with $36.6 million for 2001, an increase of $16.4 million or 44.8%. This increase is due to the previously mentioned increase in the retentions relative to specific products and rate increases, slightly offset by terminated products.
- Reinsurance net premiums earned were $8.3 million for 2002, compared with $54.8 million for 2001. This decrease was attributable to our not writing any reinsurance in 2002. The net premiums earned in 2002 related to business written in 2001. The decrease in net premiums earned for reinsurance was consistent with the decrease in net premiums written.
Net Investment Income
Gross investment income was $24.6 million for 2002, compared with $24.5 million for 2001, an increase of $0.1 million. The $0.1 million difference was primarily due to a decrease in the average yield on fixed-income investments and lower interest rates on overnight cash balances, offset by an increase in cash and invested assets. Cash and invested assets were $611.1 million as of December 31, 2002, compared with $516.4 million as of December 31, 2001. The growth in the investment portfolio was due to net cash flows provided from operating activities. The average duration was 5.3 years as of December 31, 2002, compared with 5.9 years as of December 31, 2001. Our book yield on fixed income investments was 5.12% in 2002 compared with 5.97% in 2001.
Investment expenses were $6.9 million for 2002, compared with $5.1 million for 2001, an increase of $1.8 million or 35.3%. The increase was primarily due to an increase in our invested asset base as well as an increase in investment management fees.
Net Realized Investment Gain (Loss)
Net realized investment loss was $11.7 million for 2002, compared with a $12.7 million net realized investment loss for 2001. The net investment loss for 2002 consisted of realized losses within our equity portfolio of $12.1 million consistent with the performance of the broader equity markets in 2002 and 2001, losses of $1.3 million on our investments in limited partnerships for other than temporary declines, and $1.7 million of gains relative to fixed income investments. The net realized investment loss for 2001 included an $7.8 million loss relative to our equity portfolio, $1.0 million of realized gains from our fixed income investments offset by $2.9 million for other than temporary impairments for fixed income securities and $2.9 million for other than temporary impairments for limited partnerships.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses were $201.8 million for 2002, compared with $128.3 million for 2001, an increase of $73.5 million or 57.3%. The loss ratio for 2002 was 124.0% compared with 85.3% for 2001. See "-- Special Note Regarding 2002." A further breakdown of losses incurred is as follows:
- E&S net losses and loss adjustment expenses were $140.9 million for 2002, compared with $43.9 million for 2001. The loss ratio was 138.9% for 2002 compared with 74.4% for 2001. The deterioration was the result of the adverse loss development discussed above.
- Specialty admitted net losses and loss adjustment expenses were $52.6 million for 2002, compared with $29.1 million for 2001. The loss ratio for 2002 was 99.1% compared with 79.5% for 2001. The deterioration was the result of the adverse development discussed above.
- Reinsurance net losses and loss adjustment expenses were $8.3 million for 2002, compared with $55.4 million for 2001. The loss ratio for 2002 was 100.0% compared with 101.2% for 2001.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $18.9 million for 2002, compared with $15.9 million for 2001, an increase of $3.0 million or 18.9%. This increase can be attributed to a $4.1 million increase in other underwriting expense and a $1.1 million decrease in acquisition costs.
Acquisition costs decreased by $1.1 million in 2002 primarily as a result of a $6.1 million decrease in contingent commission offset by a $3.9 million decrease in ceding commission.
Other underwriting expenses increased $4.1 million in 2002, compared with 2001. Premium tax expense increased $1.9 million due to the increased amount of admitted premiums written. Legal expense increased $2.0 million as a result of the RAS arbitration. Salary expense decreased by $1.8 million principally due to a decline in incentive compensation. Other employee benefits increased by approximately $0.8 million.
We recorded a charge for an allowance for doubtful reinsurance receivables of $44.0 million in 2002.
Expense and Combined Ratios
The expense ratio increased to 38.6% for 2002 from 10.6% for 2001. The expense ratio contains the $44.0 million reserve for uncollectible reinsurance, which caused the expense ratio to increase by 27.0 percentage points.
The overall combined ratio increased to 162.6% for 2002 from 95.9% for 2001.
Other Operating Expenses
Other operating expenses were $5.9 million for 2002, compared with $2.2 million for 2001, an increase of $3.7 million. The increase was primarily the result of a $2.5 million charge for potentially uncollectible producer balances.
Income Tax Expense
Income tax benefit was $40.5 million for 2002, compared with an income tax expense of $0.3 million for 2001. The effective tax rate benefit in 2002 was 39.8% compared with an effective tax rate expense of 2.8% in 2001. The effective tax differs from the United States statutory rate of 35.0% primarily due to tax-exempt investment income. We carried back our 2002 tax losses for five years. As a result of the carryback, alternative minimum tax of $7.3 million was incurred in those earlier years. The alternative minimum tax carryover is available for future years and does not expire.
The factors described above resulted in a net loss for 2002 of $61.7 million compared with net income of $10.8 million for 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Premiums
Gross premiums written were $670.5 million for 2001, compared with $453.5 million for 2000, an increase of $217.0 million or 47.9%. A further breakdown of gross premiums written is as follows:
- E&S gross premiums written were $398.3 million for 2001, compared with $260.7 million for 2000, an increase of $137.6 million or 52.8%. The growth in E&S gross premiums written was the result of growth of existing products due to increased rates and increased exposures combined with new business.
- Specialty admitted gross premiums written were $210.2 million for 2001, compared with $130.7 million for 2000, an increase of $79.5 million or 60.8%. The growth in specialty admitted gross premiums written was caused primarily by rate increases combined with several large new products written for the first time in 2001.
- Reinsurance gross premiums written were $62.0 million for both 2000 and 2001.
Net premiums written were $169.3 million for 2001, compared with $127.6 million for 2000, an increase of $41.7 million or 32.7%. The ratio of net premiums written to gross premiums written was 25.2% for 2001 compared with 28.1% for 2000. A further breakdown of net premiums written is as follows:
- E&S net premiums written were $68.2 million for 2001, compared with $40.7 million for 2000, an increase of $27.5 million or 67.6%. The ratio of net premiums written to gross premiums written was 17.1% for 2001, compared with 15.6% for 2000. The increase in net premiums written was due to the increase in direct premiums written combined with an increased retention relative to a product within our non-medical professional liability product class.
- Specialty admitted net premiums written were $39.1 million for 2001, compared with $24.9 million for 2000, an increase of $14.2 million or 57.0%. The ratio of net premiums written to gross premiums written was 18.6% for 2001 as compared with 19.1% for 2000. The increase in net premiums written was consistent with the increase in gross premiums written.
- Reinsurance net premiums written were $62.0 million for both 2000 and 2001.
Net premiums earned were $150.3 million for 2001, compared with $136.9 million for 2000, an increase of $13.4 million or 9.8%. A further breakdown of net premiums earned is as follows:
- E&S net premiums earned were $59.0 million for 2001, compared with $40.5 million for 2000, an increase of $18.5 million or 45.7%.
- Specialty admitted net premiums earned were $36.6 million for 2001, compared with $25.7 million for 2000, an increase of $10.9 million or 42.4%.
- Reinsurance net premiums earned were $54.8 million for 2001, compared with $70.8 million for 2000, a decrease of $16.0 million or 22.6%.
Net Investment Income
Income from investments excluding realized capital gains and losses was $24.5 million for 2001, compared with $28.6 million for 2000. This decrease resulted principally from a decrease in the investment yield of the fixed-income investments and a decline in interest rates on overnight cash balances. During 2001, the average rate on overnight investments was 4.0% compared with 6.3% during 2000. We held $77.1 million of cash and cash equivalents as of December 31, 2001, compared with $124.8 million as of December 31, 2000. Cash and invested assets grew to $516.4 million as of December 31, 2001, compared with $483.4 million as of December 31, 2000. The growth in the investment portfolio was due to net cash flows provided from operating activities; the average duration of our fixed income investments approximated 5.9 years as of December 31, 2001, compared with 5.4 years as of December 31, 2000. Book yield on our fixed income investments was 5.97% as of December 31, 2001, compared with 6.42% as of December 31, 2000.
Investment expenses were $5.1 million for 2001, compared with $6.1 million for 2000, a decrease of $1.0 million or 16.4%.
Net Realized Investment Gain (Loss)
Net realized investment loss was $12.7 million for 2001, compared with a $0.6 million realized investment gain for 2000. The net realized investment loss for 2001 consisted of an $7.8 million loss relative to our equity portfolio, $1.0 million realized gains from our fixed income investments offset by $2.9 million for other than temporary impairments for fixed income securities and $2.9 million for other than temporary impairments for limited partnerships. In 2000, we recorded a realized investment gain of $1.0 million on our fixed income investments, a $1.9 million gain from the sale of a limited liability venture capital fund, and a $2.3 million loss on our equity portfolio.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses were $128.3 million for 2001, compared with $113.2 million for 2000. The loss ratio increased to 85.3% for 2001 from 82.6% for 2000. The 2001 operating results included favorable loss development of $17.3 million offset by strengthening of prior year loss reserves of $6.1 million as well as a $5.0 million charge resulting from a commutation with a reinsurer. The prior year reserve increase related principally to the commercial automobile liability and animal mortality lines of business. These factors added 7.5 percentage points to the 2001 loss ratio. The September 11, 2001 terrorist attacks in New York, Washington D.C. and Pennsylvania resulted in no significant property or casualty losses to us. A further breakdown of losses incurred is as follows:
- E&S net losses and loss adjustment expenses were $43.9 million for 2001, compared with $24.6 million for 2000. The loss ratio was 74.4% for 2001, compared with 60.8% for 2000. The increase in the loss ratio for 2001 was primarily due to the above mentioned commutation with one of our reinsurers.
- Specialty admitted net losses and loss adjustment expenses were $29.1 million for 2001, compared with $18.4 million for 2000. The loss ratio was 79.5% for 2001 compared with
71.7% for 2000. The increase in the loss ratio for 2001 was primarily due to the loss experience of our animal mortality business.
- Reinsurance net losses and loss adjustment expenses were $55.4 million for 2001, compared with $70.1 million for 2000. The loss ratio for 2001 was 101.2% compared with 99.1% for 2000.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $15.9 million for 2001, compared with $15.0 million for 2000, an increase of $0.9 million or 6.0%. This increase can be attributed to a $6.5 million increase in other underwriting expenses and a $5.6 million decrease in acquisition costs. A further analysis of acquisition costs and other underwriting expenses is as follows:
- $2.7 million of the decrease in acquisition costs was due to a reduction in contingent commission expense. The remainder of the acquisition cost reduction was attributable to increased levels of ceding commission recognized in 2001.
- The $6.5 million increase in other underwriting expense in 2001, compared with 2000 is due primarily to increased legal expense of $2.5 million related to RAS, and increases in premium taxes attributable to increased admitted writings in 2001.
Expense and Combined Ratios
The expense ratio improved to 10.6% for 2001, compared with 11.0% for 2000.
The combined ratio increased slightly to 95.9% for 2001, compared with 93.6% for 2000.
Income Tax Expense
Income tax expense was $0.3 million for 2001, compared with $5.9 million for 2000. The effective tax rate was 2.8% in 2001, compared with a rate of 20.6% in 2000. The difference from the United States statutory rate of 35.0% was mainly attributable to tax-exempt interest income. Total pre-tax income was $18.1 million less in 2001 compared with 2000.
The factors described above resulted in net income for 2001 of $10.8 million, compared with net income of $22.7 million for 2000.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF FUNDS
United National Group is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company, United National Casualty Insurance Company, U.N. Barbados and U.N. Bermuda.
United National Group's principal source of cash to meet short-term and long-term liquidity needs, including the payment of dividends to stockholders and corporate expenses, includes dividends and other permitted disbursements from U.N. Barbados, which in turn is largely dependent on dividends and other payments from U.N. Bermuda and our U.S. Insurance Subsidiaries. United National Group has no planned capital expenditures that could have a material impact on its long-term liquidity needs.
The principal sources of funds at U.N. Barbados, U.N. Bermuda and our U.S. Insurance Subsidiaries include underwriting operations, investment income and proceeds from sales and redemptions of investments. Funds are used by U.N. Barbados, U.N. Bermuda and our U.S. Insurance Subsidiaries principally to pay claims and operating expenses, to purchase investments and to make dividend payments. United National Group's future liquidity is dependent on the ability of U.N. Barbados, U.N. Bermuda and our U.S. Insurance Subsidiaries to pay dividends.
United National Group's insurance subsidiaries are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. United National Insurance Company may pay dividends without advance regulatory approval only out of unassigned surplus. The maximum dividend payout that may be made without prior approval in 2003 is $22.9 million.
SURPLUS LEVELS
United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company and United National Casualty Insurance Company are required by law to maintain a certain minimum level of policyholders' surplus on a statutory basis. Policyholders' surplus is calculated by subtracting total liabilities from total assets. The NAIC adopted risk-based capital standards designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of each insurer's assets and liabilities and mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. Based on the standards currently adopted, our U.S. Insurance Subsidiaries' capital and surplus are in excess of the prescribed risk-based capital requirements.
CASH FLOWS
Sources of operating funds consist primarily of net premiums written and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments.
Net cash provided by operating activities was $31.9 million for the nine months ended September 30, 2003, compared with net cash provided by operating activities of $83.0 million for the nine months ended September 30, 2002. This decrease in net cash provided by operations resulted primarily from a decrease in premiums written. Net premiums collected for the nine month period ended September 30, 2003 were $119.1 million, a reduction of $56.9 million compared with the nine month period ended September 30, 2002.
Net cash used for investing activities was $23.1 million for the nine months ended September 30, 2003, compared with $88.4 million for the nine months ended September 30, 2002. The decrease in the cash used for investing was primarily due to a reduction in operational cash flow due to declines in premiums written and an increase in cash awaiting investment, as well as $10.8 million of cash used to purchase Wind River Investment Corporation, net of $105.0 million of cash acquired.
Net cash produced by financing activities was $17.6 million for the nine months ended September 30, 2003. The source of the financing funds included the offering by American Insurance Service, Inc. or, "AIS," of $10.0 million trust preferred securities, $2.0 million of common shares issued under stock purchase plans, and a $5.6 million capital contribution received from the previous parent prior to the acquisition.
We produced net cash flows from operating activities of $105.0 million in 2002, compared with $18.0 million for 2001. The increase in net cash provided by operations resulted primarily from an increase in premiums written in 2002. Net premiums collected in 2002 were $165.2 million, a $39.9 million increase compared to 2001. Net losses paid in 2002 were $97.7 million, a $5.0 million reduction, compared with 2001. Cash flow produced by trading activities was $5.7 million in 2002, compared with a use of operating cash flow of $28.6 million in 2001.
Net cash used for investing activities was $109.1 million for 2002, compared with $65.8 million for 2001, as we used our strong cash flows from operations to purchase bonds and preferred stocks.
Net cash used for investing activities was $65.8 million for 2001, compared with $26.3 million for 2000. This increase was attributable primarily to the investment of excess cash held as of December 31, 2000.
LIQUIDITY
Our U.S. Insurance Subsidiaries maintain sufficient liquidity to pay claims.
Our U.S. Insurance Subsidiaries participate in an intercompany pooling arrangement whereby premiums, losses, and expenses are shared pro rata among the members of the group. United National Insurance Company is not an authorized reinsurer in all states. As a result, any losses and unearned premium that are ceded to United National Insurance Company by the other companies in the group must be collateralized. United National Insurance Company has trusts in place to assist the other members of the group in meeting their regulatory requirements.
There are two intercompany pooling agreements in place. The first pooling agreement governs policies that were written prior to July 1, 2002. The second pooling agreement governs policies that are written on or after July 1, 2002. The method by which intercompany reinsurance is ceded is different for each pool. In the first pool, we cede all business to United National Insurance Company. United National Insurance Company cedes in turn to external reinsurers. The remaining net premiums retained is allocated to the companies in the group according to their respective pool participation percentages. In the second pool, each company in the group first cedes to external reinsurers. The remaining net is ceded to United National Insurance Company where the net premiums written of the group are pooled and reallocated to the group based on their respective participation percentages. The second pool requires less trust funding by United National Insurance Company as a result of it ceding less business to the other group members. United National Insurance Company only has to fund the portion that is ceded to it after cessions have occurred with external reinsurers. United National Insurance Company retains 80.0% of the risk associated with each pool. To cover the required minimum exposure as of December 31, 2002, the trusts were funded to approximately $290.0 million as of February 2003. It is anticipated that the required funding amount will decline in future periods, which would improve the overall liquidity of the domestic insurance group.
CAPITAL RESOURCES
We do not anticipate paying any cash dividends on any of our common shares in the foreseeable future. We currently intend to retain any future earnings to fund the development and growth of our business.
As a result of the acquisition of our U.S. Operations, senior notes in an aggregate principal amount of $72.8 million, subject to adjustment, were issued to the Ball family trusts, as part of the purchase price, by our subsidiary, Wind River Investment Corporation. These senior notes have an interest rate of 5.0%, which may be paid either in cash or in kind. These senior notes mature on September 5, 2015; however, in certain circumstances we are required to make mandatory prepayments on these senior notes on October 1 of each year. We are only required to make such mandatory prepayments if we have generated "excess cash flow" for the preceding fiscal year. "Excess cash flow" generally means an amount equal to our consolidated net income, less such amounts as our Board of Directors may determine are necessary to: (1) maintain an A.M. Best rating of at least "A" (Excellent) for each of our U.S. Insurance Subsidiaries; (2) make permitted dividend payments; (3) maintain the statutory surplus of our U.S. Insurance Subsidiaries at acceptable levels and (4) provide our U.S. Operations with adequate levels of working capital.
For 2003, United National Insurance Company can pay a dividend of $22.9 million without regulatory approval.
U.N. Barbados holds a note in the amount of $175.0 million from U.N. Holdings II, Inc. The note has an interest rate of 6.64% and matures in 2018. It is anticipated that interest will be paid yearly. U.N. Holdings II, Inc. has no operations. Its ability to generate cash to repay the note is dependent on dividends that it receives from its subsidiaries.
On September 30, 2003, AIS, a wholly-owned indirect subsidiary of United National Group, sold $10.0 million (aggregate liquidation preference) of Floating Rate Preferred Securities to Dekania CDO I, Ltd., an exempted company incorporated with limited liability under the law of the Cayman Islands, in a
private placement through AIS's wholly owned Delaware subsidiary United National Group Capital Trust I.
AIS, through United National Group Capital Trust, together with other insurance companies and insurance holding companies, issued trust preferred securities to the collateralized debt obligation pool organized by Dekania Capital Management LLC, which in turn, issued its securities to institutional and accredited investors. United National Group Capital Trust issued 10,000 trust preferred securities, having a stated liquidation amount of $1,000 per security, that mature on September 30, 2033 and bear a floating interest rate, reset quarterly, equal to London Interbank Offered Rate plus 4.05%. AIS, through United National Group Capital Trust, has the right to call the trust preferred securities at par after September 30, 2008, five years from the date of issuance. The trust preferred securities have not been and will not be registered under the Securities Act, and satisfy the eligibility requirements of Rule 144(d)(3) under the Act.
The entire proceeds from the sale of the trust preferred securities were used for the purchase of $10.0 million (in principal amount) of unsecured junior subordinated deferrable interest notes issued by AIS under a junior subordinated indenture, dated as of September 30, 2003, between AIS and JPMorgan Chase Bank, as indenture trustee.
On September 5, 2004, we will begin paying an annual management fees of $1.5 million in the aggregate to Fox Paine & Company and The AMC Group, L.P.
INFLATION
Property and casualty insurance premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves.
Substantial future increases in inflation could result in future increases in interest rates, which in turn are likely to result in a decline in the market value of the investment portfolio and resulting unrealized losses or reductions in shareholders' equity.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
We believe that we are principally exposed to two types of market risk:
interest rate risk and credit risk.
INTEREST RATE RISK
Our primary market risk exposure is to changes in interest rates. Our fixed income investments are exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, the market value of our fixed income investments fall, and the converse is also true. We expect to manage interest rate risk through an active portfolio management strategy that involves the selection, by our managers, of investments with appropriate characteristics, such as duration, yield, currency and liquidity, that are tailored to the anticipated cash outflow characteristics of our liabilities. Our strategy for managing interest rate risk also includes maintaining a high quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. A significant portion of our investment portfolio matures each year, allowing for reinvestment at current market rates. Our investment portfolio is actively managed and trades are made to balance our exposure to interest rates. As of September 30, 2003, assuming identical shifts in interest rates for securities of all maturities, an immediate 100 basis point increase in market interest rates would have resulted in an estimated decrease in market value of 4.1%, or approximately $19.9 million on our fixed income securities of $486.5 million, and an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 4.3% or approximately $20.8 million.
CREDIT RISK
We have exposure to credit risk primarily as a holder of fixed income investments. Our investment policy requires that we invest in debt instruments of high credit quality issuers and limits the amount of credit exposure to any one issuer based upon the rating of the security.
In addition, we have credit risk exposure to our general agencies and reinsurers. We seek to mitigate and control our risks to producers by typically requiring our general agencies to render payments within no more than 45 days after the month in which a policy is effective and including provisions within our general agency contracts that allow us to terminate a general agencies' authority in the event of non-payment.
With respect to our credit exposure to reinsurers, we seek to mitigate and control our risk by ceding business to only those reinsurers having adequate financial strength and sufficient capital to fund their obligation. In addition, we seek to mitigate credit risk to reinsurers through the use of trusts for collateral. As of September 30, 2003, $646.2 million of collateral was held in trust to support the reinsurance receivables.
COMMITMENTS
We have commitments in the form of operating leases, commitments to fund limited partnerships and a revolving line of credit. As of September 30, 2003, contractual obligations related to these commitments were as follows:
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
(DOLLARS IN THOUSANDS) ------- --------- --------- --------- ---------
Operating leases(1).......................... $10,870 $2,084 $3,876 $4,910 $ --
Commitments to fund limited
partnerships(2)............................ 5,447 5,447 -- -- --
Discretionary demand line of credit(3)....... 155 31 62 62 --
Senior notes payable to related party........ 72,848 -- -- -- 72,848
Company obligated mandatorily redeemable
preferred securities of trust holding
solely junior subordinated securities(5)... 10,000 -- -- -- 10,000
------- ------ ------ ------ -------
Total...................................... $99,320 $7,562 $3,938 $4,972 $82,848
======= ====== ====== ====== =======
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(1) We lease office space and equipment as part of our normal operations. The amounts shown above represent future commitments under such operating leases.
(2) We are required to commit additional capital to certain limited partnership investments during future periods. Because the timing of the payments is not specified by the limited partnership agreements, all such commitments are treated as current obligations for the purpose of this table.
(3) There were no outstanding borrowings against the discretionary demand line of credit as of September 30, 2003. The amounts shown above represent fees due on the amount available for borrowing.
(4) As a result of the acquisition of Wind River Investment Corporation, senior notes in an aggregate principal amount of approximately $72.8 million, subject to adjustment, were issued to the Ball family trusts, as part of the purchase price. These senior notes have an interest rate of 5.0%, which may be paid either in cash or in kind. These senior notes mature on September 5, 2015; however, in certain circumstances we are required to make mandatory prepayments on these senior notes. We are required to make such mandatory prepayments if "excess cash flow," as defined, was generated in the preceding fiscal year. "Excess cash flow" is defined as an amount equal to consolidated net income, less such amounts as our Board of Directors may determine are necessary to: (1) maintain an A.M. Best rating of at least "A" (Excellent) for each of our U.S. Insurance Subsidiaries; (2) make
permitted dividend payments; (3) maintain the statutory surplus of our U.S. Insurance Subsidiaries at acceptable levels; and (4) provide us with adequate levels of working capital.
(5) On September 30, 2003, AIS participated in a pooled trust preferred transaction led by Dekania Capital Management LLC. In connection with this transaction, AIS issued $10.0 million in principal amount of unsecured junior subordinated deferrable interest notes of AIS to United National Group Capital Trust I, a Delaware statutory trust, United National Group Capital Trust I issued $10.0 million aggregate liquidation preference of floating rate preferred securities to Dekania CDO I, Ltd., a special purpose funding vehicle created by Dekania Capital Management LLC. AIS has guaranteed the payment of amounts payable in respect of the floating rate preferred securities. The stated maturity date of the notes and the preferred securities is September 30, 2033. Interest is payable quarterly, in arrears, at 4.05% over the London interbank offered interest rate.
INDUSTRY BACKGROUND AND TRENDS
INDUSTRY CONDITION AND TRENDS
The property and casualty insurance industry has historically been a cyclical industry. During periods of reduced underwriting capacity, as defined by availability of capital, lower competition generally results in more favorable policy terms and conditions for insurers. During periods of excess underwriting capacity, pricing and policy terms and conditions are generally less favorable to insurers due to competition. In the past, several factors affected underwriting capacity, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors.
We believe that during the 1990s the insurance industry maintained excess underwriting capacity. As a result, the industry suffered from lower pricing, less favorable policy terms and conditions, less stringent underwriting standards and reduced profitability. Significant catastrophic losses in 1999 and a subsequent contraction of underwriting capacity led to price increases and policy terms and conditions more favorable to insurers in 2000.
We believe that these trends continued and accelerated in 2001 when the property and casualty insurance industry experienced a severe dislocation as a result of an unprecedented impairment of capital, causing a substantial contraction in industry underwriting capacity. We believe that this reduction in capacity is a result of, among other things:
- losses caused by the terrorist attacks of September 11, 2001, which resulted in the largest insured loss in history, estimated at $30 to $40 billion by A.M. Best;
- the existence of substantial reserve deficiencies, resulting from asbestos, environmental and directors and officers liability related claims and from poor underwriting in the late 1990s;
- substantial investment losses as a result of a decline in the global equity markets and significant credit losses, with the Insurance Services Office estimating that the U.S. property and casualty industry as a whole had realized and unrealized losses from the end of 2000 through the end of 2002 of $33 billion;
- the exit or insolvency of several insurance market participants, such as Reliance Group, Frontier Insurance Group, GAINSCO and American Equity, each of which either exited particular lines of business or significantly reduced their activities;
- the ratings downgrade of a significant number of insurers and reinsurers; and
- increased financial scrutiny of insurers and financial services companies by federal and state regulatory authorities as a result of high-profile corporate scandals and of the resulting changes in corporate governance.
These factors have resulted in a general environment of rate increases and conservative risk selection, more restrictive coverage terms and a significant movement of premium from the standard market to the specialty insurance market. During 2002, demand for insurance products to manage risk accelerated while underwriting capacity decreased. We believe that this environment will continue through at least 2004. Increased reinsurance costs, to some extent offset the benefits of these trends to us and to primary insurance companies in general.
Consistent with the trends witnessed in the broader property and casualty market, during 2001 and 2002, our rate increases on renewal business across all segments approximated 23% and 30%, respectively. Through September 30, 2003, our rate increases this year on renewal business approximated 27%, which rates we will earn over the period of time for which the policies are in force, generally the next 12 months. We cannot assure you, however, that these favorable trends will continue or that these rate increases can be sustained.
SPECIALTY INSURANCE MARKET
The specialty insurance market differs significantly from the standard property and casualty insurance market. In the standard property and casualty insurance market, insurance rates and forms are highly regulated, products and coverages are largely uniform and have relatively predictable exposures. In the standard market, policies must be written by insurance companies that are admitted to transact business in the state in which the policy is issued. As a result, in the standard property and casualty insurance market insurance companies tend to compete for customers primarily on the basis of price and financial strength.
In contrast, the specialty insurance market, which we consider to be composed of the E&S market and the specialty admitted market, provides coverage for hard-to-place risks that do not fit the underwriting criteria of insurance companies operating in the standard market. In the E&S market, insurance rates and forms are not regulated and can be tailored to meet specific risks. However, U.S. insurance regulations generally require a risk to be declined by three admitted carriers before an E&S lines insurance company may write the risk. The specialty admitted market includes policies written to cover hard-to-place risks, including risks associated with insureds engaged in similar, but highly-specialized types of activities. These insureds are generally forced to rely on specialty admitted insurance companies for one of two reasons: such insureds require a total insurance product not otherwise available from standard market insurers, or such insureds require insurance products that are overlooked by large admitted carriers. For regulatory or marketing reasons, these insureds require products that are written by an admitted insurance company.
Competition in the specialty insurance market tends to focus less on price and more on availability, service and other considerations. While specialty insurance market exposures may have higher perceived insurance risk than their standard market counterparts, specialty insurance market underwriters historically have been able to generate underwriting profitability superior to standard market underwriters. According to A.M. Best, over the past ten years, the average combined ratio for insurers operating in the E&S market was 10.7 percentage points lower than that of insurers operating in the property and casualty industry as a whole.
According to A.M. Best, over the 20-year period from 1983 through 2002, the surplus lines market grew from an estimated $2.1 billion in direct premiums written to $25.6 billion, representing a 13.3% compound annual growth rate and aggregate growth of 1,119.1%. In contrast, the U.S. property and casualty industry grew more moderately from $95.5 billion in direct premiums written to $406.7 billion, representing a 7.5% compound annual growth rate and aggregate growth of 325.9%. During this period, the surplus lines market as a percent of the total property and casualty industry grew from approximately 2.4% to 4.2%. Additionally, the growth in terms of commercial lines market share, which comprises the majority of surplus lines premiums, increased from 3.6% to 8.8% over this period.
The specialty insurance market is significantly affected by the conditions of the insurance market in general. Hard market conditions (i.e., those favorable to insurers), like those being experienced at present, tend to generate a proportion of business moving from the admitted market back to the surplus lines market, and vice versa when soft market conditions are prevalent. During hard markets, standard market underwriters generally rely on traditional underwriting methods and make adjustments in policy terms, conditions and limits. The firming of the current property and casualty market, which we believe commenced in 2000, caused standard market carriers to refocus on their core books of business.
Initially, the market shift into the E&S market occurred at a gradual pace. According to A.M. Best data, direct premiums written by the domestic E&S market increased by 8.5% in 2000. Once admitted carriers began to stress underwriting criteria and risk selection techniques in an effort to bolster their operating profits by eliminating non-core lines of business, rather than re-pricing them, the movement of premiums to surplus lines accelerated. As a result, direct premiums written in the domestic E&S market grew 36.6% in 2001 and 81.7% in 2002. Growth of direct premiums written in the total E&S market, which includes domestic professional E&S underwriters, Lloyds of London, other regulated non-domestic insurers and domestic specialty underwriters was 9.8% in 2000, 35.7% in 2001 and 61.7% in 2002.
BUSINESS
OVERVIEW
United National Group is a holding company formed on August 27, 2003 under the laws of the Cayman Islands to acquire our U.S. Operations.
Through our U.S. Operations we are a leading specialty property and casualty insurer with a 43-year operating history in the specialty insurance markets. In 2002, United National Insurance Company was the sixth largest E&S insurance company according to Business Insurance, and we were the 11th largest E&S insurance group according to A.M. Best, in each case on the basis of direct premiums written. Our Non-U.S. Operations, which consist of recently formed Barbados-based and Bermuda-based insurance companies, are expected to begin offering insurance and reinsurance products to third parties and reinsurance to our U.S. Operations in the near future.
We write specialty insurance products that are designed to meet the specific needs of targeted niche insurance markets. These niche markets are typically well-defined, homogeneous groups of insureds to which, due to some particular risk exposure, standard market insurers do not offer insurance coverage. Examples of products that we write for these markets include property and casualty insurance for social service agencies, insurance for equine mortality risks and insurance for vacant property risks. We believe that our specialty insurance product focus and niche market strategy has enabled us to outperform the property and casualty industry as a whole. For example, our combined ratio, based on our statutory financial statements and calculated as an unweighted average, was 13.8 percentage points better than the property and casualty industry as a whole over the past 20 years, based on data from A.M. Best.
We compete in the specialty insurance market through our two primary business segments, our E&S segment and our specialty admitted segment. We offer four general classes of insurance products across both of these primary business segments: specific specialty insurance products, umbrella and excess insurance products, property and general liability insurance products and non-medical professional liability insurance products. We distribute the insurance products of our U.S. Operations through our wholly-owned subsidiary, J.H. Ferguson, as well as through a group of 51 professional general agencies that have limited quoting and binding authority, and with which on average, we have an eight-year working relationship.
Our financial goal is to produce superior returns to our shareholders by achieving underwriting profits and by steadily increasing our shareholders' equity over the long term. We have produced a 95.4% combined ratio, based on our statutory financial statements and calculated as an unweighted average, over the last 20 years, and we have reported an underwriting profit, based on our statutory financial statements, in 19 of the past 20 years.
Our U.S. Insurance Subsidiaries are rated "A" (Excellent) by A.M. Best,
which assigns ratings to each insurance company transacting business in the
United States. "A" (Excellent) is the third highest rating of sixteen rating
categories. These ratings are based upon factors of concern to policyholders and
are not directed to the protection of investors. In June 2003, each of our U.S.
Insurance Subsidiaries was downgraded from "A+" (Superior) to "A" (Excellent) by
A.M. Best. This downgrade followed a significant decrease in our surplus during
2002, primarily due to reserve strengthening we recorded in 2002 relating to
accident years 2001 and prior and due to the results of an arbitration
proceeding with one of our reinsurers.
ACQUISITION OF OUR U.S. OPERATIONS
On September 5, 2003, Fox Paine & Company made a capital contribution of $240.0 million to us, in exchange for 10.0 million Class B common shares and 14.0 million Series A preferred shares, and we acquired Wind River Investment Corporation, the holding company for our U.S. Operations, from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania.
To effect this acquisition, we used $100.0 million of this $240.0 million capital contribution to purchase a portion of the common stock of Wind River Investment Corporation held by the Ball family
trusts. We then purchased the remainder of the common stock of Wind River Investment Corporation that was also held by the Ball family trusts, paying consideration consisting of 2.5 million Class A common shares, 3.5 million Series A preferred shares and senior notes issued by Wind River Investment Corporation having an aggregate principal amount of approximately $72.8 million.
Of the remaining $140.0 million contributed to us, we then contributed $80.0 million to our U.S. Operations, used $43.5 million to capitalize our Non-U.S. Operations and used $16.5 million to fund fees and expenses incurred in connection with the acquisition. Total expenses incurred in connection with the acquisition are anticipated to be approximately $17.6 million. The remaining unpaid acquisition expenses are expected to be funded through our U.S. Operations. See "Our Relationship with Fox Paine & Company."
OUR COMPETITIVE STRENGTHS
We believe that we have certain characteristics that distinguish us from our competitors, including:
- ESTABLISHED REPUTATION IN THE SPECIALTY INSURANCE INDUSTRY. We were founded in 1960 and have a 43-year operating history in the E&S and specialty admitted insurance markets, and we operate in all 50 states.
- EXPERIENCED MANAGEMENT TEAM. Our experienced management team has an average of over 22 years of experience in the insurance industry and has been with us for an average of 15 years. Each member of our senior management team participates in our stock incentive plan, which is intended to align management compensation with the achievement of the goals of our shareholders.
- EXTENSIVE SPECIALIZED NICHE UNDERWRITING CAPABILITIES. We believe that we have a conservative, focused underwriting organization and are recognized for our ability to develop innovative and creative insurance products in the E&S and specialty admitted insurance markets. Our underwriting team of 63 people includes 34 experienced underwriters with an average of 24 years of industry experience. We produced a 95.4% combined ratio, based on our statutory financial statements and calculated as an unweighted average, over the past 20 years and an underwriting profit, based on our statutory financial statements, in 19 of the last 20 years.
- WELL-ESTABLISHED PROCESSES AND PROCEDURES. We have developed critical, customized processes and procedures including our underwriting processes, our systematic legal contracting procedures and our quality control systems. We believe they represent industry best practices. We believe that the combination of these processes and procedures enable us to develop, underwrite and quickly analyze the results of our business. This ability further enables us to capitalize on business opportunities by modifying, improving or exiting a product efficiently.
- STRONG MARKET RELATIONSHIPS. We believe that the underwriting expertise and extensive industry relationships developed by our senior management team and underwriters have allowed us to maintain a leading presence in the E&S and specialty admitted insurance markets. We have strong, longstanding relationships with a group of 51 professional general agencies that extend over eight years on average. We have equally strong relationships with our reinsurers; our relationship with our ten largest reinsurers, representing 86% of our outstanding reinsurance receivables, extends over 17 years on average.
- BALANCE SHEET STRENGTH. We believe our conservative underwriting and investment policies have enabled us to maintain at least an "A" (Excellent) rating or better from A.M. Best for 17 consecutive years. Our rating enables us to compete with the highest rated insurers in the industry.
OUR STRATEGY
Our financial goal is to produce a superior return to our shareholders by achieving underwriting profits and by steadily increasing our shareholders' equity over the long term. We intend to reach our goal by:
- MAINTAINING A LEADERSHIP ROLE IN THE E&S AND SPECIALTY ADMITTED MARKETS. We intend to continue to focus on the needs of the E&S and specialty admitted markets by developing customized insurance products for our insureds, using sophisticated underwriting solutions and providing predictable and helpful customer service.
- FOCUSING ON SPECIFIC NICHE MARKETS IN WHICH WE HAVE DEMONSTRATED UNDERWRITING EXPERTISE. We believe our depth of experience across a diverse set of niche markets provides us a competitive advantage that enables us to identify opportunities and generate superior profitability. We intend to utilize our disciplined, systematic underwriting and quality control processes to obtain the appropriate rates and selection of insureds. Our approach has generated an underwriting profit, based on our statutory financial statements, in 19 of the last 20 years.
- OPPORTUNISTICALLY MANAGING A DIVERSE PRODUCT PORTFOLIO. We continue opportunistically to manage our product portfolio to grow premiums written in those areas experiencing strong price increases and improving underwriting terms and conditions. In order to achieve this growth, we are increasing our retention of our most profitable products. Across our top ten products, as ranked by net premiums written, we increased retention from 31.6% for the nine months ended September 30, 2002 to 44.6% for the nine months ended September 30, 2003.
- MAINTAINING A CONSERVATIVE BALANCE SHEET AND A STRONG A.M. BEST RATING. We intend to remain conservative in our underwriting, reinsurance buying and investment practices and to use extensive modeling techniques to protect our current position with the rating agencies, particularly A.M. Best. Our investment philosophy will remain consistent with our current conservative investment portfolio, of which 90.1% is invested in fixed income securities and cash and cash equivalents as of September 30, 2003 with the fixed income securities having a 4.6-year duration and an average quality rating of AA.
- BUILDING SHAREHOLDER VALUE. By growing underwriting profits through our disciplined approach and conservatively managing a large investment portfolio, we intend to grow shareholders' equity over the long term.
BUSINESS SEGMENTS
We operate our business through three business segments: E&S, specialty admitted, and reinsurance. The following table sets forth an analysis of gross premiums written by segment during the periods indicated:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------ NINE MONTHS ENDED
2000 2001 2002 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS) -------- ------- -------- ------- -------- ------- -------- -------
E&S....................... $260,730 57.5% $398,308 59.4% $543,998 68.6% $380,624 70.0%
Specialty admitted........ 130,734 28.8 210,212 31.4 249,085 31.4 163,189 30.0
Reinsurance............... 62,000 13.7 62,000 9.2 -- -- -- --
-------- ----- -------- ----- -------- ----- -------- -----
Total gross premiums
written............. $453,464 100.0% $670,520 100.0% $793,083 100.0% $543,813 100.0%
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E&S
Our E&S segment focuses on writing insurance for hard-to-place risks and risks that standard admitted insurers specifically choose not to write. Our eligibility as an E&S lines insurer allows us to underwrite unique risks with more flexible policy forms and unregulated premium rates. This flexibility typically results in coverages that are more restrictive and more expensive than those offered in the standard admitted market. In 2002, the United States E&S market as a whole represented approximately $25.6 billion in direct premiums written according to A.M. Best, or approximately 6.3% of the $406.7 billion United States property and casualty industry direct premiums written. According to A.M. Best, the E&S market as a whole grew 61.7% from 2001 to 2002 on the basis of direct premiums written. In 2002, we had $544.0 million of gross premiums written in the E&S market.
SPECIALTY ADMITTED
Our specialty admitted segment focuses on writing insurance for risks that are unique and hard to place in the standard market for insureds that are required, for marketing and regulatory reasons, to purchase insurance from an admitted insurance company. We estimate that the specialty admitted market as a whole is comparable in size to the E&S market. The specialty admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. In 2002, we had $249.1 million of gross premiums written in the specialty admitted market.
REINSURANCE
Our reinsurance segment includes assumed business written in support of a select group of direct writing reinsurers. Any underwriting exposure under this segment has been commuted at no loss to us. This segment was de-emphasized in 2002, but we may write this type of business in the future through our Non-U.S. Operations.
PRODUCTS AND PRODUCT DEVELOPMENT
We offer four general classes of insurance products across both our E&S and specialty admitted business segments. These four classes of products are specific specialty insurance products, umbrella and excess insurance products, property and general liability insurance products and non-medical professional liability insurance products. The following table sets forth an analysis of gross premiums written by product class during the periods indicated:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------ NINE MONTHS ENDED
2000 2001 2002 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS) -------- ------- -------- ------- -------- ------- -------- -------
Specific specialty................ $277,167 70.8% $375,962 61.8% $439,364 55.4% $245,144 45.1%
Umbrella and excess............... 58,095 14.8 138,425 22.8 209,369 26.4 134,847 24.8
Property and general liability.... 32,360 8.3 50,725 8.3 75,376 9.5 96,939 17.8
Non-medical professional
liability....................... 23,842 6.1 43,408 7.1 68,974 8.7 66,883 12.3
-------- ----- -------- ----- -------- ----- -------- -----
Total......................... $391,464 100.0% $608,520 100.0% $793,083 100.0% $543,813 100.0%
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Our insurance products target very specific, defined, homogenous groups of insureds with customized coverages to meet their needs. Our products include customized guidelines, rates and forms tailored to our risk and underwriting philosophy.
The following chart provides representative examples of certain products we offer by product class for specific types of customers:
PRODUCT CLASS PRODUCT CUSTOMER HYPOTHETICAL CLAIM
------------------------ ------------------------ ------------------------ ------------------------
Specific Specialty Equine mortality Owner of pleasure or Horse dies
show horse
Dealer open lot physical Auto dealer distribution Car on open lot damaged
damage center due to hail storm
Umbrella and Excess Umbrella liability Small to medium size Employee car accident,
coverage over multiple businesses, such as trip and fall or
$1 million liability warehouses, retail products claim
coverages stores, commercial
contractors and
apartment buildings
Excess liability Small to medium size Trip and fall or
coverage over $1 million businesses seeking to products claim
primary general purchase more than $1
liability policy million general
liability limit policies
Property and General Commercial packages Small businesses, such Trip and fall or
Liability as warehouses, retail premises claim
stores and restaurants
Bicycle manufacturing Retail bicycle store and Trip and fall or product
bicycle warehouse malfunction claim
Vacant dwellings Home of an individual Fire damage
that recently entered a
nursing home
Non-Medical Professional Social service agency Rehabilitation centers Case worker does not
Liability and counseling centers properly supervise
charge
Educators legal School boards Teacher sues for
liability discrimination if
released prior to tenure
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We utilize a product development process that incorporates disciplined underwriting and due diligence followed by comprehensive home office controls that are intended to maximize underwriting profitability. For example, in 2002, we evaluated approximately 300 products or appointments, of which approximately 50 met our criteria for consideration and ultimately six led to new products or appointments. We believe that direct contacts between our field and home office personnel and our customers have enabled us to identify high quality and profitable products to underwrite. We conduct extensive product due diligence and have strict underwriting guidelines that include in-house actuarial loss analysis and profit calculations based on activity-based costing models. We purchase tailored reinsurance structures for each product and have a formal reinsurance placement process governed by our reinsurance security committee, which consists of six senior executives. Our documentation and underwriting controls include general agency contracts and reinsurance treaties that are specifically tailored for each relationship, daily monitoring, monthly reviews of all products by our senior management and regular on-site general agency audits.
GEOGRAPHIC CONCENTRATION
The following table sets forth the geographic distribution of our direct premiums written for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------ NINE MONTHS ENDED
2000 2001 2002 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS) -------- ------- -------- ------- -------- ------- -------- -------
New York........................ $ 37,678 9.7% $ 60,964 10.1% $ 66,858 8.4% $ 58,887 10.8%
California...................... 56,215 14.4 71,744 11.9 81,573 10.3 57,174 10.5
Florida......................... 35,532 9.1 57,600 9.4 88,990 11.2 46,293 8.5
New Jersey...................... 14,572 3.7 22,077 3.6 34,704 4.4 34,425 6.3
Texas........................... 43,091 11.1 71,276 11.8 76,498 9.7 32,621 6.0
Pennsylvania.................... 21,600 5.5 31,783 5.3 51,220 6.5 25,865 4.8
Louisiana....................... 8,912 2.3 16,718 2.8 27,449 3.5 24,018 4.4
Illinois........................ 18,496 4.8 21,503 3.6 27,872 3.5 22,562 4.2
Ohio............................ 16,669 4.3 22,590 3.7 31,711 4.0 21,598 4.0
Alabama......................... 15,362 3.9 22,698 3.8 30,999 3.9 21,269 3.9
-------- ----- -------- ----- -------- ----- -------- -----
Subtotal.................... $268,127 68.9% $398,953 66.0% $517,874 65.4% $344,712 63.4%
All Others...................... 121,221 31.1 205,785 34.0 273,990 34.6 199,052 36.6
-------- ----- -------- ----- -------- ----- -------- -----
Total....................... $389,348 100.0% $604,738 100.0% $791,864 100.0% $543,764 100.0%
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UNDERWRITING
We utilize a three-step underwriting process that is intended to ensure appropriate selection of risk.
First, we carefully and thoroughly review the expected exposure, policy terms, premium rates, conditions and exclusions to determine whether a risk appropriately fits our overall strategic objectives. Risks that meet this criteria are outlined within pre-approved comprehensive underwriting manuals. We also develop specific administrative and policy issuance processes and procedures that are provided to our underwriting personnel and our professional general agencies.
Second, our professional general agencies, including our wholly-owned subsidiary, J.H. Ferguson, and our direct underwriting personnel further underwrite and assist in the selection of the specific insureds. Our professional general agencies utilize the underwriting manuals and processes and procedures that we provide to generate an insurance quote for the particular insured. In certain cases, a professional general agency may have a potential insured that requires insurance for a risk that lies outside of the scope of our pre-approved underwriting guidelines. For these risks, we also provide a process to enable the delivery of an insurance quote directly from us, after specific review by our underwriters. We regularly update our underwriting manuals to ensure that they clearly outline risk eligibility, pricing, second-step underwriting guidelines and processes, approved policy forms and policy issuance and administrative procedures.
Third, we monitor the quality of our underwriting on an ongoing basis. Our underwriting staff closely monitors the underwriting quality of our business through a very disciplined control system developed for all products and appointments. Our control system consists of five independent steps that we believe ensure the integrity of our underwriting guidelines and processes, including:
- daily updates of all insureds underwritten;
- individual policy reviews;
- monthly general agency and product profile reviews;
- on-site general agency audits for profitability, processes and controls that provide for removal of general agencies not producing satisfactory underwriting results or complying with established guidelines; and
- internal annual actuarial and profitability reviews.
We provide strong incentives to our professional general agencies to produce profitable business through contingent profit commission structures that are tied directly to the achievement of loss ratio and profitability targets.
MARKETING AND DISTRIBUTION
We primarily market the insurance products of our U.S. Operations through our wholly-owned subsidiary J.H. Ferguson, and through a group of 51 professional general agencies that have limited quoting and binding authority that in turn sell our insurance products to insureds through retail insurance brokers. Some of our professional general agencies have limited quoting and binding authority with respect to a single insurance product and others have limited quoting and binding authority with respect to multiple products. Our distribution strategy is to maintain strong relationships with a limited number of high-quality professional general agencies. Professional general agencies typically work exclusively with us on our products. We carefully select our professional general agencies based on their experience and reputation.
Of our professional general agencies, the top five, including J.H. Ferguson, accounted for approximately 51% of our direct premiums written for the nine months ended September 30, 2003, with no one general agency accounting for more than 12%. J.H. Ferguson accounted for approximately 10% of direct premiums written during that period.
We believe that our distribution strategy enables us effectively to access numerous small markets at a relatively low fixed-cost through the marketing, underwriting and administrative support of our professional general agencies. These professional general agencies and their retail insurance brokers have local market knowledge and expertise that enables us to access these markets more effectively.
PRICING
We generally use the actuarial loss costs promulgated by the Insurance Services Office as a benchmark in the development of pricing for our products. We further develop our pricing through the use of our pricing actuary to ultimately establish pricing tailored to each specific product we underwrite, taking into account historical loss experience and individual risk and coverage characteristics.
Recently, we have been successful in increasing our rates. For example, during 2001 and 2002, our rate increases on renewal business, across all segments, approximated 23% and 30%, respectively. Through September 30, 2003, our rate increases on renewal business approximated 27%, which rates we will earn over the period of time for which the policies are in force, generally the next 12 months. We cannot assure you, however, that these favorable trends will continue or that these rate increases can be sustained.
REINSURANCE
We purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophe losses. Reinsurance allows us to control exposure to losses, stabilize earnings and protect capital resources. We purchase reinsurance on both a proportional and excess of loss basis. The type, cost and limits of reinsurance we purchase can vary from year to year based upon our desired retention levels and the availability of quality reinsurance at an acceptable price. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies it has written, it does make the assuming reinsurer liable to the insurer to the extent of the insurance ceded. Our reinsurance contracts renew throughout the year, and all of our reinsurance is purchased following review by our reinsurance security committee.
We purchase specific types and structures of reinsurance depending upon the specific characteristics of the lines of business we underwrite. We will typically seek to place proportional reinsurance in many of our specific specialty products, umbrella and excess products or in the development stages of a new product. We believe that this approach allows us more cost effectively to control our net exposure in these product areas. In our proportional reinsurance contracts, we generally receive a ceding commission on the premium ceded to reinsurers. This commission compensates us for the direct costs associated with the production and underwriting of the business. In addition, many of our proportional reinsurance contracts allow us to share in any excess profits generated under such contracts.
We purchase reinsurance on an excess of loss basis to cover individual risk severity. These structures are utilized to protect our primary positions on property and general liability products and non-medical professional liability products. These structures allow us to maximize our underwriting profits by retaining a greater portion of the risk in these well defined and seasoned products, while protecting against the possibility of unforeseen volatility. Additionally, we purchase facultative risk protection on single risks when we deem necessary.
Our property writings are generally not catastrophe exposed, and our casualty focus does not typically generate a clash exposure. To protect us from the certain exposures that do exist, we purchase $5.0 million property catastrophe and $1.0 million casualty clash coverages, both of which are on a per occurrence basis.
We purchase reinsurance from a number of financially strong reinsurers with which we have long-standing relationships. In addition, in certain circumstances, we hold collateral, including escrow funds and letters of credit, under reinsurance agreements. The following table sets forth our ten largest reinsurers, with which we have an average relationship of 17 years, in terms of amounts receivable, net of reinsurance payables to these reinsurers as of September 30, 2003. Also shown are the amounts of premiums written ceded by us to these reinsurers during the nine months ended September 30, 2003.
A.M. GROSS PREPAID TOTAL CEDED
BEST REINSURANCE REINSURANCE REINSURANCE PERCENT OF PREMIUMS PERCENT OF
RATING RECEIVABLES PREMIUM ASSETS TOTAL WRITTEN TOTAL
(DOLLARS IN MILLIONS) ------ ----------- ----------- ----------- ---------- -------- ----------
American Re-Insurance Co. ...... A+ $ 678.8 $ 91.9 $ 770.7 37.4% $ 173.9 44.0%
Employers Reinsurance Corp. .... A 377.3 39.6 416.9 20.2 89.5 22.7
Hartford Fire Insurance Co. .... A+ 116.7 5.8 122.5 5.9 25.3 6.4
Converium Re (North America).... A 105.7 2.3 108.0 5.2 13.7 3.5
GE Reinsurance Corporation ..... A 90.7 3.7 94.4 4.6 16.6 4.2
General Reinsurance Corp. ...... A++ 80.5 5.5 86.0 4.2 14.3 3.6
Generali -- Assicurazioni....... A+ 57.1 0.0 57.1 2.8 0.1 0.0
Swiss Reinsurance America
Corp.......................... A+ 41.3 1.3 42.6 2.1 3.3 0.8
SCOR Reinsurance Company........ B++ 38.5 0.1 38.6 1.9 5.2 1.3
Odyssey Reinsurance Corp. ...... A 31.6 0.0 31.6 1.5 (0.2) 0.0
-------- ------ -------- ----- ------- -----
Subtotal.................... $1,618.2 $150.2 $1,768.4 85.8% $ 341.7 86.5%
All other reinsurers............ 265.5 26.5 292.0 14.2 53.3 13.5
-------- ------ -------- ----- ------- -----
Total reinsurance
receivables before
purchase accounting
adjustments............... $1,883.7 $176.7 $2,060.4 100.0% $ 395.0 100.0%
-------- ------ -------- ===== ======= =====
Purchase accounting
adjustments............... (98.5) (57.8) (156.3)
Total receivables......... $1,785.2 $118.9 $1,904.1
-------- ====== --------
Collateral held in trust from
reinsurers.................... (646.4) (646.4)
-------- --------
Net receivables............. $1,138.8 $1,257.7
======== ========
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As of September 30, 2003, we had total reinsurance receivables of $1,883.7 million, which were carried at $1,785.2 million. The carrying value of the receivables is net of a $98.5 million reduction recorded upon our acquisition of Wind River Investment Corporation. This adjustment represented the net effect of (1) discounting the reinsurance receivables balance, (2) applying a risk margin to the reinsurance receivables balance and (3) reducing gross reinsurance receivables by an amount equal to Wind River Investment Corporation's estimate of potentially uncollectible reinsurance receivables as of the acquisition date, which was $49.1 million. As of September 30, 2003, we also had $118.9 million of prepaid reinsurance premiums.
Historically, there have been insolvencies following a period of competitive pricing in the industry. While we believe our reinsurance receivables are realizable based on currently available information, conditions may change or additional information might be obtained that may require us to record an allowance. We periodically review our financial exposure to the reinsurance market and the level of our allowance and continue to take actions in an attempt to mitigate our exposure to possible loss. For further information on our reserves, including the establishment of our allowance for doubtful reinsurance receivables in predecessor periods and our relationship with our reinsurers, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Special Note Regarding 2002."
CLAIMS MANAGEMENT AND ADMINISTRATION
Our approach to claims management is designed to investigate reported incidents at the earliest juncture, to select, manage and supervise all legal and adjustment aspects of claims, including settlement, for the mutual benefit of us, our general agencies, reinsurers and insureds. Our general agencies generally have no authority to settle claims or otherwise exercise control over the claims process. Our claims management staff supervises or processes all claims. We have a formal claims review process, and all claims greater than $100,000 are reviewed by our senior claims management and certain of our senior executives.
To handle claims, we utilize our own in-house claims department as well as third party claims administrators, or "TPAs," and assuming reinsurers, to whom we delegate limited claims handling authority. Our experienced in-house staff of approximately 50 claims management professionals are assigned to one of five dedicated claim units: casualty claims, latent exposure claims, property claims, TPA oversight and a wholly-owned subsidiary that administers claims mostly on the west coast of the United States. Each of these units receives supervisory direction and updates on industry, legislative and product developments from the unit director. Our claims management personnel have an average of approximately 19 years of experience in the industry. The dedicated claims units meet regularly to communicate changes that may occur within their assigned specialty.
As of September 30, 2003, we had approximately $646.1 million of outstanding reserves on known claims. Claims relating to approximately 42.0% of those reserves are handled by our in-house claims management professionals, while approximately 37.0% of those reserves are handled by our TPAs, which send us detailed financial and claims information on a monthly basis. We also individually supervise in-house any significant or complicated TPA handled claims, and conduct two to five day on-site audits of our TPAs at least twice a year. Approximately 21.0% of our reserves are handled by our assuming reinsurers. We diligently review and supervise the claims handled by our reinsurers to protect our reputation and minimize exposure.
OUR NON-U.S. OPERATIONS
Our Non-U.S. Operations consist of U.N. Barbados and U.N. Bermuda, each of which was recently formed. To date, our Non-U.S. Operations have not commenced operations. In the near future, after obtaining the necessary regulatory approvals and eligibilities, we intend to begin writing third-party insurance policies through our Non-U.S. Operations that are substantially identical to those that we have historically offered through our U.S. Operations, potentially including reinsurance, and that are subject to
similar underwriting review. We intend to distribute these insurance products through wholesale insurance brokers in the United States, rather than through a network of professional general agencies.
We also intend to use our Non-U.S. Operations to provide reinsurance to our U.S. Operations, largely on a proportional basis.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Applicable insurance laws require us to maintain reserves to cover our estimated ultimate losses under insurance policies that we write and for loss adjustment expenses relating to the investigation and settlement of policy claims.
We establish losses and loss adjustment expenses reserves for individual claims by evaluating reported claims on the basis of:
- our knowledge of the circumstances surrounding the claim;
- the severity of injury or damage;
- jurisdiction of the occurrence;
- the potential for ultimate exposure;
- the type of loss; and
- our experience with the insured and the line of business and policy provisions relating to the particular type of claim.
In most cases, we estimate such losses and claims costs through an evaluation of individual claims. However, for some types of claims, we initially use an average reserving method until more information becomes available to permit an evaluation of individual claims. We also establish loss reserves IBNR, losses based in part on statistical information and in part on industry experience with respect to the probable number and nature of claims arising from occurrences that have not been reported. We also establish our reserves based on our estimates of future trends in claims severity and other subjective factors. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Reserves are recorded on an undiscounted basis. The reserves of each of our U.S. Insurance Subsidiaries are established in conjunction with and reviewed by our in-house actuarial staff and are certified annually by our independent actuaries.
With respect to some classes of risks, the period of time between the occurrence of an insured event and the final resolution of a claim may be many years, and during this period it often becomes necessary to adjust the claim estimates either upward or downward. Certain classes of umbrella and excess liability that we underwrite have historically had longer intervals between the occurrence of an insured event, reporting of the claim and final resolution. In such cases, we are forced to estimate reserves over long periods of time with the possibility of several adjustments to reserves. Other classes of insurance that we underwrite, such as most property insurance, historically have shorter intervals between the occurrence of an insured event, reporting of the claim and final resolution. Reserves with respect to these classes are therefore less likely to be adjusted.
The reserving process is intended to reflect the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived trends. However, there is no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, or to the way one factor may affect another.
The loss development triangles below show changes in our reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on the basis of U.S. GAAP. The estimate is increased or decreased as more information becomes known about the frequency and severity of losses for individual years. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate.
The first line of the loss development triangle shows, for the years indicated, our net reserve liability including the reserve for incurred but not reported losses. The first section of the table shows, by year, the cumulative amounts of losses and loss adjustment expenses paid as of the end of each succeeding year. The second section sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. The "cumulative redundancy (deficiency)" represents, as of the date indicated, the difference between the latest re-estimated liability and the reserves as originally estimated.
This loss development triangle shows development in loss reserves on a net basis:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance sheet
reserves:.......... $117,444 $140,993 $152,457 $155,030 $168,599 $180,651 $210,483 $167,868 $131,128 $156,784
Cumulative paid as of:
One year later..... $ 14,177 $ 22,355 $ 29,966 $ 15,886 $ 13,190 $ 8,360 $ 85,004 $ 64,139 $ 26,163 $ 63,667
Two years later.... 24,023 39,305 38,623 25,120 13,543 64,079 110,073 82,119 72,579
Three years later... 32,182 49,267 45,974 21,867 56,603 77,775 123,129 118,318
Four years later... 39,603 55,573 39,537 47,023 66,083 85,923 152,915
Five years later... 42,837 52,191 52,829 54,490 72,451 111,044
Six years later.... 44,316 56,090 58,647 58,064 93,652
Seven years later... 45,668 59,312 61,160 77,962
Eight years later... 46,874 60,112 79,835
Nine years later... 46,390 65,748
Ten years later.... 48,205
Re-estimated liability
as of:
End of year........ $117,444 $140,993 $152,457 $155,030 $168,599 $180,651 $210,483 $167,868 $131,128 $156,784
One year later..... 121,582 139,523 146,119 146,678 148,895 164,080 195,525 157,602 124,896 228,207
Two years later.... 120,984 131,504 138,304 127,939 137,056 146,959 185,421 155,324 180,044
Three years later... 110,402 126,872 119,561 116,751 121,906 137,711 182,584 192,675
Four years later... 105,113 109,751 114,905 105,368 118,144 136,307 211,544
Five years later... 87,942 103,968 105,963 101,712 116,890 157,605
Six years later.... 79,266 95,141 101,982 98,847 132,663
Seven years later... 72,295 92,563 98,445 111,484
Eight years later... 70,964 88,877 111,444
Nine years later... 67,457 80,558
Ten years later.... 58,257
Cumulative redundancy
(deficiency)....... $ 59,187 $ 60,435 $ 41,013 $ 43,546 $ 35,936 $ 23,046 $ (1,061) $(24,807) $(48,916) $(71,423)
2002
(DOLLARS IN THOUSANDS) --------
Balance sheet
reserves:.......... $260,823
Cumulative paid as of:
One year later.....
Two years later....
Three years later...
Four years later...
Five years later...
Six years later....
Seven years later...
Eight years later...
Nine years later...
Ten years later....
Re-estimated liability
as of:
End of year........ $260,823
One year later.....
Two years later....
Three years later...
Four years later...
Five years later...
Six years later....
Seven years later...
Eight years later...
Nine years later...
Ten years later....
Cumulative redundancy
(deficiency)....... $ 0
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The net deficiency for 1998 through 2001 primarily resulted from the factors described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Special Note Regarding 2002."
The following table provides a reconciliation of the liability for losses and loss adjustment expenses, net of reinsurance ceded:
2000 2001 2002
(DOLLARS IN THOUSANDS) -------- -------- ----------
Reserves for unpaid losses and loss adjustment expenses at
beginning of year......................................... $805,717 $800,630 $ 907,357
Less: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses.................................. 637,850 669,504 750,573
-------- -------- ----------
Net reserves for losses and loss adjustment expenses at
beginning of year.................................... 167,867 131,126 156,784
Incurred losses and loss adjustment expenses:
Provision for losses and loss adjustment expenses for
claims occurring in the current year................... 123,476 134,558 130,327
(Decrease) increase in estimated losses and loss
adjustment expenses for claims occurring in prior
years(1)............................................... (10,325) (6,220) 71,423
-------- -------- ----------
Incurred losses and loss adjustment expenses........... 113,151 128,338 201,750
Losses and loss adjustment expenses payments for claims
occurring during:
Current year.............................................. 85,811 76,508 34,045
Prior years............................................... 64,081 26,172 63,669
-------- -------- ----------
Losses and loss adjustment expenses payments........... 149,892 102,680 97,714
Net reserves for losses and loss adjustment expenses at end
of year................................................... 131,126 156,784 260,820
Plus: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses.................................. 669,504 750,573 1,743,602
-------- -------- ----------
Reserves for unpaid losses and loss adjustment expenses
at end of year....................................... $800,630 $907,357 $2,004,422
======== ======== ==========
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(1) In 2002, we increased our net loss reserves relative to accident years 2001 and prior by $47.8 million primarily due to higher than anticipated losses in the multi-peril and other liability lines of business and by $23.6 million due to the conclusion of an arbitration proceeding. Net losses and loss adjustment expense ratio increased by 43.9 percentage points in 2002 due to this $71.4 million increase in net loss reserves.
ENVIRONMENTAL AND ASBESTOS EXPOSURE
Although we believe our exposure to be limited, we have exposure to environmental and asbestos claims. Our environmental exposure arises from the sale of general liability and commercial multi-peril insurance. Currently, our policies continue to exclude classic environmental contamination claims. In some states we are required, however, depending on the circumstances, to provide coverage for such bodily injury claims as an individual's exposure to a release of chemicals. We have also issued policies that were intended to provide limited pollution and exposure coverage. These policies were specific to certain types of products underwritten by us. We receive a number of asbestos-related claims. The majority are declined based on well-established exclusions. As of September 30, 2003, we had $5.7 million of net loss reserves for asbestos-related claims and $2.4 million for pollution. We attempt to estimate the full impact of the environmental and asbestos exposure by establishing full case reserves on all known losses. In 2001 and prior years, environmental and asbestos claims were aggregated and reviewed with other lines of business
that have long periods of loss development. In 2002, we identified that portion of our IBNR reserves related to environmental and asbestos. The following table shows asbestos and environmental losses:
YEARS ENDED DECEMBER 31,
---------------------------
2000 2001 2002
(DOLLARS IN THOUSANDS) ------- ------- -------
Net reserve for A&E losses and loss adjustment expenses
reserves -- beginning of period........................... $ 3,291 $ 2,449 $ 2,104
Plus: Incurred losses and loss adjustment expenses -- case
reserves.................................................. (177) (8) 170
Plus: Incurred losses and loss adjustment
expenses -- IBNR.......................................... -- -- 6,370
Less: Payments.............................................. 665 337 500
------- ------- -------
Net reserve for A&E losses and loss adjustment
expenses -- end of period............................ $ 2,449 $ 2,104 $ 8,144
======= ======= =======
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INVESTMENTS
Insurance company investments must comply with applicable regulations that prescribe the type, quality and concentration of investments. These regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, and preferred and common equity securities. As of September 30, 2003, we had $800.2 million of investment and cash and cash equivalents assets. The majority of our invested assets are held by our U.S. Insurance Subsidiaries.
Our investment policy is determined by our Board of Directors and is reviewed on a regular basis. We will engage third-party investment advisors to oversee our investments and to make recommendations to our Board of Directors. Our investment policy allows us to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private equity investments. With respect to fixed income securities, the maximum exposure per issuer varies as a function of the credit quality of the security. The allocation between taxable and tax-exempt fixed income securities is determined based on market conditions and tax considerations, including the applicability of the alternative minimum tax. The maximum allowable investment in equity securities under our investment policy is based on a percentage of our capital and surplus.
Although we generally intend to hold fixed income securities to maturity, we regularly reevaluate our position based upon market conditions. As of September 30, 2003, our fixed income securities had a weighted average maturity of 7.4 years and a weighted average duration of 4.6 years. Our financial statements reflect an unrealized gain on fixed income securities available for sale as of September 30, 2003, of $11.4 million on a pre-tax basis.
The following table shows a profile of our fixed income investments. The table shows the average amount of investments, income earned and the book yield thereon for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
2000 2001 2002 2002 2003
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- --------
Average investments, at cost............ $280,039 $324,412 $407,194 $397,838 $473,772
Gross investment income(1).............. 17,991 19,307 20,868 15,662 14,544
Book yield.............................. 6.42% 5.97% 5.12% 5.25% 4.09%
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(1) Represents investment income, gross of investment expenses and excluding realized gains and losses.
The following table summarizes by type the estimated market value of our investments and cash and cash equivalents as of December 31, 2002 and September 30, 2003:
DECEMBER 31, 2002 SEPTEMBER 30, 2003
--------------------------- ---------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
(DOLLARS IN THOUSANDS) -------- ---------------- -------- ----------------
Cash and cash equivalents.................. $ 72,942 11.9% $234,356 29.3%
U.S. Treasury securities................... $ 30,667 5.0% $ 37,940 4.7%
Obligations of states, municipalities and
political subdivisions................... 99,580 16.3 103,663 13.0
Special revenue fixed income securities.... 303,500 49.7 321,416 40.2
Corporate fixed income securities.......... 14,939 2.4 18,703 2.3
Asset-backed and mortgage-backed
securities............................... 8,150 1.3 4,086 0.5
Other bonds................................ 4,189 0.7 711 0.1
-------- ----- -------- -----
Total fixed income securities............ $461,025 75.4% $486,519 60.8%
Marketable equity securities............... $ 34,710 5.7% $ 34,591 4.3%
Other investments(1)....................... 42,452 7.0 44,703 5.6
-------- ----- -------- -----
Total investments and cash and cash
equivalents......................... $611,129 100.0% $800,169 100.0%
======== ===== ======== =====
|
(1) Includes, as of December 31, 2002, $5.4 million of investments that were sold for $6.0 million on August 25, 2003 to an affiliate of the Ball family trusts.
The following table summarizes, by Standard & Poor's rating classifications, the market value of our investments in fixed income securities, as of December 31, 2002 and September 30, 2003:
DECEMBER 31, 2002 SEPTEMBER 30, 2003
--------------------------- ---------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
(DOLLARS IN THOUSANDS) -------- ---------------- -------- ----------------
AAA........................................ $353,286 76.6% $383,701 78.9%
AA......................................... 70,759 15.3 74,974 15.4
A.......................................... 22,968 5.0 11,024 2.3
BBB........................................ 9,613 2.1 15,539 3.2
BB......................................... 1,616 0.4 1,281 0.2
B.......................................... 522 0.1 -- --
CC......................................... 2,261 0.5 -- --
-------- ----- -------- -----
Total fixed income securities......... $461,025 100.0% $486,519 100.0%
======== ===== ======== =====
|
The following table sets forth the expected maturity distribution of the fixed income securities at their estimated market value as of December 31, 2002 and September 30, 2003:
DECEMBER 31, 2002 SEPTEMBER 30, 2003
--------------------------- ---------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
(DOLLARS IN THOUSANDS) -------- ---------------- -------- ----------------
One year or less........................... $ 29,596 6.4% $ 14,246 2.9%
More than one year to five years........... 184,951 40.1 234,897 48.3
More than five years to ten years.......... 177,882 38.6 157,464 32.4
More than ten years to fifteen years....... 23,738 5.1 15,142 3.1
More than fifteen years.................... 36,708 8.0 59,884 12.3
-------- ----- -------- -----
Securities with fixed maturities......... 452,875 98.2 481,633 99.0
Asset-backed and mortgage-backed
securities............................... 8,150 1.8 4,886 1.0
-------- ----- -------- -----
Total fixed income securities......... $461,025 100.0% $486,519 100.0%
======== ===== ======== =====
|
The weighted average life of our asset-backed and mortgage-backed securities is 6.9 years. The value of our portfolio of fixed income securities is inversely correlated to changes in market interest rates. In addition, some of our fixed income securities have call or prepayment options. This could subject us to reinvestment risk should interest rates fall or issuers call their securities and we are forced to invest the proceeds at lower interest rates. We mitigate this risk by investing in securities with varied maturity dates, so that only a portion of the portfolio will mature at any point in time.
Our equity portfolio consists primarily of mutual funds and equity securities traded on national stock exchanges.
COMPETITION
We compete with numerous domestic and international insurance companies and reinsurers, Lloyd's syndicates, risk retention groups, insurance buying groups, risk securitization products and alternative self-insurance mechanisms. In particular, in the specialty insurance market we compete against, among others:
- American International Group;
- Berkshire Hathaway;
- Great American Insurance Group;
- HCC Insurance Holdings, Inc.;
- Markel Corporation;
- Nationwide Insurance;
- Penn-America Group;
- Philadelphia Consolidated Group;
- RLI Corporation; and
- W.R. Berkley Corporation.
Competition may take the form of lower prices, broader coverages, greater product flexibility, higher quality services, reputation and financial strength or higher ratings by independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market needs and by maintaining relationships with brokers and insureds who rely on our expertise. This expertise, and our reputation for offering and underwriting products that are not readily available, is our principal means of differentiating us from our competition. Each of our products has its own distinct competitive
environment. We seek to compete through innovative ideas, appropriate pricing, expense control and quality service to policyholders, general agencies and brokers.
RATINGS
A.M. Best ratings for the industry range from "A++" (Superior) to "F" (In Liquidation) with some companies not being rated. Each of our U.S. insurance subsidiaries is currently rated "A" (Excellent) by A.M. Best, and has been rated "A" (Excellent) or higher for 17 consecutive years. Publications of A.M. Best indicate that "A" (Excellent) ratings are assigned to those companies that, in their opinion, have achieved excellent overall performance when compared with the standards established by these firms and have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews its profitability, leverage and liquidity, as well as its spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its assets, the adequacy of its policy and loss reserves, the adequacy of its surplus, its capital structure and the experience and objectives of its management. These ratings are based on factors relevant to policyholders, general agencies, insurance brokers and intermediaries and are not directed to the protection of investors.
In June 2003, each of our U.S. Insurance Subsidiaries was downgraded from "A+" (Superior) to "A" (Excellent) by A.M. Best. This downgrade followed a decrease in our policyholders surplus during 2002, due primarily to reserve strengthening that we recorded in 2002 relating to accident years 2001 and prior, and to the results of an arbitration proceeding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Special Note Regarding 2002."
We intend to apply for an A.M. Best rating for U.N. Barbados and U.N. Bermuda in the near future.
CORPORATE STRUCTURE
The following chart shows the structure of our organization, following the acquisition of our U.S. Operations and the formation of our Non-U.S. Operations:
(COMPANY ORGANIZATION STRUCTURE)
EMPLOYEES
As of September 30, 2003, we had approximately 250 employees, six of whom were executive officers. In addition, we have contracts with international insurance service providers based in Barbados and in Bermuda to provide services to our Non-U.S. Operations. We expect to hire individuals in the near future who will operate out of our Barbados and Bermuda offices, subject to approval of any required work permits for non-resident employees. None of our employees are covered by collective bargaining agreements, and our management believes that our relationship with our employees is excellent.
FACILITIES
We lease approximately 61,525 square feet of office space in Bala Cynwyd, Pennsylvania, which serves as the headquarters location for our U.S. Operations, pursuant to a lease that expires on December 31, 2008. In addition, we lease office space in the following locations: Evanston, Illinois; Grand Rapids, Michigan; and Glendale, California. We also have office space available in Bridge Town, Barbados and Hamilton, Bermuda. We believe this office space is sufficient for us to conduct our business.
LEGAL PROCEEDINGS
Other than as described below, we are not currently involved in any material litigation or arbitration proceeding. We anticipate that, similar to the rest of the insurance and reinsurance industry, we may be subject to litigation and arbitration proceedings in the ordinary course of business.
On January 26, 2001, our subsidiary Diamond State Insurance Company was named a defendant in a lawsuit filed in the United States District Court for the Southern District of New York by Bank of America N.A. and Platinum Indemnity Limited for breach of contract, negligent selection and supervision of a general agency and related claims for relief. Bank of America and Platinum seek indemnification of approximately $29.0 million, plus interest in excess of $10.0 million and fees and costs, under alleged "facultative reinsurance policies" issued by Worldwide Weather Insurance Agency, Inc. purportedly on behalf of Diamond State. The complaint alleges the "facultative reinsurance policies" reinsure Platinum for losses paid under Weather Risk Mitigation Insurance Policies issued by Platinum to Palladium Insurance Limited covering specific weather derivative trades entered into by Palladium. Bank of America is the issuing bank for a letter of credit in favor of Palladium, and is allegedly the assignee of Platinum's rights against Diamond State. Diamond State denies the allegations in the complaint, and takes the position, among other things, that even if the "facultative reinsurance policies" were issued in its name, they are unenforceable because Worldwide Weather Insurance Agency and its principal, Harold Mollin, exceeded any authority, either actual or apparent, to issue such "facultative reinsurance policies." The parties are currently engaged in discovery, and a trial date has not been set.
In related proceedings, Diamond State has preserved its potential avenues of recovery in the event it is found liable to Bank of America and Platinum. Diamond State is in arbitration against Partner Reinsurance Company Ltd. and Partner Reinsurance Company of the U.S. seeking recovery under a reinsurance agreement covering business produced by Worldwide Weather Insurance Agency on a 100% basis with regard to the type of risk involved. In addition, if Diamond State were held liable to Bank of America on the ground that Diamond State was negligent in appointing Mr. Mollin and Worldwide Weather Insurance Agency, Diamond State is seeking indemnification and contribution from Partner Reinsurance Company of the U.S. because of its role in the appointment of Mr. Mollin and the Worldwide Weather Insurance Agency. The arbitration is not likely to proceed to a hearing until the Bank of America litigation is resolved.
On July 11, 2003, our subsidiary United National Insurance Company was named a defendant in a lawsuit filed in the Superior Court of Fulton County, Georgia, by Gulf Underwriters Insurance Company seeking rescission of a facultative reinsurance certificate issued to United National Insurance Company with regard to an individual insurance policy. The facultative reinsurance certificate provided 100% reinsurance to United National Insurance Company for loss and loss adjustment expenses paid under the insurance policy. The lawsuit followed United National Insurance Company's billing to Gulf for
reimbursement of a loss in the amount of $3.1 million that was paid under that insurance policy. The rescission claim is based on allegations of breach of contract; misrepresentation; non-disclosure and breach of duty of good faith; and fraud. The complaint also seeks attorney's fees and costs.
United National Insurance Company denies the allegations in the complaint and has filed a counterclaim seeking payment of the amount of losses and loss adjustment expenses paid under the insurance policy plus statutory damages of $1.6 million as a result of late payment. This litigation has just begun, and a trial date has not been set.
We cannot assure you that lawsuits, arbitrations or other litigation will not have a material adverse effect on our business, financial condition or results of operations.
REGULATION
GENERAL
The business of insurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In the Cayman Islands, Barbados and Bermuda, we operate under a relatively less intensive regulatory regime than exists in the United States. We are subject to extensive regulation in the United States.
CAYMAN ISLANDS
As a holding company, United National Group is not subject to any insurance regulation by any authority in the Cayman Islands.
UNITED STATES
United National Group has four operating insurance subsidiaries domiciled in the United States; United National Insurance Company, which is domiciled in Pennsylvania; Diamond State Insurance Company and United National Casualty Insurance Company, each of which is domiciled in Indiana; and United National Specialty Insurance Company, which is domiciled in Wisconsin. We refer to these companies collectively as our U.S. Insurance Subsidiaries.
U.S. INSURANCE HOLDING COMPANY REGULATION OF UNITED NATIONAL GROUP
United National Group, as the indirect parent of our U.S. Insurance Subsidiaries, is subject to the insurance holding company laws of Indiana, Pennsylvania and Wisconsin. These laws generally require each of our U.S. Insurance Subsidiaries to register with its respective domestic state insurance department and to furnish annually financial and other information about the operations of the companies within the United National Group insurance holding company system. Generally, all material transactions among affiliated companies in the holding company system to which any of our U.S. Insurance Subsidiaries is a party, including sales, loans, reinsurance agreements and service agreements with the non-insurance companies within the United National Group of insurance companies or any other U.S. Insurance Subsidiary must be fair and, if material or of a specified category, require prior notice and approval or absence of disapproval by the insurance department where the subsidiary is domiciled.
CHANGES OF CONTROL
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant's board of directors and executive officers, the acquiror's plans for the management of the applicant's board of directors and executive officers, the acquiror's plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of our U.S. Insurance Subsidiaries, the insurance change of control laws of Indiana, Pennsylvania and Wisconsin would likely apply to such a transaction. While our articles of association limit the voting power of any shareholder to less than 9.5%, there can be no assurance that the applicable state insurance regulator would agree that such shareholder did not control the applicable U.S. Insurance Subsidiary.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of United National Group, including through transactions, and in particular unsolicited transactions, that some or all of the shareholders of United National Group might consider to be desirable.
LEGISLATIVE CHANGES
On November 26, 2002, the Federal Terrorism Risk Insurance Act was enacted to ensure the availability of insurance coverage for defined terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance, including us, to offer coverage against certain acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 90% of covered losses, exceeding a premium-based deductible, up to an industry limit of $100 billion resulting from covered acts of terrorism. Any policy exclusion existing at the time the law was enacted for such coverage was immediately nullified, although such exclusions were subject to reinstatement if either the insured consented to reinstatement or failed to pay any applicable increase in premium resulting from the additional coverage within 30 days of being notified of the increase. With respect to policies issued after the law became effective, insurers are required to offer such coverage at a stated premium. If the insured does not wish to purchase the coverage, the policy may exclude such coverage. It should be noted that "act of terrorism" as defined by the law excludes purely domestic terrorism. For an act of terrorism to have occurred, the U.S. Treasury Secretary must make several findings, including that the act was committed on behalf of a foreign person or foreign interest. The law expires automatically at the end of 2005.
STATE INSURANCE REGULATION
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including but not limited to licensing to transact admitted business or determining eligibility to write surplus lines business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends, approving policy forms and related materials in certain instances and approving premium rates in certain instances. State insurance laws and regulations may require our U.S. Insurance Subsidiaries to file financial statements with insurance departments everywhere they will be licensed or eligible or accredited to conduct insurance business, and their operations are subject to review by those departments at any time. Our U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with statutory accounting principles, or "SAP," and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years, although market conduct examinations may take place at any time. These examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. In addition, admitted insurers are subject to targeted market conduct examinations involving specific insurers by state insurance regulators in the state in which the insurer is admitted.
STATE DIVIDEND LIMITATIONS
Indiana
Under Indiana law, Diamond State Insurance Company and United National Casualty Insurance Company may not pay any dividend or make any distribution of cash or other property the fair market value of which, together with that of any other dividends or distributions made within the 12 consecutive months ending on the date on which the proposed dividend or distribution is scheduled to be made, exceeds the greater of (1) 10% of its surplus as of the 31st day of December of the last preceding year, or (2) its net income for the 12-month period ending on the 31st day of December of the last preceding year, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An additional limitation is that Indiana does not permit a domestic insurer to declare or pay a dividend except out of earned surplus unless otherwise approved by the commissioner before the dividend is paid.
Pennsylvania
Under Pennsylvania law, United National Insurance Company may not pay any dividend or make any distribution that, together with other dividends or distributions made within the preceding 12 consecutive months, exceeds the greater of (1) 10% of its surplus as shown on its last annual statement on file with the commissioner or (2) its net income for the period covered by such statement, not including pro rata distributions of any class of its own securities, unless the commissioner has received notice from the insurer of the declaration of the dividend and the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An additional limitation is that Pennsylvania does not permit a domestic insurer to declare or pay a dividend except out of unassigned funds (surplus) unless otherwise approved by the commissioner before the dividend is paid. Furthermore, no dividend or other distribution may be declared or paid by a Pennsylvania insurance company that would reduce its total capital and surplus to an amount that is less than the amount required by the Insurance Department for the kind or kinds of business that it is authorized to transact.
Wisconsin
Under Wisconsin law, United National Specialty Insurance Company may not
pay any dividend or make any distribution of cash or other property, other than
a proportional distribution of the insurer's stock, the fair market value of
which, together with that of other dividends paid or credited and distributions
made within the preceding 12 months, exceeds the lesser of (1) 10% of its
surplus as of the preceding 31st day of December, or (2) the greater of (a) its
net income of the insurer for the calendar year preceding the date of the
dividend or distribution, minus realized capital gains for that calendar year or
(b) the aggregate of its net income for the three calendar years preceding the
date of the dividend or distribution, minus realized capital gains for those
calendar years and minus dividends paid or credited and distributions made
within the first two of the preceding three calendar years, unless it reports
the extraordinary dividend to the commissioner at least 30 days before payment
and the commissioner does not disapprove the extraordinary dividend within that
period. Additionally, under Wisconsin law, all authorizations of distributions
to shareholders, other than stock dividends, shall be reported to the
commissioner in writing and no payment may be made until at least 30 days after
such report.
The dividend limitations imposed by the state laws are based on the statutory financial results of the respective U.S. Insurance Subsidiaries that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP. See "-- Statutory Accounting Principles." Key differences relate to among other items, deferred acquisition costs, limitations on deferred income taxes, required investment reserves and reserve calculation assumptions and surplus notes.
For 2003, the maximum amount of distributions that our U.S. Insurance Subsidiaries could pay in dividends under applicable laws and regulations without regulatory approval is approximately $22.9 million.
INSURANCE REGULATORY INFORMATION SYSTEM RATIOS
The NAIC Insurance Regulatory Information System, or "IRIS," was developed by a committee of the state insurance regulators and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 12 industry ratios and specifies "usual values" for each ratio. Departure from the usual values of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. Insurers that report four or more ratios that fall outside the range of usual values are generally targeted for regulatory review.
For 2002, United National Insurance Company had four ratios that fell outside the range of usual values: the Two-Year Overall Operating Ratio, the Change in Policyholders' Surplus Ratio, the Investment Yield Ratio and the Surplus Aid to Policyholders' Surplus Ratio. The first two of these ratios fell outside of the usual ranges as a result of our increase in loss reserves and the recording of an allowance for doubtful reinsurance receivables in 2002. The Investment Yield Ratio fell outside of the usual ranges as a
result of our investment in tax exempt fixed income securities, which generally have a lower yield than that of taxable fixed income securities. The final ratio fell outside of usual values as a result of the amount of quota share reinsurance purchased in 2002 and the related ceding commission income paid to us.
For 2002, United National Specialty Insurance Company likewise had four ratios that fell outside of the range of usual values, including the first three ratios listed above and the Two-Year Reserve Development to Policyholders' Surplus Ratio. The first three of these ratios fell outside of the usual range of values for substantially the same reasons as described above, while the last ratio fell outside the usual range of values as a result of the increase in loss reserves in 2002.
We have received inquiries from state insurance departments and we have prepared an analysis for such state insurance departments of the factors responsible for such values. As a result of our improved business performance thus far in 2003 and of the new capital received by our U.S. Insurance Subsidiaries in connection with our acquisition of them, we do not expect that these ratios will fall outside of the usual ranges for 2003.
RISK-BASED CAPITAL REGULATIONS
Indiana, Pennsylvania and Wisconsin require that each domestic insurer report its risk-based capital based on a formula calculated by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The respective state insurance regulators use the formula as an early warning regulatory tool to identify possibly inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws impose broad confidentiality requirements on those engaged in the insurance business (including insurers, general agencies, brokers and others) and on state insurance departments as to the use and publication of risk-based capital data. The respective state insurance regulators have explicit regulatory authority to require various actions by, or to take various actions against, insurers the total adjusted capital of which does not exceed certain risk-based capital levels. Each of United National Insurance Company, Diamond State Insurance Company, United National Casualty Insurance Company and United National Specialty Insurance Company have risk-based capital in excess of the required levels prior to the September 5, 2003 acquisition of Wind River Investment Corporation and the contribution of $80.0 million to our U.S. Operations.
STATUTORY ACCOUNTING PRINCIPLES
SAP is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer's surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer's domiciliary state.
U.S. GAAP is concerned with a company's solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses. As a direct result, different assets and liabilities and different amounts of assets and liabilities are reflected in financial statements prepared in accordance with U.S. GAAP than financial statements prepared in accordance with SAP.
Statutory accounting practices established by the NAIC and adopted in part by the Indiana, Pennsylvania and Wisconsin regulators determine, among other things, the amount of statutory surplus and statutory net income of our U.S. Insurance Subsidiaries and thus determine, in part, the amount of funds these subsidiaries have available to pay dividends.
GUARANTY ASSOCIATIONS AND SIMILAR ARRANGEMENTS
Most of the jurisdictions in which our U.S. Insurance Subsidiaries are admitted to transact business require property and casualty insurers doing business within that jurisdiction to participate in guaranty associations. These organizations are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offset or in limited circumstances by surcharging policyholders.
OPERATIONS OF U.N. BARBADOS AND U.N. BERMUDA
The insurance laws of each of the United States and of many other countries regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by non-U.S. insurers and reinsurers that are not admitted to do business within such jurisdictions. U.N. Barbados and U.N. Bermuda are not admitted to do business in the United States. We do not intend that U.N. Barbados and U.N. Bermuda will maintain offices or solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction in the United States where the conduct of such activities would require these companies to be admitted or authorized. U.N. Bermuda does intend to seek surplus lines approvals and eligibilities in certain U.S. jurisdictions as further described below.
As a reinsurer that is not licensed, accredited or approved in any state in the United States, each of U.N. Barbados and U.N. Bermuda will be required to post collateral security with respect to reinsurance liabilities it assumes from the ceding U.S. Insurance Subsidiaries as well as other U.S. ceding companies. The posting of collateral security is generally required in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers. Under applicable United States "credit for reinsurance" statutory provisions, the security arrangements generally may be in the form of letters of credit, reinsurance trusts maintained by third-party trustees or funds-withheld arrangements whereby the ceded premium is held by the ceding company. If "credit for reinsurance" laws or regulations are made more stringent in Indiana, Pennsylvania, Wisconsin or other applicable state or any of the U.S. Insurance Subsidiaries redomesticates to one of the few states that does not allow credit for reinsurance ceded to non-licensed reinsurers, we may be unable to realize some of the benefits we expect from our business plan. Accordingly, our, U.N. Barbados' and U.N. Bermuda's business operations could be adversely affected.
U.N. Bermuda is currently preparing to seek surplus lines approvals and eligibilities in certain U.S. jurisdictions. In order to obtain such approvals and eligibilities, U.N. Bermuda must first be included on the Quarterly Listing of Alien Insurers ("Quarterly Listing") that is maintained by the International Insurers Department ("IID") of the NAIC.
U.N. Bermuda will be required to establish a U.S. surplus lines trust fund with a U.S. bank to secure U.S. surplus lines policyholders. The initial minimum trust fund amount is $5.4 million. In subsequent years, U.N. Bermuda must add an amount equal to 30% of its U.S. surplus lines liabilities, as at year end and certified by an actuary, subject to the current maximum of $60 million. The NAIC's IID Plan of Operation Working Group is currently in the early stages of considering proposals to increase both the trust fund maximum amount and the variable percentage amount.
Applications for state surplus lines approvals and eligibilities may be required in certain jurisdictions. As with the IID, certain jurisdictions require annual requalification filings. Such filings customarily include financial and related information, updated national and state-specific business plans, descriptions of reinsurance programs, updated officers and directors biographical affidavits and similar information.
Apart from the financial and related filings required to maintain U.N. Bermuda's place on the Quarterly Listing and its jurisdiction-specific approvals and eligibilities, U.N. Bermuda generally will not
be subject to regulation by U.S. jurisdictions. Specifically, rate and form regulations otherwise applicable to authorized insurers will generally not apply to U.N. Bermuda's surplus lines transactions. Similarly, U.S. solvency regulation requirements, including risk-based capital standards, investment limitations, credit for reinsurance and holding company filing requirements, which would otherwise be applicable to authorized insurers, do not generally apply to alien surplus lines insurers such as U.N. Bermuda.
BARBADOS
U.N. Barbados will be subject to regulation under the Barbados Exempt Insurance Act, 1996. In addition, under the Barbados Companies Act, U.N. Barbados may only pay a dividend out of the realized profits of the company and may not pay a dividend unless (1) after payment of the dividend it is able to pay its liabilities as they become due, (2) the realizable value of its assets is greater than the aggregate value of its liabilities and (3) the stated capital accounts are maintained in respect of all classes of shares.
U.N. Barbados will also be required to maintain assets in an amount that permits it to meet the prescribed minimum solvency margin for the net premium income level of its business. In respect of its general insurance business, U.N. Barbados will be required to maintain the following margin of solvency:
- to the extent that premium income of the preceding financial year did not exceed approximately $750,000, assets must exceed liabilities by approximately $125,000;
- to the extent that premium income of the preceding financial year exceeds approximately $750,000 but is equal to or less than approximately $5.0 million, the assets must exceed liabilities by 20% of the premium income of the preceding financial year; and
- to the extent that premium income of the preceding financial year exceeds approximately $5.0 million, the assets must exceed liabilities by the aggregate of approximately $1.0 million and 10% of the premium income of the preceding financial year.
U.N. Barbados is not required currently to maintain any additional statutory deposits or reserves relative to its business.
U.N. Barbados is expressly authorized as a licensed exempt insurance company by the Barbados Act to make payments of dividends to non-residents of Barbados and to other licensees free of Barbados withholding tax and without the need for exchange control permission.
BERMUDA
BERMUDA INSURANCE REGULATION
The Insurance Act 1978 of Bermuda and related regulations, as amended, or the "Insurance Act," regulates the insurance business of U.N. Bermuda and provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority, or "BMA," under the Insurance Act. U.N. Bermuda has been registered as a Class 3 insurer by the BMA. The continued registration of an applicant as an insurer is subject to it complying with the terms of its registration and such other conditions as the BMA may impose from time to time.
The Insurance Act also imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
CLASSIFICATION OF INSURERS
There are four classifications of insurers carrying on general business, with Class 4 insurers subject to the strictest regulation. U.N. Bermuda, which is incorporated to carry on general insurance and reinsurance business, is registered as a Class 3 insurer in Bermuda.
CANCELLATION OF INSURER'S REGISTRATION
An insurer's registration may be canceled by the Supervisor of Insurance of the BMA on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act.
PRINCIPAL REPRESENTATIVE
An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. For the purpose of the Insurance Act, U.N. Bermuda's principal office is its executive offices in Hamilton, Bermuda, and U.N. Bermuda's principal representative is Marsh Management Services (Bermuda) Ltd.
INDEPENDENT APPROVED AUDITOR
Every registered insurer must appoint an independent auditor who will audit and report annually on the statutory financial statements and the statutory financial return of the insurer, both of which, in the case of U.N. Bermuda, are required to be filed annually with the BMA.
LOSS RESERVE SPECIALIST
As a registered Class 3 insurer, U.N. Bermuda is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its losses and loss expenses provisions.
STATUTORY FINANCIAL STATEMENTS
U.N. Bermuda must prepare annual statutory financial statements. The Insurance Act prescribes rules for the preparation and substance of these statutory financial statements (which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto). U.N. Bermuda is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments. The statutory financial statements are not prepared in accordance with United States GAAP and are distinct from the financial statements prepared for presentation to U.N. Bermuda's shareholders and under the Companies Act, which financial statements, in the case of U.N. Bermuda, will be prepared in accordance with U.S. GAAP.
ANNUAL STATUTORY FINANCIAL RETURN
U.N. Bermuda is required to file with the BMA a statutory financial return no later than four months after its financial year end (unless specifically extended upon application to the BMA). The statutory financial return for a Class 3 insurer includes, among other matters, a report of the approved independent auditor on the statutory financial statements of the insurer, solvency certificates, the statutory financial statements, a declaration of statutory ratios and the opinion of the loss reserve specialist.
MINIMUM SOLVENCY MARGIN AND RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS
Under the Insurance Act, the value of the general business assets of a Class 3 insurer, such as U.N. Bermuda, must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin.
Additionally, under the Companies Act, U.N. Bermuda may only declare or pay a dividend if U.N. Bermuda has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts.
MINIMUM LIQUIDITY RATIO
The Insurance Act provides a minimum liquidity ratio for general business insurers, such as U.N. Bermuda. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities, as such terms are defined in the Insurance Act and its related regulations.
SUPERVISION, INVESTIGATION AND INTERVENTION
The BMA has wide powers of investigation and document production in relation to Bermuda insurers under the Insurance Act. For example, the BMA may appoint an inspector with extensive powers to investigate the affairs of U.N. Bermuda if the BMA believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders.
CERTAIN OTHER BERMUDA LAW CONSIDERATIONS
U.N. Bermuda must comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions from contributed surplus.
Although U.N. Bermuda is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to the non-resident status, U.N. Bermuda may engage in transactions in currencies other than Bermuda dollars, and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to United States residents that are holders of its common shares.
Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an "exempted" company, U.N. Bermuda may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance, participate in certain business transactions, including transactions involving Bermuda landholding rights and the carrying on of business of any kind for which it is not licensed in Bermuda.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as to persons who will serve as our directors and executive officers immediately upon completion of this offering, as well as those individuals who serve as the executive officers of our U.S. Operations. All directors hold office until the next general annual meeting of shareholders or until their successors are duly elected and qualified in accordance with our articles of association. Officers serve at the request of our Board of Directors.
NAME AGE POSITION
---- --- --------
Saul A. Fox.................... 50 Chairman, Chief Executive Officer and Director, United
National Group
Troy W. Thacker................ 31 President and Director, United National Group
Kevin L. Tate.................. 47 Chief Financial Officer, United National Group; Senior Vice
President and Chief Financial Officer of U.S. Operations
Seth D. Freudberg.............. 44 President and Chief Executive Officer of U.S. Operations
Richard S. March............... 62 Senior Vice President and General Counsel of U.S. Operations
Robert Cohen................... 54 Senior Vice President -- Marketing of U.S. Operations
William F. Schmidt............. 42 Senior Vice President and Chief Underwriting Officer of U.S.
Operations
Jonathan P. Ritz............... 35 Senior Vice President -- Ceded Reinsurance of U.S.
Operations
W. Dexter Paine, III........... 42 Director, United National Group
Robert N. Lowe, Jr............. 45 Director, United National Group
Angelos J. Dassios............. 29 Director, United National Group
Russell C. Ball, III........... 37 Director, United National Group
John J. Hendrickson............ 43 Director, United National Group
Edward J. Noonan............... 45 Director, United National Group
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Saul A. Fox, 50, has served as our Chairman and Chief Executive Officer since September 5, 2003 and has served as Chief Executive of Fox Paine & Company since he co-founded Fox Paine & Company in 1997. Prior to founding Fox Paine & Company, Mr. Fox was general partner with Kohlberg, Kravis & Roberts & Co. During his thirteen years with Kohlberg, Kravis & Roberts & Co., Mr. Fox led a focused investment effort in the global insurance and reinsurance sectors. This effort included the 1992 acquisition of American Reinsurance Corp. and the 1995 acquisition of Canadian General Insurance Company. Mr. Fox was Chairman of the Executive Committee of the Board of Directors for both companies. Prior to joining Kohlberg, Kravis & Roberts & Co., Mr. Fox was an attorney specializing in tax, business law and mergers and acquisitions and participated significantly in law firm management at Latham & Watkins LLP, an international law firm headquartered in Los Angeles, California. Mr. Fox received a B.S. in Communications from Temple University in 1975 (summa cum laude) and a J.D. from the University of Pennsylvania School of Law in 1978 (cum laude). Mr. Fox is a director of Alaska Communications Systems Holdings, Inc. and a Member of the Board of Overseers, University of Pennsylvania Law School. Mr. Fox was nominated for election as a director by Fox Paine & Company pursuant to its rights under our shareholders agreement. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
Troy W. Thacker, 31, has served as our President since September 5, 2003 and a Director at Fox Paine & Company since 2001. Prior to joining Fox Paine & Company, Mr. Thacker was an investment professional at Gryphon Investors, Inc., a San Francisco, California based private equity firm, which he joined after receiving his M.B.A. from Harvard Business School in 2000. From 1997 through 1998,
Mr. Thacker was employed by SCF Partners, a private equity firm, and from 1995 through 1997, Mr. Thacker was an analyst at Morgan Stanley & Co. Mr. Thacker received a B.S. in Chemical Engineering from Rice University in 1995. Mr. Thacker was nominated for election as a director by Fox Paine & Company pursuant to its rights under our shareholders agreement. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
Kevin L. Tate, 47, has been our Chief Financial Officer since September 5, 2003 and has served as Senior Vice President and Chief Financial Officer of our U.S. Operations since 1990. Mr. Tate joined our U.S. Operations in 1984 as Vice President and Controller. Prior to joining our U.S. Operations, Mr. Tate served as a senior auditor at Deloitte Haskins & Sells from 1978 to 1982. In 1982, he joined the then parent company of our U.S. Operations, American Manufacturing Corporation as Manager of Financial Accounting. Mr. Tate is a member of the American and Pennsylvania Institutes of Certified Public Accountants. Mr. Tate received a B.S. in Accounting and Finance from Lehigh University in 1978.
Seth D. Freudberg, 44, has served as President and Chief Executive Officer of our U.S. Operations since 1988. Mr. Freudberg joined our U.S. Operations in 1983. He was promoted to various executive positions until the Board of Directors elected him to his current post in 1988. Mr. Freudberg has served both as Chairman of the NAII Surplus Lines Committee and as a Board Member of the Insurance Society of Pennsylvania. He holds the Chartered Property and Casualty Underwriter designation. Mr. Freudberg received a B.S. in Economics from The Wharton School at the University of Pennsylvania in 1981.
Richard S. March, 62, has served as General Counsel and Senior Vice President of our U.S. Operations since 1996. Previously, Mr. March represented our U.S. Operations in various capacities at the Philadelphia law firm of Galfand, Berger, Lurie, Brigham & March during his 31 years in private practice with that firm. Although not an employee of our U.S. Operations during that time, Mr. March served as an officer and General Counsel throughout most of those years. Mr. March received a B.S. in Economics from The Wharton School at the University of Pennsylvania in 1962 and an L.L.B. from the University of Pennsylvania School of Law in 1965.
Robert Cohen, 54, has served as Senior Vice President -- Marketing of our U.S. Operations since 1996. Mr. Cohen joined our U.S. Operations in 1992 as Vice President of Underwriting. From 1994 to 1996, Mr. Cohen served as Vice President of Marketing. Prior to joining our U.S. Operations, from 1971 to 1992, Mr. Cohen served as Senior Vice President for Delaware Valley Underwriting Agency, one of the nation's largest independently owned wholesale broker/general agency. Mr. Cohen received a B.B.A. in Marketing from Temple University in 1970.
William F. Schmidt, 42, has served as Senior Vice President and Chief Underwriting Officer of our U.S. Operations since 1997. Prior to joining us, Mr. Schmidt served as Senior Vice President Branch Manager and Chief Underwriting Officer at Calvert Insurance Company, and prior to that as the Chief Financial Officer of Stewart Smith Insurance Brokers. Mr. Schmidt began his career as a CPA with Ernst & Whinney, becoming a Certified Public Accountant in May 1985. Mr. Schmidt received a B.S. in Accounting from SUNY Oswego in 1983.
Jonathan P. Ritz, 35, has served as Senior Vice President -- Ceded Reinsurance of our U.S. Operations since 2002. From 1997 to 2002, Mr. Ritz served as Vice President of Marketing. Prior to joining our U.S. Operations, Mr. Ritz served as a reinsurance broker for E. W. Blanch Company from 1990 to 1994. In 1994, Mr. Ritz joined the reinsurance brokering operations of Johnson & Higgins (Willcox) as an Assistant Vice President before being promoted to Vice President in 1996 at Guy Carpenter after the acquisition of Johnson & Higgins by Marsh & McLennan Companies, Inc. Mr. Ritz received a B.B.A. in Marketing from Loyola College in 1990.
W. Dexter Paine, III, 42, has served as President of Fox Paine & Company since he co-founded Fox Paine & Company in 1997. From 1994 through 1997, Mr. Paine served as a senior partner of Kohlberg & Company. Prior to joining Kohlberg & Company, Mr. Paine served as a general partner at Robertson Stephens & Company. Mr. Paine received a B.A. in Economics from Williams College in 1983.
Mr. Paine is Chairman of the Board of Directors of WJ Communications, Inc. and a director of Alaska Communications Systems Holdings, Inc. and of Maxxim Medical Inc. Mr. Paine was nominated for election as a director by Fox Paine & Company pursuant to its rights under our shareholders agreement. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
Robert N. Lowe, Jr., 45, has served as Chief Operating Officer of Fox Paine & Company since 2002. Prior to joining Fox Paine & Company, Mr. Lowe was with Arthur Andersen LLP for 21 years, most recently as the firm's Managing Partner, Expansions and Alliances. Mr. Lowe received a B.S. in Accounting and Masters of Accounting (Tax) from the University of Florida in 1980 and 1981, respectively (both with High Honors). Mr. Lowe is a director of WJ Communications, Inc. and of Maxxim Medical Inc. Mr. Lowe will be nominated for election as a director by Fox Paine & Company pursuant to its rights under our shareholders agreement. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
Angelos J. Dassios, 29, has served as a Vice President at Fox Paine &
Company since 2002. Prior to joining Fox Paine & Company, Mr. Dassios was an
associate in the Principal Investment Area from 1998 through 2002, and an
analyst in both the Principal Investment Area and the Investment Banking
Division from 1996 through 1998, of Goldman, Sachs & Co. Mr. Dassios received an
A.B. in Applied Mathematics from Dartmouth College in 1996 (summa cum laude, Phi
Beta Kappa). Mr. Dassios was nominated for election as a director by Fox Paine &
Company pursuant to its rights under our shareholders agreement. See "Our
Relationship with Fox Paine & Company -- Shareholders Agreement -- Board
Composition."
Russell C. Ball, III, 37, has served as the Chief Executive Officer of The AMC Group, L.P. since 1993. The AMC Group is a privately-owned limited partnership that provides services under a management agreement to interests of the Ball family trusts in manufacturing, franchising, insurance and real estate enterprises. Mr. Ball received a B.A. in History from Harvard University in 1988 and an M.B.A. from Pennsylvania State University in 1992. Mr. Ball was nominated for election as a director by the Ball family trusts pursuant to their rights under our shareholders agreement. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
John J. Hendrickson, 43, has served as a Managing Director with Fox-Pitt, Kelton Inc., a subsidiary of Swiss Reinsurance Company that provides research, brokerage and investment banking services specializing in the insurance and financial services sector, since March 2003. From July 1998 to March 2003, Mr. Hendrickson was a member of the Executive Board of Swiss Re and head of Swiss Re's merchant banking division. Prior to joining Swiss Re, Mr. Hendrickson was a founding partner of Securitas Capital, a private equity fund focused on investments in the insurance industry. Prior to joining Securitas, Mr. Hendrickson held various positions with Smith Barney during his ten-year tenure there, including Managing Director and Head of the Insurance Group within the corporate finance department. Mr. Hendrickson is a director of Atradius, formerly Gerling NCM, a trade credit insurance company headquartered in Amsterdam. He is also a director of Allied World Assurance Holdings, Ltd, a Bermuda-based property and casualty insurance and reinsurance company. Mr. Hendrickson received a B.A. in History and an M.S. in Industrial Engineering from Stanford University in 1983.
Edward J. Noonan, 45, retired from American Re-Insurance Corporation in 2002. Mr. Noonan worked with American Re-Insurance from 1983 until March of 2002. He served as President and Chief Executive Officer of that company from March of 1997 through March of 2002. Mr. Noonan also served as Chairman of Inter-Ocean Reinsurance Holdings of Hamilton, Bermuda from 1997 to 2002. Prior to joining American Re-Insurance, Mr. Noonan worked at Swiss Reinsurance from 1979 to 1983. Mr. Noonan received a B.S. in Finance from St. John's University in 1979 (cum laude). Mr. Noonan is also a director of the St. Mary Medical Center Foundation.
BOARD OF DIRECTORS
The Board of Directors is responsible for the management of the overall affairs of United National Group. To assist it in carrying out its duties, the Board of Directors may delegate certain of its powers to its executive officers.
The Companies Law (2003 Revision) of the Cayman Islands does not set out the duties of directors. However, a Cayman Islands court has held that the fiduciary obligations of a senior manager with major responsibilities was the same as that of a director or trustee. These duties were listed as "the observance of general standards of loyalty, honesty, good faith, and the avoidance of a conflict of duty and self-interest."
A Cayman Islands court would also view as highly persuasive the United Kingdom common law principles relating to directors' duties. By application of the common law principles, the duties of the directors of United National Group can be summarized as follows:
- a duty to act in what the directors bona fide consider to be the best interests of the company (and in this regard it should be noted that what is in the best interests of the group of companies to which United National Group belongs is not necessarily in the best interests of United National Group);
- a duty to exercise their powers for the purposes for which they are conferred;
- a duty of trusteeship of United National Group's assets;
- a duty to avoid conflicts of interest and of duty;
- a duty to disclose personal interest in contracts involving United National Group;
- a duty not to make secret profits from the directors' office; and
- a duty to act with skill and care.
Our Board of Directors is currently comprised of five directors, namely Messrs. Fox, Paine, Thacker, Dassios and Ball. Prior to completion of this offering, we will expand our Board of Directors to consist of eleven individuals and will appoint Messrs. Lowe, Hendrickson and Noonan, one other director who is considered "independent" for purposes of the rules of the Nasdaq National Market and one other director. Following completion of this offering, our Board of Directors intends to appoint one additional independent director, for a total of three independent directors.
Under the terms of our shareholders agreement, Fox Paine & Company is entitled to nominate and have elected a majority of the members of our Board of Directors and, for so long as the Ball family trusts own securities representing at least 5% of our total voting power, the Ball family trusts have the right to appoint one director. See "Our Relationship with Fox Paine & Company -- Shareholders Agreement -- Board Composition."
BOARD COMMITTEES
Upon completion of this offering, we intend to establish the following committees of our Board of Directors: executive committee; audit committee; compensation committee; nominating and governance committee; and operating committee.
EXECUTIVE COMMITTEE
The executive committee is expected to consist of Messrs. Fox and Thacker. The executive committee will have the authority to exercise the powers of the Board of Directors, other than those reserved to the audit committee, the compensation committee, the nominating and governance committee and the operating committee or our full Board of Directors, between meetings of our full Board of Directors.
AUDIT COMMITTEE
The audit committee is initially expected to consist of Messrs. Noonan and Lowe and one independent director. The audit committee will:
- review the audit plans and findings of our independent auditors, the audit plans and findings of our internal audit and the results of regulatory examinations and will track results of management's corrective action plans as necessary;
- review our accounting policies and controls, compliance programs and significant tax and legal matters;
- recommend to our Board of Directors the annual appointment of our independent auditors; and
- review our risk management processes.
COMPENSATION COMMITTEE
The composition of the compensation committee has not been determined; however, it will be comprised in such a manner so as to comply with the rules of the Nasdaq National Market. The compensation committee will oversee our compensation and benefit policies and plans.
NOMINATING AND GOVERNANCE COMMITTEE
The composition of the nominating and governance committee has not been determined; however, it will be comprised in such a manner so as to comply with the rules of the Nasdaq National Market. The nominating and governance committee will nominate candidates for election to our Board of Directors and establish and maintain our corporate governance policies.
OPERATING COMMITTEE
The operating committee is expected to consist of Messrs. Fox, Thacker and Dassios. The operating committee will oversee a number of policies relating to our day-to-day operations, including our underwriting policies (including approving exceptions therefrom), our reinsurance and risk management processes and our investment guidelines.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, prior to completion of this offering, our Board of Directors did not have a compensation committee, but we intend to form a compensation committee upon completion of this offering. Prior to this offering, our senior management was directly involved in setting compensation for our executives.
ELECTION OF EXECUTIVE OFFICERS
Our officers are elected by the Board of Directors and serve at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Directors who currently are not receiving compensation as officers or employees of United National Group or any of its affiliates, who we refer to as "Non-Employee Directors," are paid an annual retainer of $30,000, $11,250 of which is payable in cash and the remainder of which is payable in restricted Class A common shares valued at the time of the grant. Class A common shares granted to Non-Employee Directors vest monthly from the date of grant over a three-year period and will be forfeited if the Non-Employee Director's services are terminated prior to vesting for any reason. Non-Employee Directors are also paid $2,500 for each Board of Directors meeting attended in person and $1,000 for each
Board meeting attended by telephonic means. With respect to additional committee service, Non-Employee Directors are paid $2,500 for each additional committee meeting attended in person and $1,000 for each such meeting attended by telephonic means. All members of our Board of Directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors and its committees. These provisions are subject to change by our Board of Directors.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or awarded in 2002 to the President and Chief Executive Officer of our U.S. Operations and to our other named executive officers of our U.S. Operations who were the most highly compensated in 2002.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL ANNUAL OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION SARS
------------------ ---- -------- -------- ------------ ------------
Seth D. Freudberg,............................. 2002 $385,786 $111,850 $1,000 --
President and Chief Executive Officer
Richard S. March,.............................. 2002 293,838 56,813 -- --
Senior Vice President and General
Counsel
Kevin L. Tate,................................. 2002 219,873 42,406 1,000 --
Senior Vice President and Chief
Financial Officer
Robert Cohen,.................................. 2002 235,890 45,957 -- --
Senior Vice President -- Marketing
William F. Schmidt,............................ 2002 223,873 43,218 -- --
Senior Vice President and Chief
Underwriting Officer
Jonathan P. Ritz,.............................. 2002 179,798 67,400 -- 583*
Senior Vice President -- Ceded
Reinsurance
|
* Reflects stock appreciation rights granted to Mr. Ritz on shares of AIS common stock. This stock appreciation rights plan was terminated on September 5, 2003.
OPINION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE GRANT
UNDERLYING GRANTED TO OR BASE DATE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME AND PRINCIPAL POSITION GRANTED($) FISCAL YEAR ($/SH) DATE VALUE$
--------------------------- ------------ ------------ --------- ---------- -------
Seth D. Freudberg..................... -- -- -- -- --
President and Chief Executive
Officer
Richard S. March,..................... -- -- -- -- --
Senior Vice President and General
Counsel
Kevin L. Tate......................... -- -- -- -- --
Senior Vice President and Chief
Financial Officer
Robert Cohen,......................... -- -- -- -- --
Senior Vice President -- Marketing
William F. Schmidt,................... -- -- -- -- --
Senior Vice President and Chief
Underwriting Officer
Jonathan P. Ritz...................... 583 0.3% $1,670.98 N/A(1) N/A(1)
Senior Vice President -- Ceded
Reinsurance
|
(1) Stock appreciation rights plan was terminated on September 5, 2003.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT YEAR END
AT YEAR END ($)(1)
SHARES ------------- ---------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME AND PRINCIPAL POSITION EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
--------------------------- ------------ ------------ ------------- ---------------
Seth D. Freudberg, ...................... -- -- 1,961/2,942 $1,878,755
President and Chief Executive Officer
Richard S. March, ....................... -- -- 566/566 $ 442,052
Senior Vice President and General
Counsel
Kevin L. Tate, .......................... -- -- 566/566 $ 442,052
Senior Vice President and Chief
Financial Officer
Robert Cohen, ........................... -- -- 566/566 $ 442,052
Senior Vice President -- Marketing
William F. Schmidt, ..................... -- -- 113/453 $ 68,564
Senior Vice President and Chief
Underwriting Officer
Jonathan P. Ritz, ....................... -- -- --/583 0
Senior Vice President -- Ceded
Reinsurance
|
(1) The stock appreciation rights plan was terminated on September 5, 2003 and the named executives received payments as described under "-- Acquisition -- Related Payments."
EMPLOYMENT AGREEMENTS
Each of Messrs. Freudberg, March, Cohen, Schmidt, Tate and Ritz has a current executive employment agreement with United National Insurance Company, or "UNIC," an indirect wholly owned subsidiary of the United National Group. The agreements are similar in structure and provide for five-year initial employment terms, commencing on the date of acquisition, September 5, 2003, with additional one-year renewal terms unless either party gives 90 days prior written notice of non-renewal to the other. If UNIC elects not to renew the agreement at the end of the initial five-year term, and the executive has otherwise performed satisfactorily, the executive will receive, conditioned upon execution of a general release and compliance with post-termination obligations, monthly payments of base salary until the earlier of six months following the date of termination or the commencement of full-time employment with another employer.
Under the agreements, UNIC may also terminate the executive for "cause" or if the executive becomes "disabled" (as such terms are defined in the agreement) or upon the death of the executive, in which case (1) the executive would not be entitled to any separation payments in the case of a termination for cause or death, and (2) in the case of disability, the executive would be entitled to six months of base salary payable monthly (subject to reduction for disability payments otherwise received by the executive), and conditioned upon the execution by the executive of a general release and compliance with post-termination obligations.
If UNIC terminates the executive without "cause" or the executive resigns as a result of the relocation of the principal executive offices of UNIC or the business relocation of the executive (in each case without UNIC offering the executive a reasonable relocation package), UNIC has agreed to severance pay of twenty-four months in the case of Mr. Freudberg and eighteen months in the case of the other executives, payable monthly, and subject to the execution of a general release and further adjustment for the equity compensation package granted to such executive. During this severance period, UNIC is also obligated to maintain any medical, health and accident plan or arrangement in which the executive participates until the earlier of the end of the severance period or the executive becoming eligible for coverage by another employer and subject to the executive continuing to bear his share of coverage costs.
All of the executive agreements also impose non-compete, non-solicitation and confidentiality obligations on the executives upon their termination for any reason. The non-compete provisions provide that for a period of 18 months following the termination of employment for any reason the executives shall not directly or indirectly engage in any "competitive business," which includes any business engaging in the specialty property and casualty insurance business or any business engaging in the insurance agency or brokerage business (or any other material business of UNIC or its affiliates) or which has business dealings with any general agency or producer of UNIC. The non-solicitation provisions prohibit the executives, for a period of eighteen months following termination of employment, from doing business with any employee, officer, director, agent, consultant or independent contractor employed by or performing services for UNIC, or engaging in insurance-related business with any party who is or was a customer of UNIC during the executives' employment (or during such eighteen-month period), or a business prospect of UNIC during the executive's employment. The employment agreements also provide that the executives may elect to forego separation payments and certain equity awards (discussed below) and in return no longer be subject to certain provisions of the non-competition restrictions (such as those prohibiting engaging in the specialty and casualty insurance business or any business engaging in the insurance agency or brokerage business), but still remain subject to other non-compete provisions, confidentiality provisions and non-solicitation provisions of the agreements. If the executives violate their restrictive covenants or confidentiality obligations, the employment agreements also have provisions that permit UNIC to recover gain realized by the executives upon the exercise of options or sale of stock during a designated period, to purchase their shares at the lesser of cost or fair market value and for the forfeiture of any unexercised options.
With respect to the executives' annual cash compensation, the agreements provide as follows: (1) Mr. Freudberg is entitled to an annual salary of $415,000; (2) Mr. March is entitled to an annual
salary of $320,000; (3) Mr. Cohen is entitled to an annual salary of $255,000;
(4) Mr. Schmidt is entitled to an annual salary of $245,000; (5) Mr. Tate is
entitled to an annual salary of $237,500; and (6) Mr. Ritz is entitled to a
salary of $225,000. Each executive is also eligible for an annual bonus
conditioned on the achievement of performance targets included in the bonus plan
adopted by our Board of Directors.
In connection with the execution of their employment agreements, the named executives also purchased our Class A common shares at a purchase price of $10.00 per share. Class A common shares purchased by the named executives are subject to the terms of a restricted share purchase agreement and a Management Shareholders Agreement. The number of Class A common shares acquired by the named executives is as follows: Mr. Freudberg - 50,000 shares; Mr. March - 26,250 shares; Mr. Cohen - 26,250 shares; Mr. Schmidt - 26,250 shares; Mr. Tate - 26,250 shares; and Mr. Ritz - 26,250 shares.
The executives have been granted various options to purchase our Class A common shares. Options denoted as the "Option-A Tranche" granted on September 5, 2003 have an exercise price of $6.50 per share and are fully vested at the time of the grant; Messrs. Freudberg and March were granted 200,000 and 56,074 options, respectively, from the Option-A Tranche. The second set of options granted to all named executive officers on September 5, 2003 have an exercise price of $10 per share and vests over time in 20% increments over a five-year period, with any unvested options forfeitable upon termination of the executive's employment for any reason (including cause); Mr. Freudberg was granted 75,000 of these options and the other named executive officers were each granted 39,375 of these options. The final set of options are performance-vesting options granted on September 5, 2003, having an exercise price of $10 per share with vesting in 25% increments and conditioned upon our achieving various operating targets or Fox Paine & Company achieving an agreed upon rate of return on its investment in us; Mr. Freudberg was granted 125,000 of these options and the other named executive officers were each granted 65,625 of these options.
MANAGEMENT SHAREHOLDERS AGREEMENT
All named executives are parties to a Management Shareholders Agreement, or "MSA", that applies to all shares acquired by such executives, whether by direct purchase or upon option exercise. Generally, all shares governed by the MSA are subject to transfer restrictions, some of which no longer apply upon our filing of a registration statement covering the shares or the reduction in Fox Paine & Company's ownership interest to below 10%. The management shareholders are also subject to a "drag along" obligation on their shares and may be required to join in the sale by Fox Paine & Company of at least 50% of its shareholdings in us, on the same terms and conditions as Fox Paine & Company. In any case, we may elect to purchase the shares owned by an executive upon the termination of the executive's employment for cause or his resignation for any reason (other than for retirement or failure to renew the executive's employment agreement), generally, at the lesser of cost or fair market value (provided that for purposes of this repurchase provision, the cost of shares realized by Messrs. Freudberg and March upon the exercise of their Option-A Tranche Shares shall be $10.00). If the executive's employment is terminated due to death, disability, retirement or by us without cause, we may elect to repurchase the executive's stock at fair market value as determined by the Board of Directors. The repurchase rights of the Company extend for seven years from the execution of the MSA. If during the first five years from the execution of the MSA, the employment of Messrs. Freudberg and March is terminated by us or our subsidiaries for any reason, they have the right within 90 days of such termination to have us purchase all of the Option-A Tranche Shares realized upon exercise at the lesser of $10.00 or fair market value. The Board of Directors has also agreed to consider providing Messrs. Freudberg and March with the right to have any unexercised portion of the Option-A Tranche purchased by the us for a per share amount equal to the difference (if any) between the exercise price ($6.50) and the lesser of $10.00 or fair market value, provided that such a repurchase will not result in any material adverse accounting consequences to us, and if the Board of Directors determines not to provide such a right, the Board of Directors has agreed to cooperate with Messrs. Freudberg and March to implement a mutually satisfactory alternative. Our payment obligations with respect to any such repurchase obligations are subject to a formula providing for
an initial partial payment, followed by a subsequent payment three years later upon confirmation of fair market value, and all payment obligations are conditioned on compliance with applicable covenants governing cash expenditures.
The MSA also provides that if, after the public offering, we subsequently propose to include common shares and shares held by Fox Paine & Company on any registration statement, and if the management shares covered under the MSA are not at such time or otherwise subject to registration or sale under Rule 144, then the management shareholders may exercise certain "piggyback" registration rights, subject to cutbacks at the discretion of the managing underwriters.
SHARE INCENTIVE PLAN
PURPOSE
Our Board of Directors and shareholders approved our Share Incentive Plan, or "Plan." The purpose of the Plan is to enable us to offer key employees and our Non-Employee Directors stock options, restricted stock and other stock-based awards. We believe this will help us attract, retain and reward our key employees and directors, and strengthen the mutuality of interests between such individuals and our shareholders. The Plan also provides additional advantages if the Board of Directors determines to acquire other business operations, by permitting us to offer the employees and Non-Employee Directors of such businesses share-based awards. Under certain circumstances our consultants and affiliates may also be eligible for grants under the Plan.
ADMINISTRATION
The Plan will be administered by a committee of the Board of Directors. That committee will consist of two or more Non-Employee Directors, each of whom is intended to be, to the extent required by Rule 16b-3 under the Exchange Act and Section 162(m) of the Code, a Non-Employee Director under Rule 16b-3 and an outside director under Section 162(m) of the Code. With respect to the application of the Plan to Non-Employee Directors, the committee is the Board of Directors. If no committee exists, the functions of the committee will be exercised by the Board of Directors.
The committee has the full authority to administer and interpret the Plan, to grant discretionary awards under the Plan, to determine the persons to whom awards will be granted, to determine the number of shares of common stock to be covered by each award (subject to the individual participant limitations provided in the Plan), to prescribe the form of instruments evidencing awards and to make all other determinations and to take all such steps in connection with the Plan and the awards thereunder as the committee, in its sole discretion, deems necessary or desirable.
The terms and conditions of individual awards will be set forth in written agreements consistent with the Plan. Awards under the Plan may not be made on or after September 5, 2013, but awards granted prior to such date may extend beyond that date.
ELIGIBILITY AND TYPES OF AWARDS
Our Non-Employee Directors, senior officers, senior management and key employees, and those of certain of our subsidiaries and affiliates, and in some circumstances our consultants, are eligible to be granted stock options, restricted shares and other share-based awards under the Plan. Eligibility for awards under the Plan is determined by the committee, in its sole discretion. As of the date of this prospectus, awards have been granted under the Plan as set forth in "Option Grants to Executive Officers."
AVAILABLE SHARES
A maximum of 2,000,000 Class A common shares may be issued or used for reference purposes under the Plan. The maximum number of common shares with respect to which an award may be granted under the Plan during any fiscal year to any individual will be 800,000 shares in the case of options or, in the case of other share-based awards, a maximum value at grant based on 400,000 Class A common shares, except that these maximum numbers for an individual with respect to options shall be increased for
subsequent fiscal years to the extent that awards with respect to fewer than 800,000 shares are made for such individual during any fiscal year.
The committee may, in accordance with the term of the Plan, make appropriate adjustments to the number of common shares available for the grant of awards and the terms of outstanding options and other awards to reflect any stock dividend or distribution, stock split, reverse stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares (and certain other events affecting our capital structure or business).
AMENDMENT AND TERMINATION
Notwithstanding any other provision of the Plan, the Board of Directors
or the committee may at any time, amend, suspend or terminate the Plan entirely,
retroactively or otherwise; provided, however, that, unless otherwise required
by law, the rights of a participant with respect to awards granted prior to such
amendment, suspension or termination, may not be impaired without the consent of
such participant and, provided further, without the approval of our
shareholders, to the extent required under applicable securities or tax law, no
amendment may be made that would (1) increase the aggregate number of our common
shares that may be issued under the Plan; (2) increase the maximum individual
participant share limitations for a fiscal year; (3) change the classification
of individuals eligible to receive awards under the Plan; (4) decrease the
minimum exercise price of any stock option; (5) extend the maximum option term;
(6) materially alter the performance goals for the award of other stock based
awards; or (7) require shareholder approval in order for the Plan to continue to
comply with applicable securities law.
ACQUISITION-RELATED PAYMENTS
In connection with the acquisition, the named executive officers received
payments from the U.S. Operations for the settlement of stock appreciation
rights previously granted in connection with the U.S. Operations and for
retention payments relating to their services through the closing of the
acquisition. The named executive officers participated in a stock appreciation
rights plan maintained by AIS during periods prior to September 5, 2003. This
stock appreciation rights plan was terminated upon the completion of our
acquisition of our U.S. Operations on September 5, 2003. The named executive
officers received the following cash payments in satisfaction of stock
appreciation rights outstanding and retention payments, respectively: Mr.
Freudberg -- $922,087 and $117,913; Mr. March -- $196,260 and $1,047,480; Mr.
Tate -- $196,260 and $1,243,740; Mr. Cohen -- $196,260 and $1,243,740; Mr.
Schmidt -- $0 and $1,249,460; and Mr. Ritz -- $0 and $1,249,460. Such payments
were approved by the then shareholders of the U.S. Operations in accordance with
Section 280G of the Code and the regulations promulgated thereunder.
In addition, Mr. Schmidt and Mr. Ritz received cash bonuses of $190,540 each in connection with the acquisition.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Generally, the directors and officers of United National Group are not personally liable for its debts, liabilities or obligations except for those debts, liabilities or obligations that arise out of the negligence, fraud or breach of fiduciary duty on the part of an individual director or officer, or out of an action not within the authority of the individual director or officer and not ratified by United National Group.
Our articles of association make indemnification of directors and officers and advancement of expenses to defend claims against directors and officers mandatory on the part of United National Group to the fullest extent allowed by law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of association provide for the indemnification of our directors and officers against liabilities that they may incur while discharging the duties of their offices. See "Description of Share Capital -- Indemnification."
In addition, we have entered into indemnification agreements with our directors and officers, under which we agreed to indemnify our directors and officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or officer was, or is threatened to be made, a party by reason of the fact that the director or officer is or was our director, officer, employee or agent, provided that the director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, our best interest.
PRINCIPAL SHAREHOLDERS
The table on the following page sets forth certain information concerning the beneficial ownership of our common and preferred shares as of September 30, 2003, including the percentage of our total voting power such shares represent on an actual basis and as adjusted to give effect to this offering (assuming the underwriters do not exercise their overallotment option), by:
- each of our executive officers;
- each of our directors;
- each holder known to us to hold beneficially more than 5% of any class of our shares; and
- all of our executive officers and directors as a group.
As of September 30, 2003, the following share capital of United National Group was issued and outstanding:
- 2,698,750 Class A common shares;
- 12,687,500 Class B common shares, each of which is convertible at any time at the option of the holder into one Class A common share; and
- 15,000,000 Series A preferred shares, each of which is convertible at any time at the option of the holder into one Class B common share, each of which, in turn, is convertible as described in the preceding bullet point.
Based on the foregoing, and assuming each Series A preferred share is converted into one Class B common share, and each Class B common share (including those into which the Series A preferred shares have been converted as described in the first clause of this sentence) is converted into one Class A common share, as of September 30, 2003, there would have been 30,386,250 Class A common shares issued and outstanding.
Except as otherwise set forth in the footnotes to the table, each beneficial owner has the sole power to vote and dispose all shares held by that beneficial owner.
PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERSHIP
BEFORE THIS OFFERING(1)(2)
---------------------------------------------------------
CLASS A CLASS B SERIES A
COMMON SHARES COMMON SHARES PREFERRED SHARES % TOTAL %
----------------- ----------------- ----------------- VOTING AS-CONVERTED
NAME AND ADDRESS SHARES % SHARES % SHARES % POWER(4) OWNERSHIP(5)
---------------- ---------- ---- ---------- ---- ---------- ---- -------- ------------
Fox Paine &
Company(6)............. 24,997,382 91.4% 24,659,932 89.1% 11,972,432 79.8% 88.3% 82.3%
Ball family trusts(7)... 5,190,118 90.6 3,027,568 19.3 3,027,568 20.2 11.6 17.0
Saul A. Fox(8).......... -- -- -- -- -- -- -- --
Troy W. Thacker(8)...... -- -- -- -- -- -- -- --
Kevin L. Tate........... 26,250 1.0 -- -- -- -- * *
Seth D. Freudberg....... 250,000 8.6 -- -- -- -- * *
Richard S. March........ 82,324 3.0 -- -- -- -- * *
Robert Cohen............ 26,250 1.0 -- -- -- -- * *
William F. Schmidt...... 26,250 1.0 -- -- -- -- * *
Jonathan P. Ritz........ 26,250 1.0 -- -- -- -- * *
W. Dexter Paine,
III(8)................. -- -- -- -- -- -- -- --
Robert N. Lowe,
Jr.(8)................. -- -- -- -- -- -- -- --
Angelos J. Dassios(8)... -- -- -- -- -- -- -- --
Russell C. Ball,
III(9)................. 5,190,118 90.6 3,027,568 23.2 11.7 17.0
John J. Hendrickson..... -- -- -- -- -- -- -- --
Edward J. Noonan........ -- -- -- -- -- -- -- --
All directors and
executive officers as a
group (14 persons)..... 5,627,442 94.1% 3,027,568 23.2% 3,027,568 20.2% 11.8% 18.5%
BENEFICIAL OWNERSHIP
AFTER THIS OFFERING(1)(2)(3)
---------------------------------------------------------
CLASS A CLASS B SERIES A
COMMON SHARES COMMON SHARES PREFERRED SHARES % TOTAL %
----------------- ----------------- ----------------- VOTING AS-CONVERTED
NAME AND ADDRESS SHARES % SHARES % SHARES % POWER(4) OWNERSHIP(5)
---------------- ---------- ---- ---------- ---- ---------- ---- -------- ------------
Fox Paine &
Company(6).............
Ball family trusts(7)...
Saul A. Fox(8)..........
Troy W. Thacker(8)......
Kevin L. Tate...........
Seth D. Freudberg.......
Richard S. March........
Robert Cohen............
William F. Schmidt......
Jonathan P. Ritz........
W. Dexter Paine,
III(8).................
Robert N. Lowe,
Jr.(8).................
Angelos J. Dassios(8)...
Russell C. Ball,
III(9).................
John J. Hendrickson.....
Edward J. Noonan........
All directors and
executive officers as a
group (14 persons).....
|
* Less than 1.0%
** Unless otherwise set forth above, the address for each beneficial owner is c/o United National Group, Ltd., Walker House, Mary Street, P.O. Box 908GT, George Town, Grand Cayman, Cayman Islands.
(1) The numbers of shares set forth in these columns are calculated in accordance with the provisions of Rule 13d-3 under the Securities Exchange Act of 1934. As a result, these figures assume the exercise or conversion by each beneficial owner of all securities that are exercisable or convertible within 60 days of the date of this prospectus. In particular, the figures relating to beneficial ownership of Class A common shares for a particular beneficial owner assume:
- conversion of each Series A preferred share held by that beneficial owner into one Class B common share; and
- conversion of each Class B common share (including those into which the Series A preferred shares are converted as described in the preceding bullet point) into one Class A common share.
The figures relating to beneficial ownership of Class B common shares for a particular beneficial owner assume conversion of each Series A preferred share held by that beneficial owner into one Class B common share.
(2) The percentages set forth in these columns are calculated in accordance with the provisions of Rule 13d-3 under the Securities Act of 1934. In particular:
- Class A common shares that may be acquired by a particular beneficial owner upon the conversion of Class B common shares (including Class B common shares that may be acquired upon the conversion of Series A preferred shares) are deemed to be outstanding for the purpose of computing the percentage of the Class A common shares owned by such beneficial owner but are not be deemed to be outstanding for the purpose of computing the percentage of the class owned by any other beneficial owner; and
- Class B common shares that may be acquired by a particular beneficial owner upon the conversion of Series A preferred shares are be deemed to be outstanding for the purpose of computing the percentage of the Class B common shares owned by such beneficial owner but are not be deemed to be outstanding for the purpose of computing the percentage of the class owned by any other beneficial owner.
As a result, the percentages in these columns do not sum to 100%.
(3) Assumes redemption of the Series A preferred shares as described under "Use of Proceeds," including the issuance of Class A common shares in such redemption.
(4) The percentages in this column represent the percentage of the total outstanding voting power of United National Group that the particular beneficial owner holds. The numerator used in this calculation is the total votes to which each beneficial owner is entitled, taking into account that each Class B common share and each Series A preferred share has ten votes, and the denominator is the total number of votes to which all outstanding shares of United National Group are entitled, again taking into account that each Class B common share and each Series A preferred share has ten votes.
(5) The percentages in this column represent the percentage of the total outstanding share capital of United National Group that a particular beneficial owner holds on an as-converted basis, assuming that each Series A preferred share is converted into one Class B common share and each Class B common share (including those into which the Series A preferred shares have been converted) is converted into one Class A common share. As of September 30, 2003, there would have been 30,386,250 Class A common shares issued and outstanding on this basis. The numerator used in this calculation is the total number of Class A common shares each beneficial owner holds on an as- converted basis and the denominator is the total number of Class A common shares on an as-converted basis.
(6) The security holders are: U.N. Holdings (Cayman), Ltd.; U.N. Co-Investment Fund I (Cayman), L.P.; U.N. Co-Investment Fund II (Cayman), L.P.; U.N. Co-Investment Fund III (Cayman), L.P.; U.N. Co-Investment Fund IV (Cayman), L.P.; U.N. Co-Investment Fund V (Cayman), L.P.; U.N. Co-Investment Fund VI (Cayman), L.P.; U.N. Co-Investment Fund VIII (Cayman), L.P.; and
U.N. Co-Investment Fund IX (Cayman), L.P. A majority of the outstanding share capital of U.N. Holdings (Cayman), Ltd. is held by Fox Paine Capital Fund II International, L.P. The general partner of Fox Paine Capital Fund II International, L.P. is Fox Paine Capital International Fund GP, L.P. The sole general partner of Fox Paine Capital International Fund GP, L.P. is Fox Paine International GP, Ltd. As a result, each of Fox Paine Capital Fund II International, L.P., Fox Paine Capital International Fund GP, L.P. and Fox Paine International GP, Ltd. may be deemed to control U.N. Holdings (Cayman), Ltd. The sole general partner of each of U.N. Co-Investment Fund I (Cayman), L.P., U.N. Co-Investment Fund II (Cayman), L.P., U.N. Co-Investment Fund III (Cayman), L.P., U.N. Co-Investment Fund IV (Cayman), L.P., U.N. Co-Investment Fund V (Cayman), L.P., U.N. Co-Investment Fund VI (Cayman), L.P., U.N. Co-Investment Fund VIII (Cayman), L.P. and U.N. Co-Investment Fund IX (Cayman), L.P. is Fox Paine Capital International Fund GP, L.P., which may be deemed to control such funds.
(7) The security holders are the following trusts: Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/w of Russell C. Ball, Sr., as appointed by Russell C. Ball, Jr., f/b/o Russell C. Ball, III; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/w of Russell C. Ball, Sr., as appointed by Russell C. Ball, Jr., f/b/o Andrew L. Ball; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t of Ethel M. Ball, dated 2/9/67, as appointed by Russell C. Ball, Jr., f/b/o Russell C. Ball, III; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t of Ethel M. Ball, dated 2/9/67, as appointed by Russell C. Ball, Jr., f/b/o Andrew L. Ball; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t of Russell C. Ball, Jr., dated 11/9/67; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t Russell C. Ball, Jr., dated 6/9/69; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t Russell C. Ball, Jr., dated 1/29/70; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t Russell C. Ball, Jr., dated 1/24/73; Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t Russell C. Ball, Jr., dated 12/22/76 f/b/o Russell C. Ball, III; and Russell C. Ball, III, Andrew L. Ball, PNC Bank, N.A., trustees u/a/t Russell C. Ball, Jr., dated 12/22/76 f/b/o Andrew L. Ball. Russell C. Ball, III, Andrew L. Ball and PNC Bank, N.A. are the sole co-trustees of each trust and, therefore, share voting and dispositive power over all of the Class A common shares and Series A preferred shares held by the Ball family trusts. The address for each of the Ball family trusts is 555 Croton Road, Suite 300, King of Prussia, Pennsylvania 19406.
(8) Each of Messrs. Fox, Paine, Lowe, Thacker and Dassios is a shareholder of Fox Paine International GP, Ltd., which acts through its board of directors, which currently consists of Messrs. Fox and Paine. Each of Messrs. Fox, Paine, Lowe, Thacker and Dassios disclaims beneficial ownership of all shares held by U.N. Holdings (Cayman), Ltd., U.N. Co-Investment Fund I (Cayman), L.P., U.N. Co-Investment Fund II (Cayman), L.P., U.N. Co-Investment Fund III (Cayman), L.P., U.N. Co-Investment Fund IV (Cayman), L.P., U.N. Co-Investment Fund V (Cayman), L.P., U.N. Co-Investment Fund VI (Cayman), L.P., U.N. Co-Investment Fund VIII (Cayman), L.P. and U.N. Co-Investment Fund IX (Cayman), L.P., except to the extent of his indirect pecuniary interest in such shares through ownership of such entities.
(9) Mr. Ball is a co-trustee of each of the Ball family trusts described in footnote 7, and, therefore, shares voting and dispositive power over all of the Class A common shares and Series A preferred shares held by the Ball family trusts.
OUR RELATIONSHIP WITH FOX PAINE & COMPANY
The following summary of the material terms of the Amended and Restated Investment Agreement, the Shareholders Agreement and the Management Agreement is qualified in its entirety by reference to the Investment Agreement, the Shareholders Agreement and the Management Agreement, each of which is filed as an exhibit to the registration statement of which this prospectus forms a part.
INVESTMENT AGREEMENT
On September 5, 2003, Fox Paine & Company made an aggregate capital contribution of $240.0 million to us, in exchange for an aggregate of 10.0 million Class B common shares and 14.0 million Series A preferred shares, and we acquired Wind River Investment Corporation, the holding company for our U.S. Operations, from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania. Prior to September 5, 2003, Wind River Investment Corporation was owned by the Ball family trusts and had no relationship with Fox Paine & Company, other than as described in this section and under "-- Our Investment with Fox Paine & Company."
To effect the acquisition, we used $100.0 million of this $240.0 million capital contribution to purchase a portion of the common stock of Wind River Investment Corporation held by the Ball family trusts. We then purchased the remainder of the outstanding common stock of Wind River Investment Corporation that was also held by the Ball family trusts, paying consideration consisting of 2.5 million Class A common shares, 3.5 million Series A preferred shares and senior notes issued by Wind River Investment Corporation having an aggregate principal amount of approximately $72.8 million.
Of the remaining $140.0 million contributed to us, we then contributed $80.0 million to our U.S. Operations, used $43.5 million to capitalize our Non-U.S. Operations and used $16.5 million to fund fees and expenses incurred in connection with the transaction.
The principal amount of the senior notes are subject to adjustment as a result of the Ball family trusts' agreement to indemnify us for certain breaches of representations, warranties and covenants in the Investment Agreement and as result of the amount of recoveries by us from certain of our obligors. Any indemnification payment due from the Ball family trusts to us is to be first offset against the interest outstanding on the senior notes held by the Ball family trusts and then against any principal outstanding on such senior notes. If no principal is then outstanding, the Ball family trusts must instead make the indemnification payment directly to us. In addition, if proceeds from settlement arrangements that we enter into with certain of our obligors are greater than a specified amount, the principal amount of the senior notes will be increased by one-half of the excess, up to $7.5 million. Further, if we receive proceeds from settlement arrangements when the senior notes are no longer outstanding, the amount that would have increased the principal amount of the senior notes will instead be paid in cash to the Ball family trusts.
Wind River Investment Corporation wholly-owned two subsidiaries prior to August 18, 2003. The subsidiaries included AIS and a real estate company. On August 18, 2003, the real estate subsidiary was spun off to the Ball family trusts. The historical financial data for United National Group has been adjusted to exclude the activity related to the former real estate subsidiary because Wind River Investment Corporation (through AIS and its subsidiaries) and the real estate subsidiary participated in dissimilar businesses; they were operated and financed autonomously; and they had only incidental common costs. Additionally, Wind River Investment Corporation and the former subsidiary will be operated and financed autonomously following the spin-off and there are no material financial commitments, guarantees or contingent liabilities between the companies.
SHAREHOLDERS AGREEMENT
In connection with the acquisition, on September 5, 2003, United National Group, Fox Paine & Company and the Ball family trusts entered into a shareholders agreement. The material terms of the shareholders agreement are described below.
BOARD COMPOSITION
The shareholders agreement provides that our Board of Directors consist of five directors. Of these five directors, four are to be nominated by Fox Paine & Company and, for so long as the Ball family trusts beneficially own at least 5% of our outstanding shares, one is to be nominated by the Ball family trusts. As of the completion of this offering, the shareholders agreement will be amended to provide that our Board of Directors be comprised of 11 directors. Of these 11 directors, six directors are to be nominated by Fox Paine & Company and, for so long as the Ball family trusts beneficially own at least 5% of our outstanding shares, one director is to be nominated by the Ball family trusts. The agreement requires Fox Paine & Company and the Ball family trusts to vote in favor of the election of the nominees. The remaining directors will include three individuals who are considered "independent" for purposes of the rules of the Nasdaq National Market.
TRANSFERABILITY RIGHTS
The shareholders agreement provides that the Ball family trusts cannot generally transfer any Class A common shares or Series A preferred shares, whether currently owned or subsequently acquired, without the approval of our Board of Directors, except to another Ball family trust or their affiliates or to a principal beneficiary of any Ball family trust.
Fox Paine & Company agreed that, if it proposed to transfer any Class B common shares or Series A preferred shares to an unaffiliated third party, it would provide the Ball family trusts with customary "tag-along" rights. Namely, in any such sale, the Ball family trusts would be permitted to participate in such transfer by selling a number of shares that bears the same proportion to the aggregate number of shares that they hold, as the number of shares proposed to be sold by Fox Paine & Company bears to the aggregate number of shares held by Fox Paine & Company. Similarly, the Ball family trusts have agreed that, if Fox Paine & Company proposes to transfer Class B common shares or Series A preferred shares in such amounts that following such transfer, Fox Paine & Company will no longer have a majority of the outstanding shares, Fox Paine & Company will have "drag-along" rights against the Ball family trusts. Specifically, Fox Paine & Company will have the right to require the Ball family trusts to transfer a number of shares that bears the same proportion to the aggregate number of shares that they hold, as the number of shares proposed to be sold by Fox Paine & Company bears to the aggregate number of shares held by Fox Paine & Company.
Each of United National Group and Fox Paine & Company further agreed to provide the Ball family trusts with "piggyback" registration rights under the Securities Act in connection with any registered offering of common shares by United National Group in which Fox Paine & Company participates.
Finally, United National Group agreed to provide the Ball family trusts with rights of first refusal if United National Group or any of its subsidiaries propose to issue additional equity interests or debt securities. However, these rights of first refusal will not be applicable following completion of this offering.
TERMINATION
Certain material terms of the shareholders agreement will terminate when Fox Paine & Company ceases to hold at least 25.0% of our fully diluted outstanding common shares. All terms of the agreement, except terms with respect to tag-along and piggyback registration rights and indemnification, will terminate upon any completion of any transaction that results in Fox Paine & Company and the Ball family trusts owning in the aggregate less than a majority of the voting power of the entity surviving such transaction. The Ball family trusts' piggyback registration rights survive until the earlier of September 5, 2023 or the date that they no longer hold any securities outstanding that are registrable under the Securities Act.
MANAGEMENT AGREEMENT
On September 5, 2003, as part of the acquisition, we entered into a management agreement with Fox Paine & Company and The AMC Group, L.P., an affiliate of the Ball family trusts. In the management agreement, we agreed to pay to Fox Paine & Company an initial management fee of $13.2 million for the year beginning on September 5, 2003, which was paid on September 5, 2003, and thereafter an annual management fee of $1.2 million subject to certain adjustments. We likewise agreed to pay to The AMC Group an annual management fee of $0.3 million subject to certain adjustments. We believe these fees represent fair value for the services rendered to us by Fox Paine & Company and The AMC Group. In exchange for their management fees, Fox Paine & Company and The AMC Group assist us and our affiliates with strategic planning, budgets and financial projections and assist us and our affiliates in identifying possible strategic acquisitions and in recruiting qualified management personnel. In addition, The AMC Group has agreed to provide us with transitional services relating to the use of certain tax and accounting software for a limited period of time. Fox Paine & Company and The AMC Group also consult with us and our affiliates on various matters including tax planning, public relations strategies, economic and industry trends and executive compensation.
Fox Paine & Company and The AMC Group will continue to provide management services under this agreement until either Fox Paine & Company or The AMC Group no longer holds any equity investment in our company or we agree with Fox Paine & Company and The AMC Group to terminate this management relationship. In connection with this agreement, we agreed to indemnify Fox Paine & Company and The AMC Group against various liabilities that may arise as a result of the management services they will provide us. We also agreed to reimburse Fox Paine & Company and The AMC Group for expenses incurred in providing management services.
OUR INVESTMENT WITH FOX PAINE & COMPANY
We are a limited partner in Fox Paine Capital Fund II, L.P. and Fox Paine Capital Fund II International, L.P., investment funds managed by Fox Paine & Company. Our interest in these partnerships is valued, as of September 30, 2003, at $5.3 million, and we have a remaining capital commitment to these partnerships of approximately $3.9 million.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2003, 2002, 2001 and 2000, we paid management and investment advisory fees of approximately $0, $9.9 million, $7.1 million and $7.1 million, respectively to The AMC Group, L.P., an affiliate of the Ball family trusts, which at the time were our shareholders.
As of December 31, 2002, 2001 and 2000, we had payable balances due to affiliates of the Ball family trusts, which at the time were our shareholders, totaling approximately $0.2 million, $0.1 million and $0.4 million, respectively.
As of January 1, 2000, Wind River Investment Corporation owed $3.5 million to Wind River Investment, LLC, an affiliate of the Ball family trusts, which included a note receivable of $3.5 million and interest receivable of $28,455 under a promissory note. The annual rate of interest on this note was 6.0%. During 2001, United National Insurance Company purchased this promissory note from Wind River Investments, LLC for $3.9 million, which included a note receivable of $3.5 million and interest receivable of $0.4 million. During 2002, United National Insurance Company sold this promissory note to American Manufacturing Corporation (Delaware), an affiliate of the Ball family trusts, for $4.2 million, which included a note receivable of $3.9 million and interest receivable of $0.4 million. No gain or loss was recognized on the sale to American Manufacturing Corporation (Delaware). On August 18, 2003, in anticipation of the sale of Wind River Investment Corporation, the Ball family trusts assumed this debt owed to American Manufacturing Corporation (Delaware). A total of $4.3 million was assumed, which included a note receivable of $3.9 million and interest receivable of $0.5 million.
During 2001, we purchased a promissory note from Wind River Investments, LLC for $1.4 million. The promissory note was a loan to The AMC Group, L.P. The annual rate of interest on this note was 6.0%. Between 2001 and 2003 we received principal payments of $0.7 million and interest payments of $0.1 million. In April 2003, we sold this promissory note to American Manufacturing Corporation (Delaware) for $0.6 million (the amortized value as of April 30, 2003). No gain or loss was recognized on the sale to American Manufacturing Corporation (Delaware).
During 2001, we purchased a promissory note from Philadelphia Gear Corporation, an affiliate of the Ball family trusts, for $2.4 million. The promissory note was a loan to 181 Properties, LP, an affiliate of the Ball family trusts. The annual rate of interest on this note was 6.3%. During 2001, we received interest payments of $74,784. In April 2003, we sold this promissory note to American Manufacturing Corporation (Delaware) for $2.6 million, which included a note receivable of $2.4 million and interest receivable of $0.2 million. No gain or loss was recognized on the sale to American Manufacturing Corporation (Delaware).
During 2001, we purchased a mortgage from Wind River Investment, LLC for $1.3 million. The annual rate of interest on this mortgage was 7.8%. During 2003, this mortgage loan was repaid in full.
During 2000, we issued insurance policies to affiliates with premiums totaling approximately $94,000. During 2003, 2002 and 2001, no such insurance policies were issued to affiliates.
During 2000, we assigned our interests in various limited liability partnership funds and other venture capital funds to Wind River Investment, LLC. In connection with this transaction, a gain of $2.0 million was included in income. Also during 2000, we purchased interests in two limited liability partnership funds from Wind River Investment, LLC for their then fair market value of $3.4 million.
During 2000, Little Round Top Inc., a real estate company that at the time was a wholly-owned subsidiary of Wind River Investment Corporation, but which was distributed to the Ball family trusts prior to the sale of Wind River Investment Corporation, established a demand promissory note with American Manufacturing Corporation (Pennsylvania). Little Round Top participates in real estate related ventures and was not included in the sale of Wind River Investment Corporation. The interest rate on this promissory note was variable and was equal to the applicable federal rate at the end of each month. Between 2000 and 2003, we borrowed $0.6 million, made principal payments of $32,801 and made interest payments of $81.
During 2000, Robert Strouse, president of The AMC Group, L.P., issued a promissory note to Little Round Top. The annual interest rate on this promissory note was 6.39%. During 2000, we loaned Mr. Strouse $0.3 million under the promissory note. During 2002 and 2003 we received interest payments of $32,642 and $20,577, respectively.
During 2000, we made a demand promissory note with Wind River Investment,
LLC. The annual rate of interest on this note was 6%. Between 2000 and 2003 we
borrowed $0.1 million, made principal payments of $20,000 and made interest
payments of $7,173. On August 28, 2003, we paid $96,113 to Wind River
Investment, LLC to satisfy this loan in full, which included principal of
$92,436 and interest of $3,677.
During 2001, Little Round Top issued a promissory note to American Manufacturing Corporation (Delaware). The annual rate of interest on this note was 10%. Between 2001 and 2003, we borrowed $1.6 million under this promissory note.
On August 18, 2003, Wind River Investment Corporation distributed its investment in Little Round Top to the Ball family trusts in anticipation of our acquisition of Wind River Investment Corporation.
On August 25, 2003, Wind River Investment Corporation sold a series of limited partnership interests to Wind River Investments, LLC. Proceeds from the sale of these investments totaled $6.0 million.
During the time that Wind River Investment Corporation was owned by the Ball family trusts, our employees were eligible for participation in the health and welfare and retirement benefits packages offered by American Manufacturing Corporation (Pennsylvania). In conjunction therewith, American Manufacturing Corporation (Pennsylvania) provided services such as selection of vendors, maintenance of plan documents, legal compliance, record keeping, coordination of actuarial studies and plan audits and preparation of all required regulatory filings.
On September 5, 2003, we paid Fox Paine & Company a fee of $13.2 million, of which $12.0 million were management expenses related to the acquisition of Wind River Investment Corporation and $1.2 million were a management fee for services that will be rendered for the one-year period starting September 6, 2003.
On September 5, 2003, we paid $0.3 million to the American Manufacturing Corp., an affiliate of the Ball family trusts, a management fee for services that will be rendered for the one-year period starting September 6, 2003.
On September 5, 2003, we paid Fox Paine & Company $0.5 million as reimbursement for expenses related to the acquisition of Wind River Investment Corporation.
DESCRIPTION OF SHARE CAPITAL
Our authorized share capital consists of $100,000, which is divided into 900,000,000 common shares and 100,000,000 preferred shares, each with a nominal or par value of $0.0001 per share. As of the date of this prospectus, our common shares are divided into two classes, Class A common shares and Class B common shares. As of the date of this prospectus, we have issued one series of preferred shares, which series has been designated as Series A preferred shares.
We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association, the Companies Law (2003 Revision) and the common law of the Cayman Islands. The following is a summary of material provisions of our memorandum and articles of association as they will be amended and restated immediately prior to completion of this offering and the Companies Law, insofar as they relate to the material terms of our share capital. The following summary is qualified in its entirety by reference to our memorandum and articles of association, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part.
For information concerning agreements relating to our share capital, see "Our Relationship with Fox Paine & Company -- Shareholders Agreement" and "Management -- Management Shareholders Agreement."
GENERAL
All shares, whether common or preferred, will be issued fully paid as to nominal or par value and any premium determined by the Board of Directors at the time of issue and are non-assessable. All shares are to be issued in registered, and not bearer, form, and are issued when registered in the register of shareholders of United National Group. Each registered holder of shares is entitled, without payment, to a certificate representing such holder's shares. All unissued shares are under control of the Board of Directors and may be redesignated, allotted or disposed of in such manner as the Board of Directors may determine.
COMMON SHARES
GENERAL
As noted above, our common shares are divided into Class A common shares and Class B common shares. Except as set forth under " -- Voting Rights" and " -- Conversion," all Class A common shares and Class B common shares rank equal in all respects and have identical rights. The common shares are not entitled to any sinking fund or pre-emptive rights.
VOTING RIGHTS AND GENERAL MEETINGS
Subject to adjustment as described under " -- Voting Adjustments," holders of common shares are entitled to attend general meetings of United National Group and each Class A common share is entitled to one vote and each Class B common share is entitled to ten votes on all matters upon which the common shares are entitled to vote at any general meeting, including the election of directors. Voting at any general meeting of shareholders is by a poll. Our articles of association provide that actions by written consent of shareholders may only be taken if such action is executed by all holders of shares entitled to receive notice of and vote at a general meeting.
We will hold an annual general meeting of shareholders at such time and place as the Board of Directors may determine. In addition, the Board of Directors may convene a general meeting of shareholders at any time upon ten days' notice. Further, general meetings may also be convened upon written requisition of shareholders holding not less than fifty percent of the votes entitled to be voted at any general meeting, which requisition must state the objects for the general meeting.
The required quorum for a general meeting of our shareholders consists of shareholders present in person or by proxy and entitled to vote that hold in the aggregate at least a majority of the votes entitled to be cast at such general meeting.
Subject to the quorum requirements referred to in the previous paragraph, any ordinary resolution requires the affirmative vote of a simple majority of the votes cast in a general meeting of United National Group for shareholder approval while a special resolution requires the affirmative vote of two-thirds of the votes cast attaching to the common shares. A special resolution is required for matters such as a change of name, amending our memorandum and articles of association and placing us into voluntary liquidation. Holders of shares entitled to vote at a general meeting have the power, among other things, to elect directors, ratify appointment of auditors and make changes in the amount of our authorized share capital.
Generally, all shareholders vote together as a single class, except when considering a scheme of arrangement or considering a variation of the rights attached to a particular class of shares.
DIVIDENDS
The holders of our common shares are entitled to receive such dividends, which may consist of cash or other property, as may be declared by our Board of Directors. Any such dividends will be paid equally on Class A common shares and Class B common shares. Any such dividends to be paid in cash may be paid only out of profits, which include net earnings and retained earnings undistributed in prior years, and out of share premium, a concept analogous to paid-in surplus in the United States, subject to a statutory solvency test.
LIQUIDATION
In the event of any liquidation, dissolution or winding up, holders of common shares shall be entitled to receive distributions in proportion to the number of common shares held by such holder, without regard to class. The liquidator in any such liquidation may, upon approval of an ordinary resolution of shareholders and subject to any preferences and priorities of issued share capital, divide among the shareholders in cash or in kind the whole or any part of our assets, determine how such division shall be carried out as between the shareholders or different classes of shareholders and may vest the whole or any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator, upon the approval of an ordinary resolution of the shareholders, sees fit, provided that a shareholder shall not be compelled to accept any shares or other assets that would subject the shareholder to liability.
CONVERSION
Each Class B common share is convertible at any time at the option of the holder thereof into one Class A common share. In addition, each Class B common share shall be automatically converted into one Class A common share upon any transfer by the registered holder of that share, whether or not for value, except for transfers to a nominee or affiliate of such holder in a transfer that will not result in a change of beneficial ownership as determined under Rule 13d-3 under the Exchange Act or to a person that already holds Class B common shares.
REDEMPTION
Each common share may be redeemed upon the approval by both the Board of Directors and an ordinary resolution of shareholders of any agreement entered into by United National Group relating to a business combination transaction involving United National Group.
Relevant business combinations would include those effected by stock purchases or other means, after which any person or entity (other than Fox Paine & Company and its affiliates) would have a majority of the votes represented by our issued and outstanding shares. The terms of such redemption, including the consideration to be received by the holders of common shares in such redemption, which consideration may consist of cash or other property, shall be set forth in the agreement pursuant to which
such redemption is to be made and that is approved as provided in the preceding sentence. The consideration to be received by the holders of Class A common shares and Class B common shares is not required to be identical and may differ. Holders of common shares will not have appraisal or similar rights in any such redemption.
TRANSFER RESTRICTIONS
Our Board of Directors may decline to register a transfer of any common shares under certain circumstances, including if the Board of Directors has reason to believe that as a result of such transfer, any non-de minimis adverse tax, regulatory or legal consequences may occur to us, to any of our subsidiaries or to any of our shareholders.
ACQUISITION OF COMMON SHARES BY UNITED NATIONAL GROUP
Under our articles of association and subject to Cayman Islands law, if our Board of Directors determines that any shareholder's ownership of common shares may result in non-de minimis adverse tax, legal or regulatory consequences to us, to any of our subsidiaries or to any of our shareholders, we have the option but not the obligation to require such shareholders to sell to us, or to a third party to which we have assigned that right to repurchase shares, at fair market value, as determined in the good faith discretion of the minimum number of common shares that is necessary to avoid or cure any such adverse consequences.
MISCELLANEOUS
Share certificates registered in the names of two or more persons are deliverable to any one of them named in the share register, and if two or more such persons tender a vote, the vote of the person whose name first appears in the share register will be accepted to the exclusion of any other.
PREFERRED SHARES
Under our articles of association, preferred shares may be issued from time to time in one or more series as the Board of Directors may determine. The Board of Directors has the power, without any vote or action on behalf of shareholders, to fix by resolution the rights and preferences of each series of preferred shares so issued, including:
- the distinctive designation of such series and the number of preferred shares that will be so designated;
- the dividend rate and preferences of such series, if any, the dividend payment dates, the periods in which dividends are payable, whether such dividends are to be cumulative and whether such dividends are to be payable in cash or in kind;
- whether such preferred shares are to be convertible into or exchangeable for common or other shares of United National Group and the conversion price or rate, including any adjustments thereto, at which such conversion or exchange will be effected;
- the preferences, and the amounts thereof, if any, such preferred shares are entitled to upon winding up, liquidation or dissolution of United National Group;
- the voting power, if any, of the preferred shares;
- the redemption terms, transfer restrictions and preemptive rights, if any, of the preferred shares; and
- such other terms, conditions, special rights and provisions as the Board of Directors may determine.
Any or all of the rights and preferences of such preferred shares may be greater than the rights of our common shares, and our Board of Directors, without shareholder approval, may issue preferred shares
with voting, conversion or other rights that could adversely affect the voting power and other rights of holders of our common shares. Subject to the general duty of the Board of Directors to act in the best interest of United National Group, preferred shares can be issued quickly with terms calculated to delay or prevent a change in control of us or make removal of management more difficult. Additionally, the issuance of preferred shares may have the effect of decreasing the market price of the common shares, and may adversely affect the voting and other rights of the holders of common shares. We have no current plan to issue additional preferred shares.
SERIES A PREFERRED SHARES
On September 5, 2003, the Board of Directors designated a series of our preferred shares as "Series A preferred shares." The rights and preferences of the Series A preferred shares are described below:
Ranking
With respect to dividends rights and rights upon winding up, dissolution and liquidation, the Series A preferred shares rank prior to our common shares and equal to any shares that, pursuant to our articles of association or the resolution designating such shares, are entitled to share ratably with the Series A preferred shares in such regard.
Dividends
The holder of each Series A preferred share is entitled to receive dividends at an annual rate of 15% of the liquidation preference of each Series A preferred share plus all accrued but unpaid dividends beginning on the date of issuance of the Series A preferred shares. Dividends on the Series A preferred shares are payable semi-annually, beginning on March 1, 2004. Dividends with respect to each entire semi-annual period accrue on the first day of such period and are payable regardless of whether the Series A preferred shares remain outstanding at the end of such semi-annual period. Dividends on the Series A preferred shares are payable in cash, additional Series A preferred shares or any combination thereof, at the discretion of the Board of Directors.
Liquidation Preference
Upon winding up, dissolution or liquidation, each Series A preferred share is entitled to a liquidation preference of $10.00 plus all accrued but unpaid dividends, before any distribution is made with respect to common shares or other shares ranking junior to the Series A preferred shares. If upon a winding up, dissolution or liquidation the liquidation preference on the Series A preferred shares is not paid in full, the holders of Series A preferred shares and other shares ranking equal to the Series A preferred shares, shall be entitled to share equally and ratably in any distribution to shareholders in proportion to the full liquidation preference and all accrued but unpaid dividends to which such holders are otherwise entitled.
Voting Rights
Subject to adjustments as described under "-- Voting Adjustments," holders of Series A preferred shares are entitled to notice of and to vote at general meetings of shareholders on all matters upon which the holders of common shares are entitled to vote. The Series A preferred shares and common shares shall vote together as a single class. Each Series A preferred share will have the same number of votes as could be cast by the holder of the number of Class B common shares into which each Series A preferred share could be converted as described under "-- Conversion" on the record date for such general meeting.
In addition, the affirmative vote of 90% of the outstanding Series A preferred shares is required to amend in any manner that would adversely affect, alter or change the powers, preferences or special rights of the Series A preferred shares.
Conversion
Each Series A preferred share is convertible at any time at the option of the holder thereof into one Class B common share, subject to adjustment in certain circumstances, including in the event of share splits and combinations, dividends of shares and other property, transactions in which the Class B common shares are exchanged and issuances of common shares at values below market value. In addition, on September 5, 2005, each Series A preferred share shall automatically convert into one Class B common share, subject to similar adjustments.
Redemption
Upon completion of an initial public offering of common shares resulting in net proceeds of $50.0 million or more to United National Group, a number of Series A preferred shares determined so that 110% of the aggregate liquidation preference plus accrued but unpaid dividends is equal to the net proceeds to United National Group from such initial public offering shall be redeemed. The redemption price will be paid as follows:
- an amount equal to 100% of the liquidation preference shall be paid in cash; and
- the remainder of the redemption price shall be through delivery of Class A common shares having a value (based on the initial offering price to the public, gross of any underwriting discounts or commissions, in such initial public offering) equal to 10.0% of the liquidation preference plus all accrued but unpaid dividends.
VOTING ADJUSTMENTS
In general, and except as provided below, shareholders have one vote for each Class A common share and ten votes for each Class B common share or Series A preferred share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, pursuant to a mechanism specified in our articles of association, the voting rights exercisable by a shareholder may be limited. In any situation in which the "controlled shares" (as defined below) of a U.S. Person would constitute 9.5% or more of the votes conferred by the issued shares, the voting rights exercisable by a shareholder with respect to such shares will be limited so that no U.S. Person is deemed to hold 9.5% or more of the voting power conferred by our shares. The votes that could be cast by a shareholder but for these restrictions will be allocated to the other shareholders pro rata based on the voting power held by such shareholders, provided that no allocation of any such voting rights may cause a U.S. Person to exceed the 9.5% limitation as a result of such allocation. In addition, our Board of Directors may limit a shareholder's voting rights where it deems necessary to do so to avoid adverse tax, legal or regulatory consequences. Our articles of association provide that shareholders will be notified of the applicable voting power exercisable with respect to their shares prior to any vote to be taken by the shareholders. "Controlled shares" include, among other things, shares that a U.S. Person owns directly, indirectly or constructively (within the meaning of Section 958 of the Code).
We also have the authority under our articles of association to request information from any shareholder for the purpose of determining whether a shareholder's voting rights are to be limited or reallocated pursuant to the articles of association. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate the shareholder's voting rights.
OUR BOARD OF DIRECTORS
Our articles of association provide that the size of the Board of Directors shall be determined from time to time by our Board of Directors, but unless such number is so fixed, our Board of Directors will consist of eleven directors. Any directors may be removed prior to the expiration of such director's term by ordinary resolution of the shareholders. The appointment or removal of a director requires the
simple majority of votes cast, in person or by proxy, at the general meeting at which the proposal is put forth.
Generally, the affirmative vote of a majority of the directors present at any meeting at which a quorum is present shall be required to authorize corporate action. In the case of equality of votes, the Chairman of our Board of Directors shall have the deciding vote. Corporate action may also be taken by a unanimous written resolution of the Board of Directors without a meeting. Unless otherwise fixed at a different number, a majority of the directors in office shall constitute a quorum.
TAX LIABILITY RESULTING FROM ACTS OF SHAREHOLDERS
Our articles of association provide certain protections against adverse tax consequences to us resulting from laws that apply to our shareholders. If a shareholder's death or non-payment of any tax or duty payable by the shareholder, or any other act or thing involving the shareholder, causes any adverse tax consequences to us, (1) the shareholder or its executor or administrator is required to indemnify us against any tax liability that we incur as a result, (2) we will have a lien on any dividends or any other distributions payable to the shareholder by us to the extent of the tax liability and (3) if any amounts not covered by our lien on dividends and distributions are owed to us by the shareholder as a result of our tax liability, we have the right to refuse to register any transfer of the shareholder's shares.
VOTING OF SUBSIDIARY SHARES
Our articles of association provide that if we are required or entitled to vote at a general meeting of our direct non-U.S. subsidiaries, our directors shall refer the subject matter of the vote to our shareholders and seek direction from our shareholders as to how we should vote on the resolution proposed by such direct non-U.S. subsidiary, other than resolutions regarding any subject matter relating to a U.S. indirect subsidiary. Substantially similar provisions are or will be contained in the by-laws of U.N. Barbados with respect to U.N. Holdings II, Inc. and any non-U.S. subsidiaries, including U.N. Bermuda, it may have and in the bye-laws of U.N. Bermuda with respect to any non-U.S. subsidiaries it may have.
INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL
Many insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by insurance authorities of any proposed acquisition of an insurance company that is domiciled or, in some cases, having such substantial business that it is deemed to be commercially domiciled in that jurisdiction. See "Regulation -- United States -- Changes of Control."
DIFFERENCES IN CORPORATE LAW
The Companies Law is modeled after that of England but does not follow recent United Kingdom statutory enactments and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
MERGERS AND SIMILAR ARRANGEMENTS
Cayman Islands law does not provide for mergers as that expression is understood under U.S. corporate law. While Cayman Islands law does have statutory provisions that provide for the reconstruction and amalgamation of companies commonly referred to in the Cayman Islands as a "scheme of arrangement," the procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders meeting by each class of shareholders, in each case, by a majority of the number of holders of each class of a company's shares who are present and voting (either in person or by proxy) at such a meeting, which holders must also represent 75% in value of such
class issued and outstanding. The convening of this meeting and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect the creditors' interests. Furthermore, the Grand Court will only approve a scheme of arrangement if it is satisfied that:
- the statutory provisions as to majority vote have been complied with;
- the shareholders have been fairly represented at the meeting in question;
- the scheme of arrangement is such as a businessman would reasonably approve; and
- the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
If the scheme of arrangement and reconstruction is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
In addition, if a third party purchases at least 90.0% of our outstanding shares within a four-month period, the purchaser may, during the following two months, require the holders of the remaining shares to transfer their shares on the same terms on which the purchaser acquired the first 90.0% of our outstanding shares. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
SHAREHOLDER SUITS
While our Cayman Islands counsel, Walkers, is aware of only a small number of derivative actions having been brought in the Cayman Islands, such actions are subject to procedural requirements and can only be brought in the following limited circumstances in which:
- a company is acting or proposing to act illegally or outside the scope of its corporate authority;
- the act complained of, although not outside the scope of the company's corporate authority, could be effected only if authorized by more than a simple majority vote of shareholders;
- the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or
- those who control the company are perpetrating a "fraud on the minority."
Class actions that have been brought as representative actions in the Cayman Islands and are subject to the same procedural constraints.
INDEMNIFICATION
Cayman Islands law does not limit the extent to which a company may indemnify its directors, officers, employees and agents, except to the extent that any such provision maybe held by the Cayman Islands courts to be contrary to public policy. For instance, a provision purporting to provide indemnification against civil fraud or the consequences of committing a crime may be deemed contrary to public policy. In addition, an officer or director may not be indemnified for his own fraud or willful default. Our articles of association make indemnification of directors and officers and advancement of expenses to defend claims against directors and officers mandatory on the part of United National Group to the fullest extent allowed by law.
INSPECTION OF BOOKS AND RECORDS
Holders of our shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements.
PROHIBITED SALE OF SECURITIES UNDER CAYMAN ISLANDS LAW
An exempted company such as us that is not listed on the Cayman Islands Stock Exchange is prohibited from making any invitations to the public in the Cayman Islands to subscribe for any of its securities.
LISTING
We have applied to have our Class A common shares approved for quotation on the Nasdaq National Market under the symbol "UNGL."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common shares will be .
SHARES ELIGIBLE FOR FUTURE SALE
We can make no prediction as to the effect, if any, that market sales of our Class A common shares or the availability of Class A common shares for sale will have on the market price prevailing from time to time. The sale of substantial amounts of our Class A common shares in the public market could adversely affect the prevailing market price of our Class A common shares and our ability to raise equity capital in the future. For information concerning agreements between us and our existing shareholders, including restrictions on transfer, registration rights and other matters, see "Our Relationship With Fox Paine & Company" and "Management -- Management Shareholders Agreement."
SALE OF RESTRICTED SHARES
As of September 5, 2003, we had an aggregate of 30,198,750 outstanding Class A common shares (assuming full conversion of our Class B common shares and Series A preferred shares into Class A common shares in accordance with their terms), options to purchase an additional 1,138,574 Class A common shares and warrants to purchase an additional 55,000 Class A common shares. We expect to issue an additional Class A common shares in this offering. Up to % of the Class A common shares for sale in this offering are reserved for purchase by our directors, officers and employees through a reserved share program. All of the Class A common shares to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any Class A common shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. As defined in Rule 144, an affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the issuer.
LOCK-UP AGREEMENTS
United National Group, our directors and executive officers, all of our current shareholders and those persons who purchase common shares through the reserved share program have agreed with the underwriters not to, directly or indirectly, dispose of or hedge any of their common shares or securities convertible into or exchangeable for common shares, whether owned currently or acquired later, for a period of 180 days from the date of this prospectus, without the prior written consent of United National Group and Merrill Lynch, Pierce, Fenner & Smith Incorporated, subject to certain exceptions (which consent with respect to the reserved share program will not be granted for any sales during the first 90 days of such lock-up). Immediately following this offering, shareholders subject to lock-up agreements will own Class A common shares (assuming full conversion of Class B common shares and Series A preferred shares in accordance with their terms), representing approximately % of the then outstanding Class A common shares, or approximately % if the underwriters' overallotment option is exercised in full.
United National Group may, however, grant options to purchase Class A common shares under its share incentive plan and may issue Class A common shares upon the exercise of outstanding options under the share incentive plan as long as the holder of such common shares agrees in writing to be bound by the obligations and restrictions of the lock-up agreement.
RULE 144
In general, under Rule 144 as currently in effect, a person that has beneficially owned common shares for at least one year, including a person that is an affiliate, is entitled to sell within any three-month period a number of shares that does not exceed the greater of:
- 1% of the number of common shares then outstanding; or
- the average weekly trading volume of the common shares on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to a sale, subject to restrictions specified in Rule 144.
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
RULE 144(k)
Under Rule 144(k), a person that has not been one of our affiliates at any time during the three months preceding a sale, and that has beneficially owned the common shares proposed to be sold for at least two years, is entitled to sell those common shares without regard to the volume, manner-of-sale or other limitations contained in Rule 144.
STOCK OPTIONS
We had granted options to purchase a total of 1,138,574 Class A common shares as of September 5, 2003, of which 256,074 were fully vested.
Following the consummation of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register the Class A common shares issued or reserved for issuance under our Stock Incentive Plan. Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, Class A common shares registered under such registration statement will be available for sale in the open market, unless such common shares are subject to vesting restrictions with us or the lock-up restrictions described above, or unless such shares are held by persons who are considered our "affiliates," as such term is defined under the Securities Act.
MATERIAL TAX CONSIDERATIONS
The following summary of our taxation, and the taxation of our shareholders is based upon current law and does not purport to be a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase Class A common shares. Legislative, judicial or administrative changes may be forthcoming that could affect this summary.
The following legal discussion (including and subject to the matters and qualifications set forth in such summary) of the material tax considerations under (1) "Taxation of United National Group and Subsidiaries -- Cayman" and "Taxation of Shareholders -- Cayman Taxation" is based upon the advice of Walkers, special Cayman legal counsel, (2) "Taxation of United National Group and Subsidiaries -- Barbados" is based upon the advice of David King & Co., (3) "Taxation of United National Group and Subsidiaries -- Bermuda" and "Taxation of Shareholders -- Bermuda Taxation" is based upon the advice of Appleby, Spurling and Kempe and (4) "Taxation of United National Group and Subsidiaries -- United States" and "Taxation of Shareholders -- United States Taxation" is based upon the advice of LeBoeuf, Lamb, Greene & MacRae, L.L.P., as special U.S. tax counsel. Each of these firms has reviewed the relevant portion of this discussion (as set forth above) and believes that such portion of the discussion constitutes, in all material respects, a fair and accurate summary of the relevant income tax considerations relating to United National Group and its subsidiaries and the ownership of United National Group's Class A common shares by investors that are U.S. Persons (as defined below) who acquire such shares in this offering. The advice of such firms does not include any factual or accounting matters, determinations or conclusions such as insurance accounting determinations or RPII, amounts and computations and amounts or components thereof (for example, amounts or computations of income or expense items or reserves entering into RPII computations) or facts relating to the business, income, reserves or activities of United National Group and its subsidiaries. The advice of these firms relies upon and is premised on the accuracy of factual statements and representations made by United National Group and its subsidiaries concerning the business and properties, ownership, organization, source of income and manner of operation of United National Group and its subsidiaries. The discussion is based upon current law. Legislative, judicial or administrative changes or interpretations may be forthcoming that could be retroactive and could affect the tax consequence to holders of Class A common shares. The tax treatment of a holder of Class A common shares, or of a person treated as a holder of Class A common shares for U.S. federal income, state, local or foreign tax purposes, may vary depending on the holder's particular tax situation. Statements contained herein as to the beliefs, expectations and conditions of United National Group and its subsidiaries as to the application of such tax laws or facts represent the view of management as to the application of such laws and do not represent the opinions of counsel. PROSPECTIVE INVESTORS (INCLUDING ALL NON-U.S. PERSONS AS DEFINED BELOW) SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF OWNING CLASS A COMMON SHARES UNDER THE LAWS OF THEIR COUNTRIES OF CITIZENSHIP, RESIDENCE, ORDINARY RESIDENCE OR DOMICILE.
TAXATION OF UNITED NATIONAL GROUP AND SUBSIDIARIES
CAYMAN ISLANDS
United National Group has been incorporated under the laws of the Cayman Islands as an exempted company and, as such, obtained an undertaking on September 2, 2003 from the Governor in Council of the Cayman Islands substantially that, for a period of 20 years from the date of such undertaking, no law that is enacted in the Cayman Islands imposing any tax to be levied on profit or income or gains or appreciation shall apply to us and no such tax and no tax in the nature of estate duty or inheritance tax will be payable, either directly or by way of withholding, on our common shares. Given the limited duration of the undertaking, we cannot be certain that we will not be subject to Cayman Islands tax after the expiration of the 20-year period.
BARBADOS
Under the Barbados Act, no income tax, capital gains tax or other direct tax or impost is levied in Barbados on U.N. Barbados in respect of (1) its profits or gains, (2) the transfer of its securities to any person who is not a resident of Barbados, (3) its shareholders or transferees in respect of the transfer of all or any part of its securities or other assets to another licensee under the Barbados Act or to any person who is not a resident of Barbados or (4) any portion of any dividend, interest, or other return payable to any person in respect of his or her holding any shares or other of its securities. U.N. Barbados has applied for a guarantee from the Minister of Finance of Barbados that such benefits and exemptions effectively will be available for 30 years. U.N. Barbados will be required to pay an annual licensing fee that is currently approximately $2,500, and will be subject to tax at a rate of 2% on its first $125,000 of taxable income after the first 15 financial years and thereafter the amount of such tax will not exceed approximately $2,500 per annum. Given the limited duration of any guarantee that we may receive, we cannot be certain that we will not be subject to Barbados tax after the expiration of the guarantee.
BERMUDA
Currently, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by U.N. Bermuda or its shareholders, other than shareholders ordinarily resident in Bermuda, if any. Currently, there is no Bermuda withholding or other tax on principal, interest or dividends paid to holders of the common shares of U.N. Bermuda, other than holders ordinarily resident in Bermuda, if any. There can be no assurance that U.N. Bermuda or its shareholders will not be subject to any such tax in the future.
U.N. Bermuda has applied for a written assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to U.N. Bermuda or to any of its operations, shares, debentures or obligations through March 28, 2016; provided that any such assurance will be subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda, or to prevent the application of any taxes payable by U.N. Bermuda in respect of real property or leasehold interests in Bermuda held by them. Given the limited duration of any assurance that we may receive, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.
UNITED STATES
The following discussion is a summary of all material U.S. federal income tax considerations relating to our operations. Although we have not commenced business operations outside the United States, we intend to manage our business in a manner designed to reduce the risk that United National Group, U.N. Barbados and U.N. Bermuda will be treated as engaged in a U.S. trade or business for U.S. federal income tax purposes. However, whether business is being conducted in the United States is an inherently factual determination. Because the Code, regulations and court decisions fail to identify definitively activities that constitute being engaged in a trade or business in the United States, we cannot be certain that the IRS will not contend successfully that United National Group, U.N. Barbados or U.N. Bermuda are or will be engaged in a trade or business in the United States. A non-U.S. corporation deemed to be so engaged would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation is generally entitled to deductions and credits only if it timely files a U.S. federal income tax return. U.N. Barbados and U.N. Bermuda intend to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax. The
highest marginal federal income tax rates currently are 35% for a corporation's effectively connected income and 30% for the "branch profits" tax.
If U.N. Barbados is entitled to the benefits under the Barbados Treaty, U.N. Barbados would not be subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business unless that trade or business was conducted through a permanent establishment in the United States. For purposes of the Barbados Treaty, a permanent establishment in the United States is defined to include a branch, office or place of management through which the business of the enterprise is carried on, or an agent (other than an independent agent acting in the ordinary course of its business) that has, and habitually exercises in the United States, authority to conclude contracts in the name of the corporation. No regulations interpreting the Barbados Treaty have been issued. U.N. Barbados currently intends to conduct its activities to reduce the risk that it will have a permanent establishment in the United States, although we cannot be certain that we will achieve this result.
An enterprise resident in Barbados generally will be entitled to the benefits of the Barbados Treaty if (1) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Barbados or U.S. citizens and its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities to, persons who are neither residents of either the United States or Barbados nor U.S. citizens, or (2) the company is a resident of Barbados engaged in a trade or business in Barbados and the income derived by such company from the United States is connected to such company's Barbados trade or business. We cannot be certain that U.N. Barbados will be eligible for Barbados Treaty benefits immediately following this offering or in the future because of factual and legal uncertainties regarding the residency and citizenship of United National Group's shareholders and further because of the factual and legal uncertainty regarding whether the income, if any, that U.N. Barbados may earn in the future will be sufficiently connected to the trade or business that U.N. Barbados will conduct in Barbados.
If U.N. Bermuda is entitled to the benefits under the income tax treaty between Bermuda and the United States (the "Bermuda Treaty"), U.N. Bermuda would not be subject to U.S. income tax on any business profits of its insurance enterprise found to be effectively connected with a U.S. trade or business, unless that trade or business is conducted through a permanent establishment in the United States. No regulations interpreting the Bermuda Treaty have been issued. U.N. Bermuda currently intends to conduct its activities to reduce the risk that it will have a permanent establishment in the United States, although we cannot be certain that we will achieve this result.
An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if (1) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Bermuda or U.S. citizens and (2) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities to, persons who are neither residents of either the United States or Bermuda nor U.S. citizens. We cannot be certain that U.N. Bermuda will be eligible for Bermuda Treaty benefits immediately following the offering or in the future because of factual and legal uncertainties regarding the residency and citizenship of our shareholders.
Foreign insurance companies carrying on an insurance business within the United States have a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If either U.N. Barbados or U.N. Bermuda is considered to be engaged in the conduct of an insurance business in the United States and it is not entitled to the benefits of the Barbados Treaty or Bermuda Treaty, respectively, in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Code could subject a significant portion of U.N. Barbados' and U.N. Bermuda's investment income to U.S. income tax. In addition, while the Bermuda Treaty clearly applies to premium income, it is uncertain whether the Bermuda Treaty applies to other income such as investment income. If U.N. Bermuda is considered engaged in the conduct of an insurance business in the United States and is entitled to the benefits of the Bermuda Treaty in general, but the Bermuda Treaty is interpreted to not
apply to investment income, a significant portion of U.N. Bermuda's investment income could be subject to U.S. income tax.
Foreign corporations not engaged in a trade or business in the United States are subject to 30% U.S. income tax imposed by withholding on the gross amount of certain "fixed or determinable annual or periodic gains, profits and income" derived from sources within the United States (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The Bermuda Treaty does not reduce the rate of tax in such circumstances. The Barbados Treaty reduces the rate of withholding tax on interest payments to 5% and on dividend payments to 15%, or 5% if the shareholder owns 10% or more of the company's voting stock. The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rates of tax applicable to premiums paid to U.N. Barbados or U.N. Bermuda on such business are 4% for direct casualty insurance premiums and 1% for reinsurance premiums.
U.N. Holdings II, Inc., U.N. Holdings Inc., AIS, United National Insurance Company, American Insurance Adjustment Agency, Inc., International Underwriters, Inc., Unity Risk Partners Insurance Service, Inc., Emerald Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company and United National Casualty Insurance Company are each subject to taxation in the United States at regular corporate rates. Additionally, dividends and other types of passive income paid by U.N. Holdings II, Inc. to U.N. Barbados would be subject to reduction under the Barbados Treaty as described above.
Legislation has been introduced in the U.S. Congress that would override or renegotiate the Barbados Treaty. We cannot predict whether this proposed legislation or other similar legislation will be enacted. In addition, a recent press release by the U.S. Treasury Department indicates that the United States and Barbados are currently discussing revisions to the Barbados Treaty and that concluding these revisions is a matter of priority for both governments. Accordingly, no assurances can be given as to the availability of benefits under the Barbados Treaty in future years.
Personal Holding Companies
United National Group or any of its foreign subsidiaries could be subject to U.S. tax or any of its U.S. subsidiaries could be subject to additional U.S. tax on a portion of its income if any of them is considered to be a personal holding company, or "PHC," for U.S. federal income tax purposes. A corporation generally will be classified as a PHC for U.S. federal income tax purposes in a given taxable year if (1) at any time during the last half of such taxable year, five or fewer individuals (without regard to their citizenship or residency and including as individuals for this purpose certain entities such as certain tax-exempt organizations and pension funds) own or are deemed to own (pursuant to certain constructive ownership rules) more than 50% of the stock of the corporation by value and (2) at least 60% of the corporation's gross income, as determined for U.S. federal income tax purposes, for such taxable year consists of "PHC income." PHC income includes, among other things, dividends, interest, royalties, annuities and, under certain circumstances, rents. In the case of a non-U.S. corporation, PHC income does not include foreign source income, except to the extent such income is effectively connected with a U.S. trade or business. Under the constructive ownership rules, among other things, a partner will be treated as owning a proportionate amount of the stock owned by a partnership and a partner who is an individual will be treated as owning the stock owned by his or her partners. Also, stock treated as owned by such partner proportionally through such partnership will be treated as owned by the partner for purposes of reapplying the constructive ownership rules. The PHC rules contain an exception for foreign corporations that are classified as Foreign Personal Holding Companies (as discussed below).
If United National Group or any subsidiary were a PHC in a given taxable year, such corporation would be subject to a 15% PHC tax on its "undistributed PHC income" (which, in the case of United National Group, U.N. Barbados and U.N. Bermuda, would exclude PHC income that is from foreign sources, except to the extent that such income is effectively connected with a trade or business in the
U.S.). Thus, the PHC income of United National Group, U.N. Barbados and U.N. Bermuda would not include underwriting income or investment income derived from foreign sources and should not include dividends received by United National Group from U.N. Barbados (as long as U.N. Barbados is not engaged in a trade or business in the U.S.). For taxable years beginning after December 31, 2008, the PHC tax rate on "undistributed PHC income" will be equal to the highest marginal rate on ordinary income applicable to individuals.
We believe that five or fewer individuals or tax-exempt organizations will be treated as owning more than 50% of the value of our shares. Consequently, we or one or more of our subsidiaries could be or become PHCs, depending on whether we or any of our subsidiaries satisfy the PHC gross income test. We intend to manage our business to reduce the possibility that we will meet the 60% income threshold.
We cannot be certain, however, that United National Group and its subsidiaries will not become PHCs following this offering or in the future because of various factors including legal and factual uncertainties regarding the application of the constructive ownership rules, the makeup of United National Group's shareholder base, the gross income of United National Group or any of its subsidiaries and other circumstances that could change the application of the PHC rules to United National Group and its subsidiaries. If United National Group or any of its subsidiaries is or were to become a PHC in a given taxable year, such company would be subject to PHC tax on its "undistributed PHC income." In addition, if United National Group or any of its subsidiaries were to become PHCs we cannot be certain that the amount of PHC income will be immaterial.
TAXATION OF SHAREHOLDERS
CAYMAN ISLANDS TAXATION
The following summary sets forth the material Cayman Islands income tax considerations related to the purchase, ownership and disposition of our Class A common shares. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor's particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
You will not be subject to Cayman Islands taxation on payments of dividends or upon the repurchase by us of your common shares. In addition, you will not be subject to withholding tax on payments of dividends or distributions, including upon a return of capital, nor will gains derived from the disposal of common shares be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.
No Cayman Islands stamp duty will be payable by you in respect of the issue or transfer of common shares. However, an instrument transferring title to a common share, if brought to or executed in the Cayman Islands, would be subject to Cayman Islands stamp duty.
Prospective investors should consult their professional advisers on the possible tax consequences of buying, holding or selling our common shares under the laws of their country of citizenship, residence or domicile.
UNITED STATES TAXATION
The following summary sets forth the material United States federal income tax considerations related to the purchase, ownership and disposition of our Class A common shares. Unless otherwise stated, this summary deals only with shareholders that are U.S. Persons (as defined below) who purchase their Class A common shares in this offering, who did not own (directly or indirectly through foreign entities or constructively) shares of United National Group prior to this offering and who hold their Class A common shares as capital assets within the meaning of section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder in light of such shareholder's specific circumstances. For example, if a partnership holds our Class A
common shares, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership holding the Class A common shares, you should consult your tax advisor. In addition, the following summary does not address the U.S. federal income tax consequences that may be relevant to special classes of shareholders, such as financial institutions, insurance companies, regulated investment companies, real estate investment trusts, financial asset securitization investment trusts, dealers or traders in securities, tax-exempt organizations, expatriates, persons who are considered with respect to United National Group or any of its non-U.S. subsidiaries as "United States shareholders" for purposes of the "controlled foreign corporation," or "CFC," rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total combined voting power of all classes of shares of United National Group, U.N. Barbados or U.N. Bermuda entitled to vote (i.e., 10% U.S. Shareholders)), or persons who hold the Class A common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle, who may be subject to special rules or treatment under the Code. This discussion is based upon the Code, treasury regulations under the Code and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date hereof and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion does not include any description of the tax laws of any state or local governments within the United States.
For purposes of this discussion, the term "U.S. Person" means (1) a citizen or resident of the United States, (2) a partnership or corporation, or entity treated as a partnership or corporation, created or organized in or under the laws of the United States, or any political subdivision thereof, (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (4) a trust if either (a) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (b) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes or (5) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
Taxation of Dividends
Subject to the discussions below relating to the potential application of the CFC, related person insurance income, or "RPII," foreign personal holding company, or "FPHC," and passive foreign investment company, or "PFIC," rules, cash distributions, if any, made with respect to the Class A common shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of United National Group (as computed using U.S. tax principles). Under recently enacted legislation, we believe certain dividends paid before 2009 to individual shareholders should be eligible for reduced rates of tax, provided that certain holding period requirements are satisfied, because we believe our Class A common shares should be treated as readily tradeable on an established securities market in the United States. Dividends paid by us will not be eligible for the dividends received deduction. To the extent such distributions exceed United National Group's earnings and profits, they will be treated first as a return of the shareholder's basis in the Class A common shares to the extent thereof, and then as gain from the sale of a capital asset.
Classification of United National Group, U.N. Barbados or U.N. Bermuda as Controlled Foreign Corporations
Each 10% U.S. Shareholder (as defined below) of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the CFC, directly or indirectly through foreign entities, on the last day of the CFC's taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income," even if the subpart F income is not distributed. A foreign corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through foreign entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., "constructively")) more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation, or more than 50% of
the total value of all stock of such corporation. For purposes of taking into account insurance income, which is a category of subpart F income, the term CFC also includes a foreign insurance company in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks. A "10% U.S. Shareholder" is a U.S. Person that owns (directly, indirectly through foreign entities or constructively) at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. As a result of the attribution and constructive ownership rules described above, we believe that United National Group, U.N. Barbados and U.N. Bermuda are CFCs. That status as a CFC does not cause us or any of our subsidiaries to be subject to U.S. federal income tax. Such status also has no adverse U.S. federal income tax consequences for any U.S. Person that is not a 10% U.S. Shareholder.
We believe that because of the anticipated dispersion of our share ownership, provisions in our organizational documents that limit voting power (these provisions are described in "Description of Share Capital") and other factors, no U.S. Person who acquires shares of United National Group in this offering directly or indirectly through foreign entities and that did not own (directly or indirectly through foreign entities or constructively) shares of United National Group prior to this offering should be treated as owning (directly, indirectly through foreign entities, or constructively) 10% or more of the total voting power of all classes of shares of United National Group, U.N. Barbados or U.N. Bermuda. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge.
The RPII CFC Provisions
The following discussion generally is applicable only if the RPII of U.N. Barbados or U.N. Bermuda determined on a gross basis, is 20% or more of U.N. Barbados' or U.N. Bermuda's insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any fiscal year in which U.N. Barbados' and U.N. Bermuda's RPII falls below the 20% threshold. Although we cannot be certain, United National Group believes that the gross RPII of each of U.N. Barbados and U.N. Bermuda as a percentage of its gross insurance income will be for the foreseeable future below the 20% threshold for each tax year. Additionally, as United National Group is not licensed as an insurance company, we do not anticipate that United National Group will have insurance income, including RPII. RPII is any "insurance income" (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "RPII shareholder" (as defined below) or a "related person" (as defined below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract that would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company. For purposes of inclusion of the RPII of U.N. Bermuda or U.N. Barbados in the income of any shareholder of United National Group, unless an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through foreign entities) any amount of United National Group's shares. Generally, the term "related person" for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons that control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A corporation's pension plan is ordinarily not a "related person" with respect to the corporation unless the pension plan owns, directly or indirectly through the application of certain constructive ownership rules, more than 50% measured by vote or value, of the stock of the corporation. U.N. Barbados and U.N. Bermuda will be treated as CFCs under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through foreign entities or constructively) 25% or more of the shares of United National Group by vote or value.
RPII Exceptions
The special RPII rules do not apply if (1) direct and indirect insureds and persons related to such insureds, whether or not U.S. Persons, are treated as owning (directly or indirectly through foreign entities) less than 20% of the voting power and less than 20% of the value of the stock of United National Group, which we refer to as the "20% Ownership Exception," (2) RPII, determined on a gross basis, is less than 20% of each of U.N. Barbados' and U.N. Bermuda's gross insurance income for the taxable year, which we refer to as the "20% Gross Income Exception," (3) each of U.N. Barbados and U.N. Bermuda elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business, and waives all treaty benefits with respect to RPII and meets certain other requirements or (4) each of U.N. Barbados and U.N. Bermuda elects to be treated as a U.S. corporation and waives all treaty benefits and meets certain other requirements. Where none of these exceptions applies, each U.S. Person owning or treated as owning any shares in United National Group (and therefore, indirectly, in U.N. Barbados or U.N. Bermuda) on the last day of United National Group's taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which U.N. Barbados or U.N. Bermuda were CFCs under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person's share of U.N. Barbados' or U.N. Bermuda's current year earnings and profits as reduced by the U.S. Person's share, if any, of certain prior year deficits in earnings and profits. U.N. Barbados and U.N. Bermuda intend to operate in a manner that is intended to ensure that each qualifies for the 20% Gross Income Exception. Although we do not expect that the RPII of U.N. Barbados or U.N. Bermuda will equal or exceed 20% of its gross insurance income, it is possible that we will not be successful in qualifying under this exception.
Computation of RPII
In order to determine how much RPII U.N. Barbados or U.N. Bermuda has earned in each taxable year, U.N. Barbados and U.N. Bermuda may obtain and rely upon information from its insureds and reinsureds to determine whether any of the insureds, reinsureds or persons related thereto owning (directly or indirectly through non-U.S. entities) shares of United National Group are U.S. Persons. United National Group may not be able to determine whether any of the underlying direct or indirect insureds to which U.N. Barbados or U.N. Bermuda provides insurance or reinsurance are shareholders or related persons to such shareholders. Consequently, United National Group may not be able to determine accurately the gross amount of RPII earned by U.N. Barbados or U.N. Bermuda in a given taxable year. For any year in which either of U.N. Barbados or U.N. Bermuda does not meet the 20% Gross Income Exception and the 20% Ownership Exception, United National Group may also seek information from its shareholders as to whether beneficial owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent United National Group is unable to determine whether a beneficial owner of shares is a U.S. Person, United National Group may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders.
If, as expected, RPII is less than 20% of gross insurance income, RPII shareholders will not be required to include RPII in their taxable income. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses.
Apportionment of RPII to U.S. Holders
Every RPII shareholder who owns shares on the last day of any fiscal year of United National Group in which U.N. Barbados or U.N. Bermuda does not meet the 20% Gross Income Exception and the 20% Ownership Exception should expect that for such year it will be required to include in gross income its share of U.N. Barbados' or U.N. Bermuda's RPII for the portion of the taxable year during which U.N. Barbados or U.N. Bermuda was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. An RPII shareholder who owns shares
during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of U.N. Barbados' or U.N. Bermuda's RPII.
Basis Adjustments
An RPII shareholder's tax basis in its shares will be increased by the amount of any RPII that the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by United National Group out of previously taxed RPII income. The RPII shareholder's tax basis in its shares will be reduced by the amount of such distributions that are excluded from income.
Uncertainty as to Application of RPII
The RPII provisions have never been interpreted by the courts or the Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made in the proposed regulation or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. These provisions include the grant of authority to the Treasury Department to prescribe "such regulations as may be necessary to carry out the purpose of this subsection including . . . regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise." Accordingly, the meaning of the RPII provisions and their application to U.N. Barbados and U.N. Bermuda is uncertain. In addition, we cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent IRS examination. Any prospective investor considering an investment in Class A common shares should consult his tax advisor as to the effects of these uncertainties.
Tax-Exempt Shareholders
Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includible in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax-exempt entities are urged to consult their tax advisors as to the potential impact of the unrelated business taxable income provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in the circumstances described below in "Information Reporting and Backup Withholding."
Dispositions of Class A Common Shares
Subject to the discussions below relating to the potential application of the Code section 1248, PFIC and FPHC rules, holders of Class A common shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of Class A common shares in the same manner as on the sale, exchange or other disposition of any other shares held as capital assets. If the holding period for these Class A common shares exceeds one year, any gain will be subject to tax at a current maximum marginal tax rate of 15% for individuals and 35% for corporations. Moreover, gain, if any, generally will be U.S. source gain and generally will constitute "passive income" for foreign tax credit limitation purposes.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a foreign corporation and such person owned, directly, indirectly through certain foreign entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC's earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). We believe, because of the anticipated dispersion of our share ownership, provisions in our organizational documents that limit voting power and other factors, that no U.S. shareholder of United National Group that acquires shares in this offering and did not own (directly,
indirectly through foreign entities or constructively) shares of United National Group prior to this offering) should be treated as owning (directly, indirectly through foreign entities or constructively) 10% of more of the total voting power of United National Group; to the extent this is the case, the application of Code section 1248 under the regular CFC rules should not apply to dispositions of our Class A common shares. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, United National Group will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form.
Code section 1248 also applies to the sale or exchange of shares in a foreign corporation if the foreign corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Gross Income Exception or the 20% Ownership Exception applies. Existing proposed regulations do not address whether Code section 1248 would apply if a foreign corporation is not a CFC but the foreign corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a domestic corporation. We believe, however, that this application of Code section 1248 under the RPII rules should not apply to dispositions of Class A common shares because United National Group will not be directly engaged in the insurance business. We cannot be certain, however, that the IRS will not interpret the proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide that these rules will apply to dispositions of Class A common shares. Prospective investors should consult their tax advisors regarding the effects of these rules on a disposition of Class A common shares.
Passive Foreign Investment Companies
In general, a foreign corporation will be a PFIC during a given year if
(1) 75% or more of its gross income constitutes "passive income" or (2) 50% or
more of its assets produce passive income.
If United National Group were characterized as a PFIC during a given year, U.S. Persons holding Class A common shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such persons made a "qualified electing fund election" or "mark-to-market" election. It is uncertain that United National Group would be able to provide its shareholders with the information necessary for a U.S. Person to make a "qualified electing fund election." In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the shares during the three preceding taxable years (or shorter period during which the taxpayer held the shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period. In addition, a distribution paid by United National Group to U.S. shareholders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for a reduced rate of tax under recently enacted legislation with respect to dividends paid before 2009. If United National Group were considered a PFIC, upon the death of any U.S. individual owning Class A common shares, such individual's heirs or estate may not be entitled to a "step-up" in the tax basis of the Class A common shares that might otherwise be available under U.S. federal income tax laws.
For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules provide that income "derived in the active conduct of an insurance business by a corporation that is predominantly engaged in an insurance business . . . is not treated as passive income." The PFIC provisions also contain a look-through rule under which a foreign corporation shall be treated as if it "received directly its proportionate share of the income" and as if it "held its
proportionate share of the assets" of any other corporation in which it owns at least 25% of the value of the stock.
The insurance income exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. We expect for purposes of the PFIC rules that U.N. Bermuda will be predominantly engaged in an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of U.N. Bermuda's insurance business in each year of operations. Accordingly, none of the income or assets of U.N. Bermuda should be treated as passive. Additionally, we expect that the passive income and assets (other than the stock of any indirect United National Group subsidiary) of any other U.N. Barbados subsidiary will be de minimis in each year of operations with respect to the overall income and assets of United National Group. Under the look-through rule each of United National Group and U.N. Barbados should be deemed to own its proportionate share of the assets and to have received its proportionate share of the income of its direct and indirect subsidiaries for purposes of the 75% test and the 50% test. As a result, we believe that United National Group and U.N. Barbados should not be treated as PFICs. However, as there are currently no regulations regarding the application of the PFIC provisions to an insurance company and new regulations or pronouncements interpreting or clarifying these rules may be forthcoming, we can not be certain that the IRS will not challenge this position and that a court will not sustain such challenge. Prospective investors should consult their tax advisor as to the effects of the PFIC rules.
Foreign Personal Holding Companies
A foreign corporation will be classified as an FPHC for U.S. federal income tax purposes if (1) at any time during the taxable year at issue, five or fewer individuals who are U.S. citizens or residents own or are deemed to own (pursuant to certain constructive ownership rules) more than 50% of all classes of the corporation's stock measured by voting power or value and (2) at least 60% (or 50% in taxable years subsequent to the characterization of the foreign company as an FPHC) of its gross income for the year is "FPHC income." Under these constructive ownership rules, among other things, a partner will be treated as owning a proportionate amount of the stock owned by the partnership and a partner who is an individual will be treated as owning the stock owned by his partners. Also, stock treated as owned by such partner proportionally through such partnership will be treated as owned by the partner for purposes of reapplying the constructive ownership rules. If United National Group, U.N. Barbados or U.N. Bermuda were or were to become FPHCs, a portion of the "undistributed foreign personal holding company income" (as defined for U.S. federal income tax purposes) of each such FPHC would be imputed to all of United National Group's shareholders who are U.S. Persons. Such income would be taxable as a dividend even if no distributions were made, and should not be eligible for a reduced rate of tax under recently enacted legislation, with respect to dividends paid before 2009. In such event, subsequent cash distributions will first be treated as a tax-free return of any previously taxed and undistributed amounts. In addition, a distribution paid by United National Group to a U.S. shareholder that is not treated as a tax-free return of any previously taxed and undistributed amount and is characterized as a dividend would not be eligible for a reduced rate of tax under recently enacted legislation with respect to dividends paid before 2009. If United National Group were to become an FPHC in the year next preceding the date of the death of any U.S. individual owning Class A common shares, such individual's heirs or estate would not be entitled to a "step-up" in the basis of the Class A common shares that might otherwise be available under U.S. federal income tax laws. Moreover, each shareholder who owns, directly or indirectly, 10% or more of the value of an FPHC is required to file IRS Form 5471. We believe that five or fewer U.S. individuals may be treated as owning more than 50% of the voting power or value of our shares. Consequently, United National Group, U.N. Barbados or U.N. Bermuda could be or become an FPHC, depending on whether any company satisfies the FPHC gross income test. We intend to monitor the income of United National Group, U.N. Barbados and U.N. Bermuda to reduce the possibility that each company will meet the 60% income threshold. We cannot be certain, however, that United National Group, U.N. Barbados or U.N. Bermuda will not be considered an FPHC, because of factors including legal and factual uncertainties regarding the application of the constructive ownership rules, the makeup of United National
Group's shareholder base, the gross income of United National Group, U.N. Barbados or U.N. Bermuda and other circumstances that could change the application of the FPHC rules to United National Group, U.N. Barbados and U.N. Bermuda. If United National Group, U.N. Barbados or U.N. Bermuda is or becomes an FPHC, there can be no assurance that the amount of FPHC income would be immaterial.
Foreign Tax Credit
Because it is anticipated that U.S. Persons will own a majority of our shares, only a portion of the current income inclusions, if any, under the CFC, RPII, FPHC and PFIC rules and of dividends paid by us (including any gain from the sale of Class A common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder's U.S. foreign tax credit limitations. We will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the "subpart F income," RPII and dividends that are foreign source income will constitute either "passive" or "financial services" income for foreign tax credit limitation purposes. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.
Information Reporting and Backup Withholding
Under certain circumstances, U.S. Persons owning stock in a foreign
corporation are required to file IRS Form 5471 with their U.S. federal income
tax returns. Generally, information reporting on IRS Form 5471 is required by
(1) a person who is treated as a RPII shareholder, (2) a 10% U.S. Shareholder of
a foreign corporation that is a CFC for an uninterrupted period of 30 days or
more during any tax year of the foreign corporation, and who owned the stock on
the last day of that year and (3) under certain circumstances, a U.S. Person who
acquires stock in a foreign corporation and as a result thereof owns 10% or more
of the voting power or value of such foreign corporation, whether or not such
foreign corporation is a CFC. For any taxable year in which United National
Group determines that gross RPII constitutes 20% or more of U.N. Barbados' or
U.N. Bermuda's gross insurance income and the 20% Ownership Exception does not
apply, United National Group will provide to all U.S. Persons registered as
shareholders of its Class A common shares a completed IRS Form 5471 or the
relevant information necessary to complete the form. Failure to file IRS Form
5471 may result in penalties.
Information returns may be filed with the IRS in connection with distributions on the Class A common shares and the proceeds from a sale or other disposition of the Class A common shares unless the holder of the Class A common shares establishes an exemption from the information reporting rules. A holder of Class A common shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person's U.S. federal income tax liability and may entitle the U.S. Person to a refund, provided that the required information is furnished to the IRS.
Proposed U.S. Tax Legislation
Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. In this regard, legislation has been introduced that includes a provision that permits the IRS to reallocate or recharacterize items of income, deduction or certain other items related to a reinsurance agreement between related parties to reflect the proper source, character and amount for each item (in contrast to current law, which only refers to source and character). While there are no currently pending legislative proposals that, if enacted, would have a material adverse effect on us or our shareholders, it is possible that broader based legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders.
Additionally, the U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the United States or is a PFIC, or whether U.S. Persons would be required to include in their gross income the subpart F income or the RPII of a CFC, are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to insurance companies and the regulations regarding RPII are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. We cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as book-running manager of this offering and, together with Banc of America Securities LLC, Dowling & Partners Securities, LLC, Fox-Pitt, Kelton Inc. and Keefe, Bruyette & Woods, Inc., is acting as representative of the underwriters named below. Subject to the terms and conditions described in a purchase agreement between us and the underwriters, we agreed to sell to the underwriters, and the underwriters severally agreed to purchase from us the number of Class A common shares listed opposite their names below.
NUMBER OF
CLASS A
COMMON SHARES
UNDERWRITER -------------
-----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Banc of America Securities LLC..............................
Dowling & Partners Securities, LLC..........................
Fox-Pitt, Kelton Inc. ......................................
Keefe, Bruyette & Woods, Inc. ..............................
-------
Total..........................................
=======
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The underwriters have agreed to purchase all of the Class A common shares sold under the purchase agreement if any of these Class A common shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the purchase agreement may be terminated.
We agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the Class A common shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the Class A common shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives advised us that the underwriters propose initially to offer the Class A common shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ . per Class A common share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ . per Class A common share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount and proceeds before expenses to United National Group. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price...................... $ $ $
Underwriting discount...................... $ $ $
Proceeds, before expenses, to United
National Group........................... $ $ $
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The expenses of the offering, not including the underwriting discount, are estimated at $ and are payable by United National Group.
OVERALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to additional Class A common shares at the public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional Class A common shares proportionate to that underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial public offering price, up to Class A common shares offered by this prospectus for sale to some of our directors, officers, employees, distributors, dealers, business associates and related persons. If these persons purchase reserved Class A common shares, this will reduce the number of Class A common shares available for sale to the general public. Any reserved common shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other Class A common shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing shareholders have agreed, with exceptions, not to sell or transfer any Class A common shares for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any Class A common shares;
- sell any option or contract to purchase any Class A common shares;
- purchase any option or contract to sell any Class A common shares;
- grant any option, right or warrant for the sale of any Class A common shares;
- lend or otherwise dispose of or transfer any Class A common shares;
- request or demand that we file a registration statement related to any sale of Class A common shares; or
- enter into any swap or any other agreement or any transaction that transfers, in whole or in part, the economic consequence of ownership of any Class A common shares whether any such swap or transaction is to be settled by delivery of Class A common shares or other securities, in cash or otherwise.
This lockup provision applies to Class A common shares and to securities convertible into or exchangeable or exercisable for or repayable with Class A common shares, including our Class B common shares and our Series A preferred shares, but permits the redemption of the Series A preferred shares. It also applies to common shares owned now or acquired later by the person executing the agreement or for which the person executing the agreement has or later acquires the power of disposition.
NASDAQ QUOTATION
We have applied to have the Class A common shares approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "UNGL."
Prior to this offering, there has been no public market for our Class A common shares. The initial public offering price will be determined through negotiations between us and the representatives. In
addition to prevailing market conditions, the factors to be considered in determining the initial public offering price include, among others:
- the valuation multiples of publicly traded companies that the representatives believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in which we compete;
- an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues;
- the present state of our development; and
- the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.
An active trading market for the Class A common shares may not develop. It is also possible that after the offering, the Class A common shares will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5.0% of the Class A common shares in the aggregate to accounts over which they exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the Class A common shares is completed, SEC rules may limit underwriters from bidding for and purchasing our Class A common shares. However, the representatives may engage in transactions that stabilize the price of our Class A common shares, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in our Class A common shares in connection with the offering, i.e., if they sell more Class A common shares than are listed on the cover of this prospectus, the representatives may reduce that short position by purchasing Class A common shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the overallotment option described above. Purchases of our Class A common shares to stabilize their price or to reduce a short position may cause the price of our Class A common shares to be higher than it might be in the absence of such purchases.
The representatives may also impose a penalty bid on underwriters. This means that if the representatives purchase Class A common shares in the open market to reduce the underwriters' short position or to stabilize the price of such Class A common shares, they may reclaim the amount of the selling concession from the underwriters who sold those Class A common shares. The imposition of a penalty bid may also affect the price of our Class A common shares in that it discourages resales of those Class A common shares.
Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our Class A common shares. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
Some of the underwriters or their affiliates have interests in investment funds affiliated with Fox Paine & Company. Some of the underwriters or their affiliates have engaged in, and in the future may engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates, including Fox Paine & Company. They have received customary fees and commissions for
these transactions. We are involved in legal proceedings involving an affiliate of one of the underwriters. See "Business -- Legal Proceedings."
LEGAL MATTERS
LeBoeuf, Lamb, Greene & MacRae, L.L.P., as special U.S. tax counsel, is representing us in connection with this offering. Legal matters in connection with the offering of the Class A common shares have been passed upon for United National Group by its Cayman Islands counsel, Walkers, Cayman Islands. Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, acts as counsel for the underwriters. The underwriters are being advised as to certain legal matters with respect to Cayman Islands law by Maples and Calder, Cayman Islands.
EXPERTS
The financial statements as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this prospectus are included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-1 with the Securities and Exchange Commission, or SEC, regarding this offering. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement, and you should refer to the registration statement and its exhibits to read that information. References in this prospectus to any of our contracts or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may read and copy the registration statement, the related exhibits and the reports and other information we file with the SEC at the SEC's public reference facilities maintained at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The website's Internet address is www.sec.gov.
Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports, proxy statements and other information with the SEC. You will be able to obtain copies of this material from the public reference room of the SEC as described above, or inspect them without charge at the SEC's website. In addition, you will be able to inspect such reports free of charge on our company Internet website, www.unitednat.com.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER UNITED STATES
FEDERAL SECURITIES LAWS AND OTHER MATTERS
United National Group is an exempted company incorporated with limited liability under the laws of the Cayman Islands. In addition, some of its directors and officers reside outside the United States, and all or a substantial portion of their assets and United National Group's assets are or may be located in jurisdictions outside the United States. Therefore, it may be difficult for investors to effect service of process within the United States upon our non-U.S. based directors and officers or to recover against United National Group, or such directors and officers, or obtain judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws against them.
However, United National Group may be served with process in the United States with respect to actions against it arising out of or in connection with violations of U.S. federal securities laws relating to
offers and sales of Class A common shares made hereby by serving National Registered Agents, Inc., 440 Ninth Avenue, Fifth Floor, New York, New York 10001, our U.S. agent irrevocably appointed for that purpose.
We have been advised by our Cayman Islands counsel that, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will, based on the principle that a judgment by a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given, recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner, and is not a kind for which the enforcement is contrary to the public policy of the Cayman Islands. There is doubt, however, as to whether the courts of the Cayman Islands will (a) recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States, or (b) in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature.
A Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.
INDEX TO FINANCIAL STATEMENTS
WIND RIVER INVESTMENT CORPORATION:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of December 31, 2001 and
2002................................................... F-3
Consolidated Statements of Operations For the Years Ended
December 31, 2000, 2001 and 2002....................... F-4
Consolidated Statements of Comprehensive Income For the
Years Ended December 31, 2000, 2001 and 2002........... F-5
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2000, 2001 and 2002... F-6
Consolidated Statements of Cash Flows For the Years Ended
December 31, 2000, 2001 and 2002....................... F-7
Notes to Consolidated Financial Statements................ F-8
UNITED NATIONAL GROUP:
Consolidated Balance Sheets as of December 31, 2002 and
September 30, 2003 (Unaudited)......................... F-26
Consolidated Statements of Operations For the Nine Months
Ended September 30, 2002 and 2003 (Unaudited).......... F-27
Consolidated Statements of Comprehensive Income For the
Nine Months Ended September 30, 2002 and 2003
(Unaudited)............................................ F-28
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2002 and 2003
(Unaudited)............................................ F-29
Consolidated Statements of Cash Flows For the Nine Months
Ended September 30, 2002 and 2003 (Unaudited).......... F-30
Notes to Consolidated Financial Statements (Unaudited).... F-31
Report of Independent Auditors ........................... F-46
Balance Sheet as of August 29, 2003....................... F-47
Notes to Balance Sheet.................................... F-48
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Wind River Investment Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Wind River Investment Corporation and its subsidiaries at December 31, 2001 and 2002, and the results of their operations and their cash flows for the three years ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
June 25, 2003
WIND RIVER INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(DOLLARS IN THOUSANDS)
2001 2002
ASSETS ---------- ----------
Bonds:
Trading securities, at fair value (amortized cost:
2001-$15,766; 2002-$14,913)............................ $ 16,196 $ 14,607
Available for sale securities, at fair value (amortized
cost: 2001-$334,250; 2002-$434,957).................... 337,167 446,418
Preferred stocks:
Trading securities, at fair value......................... 1,893 3,106
Available for sale securities, at fair value.............. 865 --
Common stocks:
Trading securities, at fair value......................... 49,006 31,604
Other invested assets....................................... 32,998 41,285
Mortgage loans.............................................. 1,226 1,167
---------- ----------
Total investments...................................... 439,351 538,187
Cash and cash equivalents................................... 77,057 72,942
Receivable for securities................................... 280 --
Agents' balances, net of allowance.......................... 40,724 50,744
Reinsurance receivables, net of allowance................... 799,066 1,743,524
Funds held by reinsured companies........................... 8,250 --
Accrued investment income................................... 4,932 6,567
Federal income taxes receivable............................. 2,144 31,798
Deferred federal income taxes............................... 15,663 29,970
Deferred acquisition costs, net............................. 428 3,289
Prepaid reinsurance premiums................................ 172,988 196,172
Other assets................................................ 14,871 12,427
---------- ----------
Total assets........................................... $1,575,754 $2,685,620
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses.................. $ 907,357 $2,004,422
Unearned premiums........................................... 214,028 247,138
Amounts held for the account of others...................... 5,794 13,766
Ceded balances payable...................................... 53,853 61,787
Payable for securities...................................... -- 6,250
Contingent commissions...................................... 9,496 5,426
Due to affiliates........................................... 101 163
Other liabilities........................................... 60,281 78,031
---------- ----------
Total liabilities...................................... 1,250,910 2,416,983
---------- ----------
Commitments and Contingencies (Note 11)..................... -- --
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value; 100 shares authorized, issued
and outstanding........................................... -- --
Additional paid-in capital.................................. 81,186 81,186
Accumulated other comprehensive income...................... 1,873 7,329
Retained earnings........................................... 241,785 180,122
---------- ----------
Total shareholders' equity............................. 324,844 268,637
---------- ----------
Total liabilities and shareholders' equity............. $1,575,754 $2,685,620
========== ==========
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See accompanying notes to consolidated financial statements.
WIND RIVER INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 2001 2002
REVENUES: --------- --------- ---------
Gross premiums written.................................... $ 453,464 $ 670,520 $ 793,083
========= ========= =========
Net premiums written...................................... $ 127,572 $ 169,310 $ 172,689
========= ========= =========
Net premiums earned....................................... $ 136,931 $ 150,336 $ 162,763
Net investment income..................................... 22,490 19,353 17,685
Net realized investment gains (losses).................... 593 (12,719) (11,702)
--------- --------- ---------
Total revenues....................................... 160,014 156,970 168,746
--------- --------- ---------
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses................... 113,151 128,338 201,750
Acquisition costs and other underwriting expenses......... 14,999 15,867 18,938
Provision for doubtful reinsurance receivables............ -- -- 44,000
Other operating expenses.................................. 2,918 2,220 5,874
Interest expense.......................................... 322 77 115
--------- --------- ---------
Income (loss) before income taxes.................... 28,624 10,468 (101,931)
Income tax (benefit) expense.............................. 5,883 295 (40,520)
--------- --------- ---------
Net income (loss) before equity in net income (loss)
of partnerships.................................... 22,741 10,173 (61,411)
Equity in net income (loss) of partnerships............... -- 664 (252)
--------- --------- ---------
Net income (loss).................................... $ 22,741 $ 10,837 $ (61,663)
========= ========= =========
PER SHARE DATA:
Weighted-average common shares outstanding........... 100 100 100
Weighted-average share equivalents outstanding....... -- -- --
--------- --------- ---------
Weighted-average share and share equivalents
outstanding........................................ 100 100 100
========= ========= =========
Basic and diluted earnings per share................. $ 227 $ 108 $ (617)
========= ========= =========
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See accompanying notes to consolidated financial statements.
WIND RIVER INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(DOLLARS IN THOUSANDS)
2000 2001 2002
-------- -------- --------
Net income (loss)........................................... $ 22,741 $ 10,837 $(61,663)
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period............................................... 14,512 (10,016) (3,880)
Less:
Reclassification adjustment for (losses) gains
included in net income (loss)..................... (2,915) 7,961 12,275
-------- -------- --------
Other comprehensive income (loss), before tax............. 11,597 (2,055) 8,395
Income tax (expense) benefit related to items of other
comprehensive loss..................................... (4,059) 719 (2,939)
-------- -------- --------
Other comprehensive income (loss), net of tax............. 7,538 (1,336) 5,456
-------- -------- --------
Comprehensive income (loss), net of tax..................... $ 30,279 $ 9,501 $(56,207)
======== ======== ========
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See accompanying notes to consolidated financial statements.
WIND RIVER INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(DOLLARS IN THOUSANDS)
2000 2001 2002
Common shares: -------- -------- --------
Balance at beginning and end of year...................... 100 100 100
Common stock:
Balance at beginning and end of year...................... $ -- $ -- $ --
Additional paid-in capital
Balance at beginning and end of year...................... 81,186 81,186 81,186
Accumulated other comprehensive income:
Net of deferred income taxes:
Balance at beginning of year........................... (4,329) 3,209 1,873
Other comprehensive income (loss), net of taxes........ 7,538 (1,336) 5,456
-------- -------- --------
Balance at end of year............................... 3,209 1,873 7,329
-------- -------- --------
Retained earnings:
Balance at beginning of year........................... 208,207 230,948 241,785
Net income (loss)...................................... 22,741 10,837 (61,663)
-------- -------- --------
Balance at end of year............................... 230,948 241,785 180,122
-------- -------- --------
Total shareholders' equity.................................. $315,343 $324,844 $268,637
======== ======== ========
|
See accompanying notes to consolidated financial statements.
WIND RIVER INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(DOLLARS IN THOUSANDS)
2000 2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ---------- ----------
Net income (loss)......................................... $ 22,741 $ 10,837 $ (61,663)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Deferred federal income taxes........................... 1,986 (4,533) (17,104)
Amortization of bond premium and discount, net.......... (1,178) (81) 853
(Loss) gain on sale of investments...................... (2,917) 7,961 12,275
Unrealized loss (gain) on trading securities............ 2,324 4,758 (573)
Equity in net income or loss of partnerships............ -- (664) 252
Proceeds from sale or maturity of trading securities.... 2,142 20,855 33,598
Purchase of trading securities.......................... (49,281) (49,471) (27,896)
Provision for doubtful agent's balances................. -- -- 2,500
Provision for doubtful reinsurance receivables.......... -- -- 44,000
CHANGES IN:
Agents' balances........................................ 19,467 (3,280) (12,520)
Reinsurance receivables................................. (46,578) (104,300) (988,458)
Unpaid losses and loss adjustment expenses.............. (5,087) 106,727 1,097,065
Unearned premiums....................................... 4,668 63,950 33,110
Ceded balances payable.................................. (2,121) 15,855 7,934
Other liabilities....................................... 19,170 4,232 17,750
Amounts held for the account of others.................. (2,144) 2,961 7,972
Funds held by reinsured companies....................... 45,381 (7,250) 8,250
Contingent commissions.................................. 1,961 444 (4,070)
Federal income tax receivable........................... 3,559 255 (29,655)
Prepaid reinsurance premiums............................ (14,027) (44,981) (23,184)
Receivable for securities............................... 4,566 (400) 6,530
Other -- net............................................ (5,080) (5,829) (1,993)
---------- ---------- ----------
Net cash from operating activities................... (448) 18,046 104,973
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of bonds and preferred stocks.......... 36,264 95,255 187,391
Proceeds from maturity of bonds........................... 675 3,075 6,000
Proceeds from sale of other invested assets............... 1,977 196 4,347
Purchase of bonds and preferred stocks.................... (54,855) (142,105) (292,410)
Proceeds from sale or repayment of mortgage principal..... -- 51 59
Purchase of mortgages..................................... -- (1,277) --
Purchase of other invested assets, including promissory
notes................................................... (10,321) (20,962) (14,475)
---------- ---------- ----------
Net cash from investing activities................... (26,260) (65,767) (109,088)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility.......................... -- -- 17,600
Repayments of credit facility............................. -- -- (17,600)
---------- ---------- ----------
Net cash from financing activities................... -- -- --
---------- ---------- ----------
Net decrease in cash and cash equivalents............ (26,708) (47,721) (4,115)
Cash and cash equivalents at beginning of year.............. 151,486 124,778 77,057
---------- ---------- ----------
Cash and cash equivalents at end of year.................... $ 124,778 $ 77,057 $ 72,942
========== ========== ==========
Supplemental disclosure of cash flows information:
Income taxes paid......................................... $ 4,650 $ 4,470 $ 6,147
========== ========== ==========
|
See accompanying notes to consolidated financial statements.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wind River Investment Corporation ("Wind River") and its wholly-owned subsidiary, American Insurance Service, Inc. ("AIS")(collectively, the "Company"). AIS owns all of the outstanding shares of American Insurance Adjustment Agency, Inc., International Underwriters, Inc., Unity Risk Partners Insurance Services, Inc. and United National Insurance Company ("UNIC"). UNIC owns all of the outstanding shares of Diamond State Insurance Company ("DSIC"). DSIC owns all of the outstanding shares of United National Specialty Insurance Company ("UNSIC"), United National Casualty Insurance Company ("UNCIC") and J.H. Ferguson & Associates, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which differ in certain respects from those followed in reports to insurance regulatory authorities. The preparation of financial statements in conformity with 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.
FORMATION OF UNITED NATIONAL CASUALTY INSURANCE COMPANY
During 2002, UNIC and its subsidiaries formed UNCIC. On May 9, 2002, DSIC purchased $5.0 million of UNCIC common stock. UNIC subsequently contributed $40.2 million to DSIC. DSIC contributed $20.0 million of capital to UNSIC and $15.0 million to UNCIC. The formation of a new insurance carrier and capital contributions to DSIC and UNSIC were completed to increase the admitted writing capabilities of the group.
DESCRIPTION OF BUSINESS
The Company writes property and casualty insurance lines on both a surplus lines and admitted basis. These coverages include general liability (consisting of owners, landlords and tenants, manufacturers and contractors, products, comprehensive personal, liquor law and umbrella liability forms), commercial multiple peril, commercial and private passenger auto, fire coverages and miscellaneous errors and omissions. Facilities are also available for writing of unique and unusual risks. Collectively, Wind River's insurance subsidiaries are licensed in all 50 states and the District of Columbia.
CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers all liquid instruments with maturities, at date of acquisition, of three months or less to be cash equivalents. The Company has a cash management program that provides for the investment of excess cash balances primarily in short-term money market instruments. Generally, bank balances exceed federally insured limits. The carrying amount of cash and cash equivalents approximates fair value.
INVESTMENTS
The Company's investments in bonds classified as available for sale and trading are carried at their fair value. The difference between book value and fair value of bonds classified as available for sale, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. The current year change in the difference between book value and fair value of bonds classified as trading is included in income.
Preferred stocks are carried at fair value. The difference between book and fair value of preferred stocks classified as available for sale, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. The current year change in the difference between book value and fair value of preferred stocks classified as trading is included in income.
Common stocks are carried at fair value. All of the Company's investments in common stock are classified as trading as of December 31, 2001 and 2002. The current year change in the difference between book value and fair value of common stocks is included in income.
Other invested assets are comprised primarily of limited liability partnerships interests and uncollateralized commercial loans. Partnership interests of three percent ownership or greater are accounted for under the equity method. Partnership interests of less than three percent ownership are carried at their fair value. The difference between book value and fair value of partnership interests of less than three percent ownership, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. Uncollateralized commercial loans are stated at unpaid principal balance, net of allowances.
Net realized gains and losses on investments are reported as a component of income from investments. Such gains or losses are determined based on the specific identification method.
The Company's investments are regularly evaluated to determine if declines in market value below amortized cost are other than temporary. If market value declines are determined to be other than temporary, the security's cost basis is adjusted to the market value of the security, with the loss recognized in the current period.
The Company measures the fair value of investments in fixed income and equity portfolios based upon quoted market prices. The Company also holds investments in several limited partnerships, which were valued at $24.5 million and $37.7 million as of December 31, 2001 and 2002, respectively. Several of these partnerships invest solely in securities that are publicly traded and are valued at the net asset value as reported by the investment manager. As of December 31, 2001 and 2002, respectively, the limited partnership portfolio includes $9.2 million and $16.8 million in securities for which there is no readily available independent market price. The estimated fair value of such securities is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period.
The provisions of Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," require, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The Company held no derivative financial instruments, nor embedded financial derivatives, as of December 31, 2001 or 2002.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGENTS' BALANCES
In the normal course of business, the Company has various receivables due from agents or insureds. However, cash received prior to the processing of the related policies is recorded as a credit to agents' balances. During 2002, the Company established a $2.5 million allowance for uncollectible receivables due from agents or insureds. The expense associated with the establishment of this reserve has been reflected in the Company's results of operation in 2002. The five largest general agencies accounted for approximately 37.5% of the net premiums written for the year ended December 31, 2002.
DEFERRED ACQUISITION COSTS/FUTURE SERVICING COSTS
The excess of the Company's costs of acquiring new and renewal insurance and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred acquisition costs and amortized over the period in which the related premiums are earned. The excess of the ceding commissions earned from reinsurers over the Company's costs of acquiring new and renewal insurance and reinsurance contracts is capitalized as future servicing costs and amortized over the period in which the related premiums are earned. Deferred acquisition costs and future servicing costs are netted in the accompanying consolidated financial statements. The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs that are directly related to and vary with the production of business. The method followed in computing such amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses represents the Company's best estimate of future amounts needed to pay losses and related settlement expenses with respect to insured events. This liability is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period with respect to direct business, estimates received from ceding reinsurers with respect to assumed reinsurance and estimates of unreported losses established by management.
The process of establishing the liability for property and casualty unpaid losses and loss adjustment expenses is a complex process, requiring the use of informed estimates and judgments. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of the loss to the Company. To establish this liability, the Company reviews past loss experience and considers a variety of other factors such as legal, social and economic developments. The Company regularly reviews and updates the methods of making such estimates and establishing the resulting liabilities. Any resulting adjustments are recorded in income during the period in which the determination is made.
PREMIUMS
Premiums are recognized as revenue ratably over the term of the respective policies. Unearned premiums are computed to the day of expiration. Premium suspense is recorded in Other Liabilities in the accompanying balance sheets.
INCOME TAXES
The Company files a consolidated federal tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets.
CONTINGENT COMMISSIONS
Certain managing general agencies receive special incentives when certain premium thresholds are met or when loss results of programs are more favorable than predetermined thresholds. These costs are estimated and charged to other underwriting expenses when incurred.
REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts receivable from reinsurers are estimated in a manner consistent with the reinsured policy. The Company regularly reviews the collectibility of reinsurance receivables. Any allowances resulting from this review are included in income during the period in which the determination is made. During 2002, the Company recorded an allowance for doubtful reinsurance receivables of $44.0 million.
EARNINGS PER SHARE
Basic earnings per share has been calculated by dividing net income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income available to common shareholders by the weighted-average common shares outstanding and the weighted-average share equivalents outstanding.
(2) INVESTMENTS
Bonds, included in the available for sale category, with an amortized cost of approximately $84.1 million and $136.3 million, and an estimated fair market value of approximately $86.6 million and $141.4 million, were deposited with various governmental authorities in accordance with statutory requirements at December 31, 2001 and 2002, respectively.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated fair value of investments classified as available for sale are as follows as of December 31, 2001 and 2002:
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
2001 (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
-------------------------------- --------- ---------- ---------- ----------
Bonds:
Obligations of states and political
subdivisions.......................... $253,550 $5,212 $2,479 $256,283
Mortgage-backed securities............... 48,450 1,225 552 49,123
U.S. treasury and agency obligations..... 18,847 400 8 19,239
Corporate notes.......................... 13,403 192 1,073 12,522
-------- ------- ------ --------
Total bonds........................... 334,250 7,029 4,112 337,167
Preferred stock............................ 900 -- 35 865
-------- ------- ------ --------
Total................................. $335,150 $7,029 $4,147 $338,032
======== ======= ====== ========
|
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
2002 COST GAINS LOSSES FAIR VALUE
---- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Bonds:
Obligations of states and political
subdivisions.......................... $391,706 $13,446 $2,072 $403,080
Mortgage-backed securities............... 8,566 35 451 8,150
U.S. treasury and agency obligations..... 29,364 1,303 -- 30,667
Corporate notes.......................... 5,321 -- 800 4,521
-------- ------- ------ --------
Total................................. $434,957 $14,784 $3,323 $446,418
======== ======= ====== ========
|
The Company held no debt or equity investments in a single issuer totaling in excess of 10% of shareholders' equity at December 31, 2001 or 2002.
The amortized cost and estimated fair value of debt securities classified as available for sale at December 31, 2002, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
(DOLLARS IN THOUSANDS) --------- ----------
Due in one year or less..................................... $ 27,071 $ 28,319
Due after one year through five years....................... 141,163 145,104
Due after five years through ten years...................... 203,264 207,968
Due after ten years......................................... 54,893 56,877
Mortgage-backed securities.................................. 8,566 8,150
-------- --------
$434,957 $446,418
======== ========
|
Proceeds from sales of investments in debt and preferred stocks classified as available for sale were $36.3 million, $95.3 million and $187.4 million during 2000, 2001 and 2002, respectively. Gross gains of $1.4 million, $1.2 million and $3.2 million and gross losses of $0.3 million, $3.6 million and $1.6 million were realized on those sales during 2000, 2001 and 2002, respectively. During 2001, the Company recorded realized losses, net of tax, of $2.9 million for bonds that experienced other than temporary declines in their
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated market value. During 2000, 2001, and 2002, the Company recorded realized losses, net of tax, of $0, $1.6 million, and $0.8 million for other invested assets that experienced other than temporary declines in their estimated market value.
Investments in debt securities classified as trading securities at December 31, 2001 and 2002, had a fair value of $16.2 million and $14.6 million, respectively. In addition, common stocks with a fair value of $49.0 million and $31.6 million at December 31, 2001 and 2002, respectively, were classified as trading securities.
A loss of $1.5 million, net of tax benefit of $0.8 million in 2000, a loss of $3.1 million, net of tax benefit of $1.7 million in 2001, and a gain of $0.4 million, net of tax expense of $0.2 million in 2002, on debt and equity securities classified as trading securities were included in earnings in 2000, 2001 and 2002, respectively.
The sources of net investment income for the years ended December 31, 2000, 2001 and 2002 are as follows:
2000 2001 2002
(DOLLARS IN THOUSANDS) ------- ------- -------
Fixed maturities........................................ $17,991 $19,307 $20,868
Equity securities....................................... 271 976 872
Cash and cash equivalents............................... 2,119 3,665 1,411
Short term investments.................................. 8,197 66 --
Other................................................... -- 477 1,444
------- ------- -------
Total investment income............................ 28,578 24,491 24,595
Investment expense...................................... (6,088) (5,138) (6,910)
------- ------- -------
Net investment income.............................. $22,490 $19,353 $17,685
======= ======= =======
|
There were no material investments in fixed maturity securities that were non-income producing for the years ended December 31, 2000, 2001 or 2002.
(3) FEDERAL INCOME TAXES
The effective tax rate for the years ended December 31, 2000, 2001 and 2002 differs from the United States statutory rate principally due to tax-exempt investment income.
For income tax purposes, property and casualty insurance companies are required to recalculate the liability for unpaid losses and loss adjustment expenses on a discounted basis and to recalculate unearned premium.
The Company incurred a net operating loss and realized losses in 2002 and will carry those losses back to prior years to recover federal income taxes. The current tax receivable represents the expected refund claim for the carryback along with the refund request for estimated payments and similar payments
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made for the 2002 federal income tax return. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2001 and 2002 are presented below:
(DOLLARS IN THOUSANDS)
2001 2002
Deferred tax assets: ------- -------
Losses on trading securities.............................. $ 1,986 $ 2,004
Losses on other securities................................ 2,400 2,279
Discounted unpaid losses and loss adjustment expenses..... 9,190 15,808
Unearned premiums......................................... 2,873 3,568
Alternative minimum tax credit carryover.................. -- 7,301
Other..................................................... 781 4,760
------- -------
Total deferred tax assets.............................. 17,230 35,720
Deferred tax liabilities:
Unrealized gain on securities available for sale.......... 1,366 4,011
Deferred acquisition costs................................ 150 1,151
Other..................................................... 51 588
------- -------
Total deferred tax liabilities......................... 1,567 5,750
------- -------
Total net deferred tax assets.......................... $15,663 $29,970
======= =======
|
The alternative minimum tax credit carryover is available for future years and does not expire.
Management believes it is more likely than not that the deferred tax assets will be completely utilized in future years.
Cash paid for federal income taxes was $4.7 million, $4.5 million and $6.1 million in 2000, 2001 and 2002, respectively.
(4) REINSURANCE
The Company cedes insurance to unrelated insurers in the ordinary course of business to limit its net loss exposure. In addition, there are excess of loss contracts that protect against losses over stipulated amounts. Reinsurance ceded arrangements do not discharge the Company of primary liability as the originating insurer.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2002, the Company had reinsurance receivables (including prepaid reinsurance premiums) due from the following reinsurers that exceeded 3% of shareholders' equity:
A.M. BEST
RATINGS
(AS OF
REINSURANCE DECEMBER 31,
RECEIVABLES 2002)
(DOLLARS IN MILLIONS) ------------ ------------
Berkshire Hathaway....................................... $ 84.7 A++
CNA Insurance Group...................................... 10.9 A
Converium Re (North America)............................. 103.9 A
Everest Reinsurance Company.............................. 23.4 A+
Fairfax Financial........................................ 29.8 A
GE Global Group.......................................... 424.5 A+
Gerling Global Re Group.................................. 29.9 NR-5/NR-3
Hartford Fire Insurance Co. ............................. 111.1 A+
Insurance Corp of Hannover............................... 12.1 A+
Lumbermans Mutual Casualty Co. .......................... 19.0 D
Motors Insurance Corporation............................. 15.1 A
Munich Group............................................. 708.3 A+
Penn Mfr Asn Ins......................................... 8.9 A-
Riunione Adriatica Di Sicurta............................ 23.5 A+
SCOR Reinsurance Company................................. 49.0 A-
St. Paul Group........................................... 24.5 A
Swiss Re Group........................................... 64.8 A++\A+
Trenwick America Reins Corp. ............................ 29.7 NR-4
White Mountains Group.................................... 8.2 A-
XL Reinsurance Company................................... 28.9 A+
--------
$1,810.2
========
|
During 2000, the Company commuted several assumed reinsurance treaties. These commutations release the Company from all future obligations under the agreement. No gain or loss was recognized on the transactions. Losses and loss adjustment expenses paid in connection with these commutations, totaling $36.5 million in 2000, were offset by funds held by the reinsured companies relative to these treaties.
On April 6, 2001, the Company commuted all of its reinsurance arrangements with Reliance Insurance Company. As a result of this commutation, the Company has reported in its operations in 2001 losses and loss adjustment expenses incurred of $5.0 million.
During 2002, the Company established a $44.0 million allowance for potentially uncollectible reinsurance. The Company believes its reinsurance receivables are collectible net of the allowance.
On April 16, 2002, the Company commuted an assumed aggregate stop loss retrocession agreement. The commutation released the Company from all future obligations under the agreement. Losses paid in connection with this commutation, totaling $82.9 million, were offset by funds held by the reinsurer relative to this treaty. Losses and loss adjustment expenses incurred during 2001 were $49.9 million and $5.4 million, respectively. Premiums earned were $52.0 million for the year ended December 31, 2001 in connection with this assumed agreement. No gain or loss was recognized as a result of this commutation.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001 and 2002, the Company had letters of credit totaling $159.2 million and $104.5 million, respectively, collateralizing reinsurance receivables.
During 2002, the Company was involved in arbitration proceedings with one of its reinsurers, Riunione Adriatica Di Sicurta ("RAS"). RAS was seeking to rescind the reinsurance agreement and prohibit the Company from drawing down on available lines of credit, and demanding repayment of funds drawn from the line of credit. On October 1, 2002 the arbitration panel issued an Order and Award holding RAS liable for a portion of the total amount in dispute. RAS was also ordered to pay interest at a rate of 4% compounded annually with respect to balances currently due. The panel further ordered a portion of the reinsurance agreement between RAS and the Company to be rescinded from inception. RAS was released from all future liabilities or responsibilities to the Company with respect to the rescinded portion of the reinsurance agreement. This rescission had a $20.6 million detrimental impact on the underwriting results of the Company during 2002.
In connection with this rescission, the Company reported the following amounts in its operations for the year ended December 31, 2002:
(DOLLARS IN THOUSANDS)
Losses and loss adjustment expense incurred................. $(23,610)
Premium earned.............................................. 3,968
Reversal of ceding commission income........................ (938)
--------
Total -- underwriting income effect.................... $(20,580)
========
|
The effect of reinsurance on premiums written and earned is as follows:
WRITTEN EARNED
(DOLLARS IN THOUSANDS) -------- --------
For the year ended December 31, 2000:
Direct business........................................... $389,348 $374,179
Reinsurance assumed....................................... 64,116 74,627
Reinsurance ceded......................................... 325,892 311,875
-------- --------
Net premiums......................................... $127,572 $136,931
======== ========
Percentage assumed of net................................... 54.5%
========
For the year ended December 31, 2001:
Direct business........................................... $604,738 $547,963
Reinsurance assumed....................................... 65,782 58,599
Reinsurance ceded......................................... 501,210 456,226
-------- --------
Net premiums......................................... $169,310 $150,336
======== ========
Percentage assumed of net................................... 39.0%
========
For the year ended December 31, 2002:
Direct business........................................... $791,864 $750,426
Reinsurance assumed....................................... 1,220 9,538
Reinsurance ceded......................................... 620,395 597,201
-------- --------
Net premiums......................................... $172,689 $162,763
======== ========
Percentage assumed of net................................... 5.9%
========
|
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PENSION AND DEFERRED COMPENSATION PLANS
UNIC participates in a non-contributory pension plan with the American Manufacturing Corporation (an affiliate) covering all employees. The plan provides pension benefits that are based on length of service and a percentage of average qualifying compensation for the highest five consecutive years of employment. The funding policy is to contribute the requirements set forth in the Employee Retirement Income Security Act ("ERISA") plus such additional amounts that the Company may determine to be appropriate. Total plan assets exceeded the projected benefit obligations at December 31, 2001 and 2002. The Company recorded prepaid pension assets of $1.3 million and $0.8 million, as of December 31, 2001 and 2002, respectively. The Company recorded pension income of $0.5 million for 2000 and pension expense of $0.1 million and $0.5 million in 2001 and 2002, respectively.
The Company has a qualified 401(k) defined contribution plan that covers substantially all of its full-time employees. Eligible employees may elect to defer up to 15% of their salary. The Company matches 50% of employees' contributions up to 6% of their salary. Eligible employees are vested in the Company's contribution and related investment income after five years of service. Expense for the plan in 2000, 2001 and 2002 was $0.2 million, $0.2 million and $0.3 million, respectively.
The Company also has a qualified deferred compensation plan for certain key executives. At December 31, 2000, 2001 and 2002, the Company accrued $3.5 million, $4.7 million and $3.9 million, respectively, in other liabilities related to this plan, and the Company recorded expense (income) of $1.4 million, $1.1 million and $(0.8) million for the years ended December 31, 2000, 2001 and 2002, respectively, for this plan.
(6) STATUTORY FINANCIAL INFORMATION
These consolidated financial statements vary in certain respects from those prepared using statutory accounting practices prescribed or permitted by the applicable state Departments of Insurance ("Insurance Departments"). Prescribed Statutory Accounting Practices ("SAP") include state laws, regulations and general administrative rules, as well as a variety of National Association of Insurance Commissioners ("NAIC") publications. Permitted SAP encompasses all accounting practices that are not prescribed. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification") guidance that replaced the previous version of the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting beginning in 2001. Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, such as deferred income taxes, which are recorded under the Codification. The effect of the adoption on the Company's statutory surplus as of January 1, 2001 was an increase of $4.2 million, primarily as a result of the recording of a deferred tax asset.
GAAP differs in certain respects from SAP prescribed or permitted by the Insurance Departments. The principal differences between SAP and GAAP are as follows:
- Under SAP, investments in debt securities are carried at amortized cost, while under GAAP, the Company records its debt securities at estimated fair value.
- Under SAP, policy acquisition costs, such as commissions, premium taxes, fees and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy.
- Under SAP, certain assets, designated as "Non-admitted Assets" (such as prepaid expenses) are charged against surplus.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Under SAP, net deferred income tax assets are admitted following the application of certain criteria, with the resulting admitted deferred tax amount being credited directly to surplus.
- Under SAP, receivables are non-admitted based upon aging criteria.
- Under SAP, the costs and related recoverables for guaranty funds and other assessments are recorded based on management's estimate of the ultimate liability and related recoverable settlement, while under GAAP, such costs are accrued when the liability is probable and reasonably estimable and the related recoverable amount is based on future premium collections or policy surcharges from in-force policies.
The NAIC issues model laws and regulations, many of which have been
adopted by state insurance regulators, relating to: (a) risk-based capital
("RBC") standards; (b) codification of insurance accounting principles; (c)
investment restrictions; and (d) restrictions on the ability of insurance
companies to pay dividends.
Wind River's subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, and are subject to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. Applying the current regulatory restrictions as of December 31, 2002, approximately $22.9 million is available for distribution during 2003. The Company paid no dividends during the three years ended December 31, 2003.
The NAIC's risk-based capital model provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks, as well as its reinsurance exposures, to assess the potential need for regulatory attention. The model provides four levels of regulatory attention, varying with the ratio of the insurance company's total adjusted capital to its authorized control level RBC ("ACLRBC"): (a) if a company's total adjusted capital is less than or equal to 200%, but greater than 150% of its ACLRBC (the "Company Action Level"), the company must submit a comprehensive plan to the regulatory authority proposing corrective actions aimed at improving its capital position; (b) if a company's total adjusted capital is less than or equal to 150%, but greater than 100% of its ACLRBC (the "Regulatory Action Level"), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed; (c) if a company's total adjusted capital is less than or equal to 100%, but greater than 70% of its ACLRBC (the "Authorized Control Level"), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control; and (d) if a company's total adjusted capital is less than or equal to 70% of its ACLRBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control.
The following is selected information for Wind River's domestic insurance subsidiaries, net of intercompany eliminations, where applicable, as determined in accordance with SAP:
2000 2001 2002
(DOLLARS IN THOUSANDS) -------- -------- --------
Statutory capital and surplus........................ $299,198 $304,266 $228,751
Statutory net income (loss).......................... $ 33,025 $ 11,651 $(78,015)
|
As of December 31, 2002, the total adjusted capital of UNIC, DSIC, UNSIC, and UNCIC exceeds the levels that would result in regulatory action under these standards. However, UNIC's ACLRBC ratio has declined significantly during the past year and is near the level that would require it to submit a comprehensive plan aimed at improving its capital position.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASE COMMITMENTS
Total rental expense under operating leases for the years ended December 31, 2000, 2001 and 2002 aggregated $1.3 million, $1.6 million and $1.8 million, respectively. Future minimum payments under non-cancelable operating leases are as follows:
(DOLLARS IN THOUSANDS)
2003........................................................ $ 2,084
2004........................................................ 1,953
2005........................................................ 1,923
2006........................................................ 1,953
2007 and thereafter......................................... 3,999
-------
Total..................................................... $11,912
=======
|
(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
2000 2001 2002
(DOLLARS IN THOUSANDS) ---------- ---------- ----------
Unpaid losses and loss adjustment expenses at January
1...................................................... $805,717 $800,630 $907,357
Less gross reinsurance receivables on unpaid losses and
loss adjustment expenses............................... 637,850 669,504 750,573
---------- ---------- ----------
Net balance at January 1............................ 167,867 131,126 156,784
Incurred losses and loss adjustment expenses related to:
Current year........................................... 123,476 134,558 130,327
Prior years............................................ (10,325) (6,220) 71,423
---------- ---------- ----------
Total incurred losses and loss adjustment
expenses.......................................... 113,151 128,338 201,750
Paid losses and loss adjustment expenses related to:
Current year........................................... 85,811 76,508 34,045
Prior years(1)......................................... 64,081 26,172 63,669
---------- ---------- ----------
Total paid losses and loss adjustment expenses...... 149,892 102,680 97,714
---------- ---------- ----------
Net balance at December 31............................... 131,126 156,784 260,820
Plus gross reinsurance receivables on unpaid losses and
loss adjustment expenses............................... 669,504 750,573 1,743,602
---------- ---------- ----------
Unpaid losses and loss adjustment expenses at December
31..................................................... $800,630 $907,357 $2,004,422
========== ========== ==========
|
(1) Paid losses and loss adjustment expenses in 2001, related to prior years, included the commutation with Reliance Insurance Company in the amount of $9.9 million.
The increase in losses and loss adjustment expenses of $71.4 million related to prior years is primarily attributable to higher than anticipated losses of $47.8 million in the multiple peril and other liability lines of both our excess and surplus ("E&S") and specialty admitted segments and the results of an arbitration proceeding that resulted in the rescission of a reinsurance agreement that caused prior year losses to increase by $23.6 million. See Note 4 for additional details regarding the rescission.
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to 2002, management used its traditional methods of examining reserves for losses and loss adjustment expenses relative to these accident years. In 2002, management determined that it was necessary to increase the projected ultimate loss ratios, relative to these accident years, due to the fact that losses relative to these accident years were emerging at a rate that was greater than originally expected. As a result, prior year losses were increased by $47.8 million.
In the past, the Company underwrote a product of multi-peril business insuring general contractors and developers that has resulted in significant exposure to construction defect claims. Management believes its reserves for this product ($36.8 million as of December 31, 2002, net of reinsurance) are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims may vary significantly from the amounts currently recorded.
The Company has 37 direct claims related to the September 11th terrorist attacks as of December 31, 2002. The majority of these claims are first party property claims while a few stem from event interruption. Estimated direct indemnity exposure as of December 31, 2002, was $5.0 million with ceded exposure to non-affiliates totaling $4.6 million, leaving net indemnity exposure of $0.4 million. The Company does not anticipate any additional material impact to its financial statements, nor does it expect any future obligations related to this tragedy.
The Company has exposure to environmental and asbestos claims. The environmental exposure arises from the sale of general liability and commercial multi-peril insurance and the asbestos exposure primarily arises from the sale of product liability insurance. In establishing the liability for unpaid losses and loss adjustment expenses related to asbestos and environmental exposures, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. In 2001 and prior years, environmental and asbestos claims were aggregated and reviewed with other long-tailed lines of business. IBNR was established in the aggregate for these long-tailed lines. In 2002, the Company performed a detailed reserve review. Asbestos and environmental reserves were separately analyzed and the Company identified the portion of its IBNR reserves related to those claims. Included in net unpaid losses and loss adjustment expenses as of December 31, 2002 were IBNR reserves of $6.4 million and case reserves of approximately $1.8 million for known asbestos- and environmental-related claims. As of December 31, 2001 the Company held case reserves of $2.1 million for known asbestos- and environmental-related claims.
(9) SEGMENT INFORMATION
The Company's operations are classified into three reportable business segments that are organized around its three underwriting divisions: E&S lines, specialty admitted and reinsurance. The segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon premium production and the associated losses and loss adjustment expenses experience. Investments and investment performance including investment income and net realized investment gains and losses; acquisition costs and other underwriting expenses including commissions, premium taxes and other acquisition costs; and other operating expenses are managed at a corporate level by the corporate accounting function in conjunction with other corporate departments and are included in "Corporate."
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reinsurance segment was de-emphasized in 2002 and the Company did not write any business in this segment in 2002.
Gross premiums written, excluding the reinsurance segment, by product class for the years ended December 31, 2000, 2001, and 2002 are as follows:
2000 2001 2002
(DOLLARS IN THOUSANDS) -------- -------- --------
Specific specialty.......................................... $277,167 $375,962 $439,364
Umbrella and excess......................................... 58,095 138,425 209,369
Property and general liability.............................. 32,360 50,725 75,376
Non-medical professional liability.......................... 23,842 43,408 68,974
-------- -------- --------
Total................................................... $391,464 $608,520 $793,083
======== ======== ========
|
The gross premiums written information above is not segregated by business segment because product lines cross segments.
Following is a tabulation of business segment information for each of the past three years. Corporate information is included to reconcile segment data to the consolidated financial statements:
SPECIALTY
(DOLLARS IN THOUSANDS) E&S ADMITTED REINSURANCE CORPORATE TOTAL
2000: ----------- ----------- ----------- ----------- -----------
Revenues:
Gross premiums written.................... $ 260,730 $ 130,734 $ 62,000 $ -- $ 453,464
Net premiums written...................... 40,663 24,909 62,000 -- 127,572
Net premiums earned....................... 40,504 25,677 70,750 -- 136,931
Net investment income..................... -- -- -- 22,490 22,490
Net realized investment gains............. -- -- -- 593 593
---------- ---------- ---------- ---------- ----------
Total revenues........................ 40,504 25,677 70,750 23,083 160,014
Losses and expenses:
Net losses and loss adjustment expenses... 24,613 18,408 70,130 -- 113,151
Acquisition costs and other underwriting
expenses................................ -- -- -- 14,999 14,999
Other operating expenses.................. -- -- -- 2,918 2,918
Interest expense.......................... -- -- -- 322 322
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... 15,891 7,269 620 4,844 28,624
Income tax (benefit) expense.............. -- -- -- 5,883 5,883
---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships....... 15,891 7,269 620 (1,039) 22,741
Equity in net income (loss) of
partnerships............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)..................... $ 15,891 $ 7,269 $ 620 $ (1,039) $ 22,741
========== ========== ========== ========== ==========
Total assets.............................. $1,376,528 $1,376,528
========== ==========
|
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIALTY
(DOLLARS IN THOUSANDS) E&S ADMITTED REINSURANCE CORPORATE TOTAL
2001: ----------- ----------- ----------- ----------- -----------
Revenues:
Gross premiums written.................... $ 398,308 $ 210,212 $ 62,000 $ -- $ 670,520
Net premiums written...................... 68,226 39,084 62,000 -- 169,310
Net premiums earned....................... 59,004 36,582 54,750 -- 150,336
Net investment income..................... -- -- -- 19,353 19,353
Net realized and unrealized gains
(loss).................................. -- -- -- (12,719) (12,719)
---------- ---------- ---------- ---------- ----------
Total revenues........................ 59,004 36,582 54,750 6,634 $ 156,970
Losses and Expenses:
Net losses and loss adjustment expenses... 43,880 29,075 55,383 -- 128,338
Acquisition costs and other underwriting
expenses................................ -- -- -- 15,867 15,867
Other operating expenses.................. -- -- -- 2,220 2,220
Interest expense.......................... -- -- -- 77 77
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... 15,124 7,507 (633) (11,530) 10,468
Income tax (benefit) expense.............. -- -- -- 295 295
---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships....... 15,124 7,507 (633) (11,825) 10,173
Equity in net income (loss) of
partnerships............................ -- -- -- 664 664
---------- ---------- ---------- ---------- ----------
Net income (loss)..................... $ 15,124 $ 7,507 $ (633) $ (11,161) $ 10,837
========== ========== ========== ========== ==========
Total assets.............................. $1,575,754 $1,575,754
========== ==========
2002:
Revenues:
Gross premiums written.................... $ 543,998 $ 249,085 $ -- $ -- $ 793,083
Net premiums written...................... 112,110 60,579 -- -- 172,689
Net premiums earned....................... 101,474 53,039 8,250 -- 162,763
Net investment income..................... -- -- -- 17,685 17,685
Net realized and unrealized gains
(loss).................................. -- -- -- (11,702) (11,702)
---------- ---------- ---------- ---------- ----------
Total revenues........................ 101,474 53,039 8,250 5,983 168,746
Losses and Expenses:
Net losses and loss adjustment expenses... 140,943 52,556 8,251 -- 201,750
Acquisition costs and other underwriting
expenses................................ -- -- -- 62,938 62,938
Other operating expenses.................. -- -- -- 5,874 5,874
Interest expense.......................... -- -- -- 115 115
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... (39,469) 483 (1) (62,944) (101,931)
Income tax (benefit) expense.............. -- -- -- (40,520) (40,520)
---------- ---------- ---------- ---------- ----------
|
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS) SPECIALTY
E&S ADMITTED REINSURANCE CORPORATE TOTAL
----------- ----------- ----------- ----------- -----------
Net income (loss) before equity in net
income (loss) of partnerships....... (39,469) 483 (1) (22,424) (61,411)
Equity in net income (loss) of
partnerships............................ -- -- -- (252) (252)
---------- ---------- ---------- ---------- ----------
Net income (loss)..................... $ (39,469) $ 483 $ (1) $ (22,676) $ (61,663)
========== ========== ========== ========== ==========
Total assets.............................. $2,685,620 $2,685,620
========== ==========
|
(10) RELATED PARTY TRANSACTIONS
During 2000, 2001 and 2002, the Company paid management and investment advisory fees of approximately $7.1 million, $7.1 million and $9.9 million, respectively, to affiliates.
As of December 31, 2001 and 2002, the Company had payable balances due to affiliates totaling approximately $0.1 million and $0.2 million, respectively.
During 2001, the Company purchased a promissory note from Wind River Investments, LLC, an affiliate, for $3.9 million, which included a note receivable of $3.5 million and interest receivable of $0.4 million. The annual rate of interest on this note was 6%. During 2002, this note was sold for $4.2 million (the sum of book value plus accrued interest) to American Manufacturing Corporation (an affiliate). No gain or loss was realized on the sale to American Manufacturing Corporation.
During 2001, the Company issued a promissory note for $1.4 million to The AMC Group, LLC, an affiliate. The annual rate of interest on this note is 6%. This note, which was carried at amortized cost of $1.2 million and $0.8 million, was included in other invested assets as of December 31, 2001 and 2002, respectively. In April 2003, this note was sold for $0.6 million (the amortized value as of April 30, 2003) to American Manufacturing Corporation (an affiliate). No gain or loss was realized on the sale to American Manufacturing Corporation.
During 2001, the Company purchased a promissory note from Philadelphia Gear Corporation, an affiliate, for $2.4 million. The annual rate of interest on this note was 6.3%. The promissory note was a loan to 181 Properties, LP (an affiliate). This note, which was carried at amortized cost of $2.4 million, was included in other invested assets as of December 31, 2001 and 2002, respectively. In April 2003, this note was sold for $2.4 million (the amortized value as of April 30, 2003) to American Manufacturing Corporation (an affiliate). No gain or loss was realized on the sale to American Manufacturing Corporation.
For the year ended December 31, 2000, the Company issued insurance policies with premiums totaling approximately $0.1 million to affiliates.
(11) COMMITMENTS AND CONTINGENCIES
The Company has committed to investing $62.2 million over a period of time into several limited liability partnership funds. As of December 31, 2002, $41.2 million has been invested. During the period of January 1st to May 31st, 2003, an additional $2.9 million has been invested. The timing and funding of the remaining commitment of $18.1 million has not been determined. As investment opportunities are identified by the partnerships, capital calls will be made.
Various lawsuits against the Company have arisen in the ordinary course of business, including defending coverage claims brought against the Company by its policyholders or others. The Company's litigation, including coverage claims matters, is subject to many uncertainties, and given their complexity and scope, the outcomes cannot be predicted with certainty. It is possible that the results of operations in
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a particular quarterly or annual period could be materially affected by an ultimately unfavorable outcome of litigation or coverage claim matters. Management believes, however, that the ultimate outcome of all litigation and coverage claim matters after consideration of applicable reserves should not have a material adverse effect on the Company's financial condition.
On January 26, 2001, our subsidiary DSIC was named a defendant in a lawsuit filed in the United States Court for the Southern District of New York by Bank of America N.A. and Platinum Indemnity Limited for breach of contract, negligent supervision and reckless disregard of an agent, and related claims for relief. Bank of America and Platinum seek indemnification of approximately $29 million, plus interest in excess of $10 million and fees and costs, under alleged "facultative reinsurance policies" issued by Worldwide Weather Insurance Agency, Inc., purportedly on behalf of DSIC. The complaint alleges the facultative certificates reinsure Platinum for losses paid under Weather Risk Mitigation Insurance Policies issued by Platinum to Palladium Insurance Limited covering specific weather derivative trades. Bank of America is the issuing bank for a letter of credit in favor of Palladium, and is allegedly the assignee of Platinum's rights against DSIC. DSIC denies the allegations in the complaint, and takes the position, among other things, that even if the facultative certificates were issued in its name, they are unenforceable because Worldwide Weather Insurance Agency and its principal exceeded any authority, either actual or apparent, to issue the "facultative reinsurance policies." The parties are currently engaged in discovery, and a trial date has not been set. The Company believes that this claim is without merit and is vigorously defending this action.
In related proceedings, DSIC has preserved its potential avenues of recovery in the event it is found liable to Bank of America and Platinum. DSIC is in arbitration against Partner Reinsurance Company Ltd. and Partner Reinsurance Company of the U.S. seeking recovery under a reinsurance agreement covering the business produced by Worldwide Weather Insurance Agency on a 100% quota share basis. In addition, if it were held liable to Bank of America on the grounds DSIC was negligent in appointing the Worldwide Weather Insurance Agency, DSIC is claiming indemnification and contribution from Partner Reinsurance Company of the U.S. because of its role in the appointment of the agency's principal and the Worldwide Weather Insurance Agency. The arbitration has been consolidated into the Bank of America litigation for discovery purposes, and is not likely to proceed to a hearing until the Bank of America litigation is resolved.
During 2002, the Company established a $25 million Revolving Credit Facility with Citizens Bank of Pennsylvania. Interest is payable monthly at either the London inter-bank "offered" rate (LIBOR) plus 65 basis points or the Prime Rate. As of December 31, 2002, there were no balances due in connection with this credit facility. The Revolving Credit Facility was converted to a Demand Discretionary Facility in February 2003.
(12) SUBSEQUENT EVENTS
On May 1, 2003, affiliates of Fox Paine and Company, LLC, a San Francisco, California based private equity firm, entered into an Investment Agreement in which they agreed to acquire a controlling interest in the Company.
In March 2003, the Company resolved a claim by one of its producers that his agency sustained damages in loss of business and in the value of his agency as a result of the alleged delay in DSIC obtaining regulatory approval of rates and forms necessary to support the producer's business. The Company paid the agent $0.4 million in connection with this resolution.
On February 28, 2003, AIS converted from a C Corporation to an S Corporation. AIS will file a consolidated federal tax return as of February 28, 2003. In subsequent periods, UNIC and its subsidiaries
WIND RIVER INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will file a consolidated federal income tax return and AIS and its other subsidiaries, AIAA, IUI and URP, will each file a separate, stand-alone federal income tax return.
(13) NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS No. 150"). The objective of SFAS No. 150 is to establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equities. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS NO. 148") which amends SFAS Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). The objective of SFAS No. 148 is to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 does not change the provisions of SFAS No. 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
FASB Interpretation 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" became effective December 15, 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
FASB Interpretation 46 "Consolidation of Variable Interest Entities" was issued in January 2003 and is effective at various dates for various requirements. This interpretation addresses consolidation of variable interest entities (formerly known as special purpose entities). Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
UNITED NATIONAL GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR SUCCESSOR
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
2002 2003
------------------ -------------------
(UNAUDITED)
ASSETS
Bonds:
Trading securities, at fair value (amortized cost:
2002 -- $14,913; 2003 -- $0)............................ $ 14,607 $ --
Available for sale securities, at fair value (amortized
cost: 2002 -- $434,957; 2003 -- $475,117)............... 446,418 486,519
Preferred shares:
Trading securities, at fair value......................... 3,106 --
Available for sale securities, at fair value.............. -- 3,354
Common shares:
Trading securities, at fair value......................... 31,604 --
Available for sale securities, at fair value.............. -- 31,237
Other invested assets....................................... 41,285 44,703
Mortgage loans.............................................. 1,167 --
---------- ----------
Total investments....................................... 538,187 565,813
Cash and cash equivalents................................... 72,942 234,356
Agents' balances............................................ 50,744 68,915
Reinsurance receivables..................................... 1,743,524 1,785,213
Accrued investment income................................... 6,567 6,403
Federal income taxes receivable............................. 31,798 7,557
Deferred federal income taxes............................... 29,970 22,882
Deferred acquisition costs, net............................. 3,289 1,373
Prepaid reinsurance premiums................................ 196,172 118,892
Other assets................................................ 12,427 23,515
---------- ----------
Total assets............................................ $2,685,620 $2,834,919
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses.................. $2,004,422 $2,085,658
Unearned premiums........................................... 247,138 168,146
Amounts held for the account of others...................... 13,766 12,919
Ceded balances payable...................................... 61,787 78,592
Payable for securities...................................... 6,250 --
Contingent commissions...................................... 5,426 7,219
Senior notes payable to related party....................... -- 72,848
Due to affiliates........................................... 163 158
Subordinated Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated securities............................ -- 10,000
Other liabilities........................................... 78,031 42,465
---------- ----------
Total liabilities....................................... $2,416,983 $2,478,005
---------- ----------
Commitments and contingencies (Note 9)...................... -- --
SHAREHOLDERS' EQUITY:
Common shares, $0.0001 par value, 900,000,000 common shares
authorized, 2,698,750 Class A common shares, issued and
outstanding and 12,687,500 Class B common shares issued
and outstanding........................................... -- 1
Preferred shares, $0.0001 par value, 100,000,000 shares
authorized, 15,000,000 issued and outstanding............. -- 2
Additional paid-in capital.................................. 81,186 315,107
Accumulated other comprehensive income...................... 7,329 8,689
Retained earnings........................................... 180,122 33,115
---------- ----------
Total shareholders' equity.............................. 268,637 356,914
---------- ----------
Total liabilities and shareholders' equity.............. $2,685,620 $2,834,919
========== ==========
|
See accompanying notes to consolidated financial statements.
UNITED NATIONAL GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR PREDECESSOR SUCCESSOR
NINE MONTHS JANUARY 1, 2003 SEPTEMBER 6, 2003
ENDED THROUGH THROUGH
SEPTEMBER 30, 2002 SEPTEMBER 5, 2003 SEPTEMBER 30, 2003
------------------ ----------------- ------------------
REVENUES:
Gross premiums written........................ $ 680,817 $ 510,623 $ 33,190
========= ========= ===========
Net premiums written.......................... 171,047 139,116 9,692
========= ========= ===========
Net premiums earned........................... 157,557 128,254 10,687
Net investment income......................... 12,968 13,289 792
Net realized investment (losses) gains........ (15,039) 5,589 (718)
--------- --------- -----------
Total revenues........................... 155,486 147,132 10,761
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses....... 143,187 84,885 7,349
Acquisition costs and other underwriting
expenses.................................... 14,339 30,543 4,587
Provision for doubtful reinsurance
receivables................................. 1,750 --
Other operating expenses...................... 2,436 288 124
Interest expense.............................. 676 46 249
--------- --------- -----------
Income (loss) before income taxes........... (5,152) 29,620 (1,548)
Income tax (benefit) expense.................. (5,333) 6,850 (1,106)
--------- --------- -----------
Net income (loss) before equity in net
income (loss) of partnerships............ 181 22,770 (442)
Equity in net income (loss) of partnerships... (995) 1,834 258
--------- --------- -----------
Net income (loss) before extraordinary
gain..................................... (814) 24,604 (184)
Extraordinary gain............................ -- -- 46,424
--------- --------- -----------
Net income.................................. $ (814) $ 24,604 $ 46,240
========= ========= ===========
PER SHARE DATA:
Net income (loss) available to common
shareholders before extraordinary gain...... $ (814) $ 24,604 $ (13,309)
Basic....................................... $ (8,140) $ 246,040 $ (1.04)
========= ========= ===========
Diluted..................................... $ (8,140) $ 246,040 $ (1.04)
========= ========= ===========
Extraordinary gain............................ $ -- $ -- $ 46,424
Basic....................................... $ -- $ -- $ 3.63
========= ========= ===========
Diluted..................................... $ -- $ -- $ 3.63
========= ========= ===========
Net income (loss) available to common
shareholders................................ $ (814) $ 24,604 $ 33,115
Basic....................................... $ (8,140) $ 246,040 $ 2.59
========= ========= ===========
Diluted..................................... $ (8,140) $ 246,040 $ 2.59
========= ========= ===========
Weighted-average number of shares outstanding
Basic....................................... 100 100 12,806,250
========= ========= ===========
Diluted..................................... 100 100 12,806,250
========= ========= ===========
|
See accompanying notes to consolidated financial statements.
UNITED NATIONAL GROUP, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
PREDECESSOR SUCCESSOR
PREDECESSOR JANUARY 1, SEPTEMBER 6,
NINE MONTHS 2003 2003
ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 5, SEPTEMBER 30,
2002 2003 2003
-------------- ------------- -------------
Net income (loss)..................................... $ (814) $ 24,604 $ 46,240
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period............................... 14,333 (2,450) 13,538
Less:
Reclassification adjustment for (losses)
gains included in net income.............. (1,407) 568 (170)
Other comprehensive income (loss), before tax....... 12,926 (3,018) 13,368
Income tax expense (benefit) related to items of
other comprehensive income (loss)................ 4,524 (1,056) 4,679
-------- -------- --------
Other comprehensive income (loss), net of tax....... 8,402 (1,962) 8,689
-------- -------- --------
Comprehensive income, net of tax...................... $ 7,588 $ 22,642 $ 54,929
======== ======== ========
|
See accompanying notes to consolidated financial statements
UNITED NATIONAL GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR PREDECESSOR SUCCESSOR
NINE MONTHS JANUARY 1, 2003 SEPTEMBER 6, 2003
ENDED THROUGH THROUGH
SEPTEMBER 30, 2003 SEPTEMBER 5, 2003 SEPTEMBER 30, 2003
------------------ ------------------ ------------------
Common shares:
Number at beginning of period............ 100 100 --
Class A common shares issued............. -- -- 2,698,750
Class B common shares issued............. 10,000,000
Class B common shares issued in exchange
for Series A preferred shares......... -- -- 2,687,500
-------- -------- -----------
Number at end of period............... 100 100 15,386,250
-------- -------- -----------
Common stock:
Balance at beginning of period........... $ -- $ -- $ --
Class A common shares issued............. -- -- --
Class B common shares issued in exchange
for Series A preferred shares......... -- -- 1
-------- -------- -----------
Balance at end of period.............. $ -- $ -- $ 1
-------- -------- -----------
Preferred shares:
Number at beginning of period............ -- --
Preferred shares issued.................. -- 17,500,000
Preferred shares exchanged For Class B
common shares......................... (2,500,000)
-------- -------- -----------
Number at end of period............... -- -- 15,000,000
-------- -------- -----------
Preferred stock:
Balance at beginning of period........... $ -- $ -- $ --
Preferred stock issued................... -- -- 2
Preferred shares exchanged For Class B
common shares......................... -- -- --
-------- -------- -----------
Balance at end of period.............. $ -- $ -- $ 2
-------- -------- -----------
Additional paid-in capital:
Balance at beginning of period........... $ 81,186 $ 81,186 $ --
Preferred shares exchanged for Class B
common shares......................... 1,875
Preferred share dividends................ 11,250
Contributed capital...................... -- 5,638 301,982
-------- -------- -----------
Balance at end of period.............. $ 81,186 $ 86,824 $ 315,107
-------- -------- -----------
Accumulated other comprehensive income net
of deferred income:
Balance at beginning of period........... $ 1,873 $ 7,329 $ --
Other comprehensive income, net of
taxes................................. 8,402 (1,962) 8,689
-------- -------- -----------
Balance at end of period.............. $ 10,275 $ 5,367 $ 8,689
-------- -------- -----------
Retained earnings:
Balance at beginning of period........... $241,785 $180,122 $ --
Net income............................... (814) 24,604 46,240
Preferred share dividends................ (11,250)
Preferred share dividends received and
exchanged for Class B common shares... (1,875)
-------- -------- -----------
Balance at end of period.............. 240,971 204,726 33,115
-------- -------- -----------
Total shareholders' equity.......... $332,432 $296,917 $ 356,914
======== ======== ===========
|
See accompanying notes to consolidated financial statements.
UNITED NATIONAL GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
PREDECESSOR PREDECESSOR SUCCESSOR
NINE JANUARY 1, 2003 SEPTEMBER 6, 2003
MONTHS ENDED THROUGH THROUGH
SEPTEMBER 30, 2002 SEPTEMBER 5, 2003 SEPTEMBER 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES: ------------------ ----------------- ------------------
Net income..................................... $ (814) $ 25,963 $ 46,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain........................... -- -- (46,424)
Deferred federal income taxes................ (6,173) 842 2,253
Amortization of bond premium and discount,
net........................................ 518 1,504 266
Net realized investment gains................ 6,400 2,994 718
Equity in loss (income) of partnerships...... 995 (1,834) (258)
Unrealized loss (gain) on trading
securities................................. 8,639 (8,583) --
Provision for doubtful reinsurance
receivables................................ (569) 1,750 --
Proceeds from sale or maturity of trading
securities................................. 24,182 9,827 --
Purchase of trading securities............... (17,736) (9,764) --
CHANGES IN:
Agents' balances............................. (44,604) (32,077) 13,906
Reinsurance receivables...................... (46,827) (102,611) 53,794
Unpaid losses and loss adjustment expenses... 87,011 116,172 14,469
Unearned premiums............................ 73,946 5,450 (4,570)
Ceded balances payable....................... 37,428 25,691 (53,631)
Other liabilities............................ 13,115 (24,170) (13,167)
Amounts held for the account of others....... 10,966 5,070 (5,917)
Funds held by reinsured companies............ 8,250 -- --
Contingent commissions....................... (4,393) 1,718 75
Federal income tax receivable................ (6,378) 31,099 (6,858)
Prepaid reinsurance premiums................. (60,456) 5,100 3,890
Payable for securities....................... 190 (6,227) (23)
Other -- net................................. (729) 1,489 (20,113)
----------- --------- ---------
Net cash from operating activities......... 82,961 47,241 (15,350)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of bonds and preferred
stocks....................................... 140,481 71,654 12,473
Proceeds from maturity of bonds................ 5,000 2,500 --
Proceeds from sale of other invested assets.... 937 14,433 125
Purchase of bonds and preferred stocks......... (222,777) (101,924) (1,151)
Proceeds from sale or repayment of mortgage
principal.................................... 44 8 --
Proceeds from sale of mortgage................. -- 1,166 --
Purchase of other invested assets.............. (12,077) (8,663) (2,892)
Acquisition of business, net of cash
acquired..................................... -- -- (10,837)
----------- --------- ---------
Net cash from investing activities......... (88,392) (20,826) (2,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility............... -- 4,650 --
Repayments of credit facility.................. -- (4,650) --
Capital contribution from Ball family trusts... -- 5,638 --
Issuance of common shares under stock purchase
plan......................................... -- -- 1,988
Issuance of trust preferred securities......... -- -- 10,000
----------- --------- ---------
Net cash from financing activities......... -- 5,638 11,988
----------- --------- ---------
Net decrease in cash and cash
equivalents............................. (5,431) 32,053 (5,644)
Cash and cash equivalents at beginning of
period....................................... 77,057 72,942 240,000
----------- --------- ---------
Cash and cash equivalents at end of period..... $ 71,626 $ 104,995 $ 234,356
=========== ========= =========
|
See accompanying notes to consolidated financial statements.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2003
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZATION OF UNITED NATIONAL GROUP, LTD.
United National Group, Ltd. ("United National Group" or the "Company") was organized by affiliates of Fox Paine & Company, LLC ("Fox Paine") on August 27, 2003, for the purpose of acquiring Wind River Investment Corporation and its subsidiaries ("Wind River" or the "Predecessor"). On September 5, 2003, Fox Paine made a capital contribution of $240.0 million to the Company, in exchange for 10.0 million Class B common shares and 14.0 million Series A preferred shares. $100.0 million of this capital contribution was used to purchase a portion of the common stock of the Predecessor from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania. Of the remaining $140.0 million contributed, $80.0 million was contributed to our U.S. Operations, $43.5 million was used to capitalize our Non-U.S. Operations and $16.5 million to fund fees and expenses incurred in connection with the acquisition. A total of $17.6 million of expenses was incurred in connection with the acquisition. The remaining unpaid costs of acquisition will be paid through the U.S. Operations. Also during September 2003, Fox Paine exchanged 2.5 million Series A preferred shares for 2,687,500 Class B common shares. United National Group did not have any material assets or operations prior to September 5, 2003.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements as of September 30, 2003 and for the nine months ended September 30, 2002 and 2003 are unaudited, but in the opinion of management, have been prepared on the same basis as the annual audited consolidated financial statements of Wind River and reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of the information set forth therein. The December 31, 2002 consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The results of operations for the nine months ended September 30, 2003, are not necessarily indicative of the operating results to be expected for the full year or any other period.
The consolidated financial statements include the accounts of United National Group, and its wholly-owned subsidiaries Wind River Insurance Company (Barbados), Ltd., U.N. Holdings II, Inc., U.N. Holdings Inc., and Wind River Investment Corporation, and its wholly-owned subsidiary, American Insurance Service, Inc. ("AIS"). AIS owns all of the outstanding shares of American Insurance Adjustment Agency, Inc. ("AIAA"), International Underwriters, Inc. ("IUI"), Unity Risk Partners Insurance Services, Inc. ("URP") and United National Insurance Company ("UNIC"). UNIC owns all of the outstanding shares of Diamond State Insurance Company ("DSIC"). DSIC owns all of the outstanding shares of United National Specialty Insurance Company ("UNSIC"), United National Casualty Insurance Company ("UNCIC") and J.H. Ferguson & Associates, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with GAAP, which differ in certain respects from those followed in reports to insurance regulatory authorities. The preparation of financial statements in conformity with 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.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Predecessor's annual audited consolidated financial statements as of and for the year ended December 31, 2002.
INVESTMENTS
As a result of the preliminary purchase price allocation, all of the Predecessor's investments at September 5, 2003 were adjusted to their fair value on that date. Thus, the fair value of all investments on September 5, 2003 became the book value prospectively for the Company. In addition, the Company used different classifications for its investments when compared to the classifications used by the Predecessor.
The Predecessor's investments in bonds were classified as available for sale and trading and were carried at their fair value. The difference between book value and fair value of bonds classified as available for sale, net of the effect of deferred income taxes, was reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. The current year change in the difference between book value and fair value of bonds classified as trading was included in income.
The Company's investments in bonds are classified as available for sale and are carried at their fair value. The difference between book value and fair value of bonds, excluding the derivative components, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. The difference between book value and fair value of the derivative components of the bonds is included in income.
As of September 5, 2003, the Predecessor owned approximately $15.3 million of convertible securities, which were classified as trading. After the acquisition, the Company's convertible securities were classified as available for sale and the Company bifurcated the embedded derivative component of these securities from the host contract. During the period September 6, 2003 through September 30, 2003, the Company recorded a $0.5 million loss in current operations due to the change in fair value of the embedded derivatives.
The Predecessor's investments in preferred stocks were classified as trading and were carried at fair value. The current year change in the difference between book value and fair value of preferred stocks was included in income.
The Company's investments in preferred stocks are classified as available for sale and are carried at fair value. The difference between book and fair value of preferred stocks, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary.
The Predecessor's investments in common stocks were classified as trading and were carried at fair value. The current year change in the difference between book value and fair value of common stocks was included in income.
The Company's investments in common stocks are classified as available for sale and carried at fair value. The difference between book and fair value of common stocks, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary.
During 2003, the Predecessor recorded other than temporary impairment losses of $1.9 million on its fixed income portfolio and $0.7 million on its investments in limited partnerships. No such losses were incurred during the nine months ended September 30, 2002.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Other invested assets are comprised primarily of limited liability partnership interests and uncollateralized commercial loans. Partnership interests of 3% ownership or greater are accounted for under the equity method. Partnership interests of less than 3% ownership are carried at their fair value. The difference between book value and fair value of partnership interests of less than three percent ownership, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. Uncollateralized commercial loans are stated at unpaid principal balances, net of allowances.
Net realized gains and losses on investments are reported as a component of income from investments. Such gains or losses are determined based on the specific identification method.
The Company's investments are regularly evaluated to determine if declines in market value below amortized cost are other than temporary. If market value declines are determined to be other than temporary, the security's cost basis is adjusted to the market value of the security, with the loss recognized in the current period.
Realized losses recorded, as a result of other than temporary impairment evaluations, for the nine months ended September 30, 2002 and 2003 were $0 and $2.6 million, respectively.
Fair value is defined as the amount at which the instrument could be exchanged in a current transaction with willing parties. The fair values of the Company's investments in bonds and stocks are determined on the basis of quoted market prices.
OTHER UNDERWRITING EXPENSES
In March 2003, the Predecessor resolved a claim by one of its producers. The Predecessor paid the agent $0.4 million in connection with this resolution. This $0.4 million charge is included in the Predecessor's results of operations in 2003 as an other underwriting expense.
During 2003, the Predecessor increased its allowance for doubtful uncollectible reinsurance receivables by $1.8 million.
INCOME TAXES
The Company files a consolidated federal tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred income tax assets.
On February 28, 2003, AIS converted from a C Corporation to an S Corporation. AIS will file a consolidated federal tax return as of February 28, 2003. In subsequent periods, UNIC and its subsidiaries will file a consolidated federal income tax return and AIS and its other subsidiaries, AIAA, IUI and URP, will each file a separate, stand-alone federal income tax return.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
On September 5, 2003, Wind River and AIS converted from an S Corporation to a C Corporation. A consolidated income tax return will be filed for all U.S. entities for the stub period from September 5, 2003 to December 31, 2003.
(2) ACQUISITION OF WIND RIVER
On September 5, 2003, the Company acquired 100% of the outstanding common stock of Wind River from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania. The purchase price for Wind River consisted of $100.0 million in cash, the issuance of 2.5 million Class A common shares valued at $10.00 per share, the issuance of 3.5 million Series A preferred shares valued at $10.00 per share and the issuance of senior notes by Wind River having an aggregate principal amount of approximately $72.8 million. The fair market valuations of the Class A common shares and Series A preferred shares were determined by using the book value of the shares on September 5, 2003, since the Company received its initial capitalization on that date.
The primary reason for the acquisition was that the Company valued the significance of Wind River's leading role in the specialty insurance markets. In addition, the Company believed that Wind River was properly positioned to take advantage of the strengthening market conditions in the property and casualty insurance industry.
In connection with the acquisition on September 5, 2003, the $250.4 million purchase price was allocated to the estimated fair values of the acquired assets and liabilities as follows (dollars in thousands):
ASSETS
Investments and cash...................................... $ 667,836
Agents' balances.......................................... 82,821
Reinsurance receivables................................... 1,794,262
Accrued investment income................................. 5,176
Federal income taxes receivable........................... 699
Deferred federal income taxes............................. (5,462)
Prepaid reinsurance premiums.............................. 122,782
Intangible assets......................................... 96,350
Other assets.............................................. 9,535
----------
Total.................................................. $2,773,999
----------
LIABILITIES
Unpaid losses and loss adjustment expenses................ $2,071,189
Unearned premiums......................................... 172,716
Amounts held for the account of others.................... 12,857
Ceded balances payable.................................... 87,478
Payable for securities.................................... 23
Contingent commissions.................................... 7,144
Due to affiliates......................................... 104
Other liabilities......................................... 59,840
----------
Total.................................................. $2,411,351
----------
Estimated fair value of net assets acquired................. $ 362,648
|
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Less: write-down of non-current non-financial assets, net of
tax
Intangible assets, net of $33,722 of taxes................ (62,628)
Other assets, net of $1,694 of taxes...................... (3,146)
----------
Total write-downs...................................... (65,774)
Adjusted estimated fair value of net assets acquired........ 296,874
----------
Excess of estimated fair value of net assets over purchase
price..................................................... $ (46,424)
==========
|
The transaction was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141).
In connection with the acquisition of Wind River, the assets and liabilities acquired by the Company were adjusted to fair value. Accordingly, the fair value of the reserve for unpaid losses and loss adjustment expenses and reinsurance receivables was estimated by (1) discounting the gross reserves and reinsurance receivables, (2) applying a risk margin to the gross reserves and reinsurance receivables and (3) reducing gross reinsurance receivables by an amount equal to Wind River's estimate of potentially uncollectible reinsurance receivables as of the acquisition date. The final factor did not impact net reinsurance receivables because Wind River had recorded an allowance for uncollectible reinsurance, which was considered a reasonable estimate of the credit risk inherent in the reinsurance receivables as of the acquisition date.
Wind River discounted the reserve for unpaid losses and loss adjustment expenses and reinsurance receivables based on the present value of the expected underlying cash flows using a risk-free interest rate of 3%, which approximated the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by Wind River's actuarial department based on historical loss data.
A risk margin of approximately 10% was applied to the discounted reserve for unpaid losses and loss adjustment expenses to reflect management's estimate of the cost Wind River would incur to reinsure the full amount of its unpaid losses and loss adjustment expenses with a third party reinsurer. This risk margin was based upon management's assessment of the uncertainty inherent in the reserve for unpaid losses and loss adjustment expenses and their knowledge of the reinsurance marketplace.
As a result of these adjustments, the fair value of the reserve for losses and loss adjustment expenses was reduced by $49.4 million as of the acquisition date. Based on the nature of Wind River's reinsurance program and expected future payout patterns, its reinsurance receivables were also reduced by $49.4 million.
As of the acquisition date, Wind River adjusted its gross and net unearned premium reserves to fair value by (1) discounting the unearned premium reserves and (2) applying a risk margin to the unearned premium reserves. The risk margin utilized to record the gross unearned premium reserves at fair value was 25%. A slightly lower 20% risk margin was utilized to calculate the net unearned premium reserves because of the shorter period of the underlying exposures, which produces a lower degree of variability in the embedded future profits. Wind River discontinued the unearned premium reserves based on the present value of the expected underlying cash flows using a risk-free interest rate of 3%, which approximated the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by Wind River's actuarial department based on historical loss data.
As a result of these adjustments, the fair value of the gross unearned premium reserves was reduced by $79.9 million as of September 5, 2003, with a $68.3 million decrease in prepaid reinsurance premiums, thereby resulting in an $11.6 million decrease in the net unearned premium reserves. The
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
adjustments to the gross and net unearned premium reserves had a directly proportional impact to gross and net premiums earned.
(3) DEBT
As a result of the acquisition of Wind River, senior notes in an
aggregate principal amount of approximately $72.8 million, subject to
adjustment, were issued to the Ball family trusts, as part of the purchase
price. These senior notes have an interest rate of 5%, which may be paid either
in cash or in kind. These senior notes mature on September 5, 2015; however, in
certain circumstances the Company is required to make mandatory pre-payments on
these senior notes. The Company is required to make such mandatory prepayments
if "excess cash flow," as defined, was generated in the preceding fiscal year.
"Excess cash flow" is defined as an amount equal to consolidated net income,
less such amounts as the Company's Board of Directors may determine are
necessary to: (1) maintain an A.M. Best rating of at least "A" (Excellent) for
each of our U.S. insurance subsidiaries; (2) make permitted dividend payments;
(3) maintain the statutory surplus of our U.S. insurance subsidiaries at
acceptable levels and (4) provide us with adequate levels of working capital.
On September 30, 2003, AIS sold $10.0 million (aggregate principal amount) of Floating Rate Preferred Securities to Dekania CDO I, Ltd., an exempted company incorporated with limited liability under the law of the Cayman Islands ("Dekania"), in a private placement through AIS's wholly owned Delaware subsidiary United National Group Capital Trust I (the "Trust").
AIS, through the Trust, together with other insurance companies and insurance holding companies, issued trust preferred securities to the collateralized debt obligation pool organized by Dekania, which in turn issued its securities to institutional and accredited investors. The Trust issued 10,000 trust preferred securities, having a stated liquidation amount of $1,000 per security, which mature on September 30, 2033 and bear a floating interest rate, reset quarterly, equal to LIBOR plus 4.05%. AIS, through the Trust, has the right to call the trust preferred securities at par after September 30, 2008. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, and satisfy the eligibility requirements of Rule 144A(d)(3) under the Act.
The entire proceeds from the sale of the trust preferred securities was used for the purchase of $10.0 million of unsecured junior subordinated deferrable interest notes issued by AIS under a junior subordinated indenture dated as of September 30, 2003 between AIS and JPMorgan Chase Bank, as indenture trustee.
(4) PENSION AND DEFERRED COMPENSATION PLANS
Prior to September 5, 2003, UNIC participated in a non-contributory pension plan with American Manufacturing Corporation (an affiliate) covering all employees. The plan provided pension benefits that were based on length of service and a percentage of the average qualifying compensation for the highest five consecutive years of employment. On September 5, 2003, the non-contributory pension plan was terminated. As a result of the acquisition of Wind River, all employees became immediately vested.
The Company maintains a 401(k) defined contribution plan covering substantially all U.S. employees. Prior to September 5, 2003, American Manufacturing Corporation had managed the Predecessor's 401(k) plan. This 401(k) plan covered substantially all full-time employees. Eligible employees could defer up to 15% of their salary. The Predecessor matched 50% of employees' contributions up to 6% of their salary. Eligible employees were vested in the Predecessor's contribution and related investment income after five years of service. As a result of the acquisition, all employees who participated in the plan were immediately vested. The Company is now responsible for managing its own
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
401(k) plan. Starting on September 5, 2003, the Company matches 75% of the first 6% contributed by the employee. In addition, the Company contributes 1% of the employee's salary regardless of whether the employee contributes to the plan.
The Predecessor had a qualified deferred compensation plan for certain key executives. Through September 5, 2003, the Predecessor had accrued $7.6 million in other liabilities related to this plan. This plan was settled and terminated upon completion of the acquisition.
(5) STOCK COMPENSATION PLANS
The Company follows Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which establishes a fair value-based method of accounting for stock-based compensation plans.
The Company has various stock option plans to reward key executives and employees of the Company. The fair value of options at the date of grant are charged to compensation costs over the vesting or performance period. $0.4 million of compensation expense was recognized for the period ended September 30, 2003. A summary of the options granted is as follows:
OPTION-A TRANCHE
WEIGHTED
NUMBER AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
------- --------------
Options outstanding August 29, 2003......................... -- --
Options issued and exercisable.............................. 256,074 $6.50
Options cancelled (reversed)................................ -- --
Options exercised........................................... -- --
-------
Options outstanding September 30, 2003...................... 256,074 $6.50
======= =====
|
256,074 Option-A tranche options were granted on September 5, 2003 at an exercise price of $6.50 per share and are fully vested at the time of the grant. The Company recognized compensation expense of $0.4 million for the period ended September 30, 2003.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
TIME-BASED OPTIONS
WEIGHTED
NUMBER AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
------- --------------
Options outstanding August 29, 2003......................... -- --
Options issued and exercisable.............................. 341,875 $10.00
Options cancelled (reversed)................................ -- --
Options exercised........................................... -- --
-------
Options outstanding September 30, 2003...................... 341,875 $10.00
======= ======
|
341,875 options were granted on September 5, 2003 at an exercise price of $10.00 per share. The options vest in 20% increments over a five-year period, with any unvested options forfeitable upon termination of employment for any reason. The first vesting period begins on December 31, 2003 and ends on December 31, 2004.
PERFORMANCE-BASED OPTIONS
WEIGHTED
NUMBER AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
------- --------------
Options outstanding August 29, 2003......................... -- --
Options issued and exercisable.............................. 540,625 $10.00
Options cancelled (reversed)................................ -- --
Options exercised........................................... -- --
-------
Options outstanding September 30, 2003...................... 540,625 $10.00
======= ======
|
540,625 performance-based options were granted on September 5, 2003 at an exercise price of $10.00 per share. The options vest in 25% increments and are conditioned upon the Company achieving various operating targets or Fox Paine achieving an agreed upon rate of return. The first vesting period begins on December 31, 2003 and ends on December 31, 2004.
The weighted average fair value of options granted under employee incentive plans was $1.55 using a Black-Scholes option-pricing model and the following assumptions:
Dividend yield...................................... 0.0% Expected volatility................................. 0.0% Risk-free interest rate............................. 3.51% Expected option life................................ 5 years |
The Company also issued a total of 55,000 warrants at an exercise price of $10.00 per share.
(6) EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. The effects of stock options, warrants and conversion of Series A preferred shares have not been included in the computation of diluted earnings per share for the period September 6, 2003 through September 30, 2003 as their effect would have been anti-dilutive. Weighted
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
average shares for the diluted earnings per share calculation would have been 18,705,000 higher if stock options, warrants and conversion of Series A Preferred Shares were included.
The following table sets forth the computation of basic and diluted earnings per share.
PREDECESSOR SUCCESSOR
PREDECESSOR ----------------- ------------------
------------------ JANUARY 1, 2003 SEPTEMBER 6, 2003
NINE MONTHS ENDED THROUGH THROUGH
SEPTEMBER 30, 2002 SEPTEMBER 5, 2003 SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ------------------ ----------------- ------------------
Net income (loss) before extraordinary
gain..................................... $ (814) $ 24,604 $ (184)
Less: Preferred stock dividends............ -- -- (13,125)
------- -------- -----------
Income (loss) available to common
shareholders before extraordinary
gain................................ (814) 24,604 (13,309)
Extraordinary gain......................... -- -- 46,424
------- -------- -----------
Net income (loss)..................... $ (814) $ 24,604 $ 33,115
======= ======== ===========
Weighted average shares for basic earnings
per share................................ 100 100 12,806,250
======= ======== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) available to common
shareholders before extraordinary gain... $(8,140) $246,040 $ (1.04)
Extraordinary gain......................... -- -- 3.63
------- -------- -----------
Net income (loss)..................... $(8,140) $246,040 $ 2.59
======= ======== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares for diluted
earnings per share....................... 100 100 12,806,250
======= ======== ===========
Net income (loss) available to common
shareholders before extraordinary
gain................................ $(8,140) $246,040 $ (1.04)
Extraordinary gain......................... -- -- 3.63
------- -------- -----------
Net income (loss)..................... $(8,140) $246,040 $ 2.59
======= ======== ===========
|
(7) SEGMENT INFORMATION
The Company's operations are classified into three reportable business segments that are organized around its three underwriting divisions: E&S lines, specialty admitted and reinsurance. The segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon premium production and the associated losses and loss adjustment expense experience. Investments and investment performance, acquisition costs and other underwriting expenses including commissions, premium taxes and other acquisition costs; and other operating expenses are managed at a corporate level and are included in "Corporate."
The reinsurance segment was de-emphasized in 2002. Subsequent to September 30, 2002, the Company amended the treaty with the reinsurer to reduce the net premiums written and earned for 2002 to $0; subsequently, the treaty was commuted.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Gross premiums written, excluding the reinsurance segment, by product class are as follows:
PREDECESSOR PREDECESSOR SUCCESSOR
------------------ ------------------ ------------------
NINE MONTHS JANUARY 1, 2003 SEPTEMBER 6, 2003
ENDED THROUGH THROUGH
SEPTEMBER 30, 2002 SEPTEMBER 5, 2003 SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS) ------------------ ------------------ ------------------
Specific specialty......................... $361,330 $230,183 $14,962
Umbrella and excess........................ 170,090 126,617 8,230
Property and general liability............. 59,192 91,022 5,916
Non-medical professional liability......... 56,205 62,801 4,082
-------- -------- -------
$646,817 $510,623 $33,190
======== ======== =======
|
The gross premiums written information is not segregated by business segment because product lines cross segments.
NINE MONTHS ENDED SEPTEMBER 30, 2002: PREDECESSOR
------------------------------------- ------------------------------------------------------------
(DOLLARS IN THOUSANDS) SPECIALTY
E&S ADMITTED REINSURANCE CORPORATE TOTAL
-------- --------- ----------- ---------- ----------
REVENUES:
Gross premiums written.................. $446,071 $200,746 $34,000 $ -- $ 680,817
======== ======== ======= ========== ==========
Net premiums written.................... 92,270 44,777 34,000 -- 171,047
======== ======== ======= ========== ==========
Net premiums earned..................... 77,274 38,033 42,250 157,557
Net investment income................... -- -- -- 12,968 12,968
Net realized investment (losses)
gains................................. -- -- -- (15,039) (15,039)
-------- -------- ------- ---------- ----------
Total revenues........................ 77,274 38,033 42,250 (2,071) 155,486
LOSSES AND EXPENSES:
Net losses and loss adjustment
expenses.............................. 73,799 27,138 42,250 -- 143,187
Acquisition costs and other underwriting
expenses.............................. -- -- -- 14,339 14,339
Provision for doubtful reinsurance
receivables........................... -- -- -- -- --
Other operating expenses................ -- -- -- 2,436 2,436
Interest expense........................ -- -- -- 676 676
-------- -------- ------- ---------- ----------
Income (loss) before income taxes..... 3,475 10,895 -- (19,522) (5,152)
Income tax (benefit) expense............ -- -- -- (5,333) (5,333)
-------- -------- ------- ---------- ----------
Net income (loss) before equity in net
(loss) income of partnerships...... 3,475 10,895 -- (14,189) 181
Equity in net income (loss) of
partnerships.......................... (995) (995)
-------- -------- ------- ---------- ----------
Net income (loss) before extraordinary
gain............................... 3,475 10,895 -- (15,184) (814)
Extraordinary gain...................... -- -- -- -- --
-------- -------- ------- ---------- ----------
Net income (loss)..................... $ 3,475 $ 10,895 $ -- $ (15,184) $ (814)
======== ======== ======= ========== ==========
Total assets............................ $1,804,256 $1,804,256
========== ==========
|
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SPECIALTY
JANUARY 1, 2003 THROUGH SEPTEMBER 5, 2003: E&S ADMITTED REINSURANCE CORPORATE TOTAL
------------------------------------------ -------- --------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
REVENUES:
Gross premiums written................... $357,394 $153,229 $ -- $ -- $ 510,623
======== ======== ===== ========== ==========
Net premiums written..................... 83,046 56,070 -- -- 139,116
======== ======== ===== ========== ==========
Net premiums earned...................... 77,942 50,312 -- -- 128,254
Net investment income.................... -- -- -- 13,289 13,289
Net realized investment (losses) gains... -- -- -- 5,589 5,589
-------- -------- ----- ---------- ----------
Total revenues......................... 77,942 50,312 -- 18,878 147,132
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses... 50,990 33,895 -- -- 84,885
Acquisition costs and other underwriting
expenses............................... -- -- -- 30,543 30,543
Provision for doubtful reinsurance
receivables............................ -- -- -- 1,750 1,750
Other operating expenses................. -- -- -- 288 288
Interest expense......................... -- -- -- 46 46
-------- -------- ----- ---------- ----------
Income (loss) before income taxes...... 26,952 16,417 -- (13,749) 29,620
Income tax (benefit) expense............. -- -- -- 6,850 6,850
-------- -------- ----- ---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships....... 26,952 16,417 -- (20,599) 22,770
Equity in net income (loss) of
partnerships........................... -- -- -- 1,834 1,834
-------- -------- ----- ---------- ----------
Net income (loss) before extraordinary
gain................................ 26,952 16,417 -- (18,765) 24,604
Extraordinary gain....................... -- -- -- -- --
-------- -------- ----- ---------- ----------
Net income (loss)...................... $ 26,952 $ 16,417 $ -- $ (18,765) $ 24,604
======== ======== ===== ========== ==========
|
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
E&S SPECIALTY
SEPTEMBER 6, 2003 THROUGH SEPTEMBER 30, 2003: LINES ADMITTED REINSURANCE CORPORATE TOTAL
--------------------------------------------- -------- --------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
REVENUES:
Gross premiums written.................... $ 23,230 $ 9,960 $ -- $ -- $ 33,190
======== ======== ===== ========== ==========
Net premiums written...................... 5,786 3,906 -- -- 9,692
======== ======== ===== ========== ==========
Net premiums earned....................... 6,495 4,192 -- -- 10,687
Net investment income..................... -- -- -- 792 792
Net realized investment (losses) gains.... -- -- -- (718) (718)
-------- -------- ----- ---------- ----------
Total revenues.......................... 6,495 4,192 -- 74 10,761
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses... 4,415 2,934 -- -- 7,349
Acquisition costs and other underwriting
expenses................................ -- -- -- 4,587 4,587
Provision for doubtful reinsurance
receivables............................. -- -- -- -- --
Other operating expenses.................. -- -- -- 124 124
Interest expense.......................... -- -- -- 249 249
-------- -------- ----- ---------- ----------
Income (loss) before income taxes....... 2,080 1,258 -- (4,886) (1,548)
Income tax (benefit) expense.............. -- -- -- (1,106) (1,106)
-------- -------- ----- ---------- ----------
Net income (loss) before equity in net
income (loss) of partnerships........ 2,080 1,258 -- (3,780) (442)
Equity in net income (loss) of
partnerships............................ -- -- -- 258 258
-------- -------- ----- ---------- ----------
Net income (loss) before extraordinary
gain................................. 2,080 1,258 -- (3,522) (184)
Extraordinary gain........................ -- -- -- 46,424 46,424
-------- -------- ----- ---------- ----------
Net income (loss)....................... $ 2,080 $ 1,258 $ -- $ 42,902 $ 46,240
======== ======== ===== ========== ==========
Total assets.............................. $2,834,919 $2,834,919
========== ==========
|
(8) RELATED PARTY TRANSACTIONS
During 2001, the Company made a loan to The AMC Group, LLC (an affiliate). This note, which was carried at amortized cost of $0.8 million, was included in other invested assets as of December 31, 2002. In April 2003, this note was sold for $0.6 million (the amortized value as of April 30, 2003) to American Manufacturing Corporation (an affiliate). No gain or loss was realized on the sale to American Manufacturing Corporation.
During 2001, AIS purchased a promissory note from Philadelphia Gear Corporation (an affiliate) for $2.3 million. The annual rate of interest on this note was 6.3%. The promissory note was a loan to 181 Properties, LP (an affiliate). This note, which was carried at amortized cost of $2.3 million, was included in other invested assets as of December 31, 2002. In April 2003, this note was sold for $2.3 million to American Manufacturing Corporation. No gain or loss was realized on the sale to American Manufacturing Corporation.
On August 25, 2003, the Predecessor sold its interest in six limited liability partnership funds to American Manufacturing Corporation, an affiliate, for $6.0 million, the sum of carrying values per UNIC's
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
March 31, 2003 statutory financial statement plus any capital calls and less any distributions between July 1, 2003 and August 25, 2003. The Predecessor recorded a capital loss of $0.1 million in connection with this transaction.
On September 5, 2003, the Company prepaid $1.5 million of management fees to Fox Paine & Company ($1.2 million) and The AMC Group, L.P. ($0.3 million), an affiliate of the Ball family trusts. The prepaid management fees cover the period from September 5, 2003 through September 4, 2004 and will be recognized ratably over that period.
As of December 31, 2002 and September 30, 2003, the Company had balances payable due to affiliates totaling approximately $0.2 million and $0.2 million, respectively.
On August 25, 2003, Wind River sold a series of limited partnership interests to Wind River Investments, LLC. Proceeds from the sale of those investments totaled $6.0 million.
On September 5, 2003, the Company paid Fox Paine a fee of $12.0 million related to the Company's acquisition of Wind River.
(9) COMMITMENTS AND CONTINGENCIES
The Company has committed to investing $45.1 million over a period of time into several limited liability partnership funds. As of September 30, 2003, $39.7 million has been invested. The Company has a remaining commitment of $5.4 million. The timing and funding of this remaining commitment has not been determined.
Various lawsuits against the Company have arisen in the ordinary course of the Company's business, including defending coverage claims brought against the Company by its policyholders or others. The Company's litigation, including coverage claims matters, is subject to many uncertainties, and given their complexity and scope, the outcomes cannot be predicted with certainty. It is possible that the results of operations in a particular quarterly or annual period could be materially affected by an ultimate unfavorable outcome of litigation and/or coverage claim matters. Management believes, however, that the ultimate outcome of all litigation and coverage claim matters after consideration of applicable reserves should not have a material adverse effect on the Company's financial condition.
On January 26, 2001, our subsidiary DSIC was named a defendant in a lawsuit filed in the United States Court for the Southern District of New York by Bank of America N.A. and Platinum Indemnity Limited for breach of contract, negligent supervision and reckless disregard of an agent, and related claims for relief. Bank of America and Platinum seek indemnification of approximately $29.0 million, plus interest in excess of $10.0 million and fees and costs, under alleged "facultative reinsurance policies" issued by Worldwide Weather Insurance Agency, Inc. purportedly on behalf of DSIC. The complaint alleges the facultative certificates reinsure Platinum for losses paid under Weather Risk Mitigation Insurance Policies issued by Platinum to Palladium Insurance Limited covering specific weather derivative trades. Bank of America is the issuing bank for a letter of credit in favor of Palladium, and is allegedly the assignee of Platinum's rights against DSIC. DSIC denies the allegations in the complaint, and takes the position, among other things, that even if the facultative certificates were issued in its name, they are unenforceable because Worldwide Weather Insurance Agency and its principal exceeded any authority, either actual or apparent, to issue the "facultative reinsurance policies." The parties are currently engaged in discovery, and a trial date has not been set. The Company believes that this claim is without merit and is vigorously defending this action.
In related proceedings, DSIC has preserved its potential avenues of recovery in the event it is found liable to Bank of America and Platinum. DSIC is in arbitration against Partner Reinsurance
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Company Ltd. and Partner Reinsurance Company of the U.S. seeking recovery under a reinsurance agreement covering the business produced by Worldwide Weather Insurance Agency on a 100% quota share basis. In addition, if it were held liable to Bank of America on the grounds DSIC was negligent in appointing Worldwide Weather Insurance Agency, DSIC is claiming indemnification and contribution from Partner Reinsurance Company of the U.S. because of its role in the appointment of the agency's principal and Worldwide Weather Insurance Agency. The arbitration has been consolidated into the Bank of America litigation for discovery purposes, and is not likely to proceed to a hearing until the Bank of America litigation is resolved.
During 2002, the Company established a $25.0 million Revolving Credit Facility with Citizens Bank of Pennsylvania. Interest is payable monthly at either the London inter-bank "offered" rate (LIBOR) plus 65 basis points or the Prime Rate. The Revolving Credit Facility was converted to a Demand Discretionary Facility in February 2003. As of September 30, 2003, there were no balances due in connection with this credit facility.
On July 11, 2003, our subsidiary United National Insurance Company was named a defendant in a lawsuit filed in the Superior Court of Fulton County, Georgia (since removed to the United States District Court for the Northern District of Georgia), by Gulf Underwriters Insurance Company seeking rescission of a facultative reinsurance certificate issued to United National Insurance Company with regard to an individual insurance policy. The facultative reinsurance certificate provided 100% reinsurance to United National Insurance Company for loss and loss adjustment expenses paid under the insurance policy. The rescission claim is based on allegations of breach of contract; misrepresentation; non-disclosure and breach of duty of good faith; and fraud. The complaint also seeks attorney's fees and costs. United National Insurance Company denies the allegations in the complaint and has filed a counterclaim for $1.6 million. This litigation has just begun and a trial date has not been set. In the opinion of management, the ultimate disposition of this matter is not expected to have a material adverse effect on the Company's financial condition.
(10) NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS No. 150"). The objective of SFAS No. 150 is to establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equities. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS No. 148"), which amends SFAS Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). The objective of SFAS No. 148 is to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 does not change the provisions of SFAS No. 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees ("APB No. 25"). In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
UNITED NATIONAL GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
FASB Interpretation 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" became effective December 15, 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
FASB Interpretation 46 "Consolidation of Variable Interest Entities" was issued in January 2003 and is effective at various dates for various requirements. The interpretation addresses consolidation of variable interest entities (formerly known as special purpose entities). Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
United National Group, Ltd.:
In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of United National Group, Ltd. (the "Company") at August 29, 2003 in conformity with accounting principles generally accepted in the United States of America. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
October 7, 2003
UNITED NATIONAL GROUP, LTD.
BALANCE SHEET
AS OF AUGUST 29, 2003
ASSETS
Cash........................................................ $150,000
--------
Total assets........................................... $150,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Commitments and contingencies............................... --
SHAREHOLDERS' EQUITY
Common shares, Class A $0.0001 par value 900,000,000 common
shares authorized, 0 Class A shares issued and
outstanding............................................... --
Common shares, Class B $0.0001 par value 900,000,000 shares
authorized, 15,000 shares issued and outstanding.......... 2
Preferred shares, $0.0001 par value, 100,000,000 shares
authorized, 0 shares issued and outstanding...............
Additional paid-in capital.................................. $149,998
--------
Total shareholders' equity............................. $150,000
--------
Total liabilities and shareholders' equity............. $150,000
========
|
See accompanying notes to balance sheet
UNITED NATIONAL GROUP, LTD.
NOTES TO BALANCE SHEET
(1) FORMATION
On August 26, 2003, United National Group, Ltd. (the "Company") was formed by U.N. Holdings (Cayman), Ltd., which was established by affiliates of Fox Paine & Company, LLC. On August 29, 2003, the Company issued 15,000 Class B common shares to U.N. Holdings (Cayman), Ltd. in exchange for $150,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The balance sheet has been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").
CASH AND CASH EQUIVALENTS
The Company considers all investments with maturities of three months or less at the date of acquisition to be cash equivalents.
(3) SHAREHOLDERS' EQUITY
Upon the formation of the Company, its board of directors authorized 900,000,000 common shares and 100,000,000 preferred shares. As of August 29, 2003, 15,000 Class B common shares were issued and outstanding. No preferred shares were issued and outstanding as of August 29, 2003.
Common shares
Class A common shares and Class B common shares have identical rights and rank equally in all respects except for voting rights and conversion features. Neither Class A common shares nor Class B common shares are entitled to any sinking or preemptive rights.
Each Class A common share is entitled to one vote, while each Class B common share is entitled to ten votes on all matters upon which the common shareholders is entitled to vote, including the election of directors.
Each Class B common share is convertible at any time into one Class A common share at the option of the holder. Additionally, each Class B common share will automatically convert into one share of Class A common share upon any transfer by the registered holder of that share, whether or not for value, except for transfers to (1) a nominee or affiliate of such holder that will not result in a change of beneficial ownership as determined under Rule 13d-3 under the Exchange Act or (2) a person who already holds Class B common shares.
Preferred shares
Each Series A preferred share is convertible at any time into one Class B common share, subject to adjustment in certain circumstances, including in the event of share splits and combinations, dividends of shares and other property, transactions in which the shares are exchanged and issuances of common shares at values below market value. In addition, on September 5, 2005, each Series A preferred share will automatically convert into one Class B common share, subject to similar adjustments.
Upon completion of a public offering of common shares resulting in net proceeds of $50.0 million or more to the Company, a number of Series A preferred shares (determined so that 110% of the aggregate liquidation preference plus accrued but unpaid dividends is equal to the net proceeds to United
UNITED NATIONAL GROUP, LTD.
NOTES TO BALANCE SHEET -- (CONTINUED)
National Group from such initial public offering) shall be redeemed. The redemption price will be paid as follows:
- an amount equal to 100% of the liquidation preference shall be paid in cash; and
- the remainder of the redemption price shall be through delivery of Class A common shares having a value (based on the initial public offering price to the public, gross of any underwriting discounts or commissions, in such public offering) equal to 10% of the liquidation preference plus all accrued but unpaid dividends.
Upon winding up, dissolution or liquidation, each Series A preferred share is entitled to a liquidation preference of $10.00 plus all accrued but unpaid dividends, before any distribution is made to holders of the Company's common shares or other shares ranking junior to Series A preferred shares.
Series A preferred shares are entitled to receive dividends at an annual rate of 15% of the liquidation preference of each such share plus all accrued but unpaid dividends. Dividends on Series A preferred shares are payable semi-annually, beginning on March 1, 2004. Such dividends are accrued on the first day of each semi-annual period. Dividends on the Series A preferred shares are payable in cash, additional Series A preferred shares or any combination thereof, at the discretion of the Company's board of directors.
Holders of Series A preferred shares are entitled to notice of and to vote at general meetings of shareholders on all matters upon which the holders of common shares are entitled to vote. The holders of Series A preferred shares and common shares vote together as a single class. Each Series A preferred share has the same number of votes that could be cast by the holder of the number of Class B common shares into which each Series A preferred share could be converted.
(4) SUBSEQUENT EVENTS
On September 5, 2003, U.N. Holdings (Cayman) Ltd. contributed an additional $239.9 million to the Company in exchange for 14,000,000 shares of Series A preferred stock and 9,985,000 shares of Class B common stock.
On September 5, 2003, the Company acquired 100% of the outstanding common stock of Wind River Investment Corporation in exchange for $100.0 million of cash, 2.5 million shares of the Company's Class A common stock, 3.5 million shares of the Company's Series A preferred stock and $72.8 million of Senior Notes issued by Wind River Investment Corporation. The Senior Notes bear interest at 5.0% per annum and mature on September 5, 2015. However, in certain circumstances, the Company may be required to make pre-payments on these Senior Notes on November 1 of each year if "excess cash flow" was generated by the Company in the preceding fiscal year. Excess cash flow is defined as an amount equal to consolidated net income, less such amounts that the Company's board of directors determines necessary to (1) maintain an A.M. Best rating of at least "A" (Excellent) for each of the U.S. Insurance Subsidiaries; (2) make dividend payments from certain subsidiaries; (3) maintain the statutory surplus of the Company's insurance subsidiaries at acceptable levels and (4) allow the Company's insurance subsidiaries to maintain adequate levels of working capital.
On September 4, 2003, the Company contributed $130,000 to Wind River Insurance Company (Barbados), Ltd. On September 5, 2003, the Company contributed Wind River Investment Corporation and $197.5 million to Wind River Insurance Company (Barbados), Ltd.
In connection with the acquisition of Wind River Investment Corporation on September 5, 2003, certain key executives purchased 198,750 shares of Class A common stock at $10.00 per share.
UNITED NATIONAL GROUP, LTD.
NOTES TO BALANCE SHEET -- (CONTINUED)
On September 5, 2003, the Company issued options to purchase 1,138,574 shares of Class A common stock and warrants to purchase 55,000 shares of Class A common stock.
On September 17, 2003, the Company filed a Registration Statement under the Securities Act of 1933 stating that it intends to sell shares of Class A common stock to the public. The Company intends to use the proceeds from the offering to redeem the outstanding shares of Series A preferred shares. Any remaining proceeds are expected be used for general corporate purposes, including capital contributions to the Company's insurance subsidiaries.
On September 30, 2003, our subsidiary, American Insurance Service, Inc., a Delaware Corporation ("AIS"), sold $10.0 million (aggregate liquidation preference) of Floating Rate Preferred Securities to Dekania CDO I, Ltd., an exempted company incorporated with limited liability under the laws of the Cayman Islands ("Dekania"), in a private placement through AIS's wholly-owned Delaware subsidiary, United National Group Capital Trust I (the "Trust").
AIS, through the Trust, together with other insurance companies and insurance holding companies, issued trust preferred securities to the collateralized debt obligation pool organized by Dekania, which in turn issued its securities to institutional and accredited investors. The Trust issued 10,000 trust preferred securities, having a stated liquidation amount of $1,000 per security, which mature on September 30, 2033 and bear a floating interest rate, reset quarterly, equal to LIBOR plus 4.05%. AIS, through the Trust, has the right to call the trust preferred securities at par after September 30, 2008. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, and satisfy the eligibility requirements of Rule 144A(d)(3) under the Act.
The entire proceeds from the sale of the trust preferred securities was used for the purchase of $10.0 million (in principal amount) of unsecured junior subordinated deferrable interest notes issued by AIS under a junior subordinated indenture dated as of September 30, 2003 between AIS and JPMorgan Chase Bank, as indenture trustee.
During September 2003, $25.0 million of Series A preferred shares were exchanged for 2,687,500 Class B common shares.
GLOSSARY OF SELECTED INSURANCE TERMS
Admitted...................... An insurer that is authorized and licensed to
do business in a given jurisdiction.
Broker........................ An intermediary that negotiates contracts of
insurance or reinsurance on behalf of an
insured party, receiving a commission from the
insurer or reinsurer for placement and other
services rendered.
Capacity...................... The percentage of surplus, or the dollar amount
of exposure, that an insurer or reinsurer is
willing or able to place at risk. Capacity may
apply to a single risk, a program, a line of
business or an entire book of business.
Capacity may be constrained by legal
restrictions, corporate restrictions or
indirect restrictions.
Casualty Insurance or
Reinsurance................... Insurance or reinsurance that is primarily
concerned with the losses caused by injuries to
third persons, i.e., not the insured, or to
property owned by third persons and the legal
liability imposed on the insured resulting
therefrom. It includes, but is not limited to,
employers' liability, workers' compensation,
public liability, automobile liability,
personal liability and aviation liability
insurance. It excludes certain types of losses
that by law or custom are considered as being
exclusively within the scope of other types of
insurance or reinsurance, such as fire or
marine.
Catastrophe................... A severe loss, typically involving multiple
claimants. Common perils include earthquakes,
hurricanes, hailstorms, severe winter weather,
floods, fires, tornadoes, explosions and other
natural or man-made disasters. Catastrophe
losses may also arise from acts of war, acts of
terrorism and political instability.
Cede; Ceding Company.......... When an insurer reinsures some or all of its
liability with another insurer, it "cedes"
business and is referred to as the "ceding
company."
Claim......................... Request by an insured or reinsured for
indemnification by an insurance company or a
reinsurance company for loss incurred from an
insured peril or event.
Clash......................... Exposure to a larger single loss than intended
due to losses incurred under two or more
coverages or policies for the same event.
Combined Ratio................ The sum of the expense ratio and the losses and
loss adjustment expense ratio.
Development................... The difference between the amount of reserves
for losses and loss adjustment expenses
initially estimated by an insurer and the
amount reestimated in an evaluation on a later
date.
Direct Insurance.............. Insurance sold by an insurer that contracts
with the insured, as distinguished from
reinsurance.
Directors and Officers
Liability..................... Insurance that covers liability for corporate
directors and officers for wrongful acts,
subject to applicable exclusions, terms and
conditions of the policy.
G-1
|
Premiums Earned............... That portion of property and casualty premiums
written that applies to the expired portion of
the policy term. Earned premiums are recognized
as revenues under both SAP and U.S. GAAP.
Excess and Surplus Lines...... Lines of insurance that admitted companies
generally are not providing in a given
jurisdiction and which are placed through
excess and surplus line brokers with companies
not admitted in the jurisdiction. Excess and
surplus lines policies generally are not
subject to regulations governing premium rates
or policy language. Excess and surplus lines
coverage may be provided for specialty products
or for standard coverages that at such time are
not being offered by admitted companies in the
particular jurisdiction.
Excess of Loss................ Reinsurance or insurance that indemnifies the
reinsured or insured against all or a specified
portion of losses over a specified currency
amount or "retention."
Exclusions.................... Provisions in an insurance or reinsurance
policy excluding certain risks or otherwise
limiting the scope of coverage.
Expense Ratio................. Under SAP, the ratio of underwriting expenses
to net premiums written. Under generally
accepted accounting principles, the ratio of
acquisition costs and underwriting expenses to
net premiums earned.
Exposure...................... The possibility of loss. A unit of measure of
the amount of risk a company assumes.
Frequency..................... The number of claims occurring during a given
coverage period.
General Agency................ An independent agency that represents one or
more insurers and has the authority to appoint
sub-agents who write their business through the
general agency. A general agency places
insurance with an insurance company in
accordance with underwriting criteria, terms
and rates established by the insurance company.
Gross Premiums Written and
Acquired...................... Total premiums for insurance written and
assumed reinsurance during a given period.
Incurred but Not Reported, or
"IBNR"........................ The liability for future payments on losses
which have occurred but have not yet been
reported in the insurer's records. This may
include expected future development on reported
claims.
Liability Insurance........... Same as casualty insurance.
Loss; Losses.................. An occurrence that is the basis for submission
or payment of a claim. Losses may be covered,
limited or excluded from coverage, depending on
the terms of the policy.
Loss Adjustment Expense....... The expenses of settling claims, including
legal and other fees.
Loss Expenses................. The expenses of settling claims, including
legal and other fees and the portion of general
expenses allocated to claim settlement costs.
G-2
|
Losses and Loss Adjustment
Expense Ratio................. The ratio of incurred losses and loss
adjustment expenses to premiums earned.
Incurred losses include an estimated provision
for incurred but not reported claims.
Loss Reserves................. Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims incurred that the insurer or reinsurer
will ultimately be required to pay in respect
of insurance or reinsurance it has written.
Reserves are established for losses and for
loss expenses, and consist of case reserves and
IBNR reserves. As the term is used in this
prospectus, "loss reserves" is meant to include
reserves for both losses and for loss expenses.
Losses Incurred............... The total losses sustained by an insurer or
reinsurer under a policy or policies, whether
paid or unpaid. Incurred losses include a
provision for IBNR.
National Association of
Insurance Commissioners, or
"NAIC"........................ An organization of the insurance commissioners
or directors of all 50 states and the District
of Columbia organized to promote consistency of
regulatory practice and statutory accounting
standards throughout the United States.
Net Premiums Earned........... The portion of net premiums written during or
prior to a given period that was actually
recognized as income during such period.
Net Premiums Written.......... Premiums retained by an insurer after deducting
premiums on business ceded to others.
Non-Admitted.................. An insurer not licensed in a given
jurisdiction, but writing insurance in that
jurisdiction on an unregulated basis with the
permission of the insurance regulatory
authorities of that jurisdiction. In some
jurisdictions, non-admitted companies appear on
a list of approved, non-admitted companies.
Policyholders' Surplus........ The amount remaining after all liabilities of
an insurance company are subtracted from all of
its assets, applying statutory accounting
principles. This amount is regarded as
financial protection to policyholders in the
event an insurer suffers unexpected or
unreserved losses.
Premiums...................... The amount charged during the term on policies
and contracts issued, renewed or reinsured by
an insurance company or reinsurance company.
Professional Liability........ Insurance that provides coverage for attorneys,
doctors, accountants and other professionals.
Rates......................... Amounts charged per unit of insurance and
reinsurance.
Reinsurance................... A procedure whereby an insurer remits or cedes
a portion of the premium to a reinsurer as
payment to the reinsurer for assuming a portion
of the related risk.
Reported Losses............... Claims or potential claims that have been
identified to a reinsurer by a ceding company
or to an insurer by an insured.
G-3
|
Reserves...................... Estimates at a given point in time of amounts
that an insurance carrier expects to pay on
losses based on facts and circumstances then
known.
Retention..................... The amount of exposure a policyholder company
retains on any one risk or group of risks. The
term may apply to an insurance policy, where
the policyholder is an individual, family or
business, or a reinsurance policy, where the
policyholder is an insurance company.
Risk-Based Capital, or
"RBC"......................... A measure adopted by the NAIC and enacted by
states for determining the minimum statutory
capital and surplus requirements of insurers
with required regulatory and company actions
that apply when an insurer's capital and
surplus is below these minimums.
Specialty Lines............... Lines of insurance for risks that are unique,
unusual or otherwise difficult to find insurers
willing to insure.
Statutory Accounting
Principles, or "SAP".......... Those principles required by state law that
must be followed by insurers in submitting
their financial statements to state insurance
departments.
TPAs.......................... Third party administrators that are used to
assist in the processing of claims.
Underwriting.................. The process of reviewing applications submitted
for insurance coverage and determining whether
to accept all or part of the coverage being
requested and what the applicable premiums,
terms and conditions should be.
Underwriting Expense.......... As used in the definition of "Expense Ratio,"
the aggregate of policy acquisition costs and
the portion of general and administrative and
other expenses of an insurer attributable to
underwriting operations.
U.S. GAAP..................... United States generally accepted accounting
principles as defined by the American Institute
of Certified Public Accountants or statements
of the Financial Accounting Standards Board.
U.S. GAAP is the method of accounting to be
used by the Company for reporting to
shareholders.
Umbrella Liability............ A form of insurance protection against losses
in excess of amounts covered by other liability
insurance policies or amounts not covered by
the usual liability policies.
Underwriter................... An employee of an insurance or reinsurance
company who examines, accepts or rejects risks
and classifies accepted risks in order to
charge an appropriate premium for each accepted
risk. The underwriter is expected to select
business that will produce an average risk of
loss no greater than that anticipated for the
class of business.
Unearned Premium.............. The portion of premiums written that is
allocable to the unexpired portion of the
policy term.
G-4
|
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- |
Through and including , 2003 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
SHARES
[UNITED NATIONAL GROUP LOGO]
UNITED NATIONAL GROUP, LTD.
CLASS A COMMON SHARES
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
DOWLING & PARTNERS SECURITIES, LLC
FOX-PITT, KELTON
KEEFE, BRUYETTE & WOODS, INC.
, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses expected to be incurred by the registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions.
Securities and Exchange Commission registration fee......... $18,607
National Association of Securities Dealers, Inc. filing
fee....................................................... 23,500
Nasdaq National Market listing fee.......................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Registrar and transfer agent fees and expenses.............. *
Miscellaneous fees and expenses............................. *
-------
Total.................................................. $ *
=======
|
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The articles of association of the registrant provide for the indemnification of its directors and officers. Specifically, under the indemnification provisions, the registrant will indemnify its directors and officers to the fullest extent permitted by law against liabilities that are incurred by the directors or officers while executing the duties of their respective offices. The directors and officers, however, will not be entitled to the indemnification if they incurred the liabilities through their own willful default or fraud.
The board resolutions of the registrant provide for the indemnification of its directors and officers against any claims arising out of or relating to the preparation, filing and distribution of this registration statement or the prospectus contained in this registration statement. The resolutions expressly authorize the registrant to indemnify its directors and officers to the fullest extent permitted by law.
The registrant is an exempted company with limited liability incorporated in the Cayman Islands. As such, it is subject to and governed by the laws of the Cayman Islands with respect to the indemnification provisions. Although The Companies Law (2003 Revision) of the Cayman Islands does not specifically restrict a Cayman Islands company's ability to indemnify its directors or officers, it does not expressly provide for such indemnification either. Certain English case law (which is likely to be persuasive in the Cayman Islands), however, indicate that the indemnification is generally permissible, unless there had been fraud, willful default or reckless disregard on the part of the director or officer in question.
The registrant has entered into indemnification agreements with its directors and officers, whereby the registrant agreed to indemnify its directors and officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or officer was, or is threatened to be made, a party by reason of the fact that such director or officer is or was a director, officer, employee or agent of the registrant, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, the best interest of the registrant. At present, there is no pending litigation or proceeding involving a director or officer of the registrant regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.
II-1
The registrant maintains insurance policies that indemnify its directors and officers against various liabilities arising under the Securities Act of 1933 and the Securities Exchange Act of 1934 that might be incurred by any director or officer in his capacity as such.
The underwriters are obligated, under certain circumstances, pursuant to the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify the registrant, the directors, certain officers and controlling persons of the registrant against liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years prior to the filing of this registration statement, the registrant issued the following unregistered securities:
1. Upon the incorporation of the registrant on August 26, 2003, one subscriber share was issued to the incorporator, Roderick Palmer, which share was repurchased by the registrant on September 5, 2003. Such sale was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering.
2. On August 29, 2003, the registrant issued 15,000 Class B Common Shares, par value $0.0001 per share (the "Class B Shares") to U.N. Holdings (Cayman) Ltd. in exchange for consideration of $150,000 in cash. Such sale was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering.
3. On September 5, 2003, the registrant issued an aggregate of 2,500,000 Class A Common Shares, par value $0.0001 per share (the "Class A Shares"), 9,985,000 Class B Shares, and 17,500,000 Series A Preferred Shares, par value $0.0001 per share (the "Preferred Shares"), in connection as described under "Our Relationship with Fox Paine & Company." Such sales were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering. The Amended and Restated Investment Agreement pursuant to which such issuances were effected is filed as an exhibit to this registration statement.
4. On September 5, 2003, the registrant issued an aggregate of 198,750 Class A Shares to Seth A. Freudberg, Richard S. March, Kevin L. Tate, Robert Cohen, William F. Schmidt and Jonathan Ritz, each of whom is an officer of subsidiaries of the registrant, in exchange for an aggregate of $2 million in cash. Such sales were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering.
5. On September 5, 2003, options to purchase an aggregate of 1,138,574 Class A Shares were granted under the registrant's Stock Incentive Plan at a weighted average exercise price of $9.21 per share. The issuance of the Class A Shares under such plan was deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensation benefit plans and contracts relating to compensation.
6. On September 11, 2003, we issued warrants to purchase an aggregate of 55,000 Class A common shares with an exercise price of $10.00 per share. Such issuances were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are being filed with this registration statement pursuant to Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* Form of Underwriting Agreement
2.1 Amended and Restated Investment Agreement, dated as of
September 5, 2003, by and among U.N. Holdings (Cayman),
Ltd., United National Group Ltd., U.N. Holdings II, Inc.,
U.N. Holdings Inc., Wind River Investment Corporation and
certain Trusts Listed on Schedule A thereof
3.1* Amended and Restated Memorandum and Articles of Association
of United National Group Ltd.
3.2 Written Resolutions of the Board of Directors Designating
the Rights and Preferences of the Series A Preferred Shares
of United National Group Ltd., dated September 5, 2003
4.1* Form of 5.0% Senior Note, due September 5, 2015, of Wind
River Investment Corporation
4.2* Deed of Guaranty, dated September 5, 2003, by United
National Group Ltd. in favor of the holders of the 5.0%
Senior Notes, due September 5, 2015, of Wind River
Investment Corporation
5.1* Legal Opinion of Walkers
10.1* Amended and Restated Shareholders Agreement, dated as of
, 2003, by and among United National Group Ltd.,
U.N. Holdings (Cayman) Ltd. and those trusts signatory
thereto
10.2 Management Shareholders Agreement, dated as of September 5,
2003, by and among United National Group Ltd. and those
management shareholder signatory thereto
10.3 Management Agreement, dated as of September 5, 2003, by and
among United National Group Ltd., Fox Paine & Company, LLC
and The AMC Group, L.P., with related Indemnity Letter
10.4* United National Group Ltd. Stock Incentive Plan
10.5 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Seth D.
Freudberg
10.6 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Richard S.
March
10.7 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Kevin L. Tate
10.8 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Robert Cohen
10.9 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and William F.
Schmidt
10.10 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Jonathan Ritz
11.1* Statement Regarding Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Walkers (included in Exhibit 5.1)
23.3* Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.4* Consent of David King & Co.
23.5* Consent of Appleby Spurling & Kempe
24.1+ Powers of Attorney
27.1* Financial Data Schedule
99.1* Form F-N
|
* To be filed by amendment.
+ Previously filed.
II-3
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on October 28, 2003.
UNITED NATIONAL GROUP, LTD.
By: /s/ SAUL A. FOX ------------------------------------ Name: Saul A. Fox Title: Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below on October 28, 2003.
SIGNATURE TITLE
--------- -----
/s/ SAUL A. FOX Chairman and Chief Executive Officer
--------------------------------------------------------
Saul A. Fox
/s/ TROY W. THACKER President and Director
--------------------------------------------------------
Troy W. Thacker
/s/ KEVIN L. TATE Principal Financial and Accounting Officer
--------------------------------------------------------
Kevin L. Tate
/s/ W. DEXTER PAINE, III Director
--------------------------------------------------------
W. Dexter Paine, III
/s/ ANGELOS J. DASSIOS Director
--------------------------------------------------------
Angelos J. Dassios
/s/ RUSSELL C. BALL, III Director
--------------------------------------------------------
Russell C. Ball, III
|
II-5
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Wind River Investment Corporation:
Our audits of the consolidated financial statements referred to in our report dated June 25, 2003 appearing in this Registration Statement on Form S-1 also included an audit of the financial statement schedules listed in Item 16(a)(2) of this Registration Statement. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Philadelphia, PA
June 25, 2003
WIND RIVER INVESTMENT CORPORATION
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS
IN RELATED PARTIES AS OF DECEMBER 31, 2002
AMOUNT AT
WHICH
SHOWN IN THE
COST* VALUE BALANCE SHEET
------------ ------------ -------------
TYPE OF INVESTMENT:
BONDS
United States Government and government agencies
and authorities............................... $ 29,364,450 $ 30,667,363 $ 30,667,363
States, municipalities, and political
subdivisions.................................. 395,938,043 407,297,598 407,297,598
Foreign Governments.............................. -- -- --
Public Utilities................................. 823,049 748,125 748,125
Convertibles and bonds with warrants attached.... 14,090,269 13,859,313 13,859,313
All other corporate bonds........................ 9,654,972 8,452,673 8,452,673
Certificates of deposit............................ -- -- --
Redeemable preferred stock......................... 825,404 653,600 653,600
------------ ------------ ------------
Total fixed maturities...................... $450,696,187 $461,678,672 $461,678,672
============ ============ ============
EQUITY SECURITIES
Common Stocks...................................... 669,740 542,327 542,327
Public Utilities................................. 4,437,379 3,863,048 3,863,048
Banks, trusts and insurance companies............ 32,038,313 27,198,250 27,198,250
Non-redeemable preferred stock..................... 2,159,780 2,452,888 2,452,888
------------ ------------ ------------
Total equity securities..................... $ 39,305,212 $ 34,056,513 $ 34,056,513
============ ============ ============
Mortgage loans on real estate...................... $ 1,166,556 $ 1,166,556 $ 1,166,556
Real estate........................................ -- -- --
Policy loans....................................... -- -- --
Other long-term investments........................ 42,354,777 41,285,106 41,285,106
Short-term investments............................. -- -- --
------------ ------------ ------------
Total Investments........................... $533,522,732 $538,186,847 $538,186,847
============ ============ ============
|
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.
WIND RIVER INVESTMENT CORPORATION
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
FUTURE POLICY OTHER BENEFITS,
DEFERRED BENEFITS, POLICY CLAIMS,
POLICY LOSSES, CLAIMS AND NET LOSSES AND
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES
------- ----------- -------------- ------------ -------- ------------ ----------- ------------
2000:
Excess and Surplus
Lines.............. $ -- $ -- $ -- $ -- $ 40,504,000 $ -- $ 24,613,000
Specialty Admitted... -- -- -- -- 25,677,000 -- 18,408,000
Reinsurance.......... -- -- -- -- 70,750,000 -- 70,130,000
Corporate............ (8,000) 800,630,000 150,078,000 -- -- 22,490,000 --
Total................ $ (8,000) $ 800,630,000 $150,078,000 $ -- $136,931,000 $22,490,000 $113,151,000
2001:
Excess and Surplus
Lines.............. $ -- $ -- $ -- $ -- $ 59,004,000 $ -- $ 43,880,000
Specialty Admitted... -- -- -- -- 36,582,000 -- 29,075,000
Reinsurance.......... -- -- -- -- 54,750,000 -- 55,383,000
Corporate............ 428,000 907,357,000 214,028,000 -- -- 19,353,000 --
Total................ $ 428,000 $ 907,357,000 $214,028,000 $ -- $150,336,000 $19,353,000 $128,338,000
2002:
Excess and Surplus
Lines.............. $ -- $ -- $ -- $ -- $101,474,000 $ -- $128,642,000
Specialty Admitted... -- -- -- -- 53,039,000 -- 64,857,000
Reinsurance.......... -- -- -- -- 8,250,000 -- 8,251,000
Corporate............ 3,289,000 2,004,422,000 247,138,000 -- -- 17,685,000 --
Total................ $3,289,000 $2,004,422,000 $247,138,000 $ -- $162,763,000 $17,685,000 $201,750,000
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
------- ------------ ----------- ------------
2000:
Excess and Surplus
Lines.............. $ -- $ $ 40,663,000
Specialty Admitted... -- -- 24,909,000
Reinsurance.......... -- -- 62,000,000
Corporate............ 280,000 2,918,000 --
Total................ $ 280,000 $ 2,918,000 $127,572,000
2001:
Excess and Surplus
Lines.............. $ -- $ -- $ 68,226,000
Specialty Admitted... -- -- 39,084,000
Reinsurance.......... -- -- 62,000,000
Corporate............ (436,000) 2,220,000 --
Total................ $ (436,000) $ 2,220,000 $169,310,000
2002:
Excess and Surplus
Lines.............. $ -- $ -- $112,110,000
Specialty Admitted... -- -- 60,579,000
Reinsurance.......... -- -- --
Corporate............ 2,861,000 5,874,000 --
Total................ $ 2,861,000 $ 5,874,000 $172,689,000
|
WIND RIVER INVESTMENT CORPORATION
SCHEDULE IV -- REINSURANCE
EARNED PREMIUMS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
(DOLLARS IN THOUSANDS) -------- --------- ------------ ---------- ----------
2000
Property & Liability Insurance...... $374,179 $311,875 $74,627 $136,931 54%
2001
Property & Liability Insurance...... $547,963 $456,226 $58,599 $150,336 39%
2002
Property & Liability Insurance...... $750,426 $597,201 $ 9,538 $162,763 6%
|
WIND RIVER INVESTMENT CORPORATION
SCHEDULE VI -- SUPPLEMENTARY INFORMATION FOR PROPERTY CASUALTY UNDERWRITERS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
RESERVES FOR
DEFERRED UNPAID CLAIMS
POLICY AND CLAIM DISCOUNT IF ANY
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED NET INVESTMENT
(DOLLARS IN THOUSANDS) COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME
---------------------- ----------- ------------- --------------- -------- -------- --------------
Consolidated Property
& Casualty Entities
2002............... $3,289 $2,004,422 $247,138 $162,763 $17,685
2001............... 428 907,357 214,028 150,336 19,353
2000............... (8) 800,630 150,078 136,931 22,490
Unconsolidated
Property Casualty
Entities(1)
2002...............
2001...............
2000...............
Proportionate share of
UNG and its
subsidiaries
50-percent-or-less-
owned property
casualty
investees(1)
2002...............
2001...............
2000...............
CLAIMS AND CLAIM
ADJUSTMENT EXPENSE AMORTIZATION OF PAID CLAIMS
INCURRED RELATED TO DEFERRED POLICY AND CLAIM
------------------------- ACQUISITION ADJUSTMENT PREMIUMS
(DOLLARS IN THOUSANDS) CURRENT YEAR PRIOR YEAR COSTS EXPENSES WRITTEN
---------------------- ------------ ---------- --------------- ----------- --------
Consolidated Property
& Casualty Entities
2002............... $130,327 $ 71,423 $(2,861) $ 97,714 $172,689
2001............... 134,558 (6,220) (436) 102,680 169,310
2000............... 123,476 (10,325) 280 149,892 127,572
Unconsolidated
Property Casualty
Entities(1)
2002...............
2001...............
2000...............
Proportionate share of
UNG and its
subsidiaries
50-percent-or-less-
owned property
casualty
investees(1)
2002...............
2001...............
2000...............
|
(1) All of the Company's subsidiaries are 100% owned and consolidated.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* Form of Underwriting Agreement
2.1 Amended and Restated Investment Agreement, dated as of
September 5, 2003, by and among U.N. Holdings (Cayman),
Ltd., United National Group, Ltd., U.N. Holdings II, Inc.,
U.N. Holdings LLC, U.N. Holdings Inc., Wind River Investment
Corporation and certain Trusts Listed on Schedule A thereof
3.1* Amended and Restated Memorandum and Articles of Association
of United National Group Ltd.
3.2 Written Resolutions of the Board of Directors Designating
the Rights and Preferences of the Series A Preferred Shares
of United National Group, Ltd., dated September 5, 2003
4.1* Form of 5.0% Senior Note, due September 5, 2015, of Wind
River Investment Corporation
4.2* Deed of Guaranty, dated September 5, 2003, by United
National Group, Ltd. in favor of the holders of the 5.0%
Senior Notes, due September 5, 2015, of Wind River
Investment Corporation
5.1* Legal Opinion of Walkers
10.1* Amended and Restated Shareholders Agreement, dated as of
, 2003, by and among United National Group Ltd.,
U.N. Holdings (Cayman) Ltd. and those trusts signatory
thereto
10.2 Management Shareholders Agreement, dated as of September 5,
2003, by and among United National Group, Ltd. and those
management shareholder signatory thereto
10.3 Management Agreement, dated as of September 5, 2003, by and
among United National Group, Ltd., Fox Paine & Company, LLC
and The AMC Group, L.P., with related Indemnity Letter
10.4* United National Group, Ltd. Stock Incentive Plan
10.5 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Seth D.
Freudberg
10.6 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Richard S.
March
10.7 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Kevin L. Tate
10.8 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Robert Cohen
10.9 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and William F.
Schmidt
10.10 Employment Agreement, dated as of September 5, 2003, by and
between United National Insurance Company and Jonathan Ritz
11.1* Statement Regarding Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Walkers (included in Exhibit 5.1)
23.3* Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.4* Consent of David King & Co.
23.5* Consent of Appleby Spurling & Kempe
24.1+ Powers of Attorney
27.1* Financial Data Schedule
99.1* Form F-N
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* To be filed by amendment.
+ Previously filed.
EXHIBIT 2.1
AMENDED AND RESTATED
INVESTMENT AGREEMENT
dated as of
September 5, 2003
among
U.N. HOLDINGS (CAYMAN), LTD.,
VIGILANT INTERNATIONAL, LTD.,
U.N. HOLDINGS II, INC., U.N. HOLDINGS LLC,
U.N. HOLDINGS INC.,
WIND RIVER INVESTMENT CORPORATION
and
THOSE TRUSTS LISTED ON SCHEDULE A
TABLE OF CONTENTS
PAGE
ARTICLE 1
DEFINITIONS
Section 1.01 Definitions............................................................................... 2
ARTICLE 2
PURCHASE, SALE AND CONTRIBUTION
Section 2.01 The Transactions.......................................................................... 10
Section 2.02 Closing................................................................................... 11
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
WIND RIVER AND THE TRUSTS
Section 3.01 Organization, Good Standing and Qualification............................................. 13
Section 3.02 Corporate Authorization; Approvals........................................................ 13
Section 3.03 Noncontravention.......................................................................... 14
Section 3.04 Capital Structure......................................................................... 14
Section 3.05 Subsidiaries.............................................................................. 15
Section 3.06 Other Equity Interests.................................................................... 15
Section 3.07 Governmental Authorization................................................................ 15
Section 3.08 Financial Statements; Undisclosed Liabilities............................................. 16
Section 3.09 Regulatory Reports........................................................................ 17
Section 3.10 Absence of Certain Changes................................................................ 17
Section 3.11 Compliance with Laws; Permits............................................................. 18
Section 3.12 Litigation................................................................................ 19
Section 3.13 Employee Benefits......................................................................... 20
Section 3.14 Labor..................................................................................... 22
Section 3.15 Employees................................................................................. 22
Section 3.16 Taxes..................................................................................... 23
Section 3.17 Intellectual Property; Data Security...................................................... 25
Section 3.18 Brokers and Finders....................................................................... 26
Section 3.19 Actuarial Analyses........................................................................ 26
Section 3.20 Material Contracts........................................................................ 26
Section 3.21 Risk Management........................................................................... 27
Section 3.22 Derivatives............................................................................... 27
Section 3.23 Insurance Coverage........................................................................ 27
Section 3.24 Records................................................................................... 28
Section 3.25 Properties................................................................................ 28
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Section 3.26 Environmental Matters..................................................................... 28
Section 3.27 Investments............................................................................... 29
Section 3.28 Reinsurance Agreements.................................................................... 29
Section 3.29 Insurance Brokers......................................................................... 29
Section 3.30 Disclosure................................................................................ 30
ARTICLE 4
REPRESENTATION AND WARRANTIES OF THE TRUSTS
Section 4.01 Organization.............................................................................. 30
Section 4.02 Authorization; Approvals.................................................................. 30
Section 4.03 Noncontravention.......................................................................... 30
Section 4.04 Governmental Authorization................................................................ 30
Section 4.05 Ownership of Wind River Common Stock...................................................... 30
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF CAYMAN PURCHASER,
PARENT, U.S. PURCHASER AND THE COMPANY
Section 5.01 Organization.............................................................................. 31
Section 5.02 Authorization; Approvals.................................................................. 31
Section 5.03 Noncontravention.......................................................................... 31
Section 5.04 Governmental Authorization................................................................ 32
Section 5.05 Purchase for Investment................................................................... 32
Section 5.06 No Inducement or Reliance; Forecasts and Projections...................................... 32
Section 5.07 Brokers and Finders....................................................................... 33
Section 5.08 Ownership of Parent; No Prior Activities.................................................. 33
ARTICLE 6
COVENANTS OF WIND RIVER AND THE TRUSTS
Section 6.01 Conduct of Business....................................................................... 34
Section 6.02 Access to Information..................................................................... 37
Section 6.03 Notices of Certain Events................................................................. 38
Section 6.04 Resignations.............................................................................. 38
Section 6.05 Nonsolicitation........................................................................... 38
Section 6.06 Intercompany Accounts..................................................................... 39
Section 6.07 Covenant Not to Compete; Nonsolicitation of Employees..................................... 39
Section 6.08 Adjustment of Principal of Senior Notes................................................... 40
Section 6.09 Certain Employee Benefits................................................................. 40
Section 6.10 Non-Marketable Securities................................................................. 40
Section 6.11 Data Security............................................................................. 41
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ARTICLE 7
COVENANTS OF CAYMAN PURCHASER, PARENT,
U.S. PURCHASER AND THE COMPANY
Section 7.01 Confidentiality........................................................................... 41
Section 7.02 Directors' and Officers' Indemnification and Insurance.................................... 42
Section 7.03 Notices of Certain Events................................................................. 42
Section 7.04 Observer Rights........................................................................... 43
ARTICLE 8
MUTUAL COVENANTS
Section 8.01 Maintenance and Preservation of Records................................................... 43
Section 8.02 Regulatory and Other Authorizations....................................................... 43
Section 8.03 Further Assurances........................................................................ 44
Section 8.04 Employee Benefit Matters.................................................................. 44
ARTICLE 9
TAX MATTERS
Section 9.01 Indemnification by the Trusts............................................................. 46
Section 9.02 Filing of Tax Returns..................................................................... 47
Section 9.03 Tax Refunds............................................................................... 47
Section 9.04 Cooperation............................................................................... 48
Section 9.05 Contests.................................................................................. 48
Section 9.06 Coordination.............................................................................. 49
Section 9.07 Miscellaneous............................................................................. 50
Section 9.08 No Election under Section 338(h)(10)...................................................... 50
ARTICLE 10
CONDITIONS
Section 10.01 Mutual Conditions......................................................................... 50
Section 10.02 Conditions to Obligations of Cayman Purchaser, Parent,
U.S. Purchaser and the Company............................................................ 50
Section 10.03 Conditions to Obligations of Wind River and the Trusts.................................... 52
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ARTICLE 11
SURVIVAL; INDEMNIFICATION
Section 11.01 Survival.................................................................................. 52
Section 11.02 Indemnification........................................................................... 53
Section 11.03 Procedures................................................................................ 54
Section 11.04 Calculation of Damages.................................................................... 55
Section 11.05 Exclusivity............................................................................... 55
Section 11.06 Trust Arrangements........................................................................ 56
ARTICLE 12
TERMINATION
Section 12.01 Grounds for Termination................................................................... 56
Section 12.02 Effect of Termination..................................................................... 57
ARTICLE 13
MISCELLANEOUS
Section 13.01 Notices................................................................................... 57
Section 13.02 Amendments and Waivers.................................................................... 58
Section 13.03 Expenses.................................................................................. 58
Section 13.04 Successors and Assigns.................................................................... 58
Section 13.05 Governing Law............................................................................. 58
Section 13.06 Jurisdiction.............................................................................. 59
Section 13.07 WAIVER OF JURY TRIAL...................................................................... 59
Section 13.08 Counterparts; Third Party Beneficiaries................................................... 59
Section 13.09 Entire Agreement.......................................................................... 59
Section 13.10 Captions.................................................................................. 59
Section 13.11 Specific Performance...................................................................... 59
Section 13.12 Severability.............................................................................. 59
Section 13.13 Publicity................................................................................. 60
Section 13.14 Trustees.................................................................................. 60
Section 13.15 Waiver of Conflict........................................................................ 60
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SCHEDULES
SCHEDULE A -- The Trusts SCHEDULE B -- Obligors SCHEDULE C -- Knowledge Individuals SCHEDULE D -- Regulatory Approvals SCHEDULE E -- Certificate Officers |
EXHIBITS
EXHIBIT 1 -- Form of Employment Agreement EXHIBIT 2 -- Form of Deed of Guaranty EXHIBIT 3 -- Form of Management Agreement EXHIBIT 4 -- Terms of Parent Preferred Shares EXHIBIT 5 -- Form of Senior Note EXHIBIT 6 -- Form of Shareholders Agreement |
AMENDED AND RESTATED INVESTMENT AGREEMENT dated as of September 5, 2003, among U.N. HOLDINGS (CAYMAN), LTD., an exempted company formed with limited liability under the laws of the Cayman Islands ("Cayman Purchaser"), VIGILANT INTERNATIONAL, LTD., an exempted company formed with limited liability under the laws of the Cayman Islands ("Parent"), U.N. HOLDINGS II, INC., a Delaware corporation ("U.S. Purchaser"), U.N. HOLDINGS LLC, a Delaware limited liability company ("U.N. Holdings LLC"), U.N. HOLDINGS INC., a Delaware corporation (the "Company"), WIND RIVER INVESTMENT CORPORATION, a Delaware corporation ("Wind River"), and those trusts set forth on Schedule A (the "Trusts").
W I T N E S S E T H :
WHEREAS, U.N. Holdings LLC, the Company, Wind River and the Trusts entered into that certain Investment Agreement, dated as of May 1, 2003, as amended May 30, 2003, August 7, 2003 and August 26, 2003 (the "Original Investment Agreement"), and the parties hereto desire that this Agreement amend and restate the Original Investment Agreement in its entirety;
WHEREAS, U.N. Holdings LLC acknowledges that as a result of this Agreement, it will not be a party to the Transactions (as defined below) as contemplated by the Original Investment Agreement;
WHEREAS, the Trusts own all of the issued and outstanding capital stock of Wind River;
WHEREAS, the Company is a direct wholly-owned subsidiary of U.S. Purchaser and U.S. Purchaser is an indirect wholly-owned subsidiary of Parent;
WHEREAS, Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River and the Trusts desire to enter into a transaction in which, among other things (a) Cayman Purchaser shall purchase from Parent and Parent shall sell to Cayman Purchaser an aggregate of 9,985,000 Parent Class B Common Shares (as defined below) and an aggregate of 14,000,000 Parent Preferred Shares (as defined below) for aggregate consideration of $239,850,000 in cash, (b) the Trusts shall contribute an aggregate of 42.946470 shares of Wind River Common Stock (as defined below) to the Company for 200,000 shares of Company Common Stock (as defined below), (c) the Trusts shall contribute an aggregate of 25.767883 shares of Wind River Common Stock to Parent in exchange for 2,500,000 Parent Class A Common Shares and 3,500,000 Parent Preferred Shares, (d) Parent shall contribute (or shall cause its direct and indirect subsidiaries to contribute) 25.767883 shares of Wind River Common Stock to the Company, (e) Parent shall cause U.S. Purchaser to be capitalized with at least $197,500,000 in cash, such capitalization to be effected in such manner as Parent shall determine, (f) U.S. Purchaser shall purchase from the Company and the Company shall sell to U.S. Purchaser 194,999 shares of Company Common Stock for aggregate consideration of $97,499,500 in cash, (g) U.S. Purchaser shall purchase from the Trusts and the Trusts shall sell to U.S. Purchaser 200,000 shares of Company Common Stock for aggregate consideration of $100,000,000 in cash and (h) Wind River shall redeem 31.285647 shares of Wind River Common Stock held by the Trusts in exchange for the Senior Notes (as defined below), in each case, upon the terms and subject to the conditions set forth below.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01 Definitions. (a) As used in this Agreement, the following terms have the following meanings:
"Action" means any complaint, claim, prosecution, indictment, action, suit, arbitration or proceeding by or before any Governmental Authority.
"Adjusted Statutory Surplus of UNIC" means, as of any date, the statutory surplus of UNIC as would be reflected on a balance sheet of UNIC as of such date prepared in accordance with SAP; provided, however, that, for purposes of calculating statutory surplus: (i) the sum of the amounts of unrealized gains and losses and realized gains and losses associated with unaffiliated equity securities for the period from January 1, 2003 through the date of such balance sheet shall be added back to or subtracted from, as appropriate, such statutory surplus; (ii) any reduction in statutory surplus since December 31, 2002 resulting from uncollectible or potentially uncollectible reinsurance recoverables shall be disregarded; provided, however, that the maximum reduction that shall be disregarded under this clause (ii) shall be $7.5 million and any amounts over $7.5 million shall not be disregarded and (iii) such statutory surplus shall be increased by an amount equal to $9,652,000.
"Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person.
"Agreement" means this Amended and Restated Investment Agreement, together with all Schedules and Exhibits.
"AIA" means American Insurance Adjustment Agency, Inc., a Pennsylvania corporation.
"AIS" means American Insurance Service, Inc., a Pennsylvania corporation.
"AMC Group" means The AMC Group, L.P., a Pennsylvania limited partnership.
"AMCD" means American Manufacturing Corporation, a Delaware corporation.
"AMCP" means American Manufacturing Corporation, a Pennsylvania corporation.
"Balance Sheet" means the unaudited consolidated balance sheet of AIS and the other Subsidiaries of Wind River as of the Balance Sheet Date included in the GAAP Financial Statements.
"Balance Sheet Date" means December 31, 2002.
"Barbados Insurance Company" means Wind River Insurance Company (Barbados) Ltd., a Barbados exempt insurance company.
"Closing Agreement" means a written and legally binding agreement with a Tax Authority relating to Taxes.
"Closing Date" means the date of the Closing; provided, that the Closing shall be deemed to be effective as of 11:59 p.m., Eastern Daylight Time, on the Closing Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Common Stock" means the common stock, par value $0.01, of the Company.
"Contract" means any agreement, lease, contract, license, note, mortgage, indenture, arrangement or obligation, whether written or oral, in each case, excluding policies of insurance, contracts of reinsurance or retrocessional agreements issued or entered into by one or more of the Subsidiaries.
"Deed of Guaranty" means a Deed of Guaranty to be executed by Parent and the Trusts, in substantially the form of Exhibit 2.
"Disclosure Letter" means the Disclosure Letter, dated as of the date of the Original Investment Agreement, delivered by Wind River and the Trusts to U.N. Holdings LLC and the Company, and appended to, and forming a part of, this Agreement.
"DSIC" means Diamond State Insurance Company, an Indiana corporation.
"Employee Plan" means any Plan that (i) is sponsored, entered into, maintained, administered or contributed to, as the case may be, by Wind River or any of its Subsidiaries or (ii) covers any current or former employee, officer or director of Wind River or any of its Subsidiaries with respect to service for Wind River or any of its Subsidiaries.
"Employment Agreements" means the employment agreements, by and between Wind River or one of its Subsidiaries and Seth D. Freudberg, Richard S. March, Robert Cohen, William F. Schmidt, Kevin L. Tate and Jonathan P. Ritz substantially in the form of Exhibit 1.
"Environmental Laws" means all Laws that have as their purpose
or that pertain to the protection of the environment (both indoors and
outdoors), or the regulation of any Hazardous Substances, including: (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq.; (ii) the Resource Conservation and
Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq.; (iii) the
Toxic Substances Control Act of 1976, as amended, 15 U.S.C. Section 2601 et
seq.; (iv) the Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251 et seq.; (v) the Clean Air Act, 42 U.S.C. Section 7401 et seq.;
(vi) the Superfund Amendments and Reauthorization Act of 1986, Public Law
99-499, 100 Stat. 1613; (vii) the Safe Drinking Water Act, 42 U.S.C. Section
300(f) et seq.; and (viii) all regulations promulgated in connection with any of
the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliates" means Wind River, its Subsidiaries and any other entity that is, or was at the relevant time, (i) treated as a single employer under Section 414 of the Code with Wind River or any of its Subsidiaries or (ii) a member of the same "controlled group" as Wind River or any of its Subsidiaries, pursuant to Section 4001(a)(14) of ERISA.
"Financial Statements" means the GAAP Financial Statements, the Wind River Financial Statements and the SAP Financial Statements.
"Fox Paine" means Fox Paine & Company, LLC, a Delaware limited liability company.
"GAAP" means U.S. generally accepted accounting principles, consistently applied.
"Governmental Authority" means any U.S. or non-U.S. governmental or regulatory authority, agency, court, commission, tribunal, body or other governmental, quasi-governmental, regulatory or self-regulatory entity, including any state insurance department or insurance or consumer finance regulatory agency, in each case, of competent jurisdiction.
"Hazardous Substances" means any waste, emission, material or substance (including gases, liquids and solids) defined or identified as toxic, hazardous or dangerous in (or for the purposes of), or that is regulated under, any Environmental Law, including asbestos, asbestos-containing materials, radon gas, urea formaldehyde foam insulation, polychlorinated biphenyls, and oil or petroleum products and by-products.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.
"IRS" means the Internal Revenue Service of the United States.
"IUI" means International Underwriters, Inc., a Pennsylvania corporation.
"J.H. Ferguson" means J.H. Ferguson & Associates, LLC, an Illinois limited liability company.
"knowledge of Wind River", "Wind River's knowledge" or any other similar knowledge qualification means the actual knowledge of those individuals set forth on Schedule C after due inquiry.
"Lien" means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance, title defect, easement, tenancy, right-of-way, license, use restriction, claim, hypothecation, assignment, preemptive right, option, right of first refusal, right of first offer, right of consent, restrictive covenant or other right, title or interest of any Person, in any such case relating to such property or asset.
"Little Round Top" means Little Round Top, Inc., a Pennsylvania corporation.
"Loyalty" means Loyalty Insurance Company, Inc., a Barbados corporation.
"Management Agreement" means the Management Agreement, by and among Fox Paine, AMC Group and Parent, substantially in the form of Exhibit 3.
"Material Adverse Change" means the occurrence of any event, incident or occurrence, or the existence of any circumstance or set of facts, that, individually or in the aggregate, has or would reasonably be expected to have a material adverse effect on the business, assets, liabilities, financial condition, results of operations or prospects of Wind River and its Subsidiaries taken as a whole, except any such effect resulting solely from or arising solely in connection with (i) changes in United States economic, regulatory or political conditions generally, including acts of war or terrorism, (ii) any event, incident or occurrence affecting the property and casualty insurance and reinsurance industry generally that, in the case of each of clause (i) and (ii), does not disproportionately affect Wind River and its Subsidiaries relative to other similarly situated businesses, (iii) the occurrence of any event, incident or occurrence that is specifically contemplated by, or that is directly related to the satisfaction of, the conditions to Closing set forth in Sections 10.02(h), (i), (k), (l) or (m) but that does not cause the condition set forth in such Section to not be satisfied or (iv) the result of the review of the reserves for claims and claims expenses of the Insurance Companies contemplated by Section 6.08(a) of the Original Investment Agreement or any event, incident or occurrence related to the recovery of amounts due from Obligors.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 3(37) of ERISA.
"Multiple Employer Plan" means a multiple employer plan within the meaning of Section 4063 or 4064 of ERISA.
"Non-Marketable Securities" means the interests in Murphy & Partners Fund, L.P., Grotech Partners, L.P., Co-Investment Fund, Liberty Associated & Partners, Bueurk, Craig, Victor LLC and Zon Capital Partners held in the Investment Assets and the notes receivable from 181 Properties, L.P. and AMC Group.
"Obligors" means those obligors of Wind River or its Subsidiaries set forth on Schedule B.
"Parent Class A Common Shares" means the Class A Common Shares, par value $0.0001 per share, of Parent.
"Parent Class B Common Shares" means the Class B Common Shares, par value $0.0001 per share, of Parent.
"Parent Preferred Shares" means the Series A Preferred Shares, par value $0.0001 per share, of Parent, the rights and preferences of which are set forth in the resolutions of the Parent's Board of Directors included in Exhibit 4.
"Parent Shares" means Parent Class A Common Shares, the Parent Class B Common Shares and Parent Preferred Shares.
"Person" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a Governmental Authority.
"Plan" means any employment, severance or similar contract, agreement or arrangement (whether or not written) or any plan, policy, fund, program or contract or arrangement (whether or not written) providing for compensation, bonus, profit-sharing, stock option, or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance or other benefits).
"Post-Closing Tax Period" means any taxable period beginning after the Closing Date; and, with respect to a taxable period that begins on or before the Closing Date and ends thereafter, the portion of such taxable period beginning after the Closing Date.
"Pre-Closing Tax Period" means any taxable period ending on or before the Closing Date; and, with respect to a taxable period that begins on or before the Closing Date and ends thereafter, the portion of such taxable period ending on and including the Closing Date.
"Property Taxes" means Taxes imposed on a periodic basis with respect to the assets of Wind River or any of its Subsidiaries, or otherwise measured by the level of any asset, including real, personal and intangible ad valorem property taxes.
"Records" means all books and records of Wind River and its Subsidiaries, including all accounting (including accounting work papers), financial reporting, tax, business, marketing, environmental, legal, corporate and other files, documents, instruments and papers, whether originals, copies (including computer generated, recorded or stored records) or otherwise, customer lists, lists of insurance producers, insurance producer information (including producer records), policy information, policyholder information, insurance policy forms, rate filing information, rating plans, claim records, sales records, underwriting records, advertising and promotional materials, financial statements, budgets, projections, financial, tax and accounting records, personnel records, compliance records, ledgers, journals, deeds, legal documents, title policies, manuals, minute books, stock certificates and books, stock transfer ledgers, contracts, franchises, permits, licenses, reports, management information systems, computer tapes, discs and other files, retrieval programs, operating data or plans and environmental studies or plans.
"Senior Note Adjustment Base Amount" means an amount equal to
(i) the sum of (a) the amount of all recoverables on paid losses outstanding as
of December 31, 2002, plus (b) all additional amounts recoverable after December
31, 2002 for, including but not limited to, paid losses, paid loss adjustment
expenses, returned premium and commission payable, in each case, from Obligors
under agreements between Wind River or any of its Subsidiaries and the Obligors,
minus (ii) $50 million.
"Senior Notes" means the Senior Notes issued by Wind River to the Trusts, each substantially in the form of Exhibit 5.
"Shareholders Agreement" means the Shareholders Agreement, by and among Cayman Purchaser, Parent and the Trusts, substantially in the form of Exhibit 6.
"Spin-Offs" means, collectively, (i) the distribution by AMCD
of all the outstanding shares of AIS to the sole shareholder of AMCD, AMCP and
(ii) the distribution by AMCP of all the outstanding shares of AIS to the
shareholders of AMCP, in each case, that occurred in 1997.
"Subsidiary" means any entity of which securities or other ownership interests having voting power to elect a majority of the board of directors or other Persons performing similar functions are directly or indirectly beneficially owned by Wind River, including AIS, UNIC, DSIC, UNCIC, UNSIC, J.H. Ferguson, AIA, Unity, IUI, Loyalty and Deale, LLC, but excluding Little Round Top.
"Tax Authority" means the IRS and any other domestic or foreign Governmental Authority responsible for the administration of any Taxes.
"Tax Claim" means any claim with respect to Taxes made by any Tax Authority that, if pursued successfully, would reasonably be expected to serve as the basis for a claim for indemnification under Article 9.
"Tax Detriment" means an increase in liability for Taxes for any taxable period, or a reduction of (i) a refund for Taxes for any taxable period or (ii) any other Tax attribute of a Person that could have reduced that Person's or an Affiliate of that Person's liability for Taxes for any taxable period, in each case, when and as actually realized through an increase of Taxes otherwise due and net of any offsetting Tax benefit actually realized through a reduction of Taxes otherwise due.
"Taxes," with respect to any Person means (i) all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, social security, unemployment, use, license, net worth, payroll, franchise, severance, transfer, recording, employment, premium, windfall profits, environmental, customs duties, capital stock, profits, sales, registration, value added, alternative or add-on minimum, estimated or other taxes, assessments or charges imposed by any Tax Authority and any interest, penalties, or additions to tax attributable thereto, (ii) any joint or several liability of such Person with any other Person for the payment of any amounts of the type described in clause (i) of this definition, and (iii) any liability of such Person for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify any other Person other than Cayman Purchaser or its Affiliates.
"Tax Return" means any return, report, form or similar statement filed or required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.
"Title IV Plan" means a Plan subject to Title IV of ERISA,
Section 302 of ERISA, or Section 412 or 4971 of the Code, that is sponsored or
maintained by any of the ERISA Affiliates, or to which any of the ERISA
Affiliates contributes or is obligated to contribute.
"Transactions" means the transactions contemplated by this Agreement, including the execution, delivery and performance of the Deed of Guaranty, the Management Agreement and the Shareholders Agreement.
"UNCIC" means United National Casualty Insurance Company, an Indiana corporation.
"UNIC" means United National Insurance Company, a Pennsylvania corporation.
"Unity" means Unity Risk Partners Insurance Services, Inc., a California corporation.
"UNSIC" means United National Specialty Insurance Company, Inc., a Wisconsin corporation.
"Updated Disclosure Letters" means (1) a letter dated May 28, 2003 from Thomas E. Wood of Drinker Biddle & Reath LLP sent to Saul A. Fox of U.N. Holdings LLC and the Company and Elliott V. Stein and Mitchell S. Presser of Wachtell, Lipton, Rosen & Katz, which provided supplemental disclosure to the Disclosure Letter, and (2) a letter dated August 13, 2003 from Timothy J. Dwyer of Wind River sent to Saul A. Fox of U.N. Holdings LLC and the Company and Elliott V. Stein and Mitchell S. Presser of Wachtell, Lipton, Rosen & Katz, which provided an update to the disclosure under item 13 of Section 3.12 of the Disclosure Letter.
"Wind River Common Stock" means the common stock, par value $1.00, of Wind River.
"Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal, as those terms are defined in
Part I of Subtitle E of Title IV of ERISA, from such Multiemployer Plan.
"WWW Litigation" means Bank of America, N.A. v. Diamond State Ins. Co. (S.D.N.Y., 01 CV 0645 (LMM) (GWG)), Diamond State Ins. Co. v. Partner Reinsurance Co. of the United States, Third Party Defendant (referred to arbitration for consolidation with the Arbitration between the United National Ins. Group and Partner Reinsurance Co., Ltd.) (S.D.N.Y., 01 CV 0645 (LMM) (GWG)), Diamond State Ins. Co. v. Worldwide Weather Trading Co., LLC (S.D.N.Y., 01 CV 2900 (LMM) (GWG)), and Arbitration Between United National Ins. Group and Partner Reinsurance Co., Ltd. (Arbitrators: N. David Thompson, Daniel E. Schmidt and Mary Ellen Burns).
(b) Each of the following terms is defined in the Section set forth opposite such term:
TERM SECTION Actuarial Analyses 3.19 AMC Pension Plan 6.09 AMC Savings Plan 6.09 Attorney Materials 6.02(c) Board 7.04 Cayman Purchaser Preamble Claim 11.03(a) Closing 2.02 COBRA Coverage 3.13(h) Company Preamble Confidential Information 7.01(a) Damages 11.02(a) GAAP Financial Statements 3.08(a) Indemnified Persons 11.02(a) Indemnifying Party 11.03(a) Indemnity Period 11.06(a) Insurance Companies 3.05(a) Intellectual Property 3.17(a) Investment Assets 3.27 Laws 3.11(a) Material Contract 3.20(b) Noncompetition Period 6.07(a) Non-resident Jurisdiction 3.16(e) Obligor Proceeds 6.08(b) Original Investment Agreement Recitals Parent Preamble PBGC 3.13(e) Permits 3.11(b) Regulatory Reports 3.09 Reinsurance Agreement 3.28(a) Release 3.26(e) SAP 3.08(c) SAP Financial Statements 3.08(c) SAR Agreements 3.13(g) Senior Note Adjustment Amount 6.08(b) Senior Notes Observer 7.04 Subsidiary Securities 3.05(b) Tax Contest Expenses 9.01(a) Tax Proceeding 9.05(b) Third Party Claim 11.03(b) Transfer Taxes 9.01(b) Trusts Preamble U.N. Holdings LLC Preamble |
TERM SECTION U.S. Purchaser Preamble Welfare Benefits 8.04(b) Wind River Preamble Wind River Financial Statements 3.08(b) Wind River Participants 8.04(d)(i) Wind River Plans 3.13(a) Wind River Savings Plan 8.04(d)(i) |
(c) Except as otherwise provided or if the context otherwise requires, whenever used in this Agreement, (i) any noun or pronoun shall be deemed to include the plural and the singular, (ii) the terms "include" and "including" shall be deemed to be followed by the phrase "without limitation" and (iii) the word "or" shall be inclusive and not exclusive.
ARTICLE 2
PURCHASE, SALE and CONTRIBUTION
Section 2.01 The Transactions. Upon the terms and subject to the conditions of this Agreement, at the Closing:
(a) Cayman Purchaser shall purchase from Parent and Parent shall sell to Cayman Purchaser 9,985,000 Parent Class B Common Shares and 14,000,000 Parent Preferred Shares for aggregate consideration of $239,850,000 in cash, and Parent shall cause U.S. Purchaser to be capitalized with at least $197,500,000 of such consideration, such capitalization to be effected in such manner as Parent shall determine;
(b) Each Trust shall contribute to the Company and the Company shall accept from each Trust, free and clear of any Liens, that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 42.946470 shares of Wind River Common Stock in the aggregate), in exchange for, free and clear of any Liens, that number of shares of Company Common Stock set forth opposite the name of such Trust on Schedule A (or 200,000 shares of Company Common Stock in the aggregate);
(c) Each Trust shall contribute to Parent and Parent shall accept from each Trust, free and clear of any Liens, that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 25.767883 shares of Wind River Common Stock in the aggregate), in exchange for, free and clear of any Liens, that number of Parent Class A Common Shares and Parent Preferred Shares set forth opposite the name of such Trust on Schedule A (or 2,500,000 Parent Class A Common Shares and 3,500,000 Parent Preferred Shares in the aggregate), and Parent shall, and shall cause its direct and indirect subsidiaries to, contribute such 25.767883 shares of Wind River Common Stock to the Company;
(d) the Company shall sell to U.S. Purchaser and U.S. Purchaser shall purchase from the Company, free and clear of any Liens, 194,999 shares of Company
Common Stock for aggregate consideration of $97,499,500 in cash, to be paid as provided in Section 2.02;
(e) each Trust shall sell to U.S. Purchaser and U.S. Purchaser shall purchase from such Trust, free and clear of any Liens, that number of shares of Company Common Stock set forth opposite the name of such Trust on Schedule A (or 200,000 shares of Company Common Stock in the aggregate) for that amount in cash set forth opposite the name of such Trust on Schedule A (or $100,000,000 in the aggregate), to be paid as provided in Section 2.02;
(f) Wind River shall redeem from each Trust that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 31.285647 shares of Wind River Common Stock in the aggregate) in exchange for a Senior Note having a principal amount equal to that amount set forth opposite the name of such Trust on Schedule A;
(g) Parent shall enter into the Deed of Guaranty;
(h) Cayman Purchaser, Parent and the Trusts shall enter into the Shareholders Agreement; and
(i) Parent, Fox Paine and AMC Group shall enter into the Management Agreement.
Section 2.02. Closing. The closing (the "Closing") of the Transactions shall take place at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, as soon as reasonably practicable, but in no event later than three business days, after satisfaction or waiver of the conditions set forth in Article 10 (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions), or at such other time or place as Cayman Purchaser, the Trusts and Wind River may mutually agree. At the Closing:
(a) Parent shall issue to Cayman Purchaser 9,850,000 Parent Class B Common Shares and 14,000,000 Parent Preferred Shares in uncertificated book entry form;
(b) Cayman Purchaser shall deliver to Parent $239,850,000 in immediately available funds by wire transfer to such account designated by Parent by notice given to Cayman Purchaser not later than two business days prior to the Closing Date, and Parent shall cause U.S. Purchaser to be capitalized with at least $197,500,000 of such consideration, such capitalization to be effected in such manner as Parent shall determine;
(c) each Trust shall deliver to the Company certificates for that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 42.946470 shares of Wind River Common Stock in the aggregate), duly endorsed or accompanied by stock powers duly endorsed in blank for transfer, with any required transfer stamps affixed thereto;
(d) each Trust shall deliver to Parent certificates for that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 25.767883 shares of Wind River Common Stock in the aggregate), duly endorsed or accompanied by stock powers duly endorsed in blank for transfer, with any required transfer stamps affixed thereto, and Parent shall, and shall cause its direct and indirect subsidiaries to deliver such certificates and any accompanying stock powers duly endorsed in blank for transfer, with any required transfer stamps affixed thereto to the Company;
(e) the Company shall issue to each Trust that number of shares of Company Common Stock set forth opposite the name of such Trust on Schedule A (or 200,000 shares of Company Common Stock in the aggregate) in uncertificated book entry form;
(f) Parent shall issue each Trust that number of Parent Class A Common Shares and Parent Preferred Shares set forth opposite the name of such Trust on Schedule A (or 2,500,000 Parent Class A Common Shares and 3,500,000 Parent Preferred Shares in the aggregate) in uncertificated book entry form;
(g) U.S. Purchaser shall deliver to the Company $97,499,500 in immediately available funds by wire transfer to such account designated by the Company by notice given to U.S. Purchaser not later than two business days prior to the Closing Date;
(h) the Company shall issue to U.S. Purchaser 194,999 shares of Company Common Stock in uncertificated book entry form;
(i) U.S. Purchaser shall deliver to each Trust cash in an amount equal to that set forth opposite the name of such Trust on Schedule A (or an aggregate of $100,000,000) in immediately available funds by wire transfer to such account of such Trust designated by such Trust by notice given to U.S. Purchaser not later than two business days prior to the Closing Date;
(j) each Trust shall transfer to U.S. Purchaser that number of shares of Company Common Stock set forth opposite the name of such Trust on Schedule A (or 200,000 shares of Company Common Stock in the aggregate);
(k) each Trust shall deliver to Wind River certificates for that number of shares of Wind River Common Stock set forth opposite the name of such Trust on Schedule A (or 31.285647 shares of Wind River Common Stock in the aggregate), duly endorsed or accompanied by stock powers duly endorsed in blank for transfer, with any required transfer stamps affixed thereto;
(l) Wind River shall deliver to each Trust a Senior Note having a principal amount equal to that amount set forth opposite the name of such Trust on Schedule A, duly executed on behalf of Wind River;
(m) Parent shall deliver to the Trusts the Deed of Guaranty, duly executed on behalf of Parent;
(n) Cayman Purchaser, Parent and the Trusts shall deliver to each of the others the Shareholders Agreement, duly executed on behalf of such party;
(o) Parent shall deliver to Fox Paine and AMC Group the Management Agreement, duly executed on behalf of Parent; and
(p) In order to effect the foregoing issuances and transfers of shares, (i) Cayman Purchaser and the Trusts shall take all necessary steps to ensure that Parent's Board of Directors updates Parent's Register of Members to reflect the issuance of the Parent Shares in the Transactions, and (ii) the Company shall take all necessary steps to update the Company's stock ledger to reflect the issuances and transfers of shares of Company Common Stock in the Transactions.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF WIND RIVER AND THE TRUSTS
Wind River and the Trusts jointly and severally represent and warrant to Cayman Purchaser, Parent, U.S. Purchaser and the Company that, except as set forth in the applicable section of the Disclosure Letter or as otherwise disclosed in the Updated Disclosure Letters, as of the date of the Original Investment Agreement (except as specifically indicated):
Section 3.01. Organization, Good Standing and Qualification.
Wind River and each of its Subsidiaries (a) is a corporation or other entity
duly organized, validly existing and, if applicable, in good standing under the
laws of its respective jurisdiction of organization, (b) has all requisite
corporate or similar power and authority to own, operate and lease its
properties and assets and to carry on its business as currently conducted and
(c) is duly qualified to do business and is in good standing as a foreign
corporation or other entity in each jurisdiction where the ownership, operation
or leasing of its assets or properties or conduct of its business requires such
qualification, except in the case of this clause (c) where the failure to be so
qualified or in good standing, individually or in the aggregate, would not or
would not reasonably be expected to materially adversely affect the business,
financial condition, results of operations or prospects of Wind River and its
Subsidiaries taken as a whole. Wind River has delivered to Cayman Purchaser or
one of its Affiliates a true, correct and complete copy of the certificate of
incorporation and bylaws, or similar organizational documents, of Wind River and
each of its Subsidiaries, in each case as amended to date, and that are in full
force and effect.
Section 3.02. Corporate Authorization; Approvals. As of the date of this Agreement, Wind River has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement and to consummate the Transactions. As of the date of this Agreement, the execution, delivery and performance of this Agreement by Wind River, and the consummation by Wind River of the Transactions, have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of Wind River are necessary to authorize this Agreement or to consummate the Transactions. This Agreement has been duly and validly executed and delivered by Wind River as of the date of this Agreement and, assuming the due authorization, execution and delivery by
each other party, constitutes a legal, valid and binding obligation of Wind River, enforceable against Wind River in accordance with its terms.
Section 3.03. Noncontravention. As of the date of this Agreement, the execution, delivery and performance of this Agreement by Wind River do not, and the consummation by Wind River of the Transactions will not, constitute or result in (a) a breach or violation of, or a default under, the certificate of incorporation or bylaws of Wind River or the comparable organizational documents of any of its Subsidiaries, (b) assuming compliance with the matters set forth in Sections 3.07, 4.04 and 5.04, a material breach or violation of, or material default under, any Law, (c) a breach or violation of, or a default under, or the creation or acceleration of any material obligations or the creation of any Lien on the assets of Wind River or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, or the creation or acceleration of any right of termination under, or require the consent of any Person under, any Material Contract binding upon Wind River or any of its Subsidiaries or any of their respective assets or any franchise, Permit or other similar authorization held by Wind River or any of its Subsidiaries or (d) any adverse change in the rights or obligations of Wind River or any of its Subsidiaries under any Material Contract to which they are a party.
Section 3.04. Capital Structure. (a) The designations and numbers of authorized, issued and outstanding shares of capital stock of Wind River and each of its Subsidiaries, together with the name of the holders of record thereof, are set forth in Section 3.04(a) of the Disclosure Letter. All of the issued and outstanding shares of Wind River Common Stock have been duly authorized and are validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no outstanding (i) securities of Wind River or any of its Subsidiaries that are convertible into or exchangeable for shares of capital stock of Wind River or (ii) options or other rights to acquire from Wind River or any of its Subsidiaries, or other obligation of Wind River or any of its Subsidiaries to issue any capital stock, or any securities convertible into or exchangeable for any capital stock, of Wind River. Since the Balance Sheet Date, Wind River has issued no shares of Wind River Common Stock, or securities convertible into or exchangeable for shares of Wind River Common Stock. Wind River has no commitments (including contingent or conditional commitments) to issue or deliver any shares of its capital stock. Except as contemplated by this Agreement, there are no outstanding obligations of Wind River or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of Wind River's capital stock.
(b) (i) There is no capital stock or other equity or voting securities of Wind River or any of its Subsidiaries authorized, reserved, issued or outstanding, (ii) neither Wind River nor any of its Subsidiaries is party to any agreement creating preemptive or other outstanding rights, subscriptions, options, warrants, stock appreciation rights, redemption rights, repurchase rights, convertible securities or other agreements, arrangements or commitments of any character relating to, or the value of which is determined by reference to, the issued or unissued capital stock or other equity interest of Wind River or any of its Subsidiaries, and (iii) neither Wind River nor any of its Subsidiaries is party to any agreement creating any other securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of Wind River or any of its Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Neither
Wind River nor any of its Subsidiaries has outstanding any bonds, debentures, notes or other similar obligations.
Section 3.05. Subsidiaries. (a) Wind River does not have any Subsidiaries other than those set forth on Section 3.05(a) of the Disclosure Letter. Section 3.05(a) of the Disclosure Letter (i) lists the jurisdiction of organization of each Subsidiary of Wind River, and (ii) in the case of any Subsidiary of Wind River that operates as an insurance company (collectively, the "Insurance Companies"), lists, as of March 31, 2003, the U.S. jurisdictions where the Insurance Companies are domiciled or "commercially domiciled" and licensed to do insurance business for insurance regulatory purposes. Each Subsidiary of Wind River holds all licenses or authorizations required or necessary to conduct its business in all material respects as currently conducted.
(b) All of the outstanding capital stock of, or other voting securities or ownership interests in, each Subsidiary of Wind River is duly authorized, fully paid and nonassessable and not subject to preemptive rights and is owned beneficially and of record by Wind River, directly or indirectly, free and clear of any Liens and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of (except for applicable insurance and securities law restrictions) such capital stock or other voting securities or ownership interests). There are no outstanding (i) securities of Wind River or any of its Subsidiaries that are convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of Wind River or (ii) options or other rights to acquire from Wind River or any of its Subsidiaries, or other obligation of Wind River or any of its Subsidiaries to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities of or ownership interests in, any Subsidiary of Wind River (the items in clauses (i) and (ii) being referred to collectively with the capital stock of the Subsidiaries of Wind River as the "Subsidiary Securities"). There are no outstanding obligations of Wind River or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the Subsidiary Securities.
Section 3.06. Other Equity Interests. Wind River does not own
(other than (a) in a bona fide fiduciary capacity, (b) in the ordinary course of
its insurance business, (c) in customer accounts held or maintained in the
ordinary course or (d) in any general account or otherwise in the ordinary
course to offset insurance liabilities) beneficially, directly or indirectly,
(i) any material equity securities or similar material interests of any Person
other than its Subsidiaries (including any securities that impose any obligation
to contribute capital) or (ii) any interest in any general partnership,
unlimited company or other Person with share capital or other equity or similar
interests of unlimited liability, or any general partnership interest in a
limited partnership.
Section 3.07. Governmental Authorization. Other than the reports, filings, registrations, consents, approvals, permits, authorizations, applications, expiry of waiting periods and/or notices under the HSR Act and under the insurance laws of Indiana, Pennsylvania and Wisconsin, no notices, reports or other filings are required to be made by Wind River or any of its Subsidiaries with, nor are any consents, registrations, approvals, permits, applications, expiry of waiting periods or authorizations required to be obtained by Wind River or any of its
Subsidiaries from, any Governmental Authority, in connection with the execution and delivery of this Agreement by Wind River or the consummation by Wind River of the Transactions.
Section 3.08. Financial Statements; Undisclosed Liabilities.
(a) (i) Section 3.08(a) of the Disclosure Letter includes true, correct and
complete copies of the audited consolidated financial statements of AIS
including audited consolidated balance sheets as of December 31, 2000 and 2001,
and audited consolidated statements of income and cash flows for the years ended
December 31, 2000 and 2001, in each case, together with the unqualified opinion
of PricewaterhouseCoopers LLP thereon and (ii) Wind River has delivered to
Cayman Purchaser or one of its Affiliates true, correct and complete copies of
the audited consolidated financial statements of AIS including an audited
consolidated balance sheet as of December 31, 2002 and audited consolidated
statements of income and cash flow for the year ended December 31, 2002
(collectively, the "GAAP Financial Statements"). The GAAP Financial Statements
fairly present in all material respects the consolidated financial position and
results of operations and cash flows of AIS and the other Subsidiaries of Wind
River as of the respective dates or for the respective periods set forth
thereon, in each case in accordance with GAAP as in effect as of such dates and
for such periods, consistently applied during the periods involved, except as
may be noted therein or in the notes thereto. AIS is a wholly-owned direct
Subsidiary of Wind River and each other Subsidiary of Wind River is owned
directly or indirectly by AIS.
(b) Wind River has delivered to Cayman Purchaser or one of its Affiliates true, correct and complete copies of the unaudited unconsolidated financial statements of Wind River including unaudited unconsolidated balance sheets as of December 31, 2000, 2001 and 2002, and unaudited and unconsolidated statements of income for the years ended December 31, 2000, 2001 and 2002 (collectively, the "Wind River Financial Statements"). The Wind River Financial Statements fairly present in all material respects the unconsolidated financial position and results of operations of Wind River as of the respective dates or for the respective periods set forth thereon.
(c) Wind River has delivered to Cayman Purchaser or one of its Affiliates true, correct and complete copies of the annual statutory statements (the "SAP Financial Statements") of each Insurance Company as of December 31, 1999, 2000, 2001 and 2002 as filed with the insurance regulatory authority of the respective jurisdictions of domicile of the Insurance Companies. The SAP Financial Statements were prepared in accordance with the statutory accounting practices and procedures required or permitted by the applicable insurance regulatory authority of the respective jurisdictions of domicile of the Insurance Companies ("SAP"), as in effect as of such dates and for such periods applied during the periods involved, except as may be noted therein or in the notes thereto, and fairly present in all material respects the statutory financial position of the Insurance Companies as of the respective date thereof and the statutory results of operations and cash flows of the Insurance Companies for the respective periods then ended. No deficiency has been asserted in writing to any Insurance Company by any Governmental Authority with respect to any of the SAP Financial Statements.
(d) Since the Balance Sheet Date neither Wind River nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), other than (i) liabilities incurred in the ordinary course of business, consistent with past practice, and that are not prohibited by this
Agreement or (ii) in connection with the negotiation, execution, delivery and performance of this Agreement (including in connection with the Original Investment Agreement) and the Transactions. As of the Balance Sheet Date, neither AIS nor any of the other Subsidiaries of Wind River had any liabilities of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) with respect to operations or entities that are not reflected within (A) the GAAP Financial Statements that are required to be accrued or disclosed in a balance sheet (or notes thereto) prepared in accordance with GAAP or (B) the SAP Financial Statements that are required to be accrued or disclosed in a balance sheet (or notes thereto) prepared in accordance with SAP.
Section 3.09. Regulatory Reports. Since December 31, 1999, Wind River and each of its Subsidiaries has timely filed all material periodic statements, together with all exhibits, interrogatories, notes, schedules and any actuarial opinions, affirmations or certifications or other supporting documents in connection therewith, required to be filed with or submitted to any Governmental Authority on forms prescribed or permitted thereby (collectively, the "Regulatory Reports"). The Regulatory Reports complied in all material respects with all applicable Laws when filed, and no material deficiency has been asserted with respect to any Regulatory Report by any Governmental Authority.
Section 3.10. Absence of Certain Changes. Except as contemplated by this Agreement, or as may be consented to by Cayman Purchaser or one of its Affiliates prior to the Closing pursuant to Section 6.01 or as may have been consented to by Cayman Purchaser or one of its Affiliates prior to Closing pursuant to Section 6.01 of the Original Investment Agreement , since the Balance Sheet Date, Wind River and each of its Subsidiaries have conducted their respective businesses only in the ordinary course, consistent with past practice, and, without limiting the generality of the foregoing, there has not been:
(a) any Material Adverse Change;
(b) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of Wind River or any repurchase, redemption or other acquisition by Wind River or any of its Subsidiaries of any capital stock or other securities of, or ownership interests in, Wind River or any of its Subsidiaries;
(c) any split, combination, recapitalization, redenomination of capital stock or other similar transaction or issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for capital stock of Wind River;
(d) any material addition, or any development involving a prospective material addition, to AIS's consolidated loss and loss adjustment expense reserves, except in the ordinary course of business consistent with past practice, including the establishment of reserves in connection with insurance coverage based on premiums earned since the Balance Sheet Date and except for any increase in reserves prior to Closing associated with the calculation of the Reserve Adjustment Amount (as defined in the Original Investment Agreement) as contemplated by Section 6.08(a) of the Original Investment Agreement;
(e) any material change in the tax, underwriting, reinsurance, marketing, pricing, claim processing and payment, reserving, actuarial, risk management, investment, financial and accounting practices, policies, procedures and methods of Wind River or any of its Subsidiaries, except as required by Law or by reason of a concurrent change in GAAP or SAP;
(f) capital expenditures in any calendar quarter in excess of $250,000;
(g) any damage, destruction or other casualty loss (to assets of Wind River or any of its Subsidiaries not covered by insurance) in excess of $250,000;
(h) any incurrence, assumption or guarantee by Wind River or any of its Subsidiaries of any indebtedness, obligation or liability, other than in the ordinary course of business consistent with past practice;
(i) any loan, advance or capital contribution (not including investments made in the ordinary course of business consistent with past practice) by Wind River or any of its Subsidiaries to any Person, other than to Wind River or any of its Subsidiaries; or
(j) any sale, assignment, transfer or other disposition of, or any incurrence, creation or assumption of any Lien on, any material asset of Wind River or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice.
Section 3.11. Compliance with Laws; Permits. (a) The business and operations of Wind River and each of its Subsidiaries have been and are being, conducted in material compliance with all applicable federal, state, local or non-U.S. laws, statutes, ordinances, rules, regulations, rulings, written interpretations, judgments, orders, injunctions, decrees, arbitration awards or agency requirements of any Governmental Authority, including all regulations regulating the business and products of insurance and all applicable orders and directives of insurance regulatory authorities and orders resulting from market conduct examinations of insurance regulatory authorities (collectively, "Laws"), in each case to the extent applicable to Wind River and its Subsidiaries, and except, with respect to the business and operations of Wind River and each of its Subsidiaries prior to December 31, 1999, as would not or would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, financial condition, results of operations or prospects of Wind River and its Subsidiaries taken as a whole. To the knowledge of Wind River, except for regulatory examinations or reviews conducted in the ordinary course, no investigation or review by any Governmental Authority with respect to Wind River or any of its Subsidiaries is as of the date of the Original Investment Agreement pending or threatened. Notwithstanding the generality of the foregoing, all insurance policies, binders, slips, certificates and Material Contracts issued by the Insurance Companies since December 31, 1999 are, to the extent required under Law, in forms approved in all material respects by applicable regulatory authorities or have been filed and not objected to (or such objection has been withdrawn or resolved) by such authorities within the period provided for objection and such forms comply in all material respects with Laws applicable to Wind River and its Subsidiaries. All reports, statements, documents, registrations, filings and submissions made by Wind River or its Subsidiaries to state insurance regulatory authorities since December 31, 1999 complied in all material respects with Laws in effect when
filed and no material deficiencies have been asserted by any such regulatory authority with respect to such reports, statements, documents, registrations, filings or submissions that have not been satisfied. To the knowledge of Wind River, all premium rates established by the Insurance Companies since December 31, 1999, that are required to be filed with or approved by insurance regulatory authorities, have been so filed or approved, the premiums charged conform to the premiums so filed or approved and comply in all material respects (or complied in all material respects at the relevant time) with the insurance laws applicable thereto.
(b) Wind River and each of its Subsidiaries holds all
insurance licenses from the insurance regulatory authorities set forth in
Section 3.11(b) of the Disclosure Letter and all other material licenses,
permits, orders, consents, approvals, registrations, authorizations,
qualifications and filings with and under all Laws and Governmental Authorities
and any applicable industry or other non-governmental self-regulatory
organizations (collectively, the "Permits") necessary for the ownership and
conduct of the respective businesses of Wind River and each of its Subsidiaries
in each of the jurisdictions in which Wind River or any of its Subsidiaries
conduct or operate their respective businesses in all material respects in the
manner now conducted. The Permits are in full force and effect in all material
respects. To the knowledge of Wind River, there is no pending or threatened
Action that may reasonably be expected to lead to the revocation, termination or
suspension of any such Permits. Notwithstanding the foregoing, all
representations regarding environmental permits, compliance with Environmental
Laws and environmental regulatory matters shall be governed by Section 3.26.
(c) No change is required in Wind River's or any of its Subsidiaries' processes, properties, practices or procedures in connection with any such Laws, and Wind River has not received any notice or communication of any noncompliance with any such Laws that has not been cured as of the date of the Original Investment Agreement. Notwithstanding the generality of the foregoing, Wind River and each of its Subsidiaries has in place policies and procedures with respect to itself and its insurance agents, managing general agents, third-party administrators, brokers, broker/dealers, distributors and agents intended to assure that their sales processes and practices are consistent with applicable Law governing such practices and processes, and, where there has been any deviation therefrom, such deviation has been cured, resolved or settled through agreements with applicable Governmental Authorities or are barred by all applicable statutes of limitations or other equitable principles. To the knowledge of Wind River, all employees of Wind River and each of its Subsidiaries with management responsibility with respect to any business line, and all officers and directors thereof required to be registered with or licensed under applicable Laws, are so licensed and in good standing with the applicable Governmental Authority.
Section 3.12. Litigation. (a) Except for first party contractual and coverage claims under insurance policies issued by the Insurance Companies and Actions under "direct action" statutes of various states, in each case in the ordinary course of the insurance operations of Wind River and its Subsidiaries, there are no (i) material Actions pending or, to the knowledge of Wind River, threatened, or to the knowledge of Wind River, investigations or inquiries pending or threatened against Wind River or any of its Subsidiaries that are not covered by insurance, (ii) judgments or outstanding orders, injunctions, decrees, stipulations, settlement agreements, citations, investigations, fines or awards against or binding upon Wind River or any
of its Subsidiaries or any of their respective assets or properties or (iii) Actions by Wind River or any of its Subsidiaries against any Person.
(b) Wind River has made available to Cayman Purchaser or one of its Affiliates true, correct and complete copies of the pleadings in the WWW Litigation, those of which filed by Wind River and its Subsidiaries, taken as a whole, accurately set forth in all material respects the facts and circumstances underlying such litigation.
Section 3.13. Employee Benefits. (a) Section 3.13(a) of the Disclosure Letter sets forth a true, correct and complete list of all Employee Plans, and identifies those Employee Plans that are maintained solely for the benefit of employees of Wind River and its Subsidiaries and their beneficiaries and dependents (the "Wind River Plans"). With respect to each Employee Plan, Wind River has delivered to Cayman Purchaser or one of its Affiliates a true, correct and complete copy of: (i) each Employee Plan, trust agreement, and insurance contract and other funding vehicle related thereto; (ii) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii) the current summary plan description and any material modifications thereto, if any (in each case, whether or not required to be furnished under ERISA); (iv) the most recent annual financial report, if any; (v) the most recent actuarial report, if any; and (vi) the most recent determination letter from the IRS, if any. There have been no amendments to any Employee Plan adopted or approved, nor has Wind River or any of its Subsidiaries undertaken to make any such amendments or to adopt or approve any new Employee Plan that is not reflected in an Employee Plan document delivered to Cayman Purchaser or one of its Affiliates pursuant to this Section 3.13(a).
(b) Each Employee Plan has been operated and administered and is in material compliance with its terms and all applicable Law, and there are no Actions (other than routine claims for benefits in the ordinary course) pending or, to the knowledge of Wind River, threatened with respect to any Employee Plan or the assets thereof that, if adversely determined, would result in any material liability or obligation of Wind River or any of its Subsidiaries. All contributions required to be made to any Employee Plan by Law or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Employee Plan, for any period through the date of the Original Investment Agreement have been timely made or paid in full or, to the extent not required to be made or paid on or before the date of the Original Investment Agreement, have been fully reflected on the Balance Sheet. Each Employee Plan that is an employee welfare benefit plan under Section 3(1) of ERISA either (i) is funded through an insurance company contract and is not a "welfare benefit fund" with the meaning of Section 419 of the Code or (ii) is unfunded.
(c) None of the ERISA Affiliates maintains, contributes to or is obligated to contribute to any Multiemployer Plan or Multiple Employer Plan, nor has any of them, at any time during the last six years, maintained, contributed to or been obligated to contribute to any Multiemployer Plan or Multiple Employer Plan. None of the ERISA Affiliates has incurred any Withdrawal Liability that has not been satisfied in full. None of the ERISA Affiliates has received any notification, nor has any reason to believe, that any Multiemployer Plan to which any of them contributes or is obligated to contribute is in reorganization, has been terminated, is insolvent, or may reasonably be expected to be in reorganization, to be insolvent, or to be terminated.
(d) Wind River and each of its Subsidiaries have timely paid all contributions, premiums and expenses payable to or in respect of each Employee Plan under the terms thereof and in accordance with all applicable Laws, except where any failure to pay such amounts has not resulted and will not result in any material liability or obligation of Wind River or any of its Subsidiaries.
(e) With respect to each Title IV Plan that is not a Multiemployer Plan: (i) there does not exist any accumulated funding deficiency within the meaning of Section 412 of the Code or Section 302 of ERISA, whether or not waived; (ii) no reportable event within the meaning of Section 4043(c) of ERISA for which the 30-day notice requirement has not been waived has occurred, and the consummation of the Transactions will not result in the occurrence of any such reportable event; (iii) all premiums to the Pension Benefit Guaranty Corporation (the "PBGC") have been timely paid in full; (iv) no liability (other than for premiums to the PBGC) under Title IV of ERISA has been or is expected to be incurred by Wind River or any of its Subsidiaries; and (v) the PBGC has not instituted proceedings to terminate any such Title IV Plan and no condition exists that presents a risk that such proceedings will be instituted or that would constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any such Title IV Plan.
(f) Neither Wind River nor any of its Subsidiaries has incurred, either directly or indirectly (including as a result of an indemnification obligation), any liability under or pursuant to any provision of Title I or IV of ERISA or the penalty, excise tax or joint and several liability provisions of the Code relating to any Employee Plan, or any other Plan sponsored or maintained by any ERISA Affiliate and, to the knowledge of Wind River, no event, transaction or condition has occurred, exists or is expected to occur or be deemed to occur at or prior to the Closing that would reasonably be expected to result in any such liability to Wind River or any of its Subsidiaries or, after the Closing, to Cayman Purchaser or one of its Affiliates.
(g) Except as provided in Section 6.09, neither the execution and delivery of this Agreement, nor the consummation of the Transactions, either alone or in combination with any other event (whether contingent or otherwise), will (i) entitle any current or former employee, consultant or director of Wind River or any of its Subsidiaries to any increased or modified benefit or payment; (ii) increase the amount of compensation or benefits due to any such employee, consultant or director; (iii) accelerate the vesting, payment or funding of any compensation, stock-based award, incentive compensation or other compensation or benefit; (iv) result in any "parachute payment" under Section 280G of the Code (whether or not such payment is considered to be reasonable compensation for services rendered); (v) cause any compensation to fail to be deductible under Section 162(m) or any other provision of the Code or any similar Law; (vi) otherwise result in any payment in the nature of severance or termination pay; or (vii) limit or prohibit (except to the extent required by ERISA or the Code) the ability to amend, merge, terminate or receive a reversion of assets from any Employee Plan or related trust. Without limiting the generality of the foregoing, as of the date of this Agreement each payment that may be made pursuant to the Stock Appreciation Rights Agreements identified in Section 3.13(g) of the Disclosure Letter (the "SAR Agreements") has been approved such that, by virtue of Sections 280G(b)(5)(A)(ii) and 280G(b)(5)(B) of the Code, it will not be a "parachute payment."
(h) Neither Wind River nor any of its Subsidiaries has any liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA ("COBRA Coverage"). Wind River and each of its Subsidiaries has reserved the right to amend, terminate or modify at any time all plans or arrangements, if any, providing for retiree health or life insurance coverage.
Section 3.14. Labor. (a) Wind River, its Subsidiaries and each member of their respective business enterprises has complied with the Worker Adjustment and Retraining Notification Act and all similar state, local and foreign laws.
(b) Each individual who renders services to Wind River or any of its Subsidiaries who is classified by Wind River or such Subsidiary, as applicable, as having the status of an independent contractor or other non-employee status for any purpose (including for purposes of taxation and tax reporting and under Employee Plans) is properly so characterized.
(c) No labor organization or group of employees of Wind River or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings, or petitions seeking a representation proceeding, presently pending, or, to the knowledge of Wind River, threatened to be brought or filed, with the National Labor Relations Board or any other labor relations tribunal or authority. To the knowledge of Wind River, there are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving Wind River or any of its Subsidiaries. Wind River and each of its Subsidiaries is in compliance in all material respects with all applicable Laws and collective bargaining agreements respecting employment and employment practices, terms and conditions of employment, wages and hours and occupational safety and health. Since December 31, 1999, no material unfair labor practice complaints have been filed against Wind River or any of its Subsidiaries with any Governmental Authority and neither Wind River nor any of its Subsidiaries has received any notice or communication reflecting an intention or threat to file any such complaint. Since December 31, 1999, no Person has made any claim, and to the knowledge of Wind River there is no basis for any claim, against Wind River or any of its Subsidiaries arising out of any statute, ordinance or regulation relating to discrimination with respect to employees or employment practices.
Section 3.15. Employees. Section 3.15 of the Disclosure Letter sets forth a true, correct and complete list as of the date of the Original Investment Agreement of the names of (a) all officers of Wind River and each of its Subsidiaries, and (b) each employee of Wind River or any of its Subsidiaries as of April 17, 2003 whose annual base salary exceeds $100,000, as well as the base salary of and bonus earned or received by all such individuals for the fiscal year ended on the Balance Sheet Date. Section 3.15 of the Disclosure Letter sets forth a true, correct and complete list, as of the date of the Original Investment Agreement, of each agreement with respect to the employment or termination of employment of any employee of Wind River or any of its Subsidiaries under which Wind River or any of its Subsidiaries has any continuing payment or performance obligations.
Section 3.16. Taxes. (a) Since December 31, 1993, all Tax Returns required to be filed by, or with respect to, Wind River or any of its Subsidiaries have been timely filed (taking into account extensions) in the manner prescribed by Law and are true, correct and complete in all material respects.
(b) Since December 31, 1993, Wind River and each of its Subsidiaries has timely paid all Taxes due and payable by it or for which it may be liable (other than Taxes that are being contested in good faith and for which adequate reserves are reflected in accordance with GAAP on the GAAP Financial Statements dated as of the Balance Sheet Date or on the Balance Sheet).
(c) Wind River and each of its Subsidiaries has made provision in accordance with GAAP on the GAAP Financial Statements dated as of the Balance Sheet Date and on the Balance Sheet (in each case, as adjusted for operations in the ordinary course of business since the Balance Sheet Date) for all accrued and contingent liabilities for Taxes.
(d) Wind River (and any predecessor thereof) is, and since the date of its formation has been, properly characterized as an "S-corporation" within the meaning of Section 1361(a)(1) of the Code. Wind River (and any predecessor thereof) has validly elected to be characterized as an "S-corporation" in all state and local jurisdictions where it would, absent such election, be subject to corporate income or franchise Tax, and has maintained its status as an "S-corporation" in such jurisdictions at all times thereafter. No state of facts exists or existed that presents or presented a risk that Wind River's status as an "S-corporation" is or was subject to termination or revocation. Wind River does not have any "earnings and profits" other than earnings and profits deemed to have been received by Wind River under Section 381(c)(2) of the Code. The amount of earnings and profits of AIS on December 31, 1997 was approximately $253.9 million. Wind River has not been liable for any Taxes imposed pursuant to Section 1374 or 1375 of the Code. Section 3.16(d) of the Disclosure Letter sets forth each Subsidiary that is properly characterized as a "Qualified Subchapter S Subsidiary" within the meaning of Section 1361(b)(3)(B) of the Code.
(e) Neither Wind River nor any of its Subsidiaries is doing business or maintains a taxable presence in a jurisdiction (a "Non-resident Jurisdiction") in which it does not file income Tax Returns, and no claim has been made in writing by any Tax Authority in a Non-resident Jurisdiction that Wind River or any of its Subsidiaries are or may be subject to taxation by that jurisdiction. No non-U.S. Subsidiary of Wind River is engaged in a trade or business in the United States for federal income Tax purposes.
(f) There is no action, suit, proceeding, investigation, assessment, adjustment, audit or claim now proposed in writing or pending against or with respect to Wind River or any of its Subsidiaries in respect of any Tax.
(g) The United States federal income Tax Returns that include Wind River or any of its U.S. Subsidiaries have been examined and settled with the IRS (or the applicable statute of limitations for the assessment of federal income Taxes for such periods have expired) for all years through December 31, 1993. There are no outstanding waivers or other agreements extending any statutory periods of limitation for the assessment of Taxes of Wind River or any of
its Subsidiaries. No power of attorney currently in force has been granted by Wind River or any of its Subsidiaries concerning any Tax matter.
(h) No gain or loss was recognized by AMCD or AMCP for income Tax purposes as a result of the Spin-Offs. The facts presented to the IRS with respect to the private letter ruling issued in 1997 regarding the Spin-Offs were true and complete as of the date of such Spin-Offs and no issues or circumstances exist that would allow the IRS to revoke such private letter ruling with retroactive effect. Within the past three years neither Wind River nor any of its Subsidiaries has been a "distributing corporation" or a "controlled corporation" in a distribution intended to qualify under Section 355(a) of Code. Other than the private letter ruling with respect to the Spin-Offs, neither Wind River nor any of its Subsidiaries has received a binding Tax ruling from or entered into a Closing Agreement with any Tax Authority.
(i) Except for complete and accurate copies of Tax sharing agreements and all amendments thereto made available to Cayman Purchaser or one of its Affiliates prior to the execution of this Agreement, there are no agreements relating to the allocation or sharing of Taxes between Wind River or any of its Subsidiaries, on the one hand, and any Person, on the other hand; nor are there any express or implied obligations on Wind River or any of its Subsidiaries to indemnify any Person for Taxes.
(j) All Taxes required to be withheld, including from any compensation, dividend or other payment, by or on behalf of Wind River or any of its Subsidiaries have been withheld, and such withheld Taxes have been duly and timely paid (or are properly held for payment) to the proper Tax Authorities.
(k) Neither Wind River nor any of its Subsidiaries
presently is or since January 1, 1994 has been (i) a "personal holding company"
within the meaning of Section 542(a) of the Code, (ii) a "foreign personal
holding company" within the meaning of Section 552(a) of the Code, (iii) except
for Loyalty, a "controlled foreign corporation" within the meaning of Section
957 of the Code, (iv) a "foreign investment company" within the meaning of
Section 1246 of the Code or (v) except for Loyalty, a "passive foreign
investment company" within the meaning of Section 1297 of the Code. Section 1291
of the Code does not apply to any distribution paid by, or any disposition of
the stock of, Loyalty.
(l) Neither Wind River nor any of its Subsidiaries (i)
has been a member of an affiliated group that files Tax Returns on a
consolidated, combined or unitary basis (other than with respect to an
affiliated group the common parent of which was AIS, UNIC or AMCP) or (ii) has
any liability for Taxes of any Person under United States Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise, other than liabilities for
Taxes of an affiliated, consolidated, combined or unitary group that includes
AIS, UNIC or AMCP as the common parent.
(m) Neither Wind River nor any of its Subsidiaries will be required to include any material item of income in, or exclude any material item of deduction from, taxable income for any Post-Closing Tax Period as a result of any (i) change in method of accounting for a Pre-Closing Tax Period under Section 481(c) of the Code (or any corresponding or similar provision of state, local or non-U.S. income Tax law), (ii) Closing Agreement, (iii) installment sale or open
transaction disposition or intercompany transaction made on or prior to the
Closing Date, (iv) prepaid amount received on or prior to the Closing Date or
(v) deferred intercompany gain or excess loss account described in Treasury
Regulations promulgated under Section 1502 of the Code (or any corresponding or
similar provision of state, local or non-U.S. income Tax law).
(n) Neither Wind River nor any of its Subsidiaries recognized a material amount of gain (or was otherwise required to include a material amount in income), as a result of any Tax election made during the period from January 1, 2003 through the Closing Date.
(o) There are no material liens for Taxes upon the assets of Wind River or any of its Subsidiaries, except for liens for current Taxes not yet due and payable.
(p) None of the Trusts is subject to withholding, including under Section 1445 of the Code, with respect to the Transactions.
(q) Neither Wind River nor any of its Subsidiaries has entered into any transaction that is required to be disclosed or registered as a tax shelter or is a "listed transaction" pursuant to Section 6011, 6111 or 6112 of the Code or the Treasury Regulations and IRS pronouncements promulgated thereunder.
(r) Section 3.16(r) of the Disclosure Letter lists all federal, state, local, and foreign income and franchise Tax Returns filed with respect to Wind River or any of its Subsidiaries for taxable periods ending after December 31, 1996, and indicates all Tax Returns for taxable periods ended on or after December 31, 1999 that (i) have been audited or (ii) are currently subject of audit. The Trusts have delivered or have caused to be delivered to Cayman Purchaser or one of its Affiliates true, correct and complete copies of all Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Wind River or any of its Subsidiaries for taxable periods ending on or after December 31, 1999, except for state and municipal premium tax returns, true, correct and complete copies of which have been made available to Cayman Purchaser or one of its Affiliates.
Section 3.17. Intellectual Property; Data Security. (a) Wind River and each of its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use, all United States and foreign patents, trademarks, trade names, trade dress, service marks, copyrights, domain names and any applications and registrations therefor, technology, know-how, computer software programs or applications (including application software and system software, source code, object code, computer software databases, programs and similar systems, and tangible or intangible proprietary information or materials, including trade secrets and any other similar type of proprietary intellectual property right (collectively, "Intellectual Property") that are material to the business of Wind River or any of its Subsidiaries as currently conducted, and any such patents, trademarks, trade names, service marks and copyrights held by Wind River or any of its Subsidiaries are valid and enforceable.
(b) To the knowledge of Wind River, the use of Intellectual Property by Wind River and its Subsidiaries does not conflict with or infringe on the Intellectual Property of any other Person and no other Person's operations conflict with or infringe the use of any material Intellectual Property of Wind River or any of its Subsidiaries. There are no Actions pending or,
to the knowledge of Wind River, threatened against or by Wind River or any of its Subsidiaries (i) challenging the rights of Wind River or any of its Subsidiaries to use or own any of its Intellectual Property or (ii) claiming a conflict or infringement by Wind River or any of its Subsidiaries with any Intellectual Property rights of any other Person or a conflict or infringement by any other Person with any Intellectual Property rights of Wind River or its Subsidiaries.
(c) Each of Wind River and its Subsidiaries has been and
is in material compliance with (i) all Laws concerning privacy or security, and
(ii) all of its internal policies and/or agreements with other Persons
concerning privacy or security.
Section 3.18. Brokers and Finders. Neither Wind River nor any of its officers, directors, employees or Subsidiaries has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with this Agreement or the Transactions.
Section 3.19. Actuarial Analyses. Section 3.19 of the Disclosure Letter sets forth a list of all actuarial reports with respect to Wind River or any Insurance Company relied upon by Wind River or any Insurance Company or Governmental Authority since December 31, 1999, and all attachments, addenda, supplements and modifications thereto (copies of which Wind River has delivered to Cayman Purchaser or one of its Affiliates) (the "Actuarial Analyses"). At the time each Actuarial Analysis was prepared, Wind River believed in good faith that it was prepared using appropriate modeling and other procedures accurately applied, if relevant, and in conformity with generally accepted actuarial standards consistently applied, and that the projections contained therein were properly prepared in accordance with the assumptions stated therein. The information and data furnished by Wind River or any Insurance Company to its independent actuaries in connection with the preparation of the Actuarial Analyses were true, complete and accurate in all material respects.
Section 3.20. Material Contracts. (a) Section 3.20 of the Disclosure Letter lists the following as of the date of the Original Investment Agreement:
(i) each Contract of Wind River or any of its Subsidiaries that provides for aggregate payments of $150,000 over any 12-month period commencing on or after the date of the Original Investment Agreement;
(ii) each Contract relating to the borrowing of money by or indebtedness of Wind River or any of its Subsidiaries or the guaranty by Wind River or any of its Subsidiaries of any obligation of any Person (other than Wind River or another of its Subsidiaries);
(iii) each mortgage or other Contract providing for a Lien on any material assets of Wind River or any of its Subsidiaries;
(iv) each Contract (other than this Agreement) that restricts or purports to restrict in any material respect the ability of Wind River or any of its Subsidiaries to (A) sell any products or services to any other Person, (B) engage in any line of business or (C) compete with any Person;
(v) each employment Contract and any other Contract with any officer or director of Wind River or any of its Subsidiaries;
(vi) each Contract providing for the indemnification by Wind River or any of its Subsidiaries of any Person, except for Contracts entered in to in the ordinary course of business; and
(vii) each Contract pertaining to the voting, transfer or holding of the shares of Wind River Common Stock or the capital stock of any of its Subsidiaries.
(b) Each of the Contracts required to be set forth in
Section 3.20 of the Disclosure Letter together with each other contract that is
material to the business, financial condition, results of operations or
prospects of Wind River and its Subsidiaries, taken as a whole, (a "Material
Contract") is enforceable against either Wind River or the Subsidiary of Wind
River that is a party thereto and, to the knowledge of Wind River, against the
other parties thereto, in accordance with its terms and is in full force and
effect and, except for such Material Contracts that expire in accordance with
their terms, will be in full force and effect as of the Closing Date. A true,
correct and complete copy of each such written Material Contract, and a
reasonably detailed written description of any oral Material Contract, has been
made available by Wind River to Cayman Purchaser or one of its Affiliates.
Neither Wind River nor any of its Subsidiaries nor, to the knowledge of Wind
River, any other party is in material breach of or in material default under any
such Material Contract. To the knowledge of Wind River, neither Wind River nor
any of its Subsidiaries has received written notice of a cancellation of or an
intent to cancel any Material Contract. Except as provided in the certificate of
incorporation or bylaws or similar organization documents of Wind River or any
of its Subsidiaries, neither Wind River nor any of its Subsidiaries is party to
any Contract providing for indemnification of directors or executive officers of
Wind River or any of its Subsidiaries.
Section 3.21. Risk Management. Wind River and each of its Subsidiaries have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by Persons of similar size and in similar lines of business as Wind River and each such Subsidiary.
Section 3.22. Derivatives. Neither Wind River nor any of its Subsidiaries holds any derivative instruments, including swaps, caps, floors and option agreements, whether entered into for Wind River's account, or for the account of any of its Subsidiaries or their customers.
Section 3.23. Insurance Coverage. Wind River has delivered to Cayman Purchaser or one of its Affiliates true, correct and complete copies of all insurance policies (other than reinsurance contracts) and fidelity bonds under which Wind River or any of its Subsidiaries is insured and relating to the assets, business, operations, employees, officers or directors of Wind River or any of its Subsidiaries. There are no material claims by Wind River or any of its Subsidiaries pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been timely paid. All such policies will, by their terms, remain in full force and effect through and including July 31, 2003.
Section 3.24. Records. The Records have been maintained in accordance with good business practices, and are true, correct and complete in all material respects.
Section 3.25. Properties. (a) Neither Wind River nor any of its Subsidiaries owns any real property.
(b) Section 3.25 of the Disclosure Letter identifies all real property leased by Wind River or any of its Subsidiaries or subleased or assigned to others as of the date of the Original Investment Agreement.
(c) Wind River and its Subsidiaries have good title to, or in the case of leased property and assets has valid leasehold interests in, all personal property and assets (whether tangible or intangible) reflected on the Balance Sheet or acquired after the Balance Sheet Date, except for property and assets sold or otherwise disposed of and leases terminated since the Balance Sheet Date in the ordinary course of business.
Section 3.26. Environmental Matters. (a) No written notice, request for information, order or complaint has been received, and there are no judicial, administrative or other Actions pending, or to the knowledge of Wind River, threatened that allege a material violation of any Environmental Law, in each case relating to Wind River or any of its Subsidiaries and arising out of any Environmental Law.
(b) Wind River and each of its Subsidiaries has all Permits necessary for its operations to comply with all applicable Environmental Laws in all material respects, and Wind River and each of its Subsidiaries are in material compliance and have been in material compliance with the terms of such Permits and with all other applicable Environmental Laws.
(c) There has been no written Phase I Assessments or Environmental Compliance Audits conducted within the past five years by Wind River or any of its Subsidiaries of any property leased by Wind River or any of its Subsidiaries.
(d) Neither Wind River nor any of its Subsidiaries has been involved in operations at any property that could reasonably be expected to lead to the imposition on Wind River or any of its Subsidiaries of any material liability under any Environmental Laws.
(e) Neither Wind River nor any of its Subsidiaries is subject to any order from or agreement with any Governmental Authority or other Person respecting liability for or the need to respond to an intentional or unintentional spilling, leaking, disposing, discharging, emitting, depositing, injecting, leaching, escaping, or any other release or threatened release as defined in any Environmental Law, of any Hazardous Substance (a "Release"), and, to the knowledge of Wind River, none of the present or past operations of Wind River or any of its Subsidiaries is the subject of any investigation by any Governmental Authority evaluating whether any remedial action is needed to respond to a Release or threatened Release.
(f) To the knowledge of Wind River, none of the properties leased by Wind River or any of its Subsidiaries contains any asbestos or asbestos containing materials that are in a friable state or that do not comply with Environmental Laws, and the expense of maintaining such materials in compliance with Environmental Laws is not material.
Section 3.27. Investments. Wind River has provided Cayman Purchaser or one of its Affiliates with a true, correct and complete list of all bonds, stocks, mortgage loans and other investments that are carried on the books and records of Wind River and its Subsidiaries as of the Balance Sheet Date (such bonds, stocks, mortgage loans and other investments, together with all bonds, stocks, mortgage loans and other investments acquired by Wind River and the Subsidiaries between the date of the Original Investment Agreement and the Closing Date, the "Investment Assets"). Except for Investment Assets sold in the ordinary course of business consistent with past practice or as contemplated by this Agreement, each of Wind River and its Subsidiaries, as applicable, has good and marketable title to all of the Investment Assets it purports to own, free and clear of all Liens.
Section 3.28. Reinsurance Agreements. (a) Section 3.28(a) of the Disclosure Letter sets forth a true, correct and complete list of all reinsurance and retrocession treaties and agreements (each, a "Reinsurance Agreement") in force as of the date of the Original Investment Agreement to which any Insurance Company is a party that are open to future cessions of insurance risk by any Insurance Company, any terminated or expired treaty or agreement under which there remains any known outstanding liability from one reinsurer with respect to paid or unpaid case reserves and any treaty or agreement with any Affiliate of Wind River or any of its Subsidiaries, the effective date of each such treaty or agreement, and the termination date of any treaty or agreement that has a definite termination date. Each Reinsurance Agreement is valid, binding and enforceable against the Insurance Company that is a party thereto and, to the knowledge of Wind River, against the other parties thereto in accordance with their terms and are in full force and effect. The Insurance Companies have performed all of the material obligations required to be performed by them under the Reinsurance Agreements and neither the Insurance Companies, nor, to the knowledge of Wind River, any of the other parties thereto is in material breach or default under any Reinsurance Agreement. As of the date of the Original Investment Agreement, Wind River is not aware of any specific facts or circumstances that would reasonably be expected to cause it to believe that any amounts due to Wind River or any of its Subsidiaries under any Reinsurance Agreement are not fully collectible (net of any reserves set forth on the Balance Sheet) by Wind River or its Subsidiaries.
(b) There are no unresolved disputes under any Reinsurance Agreement.
Section 3.29. Insurance Brokers. (a) To the knowledge of Wind River, each Person through which any Insurance Company has placed or sold insurance since December 31, 1999 was duly licensed (to the extent such licensing was required) to sell or place insurance in the jurisdictions where, and at the time when, it did so on behalf of such Insurance Company. No Person who is not an agent has any underwriting or binding authority on behalf of any Insurance Company. To the knowledge of Wind River, as of the date of the Original Investment Agreement, any amounts due to Wind River or any of its Subsidiaries under any managing general agency contracts or similar arrangements are fully collectible by Wind River or its Subsidiaries (net of any non-admitted agents balances set forth in the balance sheet of each Insurance Company included in the SAP Financial Statements).
(b) There are no unresolved disputes under any managing general agency contract or similar arrangement.
Section 3.30. Disclosure. The representations and warranties contained in this Article 3 do not contain any untrue statement of material fact or omit to state any material fact necessary to make any statement contained in this Article 3 not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE TRUSTS
Each Trust severally but not jointly represents and warrants to Cayman Purchaser, Parent, U.S. Purchaser and the Company that as of the date of the Original Investment Agreement (except as specifically indicated):
Section 4.01. Organization. Such Trust is a trust duly organized, validly existing and, if applicable, in good standing under the laws of its respective jurisdiction of organization, and has all requisite power and authority to own, operate and lease its properties and assets and to carry on its business as currently conducted.
Section 4.02. Authorization; Approvals. As of the date of this Agreement, such Trust has all necessary power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement and to consummate the Transactions. As of the date of this Agreement, the execution, delivery and performance of this Agreement by such Trust, and the consummation by such Trust of the Transactions, have been duly and validly authorized by all necessary action, and no other proceedings on the part of such Trust are necessary to authorize this Agreement or to consummate the Transactions. This Agreement has been duly and validly executed and delivered by such Trust as of the date of this Agreement and, assuming the due authorization, execution and delivery by each other party, constitutes a legal, valid and binding obligation of such Trust, enforceable against such Trust in accordance with its terms.
Section 4.03. Noncontravention. As of the date of this Agreement, the execution, delivery and performance of this Agreement by such Trust does not, and the consummation by such Trust of the Transactions will not, constitute or result in (a) a breach or violation of, or a default under, the organizational documents of such Trust or (b) assuming compliance with the matters set forth in Section 3.07, 4.04 or 5.04, a breach or violation of, or default under, any Law.
Section 4.04. Governmental Authorization. Other than the reports, filings, registrations, consents, approvals, permits, authorizations, applications, expiry of waiting periods and/or notices under the HSR Act and under the insurance laws of Indiana, Pennsylvania and Wisconsin, no notices, reports or other filings are required to be made by such Trust with, nor are any consents, registrations, approvals, permits applications, expiry of waiting periods or authorizations required to be obtained by such Trust from, any Governmental Authority, in connection with the execution and delivery of this Agreement by such Trust or the consummation by such Trust of the Transactions.
Section 4.05. Ownership of Wind River Common Stock. Such Trust is the record and beneficial owner of all of the issued and outstanding shares of capital stock of Wind
River set forth opposite its name of Schedule A, free and clear of any Liens. Upon payment by the Company therefor at the Closing, such Trusts will transfer and deliver to the Company good and marketable title to the number of shares of Wind River Common Stock set forth opposite its name on Schedule A, free and clear of any Liens except for Liens arising through the Company or any of its Affiliates.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF CAYMAN PURCHASER, PARENT, U.S.
PURCHASER AND THE COMPANY
Cayman Purchaser, Parent, U.S. Purchaser and the Company jointly and severally represent and warrant to Wind River and the Trusts that:
Section 5.01. Organization. Each of Cayman Purchaser and Parent was duly organized as an exempted company formed with limited liability under the laws of the Cayman Islands and is validly existing and in good standing under the laws of the Cayman Islands. Barbados Insurance Company, the U.S. Purchaser, the Company and each other direct and indirect subsidiary of Parent is an organization duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and each of Parent, Barbados Insurance Company, U.S. Purchaser, the Company and each other direct and indirect subsidiary of Parent has all requisite power and authority to own, operate and lease its properties and assets and to carry on its business as currently conducted or as proposed to be conducted following the completion of the Transactions. Parent has delivered to the Trusts a true, correct and complete copy of its memorandum and articles of association, as amended to date, that is in full force and effect, and a true, correct and complete copy of the charter, by-laws and other constituent documents of each of Parent's direct and indirect subsidiaries, as amended to date, that are in full force and effect.
Section 5.02. Authorization; Approvals. Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company has all necessary power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement and to consummate the Transactions. The execution, delivery and performance of this Agreement by each of Cayman Purchaser, Parent, U.S. Purchaser and the Company, and the consummation by each of Cayman Purchaser, Parent, U.S. Purchaser and the Company of the Transactions, have been duly and validly authorized by all necessary action, and no other proceedings on the part of Cayman Purchaser, Parent, U.S. Purchaser or the Company are necessary to authorize this Agreement or to consummate the Transactions. This Agreement has been duly and validly executed and delivered by each of Cayman Purchaser, Parent, U.S. Purchaser and the Company and, assuming the due authorization, execution and delivery by each other party, constitutes a legal, valid and binding obligation of each of Cayman Purchaser, Parent, U.S. Purchaser and the Company, enforceable against Cayman Purchaser, Parent, U.S. Purchaser and the Company in accordance with its terms.
Section 5.03. Noncontravention. The execution, delivery and performance of this Agreement by each of Cayman Purchaser, Parent, U.S. Purchaser and the Company do not, and the consummation by each of Cayman Purchaser, Parent, U.S. Purchaser and the Company
of the Transactions will not, constitute or result in a (i) breach or violation of, or a default under, the organizational documents of Cayman Purchaser, Parent, U.S. Purchaser or the Company or (ii) assuming compliance with the matters set forth in Sections 3.07, 4.04 and 5.04, a breach or violation of, or default under, any Law or Contract binding upon Cayman Purchaser, Parent, U.S. Purchaser or the Company.
Section 5.04. Governmental Authorization. Other than the reports, filings, registrations, consents, approvals, permits, authorizations, applications, expiry of waiting periods and/or notices under the HSR Act and with under the insurance laws of Indiana, Pennsylvania and Wisconsin, no notices, reports or other filings are required to be made by Cayman Purchaser, Parent, U.S. Purchaser or the Company with, nor are any consents, registrations, approvals, permits applications, expiry of waiting periods or authorizations required to be obtained by Cayman Purchaser, Parent, U.S. Purchaser or the Company from, any Governmental Authority, in connection with the execution and delivery of this Agreement by Cayman Purchaser, Parent, U.S. Purchaser or the Company or the consummation by Cayman Purchaser, Parent, U.S. Purchaser or the Company of the Transactions.
Section 5.05. Purchase for Investment. (a) Cayman Purchaser is purchasing the Parent Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Cayman Purchaser (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of bearing the economic risks of such investment.
(b) The Company and Parent are purchasing the shares of Wind River Common Stock for investment for their own account and not with a view to, or for sale in connection with, any distribution thereof. The Company and Parent (either alone or together with their advisors) have sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of their investment in the shares of Wind River Common Stock and are capable of bearing the economic risks of such investment.
(c) The U.S. Purchaser is purchasing the shares of Company Common Stock from the Trusts for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. The U.S. Purchaser (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of bearing the economic risks of such investment.
Section 5.06. No Inducement or Reliance; Forecasts and Projections. (a) Neither Cayman Purchaser, Parent, U.S. Purchaser nor the Company has been induced by or has relied upon any representations, warranties or statements, whether express or implied, made by Wind River or the Trusts, or any of their respective Affiliates, that are not expressly set forth in this Agreement, whether or not any such representations, warranties or statements were made in writing or orally, and that (in the absence of fraud) neither Cayman Purchaser, Parent, U.S. Purchaser nor the Company will have any right or remedy arising out of any such representation, warranty or statement.
(b) Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company acknowledges that, except as expressly set forth in this Agreement, neither Wind River nor any
Trust, nor any of their respective Affiliates, has made any representation, warranty or statement, express or implied, as to the prospects of the Company or Wind River or any of its Subsidiaries, or with respect to any forecasts or projections provided by Wind River or the Trusts, or their respective Affiliates and that (in the absence of fraud) Cayman Purchaser, Parent, U.S. Purchaser and the Company will not have any right or remedy arising out of any such representation, warranty or statement.
Section 5.07. Brokers and Finders. Neither Cayman Purchaser, Parent, U.S. Purchaser, the Company nor any of their Affiliates nor any of their respective directors, officers, or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with this Agreement or the Transactions other than as may be payable to Credit Suisse First Boston LLC.
Section 5.08. Ownership of Parent; No Prior Activities. (a) The authorized share capital of Parent consists of 900,000,000 common shares, par value $0.0001 per share, of which 15,000 Parent Class B Common Shares are outstanding, and 100,000,000 preferred shares, par value $0.0001 per share, of which one series has been designated as Parent Preferred Shares, none of which shall be issued and outstanding prior to consummation of the Transactions. All of the issued and outstanding Parent Class B Common Shares have been duly authorized and are validly issued, fully paid and nonassessable and not subject to preemptive rights. Each such outstanding Parent Class B Common Share was sold for $10 per share. Except as contemplated by this Agreement, there are no outstanding (i) securities of Parent that are convertible into or exchangeable for share capital of Parent or (ii) options or other rights to acquire from Parent, or other obligation of Parent to issue other share capital, or other securities convertible into or exchangeable for any share capital of Parent. Except as contemplated by this Agreement, Parent has no commitments (including contingent or conditional commitments) to issue or deliver any share capital. There are no outstanding obligations of Parent to repurchase, redeem or otherwise acquire any of Parent's share capital. The Parent Shares, when issued, sold and delivered to the Trusts in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable. Parent is a wholly-owned subsidiary of Cayman Purchaser, which is in turn wholly owned by Fox Paine Capital Fund II International, L.P., Fox Paine Capital Fund II Co-Investors International, L.P., E&A `J' Trust and FPC International GP, which are "side-by-side" partnerships of each other and their relative ownership percentages in Cayman Purchaser are the same as their relative ownership percentages in similar investments that they have jointly made.
(b) Except as provided in Section 5.08(a), (i) there is no share capital or other equity or voting securities of Parent authorized, reserved, issued or outstanding, (ii) Parent is not a party to any agreement creating preemptive or other outstanding rights, subscriptions, options, warrants, share appreciation rights, redemption rights, repurchase rights, convertible securities or other agreements, arrangements or commitments of any character relating to, or the value of which is determined by reference to, the issued or unissued share capital or other equity interest of Parent, and (iii) Parent is not a party to any agreement creating any other securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of Parent, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Parent does not have any outstanding bonds, debentures, notes or other similar obligations.
(c) The direct and indirect subsidiaries of Parent are each wholly owned by their respective parent entities and (i) no direct or indirect subsidiary of Parent is a party to any agreement creating preemptive or other outstanding rights, subscriptions, options, warrants, stock appreciation rights, redemption rights, repurchase rights, convertible securities or other agreements, arrangements or commitments of any character relating to, or the value of which is determined by reference to, the issued or unissued share capital or other equity interest of any direct or indirect subsidiary of Parent, and (ii) no direct or indirect subsidiary of Parent is a party to any agreement creating any other securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of any direct or indirect subsidiary of Parent, and no securities or obligations evidencing such rights are authorized, issued or outstanding. No subsidiary of Parent has any outstanding bonds, debentures, notes or other similar obligations.
(d) Each of Cayman Purchaser, Parent, Barbados Insurance Company, U.S. Purchaser, the Company and any other direct or indirect subsidiaries of Parent was formed for the purpose of engaging in the Transactions, and, except for liabilities and obligations incurred in connection with its organization or incorporation and pursuant to the terms of this Agreement, neither Cayman Purchaser, Parent, Barbados Insurance Company, U.S. Purchaser, the Company nor any other direct or indirect subsidiary of Parent has incurred any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any Person. Each of Parent and its direct and indirect subsidiaries has all requisite power and authority and has all necessary approvals, licenses, permits and authorization to own its properties and to carry on its business as presently contemplated to be conducted as described in the draft Form S-1 registration statement of Parent dated as of the date of this Agreement and delivered to the Trusts on the date of this Agreement (except that Barbados Insurance Company is not currently licensed as an insurance company in Barbados).
ARTICLE 6
COVENANTS OF WIND RIVER AND THE TRUSTS
Wind River and the Trusts jointly and severally agree that:
Section 6.01. Conduct of Business. From the date of this Agreement until the Closing Date, the Trusts shall cause Wind River and each of its Subsidiaries to, and Wind River shall, and shall cause each of its Subsidiaries to, conduct its businesses in the ordinary course consistent with past practice and to use commercially reasonable efforts to preserve intact its business organizations, goodwill and relationships with its employees and third parties (including their respective relationships with policyholders, insureds, reinsurers, agents, underwriters, brokers and investment customers) and to keep available the services of their key employees and maintain their current rights and franchises. Without limiting the generality of the foregoing, from the date of this Agreement until the Closing Date, without the prior written consent of Cayman Purchaser, the Trusts shall not permit Wind River or any of its Subsidiaries to, and Wind River shall not, and shall not permit any of its Subsidiaries to:
(a) adopt or propose any change in its certificate of incorporation or bylaws, or comparable organizational documents;
(b) merge or consolidate with any other Person or acquire a material amount of assets from any other Person;
(c) split, combine, subdivide, redeem or reclassify its capital stock;
(d) issue, deliver, sell, pledge or otherwise encumber or subject to any Lien any shares of its capital stock, any other voting securities or any securities convertible into any rights, warrants or options to acquire, any such capital stock, voting securities or convertible securities (including stock appreciation rights);
(e) declare, set aside, make or pay any dividend or distribution in respect of its capital stock or other equity interests; provided, however, that Wind River will, prior to the Closing Date, distribute its interests in Little Round Top to the Trusts;
(f) liquidate or dissolve, or adopt any plan of liquidation or dissolution;
(g) sell, lease, license or otherwise dispose of any assets or property (not including investment securities) having a fair market value in excess of $50,000 individually or $250,000 in the aggregate;
(h) discharge or satisfy any material Lien or compromise or settle any material Action pending against Wind River or any of its Subsidiaries (other than first party contractual and coverage claims under insurance policies issued by the Insurance Companies and Actions under "direct action" statutes of various states, in each case, in the ordinary course of the insurance operations of Wind River and its Subsidiaries) or, except in the ordinary course of business consistent with past practice, pay or satisfy any material obligation or liability (whether fixed or contingent);
(i) enter into any non-competition or other agreement placing current or future limitations on the conduct of its business;
(j) other than in the ordinary course of business consistent with past practice or as permitted by Section 6.01(w), terminate, cancel, surrender, modify or amend, assign or give notice of intent to terminate, cancel, modify, amend or assign any Material Contract set forth in Section 3.20(a) of the Disclosure Letter or enter into any new Material Contract that would have been required to have been set forth in Section 3.20(a) of the Disclosure Letter had such Material Contract been in effect as of the date of the Original Investment Agreement;
(k) assume, guarantee or endorse, or otherwise become responsible for, any obligations of any other Person, or make any loans or advances to any other Person;
(l) enter into any new (i) agency agreement that provides or permits: (A) a premium volume limitation greater than $5 million; (B) a projected annual reinsurance ceded written premium greater than $5 million; (C) policy limits of liability of greater than $5 million per occurrence; or (D) a per policy retention of more than $600,000 per occurrence; or (ii) Reinsurance Agreement with ceded written premium in excess of $5 million, except in
situations where the new Reinsurance Agreement is essentially a renewal of an existing agreement with substantially similar terms and conditions;
(m) engage in any transaction with any officer or director of Wind River or its Subsidiaries, or any Affiliate thereof other than pursuant to insurance policies written for the benefit of such persons outstanding as of the date of the Original Investment Agreement, or otherwise contemplated by this Agreement;
(n) (i) change its tax, reinsurance, reserving, financial or accounting policies, practices or methods, or make any change in the underwriting, marketing, pricing, claim processing, payment and risk management practices or policies, except, in each case, as required by Law or by reason of a concurrent change in GAAP or SAP, or (ii) make or rescind any material Tax election or settle or compromise any material Tax contest or other material Tax matter;
(o) change its independent public accountants;
(p) make, or enter into any commitment to make, any capital expenditures exceeding $100,000 individually, or $300,000 in the aggregate;
(q) incur or guarantee any indebtedness, except for any drawing under any existing credit facility that is repaid within ten business days;
(r) increase in any manner the compensation, employee benefits or fringe benefits of any of its employees, enter into any commitment to pay any pension, retirement or severance benefits to any of its employees; commit itself to, or enter into, any employment or change of control agreement; adopt or commit itself to any new Employee Plan; grant any phantom stock, phantom stock options, incentive compensation or similar rights or opportunities to earn compensation, to any employee; or amend, supplement, terminate or accelerate the timing of payments, the funding of benefits or the vesting of rights and benefits under, or otherwise amend, supplement or terminate, any Employee Plan (other than as may be required by applicable Law); provided, that the foregoing shall not be considered to preclude (i) increases in the base salaries of employees in the ordinary course of business and consistent with past practice both as to timing and amount, (ii) payment of compensation and benefits pursuant to the currently existing terms of Plans or binding contracts in effect as of the date of the Original Investment Agreement or (iii) payment of severance not in excess of two months' base pay, in exchange for a release of claims, in the ordinary course of business consistent with past practice;
(s) forfeit, abandon, modify, waive, terminate or otherwise change any of its material insurance licenses;
(t) terminate, cancel or amend any insurance coverage maintained by or on behalf of Wind River or any of its Subsidiaries that is not replaced by a comparable amount of insurance coverage, except as permitted by Section 6.01(w);
(u) conduct transactions in investments except in material compliance with the investment policy of Wind River and its Subsidiaries a true, correct and complete copy of
which as in effect on the date of the Original Investment Agreement has previously been delivered to Cayman Purchaser or one of its Affiliates, or modify or amend such investment policy in any material respect;
(v) enter into, negotiate, terminate, cancel, surrender, modify or amend, assign or give notice of intent to enter into, negotiate, terminate, cancel, modify, amend or assign any collective bargaining agreement;
(w) cancel or vary materially any material agency
agreement or any reinsurance treaty, or any course of dealing
thereunder, except for those agreements and treaties set forth in
Section 6.01(w) of the Disclosure Letter; or
(x) agree or commit to do any of the foregoing.
The Trusts shall not take, and shall not permit Wind River to take, any action that would make any representation or warranty of the Trusts or Wind River under this Agreement inaccurate such that the closing condition set forth in Section 10.02(b) shall not be satisfied as of the Closing Date.
Section 6.02. Access to Information. (a) From the date of this Agreement until the Closing Date, Wind River and the Trusts shall (i) give Cayman Purchaser, its counsel, financial advisors, independent accountants and other authorized representatives reasonable access (subject to, among other things, reasonable restrictions necessary to comply with applicable antitrust laws and regulations) during normal business hours and upon reasonable advance notice to Wind River to the personnel, offices, properties and Records relating to Wind River or any of its Subsidiaries, (ii) furnish to Cayman Purchaser, its counsel, financial advisors, independent accountants and other authorized representatives such financial and operating data and other information relating to Wind River or any of its Subsidiaries as such Persons may reasonably request and (iii) instruct the employees, counsel and financial advisors of the Trusts or Wind River or any of its Subsidiaries to cooperate with Cayman Purchaser in its investigation of Wind River and its Subsidiaries. Any investigation pursuant to this Section 6.02 shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Wind River or any of its Subsidiaries.
(b) At the Closing, or within three business days thereof, the Trusts shall deliver, or cause to be delivered, to Wind River all Records of Wind River and any of its Subsidiaries, and all other original agreements, documents, books and records relating to Wind River or any of its Subsidiaries in the possession of the Trusts to the extent not in the possession of Wind River or any of its Subsidiaries; provided, however, that the Trusts shall retain the original federal Tax Returns of Wind River and its Subsidiaries for the taxable years 1997 through Closing and the work papers relating thereto, and the Trusts shall provide copies of such federal and state Tax Returns and related work papers to Cayman Purchaser.
(c) Anything in this Section 6.02 or elsewhere in this Agreement to the contrary notwithstanding, effective as of the Closing, each of Cayman Purchaser, Parent, U.S. Purchaser and the Company waives, and, effective at Closing, Wind River and its Subsidiaries waive all rights that Cayman Purchaser, Parent, U.S. Purchaser the Company, Wind River or its
Subsidiaries may have, if any, to any notes, work product or communications within the attorney-client privilege (collectively, the "Attorney Materials") to or from the Trusts or any of their Affiliates prepared or received by Drinker Biddle & Reath LLP, Appleby Spurling & Kempe and Hunter & Hunter in the course of their representation of the Trusts and Wind River in connection with and solely relating to the Transactions to the extent any such right would arise as a result of Drinker Biddle & Reath LLP, Appleby Spurling & Kempe or Hunter & Hunter also having been engaged by or receiving payments from Wind River or any of its Subsidiaries in connection with the Transactions; provided that such waivers shall be null and void and of no effect with respect to Attorney Materials that are not protected by the attorney-client privilege if it is asserted.
Section 6.03. Notices of Certain Events. The Trusts and Wind River shall promptly notify Cayman Purchaser of:
(a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the Transactions;
(b) any notice or other communication from any Governmental Authority in connection with the Transactions;
(c) the commencement of any Action relating to the Trusts or Wind River in connection with the Transactions;
(d) the occurrence of any event or the existence of any condition known to Wind River that would reasonably be expected to cause it to believe that any amounts due to Wind River or any of its Subsidiaries under any Reinsurance Agreement are not fully collectible (net of any reserves set forth on the Balance Sheet) by Wind River or its Subsidiaries; and
(e) the occurrence of any event or the existence of any condition known to Wind River that causes any representation or warranty contained in Article 3 or Article 4 to become inaccurate such that the closing condition set forth in Section 10.02(b) would not reasonably be expected to be satisfied.
Section 6.04. Resignations. The Trusts shall deliver to Cayman Purchaser the resignations, effective as of the Closing Date, of the directors and officers of Wind River requested by Cayman Purchaser at least 5 days prior to the Closing Date.
Section 6.05. Nonsolicitation. Prior to the Closing, until the termination of this Agreement, the Trusts shall not, and shall not permit Wind River or its Subsidiaries, or any Affiliate thereof, to (a) solicit any inquiries or proposals for, or enter into or continue or resume any discussions with respect to or enter into any agreement with respect to, any acquisition of shares of capital stock of, or any substantial part of the assets of, Wind River or any of its Subsidiaries, or (b) furnish or cause to be furnished any non-public information concerning the business of Wind River or any of its Subsidiaries to any Person in connection with any discussions or proposed discussions regarding any acquisition of shares of capital stock of, or any substantial part of the assets of, Wind River or any of its Subsidiaries. If at any time prior to the Closing, any Trust, Wind River or any of its Subsidiaries, or any Affiliate thereof, is
approached by any Person regarding any proposal of the type described in clause
(a) of this Section 6.05, the Trusts shall promptly disclose to Cayman Purchaser
the nature of such contact and identity of such Person.
Section 6.06. Intercompany Accounts. Except for those Contracts and insurance policies set forth on Section 6.06 of the Disclosure Letter, all intercompany Contracts between the Trusts or any of their Affiliates (other than Wind River and its Subsidiaries), on the one hand, and Wind River or any of its Subsidiaries, on the other, shall be terminated on or prior to the Closing Date; provided, however, that each of the insurance policies written by any Subsidiary of Wind River for the benefit of AMCP or AMC Group or any of their respective subsidiaries outstanding as of the date of this Agreement shall remain in effect in accordance with its terms and conditions after the Closing. All intercompany loans, advances, payables and receivables between the Trusts or their Affiliates, on the one hand, and Wind River or any of its Subsidiaries, on the other, shall be settled in full as of the Closing (other than the Senior Notes).
Section 6.07. Covenant Not to Compete; Nonsolicitation of Employees. (a) In consideration of the benefits of this Agreement to the Trusts and in order to induce U.S. Purchaser to enter into this Agreement, each Trust covenants and agrees that until the later of (i) the third anniversary of the Closing Date and (ii) one year from date that the Trusts shall cease to have the right to appoint an individual to the Board of Directors of the Company under the Shareholders Agreement (such period, the "Noncompetition Period"), neither the Trusts nor any of their respective Affiliates shall engage in the business of underwriting or placing insurance in competition with any of the businesses of Wind River or any of its Subsidiaries as conducted as of the Closing Date without the express written consent of Parent.
(b) The parties intend that the covenant contained in this Section 6.07 shall be deemed a series of separate covenants for each appropriate jurisdiction and for each year of the three year term. If, in any judicial proceeding, a court of competent jurisdiction shall refuse to enforce all the separate covenants deemed included in this Section 6.07 on grounds that, taken together, they cover too extensive a geographic area or extend for too long of a period of time, the parties intend that those covenants (taken in order of the least populous jurisdictions with respect to geography) that, if eliminated, would permit the remaining separate covenants to be enforced in that proceeding, shall, for the purpose of such proceeding, be deemed eliminated from the provisions of this Section 6.07.
(c) Each Trust covenants and agrees that during the Noncompetition Period it shall not, and shall cause its Affiliates not to, solicit, induce or attempt to persuade any employee or agent of the Company, Wind River or any of its Subsidiaries to terminate his or her employment or agency relationship; provided, however, that nothing contained in this Agreement shall prohibit any Trust or any Affiliate thereof from placing a general advertisement or from employing individuals who respond to any such advertisement whether or not such individuals are then employed by Wind River or any of its Subsidiaries, or from employing any individual who contacts such Trust or any of its Affiliates on an unsolicited basis.
(d) Of the amount payable by U.S. Purchaser to the Trusts for Company Common Stock, $10,000 shall be allocated to this Section 6.07.
Section 6.08. Adjustment of Principal of Senior Notes. (a)
[Intentionally omitted.]
(b) Wind River and its Subsidiaries shall use commercially reasonable efforts to enter into settlement arrangements with the Obligors with respect to each agreement between Wind River or any of its Subsidiaries and such Obligor as soon as reasonably practicable following the date of this Agreement on such terms as Wind River and the Trusts shall in good faith determine. The gross proceeds to Wind River and its Subsidiaries from such settlement arrangements received following the Balance Sheet Date, together with any other amounts received following the Balance Sheet Date in respect to the recoverables of Wind River or any its Subsidiaries from the Obligors, are referred to as the "Obligor Proceeds," and the excess (if any) of the Obligor Proceeds over the Senior Note Adjustment Base Amount is referred to as the "Senior Note Adjustment Amount;" provided, that in no event shall the Senior Note Adjustment Amount be greater than $15 million. From and after the Closing Date, the Company shall provide the Trusts with a quarterly report detailing the receipt of any Obligor Proceeds.
(c) From and after the Closing Date, the principal amounts of the Senior Notes shall be adjusted on a quarterly basis by adding to principal amount of each Senior Note an amount equal to one half of the increase in the Senior Note Adjustment Amount from the Closing Date (or from the date of any prior adjustment pursuant to this sentence) through the date of such adjustment multiplied by a fraction (i) the numerator of which is the principal amount of such Senior Note as of the date of such adjustment, and (ii) the denominator of which is the aggregate principal amount of all Senior Notes as of the date of such adjustment. If, at any time after the Senior Notes are no longer outstanding, Wind River and its Subsidiaries receive Obligor Proceeds that would have resulted in one half of any Senior Note Adjustment Amount being added to the principal amount of the Senior Notes had the Senior Notes been outstanding, Wind River shall instead pay or cause to be paid to each Trust its pro rata share thereof in cash.
Section 6.09. Certain Employee Benefits. Wind River and the Trusts shall ensure that all individuals who are employees of Wind River or any of its Subsidiaries immediately prior to the Closing shall be fully vested, as of the Closing, in all of their accrued benefits (if any) under the American Manufacturing Corporation 401(k) Plan (the "AMC Savings Plan") and American Manufacturing Corporation and Subsidiaries Pension Plan (the "AMC Pension Plan").
Section 6.10. Non-Marketable Securities. Prior to the Closing, AMCD shall purchase from Wind River and its Subsidiaries all Non-Marketable Securities for a cash price equal to carrying value thereof set forth on the UNIC March 31, 2003 statutory statement. Notwithstanding anything to the contrary, the aggregate purchase price for the Non-Marketable Securities shall be at least $1,000. The Trusts shall cause Wind River and its Subsidiaries to be reimbursed for any capital contributions made by Wind River or any of its Subsidiaries in respect of the Non-Marketable Securities after March 31, 2003 and on or prior to the Closing Date, and Wind River and its Subsidiaries shall pay to the Trusts or their designee an amount equal to any distributions in respect the Non-Marketable Securities received by Wind River or any of its Subsidiaries after March 31, 2003 and on or prior to the Closing.
Section 6.11. Data Security. Wind River shall, and shall cause its Subsidiaries to, use commercially reasonable efforts to continue to implement, as soon as reasonably practicable following the date of this Agreement, such practices regarding the security of their internal and external computer networks as may be appropriate given the nature of the information contained on such computer networks and the businesses operated by Wind River and its Subsidiaries, including, as may be applicable, (a) safeguards against the destruction, loss or alteration of data, (b) Internet access, (c) firewall protection, (d) DMZs, (e) password protection, (f) detection controls, (g) disaster recovery/business continuity plans and (h) the implementation of security policies and procedures.
ARTICLE 7
COVENANTS OF CAYMAN PURCHASER, PARENT, U.S. PURCHASER AND THE COMPANY
Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company agrees that:
Section 7.01. Confidentiality. (a) Prior to the Closing Date and after any termination of this Agreement, if the Closing does not occur, Cayman Purchaser, Parent, U.S. Purchaser, the Company and their respective Affiliates will, except as required by Law, hold, and will cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold any nonpublic information (other than information that (i) is or becomes generally available to the public, (ii) becomes available to Cayman Purchaser, Parent, U.S. Purchaser or the Company on a non-confidential basis from a source other than Wind River or the Trusts or (iii) is independently developed by Cayman Purchaser, Parent, U.S. Purchaser or the Company) provided by Wind River or the Trusts ("Confidential Information") confidential.
(b) Wind River and the Trusts are not waiving, and will not be deemed to have waived or diminished any attorney work product protections, attorney-client privileges, or similar protections and privileges as a result of disclosing any Confidential Information (including Confidential Information relating to pending or threatened litigation) to Cayman Purchaser, Parent, U.S. Purchaser, the Company or their respective Affiliates and their respective representatives, regardless of whether Wind River or the Trusts have asserted or are presently entitled to assert such privileges and protections. The parties (i) share common legal and commercial interests in all of the Confidential Information, (ii) are or reasonably anticipate that they may become joint defendants in an Action and (iii) intend that such privileges and protections remain intact should any party become subject to any action or threatened Action. In furtherance of the foregoing, neither Cayman Purchaser, Parent, U.S. Purchaser, the Company, their respective Affiliates nor their representatives shall claim or contend in Actions between the parties to this Agreement that Wind River or the Trusts waived any attorney work product protections, attorney-client privileges, or similar protections and privileges with respect to any information, documents, or other material not disclosed to Cayman Purchaser, Parent, U.S. Purchaser, the Company, their respective Affiliates and their respective representatives as a result of Wind River or the Trusts disclosing any Confidential Information (including Confidential Information related to pending or threatened litigation) to Cayman Purchaser, Parent, U.S. Purchaser, the Company, their respective Affiliates or their respective representatives.
(c) Notwithstanding anything to the contrary contained in this Agreement, from the commencement of discussions with respect to the Transactions, each party (and each employee, representative or other agent of such party) may disclose to any and all persons, without limitation of any kind, the "tax treatment" and "tax structure" (as those terms are defined in Treasury Regulation Section 1.6011-4) of the Transactions, and all materials of any kind (including opinions or other tax analyses) that are provided to any party relating to such tax treatment and tax structure. The authorization in the immediately preceding sentence does not extend to (i) disclosure of the identities of the parties, or (ii) to the extent not inconsistent with the preceding sentence, disclosure of (A) any pricing information or (B) any other term or detail not relating to the tax treatment or tax structure of the Transactions.
Section 7.02. Directors' and Officers' Indemnification and Insurance. (a) The provisions relating to the indemnification of directors and officers in the certificate or articles of incorporation and bylaws, or any other organizational documents, as appropriate, of Wind River and its Subsidiaries shall not be amended, repealed or otherwise modified until the sixth anniversary of the Closing Date in any manner that would adversely affect in any material respect the rights thereunder of individuals who at any time prior to the Closing Date were directors or officers of Wind River or one of its Subsidiaries in respect of actions or omissions occurring at or prior to the Closing Date (including the Transactions), unless such modification is required by law.
(b) Until the sixth anniversary of the Closing Date, Cayman Purchaser, Parent, U.S. Purchaser and the Company shall cause Wind River to use its commercially reasonable efforts to include those individuals who were directors and officers of Wind River or any of its Subsidiaries prior to the Closing in any liability insurance policies for directors and officers maintained by Wind River or the Company (or any successor thereto) during such period; provided that such liability insurance shall only extend to matters arising prior to the Closing.
(c) The provisions of this Section 7.02 are intended to be for the benefit of, and shall be enforceable by, each of the individuals who at any time prior to the Closing Date were directors or officers of Wind River or any one of its Subsidiaries and his or her heirs and legal representatives, and shall be in addition to any other rights any such individual may have.
Section 7.03. Notices of Certain Events. Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company shall promptly notify Wind River and the Trusts of:
(a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the Transactions;
(b) any notice or other communication from any Governmental Authority in connection with the Transactions;
(c) the commencement of any Action relating to Cayman Purchaser, Parent, U.S. Purchaser or the Company in connection with the Transactions; and
(d) the occurrence of any event or the existence of any condition known to Cayman Purchaser, Parent, U.S. Purchaser or the Company that causes any representation or
warranty contained in Article 5 to become inaccurate such that the Closing condition set forth in Section 10.03(b) would not reasonably be expected to be satisfied.
Section 7.04. Observer Rights. For so long as the Trusts, any Affiliates of the Trusts and the principal (i.e. corpus) beneficiaries of any Trust hold Related Senior Notes (as defined in the Senior Notes) with an aggregate outstanding Principal Amount (as defined in the Senior Notes) that equals at least 50% of the aggregate Principal Amount of the Related Senior Notes as of the Closing Date, the Trusts shall have the right to appoint an individual to be an observer of Parent's Board of Directors (the "Board"), which individual shall initially be Robert H. Strouse (the "Senior Notes Observer"). The Senior Notes Observer shall have the right to attend and participate in all meetings of the Board and any committees thereof and to receive all notices and information that is provided to the Board and any committee thereof in the same manner and at the same time as such notices and information are provided to the Board or any Board committee, but shall not have the right to vote on any matters presented to the Board or any Board committee.
ARTICLE 8
MUTUAL COVENANTS
The parties agree that:
Section 8.01. Maintenance and Preservation of Records. Through the Closing Date, the Trusts shall cause Wind River to maintain or cause to be maintained the Records in all material respects in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company agrees that it shall preserve and keep the Records of Wind River and its Subsidiaries existing as of the Closing Date for a period of six years from the Closing Date or any longer period as may be required under Law, and shall make such Records available to the Trusts for any reasonable purpose, at the Trusts' expense, as may be reasonably requested by the Trusts. If Cayman Purchaser, Parent, U.S. Purchaser or the Company wishes to destroy such Records after that time, it shall first give 30 days' prior written notice to the Trusts and the Trusts shall have the right at their option and at their expense, upon prior written notice given to Cayman Purchaser within such 30-day period, to take possession of such Records within 60 days after the date of such notice to Cayman Purchaser. In addition, following the Closing Date, the Trusts shall allow Cayman Purchaser, Parent, U.S. Purchaser, the Company and their representatives (including its independent public accountants and counsel) reasonable access upon reasonable notice and during regular business hours, to Records that remain in the Trusts' possession. If the Trusts wish to destroy such Records, they shall first give 30 days' prior written notice to each of Cayman Purchaser, Parent, U.S. Purchaser and the Company, and each of Cayman Purchaser, Parent, U.S. Purchaser and the Company shall have the right at its option and at its expense upon written notice given to the Trusts within said 30-day period, to take possession of said Records within 60 days after the date of such notice to the Trusts.
Section 8.02. Regulatory and Other Authorizations. (a) Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River and the Trusts shall cooperate with each other and (i) shall use their respective commercially reasonable efforts promptly to prepare and to file
all necessary documentation, and to effect all applications, notices, petitions and filings, with each Person that are necessary or advisable to consummate the Transactions, and (ii) shall use their respective commercially reasonable efforts to obtain as promptly as practicable any Permit of such Person that is necessary or advisable to consummate the Transactions.
(b) Without limiting the generality of the foregoing, as soon as reasonably practicable after execution and delivery of this Agreement, Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River and the Trusts shall make any filings required under the HSR Act. Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River and the Trusts will each furnish all information as may be required by and will each respond as promptly as practicable to all inquiries and requests received from any other state regulatory agency properly asserting jurisdiction or by the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the HSR Act in order that the requisite approvals for the Transactions be obtained or to cause any applicable waiting periods to expire.
(c) Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River and the Trusts shall, upon request, furnish each other with all information concerning themselves, their subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary in connection with any statement, filing, notice or application made by or on behalf of Cayman Purchaser, Parent, U.S. Purchaser, the Company, Wind River or any of their respective Affiliates to any Governmental Authority in connection with the Transactions (except to the extent that such information would be, or relates to information that would be, filed under a claim of confidentiality).
Section 8.03. Further Assurances. At any time and from time to time after the Closing, the parties shall use commercially reasonable efforts to take such actions to execute and deliver such other documents, instruments of transfer or assignment, and do all such further acts and things as may be necessary or desirable to carry out the Transactions. Each party shall, on or prior to the Closing Date, use its commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions precedent set forth in Article 10, including the execution and delivery of any documents, certificates, instruments or other papers that are reasonably required for the consummation of the Transactions.
Section 8.04. Employee Benefit Matters. (a) Wind River and its Subsidiaries shall make contributions to the AMC Savings Plan with respect to their employees' benefits up to and including the Closing Date in accordance with the arrangements in effect as of the date of this Agreement. Wind River and its Subsidiaries shall have no obligation to make, and shall not make, any contributions to the AMC Pension Plan or any payments to AMCP, the Trusts or any of their respective Affiliates with respect to the AMC Pension Plan at any time after the date of the Original Investment Agreement, except in the ordinary course of business consistent with past practices and not in amounts to exceed $300,000.
(b) The Trusts and their Affiliates (other than Wind River and it Subsidiaries) shall remain solely responsible for claims for the type of benefits described in Section 3(1) of ERISA (whether or not covered by ERISA) ("Welfare Benefits") that are incurred by or with respect to employees of Wind River and its Subsidiaries and their beneficiaries and dependents on or before the Closing Date and claims relating to COBRA Coverage attributable to
"qualifying events" with respect to any employees of Wind River and its Subsidiaries and their beneficiaries and dependents that occur on or before the Closing Date. For purposes of the foregoing, a medical/dental claim shall be considered incurred when the services are rendered, the supplies are provided or medication is prescribed, and not when the condition arose; provided that claims relating to a hospital confinement that begins on or before the Closing Date but continues thereafter shall be treated as incurred on or before the Closing Date. A disability claim shall be considered incurred on or before the Closing Date if the injury or condition giving rise to the claim occurs on or before the Closing Date. Wind River and its Subsidiaries shall pay AMCP for the provision of Welfare Benefits up to and including the Closing Date in accordance with the cost-sharing arrangements in effect as of the date of this Agreement.
(c) As of the Closing Date, employees of Wind River and its Subsidiaries shall cease to participate in all Employee Plans other than the Wind River Plans.
(d) (i) As of or as soon as practicable after the Closing Date, Wind River shall establish a defined contribution savings plan intended to qualify under Sections 401(a) and 401(k) of the Code (the "Wind River Savings Plan"). Upon the compliance by Wind River with the requirements of Section 8.04(d)(ii), the Trusts shall cause the sponsor of the AMC Savings Plan to direct the trustee of the AMC Savings Plan to transfer to the trust under the Wind River Savings Plan liability for the account balance of each participant in the AMC Savings Plan who is an employee of Wind River or any of its Subsidiaries (the "Wind River Participants"), together with cash, cash equivalents or other mutually acceptable property, the value of which on such transfer date is equal to the liability; provided, that any outstanding participant loans to Wind River Participants shall be transferred in kind. Wind River shall cause the Wind River Savings Plan to continue to administer the outstanding participant loans which are transferred in kind in accordance with the transferred amortization schedules to which they are subject. Wind River shall timely submit the Wind River Savings Plan to the IRS for a favorable determination letter with respect to the qualification thereof under Sections 401(a) and 401(k) of the Code and shall make such changes as the IRS may required in order to issue such a determination letter and shall provide the Trusts with evidence of such submission and of receipt of a favorable determination letter.
(ii) Wind River shall provide the Trusts with written
evidence of (A) the adoption of the Wind River Savings Plan by Wind River and
(B) the creation of the trust thereunder. Wind River, the Trusts and the Trusts'
Affiliates shall cooperate in the filing of any IRS Forms 5310 required by the
transfer of assets and liabilities described in this Agreement, and anything
contained in this Section 8.04(d) to the contrary notwithstanding, the transfer
of assets and liabilities described in this Section 8.04(d) shall not take place
until the 31st day following the filing of all required IRS Forms 5310. In
addition, Wind River, the Trusts and the Trusts' Affiliates shall cooperate in
(I) making all other filings required under the Code or ERISA and any applicable
securities laws, (II) implementing all appropriate communications with
participants, (III) transferring appropriate records and (IV) taking all such
other actions as may be necessary and appropriate to implement the provisions of
this Section 8.04(d) in a timely manner.
ARTICLE 9
TAX MATTERS
Section 9.01. Indemnification by the Trusts. (a) The Trusts shall jointly and severally indemnify and hold harmless Cayman Purchaser, Parent, U.S. Purchaser, Company, Wind River and each Subsidiary against the following Taxes and Tax Detriments and, except as otherwise provided in Section 9.05, against any loss, damage, liability or expense, including reasonable fees for attorneys and other outside consultants, incurred in contesting or otherwise in connection therewith (individually or in the aggregate, "Tax Contest Expenses"): (i) any Taxes of the Trusts, Wind River or any Subsidiary that are allocable or that relates to a Pre-Closing Tax Period to the extent such Taxes exceed any accrual or reserves in respect thereof (not taking into account any accrual for deferred Taxes); (ii) any Taxes of any Person other than Wind River or any of its Subsidiaries for which Wind River or any Subsidiary may be liable under Treasury Regulation Section 1.1502-6 (or any comparable provision of state, local or non-U.S. law), as a transferee or successor, by contract or otherwise; (iii) any Taxes imposed on Cayman Purchaser or any Affiliate thereof (including Wind River or any of its Subsidiaries) resulting from a breach of any representation or warranty contained in Section 3.16; (iv) any Taxes imposed on Cayman Purchaser or any of its Affiliates (including Wind River and its Subsidiaries) arising out of a breach of any covenant or agreement made in this Article 9 by any of the Trusts; (v) any and all Taxes and Tax Detriments suffered by Cayman Purchaser or any Affiliate thereof (including Wind River or any of its Subsidiaries) as a result of any action by or transaction involving Wind River or any of its Subsidiaries between January 1, 2003 and the Closing Date; and (vi) the excess, if any, of $19.5 million over the amount of federal income Tax refund actually received by Wind River and its Subsidiaries within two years of the Closing Date as a result of the carrying back of net operating losses and capital losses from the taxable year ending December 31, 2002.
(b) The Trusts shall indemnify and hold harmless, as appropriate, Cayman Purchaser and each of its Affiliates (including Wind River and its Subsidiaries) from any and all transfer, documentary, sales, use, stamp, registration and other such Taxes and fees incurred in connection with the Transactions ("Transfer Taxes"), regardless of the Person responsible for such Taxes under applicable law.
(c) For purposes of this Section 9.01, in the case of any Taxes (other than Transfer Taxes) that are payable for a taxable period that includes (but does not end on) the Closing Date, the portion of such Tax related to the portion of such taxable period ending on the Closing Date shall (i) in the case of Property Taxes, be deemed to be the amount of such Tax for the entire taxable period (or, in the case of such Property Taxes determined on an arrears basis, the amount of such Tax for the immediately preceding period) multiplied by a fraction, the numerator of which is the number of days in the taxable period ending on the Closing Date and the denominator of which is the number of days in the entire taxable period and (ii) in the case of any Taxes (other than Property Taxes), be deemed equal to the amount that would be payable if the relevant taxable period ended on the Closing Date.
(d) Any payment pursuant to this Section 9.01 shall be made in immediately available funds not later than two business days before the date payment of the Taxes to which
such payment relates is due, or, if no Tax is payable, within 15 days after written demand is made for such payment. Notwithstanding any provision to the contrary in this Agreement, any and all indemnification payments made pursuant to this Article 9 shall be made to the party that actually incurred the Tax loss and shall be made net of any Tax benefits actually realized by such party as a result of such Tax loss.
Section 9.02. Filing of Tax Returns. All Tax Returns required
to be filed by Wind River or any of its Subsidiaries on or after the Closing
Date with respect to any taxable period ending on or prior to the Closing Date
will be filed by Wind River or the applicable Subsidiary when due (taking into
account extensions). Any such Tax Return shall be prepared or caused to be
prepared by the Trusts, in a manner consistent with past practices (including
any elections and accounting methods, except to the extent required by Law or to
the extent counsel for the Trusts renders a legal opinion, in form and substance
reasonably satisfactory to Cayman Purchaser and the Trusts, that a Tax Return
cannot be so prepared and filed without being subject to penalties) and shall be
submitted by the Trusts to Cayman Purchaser (together with schedules, statements
and, to the extent requested by Cayman Purchaser, supporting documentation,
including any Tax Returns, statements and supporting documentation prepared on a
pro forma basis for any Subsidiary that is included in a Tax Return filed on a
consolidated, combined or unitary basis for such taxable period at least 20
business days prior to the due date (including extensions) of such Tax Return.
Cayman Purchaser shall have the right to review all work papers and procedures
used to prepare any such Tax Return. If Cayman Purchaser, within 10 business
days after delivery of a copy of such Tax Return, notifies the Trusts in writing
that it objects to any items in such Tax Return (approval not to be unreasonably
withheld), the disputed items shall be resolved (within a reasonable time,
taking into account the deadline for filing such Tax Return) by KPMG LLP
(Philadelphia Office) or Deloitte & Touche LLP (Philadelphia Office), such firm
to be chosen by and mutually acceptable to both Cayman Purchaser and the Trusts.
Upon resolution of all such items, the relevant Tax Return shall be adjusted to
reflect such resolution and shall be binding upon the parties without further
adjustment. The final Tax Return will then be submitted to Wind River to execute
and file. The costs, fees and expenses of such accounting firm shall be borne
equally by Cayman Purchaser and the Trusts. The Trusts shall not cause Wind
River or any Subsidiary to file any amended Tax Return without the prior written
consent of Cayman Purchaser. All Tax Returns required to be filed by Wind River
or any of its Subsidiaries for any taxable period ending after the Closing Date
shall be prepared at the direction of Cayman Purchaser; provided, that, in the
case of any taxable period that begins before and ends after the Closing Date,
(i) the Trusts shall be entitled to review and approve such Tax Returns, such
approval not to be unreasonably withheld, conditioned or delayed and (ii) any
dispute relating to such Tax Returns shall be resolved in the manner described
in this Section 9.02. Anything in this Section 9.02 to the contrary
notwithstanding, except as otherwise required by Law, any income Tax Return of
Wind River for the "S short year" (as defined in Section 1362(e) of the Code)
shall be prepared on the basis of a closing of the books and Wind River and the
Trusts will execute any elections or consents required in connection with the
filing of such Tax Returns on such basis.
Section 9.03. Tax Refunds. Any refund with respect to Taxes of Wind River or any of its Subsidiaries shall be the property of Wind River or the applicable Subsidiary.
Section 9.04. Cooperation. Wind River, Cayman Purchaser and the Trusts shall furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information (including access to Records) and assistance relating to Wind River and its Subsidiaries as is reasonably necessary for the filing of any Tax Return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. Each of Cayman Purchaser and the Trusts shall make its (or its Affiliates') employees available on a basis mutually convenient to both parties to provide explanations of any documents or information provided under this Agreement and shall retain or cause to be retained all Records related to Taxes in its possession pertinent to Wind River and its Subsidiaries until the applicable period for assessment under applicable Law (giving effect to any extensions or waivers) has expired, and to abide by (or cause any party in possession thereof to abide by) all record retention agreements entered into with any Tax Authority. Prior to Cayman Purchaser, the Trusts or any Affiliates of either Cayman Purchaser or the Trusts disposing of any Records related to Taxes, notice shall be given to the other party providing reasonable terms allowing such other party, at its sole expense, to take possession of such Records. Any information obtained under this Section 9.04 shall be kept confidential, except as may be necessary in connection with the filing of Tax Returns or the conduct of any audit or other proceeding relating to Taxes. The Trusts, Affiliates of the Trusts, Cayman Purchaser and Wind River and its Subsidiaries will cooperate in the filing of all necessary Tax Returns and other documentation with respect to the Transactions.
Section 9.05. Contests. (a) If any Tax Authority asserts a Tax Claim with respect to Wind River or any of its Subsidiaries, then the party first receiving notice of such Tax Claim promptly shall provide written notice thereof to the other party or parties; provided, however, that the failure of such party to give such prompt notice shall not relieve the other party of any of its obligations under this Article 9, except to the extent that the other party is actually prejudiced thereby. Such notice shall specify in reasonable detail the basis for such Tax Claim and shall include a copy of the relevant portion of any correspondence received from the Tax Authority.
(b) The Trusts shall have the right to control, at their own expense, any audit, examination, contest, litigation or other proceeding with respect to Taxes by or against any Tax Authority (a "Tax Proceeding") in respect of Wind River or any of its Subsidiaries for any taxable period that ends on or before the Closing Date but only to the extent that such Tax Proceeding relates to a potential adjustment for which the Trusts have acknowledged in writing their liability under this Agreement to hold Cayman Purchaser, Wind River and its Subsidiaries harmless against the full amount of any adjustment that may be made as a result of such Tax Proceeding (or in the case of any taxable year that includes the Closing Date, against that portion of any adjustment allocable to the Pre-Closing Tax Period under Section 9.01(a)). If the Trusts do not expressly assume the defense of any such Tax Proceeding by providing Cayman Purchaser with written notice of the Trusts' intent to control such Tax Proceeding within 45 days after first receiving notice of such Tax Proceeding, Cayman Purchaser may defend the same in such manner as it may deem appropriate; provided, that such 45-day period shall be extended for such additional period as may be reasonably necessary (but not to exceed an additional 45 days) in order to allow the Trusts to determine whether they should acknowledge liability as provided in this Section 9.05(b); and provided further, that the Trusts shall reimburse Cayman Purchaser for its reasonable fees for attorneys and other outside consultants incurred during such additional
period. Notwithstanding the foregoing, in the event that issues relating to a
potential adjustment for which the Trusts have acknowledged their liability are
required to be dealt with in the same Tax Proceeding as separate issues relating
to a potential adjustment for which Cayman Purchaser, Wind River or any of its
Subsidiaries would be liable, Cayman Purchaser shall have the right to control
the Tax Proceeding in accordance with the principles set forth in Section
9.05(c). Any Tax Proceeding controlled by the Trusts shall be conducted as
follows: (i) the Trusts shall provide Cayman Purchaser with a timely and
reasonably detailed account of each stage of such Tax Proceeding; (ii) the
Trusts shall consult with Cayman Purchaser before taking any significant action
in connection with such Tax Proceeding; (iii) the Trusts shall consult with
Cayman Purchaser and offer Cayman Purchaser an opportunity to comment before
submitting any written materials prepared or furnished in connection with such
Tax Proceeding; (iv) the Trusts shall defend such Tax Proceeding diligently and
in good faith as if they were the only parties in interest in connection with
such Tax Proceeding; (v) Cayman Purchaser shall be entitled to participate, at
its own expense, in such Tax Proceeding and receive copies of any written
materials relating to such Tax Proceeding received from the relevant Tax
Authority (except that all Tax Contest Expenses relating to an item described in
Section 9.01(a)(v) shall be borne by the Trusts and the Trusts agree to
indemnify and hold harmless Cayman Purchaser and Wind River and its Subsidiaries
for any such costs); and (vi) the Trust shall not settle, compromise or abandon
any such Tax Proceeding, if such action could have an adverse impact on Cayman
Purchaser, any Affiliate of Cayman Purchaser (including Wind River or any of its
Subsidiaries), without obtaining the prior written consent of Cayman Purchaser,
which consent shall not be unreasonably withheld or delayed.
(c) In the case of a Tax Proceeding for a taxable year or period of Wind River or any of its Subsidiaries beginning on or before and ending after the Closing Date, Cayman Purchaser shall have the right to control such Tax Proceeding; provided, however, that (i) Cayman Purchaser shall provide the Trusts with a timely and reasonably detailed account of each stage of such Tax Proceeding; (ii) Cayman Purchaser shall consult with the Trusts before taking any significant action in connection with such Tax Proceeding; (iii) Cayman Purchaser shall consult with the Trusts and offer the Trusts an opportunity to comment before submitting any written materials prepared or furnished in connection with such Tax Proceeding; (iv) Cayman Purchaser shall defend such Tax Proceeding diligently and in good faith as if it were the only party in interest in connection with such Tax Proceeding; (v) the Trusts shall be entitled to participate in such Tax Proceeding, at their own expense, if such Tax Proceeding could have an adverse impact on the Trusts or any of their Affiliates; and (vi) Cayman Purchaser shall not settle, compromise or abandon any such Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld or delayed, of the Trusts if such settlement, compromise or abandonment could have an adverse impact on the Trusts or any of its Affiliates.
(d) Cayman Purchaser shall have the exclusive right to control any Tax Proceeding involving Wind River or any of its Subsidiaries (other than any Tax Proceeding described in Section 9.05(b) or (c)).
Section 9.06. Coordination. Notwithstanding any other provision of this Agreement, claims for indemnification with respect to Taxes and the procedures with respect thereto shall be governed exclusively by this Article 9.
Section 9.07. Miscellaneous. (a) The parties agree to treat all payments made by them to or for the benefit of the other (including any payments to Wind River or any Subsidiary) under this Article 9, under other indemnity provisions of this Agreement and for any misrepresentations or breaches of warranties or covenants as adjustments to the purchase price paid by U.S. Purchaser to the Trusts or as capital contributions for Tax purposes, as appropriate, and that such treatment shall govern for purposes of this Agreement except to the extent that the Laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-Tax basis.
(b) All payments payable under any Tax sharing agreement to which Wind River or any Subsidiary is a party for any taxable period ending on or prior to the Closing Date shall be calculated on a basis consistent with that used to date and be payable in full on the Closing Date (or a reasonable estimate thereof), notwithstanding any later time for payment set forth in any such agreement. Except as provided in the preceding sentence, all such Tax sharing agreements shall be terminated and shall be of no further force or effect (with respect to any past, present or future period) as of the Closing Date, and there shall be no liability of Wind River or any Subsidiary as of the Closing Date under any such Tax sharing agreements.
(c) For purposes of the indemnification provided by
Section 9.01 and notwithstanding any provision to the contrary, references to
Cayman Purchaser shall be deemed to include the direct and indirect shareholders
of Cayman Purchaser.
Section 9.08. No Election under Section 338(h)(10). No election under Section 338(h)(10) of the Code shall be made with respect to the Transactions.
ARTICLE 10
CONDITIONS
Section 10.01. Mutual Conditions. The obligations of each party to consummate the Transactions are subject to the satisfaction or waiver on or prior to the Closing of the following conditions:
(a) The applicable waiting period (and any extension thereof) under the HSR Act relating to the Transactions shall have expired or been terminated.
(b) All consents, authorizations, orders and approvals set forth on Schedule D shall have been obtained and shall be in full force and effect and all statutory waiting periods in respect thereof shall have expired.
(c) No provision of any applicable Law and no judgment, injunction, order or decree of any Governmental Authority shall, and no Action shall have been commenced seeking to, prohibit the consummation of the Transactions.
Section 10.02. Conditions to Obligations of Cayman Purchaser, Parent, U.S. Purchaser and the Company. The obligations of Cayman Purchaser, Parent, U.S. Purchaser and the Company to consummate the Transactions are subject to the satisfaction or waiver on or prior to the Closing of the following further conditions:
(a) Each of the Trusts shall have performed in all material respects all of its obligations under this Agreement required to be performed by it on or prior to the Closing Date, and Cayman Purchaser shall have received a certificate signed by a trustee of each Trust to the foregoing effect.
(b) Wind River shall have performed in all material respects all of its obligations under this Agreement required to be performed by it on or prior to the Closing Date, and Cayman Purchaser shall have received a certificate signed by each officer of Wind River and its Subsidiaries listed on Schedule E to the foregoing effect.
(c) The representations and warranties of the Trusts in this Agreement shall be true and correct (without regard to any qualification as to materiality) in all material respects when made and at and as of the Closing Date, as if made at and as of such date (except for representations and warranties that speak as of a specific date (without giving effect to the reference to the date of the Original Investment Agreement in the introductory provision of Articles III and IV), which shall be true and correct in all material respects as of such date), and Cayman Purchaser shall have received a certificate signed by a trustee of each Trust to the foregoing effect.
(d) The representations and warranties of Wind River in
this Agreement shall be true and correct (without regard to any
qualification as to materiality) in all material respects when made and
at and as of the Closing Date, as if made at and as of such date
(except for representations and warranties that speak as of a specific
date (without giving effect to the reference to the date of the
Original Investment Agreement in the introductory provision of Article
III), which shall be true and correct in all material respects as of
such date), and Cayman Purchaser shall have received a certificate
signed by each officer of Wind River and its Subsidiaries listed on
Schedule E to the foregoing effect.
(e) From and after the date of this Agreement, there shall not have occurred any Material Adverse Change.
(f) Each of the Trusts shall have delivered to Cayman Purchaser a duly executed certificate, in form and substance satisfactory to Cayman Purchaser, to the effect that such party is not a "foreign person" as defined in Section 1445(f) of the Code.
(g) Each Employment Agreement shall have been executed and delivered and be in full force and effect, enforceable in accordance with its terms.
(h) Except as permitted by Section 6.01(w), neither Wind River nor any of its Subsidiaries shall have cancelled any agency agreement or any reinsurance treaty, other than in the ordinary course of business consistent with past practice.
(i) A.M. Best shall not have downgraded any of the Insurance Companies below a rating of "A" (without any negative outlook or similar qualification).
(j) Cayman Purchaser shall have received confirmation from A.M. Best that, following the consummation of the Transactions, the Insurance Companies will be rated as least "A" (without any negative outlook or similar qualification).
(k) The Insurance Companies shall have received commitments for an amount of collateral from their reinsurance partners equal to at least $650 million in the aggregate.
(l) Cayman Purchaser shall have received a certificate
signed by the Chief Financial Officer of UNIC certifying on behalf of
UNIC that in his good faith judgment (i) the Adjusted Statutory Surplus
of UNIC will not be less than $240 million as of the Closing Date, and
(ii) except as indicated thereon, he is not aware of any specific facts
or circumstances applicable to any reinsurance companies that would
lead him to believe that any amounts due to Wind River or any of its
Subsidiaries under any Reinsurance Agreement are not fully collectible
(net of any reserves) by Wind River or its Subsidiaries and no such
amounts are disputed, and Cayman Purchaser shall not have reasonably
objected to the factual matters or calculations contained in such
certificate, or on which such certificate is based.
(m) Neither the Trusts nor Wind River or any of its Subsidiaries shall have taken any action to terminate any Employee Plan that is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code, and no such Employee Plan shall have otherwise been terminated.
Section 10.03. Conditions to Obligations of Wind River and the Trusts. The obligations of Wind River and the Trusts to consummate the Transactions are subject to the satisfaction or waiver on or prior to the Closing Date of the following further conditions:
(a) Each of Cayman Purchaser, Parent, U.S. Purchaser and the Company shall have performed in all material respects all of its obligations under this Agreement required to be performed by it on or prior to the Closing Date, and Wind River and the Trusts shall have received a certificate signed by an appropriate officer of each of Cayman Purchaser, Parent, U.S. Purchaser and the Company to the foregoing effect.
(b) The representations and warranties of each of Cayman Purchaser, Parent, U.S. Purchaser and the Company in this Agreement shall be true and correct (without regard to any qualification as to materiality) in all material respects when made and at and as of the Closing Date, as if made at and as of such date (except for representations and warranties that speak as of a specific date, which shall be true and correct in all material respects as of such date), and Wind River and the Trusts shall have received a certificate signed by an appropriate officer of each of Cayman Purchaser, Parent, U.S. Purchaser and the Company to the foregoing effect.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
Section 11.01. Survival. (a) The representations and warranties of the parties contained in this Agreement or in any certificate or other writing delivered pursuant to or in connection with this Agreement shall not survive the Closing; provided, however, that the representations and warranties contained in Sections 3.13 (Employee Benefits) and 3.26 (Environmental Matters) shall survive until the third anniversary of the Closing Date, the
representations and warranties contained in Section 3.16 (Taxes) (but solely to the extent applicable to income Taxes) shall survive until 30 days after expiration of the statute of limitations applicable to the matters covered thereby (giving effect to any waiver, mitigation or extension thereof), and the representations and warranties contained in Sections 3.01 (Organization, Good Standing and Qualification), 3.02 (Corporation Authorization; Approvals), 3.04 (Capital Structure), 4.01 (Organization), 4.02 (Authorization; Approvals), 4.05 (Ownership of Wind River Common Stock), 5.01 (Organization), 5.02 (Authorization; Approvals), 5.05 (Purchase for Investment) and 5.08 (Ownership of Parent; No Prior Activities) shall survive indefinitely. Notwithstanding the preceding sentence, any representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity, providing reasonable detail of such inaccuracy or breach, shall have been given to the party against whom such indemnity may be sought prior to such time.
(b) The obligations under this Agreement that by their
terms contemplate performance after the Closing (including those set forth in
Section 11.02) shall survive the Closing Date until the performance thereof.
Section 11.02. Indemnification. (a) The Trusts shall, jointly
and severally (other than with respect to Sections 4.01, 4.02 and 4.05,
indemnification obligations with respect to which shall be several and not
joint), indemnify Cayman Purchaser, Wind River, each of the Subsidiaries, and
their respective officers, directors, employees, Affiliates and their respective
successors and assigns (the "Indemnified Persons") against and hold each
Indemnified Person harmless from any damage, loss (including, with respect to
Cayman Purchaser, any loss in the value of its investment in Wind River),
liability and expense (including reasonable expenses of investigation and
reasonable attorneys' fees and expenses in connection with any Action)
("Damages") incurred or suffered by any Indemnified Person arising out or
otherwise in respect of (i) any misrepresentation or breach of representation,
warranty, covenant or agreement made or to be performed by Wind River or the
Trusts pursuant to this Agreement (without regard to any qualification as to
materiality or Material Adverse Change in such representation, warranty,
covenant or agreement) and that survives the Closing pursuant to Section 11.01,
(ii) any operations of Wind River not related to the insurance and related
businesses and activities carried on by AIS and its Subsidiaries, including Wind
River's investment in Little Round Top and (iii) any and all liabilities arising
under or relating to any of the Title IV Plans or the Employee Plans (other than
the SAR Agreements and the other Wind River Plans), whether incurred before, on
or after the Closing, including liabilities under Title IV or Section 302 of
ERISA or Section 412 or Section 4971 of the Code, and liabilities resulting from
a failure to comply with the continuation coverage requirements of Sections 601
et seq. of ERISA and Section 4980B of the Code or the group health plan
requirements of Sections 9801 et seq. of the Code and Sections 701 et seq. of
ERISA.
(b) Any indemnification payment due from the Trusts under
Section 11.02(a) to Wind River or any of its Subsidiaries shall be paid in the
following manner following written notice thereof from Cayman Purchaser to the
Trusts: (i) such indemnification shall be deducted first from any accrued but
unpaid interest on the Senior Notes, then from the then outstanding principal
amount of the Senior Notes and (ii) if the principal amount of the Senior Notes
shall be
zero, such indemnification payment shall be paid by the Trusts. To the extent of any offset of any indemnification payment against the Senior Notes, such offset shall constitute satisfaction in full of the Trusts' obligation to make such a payment and no Indemnified Person shall have any right to recover such payment directly from the Trusts. If the amount of any indemnification payment offset against the Senior Notes as provided in this Section 11.02(b) is determined to have been in excess of the proper amount or the Claim relating thereto is determined to be invalid, Wind River shall reinstate the principal amount of the Senior Notes in their proper amount, or repay the proper amount to the Trusts in cash.
(c) This Section 11.02 shall not apply to indemnification for Taxes, which shall be governed by Article 9.
Section 11.03. Procedures. (a) Each Indemnified Person shall give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any Action ("Claim") in respect of which indemnity may be sought under Section 11.02 and to provide the Indemnifying Party such information with respect thereto that the Indemnifying Party may reasonably request. The failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations under Section 11.02, except to the extent such failure shall have actually prejudiced the Indemnifying Party.
(b) The Indemnifying Party shall be entitled to participate in the defense of any Claim asserted by any Person not a party to this Agreement ("Third Party Claim") and, subject to the limitations set forth in this Section 11.03, shall be entitled to control and appoint lead counsel for such defense, in each case at its expense. Within 30 days following the receipt of notice by the Indemnifying Party of any Third Party Claim and such documentation relating to such Third Party Claim in the possession of the Indemnified Person that the Indemnifying Party reasonably requests, the Indemnifying Party shall provide notice to the Indemnified Person of its election to assume control of the defense of such Third Party Claim in accordance with the provisions of this Section 11.03.
(c) If the Indemnifying Party assumes the control of the
defense of any Third Party Claim in accordance with the provisions of this
Section 11.03, (i) the Indemnified Person (A) will not admit any liability with
respect to, or settle, compromise or discharge, any Third Party Claim without
the Indemnifying Party's prior written consent (such consent not to be
unreasonably withheld or delayed) and (B) will agree to any settlement of such
Third Party Claim if such settlement fully, completely and unconditionally
releases the Indemnified Person from all liabilities and obligations with
respect to such Third Party Claim and does not impose any injunctive or other
equitable relief against the Indemnified Person (and, without the Indemnified
Person's consent (which consent shall not be unreasonably withheld or delayed)
the Indemnifying Party will not enter into any settlement which does not satisfy
such criteria) and (ii) the Indemnified Person shall be entitled to participate
in the defense of such Third Party Claim and to employ separate counsel of its
choice for such purpose at its own expense and shall not be responsible for any
attorneys' fees of the Indemnifying Party; provided, however, that the
Indemnified Person shall have the right to employ, at the Indemnifying Party's
expense, one counsel of its choice in each applicable jurisdiction (if more than
one jurisdiction is involved) to represent the Indemnified Person if, in the
Indemnified Person's reasonable judgment, there
exists an actual or potential conflict of interest between the Indemnified Person and the Indemnifying Party or if the Indemnifying Party (A) elects not to defend, compromise or settle a Third-Party Claim, (B) fails to notify the Indemnified Person within the required time period of its election as provided in this Section 11.03 or (C) having timely elected to defend a Third-Party Claim, fails, in the reasonable judgment of the Indemnified Person, after at least 30 days' notice to the Indemnifying Party, to adequately prosecute or pursue such defense, and in each such case the Indemnified Person may defend such Third-Party Claim on behalf of and for the account and risk of the Indemnifying Party; provided, that the Indemnified Person shall defend the Third Party Claim in good faith and shall not enter into any settlement of such Third Party Claim without the prior consent of the Indemnifying Party (such consent not to be unreasonably withheld, conditioned or delayed); and provided, further, that the Indemnifying Party may resume within a reasonable period of time under the circumstances its right to defend, compromise or settle a Third Party Claim upon providing written notice thereof to the Indemnified Person and thereafter shall not be liable for the fees and expenses of the Indemnified Person's counsel (except for such fees and expenses as are incurred in the transition of such defense to the Indemnifying Party).
(d) Each party shall cooperate, and cause their respective Affiliates to cooperate, in the defense or prosecution of any Third Party Claim and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith.
Section 11.04. Calculation of Damages. The amount of any Damages for which an Indemnifying Party may be liable under Section 11.02 shall be reduced by any amounts actually received by an Indemnified Person or any of its Affiliates with respect thereto under any insurance coverage or from any other Person alleged to be responsible therefor and by the amount of the net Tax benefit, if any, realized by the Indemnified Person as a result of the event giving rise to Damages, and shall be increased to take account of the net Tax cost, if any, incurred by the Indemnified Person arising from the receipt of indemnity payments under this Agreement (grossed up for such increases), in each case when and as such Tax benefit or Tax cost is actually realized through a reduction or increase in Taxes otherwise due. If an Indemnified Person or any of its Affiliates receives an amount under insurance coverage or from such other party with respect to Damages at any time subsequent to any indemnification provided by an Indemnifying Party pursuant to Section 11.02, then such Indemnified Person shall promptly reimburse the Indemnifying Party.
Section 11.05. Exclusivity. From and after the Closing, the rights of the Indemnified Persons under Article 9 and this Article 11 shall be the sole and exclusive rights and remedies with respect to any Claims such Indemnified Person may have against the Trusts or any of their Affiliates relating to the subject matter of this Agreement (including any Claim for breach of representation, warranty, covenant or agreement), whether at law or in equity, and Cayman Purchaser, Parent, U.S. Purchaser and the Company waive any other rights and remedies. Notwithstanding the foregoing, it is understood that nothing in this Agreement shall prohibit any party from exercising its rights to seek specific performance or injunctive or similar relief for a breach of any covenant or agreement.
Section 11.06. Trust Arrangements. (a) Each of the Trusts covenants and agrees that such Trust shall not distribute any Senior Notes or Parent Shares held by such Trust until the date that is the fourth anniversary of the Closing Date; provided, that if any Claim shall be pending on such date and the aggregate outstanding principal amount of the Senior Notes (together with accrued but unpaid interest thereon) shall be less than the amount of such Claim, the Trusts shall be restricted from distributing any Parent Shares until such Claim shall have been resolved (such period, the "Indemnity Period").
(b) Notwithstanding Section 11.06(a) but subject to any restrictions set forth in the Shareholders Agreement or in the Senior Notes, any Trust may, during the Indemnity Period, distribute Senior Notes or Parent Shares held by such Trust (i) following five business days' notice to Cayman Purchaser, to another Trust, an Affiliate of the Trusts or to the principal (i.e. corpus) beneficiaries of any Trust if prior thereto such transferee assumes all of the obligations of such Trust under Article 11 and Section 9.01 and covenants to satisfy the requirements of this Section 11.06, in each case in form and substance reasonably satisfactory to Cayman Purchaser or (ii) to any other Person; provided that the written consent of Cayman Purchaser with respect thereto is obtained prior to such distribution, which consent shall not be unreasonably withheld or delayed as long as such other Person assumes all of the obligations of such Trust under Article 11 and Section 9.01 and covenants to satisfy the requirements of this Section 11.06, in each case in form and substance reasonably satisfactory to Cayman Purchaser and Cayman Purchaser reasonably believes that its rights under Article 11 and Section 9.01 would not be adversely affected by such distribution.
ARTICLE 12
TERMINATION
Section 12.01. Grounds for Termination. This Agreement may be terminated at any time prior to the Closing:
(a) by mutual written agreement of the Trusts and Cayman Purchaser;
(b) by either the Trusts or Cayman Purchaser if the Closing shall not have occurred on or before September 30, 2003; provided, that the failure of the Closing to have occurred on or before such date did not result from the material breach of the party seeking to terminate this Agreement of its obligations under this Agreement;
(c) by Cayman Purchaser if there has been a material breach of any of the obligations, representations and warranties of Wind River or the Trusts such that Section 10.02(a), (b), (c) or (d) will not be satisfied;
(d) by the Trusts if there has been a material breach of any of the obligations, representations and warranties of Cayman Purchaser, Parent, U.S. Purchaser or the Company such that Section 10.03(a) or (b) will not be satisfied; or
(e) by either the Trusts or Cayman Purchaser if consummation of the Transactions would violate any final nonappealable order, decree or judgment of any Governmental Authority.
The party desiring to terminate this Agreement shall give written notice of such termination to each other party, which notice shall be effective upon receipt.
Section 12.02. Effect of Termination. If this Agreement is
terminated as permitted by Section 12.01, such termination shall be without
liability of any party to the other parties; provided that if such termination
shall result from the deliberate (a) failure of any party to fulfill a condition
of performance of the obligations of any other party under this Agreement, (b)
failure of any party to perform a material obligation under this Agreement or
(c) material breach by any party of any representation or warranty contained in
this Agreement, and, at the time of termination the terminating party was not in
breach of its obligations under this Agreement such that the non-terminating
party would have been entitled to terminate this Agreement, such non-terminating
party shall be fully liable for any Damages incurred or suffered by the other
parties as a result of such failure or breach. Upon termination, this Agreement
shall become void and be without further force and effect and the Transactions
shall be abandoned by the parties without further action; provided, that the
provisions of this Section 12.02 and Sections 13.03, 13.05, 13.06 and 13.07
shall survive any such termination.
ARTICLE 13
MISCELLANEOUS
Section 13.01. Notices. All notices, requests and other communications to any party in connection with this Agreement shall be in writing and delivered personally, sent by documented overnight delivery service and shall be given,
if to Cayman Purchaser, Parent, U.S. Purchaser or the Company, to:
c/o Fox Paine & Company, LLC 950 Tower Lane, Suite 1150 Foster City, California 94404 Attention: Saul A. Fox
with a copy to:
Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Elliott V. Stein Mitchell S. Presser
if to Wind River, to:
Wind River Investment Corporation
c/o American Manufacturing Corporation
300 Delaware Avenue, Suite 1215
Wilmington, Delaware 19801
Attention: Robert H. Strouse
with a copy to:
The AMC Group, L.P.
555 Croton Road, Suite 300
King of Prussia, Pennsylvania 19406
Attention: General Counsel
with a copy to:
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, Pennsylvania 19103-6996
Attention: Robert C. Juelke
if to any Trust, to the address set forth opposite the name of such Trust on Schedule A. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt.
Section 13.02. Amendments and Waivers. (a) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party, or in the case of a waiver, by the party against whom such waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege under this Agreement.
Section 13.03. Expenses. All costs and expenses incurred in connection with this Agreement and the Transactions shall be paid by the party incurring such cost or expense; provided, however, that (a) Wind River shall pay all filing fees under the HSR Act incurred by Cayman Purchaser or its Affiliates in connection with the Transactions, and (b) if the Transactions are consummated, the Company shall reimburse Cayman Purchaser and its applicable Affiliates for all reasonable out-of-pocket expenses incurred by Cayman Purchaser and such Affiliates in connection with the Transactions.
Section 13.04. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns; provided, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the written consent of each other party.
Section 13.05. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and wholly-performed within such state, without regard to the conflicts of law principles of such state.
Section 13.06. Jurisdiction. Except as otherwise set forth in this Agreement, any Action seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the Transactions shall be brought in the United States District Court for the Southern District of New York or any New York State court sitting in the Borough of Manhattan, so long as one of such courts shall have subject matter jurisdiction over such Action, and each of the parties irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such Action and irrevocably waives, to the fullest extent permitted by Law, any objection that it may now or hereafter have to the laying of the venue of any such Action in any such court or that any such Action that is brought in any such court has been brought in an inconvenient forum. Process in any such Action may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 13.01 shall be deemed effective service of process on such party.
Section 13.07. WAIVER OF JURY TRIAL. EACH PARTY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS.
Section 13.08. Counterparts; Third Party Beneficiaries. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if such signatures were upon the same instrument. A facsimile or photocopied signature (which may be delivered by facsimile) shall be deemed to be the functional equivalent of an original for all purposes. This Agreement shall become effective when each party shall have received a counterpart of this Agreement signed by the other party. Except as provided in Section 7.02(c), no provision of this Agreement is intended to confer and shall not confer upon any Person other than the parties any rights or remedies.
Section 13.09. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, among the parties with respect to the subject matter of this Agreement, including the letter of intent dated as of March 8, 2003 by and between Fox Paine and Wind River and the Original Investment Agreement.
Section 13.10. Captions. The captions are included in this Agreement for convenience of reference only and shall be ignored in the construction or interpretation of this Agreement. All references to Sections or Articles contained in this Agreement shall be to Sections or Articles of this Agreement unless otherwise stated.
Section 13.11. Specific Performance. The parties acknowledge and agree that irreparable damage would occur if any party fails to consummate the Transactions in accordance with the terms of this Agreement and that the parties shall be entitled to specific performance in such event, in addition to any other remedy at law or in equity.
Section 13.12. Severability. If this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable, the parties shall be excused from the performance of such portions of this Agreement as shall be found to be illegal or unenforceable without affecting the validity of the remaining provisions of this Agreement;
provided, however, that the remaining provisions of this Agreement shall in their totality constitute a commercially reasonable agreement.
Section 13.13. Publicity. Prior to the earlier of the termination of this Agreement and the Closing the parties shall use reasonable best efforts to coordinate and agree, prior to the issuance or release thereof, upon any public release or announcement regarding the Transactions to be issued by the parties, and, except to the extent required by Law, no such public release or announcement shall be issued or released by either party without the prior written consent of the other party.
Section 13.14. Trustees. All actions under or pursuant to this Agreement by the Trustees are in their respective capacities as trustees under the Trusts and not as individuals.
Section 13.15. Waiver of Conflict. Cayman Purchaser, Parent, U.S. Purchaser and the Company waive for itself and on behalf of Wind River and its Subsidiaries any right to disqualify the counsel of the Trusts in connection with any dispute arising under this Agreement or any agreement executed and delivered in connection with this Agreement.
[Signature pages follow]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective authorized officers or trustees as of the day and year first above written.
U.N. HOLDINGS (CAYMAN), LTD.
By: /s/ Troy W. Thacker
----------------------------------------
Name: Troy W. Thacker
Title: Director
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VIGILANT INTERNATIONAL, LTD.
By: /s/ Troy W. Thacker
----------------------------------------
Name: Troy W. Thacker
Title: President
|
U.N. HOLDINGS II, INC.
By: /s/ Troy W. Thacker
----------------------------------------
Name: Troy W. Thacker
Title: Vice President, Treasurer and Secretary
|
U.N. HOLDINGS LLC
By: /s/ Troy W. Thacker
----------------------------------------
Name: Troy W. Thacker
Title: Vice President, Treasurer and Secretary
|
U.N. HOLDINGS INC.
By: /s/ Troy W. Thacker
----------------------------------------
Name: Troy W. Thacker
Title: Vice President, Treasurer and Secretary
|
WIND RIVER INVESTMENT CORPORATION
By: /s/ Timothy J. Dwyer
----------------------------------------
Name: Timothy J. Dwyer
Title: Vice President
|
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTMENT AGREEMENT]
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES U/W OF
RUSSELL C. BALL, SR., AS APPOINTED BY
RUSSELL C. BALL, JR. F/B/O RUSSELL C.
BALL, III
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES U/W OF
RUSSELL C. BALL, SR., AS APPOINTED BY
RUSSELL C. BALL, JR. F/B/O
ANDREW L. BALL
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES U/A/T OF
ETHEL M. BALL; DATED 2/9/67, AS
APPOINTED BY RUSSELL C. BALL, JR.
F/B/O RUSSELL C. BALL, III
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES U/A/T OF
ETHEL M. BALL; DATED 2/9/67, AS
APPOINTED BY RUSSELL C. BALL, JR.
F/B/O ANDREW L. BALL
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTMENT AGREEMENT]
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.;
DATED 11/9/67
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.;
DATED 6/9/69
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.;
DATED 1/29/70
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.;
DATED 1/24/73
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
RUSSELL C. BALL, III, ANDREW L. BALL,
PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.; DATED
12/22/76 F/B/O RUSSELL C. BALL, III
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTMENT AGREEMENT]
RUSSELL C. BALL, III, ANDREW L.
BALL, PNC BANK, N.A., TRUSTEES
U/A/T OF RUSSELL C. BALL, JR.; DATED
12/22/76 F/B/O ANDREW L. BALL
By: /s/ Russell C. Ball, III
----------------------------------------
Name: Russell C. Ball, III
Title: Trustee
|
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTMENT AGREEMENT]
Exhibit 3.2
ANNEXURE "A" TO THE
WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS
OF
VIGILANT INTERNATIONAL, LTD.
DESIGNATING THE RIGHTS AND PREFERENCES OF
SERIES A PREFERRED SHARES
Dated 5 September 2003
The terms of the authorized Series A Preferred Shares (as defined below) of Vigilant International, Ltd., an exempted company formed with limited liability under the laws of the Cayman Islands (the "Company"), shall be as set forth below in this Annexure A to the Written Resolutions of the Board of Directors of the Company.
(a) Designation. (1) There is hereby created from the authorized and unissued Preferred Shares, par value $0.0001 per share, of the Company a series of convertible redeemable Preferred Shares designated as the Company's "Series A Preferred Shares" (the "Series A Preferred Shares") having such rights and preferences set forth herein. Each Series A Preferred Share shall have a liquidation preference of $10.00 (the "Liquidation Preference").
(2) All Series A Preferred Shares purchased, exchanged, converted or otherwise acquired by the Company shall be canceled and, upon the taking of any action required by applicable law, shall be restored to the status of authorized but unissued Preferred Shares, par value $0.0001 per share, of the Company, without designation as to series, and may thereafter be reissued.
(b) Currency. All Series A Preferred Shares shall be denominated in United States currency, and all payments and distributions thereon or with respect thereto shall be made in United States currency. All references herein to "$" or "dollars" refer to United States currency.
(c) Ranking. The Series A Preferred Shares shall, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank (1) prior to each other class or series of shares of the Company except Parity Shares (as defined below) and (2) on a parity with Parity Shares. For purposes hereof, (A) "Junior Shares" shall mean the Class A Com-
mon Shares of the Company, par value $0.0001 per share (the "Class A Common Shares"), and the Class B Common Shares of the Company, par value $0.0001 per share (the "Class B Common Shares," and together with the Class A Common Shares, the "Common Shares"), and the shares of any other class or series of equity securities of the Company that, by the terms of the Articles of Association of the Company or of the instrument by which the Board of Directors shall fix the rights, preferences and limitations thereof, shall not be designated as Parity Shares and (B) "Parity Shares" shall mean the shares of any other class or series of equity securities of the Company that, by the terms of the Articles of Association of the Company or of the instrument by which the Board of Directors shall fix the rights, preferences and limitations thereof, shall, in the event that the dividends thereon are not paid in full, be entitled to share ratably with the Series A Preferred Shares, or shall, in the event that the amounts payable thereon on liquidation are not paid in full, be entitled to share ratably with the Series A Preferred Shares in any distribution of assets other than by way of dividends in proportion to the sums which would be payable in such distribution if all sums payable were discharged in full.
(d) Dividends. (1) The holders of Series A Preferred Shares shall be entitled to receive, from funds legally available therefor in the case of dividends paid in cash, dividends at the annual rate per Series A Preferred Share of 15% of the sum of (A) the Liquidation Preference and (B) all unpaid dividends, if any, whether or not declared, from the Issuance Date to the applicable Dividend Payment Date. Except as provided below with respect to the initial dividend period, dividends on Series A Preferred Shares shall be payable semi-annually on March 1 and September 1 of each year beginning on March 1, 2004 (each, a "Dividend Payment Date"), except that if any Dividend Payment Date is not a Business Day then the Dividend Payment Date shall be on the first immediately succeeding business day. Dividends payable with respect to Series A Preferred Shares for the semi-annual period beginning on the day following a Dividend Payment Date shall accrue on the first day of such semi-annual period (or in the case of the period ending on March 1, 2004, such dividends shall accrue on the Issuance Date) and shall be payable whether the Series A Preferred Shares remain outstanding on the succeeding Dividend Payment Date.
(2) Dividends on the Series A Preferred Shares may be paid, in the sole discretion of the Board of Directors, either in (A) cash, (B) additional Series A Preferred Shares or (C) any combination of cash and additional Series A Preferred Shares, and the issuance of the requisite number of Series A Preferred Shares (such number determined as provided in the next sentence) pursuant to (B) or (C) shall constitute full payment of any such dividend. Series A Preferred Shares issued to pay dividends shall be valued at the Liquidation Preference and fractional shares shall be issued. All dividend payments paid with respect to Series A Preferred Shares shall be paid pro rata to the holders entitled thereto. All Series A Preferred Shares issued as a dividend in respect of Series A Preferred Shares shall thereupon be duly authorized, validly issued, fully paid and non-assessable. In no event shall an election
by the Board of Directors to pay dividends, in full or in part, in cash or in Series A Preferred Shares in lieu of payment, in full or in part, in cash preclude the Board of Directors from electing any such alternative in respect of all or any portion of any subsequent dividend.
(3) Dividends to be paid on a Dividend Payment Date shall be paid to the holders of record of Series A Preferred Shares as they appear on the share register of the Company at the close of business on such record dates, which shall be not more than 45 days nor fewer than 10 days preceding each Dividend Payment Date thereof, as shall be fixed by the Board of Directors.
(e) Liquidation Preference. (1) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or a reduction or decrease in the Company's shares resulting in a distribution of assets to the holders of any class or series of the Company's shares, each holder of Series A Preferred Shares shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per Series A Preferred Share held by such holder, plus all accumulated and unpaid dividends thereon, before any distribution is made on any Junior Shares, including, without limitation, Common Shares. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or a reduction or decrease in the Company's capital shares, the amounts payable with respect to Series A Preferred Shares and all other Parity Shares are not paid in full, the holders of Series A Preferred Shares and the holders of the Parity Shares shall share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and all accumulated and unpaid dividends to which each such holder is entitled.
(2) Neither the voluntary sale, conveyance, exchange or transfer (for cash, shares, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation, merger or amalgamation of the Company with or into any person or the consolidation, merger or amalgamation of any person with or into the Company shall alone be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company, or a reduction or decrease in the capital of the Company, without the adoption of a formal plan of liquidation by the Company.
(f) Voting Rights. Except as required by applicable law, the Articles of Association of the Company and as may otherwise be provided herein or in any amendment hereto, the holders of Series A Preferred Shares shall not be entitled to any voting rights as shareholders of the Company except as follows:
(1) The affirmative vote of the holders of at least nine-tenths of the outstanding Series A Preferred Shares, voting together as a single class, in person or by proxy, at a special or annual meeting called for the purpose, or by written resolution in lieu of a meeting, shall be required to amend, repeal or change any provisions of this
Annexure A in any manner that would adversely affect, alter or change the powers, preferences or special rights of the Series A Preferred Shares; provided, however, that the creation, authorization or issuance of any other class or series of Junior or Parity Shares or the increase or decrease in the amount of authorized shares of any such class or series or of the Series A Preferred Shares, or any increase, decrease or change in the par value of any class or series of shares (including the Series A Preferred Shares), shall not require the consent of the holders of the Series A Preferred Shares and shall not be deemed to affect adversely, alter or change the powers, preferences and special rights of the Series A Preferred Shares. With respect to any matter on which the holders of the Series A Preferred Shares are entitled to vote as a separate class, each Series A Preferred Share shall be entitled to one vote.
(2) Holders of Series A Preferred Shares shall be entitled to notice of any shareholders' meeting. The holders of Series A Preferred Shares shall be entitled to vote upon all matters upon which holders of the Common Shares have the right to vote. Each Series A Preferred Share shall be entitled to a number of votes equal to the number of votes that the number of Class B Common Shares into which such Series A Preferred Shares could be converted pursuant to the provisions of paragraphs (g)(1) and (h) hereof would have had such Series A Preferred Shares been converted into Class B Common Shares at the record date for the determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written resolution of shareholders is solicited, such votes to be counted together with all other shares having general voting powers and not separately as a class.
(g) Conversion.
(1) Optional Conversion. Each Series A Preferred Share shall be
convertible at any time and from time to time at the option of the holder
thereof into fully paid and nonassessable Class B Common Shares. The mechanism
of conversion is by means of redemption of the Series A Preferred Shares and by
issue of Class B Common Shares and references herein to "conversion" shall be
construed accordingly. The number of Class B Common Shares deliverable upon
conversion of a Series A Preferred Share as of the Issuance Date, subject to
adjustment as hereinafter provided, shall be one.
(2) Mandatory Conversion. Following the second anniversary of the
Issuance Date, the Series A Preferred Shares shall automatically convert into
Class B Common Shares. The number of Class B Common Shares deliverable upon
conversion of a Series A Preferred Share shall be as set forth in paragraphs
(g)(1) and (h).
(3) Fractional Shares. In connection with the conversion of any Series A Preferred Shares, no fractions of Class B Common Shares shall be issued, but in lieu thereof,
the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price of the Class A Common Shares as of the date of conversion. If more than one Series A Preferred Share shall be surrendered for conversion by the same holder at the same time, the number of full Class B Common Shares issuable on conversion thereof shall be computed on the basis of the total number of Series A Preferred Shares so surrendered.
(4) Mechanics of Conversion. Before any holder of Series A Preferred Shares shall be entitled to convert the same into Class B Common Shares, such holder shall give written notice to the Company of the election to convert the same and shall state therein the name or names in which the Class B Common Shares are to be issued and if such Series A Preferred Shares have been issued in certificated form, surrender the certificate or certificates therefor, duly endorsed in favor of the Company, or deliver an appropriate indemnity agreement, at the office of the Company or its transfer agent for the Series A Preferred Shares. The Company shall, as soon as practicable thereafter, cause the issue of the Class B Common Shares to be recorded on the share register of the Company, and, if to be issued in certificated form, issue and deliver at such office to such former holder of Series A Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for, the number of Class B Common Shares to which such holder shall be entitled as aforesaid. An appropriate entry shall be made on the share register of the Company for the remaining Series A Preferred Shares in any case in which fewer than all of the Series A Preferred Shares held by a holder are converted. Each conversion shall be deemed to have been effected immediately prior to the close of business on the Business Day on which the notice of conversion of Series A Preferred Shares is given and, if applicable, such share certificates and other documents have been received by the Company as aforesaid.
(5) Issue Taxes. The Company shall pay all issue taxes, if any, incurred in respect of the issue of Class B Common Shares on conversion of Series A Preferred Shares. If a holder of shares surrendered for conversion specifies that the Class B Common Shares to be issued on conversion are to be issued in a name or names other than the name or names in which such surrendered shares stand, the Company shall not be required to pay any transfer or other taxes incurred by reason of the issuance of such Class B Common Shares to the name of another.
(6) Reservation of Shares. The Company shall at all times reserve and keep available, free from preemptive rights, for issuance upon the conversion of Series A Preferred Shares, such number of its authorized but unissued Class B Common Shares as will from time to time be sufficient to permit the conversion of all outstanding Series A Preferred Shares. Prior to the delivery of any securities which the Company shall be obligated to deliver upon conversion of the Series A Preferred Shares, the Company shall comply with all applicable laws and regulations which require action to be taken by the Company. All Class B Common Shares delivered upon conversion of the Series A Preferred Shares will upon deliv-
ery be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
(h) Conversion Adjustments. The number of Class B Common Shares into which each Series A Preferred Share is convertible shall be subject to adjustment from time to time as follows:
(1) Share Splits and Combinations. In case the Company shall at any time or from time to time after the Issuance Date (A) subdivide or split the outstanding Class B Common Shares, (B) combine or reclassify the outstanding Class B Common Shares into a different number of shares or (C) issue by reclassification of the Class B Common Shares any shares of the Company, then, and in each such case, the number of Class B Common Shares into which each Series A Preferred Share is convertible shall be adjusted so that the holder of any Series A Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of Class B Common Shares or other securities of the Company which such holder would have owned or have been entitled to receive after the occurrence of any of the events described above, had such Series A Preferred Shares been surrendered for conversion immediately prior to the occurrence of such event or the record date therefor, whichever is earlier. An adjustment made pursuant to this subparagraph (1) shall become effective at the close of business on the day upon which such corporate action becomes effective. Such adjustment shall be made successively whenever any event listed above shall occur.
(2) Share Dividends in Common Shares. In case the Company at any time or from time to time after the Issuance Date pays a dividend or makes a distribution in Class B Common Shares on the Class B Common Shares the number of Class B Common Shares into which each Series A Preferred Share is convertible shall be adjusted so that the holder of any Series A Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of Class B Common Shares that such holder would have owned or have been entitled to receive after such dividend, had such Series A Preferred Shares been surrendered for conversion immediately prior to the record date for the determination of holders entitled to receive such dividend.
(3) Distribution of Indebtedness, Securities, Cash or Assets. In case the Company distributes to all holders of Class B Common Shares (whether by dividend or other distribution, or in a merger, amalgamation or consolidation or otherwise) evidences of indebtedness, shares of any class or series, other securities, including rights or warrants to subscribe for securities, cash or assets, in each case, of the Company or any of its subsidiaries (other than a dividend or distribution which is made directly to the holders of Series A Preferred Shares pursuant to paragraph (d) above), the Company shall distribute to the holders of Series A Preferred Shares the same in an amount per Series A Preferred Share equal to the amount as would be payable with respect to
the number of Class B Common Shares into which such Series A Preferred Share is convertible pursuant to paragraphs (g)(1) and (h).
(4) Transactions in Which Class B Common Shares are Exchanged. In case at any time the Company shall be a party to any transaction (including, without limitation, a merger, amalgamation, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Class B Common Shares and excluding any transaction to which clauses (1), (2) or (3) of this paragraph (h) apply) in which the previously outstanding Class B Common Shares shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or entity (including cash) or any combination of any of the foregoing (each such transaction being a "Transaction"), the Company shall make all necessary provisions such that each Series A Preferred Share shall thereafter be convertible into, in lieu of Class B Common Shares, the amount of securities or other property to which such holder would actually have been entitled as a holder of Class B Common Shares upon the consummation of the Transaction if such holder had converted such Series A Preferred Shares immediately prior to such Transaction (subject to adjustments from and after consummation of the Transaction as nearly equivalent as possible to the adjustments provided for in this paragraph (h)).
(5) Below Market Offerings of Common Shares. In case the Company shall at any time, or from time to time, issue Common Shares (or securities convertible into, or exercisable for, Common Shares) at a price per share (or having a conversion or exercise price per share) less than the Current Market Price (or, in the case of an issuance or sale in connection with an underwritten public offering, less than 99% of the Current Market Price less underwriting discounts and commissions) as of the date of issuance of such shares or of such other securities, then, and in each such case, the number of Class B Common Shares into which each Series A Preferred Share is convertible shall be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of Class B Common Shares determined by multiplying (A) the number of Class B Common Shares into which such share was convertible on the day immediately prior to such date by (B) a fraction, the numerator of which shall be the sum of (i) the number of Common Shares outstanding on such date and (ii) the number of additional Common Shares issued (or into which the other securities may convert or be exercised), and the denominator of which shall be the sum of (aa) the number of Common Shares outstanding on such date and (bb) the number of Common Shares which the aggregate consideration receivable by the Company for the total number of Common Shares so issued (or into which the other securities may convert or be exercised) would purchase at such Current Market Price on such date. An adjustment made pursuant to this subparagraph (5) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively immediately after the close of business on such
date. For purposes of this subparagraph (5), the aggregate consideration receivable by the Company in connection with the issuance of Common Shares, or of other securities convertible into or exercisable for Common Shares, shall be deemed to be equal to the sum of the aggregate offering price (before deduction of reasonable underwriting discounts or commissions and expenses) of all such securities plus the minimum aggregate amount, if any, payable upon conversion or exercise of any such other securities into Common Shares.
The provisions of this clause (h) shall not apply to the issuance of any Common Shares (i) pursuant to any restricted share, share option, share purchase or similar plan or arrangement for the benefit of employees or directors of the Company or any of its subsidiaries approved by the Board of Directors or a duly organized committee thereof, or (ii) issued upon conversion of Series A Preferred Shares, including pursuant to the purchase price adjustments therein.
(i) Redemption. (1) Upon the completion of the an Initial Public Offering, the Company shall redeem outstanding Series A Preferred Shares having an aggregate Liquidation Preference and accrued but unpaid dividends equal to the net proceeds to the Company from such Initial Public Offering at the redemption price (to be paid in accordance with the next sentence) equal to 110% of the Liquidation Preference thereof, plus an amount equal to the dividends unpaid thereon, if any, whether or not declared, to the redemption date. The redemption price on any Series A Preferred Shares redeemed shall be paid as follows: (x) an amount equal to 100% of the Liquidation Preference shall be paid in cash, and (y) the remainder of the redemption price shall be paid through delivery by the Company of Class A Common Shares having a value (based on the initial offering price to the public (gross of any underwriting discounts and commissions) of the Class A Common Shares in such Initial Offering) equal to 10% of the Liquidation Preference plus an amount equal any such unpaid dividends.
(2) Not less than 10 days nor more than 45 days (such date as fixed by the Board of Directors of the Company is referred to herein as the "Redemption Record Date") prior to the date fixed for any redemption of Series A Preferred Shares, a notice specifying the time and place of the redemption shall be given by first class mail, postage prepaid, to the holders of record on the Redemption Record Date of the Series A Preferred Shares to be redeemed at their respective addresses as the same shall appear on the books of the Company, notifying each holder of record that such Series A Preferred Shares shall be cancelled on the share register of the Company on the redemption date and thereupon the redemption price of the shares, and any unpaid dividends thereon to the redemption date, shall be paid to the order of the holder whose name appears on the share register of the Company, or if such Series A Preferred Shares are issued in certificated form, calling upon each holder of record to surrender to the Company on the redemption date at the place designated in the notice such holder's
certificate or certificates representing the Series A Preferred Shares. On or after the redemption date, each holder of Series A Preferred Shares shall, if such Series A Preferred Shares are issued in certificated form, present and surrender such holder's certificate or certificates for such shares to the Company at the place designated in the redemption notice and thereupon the redemption price of the shares, and any unpaid dividends thereon to the redemption date, shall be paid to or on the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled.
(3) All redemptions or repurchases of the Series A Preferred Shares by the Company shall be made pro rata to the holders thereof.
(j) Certain Definitions. As used in this Annexure A, the following terms shall have the following meanings, unless the context otherwise requires:
"Board of Directors" means the Board of Directors of the Company.
"Business Day" means any day other than a Saturday, Sunday or a United States federal or Cayman Island holiday.
"Current Market Price" as of any given date, means (1) the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, per Class A Common
Share in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on the
New York Stock Exchange, or (2) if the Class A Common Shares are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Class A Common Shares
are listed or admitted to trading, or (3) if the Class A Common Shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the Nasdaq Stock Market or
such other system then in use, or (4) if on any such date the Class A Common
Shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Class A Common Shares selected by the Board of Directors, or (4) if none of
(1) through (4) are applicable, the fair market value of the Class A Common
Shares as determined by the Board of Directors in good faith.
"FPC" means Fox, Paine & Company, LLC.
"Initial Public Offering" means an underwritten initial public offering or public offerings (on a cumulative basis) of Class A Common Shares pursuant to a registration statement or registration statements under the Securities Act of 1933, as amended, with aggregate gross proceeds to the Company of at least $50 million.
"Issuance Date" means the first date of issuance of any Series A Preferred Shares.
(k) Headings. The headings used herein are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.
EXHIBIT 10.2
MANAGEMENT SHAREHOLDERS' AGREEMENT
DATED AS OF
SEPTEMBER 5, 2003
BY AND AMONG
VIGILANT INTERNATIONAL, LTD.
AND
THE INVESTORS LISTED
ON THE SIGNATURE PAGES HERETO
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS......................................................... 3
ARTICLE II RESTRICTIONS ON TRANSFERS OF SHARES................................ 7
2.1 General Limitations on Transfers................................. 7
2.2 Compliance with Securities Laws.................................. 9
2.3 Permitted Transfers.............................................. 9
2.4 After Acquired Equity Securities................................. 10
2.5 Tag-Along Rights................................................. 10
2.6 Drag-Along Right................................................. 12
2.7 Additional Provisions Relating to Restrictions on Transfers...... 13
ARTICLE III REGISTRATION RIGHTS............................................... 14
3.1 Piggyback and Demand Registrations............................... 14
3.2 Registration Procedures.......................................... 17
3.3 Indemnification.................................................. 19
3.4 Holdback Agreement............................................... 23
3.5 Deferral......................................................... 23
ARTICLE IV LIMITED CALL AND PUT RIGHTS........................................ 24
4.1 Company Call Rights.............................................. 24
4.2 Limited Put with Respect to Option-A Tranche..................... 25
ARTICLE V MISCELLANEOUS....................................................... 27
5.1 Effectiveness; Term.............................................. 27
5.2 No Voting or Conflicting Agreements.............................. 28
5.3 Approval of Share Incentive Plan by Management Investors......... 28
5.4 Specific Performance............................................. 28
5.5 Notices.......................................................... 28
5.6 Successors and Assigns........................................... 28
5.7 Recapitalizations and Exchanges Affecting Shares................. 28
5.8 Governing Law.................................................... 29
5.9 Descriptive Headings, Etc........................................ 29
5.10 Amendment........................................................ 29
5.11 Additional Issuances; Joinder.................................... 29
5.12 Severability..................................................... 29
5.13 Further Assurances............................................... 30
5.14 Complete Agreement; Counterparts................................. 30
5.15 Certain Transactions............................................. 30
5.16 No Third-Party Beneficiaries..................................... 30
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MANAGEMENT SHAREHOLDERS' AGREEMENT
MANAGEMENT SHAREHOLDERS' AGREEMENT, dated as of September 5, 2003 (this "AGREEMENT"), by and among Vigilant International, Ltd., a Cayman Islands exempted company formed with limited liability (the "COMPANY"), U.N. Holdings (Cayman), Ltd. ("U.N. HOLDINGS (CAYMAN), LTD") and each of the employees, officers, directors, executives, consultants and other Persons having a similar business relationship with the Company or its Affiliates (as defined below) owning or holding Equity Securities (as defined below) who are all listed on Schedule I hereto (referred to individually as a "MANAGEMENT INVESTOR" or collectively as the "MANAGEMENT INVESTORS").
Capitalized terms used but not previously or otherwise defined herein shall have the meanings ascribed to them in Article I of this Agreement.
RECITALS
WHEREAS, the Company, as of the date hereof, currently has authorized Class A Shares for issuance ("SHARES");
WHEREAS, the Company and certain direct and indirect subsidiaries of the Company have entered into or will enter into employment agreements (the "EMPLOYMENT AGREEMENTS") and/or option agreements ("OPTION AGREEMENTS") and/or restricted share purchase agreements ("RESTRICTED SHARE PURCHASE AGREEMENTS") and related agreements with certain Management Investors, that provide for, among other things, the issuance and/or purchase of Shares and the grant of Options (as defined below) to such Management Investors;
WHEREAS, the Company has reserved Shares for issuance pursuant to the Company's 2003 Share Incentive Plan (the "SHARE INCENTIVE PLAN");
WHEREAS, the parties hereto desire to restrict the sale, assignment, transfer, encumbrance or other disposition of the Shares and other Equity Securities, if any, which the parties hereto own or may hereafter acquire, and to provide for certain rights and obligations in respect thereof as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and of the terms and conditions contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings ascribed to them below:
"AFFECTED HOLDER" shall have the meaning ascribed to it in
Section 5.10 hereof.
"AFFILIATE" of a Person shall mean a Person, directly or indirectly, controlled by, controlling or under common control with such Person.
"AGREEMENT" shall have the meaning ascribed to it in the Preamble hereto.
"APPLICABLE FEDERAL RATE" shall have the meaning ascribed to it in Section 4.1 hereof.
"BOOK VALUE BASE" shall equal a per share book value amount equal to the product of (A) the per share book value of the Company as reflected in the most recent quarterly financial statements of the Company as of the "Call Date" defined in Section 4.1 hereof, and (B)0.84.
"CLAIMS" shall mean losses, claims, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened).
"COMPANY" shall have the meaning ascribed to it in the Preamble hereto.
"COMPETITOR" shall have the meaning ascribed to it in Section 2.1.4.
"COST PRICE" shall mean the amount per Share paid for each Share. In the case of Shares issued upon the exercise of an Option, the Cost Price shall equal the exercise price of such Option. The Cost Price shall be adjusted ratably as determined by the Board of Directors of the Company, in its sole discretion, in the event of share splits, share dividends, share combinations or similar events.
"DEMAND REGISTRATION" shall have the meaning ascribed to it in
Section 3.1.2 hereof.
"DRAG-ALONG RIGHT" shall have the meaning ascribed to it in
Section 2.6.1 hereof.
"DRAG-ALONG SELLER" shall have the meaning ascribed to it in
Section 2.6.2 hereof.
"EFFECTIVE DATE" shall have she meaning ascribed to it in
Section 5.1.1 hereof.
"EMPLOYMENT AGREEMENTS" shall have the meaning ascribed to it in the Recitals hereof.
"EQUITY SECURITIES" shall mean (a) all Shares and (b) all Options, other options, warrants and other debt or equity securities, convertible, exchangeable into or redeemable for any class of Shares or other equity securities of the Company.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute thereto, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect from time to time.
"FAIR MARKET VALUE" shall mean such amount as determined by the Board of Directors of the Company in light of all of the facts and circumstances, including comparable recent bona fide sales of applicable or similar securities, and after taking into account, in such manner as the Board in its discretion deems appropriate, the Book Value Base.
"FPC" means Fox Paine & Company, LLC, its subsidiaries and related entities (including without limitation Fox Paine Capital, LLC, Fox Paine Capital Fund, L.P., Fox Paine Capital Fund II GP, LLC, Fox Paine Capital Fund II L.P., Fox Paine Capital Fund II International, L.P., Fox Paine Capital Fund II Co-Investors International, L.P., U.N. Holdings (Cayman), Ltd. and all persons and entities that are partners or shareholders or members in any such related entities) and all partners, members, directors, employees, shareholders and agents of any of the foregoing.
"FPC SHAREHOLDER" shall mean U.N. Holdings (Cayman), Ltd.
"INITIATOR" shall have the meaning ascribed to it in Section 2.5.1 hereof.
"INITIATING PARTY" shall have the meaning ascribed to it in
Section 3.1.2 hereof.
"IPO" shall mean an underwritten initial public offering or public offerings (on a cumulative basis) of any class of Shares pursuant to a registration statement or registration statements under the Securities Act with aggregate gross proceeds to the Company of at least $60 million.
"MANAGEMENT INVESTORS" shall have the meaning ascribed to it in the Preamble hereto.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean The Nasdaq Stock Market, Inc.
"OFFER SHARES" shall have the meaning ascribed to it in
Section 2.5.1 hereof.
"OPTION-A TRANCHE" shall mean all Options granted to any Management Investor that are designated as such in the respective option agreement.
"OPTIONS" shall mean options to purchase Shares from the Company, whether granted pursuant to the Shares Incentive Plan or otherwise.
"PERMITTED TRANSFEREE" shall have the meaning ascribed to it in Sections 2.3.3 and 2.3.4 hereof.
"PERSON" shall mean an individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, government (or any department or agency thereof) or other entity.
"PIGGYBACK NOTICE" shall have the meaning ascribed to it in
Section 3.1.1 hereof.
"PIGGYBACK REGISTRATION" shall have the meaning ascribed to it in Section 3.1.1 hereof.
"PROPOSED TRANSFEREE" means a Person or group (as defined in
Section 13(d)(3) of the Exchange Act) other than any Management Investors or
their Affiliates to whom Shares are proposed to be Transferred.
"REGISTRABLE SECURITIES" shall mean Shares; provided, however, as to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been sold or acquired pursuant to Rule 144 (or any successor provision under the Securities Act) under the Securities Act, (iii) such securities shall have been otherwise transferred and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company, or (iv) such securities shall have ceased to be outstanding (and, in the case of Shares underlying Options granted under the Share Incentive Plan or underlying Options or warrants granted otherwise, such Shares shall have ceased to be outstanding after issuance pursuant to the exercise of such Options or warrants).
"REGISTRATION EXPENSES" shall mean any and all expenses incident to performance of or compliance with Article III, including, without limitation, (i) all SEC and shares exchange or the NASD registration and filing fees, (ii) all fees and expenses of complying with securities or "blue sky" laws (including reasonable fees and disbursements of counsel for the underwriters in connection with "blue sky" qualifications of the Registrable Securities), (iii) all printing, messenger and delivery expenses, (iv) the fees and disbursements of counsel for the Company and of the Company's independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, (v) the reasonable fees and disbursements of one counsel retained by the Management Investors such counsel to be chosen by the Management Investors by vote of a plurality of the Registrable Securities of such Management Investors being registered) as a group in connection with each such registration, (vi) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities and the reasonable fees and expenses of any special experts retained in connection with the requested registration, including any fee payable to a qualified independent underwriter within the meaning of the rules of the NASD, (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties) and (viii) securities acts liability insurance (if the Company elects to obtain such insurance) but, in all cases, excluding underwriting discounts and commissions and transfer taxes, if any.
"RESTRICTED SHARES" shall mean as Award of Class A Shares granted under the Share Incentive Plan.
"RULE 144" shall mean Rule 144 under the Securities Act.
"SALE NOTICE" shall have the meaning ascribed to it in Section 2.5.1.
"SEC" shall mean the Securities and Exchange Commission.
"SECTION 3.1 SALE NUMBER" shall have the meaning ascribed to it in Section 3.1.4 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor federal statute thereto, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect from time to time.
"SHARE INCENTIVE PLAN" shall have the meaning ascribed to it in the Recitals hereof.
"SUBSIDIARY DIVIDEND" shall have the meaning ascribed to it in
Section 4.1(a) hereof.
"TAG-ALONG RIGHT" shall have the meaning ascribed to it in
Section 2.5.3(a) hereof.
"TAG-ALONG SELLER" shall have the meaning ascribed to it in
Section 2.5.3(b) hereof.
"TAG-ALONG SHARES" shall have the meaning ascribed to it in
Section 2.5.2 hereof.
"TERMINAL PUT PERSON" shall have the meaning ascribed to it in
Section 4.2 hereof.
"TRANSFER" shall mean to sell, assign, pledge (other than pledges to the Company and its Affiliates) or encumber or otherwise transfer, directly or indirectly, whether or not for consideration.
"TRANSFEREE" shall mean any Person to whom a Transfer is made, regardless of the method of Transfer.
"TRANSFEROR" shall mean any Person by whom a Transfer is made, regardless of the method of Transfer.
"UNMATURED SHARES" shall have the meaning ascribed to it in
Section 4.1 hereof.
"VIOLATION" shall have the meaning ascribed to it in Section 3.3(a) hereof.
ARTICLE II
RESTRICTIONS ON TRANSFERS OF SHARES
2.1 General Limitations on Transfers.
2.1.1 Transfers Generally. No Management Investor shall Transfer any Shares (whether owned as of the date hereof or hereafter acquired) unless such Transfer is made in
accordance with the provisions of this Agreement and any Transfer by any Management Investors of any Shares owned as of the date hereof or hereafter acquired in violation of such provisions shall be null and void; provided further that any Transfer shall also be in accordance with the Company's Articles of Association.
2.1.2 Recordation. The Company shall not record upon its books any attempted Transfer of Shares held or owned by any of the Management Investors to any other Person, except Transfers in accordance with this Agreement, and any such attempted Transfer shall be null and void ab initio.
2.1.3 Obligations of Transferees. No Transfer of Shares by a Management Investor which would be otherwise permitted pursuant to this Agreement shall be effective unless (a) the Transferee (including a Permitted Transferee pursuant to Section 2.3) shall have executed an appropriate document (a "JOINDER AGREEMENT") in form and substance reasonably satisfactory to the Company confirming that (i) the Transferee takes such Shares subject to all the terms and conditions of this Agreement to the same extent as its Transferor was bound by and entitled to the benefits of such provisions and (ii) the Shares shall bear legends, substantially in the forms required by Section 2.7, and (b) such document shall have been delivered to and approved (as described above) by the Company prior to such Transferee's acquisition of Class A Shares, such approval not to be unreasonably withheld or delayed. Notwithstanding the foregoing, the provisions of this Section 2.1.3 shall not apply to a Transfer validly made pursuant to a Demand Registration or Piggyback Registration and, at the discretion of the Board of Directors, may not apply to Transfers made pursuant to a Tag-Along Right or Drag Along Right.
2.1.4 Prohibited Transfers; Transfers to Competitors.
Notwithstanding anything to the contrary in this Agreement, without the consent
of the Board of Directors of the Company, no Management Investor shall, at any
time, directly or indirectly, Transfer any Shares which (a) would result in the
assets of the Company constituting "Plan Assets" as such term is defined in the
Department of Labor regulations promulgated under the Employee Retirement Income
Security Act of 1974, as amended, (b) would cause the Company to be controlled
by or be under common control with an "investment company" for purposes of the
Investment Company Act of 1940, as amended, (c) would require any securities of
the Company to be registered under the Exchange Act or (d) is made to any Person
who is a Competitor (as defined below) of the Company or any of its subsidiaries
or to any Affiliate of such a Competitor (other than Transfers to the Company
and its Affiliates). Notwithstanding clause (d), a Transfer to a Competitor may
be permitted under Section 2.1.4 (d) solely if such Transfer (i) is made in
connection with the exercise of a Tag-Along Right pursuant to Section 2.5 or in
connection with the exercise of a Drag-Along Right pursuant to Section 2.6, in
which event such sale may be effected only in accordance with Section 2.5 or
Section 2.6, as applicable, or (ii) is made in accordance with all other terms
of this Agreement and is made pursuant to a widely distributed, underwritten
public offering registered under the Securities Act (or an underwritten offering
pursuant to the exercise of such other Management Investors' piggyback
registration rights pursuant to Section 3.1.1) or pursuant to a sale effected
through an open market, nondirected broker's transaction pursuant to Rule 144 in
which the seller does not know that the buyer is a Competitor. "COMPETITOR"
shall mean any Person that competes in a significant way with a substantial
business of the Company or a Person that has a substantial investment in any
such competing entity; provided that an institutional investor or its Affiliates
that hold nonvoting debt or less than 5% of the publicly
traded equity securities of any such Competitor as a passive portfolio investment shall not be a Competitor. For purposes of this provision, the good faith determination of a majority of the entire Board of Directors of the Company that a proposed Transferee is a Competitor, made within 30 days of written notice to the Board of Directors of the Company of the proposed Transfer, shall in all respects be conclusive.
2.2 Compliance with Securities Laws. Notwithstanding any other provision of this Agreement, no Management Investor shall Transfer any Shares unless the Transfer is made in accordance with the terms of this Agreement and (a) the Transfer is pursuant to an effective registration statement under the Securities Act and in compliance with any other applicable federal securities laws and state securities or "blue sky" laws or (b) such Management Investor shall have furnished the Company with (i) an opinion of counsel, if reasonably requested by the Company, which opinion and counsel shall be reasonably satisfactory to the Company, to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and under any applicable state securities or "blue sky" laws and that the Transfer otherwise complies with this Agreement and any other applicable federal securities laws and state securities or "blue sky" laws and (ii) such representation and covenants of such Management Investor as are reasonably requested by the Company to ensure compliance with any applicable federal securities laws and state securities or "blue sky" laws.
2.3 Permitted Transfers.
2.3.1 Management Investors. The general restrictions contained in Section 2.1.1 with respect to Transfers by Management Investors of Shares (other than any restrictions in the Company's Articles of Association) shall not apply to any Transfer of Shares by a Management Investor:
(a) to or among such Management Investor's spouse, children (including adopted), grandchildren (including adopted) or other living descendants, or executors, administrators, testamentary trustees or to a trust or family partnership of which there are no principal (i.e., corpus) beneficiaries or partners other than the grantor or one or more of such Management Investor, spouse or described relatives, executors, administrators, testamentary trustees, or by the laws of descent and distribution and provided that, in the case of a trust, the existing beneficiaries and/or trustee(s) and/or grantor(s) of such trust have the power to act with respect to the trust's assets without court approval and, in the case of a family partnership, that the partners thereof have the power to act with respect to the partnership's assets without court approval and the partnership is not permitted to (i) distribute assets to Persons who are not among the relatives listed above or (ii) have partners who are not among the relatives listed above, and, in any case, all the partners agree, for the benefit of the Company and the FPC Shareholder, not to amend such provisions;
(b) to a legal representative of such Management Investor in the event such Management Investor becomes mentally incompetent or to such Management Investor's personal representative following the death of such Management Investor;
(c) with the prior written approval of the Company, which approval may be granted or withheld by the Board of Directors of the Company, in its sole and absolute discretion; or
(d) made in accordance with a specific right to transfer set forth in the Employment Agreement of such Management Investor.
2.3.2 Permitted Transferees. Transferees to whom Transfers are permitted pursuant to Sections 2.3.1 are referred to herein as "PERMITTED TRANSFEREES". Any such permitted Transfer shall be subject to the terms of this Agreement, including, without limitation, compliance with Sections 2.1.2., 2.1.3, 2.2 and 2.7.
2.3.3 Transfer by Permitted Transferees. The restrictions contained in Section 2.1.1 with respect to Transfers by Management Investors of Equity Securities shall not apply to any Transfer by a Permitted Transferee of a Management Investor to such Management Investor or to another Permitted Transferee of such Management Investors, and any such Transferee shall also be a "PERMITTED TRANSFEREE," subject to the provisions of Section 2.3.2.
2.3.4 Restrictions Herein are Additional. The restrictions contained in this Article II shall be in addition to and not in lieu or limitation of any restrictions on the ownership or Transfer of Equity Securities contained in any share subscription agreement or Employment Agreement or any analogous provision of any employment, compensation or benefit agreement or arrangement or other agreement between the Company or any of its Affiliates and any Management Investors or the Articles of Association of the Company; provided, however, that, upon the termination of any such Employment Agreement or other such agreement or arrangement or lapsing of such restrictions, the restrictions and provisions contained herein shall continue in full force and effect pursuant to this Agreement.
2.3.5 Transfers to the Company. Subject only to Section 2.1.4 and 2.2, no restrictions on Transfer under this Agreement shall apply to Transfers to the Company.
2.4 After Acquired Equity Securities. Each Management Investor hereby agrees that the provisions of this Agreement shall be fully applicable in respect of any Equity Securities hereafter acquired by such Management Investor, with the same force and effect as if such Management Investor held such Equity Securities on the date of this Agreement.
2.5 Tag-Along Rights.
2.5.1 Sale Notice. If, prior to an IPO, the FPC Shareholder (for purposes of this Section 2.5 the "INITIATOR") proposes to sell any of the Shares owned by it, other than (a) to another entity comprising the FPC Shareholder or an Affiliate thereof, (b) pursuant to the exercise of a Drag-Along Right pursuant to Section 2.6, or (c) pursuant to a Piggyback Registration, then the Initiator shall first give written notice (the "SALE NOTICE") to the Company and to each of the Management Investors, stating that the Initiator desires to make such sale, referring to this Section 2.5, specifying the number of Shares proposed to be sold by the Initiator pursuant to the offer (the "OFFER SHARES"), and specifying the price, the form of consideration,
name and description of the purchaser (including controlling Persons) and the material terms pursuant to which such sale is proposed to be made.
2.5.2 Tag-Along Election. Within seven business days of the date of receipt of the Sale Notice, each Management Investor shall deliver to the Initiator and to the Company a written notice stating whether the Management Investor elects to sell a pro rata portion of its Shares (equal to (a) the total number of Shares owned by such Management Investor, plus the total number of Shares then issuable upon exercise or conversion of Equity Securities (including in the case of Options, only vested Options) then exercisable by such Management Investor, multiplied by (b) a fraction, (i) the numerator of which is the number of Offer Shares and (ii) the denominator of which is the total number of Shares held by the Initiator plus the total number of Shares then issuable upon exercise or conversion of any Equity Securities (including in the case of Options, only vested Options), if applicable, then exercisable or convertible by the Initiator) to such Proposed Transferee on the same terms, purchase price and conditions as the Initiator (with respect to each Management Investor, its "TAG-ALONG SHARES"). An election pursuant to the first sentence of this Section 2.5.2 shall constitute an irrevocable commitment by the Management Investor making such election to sell such Tag-Along Shares to the Proposed Transferee if the sale of Offer Shares to the Proposed Transferee occurs on the terms contemplated hereby. Such terms may include a maximum number of Shares such Proposed Transferee is willing to purchase, and, in such case, the Initiator and the Management Investors selling Shares pursuant hereto shall be cut back pro rata based on the number of Shares each such Management Investor is electing to sell.
2.5.3 Seller's Rights to Transfer. (a) Third-Party Sale; Tag-Along Buyer. A sale to a Proposed Transferee pursuant to this Section 2.5 shall only be consummated if the Proposed Transferee shall purchase, within 180 days of the date of the Sale Notice concurrently with and on substantially the same terms and conditions and at the same price as the Offer Shares, all of each Management Investor's Tag-Along Shares with respect to such sale, in accordance with their elections pursuant to Section 2.5.2, and subject to the last sentence thereof (the "TAG-ALONG RIGHT").
(b) Sale Agreement. Each Management Investor electing to sell Tag-Along Shares (a "TAG-ALONG SELLER") agrees to cooperate in consummating such a sale, including, without limitation, by becoming a party to the sale agreement and all other appropriate related agreements, delivering, at the consummation of such sale, share certificates and other instruments for such Shares duly endorsed for transfer, free and clear of all liens and encumbrances, and voting or consenting in favor of such transaction (to the extent a vote or consent is required) and taking any other necessary or appropriate action in furtherance thereof, including the execution and delivery of any other appropriate agreements, certificates, instruments and other documents. Each Tag-Along Seller shall be severally responsible for its proportionate share of the third-party expenses of sale incurred by the sellers in connection with such sale and the monetary obligations and liabilities incurred by the sellers in connection with such sale. Such monetary obligations and liabilities shall include (to the extent such obligations are incurred) obligations and liabilities for indemnification (including for (i) breaches of representations and warranties made in connection with such sale by the Company or any other seller with respect to the Company or the Company's business, (ii) breaches of covenants in effect prior to closing and (iii) other matters), and shall also include amounts paid into escrow or
subject to holdbacks, and amounts subject to post-closing purchase price adjustments, provided that all such obligations are equally applicable on a several and not joint basis to each Tag-Along Seller based on the consideration received by such Tag-Along Seller. The foregoing notwithstanding, (i) without the written consent of a Tag-Along Seller, the amount of such obligations and liabilities for which such Tag-Along Seller shall be responsible shall not exceed the gross proceeds received by such Tag-Along Seller in such sale, (ii) a Tag-Along Seller shall not be responsible for the fraud of any other seller or for any indemnification obligations and liabilities for breaches of representations and warranties made by any other seller with respect to such other seller's (A) ownership of and title to Shares of the Company, (B) organization, (C) authority and (D) conflicts and consents.
(c) No Liability. Notwithstanding any other provision contained in this Section 2.5.3, there shall be no liability on the part of the Company or the Initiator in the event that a sale pursuant to this Section 2.5.3 is not consummated for any reason whatsoever. The decision whether to effect a Transfer pursuant to this Section 2.5.3 shall be in the sole and absolute discretion of the Initiator.
2.6 Drag-Along Right.
2.6.1 Exercise. If the FPC Shareholder proposes to make a sale, in a bona fide arm's-length transaction or series of related transactions to a Person that is not an Affiliate of or not controlled by an entity comprising the FPC Shareholder or FPC, of at least 50% of its Shares (including those Shares issuable upon exercise or conversion of Equity Securities then exercisable or convertible by the FPC Shareholder including vested Options and Options which become exercisable at or prior to the Drag-Along Sale) then held by the FPC Shareholder to a Proposed Transferee (the "DRAG ALONG SALE"), including pursuant to a share sale, merger, business combination, recapitalization, consolidation, reorganization, restructuring or similar transaction, the FPC Shareholder shall have the right (a "DRAG-ALONG RIGHT"), exercisable upon 15 days' prior written notice to the Management Investors, to require the Management Investors to sell their Shares and, at the election of the FPC Shareholder, Equity Securities and Options (whether vested or unvested) equal to (a) the total number of Shares owned by such Management Investors, plus the total number of Shares then issuable upon the exercise of Options (whether vested or unvested), multiplied by (b) a fraction (i) the numerator of which is the number of Shares the FPC Shareholder proposes to sell to the Proposed Transferee and (ii) the denominator of which is the total number of Shares held by the FPC Shareholder plus the total number of Shares then issuable upon exercise or conversion of any Equity Securities, if applicable, then exercisable or convertible by the FPC Shareholder, to the Proposed Transferee on the same terms and conditions and at the same price (in the case of Options, the purchase price of each Option shall be equal to the purchase price attributable to the number of Shares issuable upon exercise of such Option at the time of the Drag-Along Sale less the exercise price thereof) as the FPC Shareholder would receive in connection with such transaction.
2.6.2 Sale Agreement. Each Management Investor selling Shares pursuant to a transaction contemplated by this Section 2.6 (a "DRAG-ALONG SELLER") agrees to cooperate in consummating such a sale, including, without limitation, by becoming a party to the sale agreement and all other appropriate related agreements, delivering, at the consummation of such sale, share certificates and other instruments for such Shares duly endorsed for transfer, free and
clear of all liens and encumbrances, and voting or consenting in favor of such
transaction (to the extent a vote or consent is required) and taking any other
necessary or appropriate action in furtherance thereof, including the execution
and delivery of any other appropriate agreements, certificates, instruments and
other documents. Each Drag-Along Seller shall be severally responsible for its
proportionate share of the third-party expenses of sale incurred by the FPC
Shareholder in connection with such sale. Such monetary obligations and
liabilities shall include (to the extent such obligations are incurred) monetary
obligations and liabilities for indemnification (including for (a) breaches of
representations and warranties made in connection with such sale by the Company
or any other seller with respect to the Company or the Company's business and
(b) breaches of covenants in effect prior to closing), and shall also include
amounts paid into escrow or subject to holdbacks, and amounts subject to
post-closing purchase price adjustments, provided all such obligations are
equally applicable on a several and not joint basis to each Drag-Along Seller
based on the consideration received by such Drag-Along Seller. The foregoing
notwithstanding, (a) without the written consent of a Drag-Along Seller, the
amount of such obligations and liabilities for which such Drag-Along Seller
shall be responsible shall not exceed the gross proceeds received by such
Drag-Along Seller in such sale, and (b) a Drag-Along Seller shall not be
responsible for the fraud of any other seller or any indemnification obligations
and liabilities for breaches of representations and warranties made by any other
seller with respect to such other seller's (i) ownership of and title to Shares
of the Company, (ii) organization, (iii) authority and (iv) conflicts and
consents.
2.6.3 No Liability. Notwithstanding any other provision
contained in this Section 2.6, there shall be no liability on the part of the
Company or the FPC Shareholder in the event that the sale pursuant to this
Section 2.6 is not consummated for any reason whatsoever. The decision whether
to effect a Transfer pursuant to this Section 2.6 shall be in the sole and
absolute discretion of the FPC Shareholder.
2.7 Additional Provisions Relating to Restrictions on Transfers.
2.7.1 Legends. Each of the Management Investors hereby agrees that each outstanding certificate representing Shares held or owned by such Management Investor or its Transferee, including any certificate representing Shares acquired in accordance with the provisions of this Agreement or the Employment Agreements, any certificates representing Shares issued upon exercise of the Options and any Options, in any case, subject to the provisions of this Agreement and issued prior to the date when the applicable restrictions are terminated pursuant to Section 2.7.3, shall bear endorsements reading substantially as follows:
(a) "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state and may not be transferred, sold or otherwise disposed of except while such a registration is in effect or pursuant to an exemption from registration under said Act and applicable state securities laws."
(b) "The securities represented by this certificate are subject to the terms and conditions set forth in a Management Shareholders' Agreement, dated as of _________, 2003, as amended from time to time, copies of which may be obtained from the issuer or from the holder of this security. No transfer of such
securities will be made on the books of the issuer unless accompanied by evidence of compliance with the terms of such agreement."
Each outstanding certificate representing Shares shall also bear any legend required by the terms of any subscription agreement, the Share Incentive Plan or as the Company may otherwise deem appropriate.
2.7.2 Copy of Agreement. A copy of this Agreement shall be filed with the corporate secretary of the Company, and kept with the records of the Company, and shall be made available for inspection by any Management Investors at the principal executive offices of the Company.
2.7.3 Termination of Restrictions. The restriction referred
to in the endorsement required pursuant to Section 2.7.1(a) shall cease and
terminate as to any particular Shares when, in the reasonable opinion of counsel
for the Company, such restriction is no longer required in order to assure
compliance with the Securities Act and the state securities or "blue sky" laws.
The Company or the Company's counsel, at their election, may request from any
Management Investor a certificate or an opinion of such Management Investor's
counsel with respect to any relevant matters in connection with the removal of
the endorsement set forth in Section 2.7.1(a) from such Management Investor's
share certificates, any such certificate or opinion of counsel to be reasonably
satisfactory to the Company and its counsel. The restrictions referred to in
Section 2.7.1(b) shall cease and terminate as to any particular Shares when, in
the reasonable opinion of counsel for the Company, the provisions of this
Agreement are no longer applicable to such Shares or this Agreement shall have
terminated in accordance with its terms. Any other restrictions referred to in
any other legends required pursuant to Section 2.7.1 shall cease and terminate
when, in the reasonable opinion of counsel for the Company, such restrictions
are no longer applicable. Whenever such restrictions shall cease and terminate
as to any Shares or Options, the Management Investors holding such Shares shall
be entitled to receive from the Company, without expense (other than applicable
transfer taxes, if any, if such unlegended Shares are being delivered and
transferred to any Person other than the registered holder thereof), new
certificates for a like number of Shares or like number of Options not bearing
the relevant legend(s) set forth or referred to in Section 2.7.1.
ARTICLE III
REGISTRATION RIGHTS
3.1 Piggyback and Demand Registrations.
3.1.1 Piggyback Registrations. If at any time following an
IPO, (a) the Company proposes to register for sale by the Company under the
Securities Act any of its Equity Securities (other than a registration on Form
S-4 or Form S-8, or any successor or similar forms), or any Shares of an
Initiating Party pursuant to a Demand Registration under Section 3.1.2, in a
manner that would permit registration of Registrable Securities for sale to the
public under the Securities Act, and (b) the FPC Shareholder is selling Shares
in such registered sale, the Company will each such time promptly give written
notice to all Management Investors who beneficially own any Registrable
Securities of its intention to do so, of the registration form of the SEC that
has been selected by the Company and of such holders' rights under this Section
3.1 (the "PIGGYBACK NOTICE"). Subject to Section 3.1.4 hereto, the Company will
use its reasonable
best efforts to include, and to cause the underwriter or underwriters, if applicable, to include, in the proposed offering, on the same terms and conditions as the securities of the Company included in such offering, all Registrable Securities that the Company has been requested in writing, within 15 calendar days after the Piggyback Notice is given, to register by the Management Investors thereof (each such registration pursuant to this Section 3.1.1, a "PIGGYBACK REGISTRATION"); provided, however, that (a) if, at any time after giving a Piggyback Notice and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such equity securities (or, in the case of a Demand Registration, the Initiating Party thereof so determines), the Company may, at its election (or, in the case of a Demand Registration, where the Initiating Party thereof so determines, the Company shall), give written notice of such determination to all Management Investors who beneficially own any Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such abandoned registration, and (b) in case of a determination by the Company to delay registration of its equity securities (or, in the case of a Demand Registration, the Initiating Party thereof so determines) the Company shall be permitted to (or, in the case of a Demand Registration where the Initiating Party thereof so determines, the Company, for a period not to exceed 60 days, shall) delay the registration of such Registrable Securities for the same period as the delay in registering such other Equity Securities (provided that clauses (a) and (b) above shall not relieve the Company of its obligations under Section 3.1.2). In the case of any registration of Registrable Securities in an underwritten offering pursuant to this Section 3.1.1, all Management Investors proposing to distribute their securities pursuant to this Section 3.1.l shall, at the request of the Company (or, in the case of a Demand Registration, the Initiating Party thereof), enter into an agreement in customary form with the underwriter or underwriters selected by the Company (or, in the case of a Demand Registration, selected in accordance with Section 3.1.2). Notwithstanding the foregoing, following an IPO, the Company shall not be obligated to effect registration of Registrable Securities for which Piggyback Registration is requested by a Management Investor or if, at the time of such request, all such Registrable Securities are eligible for sale to the public by the requesting Management Investor or without registration under Rule 144, with such sale not being limited by the volume restrictions thereunder.
3.1.2 Demand Registrations. The Company, at any time and
from time to time following the consummation of an IPO, upon a request of the
FPC Shareholder (the "INITIATING PARTY"), shall use its reasonable best efforts
to register under the Securities Act Registrable Securities held by the
Initiating Party (including, at the election of such Initiating Party, in an
underwritten offering) and bear all expenses in connection with such offering in
a manner consistent with Section 3.1.3 and shall enter into such other
agreements in furtherance thereof (each such registration pursuant to this
Section 3.1.2, a "DEMAND REGISTRATION"), and the Company shall provide customary
indemnifications in such instances (in a manner consistent with the
indemnification provision of this Article III) to the Initiating Party and any
such underwriters. The FPC Shareholder shall have the right to initiate such
number of Demand Registrations pursuant to this Section 3.1.2 as it shall
determine in its sole discretion. If any Demand Registration requested by the
FPC Shareholder is in the form of an underwritten offering, the FPC Shareholder
shall designate the underwriter or underwriters to be utilized in connection
such offering.
3.1.3 Expenses. The Company shall pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 3.1; provided, however, that each Management Investor shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Management Investors's Registrable Securities pursuant to a registration statement effected pursuant to this Section 3.1.
3.1.4 Priority in Piggyback and Demand Registrations. If
the managing underwriter for a registration pursuant to this Section 3.1 shall
advise the Company in writing that, in its opinion, the number of securities
requested to be included in such registration exceeds the number (the "SECTION
3.1 SALE NUMBER") that can be sold in an orderly manner in such offering within
a price range acceptable to the Company (or, in the case of a Demand
Registration, to the Initiating Party thereof), the Company shall include in
such offering the following securities:
(a) in the case of a registration initiated by
the Company (i) first, all the securities the Company proposes to register for
its own sale, (ii) second, all the securities to be registered by the FPC
Shareholder, and (iii) third, all Registrable Securities requested to be
included by all Management Investors (or if the number of such Registrable
Securities exceeds the Section 3.1 Sale Number less the number of securities
included pursuant to clauses (a)(i) and (ii) above, then the number of such
Registrable Securities included in such registration pursuant to this clause
(a)(iii) shall equal the excess of the Section 3.1 Number over the number of
securities included pursuant to clause (a)(i) above and shall be allocated pro
rata among all requesting Management Investors, on the basis of the relative
number of shares of such Registrable Securities each such Management Investor
then holds); and
(b) in the case of a Demand Registration (i)
first, all the securities requested to be registered by the Initiating Party,
(ii) second, all the securities the Company proposes to register for its own
sale and (iii) third, all Registrable Securities requested to be included by all
Management Investors (or if the number of such Registrable Securities exceeds
the Section 3.1 Sale Number less the number of securities included pursuant to
clauses (b)(i) and (ii) above, then the number of such Registrable Securities
included in such registration pursuant to this clause (b)(iii) shall equal the
excess of the Section 3.1 Number over the number of securities included pursuant
to clauses (b)(i) and (ii) above and shall be allocated pro rata among all
requesting Management Investors, on the basis of the relative number of shares
of such Registrable Securities each such Management Investor then holds).
3.1.5 Underwriting Requirements. In connection with any offering involving any underwriting of securities in a Piggyback Registration, the Company shall not be required to include any Management Investor's Registrable Securities in such underwriting unless such Management Investor accepts the terms of the underwriting as agreed upon between the Company and the underwriters in such quantities and on such terms as set forth in, Section 3.1.1, and such Management Investor agrees to sell such Management Investor's securities on the basis provided therein and completes and/or executes all questionnaires, indemnities, lock-ups, underwriting agreements and other documents (including powers of attorney and custody arrangements) required generally of all selling Management Investors, in each case, in customary form and substance, which are requested to be executed in connection therewith.
3.2 Registration Procedures. If and whenever the Company is required to use its reasonable best efforts to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Article III, the Company will, as soon as practicable:
(a) prepare and file with the SEC the requisite registration statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become and remain effective for such period as the Company shall deem appropriate;
(b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period as the Company shall deem appropriate;
(c) comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement during such period;
(d) furnish to each seller of such Registrable Securities and each underwriter such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request;
(e) (i) promptly notify each Management Investor that holds Registrable Securities covered by such registration statement, (A) when such registration statement or any post-effective amendment or supplement thereto becomes effective, (B) of the issuance by the SEC or any state securities authority of any stop order, injunction or other order or requirement suspending the effectiveness of such registration statement (and take all reasonable action to prevent the entry of such stop order or to remove it if entered, or the initiation of any proceedings for that purpose), or (C) of the happening of any event as a result of which the registration statement, as then in effect, the prospectus related thereto or any document included therein by reference includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made and (ii) in the case of an event under clause (e)(i)(B) or (C), promptly file such amendments and supplements which may be required on account of such event and use its reasonable best efforts to cause each such amendment and supplement to become effective;
(f) promptly furnish counsel for each underwriter, if any, and for the selling Management Investors of Registrable Securities copies of any written request by the SEC or any state securities authority for amendments or supplements to a registration statement and prospectus or for additional information;
(g) use reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement at the earliest possible time;
(h) use its best efforts to cause all such Registrable Securities covered by such registration statement to be listed on the principal securities exchange or authorized for quotation on Nasdaq, if any, on which similar equity securities issued by the Company are then listed or authorized for quotation, or eligible for listing or quotation, if the listing or authorization for quotation of such securities is then permitted under the rules of such exchange or the NASD;
(i) enter into an underwriting agreement with the underwriter of such offering in the form customary for such underwriter for similar offerings, including such representations and warranties by the Company, provisions regarding the delivery of opinions of counsel for the Company and accountants' letters, provisions regarding indemnification and contribution, and such other terms and conditions as are at the time customarily contained in such underwriter's underwriting agreements for similar offerings (the sellers of Registrable Securities that are to be distributed by such underwriter(s) may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriter(s) shall also be made to and for the benefit of such sellers of Registrable Securities);
(j) make available for inspection by representatives of the selling Management Investors who hold Registrable Securities and any underwriters participating in any disposition pursuant hereto and any counsel or accountant retained by such Management Investors or underwriters, all relevant financial and other records, pertinent corporate documents and properties of the Company and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, underwriter, counsel or accountant in connection with a registration pursuant hereto; provided, however, that, with respect to records, documents or information which the Company determines, in good faith, to be confidential and as to which the Company notifies such representatives, underwriters, counsel or accountants in writing of such confidentiality, such representatives, underwriters, counsel or accountants shall not disclose such records, documents or information unless (i) the release of such records, documents or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (ii) such records, documents or information have previously been generally made available to the public. Each selling Management Investor of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates (or for such Management Investor's business purposes or for any reason other than in connection with a registration hereunder) unless and until such information is made generally available (other than by such Management Investor or where such Management Investor knows that such information became publicly available as a result of a breach of any confidentiality arrangement) to the public. Each selling Management Investor of such Registrable Securities further agrees that it will, upon learning that disclosure of such records is sought, give notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent disclosure of the records deemed confidential;
(k) permit any beneficial owner of Registrable Securities who, in the sole judgment, exercised in good faith, of such holder, might be deemed to be a controlling Person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, that in the judgment of such holder, as aforesaid, should be included; and
(l) make reasonably available its employees and personnel and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any underwritten offering.
The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. The Company shall not be required to register or qualify any Registrable Securities covered by such registration statement under any state securities or "blue sky" laws of such jurisdictions other than as it deems necessary in connection with the chosen method of distribution or to take any other actions or do any other things other than those it reasonably deems necessary or advisable to consummate such distribution, and the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction.
Each beneficial owner of Registrable Securities agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in clauses (d)(i)(B) and (d)(i)(C) above, such beneficial owner will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such beneficial owner's receipt of the copies of the supplemented or amended prospectus contemplated by clause (e)(ii) above, and, if so directed by the Company, such beneficial owner will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such beneficial owner's possession, of the prospectus covering such Registrable Securities that was in effect prior to such amendment or supplement.
3.3 Indemnification. (a) In the event of any registration of any Registrable Securities pursuant to this Article III, the Company will, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, the seller of any Registrable Securities covered by such registration statement, its directors, officers, fiduciaries, employees and shareholders or members or general and limited partners (and the directors, officers, fiduciaries, employees and shareholders or members or general and limited partners thereof), each other Person who participates as an underwriter or a qualified independent underwriter, if any, in the offering or sale of such securities, each director, officer, fiduciary, employee and shareholder or general and limited partner of such underwriter or qualified independent underwriter, and each other Person
(including any such Person's directors, officers, fiduciaries, employees and shareholder or members or general and limited partners), if any, who controls such seller or any such underwriter or qualified independent underwriter, within the meaning of the Securities Act, against any and all Claims in respect thereof and expenses (including reasonable fees and expenses of counsel and any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld or delayed) to which each such indemnified party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims or expenses arise out of or are based upon any of the following actual or alleged statements, omissions or violations (each, a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such securities were registered pursuant to this Agreement under the Securities Act or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary, final or summary prospectus or any amendment or supplement thereto (unless corrected in the final prospectus), together with the documents incorporated by reference therein, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such indemnified party in any such case to the extent such Claim or expense arises out of or is based upon any Violation that occurs in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such indemnified party expressly stating that such information is for use therein.
(b) Each holder of Registrable Securities that are included in the securities as to which any Demand Registration or Piggyback Registration is being effected (and, if the Company requires as a condition to including any Registrable Securities in any registration statement filed in connection with any Demand Registration or Piggyback Registration, any underwriter and qualified independent underwriter, if any) shall, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 3.3(a)), to the fullest extent permitted by law, the Company, its directors, officers, fiduciaries, employees and shareholders (and the directors, officers, fiduciaries, employees and shareholders or members or general and limited partners thereof) and each Person (including any such Person's directors, officers, fiduciaries, employees and shareholders or members or general and limited partners), if any, controlling the Company within the meaning of the Securities Act and all other prospective sellers and their directors, officers, fiduciaries, employees and shareholders or general and limited partners and respective controlling Persons (including any such Person's directors, officers, fiduciaries, employees and shareholders or members or general and limited partners) against any and all Claims and expenses (including reasonable fees and expenses of counsel and any amounts paid in any settlement effected with the consent of the indemnifying party, which consent shall not be unreasonably withheld or delayed) to which each such indemnified party may become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims or expenses arise not of or are based upon any Violation that occurs in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such holder or underwriter or qualified independent underwriter, if any, expressly stating that such information is for use in connection with any registration statement, preliminary, final or summary prospectus or amendment or supplement or document incorporated by reference into any of the foregoing.
(c) Indemnification similar to that specified in Sections 3.3(a) and 3.3(b) (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities (and, if the Company requires as a condition to including any Registrable Securities in any registration statement filed in connection with any Demand Registration or Piggyback Registration, any underwriter and qualified independent underwriter, if any) with respect to any required registration or other qualification of securities under any state securities or "blue sky" laws.
(d) Any Person entitled to indemnification under this
Agreement shall notify promptly the indemnifying party in writing of the
commencement of any action or proceeding with respect to which a claim for
indemnification may be made pursuant to this Section 3.3, but the failure of any
indemnified party to provide such notice shall not relieve the indemnifying
party of its obligations under the preceding paragraphs of this Section 3.3,
except to the extent the indemnifying party is prejudiced thereby and shall not
relieve the indemnifying party from any liability that it may have to any
indemnified party other than under this Section 3.3. In case any action or
proceeding is brought against an indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, unless in the reasonable opinion of outside
counsel to the indemnified party a conflict of interest between such indemnified
and indemnifying parties may exist in respect of such claim, to assume the
defense thereof jointly with any other indemnifying party similarly notified, to
the extent that it chooses, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party that it so chooses, the indemnifying party shall not be liable
to such indemnified party for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that (i) if the
indemnifying party fails to take reasonable steps necessary to defend diligently
the action or proceeding within 20 days after receiving notice from such
indemnified party that the indemnified party believes it has failed to do so; or
(ii) if such indemnified party who is a defendant in any action or proceeding
that is also brought against the indemnifying party reasonably shall have
concluded that there may be one or more legal defenses available to such
indemnified party which are not available to the indemnifying party; or (iii) if
representation of both parties by the same counsel is otherwise inappropriate
under applicable standards of professional conduct, then, in any such case, the
indemnified party shall have the right to assume or continue its own defense as
set forth above (but with no more than one firm of counsel for all indemnified
parties in each jurisdiction, except to the extent any indemnified party or
parties reasonably shall have concluded that there may be legal defenses
available to such party or parties that are not available to the other
indemnified parties or to the extent representation of all indemnified parties
by the same counsel is otherwise inappropriate under applicable standards of
professional conduct) and the indemnifying party shall be liable for any
expenses therefor. No indemnifying party shall, without the written consent of
the indemnified party, which consent
shall not be unreasonably withheld, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or nor the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (A) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (B) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.
(e) If for any reason the foregoing indemnity is unavailable or is insufficient to hold harmless an indemnified party under Sections 3.3(a), 3.3(b) or 3.3(c), then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any Claim in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand from the relevant offering of securities. If, however, the allocation provided in the immediately preceding sentence is not permitted by applicable law, or if the indemnified party failed to give the notice required by Section 3.3(d) above and the indemnifying party is prejudiced thereby, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of but also the relative benefits received by the indemnifying party, on the one hand, and the indemnified party, on the other hand, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the Violation relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 3.3(e) were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the preceding sentences of this Section 3.3(e). The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything in this Section 3.3(e) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 3.3(e) to contribute any amount in excess of the gross proceeds received by such indemnifying party from the sale of Registrable Securities in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate.
(f) The indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution that any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of the Registrable Securities by any such party.
(g) The indemnification and contribution required by this
Section 3.3 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(h) In connection with underwritten offerings, the Company will use reasonable best efforts to negotiate terms of indemnification that are reasonably favorable to the various sellers pursuant thereto, as appropriate under the circumstances.
3.4 Holdback Agreement. (a) If requested in writing by the Company or the underwriter of any underwritten offering including, without limitation, an IPO, each Management Investor agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144, of any Registrable Securities or any other equity security of the Company or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering) within 14 days before or 180 days after the effective date of a registration statement or for such shorter period as the sole or lead managing underwriter or the Company shall request, in any such case, unless consented to by such underwriter or the Company, as applicable.
(b) If requested in writing by the underwriter of any
offering in connection with an underwritten Demand Registration, the Company
agrees not to effect any public sale or distribution (other than public sales or
distributions solely by and for the account of the Company of securities issued
(i) pursuant to any employee or director benefit or similar plan or any dividend
investment plan or (ii) in any acquisition by the Company) of any Registrable
Securities or any other Equity Security of the Company or of any security
convertible into or exchangeable or exercisable for any Equity Security of the
Company (in each case, other than as part of such underwritten public offering),
within 14 days before or 180 days after the effective date of a registration
statement filed in connection with a Demand Registration, or for such shorter
period as the sole or lead managing underwriter shall request, in any such case,
unless consented to by such underwriter.
3.5 Deferral. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to prepare and file, or cause to become effective, any registration statement pursuant to Section 3.1.2 at any time when, in the good faith judgment of the Board of Directors of the Company, the filing thereof at the time requested or the effectiveness thereof after filing should be delayed to permit the Company to include in the registration statement the Company's financial statements (and any required audit opinion thereon) for the then immediately preceding fiscal year or fiscal quarter, as the case may be. The filing of a registration statement by the Company cannot be deferred pursuant to the provisions of the immediately preceding sentence beyond the time that such financial statements (or any required audit opinion thereon) would be required to be filed with the SEC as part of the Company's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, if the Company were then obligated to file such reports. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to file a registration statement, or cause a registration statement previously filed pursuant to Section 3.1 to become effective, and may suspend sales by the holders of Registrable Securities under any registration that has previously become effective, at any time when, in the good faith judgment of the Board of Directors of the Company, it reasonably believes that the effectiveness of such registration statement or the offering of securities pursuant thereto would materially adversely affect a pending or proposed acquisition, merger, recapitalization, consolidation, reorganization or similar transaction or negotiations, discussions or pending proposals with respect thereto; provided, however, that deferrals pursuant to this sentence shall not exceed, in the aggregate, 120 days in any twelve-
month period. The filing of a registration statement, or any amendment or supplement thereto, by the Company cannot be deferred, and the rights of holders of Registrable Securities to make sales pursuant to an effective registration statement cannot be suspended, pursuant to the provisions of the immediately preceding sentence for more than 30 days after the abandonment or the consummation of any of the foregoing proposals or transactions, unless invoked under new circumstances.
ARTICLE IV
LIMITED CALL AND PUT RIGHTS
4.1 Company Call Rights. If a Management Investor's employment by the Company and each of its subsidiaries (or its respective successor under the Employment Agreement, if any) is terminated by the Company or its subsidiaries (or their respective successors) for Cause (as defined in such Management Investor's Employment Agreement or, if such Management Investor does not have an Employment Agreement, in any analogous provision of any employment, compensation or benefit agreement or arrangement, if any, and if not so defined, upon the good faith determination of the Board of Directors of the Company) or is terminated by the Management Investor for any reason (other than upon the failure of the Company to renew the Management Investor's Employment Agreement (and provided that the Management Investor is not otherwise in breach thereof at the time of such non-renewal and has continued his employment through the employment term (a "Non-Renewal Event")) or his retirement as provided for below), the Company shall have the right, at its election, to purchase all or a portion of the Management Investor's Shares (including any Shares held by its Permitted Transferees) at any time and from time to time (but no later than the earlier of four years after such termination or the occurrence of a Change of Control) at a price equal to the lower of the Cost Price and Fair Market Value of such shares as of the date of exercise of the call right by the Company (the "Call Date"), as may be adjusted below; provided that in the case of any Shares realized by a Management Investor in connection with the exercise of any Option-A Tranche the Cost Price shall be $10.00 per share. Upon the death or disability of a Management Investor, a Non-Renewal Event or the retirement by the Executive after satisfactory service with the Company through to the normal retirement date provided for in any Company retirement plan or if earlier such date as may otherwise be acceptable to the Company, the Company shall have the right, at its election, to purchase all or a portion of the Management Investor's Shares (including any Shares held by its Permitted Transferees) at any time and from time to time (but no later than the earlier of four years or the occurrence of a Change of Control) after such termination at a price equal to the Fair Market Value of such Shares determined as of the Call Date, as may be adjusted below. Notwithstanding the foregoing two sentences, if a Management Investor violates any obligation not to compete with the Company or its Affiliates or otherwise engages in activities in violation of the Management Investor's continuing obligation to the Company or its Affiliates (whether during or within 18 months of termination of the Management Investor's employment with the Company or any of its Affiliates), the Company shall have the right, at its election, to purchase all or a portion of the Management Investor's Shares (including any Shares held by its Permitted Transferees) at any time and from time to time (but no later than four years after such termination or the occurrence of a Change of Control) at a price equal to the lower of Cost Price and Fair Market Value of such Shares, subject in all cases to the specific provisions, if any, regarding option and equity forfeiture for breach of restrictive covenants agreed to in such
Management Investor's Employment Agreement, if any. The closings of such
purchases of Shares by the Company shall take place upon customary and
reasonable documents. Except where otherwise provided in such Management
Investors' Employment Agreement, if any, the Company shall pay the applicable
purchase price in cash to the extent that (a) such funds are available at the
Company (such availability to be determined by the Board of Directors in its
sole discretion) and (b) the Company is permitted to purchase such shares for
cash (under both applicable law and the credit and other material agreements of
the Company and its Subsidiaries) as follows: (A) in the case of a repurchase
for "Cost Price", the Company shall pay the purchase in cash within ninety (90)
days of Call Date, and (B) in the case of a repurchase for Fair Market Value (i)
as of the Call Date, the Company shall pay 80% of the initial estimated Fair
Market Value (the "Initial 80% Payment") as of the Call Date attributed by the
Board to the Management Investor's Shares to be repurchased (the "Call Shares")
and (ii) promptly after the third anniversary of the Call Date to the extent
that the Company and its outside consultants have confirmed what the actual Fair
Market Value of the Call Shares was as of the Call Date (the "Lookback Fair
Market Value"), the Company shall pay to the Management Investor (or his estate
or designee) an amount equal to the difference (if any) between (x) the Lookback
Fair Market Value and (y) the Initial 80% Payment. Any amount not permitted to
be paid in cash as a result of any of the restrictions set forth in the
preceding sentence may be paid for by the Company by delivery of a subordinated
note or other document evidencing a continuing obligation of the Company, and
the amount represented by such continuing obligation along with any accrued
interest shall be paid by the Company on or before the fifth (5th) anniversary
of the date of purchase (or such later date as may be necessary to permit the
Company to comply with any applicable borrowing covenants affecting its payment
obligations). Interest on such obligation shall accrue at the applicable federal
rate as defined in Section 1274(d) of the Internal Revenue Code of 1986, as
amended (the "APPLICABLE FEDERAL RATE"). The Board of Directors of the Company
may, in its discretion, assign the rights and obligations of the Company under
this Section 4.1 to any other Person, but no such assignment shall relieve the
Company of its obligations to the extent not satisfied by such assignee.
Notwithstanding the foregoing, with respect to any Shares, which as of the date
of purchase and sale pursuant to the call right set forth in this Section 4.1
(i) were purchased as the result of the exercise conversion or exchange of an
Option or other Equity Security or (ii) have not been owned by the respective
Management Investor for at least 180 days (in either case "Unmatured Shares"),
the closing of the purchase and sale of such Unmatured Shares shall be delayed
until a date at least 181 days following the acquisition by the respective
Management Investor (whether following the exercise of an Option or otherwise)
and the purchase price shall be determined at the time of such delayed closing.
Notwithstanding any provision of this Agreement to the contrary (including
Section 5.1.1 hereof), the rights of the Company to purchase any Shares
hereunder shall expire upon the seventh (7th) anniversary of the date of this
Agreement.
4.2 Limited Put with Respect to Option-A Tranche. If a Management Investor's employment by the Company and each of its subsidiaries (or its respective successor under the Employment Agreement, if any) is terminated by the Company or its subsidiaries (or their respective successors) for any reason, such Management Investor shall, following his termination, have the right, at his election in writing, to have the Company purchase all of the Management Investor's Shares that were acquired upon exercise of any Option-A Tranche (including any such Shares held by his Permitted Transferees) within ninety (90) days of such
termination at a per share price equal to the lower of $10.00 and the Fair
Market Value of such shares as of the date of exercise of the put right by the
Management Investor (the "Put Date"), as may be adjusted below; provided further
that with respect to any portion of the Option- A Tranche that is not yet
exercised as of such termination, Messrs Freudberg ("Freudberg") and March
("March") in their capacity as Management Investors may elect to have the
Company purchase the unexercised portion of their Option- A Tranche for a price
equal to the product of (x) the difference (if any) between (i) the lesser of
$10.00 and the Fair Market Value of such shares, minus (ii), $6.50, and (y) the
number of shares represented by the unexercised portion of the Option-A Tranche
(the "Net Option Settlement"), conditioned on the following: (A) the Net Option
Settlement shall not exceed $700,000 in the case of Freudberg and $196,260 in
the case of March, and (B) within 90 days from the execution of this Agreement,
the Board of Directors shall approve the Net Option Settlement arrangement
unless it determines, in its good faith reasonable judgment, that the
implementation of the Net Option Settlement arrangement will result in any
material adverse accounting consequences for the Company; and provided further
that if the Board of Directors does not approve the implementation of the Net
Option Settlement arrangement as described above, the Company (acting through
the Board of Directors), Freudberg and March shall cooperate in good faith to
implement promptly a mutually satisfactory alternative that would provide
Freudberg and March with the economic value, as of the Put Date, equal to the
Net Option Settlement. For purposes of the foregoing last proviso, and to the
extent otherwise permitted by law and subject to the exercise periods of the
Option-A Tranche, if the Company can identify a willing securities broker or
trader as of the Put Date, the Company, Freudberg and March agree that one
mutually satisfactory alternative shall be that if, as of the Put Date, (1) the
Shares are registered pursuant to Section 12(b) or 12(g) of the Exchange Act;
(2) the Shares are listed on a national securities exchange or interdealer
quotation system; and (3) the Fair Market Value of the Shares is greater than
$6.50, then, such securities broker or trader shall facilitate an open market
securities transaction in connection with the Shares underlying the Option-A
Tranche that will provide the Company with an amount equal to the exercise price
of the Shares then subject to the Option-A Tranche held by Freudberg or March,
as the case may be, and will provide Freudberg or March, as the case may be,
with all of the remaining proceeds from such securities transaction. The closing
of the purchase of such Shares by the Company shall take place upon customary
and reasonable documents. The Company shall pay the applicable purchase price in
cash to the extent that (a) such funds are available at the Company (such
availability to be determined by the Board of Directors in its sole discretion)
and (b) the Company is permitted to purchase such shares for cash (under both
applicable law and the credit and other material agreements of the Company and
its Subsidiaries) as follows: (A) in the case of a repurchase for "Cost Price",
the Company shall pay the purchase in cash within ninety (90) days of the Put
Date, and (B) in the case of a repurchase for Fair Market Value (i) as of the
Put Date, the Company shall pay 80% of the initial estimated Fair Market Value
(the "Initial 80% Payment") as of the Put Date attributed by the Board to the
Management Investor's Shares to be repurchased (the "Put Shares") and (ii)
promptly after the third anniversary of the Put Date to the extent that the
Company and its outside consultants have confirmed what the actual Fair Market
Value of the Put Shares was as of the Put Date (the "Lookback Fair Market
Value"), the Company shall pay to the Management Investor (or his estate or
designee) an amount equal to the difference (if any) between (x) the Lookback
Fair Market Value and (y) the Initial 80% Payment. Any amount not permitted to
be paid in cash as a result of any of the restrictions set forth in the
preceding sentence may be paid for by the
Company by delivery of a subordinated note or other document evidencing a
continuing obligation of the Company, and the amount represented by such
continuing obligation along with any accrued interest shall be paid by the
Company on or before the fifth (5th) anniversary of the date of purchase (or
such later date as may be necessary to permit the Company to comply with any
applicable borrowing covenants affecting its payment obligations). Interest on
such obligation shall accrue at the applicable federal rate as defined in
Section 1274(d) of the Internal Revenue Code of 1986, as amended (the
"APPLICABLE FEDERAL RATE"). The Board of Directors of the Company may, in its
discretion, assign the rights and obligations of the Company under this Section
4.2 to any other Person, but no such assignment shall relieve the Company of its
obligations to the extent not satisfied by such assignee. Notwithstanding the
foregoing, with respect to any Shares, which as of the date of purchase and sale
pursuant to the put right set forth in this Section 4.2 either (i) were
purchased as the result of the exercise conversion or exchange of an Option-A
Tranche or (ii) have not been owned by the respective Management Investor for at
least 180 days (in either case "Unmatured Shares"), the closing of the purchase
and sale of such Unmatured Shares shall be delayed until a date at least 181
days following the acquisition by the respective Management Investor (whether
following the exercise of an Option or otherwise) and the purchase price shall
be determined at the time of such delayed closing. Notwithstanding any provision
of this Agreement to the contrary (including Section 5.1.1 hereof), the
obligation of the Company to purchase any Shares hereunder shall expire upon the
fifth (5th) anniversary of the date of this Agreement.
ARTICLE V
MISCELLANEOUS
5.1 Effectiveness; Term.
5.1.1 This Agreement shall become effective as of _______, 2003 (the "EFFECTIVE DATE") and the rights and obligations of, and restrictions on, the Management Investors under Article II shall terminate when the FPC Shareholder and its Affiliates no longer hold in the aggregate at least [10%] of the fully diluted Shares then outstanding (subject, however, to all obligations of the parties hereto which must be fulfilled prior to such event) and provided that in any event the provisions of Article IV shall continue for so long as provided for therein. Notwithstanding the foregoing, in the event the Company enters into any agreement to merge with or into any other Person or adopts any other plan of recapitalization, consolidation, reorganization or other restructuring transaction (other than in connection with any initial public offering by the Company) as a result of which the Management Investors and their respective Permitted Transferees (including the FPC Shareholder and any Affiliates thereof) shall own less than a majority of the outstanding voting power of the entity surviving such transaction, this Agreement shall terminate.
5.1.2 Notwithstanding anything in Section 5.1.1 to the contrary, the provisions contained in Article III shall continue to remain in full force and effect until the date hereof and the date on which there are no longer any Registrable Securities outstanding or issuable or thereafter available for or subject to issuance to any Management Investors upon exercise or
conversion of any Options, rights or other convertible securities; provided, however, that the provisions of Section 3.3 shall survive termination pursuant to Section 5.1.1 or this Section 5.1.2.
5.2 No Voting or Conflicting Agreements. Prior to an IPO, no Management Investor shall grant any proxy or enter into or agree to be bound by any voting trust with respect to the Shares nor, at any time, shall any Management Investor enter into any shareholder agreements or arrangements of any kind with any Person with respect to the Shares inconsistent with the provisions of this Agreement (whether or not such agreements and arrangements are with holders of Shares that are not parties to this Agreement). The foregoing prohibition includes, but is not limited to, agreements or arrangements with respect to the acquisition, disposition or voting of Shares inconsistent with the provisions of this Agreement. No Management Investor shall act, any time, for any reason, as a member of a group or in concert with any other Persons in connection with the acquisition, disposition or voting of Shares in any manner that is inconsistent with the provisions of this Agreement.
5.3 Approval of Share Incentive Plan by Management Investors. The Management Investors, by their execution of this Agreement, hereby approve the Share Incentive Plan copies of which are attached to this Agreement as Exhibit A.
5.4 Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and, accordingly, agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement. Any remedy under this Section 5.4 is subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought.
5.5 Notices. All notices, statements, instructions or other documents required to be given hereunder shall be in writing and shall be given either personally or by mailing the same in a sealed envelope, by overnight courier or by telecopy, addressed to the Company at its principal offices and to the other parties at their addresses reflected on the signature pages hereto. Each party hereto, by written notice given to the other parties hereto in accordance with this Section 5.5, may change the address to which notices, statements, instructions or other documents are to be sent to such party. All notices, statements, instructions and other documents hereunder that are mailed or telecopied shall be deemed to have been given on the date of mailing or, in the case of telecopying, upon confirmation of receipt.
5.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties, and their respective permitted successors and assigns. If any Management Investor or any Transferee of any Management Investor shall acquire any Shares in any manner, whether by operation of law or otherwise, such Shares shall be held subject to all of the terms of this Agreement, and, by taking and holding such Shares, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement.
5.7 Recapitalizations and Exchanges Affecting Shares. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Shares, to any and all
other shares in the capital of the Company and all Equity Securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) that may be issued in respect of, in exchange for, or in substitution of, Shares or Equity Securities, or that may be issued by reason of any share dividend, share split, reverse share split, combination, recapitalization, reclassification or otherwise. Upon the occurrence of any of such events, numbers of Shares and amounts hereunder and any other appropriate terms shall be appropriately adjusted, as determined in good faith by the Board of Directors of the Company.
5.8 Governing Law. This Agreement shall be governed and construed and enforced in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof.
5.9 Descriptive Headings, Etc. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Agreement otherwise requires, references to "hereof," "herein," "hereby," "hereunder" and similar terms shall refer to this entire Agreement.
5.10 Amendment. This Agreement may not be amended or supplemented, except by an instrument in writing signed by the Company, the FPC Shareholder and by Management Investors holding a majority of the then, outstanding Shares held by all Management Investors; provided, however, that any amendment supplement or modification of this Agreement that adversely affects the rights and obligations of any particular Management Investor (an "AFFECTED HOLDER") or group thereof, as a class, differently than those of the other Management Investors shall also require the approval of Affected Holders holding a majority of the outstanding Shares held by all such Affected Holders. The foregoing notwithstanding, the Company, without the consent of any other party hereto, may amend Schedule I and the signature pages hereto, and enter into Joinder Agreements in order to add any Management Investor or any other party that becomes a holder of Shares or securities convertible into or exercisable for Shares and to reflect Transfers permitted under this Agreement.
5.11 Additional Issuances; Joinder. Any Person that is not already a party to this Agreement in the same shareholder capacity as such Person would be following the Transfer and who is acquiring any Equity Securities (except for any acquisition thereof (a) in an offering registered under the Securities Act or (b) in a Rule 144 Transaction) shall on or before the transfer or issuance to it of such Equity Securities, sign and deliver to the Company a Joinder Agreement and shall thereby become a party to this Agreement. If such Person meets the definition of an Affiliate of the FPC Shareholder (other than by reason of holding the Shares), then such Person shall be treated as comprising the FPC Shareholder hereunder. If such Person meets the definition of a Management Investor, such Person shall be treated as a Management Investor hereunder. The Company shall endeavour to require each Person acquiring an Option, warrant or other right to purchase Shares or other Equity Securities under any option or other equity participation plan to execute a Joinder Agreement.
5.12 Severability. If any term or provision of this Agreement shall to any extent be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law. Upon the determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to affect their original intent as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.
5.13 Further Assurances. The parties hereto shall from time to time execute and deliver all such further documents and do all acts and things as the other parties may reasonably require to effectively carry out or better evidence or perfect the full intent and meaning of this Agreement, including, to the extent necessary or appropriate, using all reasonable efforts to cause the amendment of the Articles of the Company in order to provide for the enforcement of this Agreement in accordance with its terms. In furtherance and not in limitation of the foregoing, in the event of any amendment, modification or termination of this Agreement in accordance with its terms, the Board of Directors of the Company shall meet within 30 days following such amendment, modification or termination or as soon thereafter as is practicable for the purpose of amending the Articles of the Company, as may be required as a result of such amendment, modification or termination, and, to the extent required by law, proposing such amendments to the shareholders entitled to vote thereon, and such action shall be the first action to be taken at such meeting.
5.14 Complete Agreement; Counterparts. This Agreement (together with the Share Incentive Plan, the Employment Agreements and the other agreements referred to herein and therein) constitutes the entire agreement and supersedes all other agreements and understandings, both written and oral, among the parties or any of them, with respect to the subject matter hereof. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
5.15 Certain Transactions. The parties hereto agree that Fox Paine & Company, LLC shall have the right to perform all consulting, financing, investment banking and similar services for the Company and its subsidiaries, for customary compensation (as determined by the Board of Directors of the Company in its sole discretion) and on other terms that are customary for similar engagements with unaffiliated third parties, and neither the Company nor its subsidiaries shall engage any other Person to perform such services during the term of this Agreement, except to the extent Fox Paine & Company, LLC shall consent thereto or shall decline, at its sole election, to perform such services; in any such case, so long as FPC holds at least [10%] of the outstanding Shares.
5.16 No Third-Party Beneficiaries. The provisions of this Agreement shall be only for the benefit of the parties to this Agreement, and no other Person (other than any indemnified party with respect to Section 3.3) shall have any third-party beneficiary or other right hereunder.
[SIGNATURES ON FOLLOWING PAGES]
MANAGEMENT SHAREHOLDERS' AGREEMENT
COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.
THE COMPANY:
VIGILANT INTERNATIONAL, LTD.
By: /s/ Troy W. Thacker
------------------------------------
Name: Troy W. Thacker
Title: President
|
FPC SHAREHOLDER:
U.N. HOLDINGS (CAYMAN), LTD.
By: /s/ Troy W. Thacker
-------------------------------
Name: Troy W. Thacker
Title: Director
|
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ James B. McCreesh ------------------------------------ Name: James B. McCreesh |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Seth D. Freudberg ------------------------------------- Name: Seth D. Freudberg |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Kevin L. Tate ------------------------------------ Name: Kevin L. Tate |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ William F. Schmidt -------------------------------------- Name: William F. Schmidt |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Robert Cohen ------------------------------------- Name: Robert Cohen |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Jonathan P. Ritz ------------------------------------------ Name: Jonathan P. Ritz |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Jerry E. Hart ------------------------------------ Name: Jerry E. Hart |
MANAGEMENT SHAREHOLDERS' AGREEMENT
CONTINUATION OF COUNTERPART SIGNATURE PAGES
MANAGEMENT INVESTORS
IN WITNESS WHEREOF, the parties below have executed this Agreement as of the first date set forth above.
/s/ Richard S. March ------------------------------------------ Name: Richard S. March |
SCHEDULE I
MANAGEMENT INVESTORS
Cohen, Robert
Freudberg, Seth D.
Hart, Jerry
March, Richard S.
McCreesh, James B.
Ritz, Jonathan
Schmidt, William F.
Tate, Kevin L.
EXHIBIT 10.3
FOX PAINE & COMPANY, LLC
950 Tower Lane
Suite 1150
Foster City, California 94404
THE AMC GROUP, L.P.
555 Croton Road, Suite 300
King of Prussia, Pennsylvania 19406
September 5, 2003
Vigilant International, Ltd.
c/o Fox Paine Capital Fund II International, L.P.
950 Tower Lane
Suite 1150
Foster City, California 94404
RE: MANAGEMENT AGREEMENT
Ladies and Gentlemen:
We refer to the Amended and Restated Investment Agreement, dated as of September 5, 2003 (the "Investment Agreement"), by and among U.N. Holdings (Cayman), Ltd., an exempted company formed with limited liability under the laws of the Cayman Islands, Vigilant International, Ltd., an exempted company formed with limited liability under the laws of the Cayman Islands (the "Company"), U.N. Holdings II, Inc., a Delaware corporation, U.N. Holdings LLC, a Delaware limited liability company, U.N. Holdings Inc., a Delaware corporation, Wind River Investment Corporation, a Delaware corporation ("Wind River"), and those Trusts listed on Schedule A thereto. As a result of transactions contemplated by the Investment Agreement, Fox Paine Capital Fund II International, L.P., a Cayman Islands exempted limited partnership (collectively with its affiliates, the "Funds"), will acquire indirect beneficial ownership of a majority of Common Shares (as defined in the Investment Agreement) and Preferred Shares (as defined in the Investment Agreement) of the Company (collectively, the "Shares").
In connection with the ongoing operations of the Company subsequent to the consummation of the transactions contemplated by the Investment Agreement, the Company agrees to pay (1) Fox Paine & Company, LLC, a Delaware limited liability company ("Fox Paine"), an annual fee equal to $1,200,000 (provided, however, that annual fee for the year beginning on September 5, 2003 shall be equal to $13,200,000) and (2) The AMC Group, L.P., a Pennsylvania limited partnership ("AMC" and, together with Fox Paine, the "Advisors"), an annual fee equal to $300,000 (together with the fee payable under (1), the "Annual Services Fees"), in each case, as compensation for Advisors' ongoing provision of certain financial and strategic consulting, advisory and other services to the Company and its affiliates including without limitation AMC's
Vigilant International, Ltd.
September 5, 2003
provision of the transition services set forth on Schedule A (the "Services") and subject to adjustment as provided in the next sentence. The portion of the Annual Services Fees payable to AMC for any year shall be reduced by an amount equal to the excess of (a) $300,000 over (b) $300,000 multiplied by a fraction, the numerator of which is the number of Shares beneficially owned by the Trusts and their affiliates on the date such Annual Services Fee is payable, and the denominator of which is 6,000,000 (as appropriately adjusted in the event of stock splits, consolidations, reorganization, distributions in kind and other similar events), and the portion of the Annual Services Fees payable to Fox Paine shall be increased by an equal amount such that the aggregate Annual Services Fees are equal to $1,500,000.
The Annual Services Fee with respect to each twelve month period
beginning on September 5 of each year shall be billed to the Company by the
Advisors and payable on or before November 1 of such year (each, a "Payment
Date"); provided, however, that the Annual Services Fee for the year beginning
on September 5, 2003 shall be due and payable in full at the closing of the
transactions contemplated by the Investment Agreement. Such Annual Services Fees
shall continue to be payable until the earlier of (1) such time as the Funds no
longer hold an indirect equity investment in the Company and (2) such time as
the Advisors and the Company agree in writing to modify or terminate the
arrangements contemplated hereby. Notwithstanding the foregoing, no Annual
Services Fee payable in respect of any year shall be paid on the applicable
Payment Date if on the most recent preceding Interest Payment Date (as defined
in Wind River's 5% Senior Notes due 2015 (the "Senior Notes")) Wind River did
not pay in full and in cash the interest on the Senior Notes with respect to the
year preceding such Payment Date. Any Annual Services Fees not paid as a result
of the preceding sentence, together with interest thereon accruing from the
applicable Payment Date at the Prime Rate from time to time announced by
Citibank, N.A., shall be deferred and shall be payable from time to time in
accordance with the following sentence. Such deferred Annual Services Fee shall
be paid (a) at such times as Additional Principal Amount (as defined in the
Senior Notes) is repaid in cash (it being expressly understood and agreed that,
for the purposes of this sentence, any payments in respect of the principal of
the Senior Notes shall be first applied to any Additional Principal Amount) and
(b) in such amounts that bear the same proportion to the aggregate amount of
such deferred Annual Services Fees (together with accrued interest thereon) as
the amount of Additional Principal Amount that is repaid in cash bears to the
aggregate amount of unpaid Additional Principal Amount.
In addition, the Company will reimburse the Advisors for their and their affiliates' documented out-of-pocket expenses in connection with the provision of any Services. The parties hereto acknowledge that the Services contemplated hereby, and the Annual Service Fee payable therefor, shall not include investment banking or other similar services that may be provided to the Company and its affiliates from time to time by the Advisors and their affiliates, or any transaction fees that may be payable in connection with any such services. Payments made by the Company pursuant to this letter agreement shall be made by wire transfer of immediately available funds to such account as the Advisors shall designate to the Company in writing from time to time.
Vigilant International, Ltd.
September 5, 2003
The Advisors may assign their rights and delegate their obligations hereunder, in whole or in part, to any of their present or future affiliates, and shall provide written notice to the Company of any such assignment.
Simultaneously herewith, the parties hereto are entering into an indemnification letter, dated as of the date hereof (the "Indemnification Letter"). The Indemnification Letter shall survive any termination, expiration or assignment of this letter agreement.
This letter agreement shall be governed by and construed and enforced
in accordance with the laws of the State of New York without regard to choice of
law or conflicts of law principles. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this letter agreement or the transactions contemplated hereby may be
brought in any federal court located in the State of New York or any New York
state court, and each of the parties hereto hereby (1) consents and submits
itself and its property to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding,
(2) consents to and submits itself and its property to the personal jurisdiction
of such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding, and (3) irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient forum. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. We and you (on your behalf and, to the extent
permitted by applicable law, on behalf of your stockholders and creditors) waive
all right to trial by jury in any action, proceeding or counterclaim (whether
based upon contract, tort or otherwise) related to or arising out of or in
connection with this letter agreement or our engagement.
[SIGNATURE PAGE FOLLOWS]
Vigilant International, Ltd.
September 5, 2003
Please confirm that the foregoing is in accordance with your understanding and agreement with the Advisors by signing a copy of this letter agreement in the space provided below.
Very truly yours,
FOX PAINE & COMPANY, LLC
By: /s/ Troy W. Thacker
----------------------------------
Name: Troy W. Thacker
Title: Authorized Person
|
THE AMC GROUP, L.P.,
By: The AMC Group, LLC, its general partner
By: /s/ Timothy J. Dwyer
-------------------------------
Name: Timothy J. Dwyer
Title: Vice President
|
ACCEPTED AND AGREED AS OF
THE DATE FIRST ABOVE WRITTEN:
VIGILANT INTERNATIONAL, LTD.
By: /s/ Troy W. Thacker
--------------------------
Name: Troy W. Thacker
Title: Authorized Person
|
SCHEDULE A
Transition Services
To allow for the continuity of the business of Wind River and its subsidiaries following the consummation of the transactions contemplated by the Investment Agreement, to the extent legally permissible and not prohibited or restricted in any way under the relevant licensing agreements, AMC will continue to provide Wind River with access to the following software licensed by AMC (the "Transition Services"):
- Best "FAS Asset Accounting" software through December 31, 2003; and
- Thomson "InSource CS Income Tax" software through the earlier of October 15, 2004 or the filing by UNIC of its state and federal tax returns.
There are no warranties by AMC relating to the Transition Services of any kind, express or implied including without limitation any implied warranties of merchantability or fitness for a particular purpose. AMC shall have no liability to Wind River and its subsidiaries or any of their respective affiliates in connection with the provision of the Transition Services.
FOX PAINE & COMPANY, LLC
950 Tower Lane
Suite 1150
Foster City, California 94404
THE AMC GROUP, L.P.
555 Croton Road, Suite 300
King of Prussia, Pennsylvania 19406
September 5, 2003
Vigilant International, Ltd.
c/o Fox Paine Capital Fund II International, L.P.
950 Tower Lane
Suite 1150
Foster City, California 94404
RE: INDEMNIFICATION AGREEMENT
Ladies and Gentlemen:
In connection with the engagement of Fox Paine & Company, LLC ("Fox Paine") and The AMC Group, L.P. ("AMC", and together with Fox Paine, the "Advisors") to assist Vigilant International, Ltd. (the "Company") with the matters set forth in the "Management Agreement" letter agreement, dated of even date herewith, by and among the Company and the Advisors, the Advisors and the Company are entering into this letter agreement. It is understood and agreed that in the event that either the Advisors or any of their members, partners, employees, agents, affiliates or controlling persons, if any (each of the foregoing, including the Advisors, being an "Indemnified Person"), becomes involved in any capacity in any action, claim, proceeding or investigation brought or threatened by or against any person, including you or your shareholders, financial advisors, underwriters or creditors, related to, arising out of or in connection with our engagement or any services provided by the Advisors or any other Indemnified Person to you or any of your affiliates, or based on any relationship among the foregoing, including without limitation the service by any employee of the Advisors as a director or officer of the Company or any of its affiliates (collectively, the "Services"), you will promptly reimburse, to the fullest extent permitted under applicable law, each such Indemnified Person for his, her or its legal and other costs and expenses (including the cost of any investigation and preparation, and any advances of expenses or other payments made by such Advisor or any of its affiliates to any other Indemnified Person under any indemnification agreement or similar arrangement between such Advisor and such other Indemnified Person) as and when they are incurred or advanced. You will, to the fullest extent permitted under applicable law, indemnify, defend and hold harmless each Indemnified Person from and against any losses, claims, damages, liabilities, costs or expenses to which any Indemnified Person may become subject under any applicable law or otherwise related to, arising out of or in connection with the Services, whether or not any pending or threatened action, claim, proceeding or investigation giving rise to such losses, claims, damages,
Vigilant International, Ltd.
September 5, 2003
liabilities or expense is initiated or brought by you or on your behalf and whether or not in connection with any action, proceeding or investigation in which you or such Indemnified Persons are a party, except to the extent that any such loss, claim, damage, liability or expense is found by a court of competent jurisdiction in a judgment which has become final in that it is no longer subject to appeal or review to have resulted primarily from such Indemnified Person's bad faith or gross negligence. You also agree that, to the fullest extent permitted under applicable law, no Indemnified Person shall have any liability (whether direct or indirect, in contract or otherwise) to you or your security holders or creditors related to, arising out of or in connection with the Services except to the extent that any loss, claim, damage or liability is found by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or review to have resulted primarily from such Indemnified Person's bad faith or gross negligence. If multiple claims are brought against us in any action, claim, proceeding or investigation related to, arising out of or in connection with our engagement, with respect to at least one of which such claims indemnification is permitted under this letter agreement and under applicable law, you agree that any award or judgment in connection therewith shall be conclusively deemed to be based on claims as to which indemnification is permitted and provided for hereunder, except to the extent such award or judgment expressly states that it, or any portion thereof, is based solely on a claim as to which indemnification is not available.
If for any reason the foregoing indemnification is held unenforceable, then you shall contribute to the loss, claim, damage, liability or expense for which such indemnification is held unenforceable in such proportion as is appropriate to reflect the relative benefits received, or sought to be received, by you on the one hand and the party entitled to contribution on the other hand in the matters contemplated by our engagement as well as the relative fault of yourselves and such party with respect to such loss, claim, damage, liability or expense and any other relevant equitable considerations. You agree that for the purposes hereof the relative benefits received, or sought to be received, by us shall be deemed to be approximately equal to the fee paid or proposed to be paid to us, if any, in connection with the related Services for which such payment is to be made. To the extent permitted by applicable law, in no event shall we or any other Indemnified Person be required to contribute an aggregate amount in excess of the aggregate fees actually paid to us for the Services with respect to which such payment is made. Your reimbursement, indemnity and contribution obligations under this letter shall be in addition to any liability which you may otherwise have, shall not be limited by any rights we or any other Indemnified Person may otherwise have and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of yourselves, ourselves, and any other Indemnified Persons.
You agree that, without our prior written consent (which will not be unreasonably withheld), you will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action, or proceeding or investigation in respect of which indemnification or contribution could be sought hereunder (whether or not we or any other Indemnified Persons are an actual or potential party to such claim, action or proceeding or investigation), unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action or proceeding or investigation. No waiver, amendment or other modification of this letter agreement shall be effective unless in
Vigilant International, Ltd.
September 5, 2003
writing and signed by each party to be bound thereby. This letter agreement and any claim related directly or indirectly to this letter agreement (including any claim concerning advice provided pursuant to this agreement) shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to choice of law or conflicts of law principles. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this letter agreement or the transactions contemplated hereby may be brought in any federal court located in the State of New York or any New York state court, and each of the parties hereto hereby (1) consents and submits itself and its property to the exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding, (2) consents to and submits itself and its property to the personal jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding, and (3) irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. We and you (on your behalf and, to the extent permitted by applicable law, on behalf of your stockholders and creditors) waive all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) related to or arising out of or in connection with this letter agreement. This letter agreement shall remain in effect indefinitely, notwithstanding any termination or expiration of the Management Agreement.
[SIGNATURE PAGE FOLLOWS]
Vigilant International, Ltd.
September 5, 2003
Please confirm that the foregoing is in accordance with your understandings and agreements with the Advisors by signing a copy of this letter agreement in the space provided below.
Very truly yours,
FOX PAINE & COMPANY, LLC
By: _____________________________________
Name:
Title:
THE AMC GROUP, L.P.,
By: The AMC Group, LLC, its general partner
By: _________________________________
Name:
Title:
ACCEPTED AND AGREED AS OF
THE DATE FIRST ABOVE WRITTEN:
VIGILANT INTERNATIONAL, LTD.
By: _________________________________
Name:
Title:
EXHIBIT 10.5
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and Seth D. Freudberg, an individual residing at 738 Cherry Circle, Wynnewood, PA 19096 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 1999 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the President and Chief Executive Officer of the Company, reporting to the Board of Directors of the Company (the "Board) and shall have responsibility for the general management and operation of the Company,
and shall have such other powers and duties as may from time to time be prescribed by the Board, provided that such duties are consistent with the Executive's position as President and Chief Executive Officer of the Company. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, and (ii) managing his personal investments and affairs, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $415,000 per year commencing as of January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive: (i) shall purchase 50,000 Class A Common Shares of Vigilant International, Ltd. ("Vigilant"), at an acquisition price of $500,000; (ii) shall receive a stock option grant for 200,000 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B; (iii) shall receive a time vesting stock option grant for 75,000 Class A Common Shares of Vigilant in the form of option grant attached as Schedule C; and (iv) shall receive a performance based stock
option grant for 125,000 Class A Common Shares of Vigilant in the form of option grant attached as Schedule D. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms, customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in
which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines, program-style insurance lines and/or reinsurance, (2) the insurance agency or brokerage business, (3) employs, contracts or consults with any managing general agent or producer of the Company and (4) any other material business of the Company or any of its affiliates as of the date of termination of the Executive's employment. In the event that this paragraph shall be determined by any court of competent jurisdiction to be unenforceable in part by reason of its being too great a period of time or covering too great a geographical area, it shall be in full force and in effect as to that period of time or geographical area determined to be reasonable by the court.
Notwithstanding anything to the contrary contained herein (A) other than in the
case of a termination of the Executive's employment for Cause hereunder, upon
termination of the Executive's employment by the Company without Cause or as a
result of his disability, the Executive may elect in writing to have the Company
acquire his then outstanding common stock and options in the Company at the
lower of cost or fair market value (as determined by the Board of the Company)
and in connection therewith execute a release, in form acceptable to the
Company, which releases the Company and its affiliates (including FPC and its
affiliates) from all obligations to make payments under Section 9 of this
Agreement, and upon compliance by the Executive with the foregoing obligations,
the Executive shall no longer be subject to the restrictions set forth in
subclauses (1) and (2) of this Section 7(a), and (B) in the event of termination
by the Company of the Executive's employment due to a disability, the Executive
shall no longer be subject to the restrictions in (1) and (2) of this Section
7(a) (but will no longer qualify for payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in irreparable injury to the Company for
which it shall have no adequate remedy in law and the Company shall, in addition
to any other remedy available to it and in lieu of Section 15 hereof, be
entitled to injunctive relief and specific performance in order to enforce the
provisions hereof. In addition to its other remedies, the Company shall be
entitled to reimbursement from the Executive and/or the Executive's employer of
costs incurred in securing a qualified replacement as a result of any breach by
the Executive of this Section. For purposes of this Agreement, "customer" shall
include, without limitation, any policyholder, managing general agent or
reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive substantially failing to perform his duties hereunder after notice from the Company and failure to cure such violation within 10 days of said notice (to the extent the Board reasonably determines such failure to perform is curable and subject to notice) or violating any material Company policies, including without limitation the Company's corporate governance and ethics guidelines, conflicts of interests policies and code of conduct applicable to all Company employees or senior executives, (ii) the engaging by the Executive in any malfeasance, fraud, dishonesty or gross misconduct adverse to the interests of the Company or its affiliates, (iii) the material violation by the Executive of any of the provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement after notice from Company and a failure to cure such violation within 10 days of said notice (including a "Forfeiture Event" as
provided for in Annex A hereto), (iv) a breach by the Executive of any representation or warranty contained herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v) the Board's determination that the Executive has exhibited incompetence or gross negligence in the performance of his duties hereunder, (vi) receipt of a final written directive or order of any governmental body or entity having jurisdiction over the Company requiring termination or removal of the Executive as President and Chief Executive Officer of the Company, or (vii) the Executive being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the
Company without Cause or if the Executive terminates his employment as a result
of (i) a written notice from the Company that its principal executive offices
are being relocated more than 90 miles from their current location or that the
Executive's principal place of employment is transferred to an office location
more than 90 miles from his then current place of employment (unless in either
case the effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence) and
(ii) the failure of the Company to offer the Executive a reasonable relocation
package to cover direct out-of-pocket losses (if any) on the sale of the
Executive's primary residence, and temporary living expenses and moving costs,
then the Company shall pay to the Executive, as full and complete liquidated
damages hereunder, an amount equal to the Executive's then monthly Annual Direct
Salary multiplied by twenty-four (24) months, with such amount payable in equal
monthly installments; provided that the amount and term of such payments is
subject to adjustment upon the Executive's acceptance of an equity compensation
package to be determined. The Company shall also maintain in full force and
effect, for the continued benefit of the Executive for the period in which the
Executive is receiving the foregoing payments, any medical or
health-and-accident plan or arrangement of the Company in which the Executive is
a participant at the time of such termination of employment; provided that the
Executive shall remain responsible for continuing to pay his share of the costs
of such
coverage; provided further that the Company shall not be under any duty to maintain such coverage if the Executive becomes eligible for coverage under any other employer's insurance and the Executive shall give the Company prompt notice of when such eligibility occurs. No payments or benefits shall be provided hereunder (i) unless and until the Company has first received a signed general release from the Executive in a form acceptable to the Company releasing the Company and Affiliates and any other parties identified by the Company and Affiliates therein, and (ii) to the extent that the Executive has breached any of his post-termination obligations hereunder.
10. REPRESENTATIONS AND WARRANTIES. In addition to any other representation and warranties contained herein, the Executive hereby represents and warrants that the representations and warranties made by the Executive in the Acquisition Documents (as defined below) do not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading. The term "Acquisition Documents" shall mean the Investment Agreement, dated as of May 1, 2003 among U.N. Holdings LLC, Wind River Investment Corporation and Those Trusts Listed on Schedule A (the "Investment Agreement"), the Stockholders Agreement, dated as of May 1, 2003 among Wind River Investment Corporation and The Stockholders Listed on the Signature Pages (the "Shareholders Agreement"), and all attachments, exhibits and other documents appended thereto (including the "Disclosure Letter" as defined in the Investment Agreement), as amended from time to time.
11. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Seth D. Freudberg
738 Cherry Circle
Wynnewood, PA 19096
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
Attn: General Counsel
With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
12. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company.
This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
13. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
14. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
15. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
16. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
17. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
18. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
19. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Kevin L. Tate By: /s/ Richard S. March
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Assistant Secretary Senior Vice President
WITNESS: Seth D. Freudberg
/s/ Robert Cohen By: /s/ Seth D. Freudberg
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A Common Shares of Vigilant International, Ltd. ("Vigilant") and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in
respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such stock or amount otherwise included in subclause (i) above.
EXHIBIT 10.6
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and Richard S. March, an individual residing at 41 Charles Lane, Cherry Hill, NJ 08003 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 1998 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the Senior Vice President and General Counsel of the Company, reporting to the President and Chief Executive
Officer ("CEO") of the Company and shall have such authority and duties, consistent with such position, as may from time to time be specified by the Board of Directors of the Company (the "Board") or CEO. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, (ii) managing his personal investments and affairs, and (iii) serving in a capacity as a certified arbitrator in disputes related to reinsurance or insurance during the Executive's personal time, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $320,000 per year commencing January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive (i) shall purchase 26,250 Class A Common Shares of Vigilant International, Ltd. ("Vigilant") at an acquisition price of $262,500, (ii) shall receive a stock option grant for 56,074 Class A Common
Shares of Holdings in the form of option grant attached as Schedule A, (iii) shall receive a time vesting stock option grant for 39,375 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B and (iv) shall receive a performance based stock option grant for 65,625 Class A Common Shares of Vigilant in the form of option grant attached as Schedule C. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms,
customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines,
program-style insurance lines and/or reinsurance, (2) the insurance agency or
brokerage business, (3) employs, contracts or consults with any managing general
agent or producer of the Company and (4) any other material business of the
Company or any of its affiliates as of the date of termination of the
Executive's employment. In the event that this paragraph shall be determined by
any court of competent jurisdiction to be unenforceable in part by reason of its
being too great a period of time or covering too great a geographical area, it
shall be in full force and in effect as to that period of time or geographical
area determined to be reasonable by the court. Notwithstanding anything to the
contrary contained herein (A) other than in the case of a termination of the
Executive's employment for Cause hereunder, upon termination of the Executive's
employment by the Company without Cause or as a result of his disability, the
Executive may elect in writing to have the Company acquire his then outstanding
common stock and options in the Company at the lower of cost or fair market
value (as determined by the Board of the Company) and in connection therewith
execute a release, in form acceptable to the Company, which releases the Company
and its affiliates (including FPC and its affiliates) from all obligations to
make payments under Section 9 of this Agreement, and upon compliance by the
Executive with the foregoing obligations, the Executive shall no longer be
subject to the restrictions set forth in subclauses (1) and (2) of this Section
7(a), and (B) in the event of termination by the Company of the Executive's
employment due to a disability, the Executive shall no longer be subject to the
restrictions in (1) and (2) of this Section 7(a) (but will no longer qualify for
payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in
irreparable injury to the Company for which it shall have no adequate remedy in law and the Company shall, in addition to any other remedy available to it and in lieu of Section 15 hereof, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. In addition to its other remedies, the Company shall be entitled to reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement as a result of any breach by the Executive of this Section. For purposes of this Agreement, "customer" shall include, without limitation, any policyholder, managing general agent or reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment
hereunder for Cause. For the purposes of this agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (i) the Executive
substantially failing to perform his duties hereunder after notice from the
Company and failure to cure such violation within 10 days of said notice (to the
extent the Board reasonably determines such failure to perform is curable and
subject to notice) or violating any material Company policies, including without
limitation the Company's corporate governance and ethics guidelines, conflicts
of interests policies and code of conduct applicable to all Company employees or
senior executives, (ii) the engaging by the Executive in any malfeasance, fraud,
dishonesty or gross misconduct adverse to the interests of the Company or its
affiliates, (iii) the material violation by the Executive of any of the
provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement
after notice from Company and a failure to cure such violation within 10 days of
said notice (including a "Forfeiture Event" as provided for in Annex A hereto),
(iv) a breach by the Executive of any representation or warranty contained
herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v)
the Board's determination that the Executive has exhibited incompetence or gross
negligence in the performance of his duties hereunder, (vi) receipt of a final
written directive or order of any governmental body or entity having
jurisdiction over the Company requiring termination or removal of the Executive
as Senior Vice President and General Counsel of the Company, or (vii) the
Executive being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the Company without Cause or if the Executive terminates his employment as a result of (i) a written notice from the Company that its principal executive offices are being relocated more than 90 miles from their current location or that the Executive's principal place of employment is transferred to an office location more than 90 miles from his then current place of employment (unless in either case the
effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence), and
(ii) the failure of the Company to offer the Executive a reasonable relocation
package to cover direct out-of-pocket losses (if any) on the sale of the
Executive's primary residence, and temporary living expenses and moving costs,
then the Company shall pay to the Executive, as full and complete liquidated
damages hereunder, an amount equal to the Executive's then monthly Annual Direct
Salary multiplied by eighteen (18) months, with such amount payable in equal
monthly installments; provided that the amount and term of such payments is
subject to adjustment upon the Executive's acceptance of an equity compensation
package to be determined. The Company shall also maintain in full force and
effect, for the continued benefit of the Executive for the period in which the
Executive is receiving the foregoing payments, any medical or
health-and-accident plan or arrangement of the Company in which the Executive is
a participant at the time of such termination of employment; provided that the
Executive shall remain responsible for continuing to pay his share of the costs
of such coverage; provided further that the Company shall not be under any duty
to maintain such coverage if the Executive becomes eligible for coverage under
any other employer's insurance and the Executive shall give the Company prompt
notice of when such eligibility occurs. No payments or benefits shall be
provided hereunder (i) unless and until the Company has first received a signed
general release from the Executive in a form acceptable to the Company releasing
the Company and Affiliates and any other parties identified by the Company and
Affiliates therein, and (ii) to the extent that the Executive has breached any
of his post-termination obligations hereunder.
10. REPRESENTATIONS AND WARRANTIES. In addition to any other representation and warranties contained herein, the Executive hereby represents and warrants that the representations and warranties made by the Executive in the Acquisition Documents (as defined below) do not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading. The term "Acquisition Documents" shall mean the Investment Agreement, dated as of May 1, 2003 among U.N. Holdings LLC, Wind River Investment Corporation and Those Trusts Listed on Schedule A (the "Investment Agreement"), the Stockholders Agreement, dated as of May 1, 2003 among Wind River Investment Corporation and The Stockholders Listed on the Signature Pages (the "Shareholders Agreement"), and all attachments, exhibits and other documents appended thereto (including the "Disclosure Letter" as defined in the Investment Agreement), as amended from time to time.
11. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Richard S. March
41 Charles Lane
Cherry Hill, New Jersey 08003
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
8
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Attn: General Counsel
With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
12. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company. This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
13. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
14. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
15. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
16. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
17. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
18. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
19. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Richard S. March By: /s/ Seth D. Freudberg
------------------------------- --------------------------------
Assistant Secretary President
WITNESS: Richard S. March
/s/ Robert Cohen By: /s/ Richard S. March
------------------------------- --------------------------------
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A Common Shares of Vigilant International, Ltd. ("Vigilant") and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of
Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such stock or amount otherwise included in subclause (i) above.
EXHIBIT 10.7
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and Kevin L. Tate, an individual residing at 305 Crum Creek Lane, Newtown Square, PA 19073 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 1998 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the Senior Vice President and Treasurer of the Company, reporting to the President and Chief Executive Officer
("CEO") of the Company and shall have such authority and duties, consistent with such position, as may from time to time be specified by the Board of Directors of the Company (the "Board") or CEO. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, (ii) managing his personal investments and affairs, and (iii) serving in a capacity as a certified arbitrator in disputes related to reinsurance or insurance during the Executive's personal time, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $237,500 per year commencing January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The initial bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive (i) shall purchase 26,250 Class A Common Shares of Vigilant International, Ltd. ("Vigilant") at an acquisition price of $262,500, (ii) shall receive a time vesting stock option grant for 39,375 of
Class A Common Shares of Vigilant in the form of option grant attached as Schedule A and (iii) shall receive a performance based stock option grant for 65,625 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms, customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and
procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines, program-style insurance lines and/or reinsurance, (2) the insurance agency or brokerage business, (3) employs, contracts or consults with any managing general agent or producer of the Company
and (4) any other material business of the Company or any of its affiliates as
of the date of termination of the Executive's employment. In the event that this
paragraph shall be determined by any court of competent jurisdiction to be
unenforceable in part by reason of its being too great a period of time or
covering too great a geographical area, it shall be in full force and in effect
as to that period of time or geographical area determined to be reasonable by
the court. Notwithstanding anything to the contrary contained herein (A) other
than in the case of a termination of the Executive's employment for Cause
hereunder, upon termination of the Executive's employment by the Company without
Cause or as a result of his disability, the Executive may elect in writing to
have the Company acquire his then outstanding common stock and options in the
Company at the lower of cost or fair market value (as determined by the Board of
the Company) and in connection therewith execute a release, in form acceptable
to the Company, which releases the Company and its affiliates (including FPC and
its affiliates) from all obligations to make payments under Section 9 of this
Agreement, and upon compliance by the Executive with the foregoing obligations,
the Executive shall no longer be subject to the restrictions set forth in
subclauses (1) and (2) of this Section 7(a), and (B) in the event of termination
by the Company of the Executive's employment due to a disability, the Executive
shall no longer be subject to the restrictions in (1) and (2) of this Section
7(a) (but will no longer qualify for payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in irreparable injury to the Company for
which it shall have no adequate remedy in law and the Company shall, in addition
to any other remedy available to it and in lieu of Section 15 hereof, be
entitled to injunctive relief and specific performance in order to enforce the provisions hereof. In addition to its other remedies, the Company shall be entitled to reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement as a result of any breach by the Executive of this Section. For purposes of this Agreement, "customer" shall include, without limitation, any policyholder, managing general agent or reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this agreement, the Company shall have "Cause" to terminate the
Executive's employment hereunder upon (i) the Executive substantially failing to
perform his duties hereunder after notice from the Company and failure to cure
such violation within 10 days of said notice (to the extent the Board reasonably
determines such failure to perform is curable and subject to notice) or
violating any material Company policies, including without limitation the
Company's corporate governance and ethics guidelines, conflicts of interests
policies and code of conduct applicable to all Company employees or senior
executives, (ii) the engaging by the Executive in any malfeasance, fraud,
dishonesty or gross misconduct adverse to the interests of the Company or its
affiliates, (iii) the material violation by the Executive of any of the
provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement
after notice from Company and a failure to cure such violation within 10 days of
said notice (including a "Forfeiture Event" as provided for in Annex A hereto),
(iv) a breach by the Executive of any representation or warranty contained
herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v)
the Board's determination that the Executive has exhibited incompetence or gross
negligence in the performance of his duties hereunder, (vi) receipt of a final
written directive or order of any governmental body or entity having
jurisdiction over the Company requiring termination or removal of the Executive
as Senior Vice President and Treasurer of the Company, or (vii) the Executive
being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the
Company without Cause or if the Executive terminates his employment as a result
of (i) a written notice from the Company that its principal executive offices
are being relocated more than 90 miles from their current location or that the
Executive's principal place of employment is transferred to an office location
more than 90 miles from his then current place of employment (unless in either
case the effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence), and
(ii) the failure of the Company to offer the
Executive a reasonable relocation package to cover direct out-of-pocket losses (if any) on the sale of the Executive's primary residence, and temporary living expenses and moving costs, then the Company shall pay to the Executive, as full and complete liquidated damages hereunder, an amount equal to the Executive's then monthly Annual Direct Salary multiplied by eighteen (18) months, with such amount payable in equal monthly installments; provided that the amount and term of such payments is subject to adjustment upon the Executive's acceptance of an equity compensation package to be determined. The Company shall also maintain in full force and effect, for the continued benefit of the Executive for the period in which the Executive is receiving the foregoing payments, any medical or health-and-accident plan or arrangement of the Company in which the Executive is a participant at the time of such termination of employment; provided that the Executive shall remain responsible for continuing to pay his share of the costs of such coverage; provided further that the Company shall not be under any duty to maintain such coverage if the Executive becomes eligible for coverage under any other employer's insurance and the Executive shall give the Company prompt notice of when such eligibility occurs. No payments or benefits shall be provided hereunder (i) unless and until the Company has first received a signed general release from the Executive in a form acceptable to the Company releasing the Company and Affiliates and any other parties identified by the Company and Affiliates therein, and (ii) to the extent that the Executive has breached any of his post-termination obligations hereunder.
10. REPRESENTATIONS AND WARRANTIES. In addition to any other representation and warranties contained herein, the Executive hereby represents and warrants that the representations and warranties made by the Executive in the Acquisition Documents (as defined below) do not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading. The term "Acquisition Documents" shall mean the Investment Agreement, dated as of May 1, 2003 among U.N. Holdings LLC, Wind River Investment Corporation and Those Trusts Listed on Schedule A (the "Investment Agreement"), the Stockholders Agreement, dated as of May 1, 2003 among Wind River Investment Corporation and The Stockholders Listed on the Signature Pages (the "Shareholders Agreement"), and all attachments, exhibits and other documents appended thereto (including the "Disclosure Letter" as defined in the Investment Agreement), as amended from time to time.
11. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Kevin L. Tate
305 Crum Creek Lane
Newtown Square, PA 19073
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
Attn: General Counsel
8
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With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
12. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company. This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
13. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
14. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
15. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
16. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
17. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
18. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
19. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Richard S. March By:/s/ Seth D. Freudberg
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Assistant Secretary President
WITNESS: Kevin L. Tate
/s/ Richard S. March By:/s/ Kevin L. Tate
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A Common Shares of Vigilant International, Ltd. ("Vigilant"), and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in
respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of Stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such Stock or amount otherwise included in subclause (i) above.
EXHIBIT 10.8
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and Robert Cohen, an individual residing at 622 Chatsworth Drive, Ambler, PA 19002 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 1998 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the Senior Vice President - Marketing of the Company, reporting to the President and Chief Executive Officer
("CEO") of the Company and shall have such authority and duties, consistent with such position, as may from time to time be specified by the Board of Directors of the Company (the "Board") or CEO. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, (ii) managing his personal investments and affairs, and (iii) serving in a capacity as a certified arbitrator in disputes related to reinsurance or insurance during the Executive's personal time, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $255,000 per year commencing January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The initial bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive (i) shall purchase 26,250 Class A Common Shares of Vigilant International, Ltd. ("Vigilant") at an acquisition price of $262,500, (ii) shall receive a time vesting stock option grant for 39,375 Class
A Common Shares of Vigilant in the form of option grant attached as Schedule A and (iii) shall receive a performance based stock option grant for 65,625 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms, customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and
procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines, program-style insurance lines and/or reinsurance, (2) the insurance agency or brokerage business, (3) employs, contracts or consults with any managing general agent or producer of the Company
and (4) any other material business of the Company or any of its affiliates as
of the date of termination of the Executive's employment. In the event that this
paragraph shall be determined by any court of competent jurisdiction to be
unenforceable in part by reason of its being too great a period of time or
covering too great a geographical area, it shall be in full force and in effect
as to that period of time or geographical area determined to be reasonable by
the court. Notwithstanding anything to the contrary contained herein (A) other
than in the case of a termination of the Executive's employment for Cause
hereunder, upon termination of the Executive's employment by the Company without
Cause or as a result of his disability, the Executive may elect in writing to
have the Company acquire his then outstanding common stock and options in the
Company at the lower of cost or fair market value (as determined by the Board of
the Company) and in connection therewith execute a release, in form acceptable
to the Company, which releases the Company and its affiliates (including FPC and
its affiliates) from all obligations to make payments under Section 9 of this
Agreement, and upon compliance by the Executive with the foregoing obligations,
the Executive shall no longer be subject to the restrictions set forth in
subclauses (1) and (2) of this Section 7(a), and (B) in the event of termination
by the Company of the Executive's employment due to a disability, the Executive
shall no longer be subject to the restrictions in (1) and (2) of this Section
7(a) (but will no longer qualify for payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in irreparable injury to the Company for
which it shall have no adequate remedy in law and the Company shall, in addition
to any other remedy available to it and in lieu of Section 15 hereof, be
entitled to injunctive relief and specific performance in order to enforce the provisions hereof. In addition to its other remedies, the Company shall be entitled to reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement as a result of any breach by the Executive of this Section. For purposes of this Agreement, "customer" shall include, without limitation, any policyholder, managing general agent or reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive substantially failing to perform his
duties hereunder after notice from the Company and failure to cure such
violation within 10 days of said notice (to the extent the Board reasonably
determines such failure to perform is curable and subject to notice) or
violating any material Company policies, including without limitation the
Company's corporate governance and ethics guidelines, conflicts of interests
policies and code of conduct applicable to all Company employees or senior
executives, (ii) the engaging by the Executive in any malfeasance, fraud,
dishonesty or gross misconduct adverse to the interests of the Company or its
affiliates, (iii) the material violation by the Executive of any of the
provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement
after notice from Company and a failure to cure such violation within 10 days of
said notice (including a "Forfeiture Event" as provided for in Annex A hereto),
(iv) a breach by the Executive of any representation or warranty contained
herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v)
the Board's determination that the Executive has exhibited incompetence or gross
negligence in the performance of his duties hereunder, (vi) receipt of a final
written directive or order of any governmental body or entity having
jurisdiction over the Company requiring termination or removal of the Executive
as Senior Vice President - Ceded Reinsurance of the Company, or (vii) the
Executive being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the
Company without Cause or if the Executive terminates his employment as a result
of (i) a written notice from the Company that its principal executive offices
are being relocated more than 90 miles from their current location or that the
Executive's principal place of employment is transferred to an office location
more than 90 miles from his then current place of employment (unless in either
case the effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence), and
(ii) the failure of the Company to offer the Executive a reasonable relocation
package to cover direct out-of-pocket losses (if any) on the sale
of the Executive's primary residence, and temporary living expenses and moving costs, then the Company shall pay to the Executive, as full and complete liquidated damages hereunder, an amount equal to the Executive's then monthly Annual Direct Salary multiplied by eighteen (18) months, with such amount payable in equal monthly installments; provided that the amount and term of such payments is subject to adjustment upon the Executive's acceptance of an equity compensation package to be determined. The Company shall also maintain in full force and effect, for the continued benefit of the Executive for the period in which the Executive is receiving the foregoing payments, any medical or health-and-accident plan or arrangement of the Company in which the Executive is a participant at the time of such termination of employment; provided that the Executive shall remain responsible for continuing to pay his share of the costs of such coverage; provided further that the Company shall not be under any duty to maintain such coverage if the Executive becomes eligible for coverage under any other employer's insurance and the Executive shall give the Company prompt notice of when such eligibility occurs. No payments or benefits shall be provided hereunder (i) unless and until the Company has first received a signed general release from the Executive in a form acceptable to the Company releasing the Company and Affiliates and any other parties identified by the Company and Affiliates therein, and (ii) to the extent that the Executive has breached any of his post-termination obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Jonathan Ritz
1212 Hamilton
West Chester, PA 19380
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
Attn: General Counsel
With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
11. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company. This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
12. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
13. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
14. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
15. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
16. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
17. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
18. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Richard S. March By: /s/ Seth D. Freudberg
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Assistant Secretary President
WITNESS: Jonathan Ritz
/s/ Richard S. March By: /s/ Jonathan Ritz
------------------------------ -------------------------------
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A common shares of Vigilant International, Ltd. ("Vigilant") and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in
respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such stock or amount otherwise included in subclause (i) above.
EXHIBIT 10.9
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and William F. Schmidt, an individual residing at 1420 Lexington Drive, Maple Glen, PA 19002 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 1998 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the Senior Vice President - Underwriting of the Company, reporting to the President and Chief Executive Officer
("CEO") of the Company and shall have such authority and duties, consistent with such position, as may from time to time be specified by the Board of Directors of the Company (the "Board") or CEO. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, (ii) managing his personal investments and affairs, and (iii) serving in a capacity as a certified arbitrator in disputes related to reinsurance or insurance during the Executive's personal time, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $245,000 per year commencing January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive (i) shall purchase 26,250 Class A Common Shares of Vigilant International, Ltd.("Vigilant") at an acquisition price of $262,500, (ii) shall receive a time vesting stock option grant for 39,375 Class
A Common Shares of Vigilant in the form of option grant attached as Schedule A and (iii) shall receive a performance based stock option grant for 65,625 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms, customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and
procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines, program-style insurance lines and/or reinsurance, (2) the insurance agency or brokerage business, (3) employs, contracts or consults with any managing general agent or producer of the Company
and (4) any other material business of the Company or any of its affiliates as
of the date of termination of the Executive's employment. In the event that this
paragraph shall be determined by any court of competent jurisdiction to be
unenforceable in part by reason of its being too great a period of time or
covering too great a geographical area, it shall be in full force and in effect
as to that period of time or geographical area determined to be reasonable by
the court. Notwithstanding anything to the contrary contained herein (A) other
than in the case of a termination of the Executive's employment for Cause
hereunder, upon termination of the Executive's employment by the Company without
Cause or as a result of his disability, the Executive may elect in writing to
have the Company acquire his then outstanding common stock and options in the
Company at the lower of cost or fair market value (as determined by the Board of
the Company) and in connection therewith execute a release, in form acceptable
to the Company, which releases the Company and its affiliates (including FPC and
its affiliates) from all obligations to make payments under Section 9 of this
Agreement, and upon compliance by the Executive with the foregoing obligations,
the Executive shall no longer be subject to the restrictions set forth in
subclauses (1) and (2) of this Section 7(a), and (B) in the event of termination
by the Company of the Executive's employment due to a disability, the Executive
shall no longer be subject to the restrictions in (1) and (2) of this Section
7(a) (but will no longer qualify for payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in irreparable injury to the Company for
which it shall have no adequate remedy in law and the Company shall, in addition
to any other remedy available to it and in lieu of Section 15 hereof, be
entitled to injunctive relief and specific performance in order to enforce the provisions hereof. In addition to its other remedies, the Company shall be entitled to reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement as a result of any breach by the Executive of this Section. For purposes of this Agreement, "customer" shall include, without limitation, any policyholder, managing general agent or reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive substantially failing to perform his
duties hereunder after notice from the Company and failure to cure such
violation within 10 days of said notice (to the extent the Board reasonably
determines such failure to perform is curable and subject to notice) or
violating any material Company policies, including without limitation the
Company's corporate governance and ethics guidelines, conflicts of interests
policies and code of conduct applicable to all Company employees or senior
executives, (ii) the engaging by the Executive in any malfeasance, fraud,
dishonesty or gross misconduct adverse to the interests of the Company or its
affiliates, (iii) the material violation by the Executive of any of the
provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement
after notice from Company and a failure to cure such violation within 10 days of
said notice (including a "Forfeiture Event" as provided for in Annex A hereto),
(iv) a breach by the Executive of any representation or warranty contained
herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v)
the Board's determination that the Executive has exhibited incompetence or gross
negligence in the performance of his duties hereunder, (vi) receipt of a final
written directive or order of any governmental body or entity having
jurisdiction over the Company requiring termination or removal of the Executive
as Senior Vice President - Underwriting of the Company, or (vii) the Executive
being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the
Company without Cause or if the Executive terminates his employment as a result
of (i) a written notice from the Company that its principal executive offices
are being relocated more than 90 miles from their current location or that the
Executive's principal place of employment is transferred to an office location
more than 90 miles from his then current place of employment (unless in either
case the effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence), and
(ii) the failure of the Company to offer the Executive a reasonable relocation
package to cover direct out-of-pocket losses (if any) on the sale
of the Executive's primary residence, and temporary living expenses and moving costs, then the Company shall pay to the Executive, as full and complete liquidated damages hereunder, an amount equal to the Executive's then monthly Annual Direct Salary multiplied by eighteen (18) months, with such amount payable in equal monthly installments; provided that the amount and term of such payments is subject to adjustment upon the Executive's acceptance of an equity compensation package to be determined. The Company shall also maintain in full force and effect, for the continued benefit of the Executive for the period in which the Executive is receiving the foregoing payments, any medical or health-and-accident plan or arrangement of the Company in which the Executive is a participant at the time of such termination of employment; provided that the Executive shall remain responsible for continuing to pay his share of the costs of such coverage; provided further that the Company shall not be under any duty to maintain such coverage if the Executive becomes eligible for coverage under any other employer's insurance and the Executive shall give the Company prompt notice of when such eligibility occurs. No payments or benefits shall be provided hereunder (i) unless and until the Company has first received a signed general release from the Executive in a form acceptable to the Company releasing the Company and Affiliates and any other parties identified by the Company and Affiliates therein, and (ii) to the extent that the Executive has breached any of his post-termination obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: William F. Schmidt
1420 Lexington Drive
Maple Glen, PA 19002
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
Attn: General Counsel
With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
11. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company. This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
12. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
13. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
14. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
15. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
16. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
17. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
18. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Richard S. March By: /s/ Seth D. Freudberg
------------------------------------ -------------------------------
Assistant Secretary President
WITNESS: William F. Schmidt
/s/ Richard S. March By: /s/ William F. Schmidt
------------------------------------ -------------------------------
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A Common Shares of Vigilant International, Ltd. ("Vigilant"), and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in
respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such stock or amount otherwise included in subclause (i) above.
EXHIBIT 10.10
EXECUTION COPY
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is executed this 5th day of September, 2003, between United National Insurance Company, a Pennsylvania corporation with its principal offices in Bala Cynwyd, PA (the "Company") and Jonathan Ritz, an individual residing at 1212 Hamilton Drive, West Chester, PA 19380 (the "Executive").
WHEREAS, the Executive has been employed previously as a senior executive officer of the United National Group of insurance companies ("UNG") under the terms of an employment agreement, executed as of January 1, 2002 (the "Prior Agreement"); and
WHEREAS, Fox Paine Capital Fund II, L.P. and certain affiliated funds (collectively "FPC") have agreed to acquire a controlling interest in UNG (the "Acquisition Transaction"); and
WHEREAS, the parties desire that the Executive be employed by the Company upon the closing of the transaction, and in connection with such employment the parties desire to provide the Executive with the opportunity to acquire an equity interest in the Company; and
WHEREAS, the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. TERM OF EMPLOYMENT; RENEWAL. The Company agrees to employ the Executive and the Executive accepts employment with the Company for the period commencing as of the closing of the Acquisition Transaction (the "Effective Date") and ending on December 31, 2008 (such initial period, as extended below, shall be referred to as the "Employment Term"). The term of this Agreement will automatically renew at the expiration of the then current term for an additional one-year period unless, at least ninety (90) days prior to the expiration date of the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the term then in effect. If the Company elects not to renew this Agreement at the expiration of the initial five year term (the "Non-Renewal Date"), and if at such time (i) there is no other event that would otherwise constitute "Cause" for the termination of the Executive's employment hereunder, (ii) the Executive continues to comply with all his post-termination obligations, and (iii) executes a general release in form satisfactory to the Company, the Company shall continue to pay to the Executive his full Annual Direct Salary from the Non-Renewal Date in equal monthly installments until the earlier of (i) the Executive secures full time employment or (ii) six months from the Non-Renewal Date. Following the Non-Renewal Date, the Executive shall notify the Company in writing upon his commencement of any full time employment.
2. POSITION AND DUTIES. The Executive shall serve as the Senior Vice President - Ceded Reinsurance of the Company, reporting to the President and Chief Executive
Officer ("CEO") of the Company and shall have such authority and duties, consistent with such position, as may from time to time be specified by the Board of Directors of the Company (the "Board") or CEO. At the request of the Board, the Executive shall also serve, without additional compensation, as an officer or director of any Affiliates of the Company that are involved in the business of insurance, underwriting, reinsurance or other matters related to the business operation of the Company. For purposes hereof, an "Affiliate" means any company that is controlled by, under common control with, or that controls the Company.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote his business time, energies and talents to the business of the Company and shall comply with each of the Company's corporate governance and ethics guidelines, conflict of interests policies and code of conduct applicable to all Company employees or senior executives as adopted by the Board from time-to-time. The Executive first shall obtain the consent of the Board in writing before engaging in any other business or commercial activities, duties or pursuits. Notwithstanding the foregoing, nothing shall preclude the Executive from (i) engaging in charitable activities and community affairs, (ii) managing his personal investments and affairs, and (iii) serving in a capacity as a certified arbitrator in disputes related to reinsurance or insurance during the Executive's personal time, provided such activities do not, in the reasonable judgment of the Board, interfere with the proper performance of his duties and responsibilities hereunder.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. During the term of this Agreement, as compensation for services rendered to Company under this Agreement, the Executive shall be entitled to receive from the Company an annual direct salary of not less than $225,000 per year commencing January 1, 2003 (the "Annual Direct Salary"). Executive's Annual Direct Salary shall be payable in substantially equal bi-weekly installments, prorated for any partial employment period. The Annual Direct Salary shall be reviewed by the Board in January of each year this Agreement is in effect and may be adjusted in the discretion of the Board after taking into account the prevailing market value of the position and the then current pay increase practice of the Company. In no event shall the Annual Direct Salary be decreased without the express written consent of the Executive.
(b) ANNUAL BONUS. During the term of this Agreement, Executive may be eligible for annual incentive awards under one or more programs adopted by the Board and established for each of the Company's fiscal years. Award opportunities and other terms and conditions of these awards, if any, will be determined by the Board based on the achievement of goals and objectives established for each of the Company's fiscal years, and shall not be paid until completion of the Company's financial statements relating to the performance period at issue and satisfaction of any other conditions adopted as part of such programs. Nothing herein shall prohibit the Company from modifying or amending any such incentive awards plan from time to time, or from terminating any such plan. The initial bonus program during the first fiscal year for which the Executive is employed hereunder shall be determined by the Company subject to approval by the Board.
(c) EQUITY INCENTIVE AWARDS. As of the Effective Date, the Executive (i) shall purchase 26,250 Class A Common Shares of Vigilant International, Ltd. ("Vigilant") at an acquisition price of $262,500, (ii) shall receive a time vesting stock option grant for 39,375 Class
A Common Shares of Vigilant in the form of option grant attached as Schedule A and (iii) shall receive a performance based stock option grant for 65,625 Class A Common Shares of Vigilant in the form of option grant attached as Schedule B. During the Employment Term, the Executive may be eligible to receive additional option awards in Vigilant as determined by the Board of the Company in its sole discretion. In addition to any exercise, vesting or other restrictions imposed on such option awards by the Board in its discretion, all such option awards shall be subject to the forfeiture provisions of Annex A attached hereto.
5. FRINGE BENEFITS, VACATION TIME, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate in or receive benefits under all corporate employment benefit plans including but not limited to any pension plan, savings plan, medical or health-and-accident plan or arrangement generally made available by the Company to its executives and key management employees as a group, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(b) The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers.
(c) During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company from time to time) in performing services hereunder, provided that the Executive properly accounts therefore in accordance with Company policy.
(d) Except as otherwise specifically provided herein, nothing paid to the Executive under any benefit plan or arrangement shall be deemed to be in lieu of compensation to the Executive hereunder.
6. PROTECTION OF COMPANY INFORMATION. During the period of his employment, or at any later time following the termination of his employment for any reason, the Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates, and shall not, without the written consent of the Board, knowingly disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or use for any purpose other than to perform his duties hereunder, any "Confidential Information" of the Company or any of its Affiliates obtained by him while in the employ of the Company. The Confidential Information protected by this provision shall include all computer software and files, policy expirations, telephone lists, customer lists, prospect lists, marketing information, information regarding managing general agents, pricing policies, contract forms, customer information, copyrights and patents, the identity of Company and Affiliate employees, Company and Affiliate books, records, files, financial information, business practices, policies and
procedures, information about all services and products of the Company and its Affiliates, names of users or purchasers of the products or services of the Company or its affiliates, methods of promotion and sale and all information which constitutes trade secrets under the law of any state in which the Company or any of its Affiliates does business. No information shall be treated as Confidential Information if it is generally available public knowledge at the time of disclosure or use by Executive, provided that information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. The Executive agrees that any breach of the restrictions set forth in this Section will result in irreparable injury to the Company and/or its Affiliates for which there is no adequate remedy at law and the Company and its Affiliates shall, in addition to any other remedies available to them, be entitled to injunctive relief and specific performance in order to enforce the provisions hereof. Notwithstanding the foregoing provisions, if the Executive is required to disclose any such confidential or proprietary information pursuant to applicable law or a subpoena or court order, the Executive shall promptly notify the Company in writing of any such requirement so that the Company or the appropriate affiliate may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions hereof. The Executive shall reasonably cooperate with the Company to obtain such a protective order or other remedy. If such order or other remedy is not obtained prior to the time the Executive is required to make the disclosure, or the Company waives compliance with the provisions hereof, the Executive shall disclose only that portion of the confidential or proprietary information which he is advised by counsel that he is legally required to so disclose. All records, files, memoranda, reports, customer lists, drawings, plans, documents and the like that the Executive uses, prepares or comes into contact with during the course of the Executive's employment shall remain the sole property of the Company and/or its affiliates, as applicable. The Executive shall execute and deliver the Company's standard "work for hire" agreement regarding ownership by the Company of all rights in its confidential and business materials.
7. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that the insurance business and operations of the Company are national in scope, and that the Company operates in multiple locations and business segments in the course of conducting its business. In consideration of this Agreement and the equity interests being made available to the Executive hereunder, the Executive covenants and agrees that during his employment with the Company, and for a period of eighteen (18) months following the termination of such employment for any reason (whether termination occurs during, upon expiration of, or following the original or the renewal term hereof), including without limitation as a result of his discharge by the Company with or without Cause or Executive's voluntary resignation, the Executive shall not directly or indirectly compete with the business of the Company or its affiliates by becoming a shareholder, officer, agent, employee, partner or director of any other corporation, partnership or other entity, or otherwise render services to or assist or hold an interest (except as less than a one percent (1%) shareholder of a publicly traded company), in any "Competitive Business" (as defined below). "Competitive Business" shall mean any person or entity (including any joint venture, partnership, firm, corporation, or limited liability company) that engages in (1) the specialty property and casualty insurance business, including excess and surplus lines, non-admitted insurance lines, program-style insurance lines and/or reinsurance, (2) the insurance agency or brokerage business, (3) employs, contracts or consults with any managing general agent or producer of the Company
and (4) any other material business of the Company or any of its affiliates as
of the date of termination of the Executive's employment. In the event that this
paragraph shall be determined by any court of competent jurisdiction to be
unenforceable in part by reason of its being too great a period of time or
covering too great a geographical area, it shall be in full force and in effect
as to that period of time or geographical area determined to be reasonable by
the court. Notwithstanding anything to the contrary contained herein (A) other
than in the case of a termination of the Executive's employment for Cause
hereunder, upon termination of the Executive's employment by the Company without
Cause or as a result of his disability, the Executive may elect in writing to
have the Company acquire his then outstanding common stock and options in the
Company at the lower of cost or fair market value (as determined by the Board of
the Company) and in connection therewith execute a release, in form acceptable
to the Company, which releases the Company and its affiliates (including FPC and
its affiliates) from all obligations to make payments under Section 9 of this
Agreement, and upon compliance by the Executive with the foregoing obligations,
the Executive shall no longer be subject to the restrictions set forth in
subclauses (1) and (2) of this Section 7(a), and (B) in the event of termination
by the Company of the Executive's employment due to a disability, the Executive
shall no longer be subject to the restrictions in (1) and (2) of this Section
7(a) (but will no longer qualify for payments pursuant to Section 9(a)).
(b) RETURN OF MATERIALS. Upon termination of employment with the Company, the Executive shall promptly deliver to the Company all correspondence, manuals, letters, notes, notebooks, computer disks, software, reports and any other document or tangible items containing or constituting Confidential Information about the business of the Company and/or its Affiliates.
(c) NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. Should
the Executive's employment with the Company be terminated for any reason
(whether such termination occurs during, upon expiration of, or following the
original or the renewal term hereof), including without limitation as a result
of his discharge by the Company with or without Cause or Executive's voluntary
resignation, for a period of eighteen (18) months following such termination the
Executive shall not: (i) contact, recruit, employ, entice, induce or solicit,
directly or indirectly, any employee, officer, director, agent, consultant or
independent contractor employed by or performing services for the Company or any
of its Affiliates to leave the employ of or terminate services to the Company or
such Affiliate, including without limitation working with the Executive, with
the entity with which the Executive has affiliated (as an employee, consultant,
officer, director, stockholder or otherwise), or with any other entity; (ii)
seek, either in his individual capacity or on behalf of any other entity,
whether directly or indirectly to solicit, communicate with or contact or
advise, or transact or otherwise engage in any insurance related business with
(x) any party who is or was a customer of the Company or any of its Affiliates
during Executive's employment by the Company or at any time during the said
eighteen (18) month period, or (y) any party who was identified as a prospect of
the Company or any of its Affiliates during Executive's employment by the
Company; or (iii) engage in or participate in any effort or act to induce any
customer (as defined in subsection 7(c)(ii)) of the Company or any of its
Affiliates to take any action which might be disadvantageous to the Company or
its Affiliates. The Executive agrees that any breach of the restrictions set
forth in Sections 6 and 7 will result in irreparable injury to the Company for
which it shall have no adequate remedy in law and the Company shall, in addition
to any other remedy available to it and in lieu of Section 15 hereof, be
entitled to injunctive relief and specific performance in order to enforce the provisions hereof. In addition to its other remedies, the Company shall be entitled to reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement as a result of any breach by the Executive of this Section. For purposes of this Agreement, "customer" shall include, without limitation, any policyholder, managing general agent or reinsurer with whom the Company or its affiliates has transacted business.
(d) In the event Executive breaches any of his covenants in this Section 7, the Company and its Affiliates shall be released from their obligation to make payments under Section 9 of this Agreement and (to the extent permitted by applicable law) to provide benefits or make payments under all employee benefit plans in which Executive participates, and the Company shall be entitled to reimbursement from the Executive of severance payments made to the Executive by the Company following termination of employment with the Company. In addition, in the event of a violation by the Executive of his covenants in this Section 7, he shall be subject to the forfeiture provisions of Annex A with respect to his equity holdings in the Company.
(e) The Executive acknowledges and agrees that the terms
of this Section 7: (i) are reasonable in light of all of the circumstances; (ii)
are sufficiently limited to protect the legitimate interests of the Company and
its subsidiaries; (iii) impose no undue hardship on the Executive; and (iv) are
not injurious to the public. The Executive further acknowledges and agrees that
(x) the Executive breach of the provisions of Section 7 will cause the Company
irreparable harm, which cannot be adequately compensated by money damages, and
(y) if the Company elects to prevent the Executive from breaching such
provisions by obtaining an injunction against the Executive, there is a
reasonable probability of the Company's eventual success on the merits. The
Executive consents and agrees that if the Executive commits any such breach or
threatens to commit any breach, the Company shall be entitled to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage, in addition to, and not in lieu of, such other remedies as may be
available to the Company for such breach, including the recovery of money
damages.
8. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his death, retirement, or the expiration of this Agreement. Upon the Executive's death, any sums then due him shall be paid to the executor, administrator or other personal representative of the Executive's estate.
(b) If the Executive becomes disabled (as certified by a licensed physician selected by the Company) and is unable to perform or complete his duties under this Agreement for a period of 180 consecutive days or 180 days within any twelve-month period, the Company shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive has under the disability insurance program maintained by the Company.
(c) The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive substantially failing to perform his
duties hereunder after notice from the Company and failure to cure such
violation within 10 days of said notice (to the extent the Board reasonably
determines such failure to perform is curable and subject to notice) or
violating any material Company policies, including without limitation the
Company's corporate governance and ethics guidelines, conflicts of interests
policies and code of conduct applicable to all Company employees or senior
executives, (ii) the engaging by the Executive in any malfeasance, fraud,
dishonesty or gross misconduct adverse to the interests of the Company or its
affiliates, (iii) the material violation by the Executive of any of the
provisions of Sections 3, 6 or 7 hereof or other provisions of this Agreement
after notice from Company and a failure to cure such violation within 10 days of
said notice (including a "Forfeiture Event" as provided for in Annex A hereto),
(iv) a breach by the Executive of any representation or warranty contained
herein (including a "Forfeiture Event" as provided for in Annex A hereto), (v)
the Board's determination that the Executive has exhibited incompetence or gross
negligence in the performance of his duties hereunder, (vi) receipt of a final
written directive or order of any governmental body or entity having
jurisdiction over the Company requiring termination or removal of the Executive
as Senior Vice President - Ceded Reinsurance of the Company, or (vii) the
Executive being charged with a felony or other crime involving moral turpitude.
(d) The Company may choose to terminate the Executive's employment at any time without Cause or reason.
9. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated
because of death, disability, or for Cause, the Company shall pay the Executive
(or his executor, administrator or other personal representative, as applicable)
his full Annual Direct Salary through the date of termination of employment at
the rate in effect at the time of termination and the Company shall have no
further obligations to the Executive under this Agreement (and the Executive
shall not be entitled to payment of any unpaid bonus or incentive award);
provided that in the event of a termination by the Company because of disability
and other than in the case of employment in any Competitive Business the Company
shall pay to the Executive, as full and complete liquidated damages hereunder,
an amount equal to the Executive's then monthly Annual Direct Salary multiplied
by six (6) months, with such amount payable in equal monthly installments and
provided further that the foregoing amounts shall be reduced by any disability
payments for which the Executive may otherwise be entitled. No payments or
benefits shall be provided hereunder in connection with the Executive's
disability (i) unless and until the Company has first received a signed general
release from the Executive (or the Executive's guardian or legal representative)
in a form acceptable to the Company releasing the Company and Affiliates and any
other parties identified by the Company and Affiliates therein, and (ii) to the
extent that the Executive has breached any of his post-termination obligations
hereunder.
(b) If the Executive's employment is terminated by the
Company without Cause or if the Executive terminates his employment as a result
of (i) a written notice from the Company that its principal executive offices
are being relocated more than 90 miles from their current location or that the
Executive's principal place of employment is transferred to an office location
more than 90 miles from his then current place of employment (unless in either
case the effect of such relocation results in the Executive's principal place of
employment being less than forty (40) miles from his principal residence), and
(ii) the failure of the Company to offer the Executive a reasonable relocation
package to cover direct out-of-pocket losses (if any) on the sale
of the Executive's primary residence, and temporary living expenses and moving costs, then the Company shall pay to the Executive, as full and complete liquidated damages hereunder, an amount equal to the Executive's then monthly Annual Direct Salary multiplied by eighteen (18) months, with such amount payable in equal monthly installments; provided that the amount and term of such payments is subject to adjustment upon the Executive's acceptance of an equity compensation package to be determined. The Company shall also maintain in full force and effect, for the continued benefit of the Executive for the period in which the Executive is receiving the foregoing payments, any medical or health-and-accident plan or arrangement of the Company in which the Executive is a participant at the time of such termination of employment; provided that the Executive shall remain responsible for continuing to pay his share of the costs of such coverage; provided further that the Company shall not be under any duty to maintain such coverage if the Executive becomes eligible for coverage under any other employer's insurance and the Executive shall give the Company prompt notice of when such eligibility occurs. No payments or benefits shall be provided hereunder (i) unless and until the Company has first received a signed general release from the Executive in a form acceptable to the Company releasing the Company and Affiliates and any other parties identified by the Company and Affiliates therein, and (ii) to the extent that the Executive has breached any of his post-termination obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Jonathan Ritz
1212 Hamilton Drive
West Chester, PA 19380
If to the Company: United National Insurance Company
Three Bala Plaza East, Suite 300
Bala Cynwyd, PA 19004
Attn: General Counsel
With a Copy To: Fox Paine & Company, LLC
950 Tower Lane, Suite 1150
Foster City, CA 94404
Attn: Troy Thacker
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or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
11. SUCCESSORS. This Agreement shall be binding upon the Executive, his heirs, executors or administrator, and the Company, and any successor to or assigns of the Company. This Agreement is not assignable by Executive. This Agreement is assignable by the Company to a successor to or purchaser of the Company's business.
12. ENFORCEMENT OF SEPARATE PROVISIONS. Should provisions of this Agreement be ruled unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
13. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without consent of any other person and, so long as the Executive lives, no person other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.
14. ARBITRATION. In the event that any disagreement or dispute whatsoever shall arise between the parties concerning this Agreement, such disagreement or dispute shall be submitted to the Judicial Arbitration and Mediation Services, Inc. ("JAMS") for resolution in a confidential private arbitration in accordance with the comprehensive rules and procedures of JAMS, including the internal appeal process provided for in Rule 34 of the JAMS rules with respect to any initial judgment rendered in an arbitration. Any such arbitration proceeding shall take place in Philadelphia, Pennsylvania before a single arbitrator (rather than a panel of arbitrators). The parties agree that the arbitrator shall have no authority to award any punitive or exemplary damages and waive, to the full extent permitted by law, any right to recover such damages in such arbitration. Each party shall each bear their respective costs (including attorney's fees, and there shall be no award of attorney's fees) and shall split the fee of the arbitrator. Judgment upon the final award rendered by such arbitrator, after giving effect to the JAMS internal appeal process, may be entered in any court having jurisdiction thereof. If JAMS is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing provisions. Each party agrees that it shall maintain absolute confidentiality in respect to any dispute between them.
15. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
16. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements, either oral or in writing, between the parties with respect to the employment of the Executive by the Company, including the Prior Agreement, and this Agreement contains all the covenants and agreements between the parties with respect to the Executive's employment.
17. ACKNOWLEDGEMENT. Executive acknowledges that he has carefully read and fully understands this Agreement and that the Company has provided him sufficient time to discuss such Agreement with an attorney.
18. CONDITION OF EFFECTIVENESS. The closing of the acquisition by FPC of the UNG transaction on or before September 30, 2003 shall be a condition precedent to the effectiveness and enforceability of this Agreement.
[signature page to follow]
EXECUTION COPY
[Amended and Restated Executive Employment Agreement Signature Page]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
ATTEST: United National Insurance Company
/s/ Richard S. March By: /s/ Seth D. Freudberg
------------------------------- -------------------------------
Assistant Secretary President
WITNESS: Jonathan Ritz
/s/ Richard S. March By: /s/ Jonathan Ritz
------------------------------- -------------------------------
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ANNEX A
OPTION AND EQUITY FORFEITURE
Forfeiture of Options and Restricted, Common and Preferred Stock and Gains Realized upon Prior Option Exercises or Sale of Stock. Unless otherwise determined by the Board of Directors of the Company, the Options granted under this Employment Agreement, together with any future option grants made to the Executive or options on the Class A Common Shares of Vigilant International, Ltd. ("Vigilant") and any restricted stock and common or preferred stock, if any, held by the Executive, shall be subject to the following additional forfeiture conditions to which the Executive, by accepting such Options or equity interests, hereby agrees. In the event of (i) the Executive's breach or failure to comply with any of the terms or conditions of Section 6 or Section 7 of this Employment Agreement or any breach of any of the representations and warranties set forth therein (whether or not employed by the Company at such breach or failure to comply) (a "Forfeiture Event"), and (ii) if the Executive is employed by the Company at the time of a Forfeiture Event, his termination of employment by the Company, all of the following will result:
(i) The unexercised portion of the Options (both unvested and vested, if any) will immediately be forfeited and canceled without payment upon the occurrence of the Forfeiture Event;
(ii) All equity, including restricted stock, common and/or preferred stock, if any, held by the Executive will, upon the occurrence of the Forfeiture Event, immediately be repurchased by the Company or its designee at the lower of fair market value (as determined by the Board of the Company) or the Executive's original purchase price (in each case reduced to reflect any outstanding liabilities of the Executive to the Company or its affiliates), with payment taking the form of a five year note from the Company or its designee, accruing interest at the lowest then applicable rate mandated by Federal law, with the principal and interest due on the fifth anniversary of the date of purchase (or such later date as may be necessary to permit the Company or its designee to comply with any applicable borrowing covenants affecting its payment obligations.) The Executive promptly shall take all appropriate and necessary action to facilitate the buy back of such equity, including the prompt delivery to the Company (or its designee) of all stock certificates or other documents that the Company may request; and
(iii) The Executive will be obligated to repay to the Company (or its designee), in cash, within five (5) business days after demand is made therefore by the Company (or its designee), the total amount of Award Gain (as defined herein) realized by the Executive (I) upon each exercise of the Options that occurred on or after (A) the date that is six (6) months prior to the Forfeiture Event, if the Forfeiture Event occurred while the Executive was employed by the Company or a subsidiary or affiliate, or (B) the date that is six (6) months prior to the date that Executive's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Executive ceased to be so employed, or (II) upon any sale, transfer or other disposition of the Class A Common Shares of Vigilant. For purposes of this Annex A, the term "Award Gain" shall mean (i) in
respect of a given Options exercise, the product of (X) the Fair Market Value per share of stock at the date of such exercise (without regard to any subsequent change in the market price of such share of stock) minus the exercise price times (Y) the number of shares as to which the Options were exercised at that date, and (ii), in respect of any sale of stock, the value of any cash or the Fair Market Value of stock or property paid or payable to the Executive less any cash or the Fair Market Value of any stock or property (other than stock or options which would have itself been forfeitable hereunder and excluding any payment of tax withholding) paid by the Executive to the Company (or its designee) as a condition or in connection with the acquisition of such stock or amount otherwise included in subclause (i) above.
EXHIBIT 21.1
Subsidiaries of United National Group, Ltd.
Wind River Insurance Company (Barbados), Ltd.
Wind River Insurance Company (Bermuda), Ltd.
Wind River Services Ltd.
U.N. Holdings II, Inc.
U.N. Holdings Inc.
Wind River Investment Corporation
American Insurance Service, Inc.
United National Insurance Company
Emerald Insurance Company
Unity Risk Partners Insurance Service, Inc.
Loyalty Insurance Company, Inc.
International Underwriters, Inc.
American Insurance Adjustment Agency, Inc.
United National Group Capital Trust I
Diamond State Insurance Company
United National Specialty Insurance Company
United National Casualty Insurance Company
J.H. Ferguson & Associates, LLC
EXHIBIT 23.1
We hereby consent to the use in this Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-108857) of our reports dated June 25, 2003 relating to the financial statements and financial statement schedules of Wind River Investment Corporation, which appear in such Registration Statement. We also consent to the references to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Philadelphia, PA October 28, 2003 |