UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended: December 31, 1997.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number: 1-11920
MMI COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3263253
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
540 Lake Cook Road, Deerfield, Illinois 60015-5290
(Address of principal executive offices)
(847) 940-7550
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value New York Stock Exchange
(title of each class) (Name of each exchange on which registered)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $460,667,000 as of December 31, 1997. The aggregate number of the
Registrant's $0.10 par value Common Stock shares outstanding on December 31,
1997 was 18,857,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated by reference into Part II of this report.
Portions of the Registrant's Proxy Statement for the 1997 annual meeting of
stockholders to be held on April 16, 1998 are incorporated by reference into
Part III of this report.
Exhibit index is located on page 24.
Page 1 of 25
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
Introduction
MMI Companies, Inc. (together with its subsidiaries, the "Company") provides
insurance products and related specialized services in two principal markets:
the United States healthcare industry and international insurance and
reinsurance markets.
Domestically, the Company offers specialized medical malpractice insurance
products and consulting services that are designed to assist healthcare
providers manage the cost and quality of care. The Company integrates its
professional liability insurance with certain of its fee-based risk management
services and does not offer such insurance or that set of risk management
services on a stand-alone basis. Accordingly, insurance clients are required to
purchase a specific set of risk modification services consisting of consulting,
education and information in order to have access to the Company's professional
liability coverage. In addition, the Company offers a variety of other
consulting and fee-based services to healthcare providers, including strategic
and management consulting, employee relations consulting, risk management
services, professional liability claims management, healthcare credentials
verification services and billing, compliance and reimbursement services.
Internationally, the Company operates as a specialty casualty and property
reinsurer and insurer operating in the London-based reinsurance and insurance
market (the "London Market"), primarily through its recently acquired
subsidiary, Unionamerica Insurance Company Limited (together with its
affiliates, "Unionamerica"). Unionamerica's core businesses are professional
liability reinsurance, including malpractice reinsurance for healthcare
providers, as well as lawyers and other professionals, and reinsurance and
insurance for a variety of property and casualty risks. Of Unionamerica's
insurance gross premiums written, approximately 74% are generated in the U.S.
The percentage of business from non-U.S. sources has grown in recent years. The
Company intends to continue to operate Unionamerica as a distinct business
entity under its current management.
History
The Company was formed in 1983 to write medical malpractice insurance and
provide risk management services for hospitals and physicians in the United
States. Since the initial public offering of its Common Stock in June 1993, the
Company has, through acquisitions and internal growth, substantially increased
its insurance assets and capital, the breadth of its products and services and
its capacity to deliver them. The Company has acquired insurance, strategic
management consulting, employee relations consulting, credentials verification
services and professional liability claims management businesses and
successfully integrated them into its operations. It also developed additional
services to assist healthcare providers manage their business operations. In
December 1997, the Company acquired Unionamerica in a stock for stock
transaction.
Unionamerica was founded in 1971. In 1993, an investor group along with
senior management acquired Unionamerica from The Continental Corporation. In
December 1995, Unionamerica completed an initial public offering of American
Depository Shares ("ADSs"). In 1996 Unionamerica acquired interests in a Lloyd's
dedicated corporate capital vehicle and a Dutch auto insurance program, and in
1997 Unionamerica acquired an interest in a Lloyd's managing agency.
Strategic Rationale for Unionamerica Acquisition
The insurance market is undergoing consolidation and insureds and reinsureds
are demanding more sophisticated products and services and seeking insurers with
greater financial capacity. These market conditions favor larger, strongly
capitalized companies with multiple licenses, strong distribution capacity and a
full complement of insurance and value-added services.
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By acquiring Unionamerica, the Company has substantially increased its
medical malpractice insurance and reinsurance premiums in the U.S., and has
increased the diversity of insurance risks in its book of business. Also, the
acquisition offers operations and distribution capabilities that support the
Company's strategy to expand its international business.
BUSINESS SEGMENTS
The Company's business is organized into three business segments: domestic
insurance, international insurance, and consulting and fee services.
The following tables set forth the Company's revenues and income before
income taxes by segment over the past three years:
<TABLE>
<CAPTION>
REVENUES BY BUSINESS SEGMENT
(IN THOUSANDS)
Year ended December 31,
---------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic insurance segment:
Net premiums earned............................... $ 159,579 $ 164,409 $ 155,191
Net investment income............................. 47,171 44,274 39,850
Realized gains (losses) on investments............ 2,418 (40) 1,367
-------- -------- --------
209,168 208,643 196,408
International insurance segment:
Net premiums earned............................... 118,658 116,982 117,712
Net investment income............................. 28,319 29,407 23,086
Realized gains (losses) on investments............ (236) (850) 325
-------- -------- ------
146,741 145,539 141,123
Consulting and fee segment........................... 51,626 34,535 22,336
-------- --------- --------
Total revenues................................. $ 407,535 $ 388,717 $ 359,867
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY LOSSES BY BUSINESS SEGMENT
(IN THOUSANDS)
Year ended December 31,
---------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic insurance segment........................... $ 23,530 $ 24,080 $ 23,036
International insurance segment (1).................. 16,216 28,480 17,379
Consulting and fee segment........................... 4,570 2,889 1,798
-------- -------- --------
Income from continuing operations before
income taxes and extraordinary losses..... $ 44,316 $ 55,449 $ 42,213
======== ======== ========
<FN>
(1) 1997 includes expenses of $9,745,000 related to the acquisition of Unionamerica.
</FN>
</TABLE>
DOMESTIC INSURANCE SEGMENT
Business Environment
The healthcare industry, particularly healthcare providers, constitutes the
Company's target market. This market has undergone substantial structural change
over the past decade and continues to evolve. Due to changes in the financing of
healthcare under managed care, the healthcare delivery system has evolved to a
complex structure involving numerous healthcare provider types and payment
mechanisms. Healthcare providers are forming integrated delivery networks
through mergers and acquisitions and contractual arrangements. These networks
include healthcare systems, physician organizations, physician management
companies, physician hospital organizations and individual hospitals and
physicians and other specialized healthcare provider entities. In
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<PAGE>
addition, healthcare is provided in numerous settings, including hospitals,
clinics, outpatient facilities, physician offices, rehabilitation and long-term
care facilities and the home.
The Company believes that the healthcare business environment requires
providers and networks to address related business, quality and insurance risks,
and the Company has developed a comprehensive set of insurance products and
consulting and fee-based services designed to assist healthcare providers
address these issues. These products and services have been developed both
internally and through acquisition.
Products
The Company's insurance products include professional liability insurance
for hospitals and healthcare systems, physicians and allied healthcare
professionals, as well as assumed reinsurance, and life and health insurance,
written principally by American Continental Insurance Company ("ACIC"), the
Company's primary domestic insurance subsidiary. According to A.M. Best, the
Company was the eighth largest writer of medical malpractice insurance in the
United States in 1996, based on direct premiums written.
Hospitals and Healthcare Systems. The Company writes primary, umbrella and
excess liability insurance for hospitals and healthcare systems. The Company has
capacity to write policy limits to $51,000,000 and obtains reinsurance for
losses in excess of $3,000,000, subject to an annual aggregate reinsurance
deductible of $8,000,000. The Company's liability insurance is written primarily
on a claims-made basis. Pricing of healthcare system insurance is strongly
influenced by the loss experience of the insured, which provides incentive for
the client to adopt and adhere to sound risk management policies.
Physicians and Allied Healthcare Professionals. The Company underwrites
physician groups and physicians that are employed by or affiliated with insured
hospitals or clinics, and locum tenens organizations. The Company writes both
primary and excess policies primarily on a claims-made basis and has capacity to
write policy limits of up to $5,000,000 per occurrence with a $7,000,000
aggregate policy limit. The Company cedes to reinsurers 100% of losses in excess
of $500,000 per claim. The Company's maximum exposure on any single occurrence
involving more than one insured is $750,000. Although physicians are
underwritten individually by the Company, pricing for all physician group
business is influenced by the experience of the insured physician group. The
Company believes that this approach to pricing and the review by group members
improves the physician underwriting process.
Other. The Company provides excess of loss reinsurance for
healthcare-sponsored medical malpractice insurance companies, principally
single-state organizations. The Company also provides group life, stop-loss, and
disability products for healthcare institutions and their employees and HMO
reinsurance and healthcare provider excess insurance.
Underwriting
The Company has a select risk underwriting philosophy and its account
management team approach supports the underwriting process. Clinical risk
management consultants prepare reports regarding potential new business and
provide site visit reports, risk assessments and recommendations, as well as
monthly statistical reports regarding risk management programs for renewal
business. The Company's risk management consultants conduct a pre-acquisition
process to determine the degree to which clients have processes in place to
assess and manage risk. Claims managers evaluate a minimum of five years of loss
history and reserve data, and underwriters require detailed historical exposure
data and three years of financial information. The Company's underwriters
perform a complete underwriting evaluation for every new and renewal applicant
and determine premiums and coverage provisions when an insurance quotation is
issued.
For physicians affiliated with insured hospitals and healthcare systems, the
underwriting process involves an evaluation of the prospective insured and a
recommendation by a committee of insured physicians for underwriting
consideration, in addition to an evaluation of a physician's loss history and
exposure data.
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Claims
The Company's approach to claims management utilizes highly experienced
multi-disciplinary teams and early clinical evaluation. The Company believes
that this approach allows it to assess claims more accurately and manage them to
resolution more efficiently. Clinical resource work groups are a key component
of claims management for the Company. Each work group meets three times a year
and includes several prominent physicians affiliated with insured healthcare
institutions and the Company's Medical Director and legal, claims, risk and
underwriting personnel. The work groups review and evaluate clinical, standard
of care, causation and risk management issues relating to new claims.
The Company emphasizes early evaluation and aggressive management of claims.
Claims professionals are required to complete a full evaluation and reserving of
claims within nine months of the filing of a claim. The claims department
conducts major case reviews semi-annually for all cases reserved at or above
$100,000 and for all obstetric claims. The major case review process ensures
ongoing senior management involvement for all large exposure claims. The Company
works closely with its defense counsel to develop case strategies and
participate in litigation of claims. Claims professionals attend case
conferences and trials and maintain an expert witness data bank. When necessary,
medical consultants are retained to assist in defense of claims.
The Company seeks a cooperative working relationship with client risk
managers. Claims professionals are assigned responsibility for claim activity on
an account basis, working closely with underwriters and risk management
consultants also assigned to these accounts. Claims professionals routinely
conduct phone consultations with client risk managers regarding specific cases
and perform claim audits annually. This working relationship and open
communication is critical for the Company to identify incidents that may result
in claims and assists the Company in evaluating and responding to claims
expeditiously.
Distribution
The Company believes that a close working relationship with its healthcare
industry clients is essential and consequently markets its products and services
directly and through insurance brokers where such a close client relationship
can be created and maintained. The Company markets nationally and has regional
insurance offices in Deerfield, Illinois; Atlanta, Georgia; and San Francisco,
California. The Company also has several small offices in locations where
specialized services are provided to clients. The Company has insurance licenses
in 50 states and the District of Columbia. In 1997, the five largest states in
terms of medical malpractice direct written premium by the Company were
Illinois, Florida, California, Texas and Tennessee, which together accounted for
approximately 47% of the Company's medical malpractice direct written premium.
CONSULTING AND FEE SEGMENT
The Company's consulting and fee segment consists of its clinical risk
management services, which are closely linked with its domestic insurance
operations, as well as management consulting, employee relations consulting,
professional liability claims administration, healthcare credentials
verification businesses and billing, compliance and reimbursement services.
Healthcare Risk Services Group
The Company's Healthcare Risk Services Group provides fee-based services
designed to help its customers increase revenues, reduce cost and improve the
quality of healthcare provided. Since its inception in 1983, the Company has
required that its insurance clients purchase certain of its risk modification
programs, educational programs and information services as a condition to
obtaining its insurance coverage.
The clinical risk modification process is designed to help clients change
practices in the healthcare setting that may increase professional liability
risk exposure. This process includes a review of each prospective insured prior
to underwriting in order to assess risk exposures and to evaluate its
receptivity to the Company's risk management philosophy. Once insured, the
client is provided specific services by the Company to help manage its risk
exposures.
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<PAGE>
The Company's specialized clinical risk modification programs seek to
contribute to the quality of patient care by improving clinical practices,
thereby reducing loss exposures and incurred losses, and improving clinical
outcomes. The Company requires that healthcare systems continually review
clinical practices and submit clinical indicator data monthly. These data
measure the insureds' degree of compliance with the guidelines which have been
developed by national work groups of physicians and other medical professionals
working under the sponsorship of the Company. These data comprise a comparative
database of practice and outcome indicators that has been maintained since 1985.
Insured institutions must also establish procedures for internal clinical and
risk management review of cases, furnish reports and make available patient
records, case review summaries and other material requested to support the
evaluation of their risk management activity.
The introduction of these programs into the insured's operation is
accomplished through a combination of consultation, education and information
services.
Consultation. The Company provides consulting services, which include
clinical, operational and administration process assessments, clinical care path
development, risk and quality management programming, risk management staffing
and assistance with peer review processes.
Education Programs. The Company includes education programs as a key element
of its approach to risk modification. The Company provides insureds with
educational opportunities including national seminars and focused topic
workshops. National seminars are offered to multi-disciplinary audiences and are
designed to address specific areas of risk exposure of national concern. Focused
topic workshops, with limited enrollment, provide in-depth training for risk
managers, healthcare executives and others within the healthcare setting on
specialized areas of risk. In addition, the Company has developed and offers The
Healthcare Risk Management Certificate Program, a ten-course professional
development and continuing education program. The Company's education programs
have been approved by several states and professional organizations for
professional certification or continuing education credit.
Information Services. Insureds receive the Company's proprietary software,
which facilitates collection, analysis and reporting of incident, claim and
clinical data. In addition, the Company has developed an on-line communications
resource for its insureds that allows for direct interaction among all clients
and from each client to the Company's staff.
Professional Liability Claims Administration
The Company provides claims administration services designed to assist
healthcare organizations manage self-insured retentions. The Company believes
that in the future, consolidating healthcare organizations will have increased
financial capacity and will seek to retain liability exposures through increased
deductibles and self-insured retentions. This trend represents an opportunity
for the Company to provide a highly specialized service to healthcare providers
on an outsourced basis.
Healthcare Credentials Management Services
Healthcare providers and managed care organizations face increased
regulatory requirements to periodically review and evaluate the credentials of
physicians and other healthcare professionals. The Company provides outsourced
information technology-based services to these organizations that enable them to
assemble credentials information in a timely and cost-efficient manner rather
than through labor intensive internal processes.
Strategy Consulting Services
The Company provides a wide variety of management consulting services,
including strategy development, healthcare system integration and development,
medical group practice development, managed care strategy design and
implementation, hospital/physician alignment strategies and business process
reengineering. These services are designed to assist healthcare clients in
implementing organizational change.
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<PAGE>
Employee Relations Consulting
The Company provides employee relations and human resource consulting
services to healthcare organizations. The Company believes that human resource
and compensation issues will take on increased importance as healthcare
organizations continue to consolidate and evolve. Principal services provided
include labor relations consulting, compensation consulting, employee opinion
surveys and human resource search services.
Billing, Compliance and Reimbursement Services
The Company provides services that help hospitals, physicians and integrated
healthcare organizations capture and report accurate and timely information on
patient care. These services are designed to assure healthcare providers that
billing and reimbursement is appropriate for service rendered.
INTERNATIONAL INSURANCE SEGMENT
Internationally, the Company operates as a specialty casualty and property
reinsurer and insurer operating in the London-based reinsurance and insurance
market (the "London Market"), primarily through its recently acquired
subsidiary, Unionamerica Insurance Company Limited (together with its
affiliates, "Unionamerica"). Unionamerica's core businesses are professional
liability reinsurance, including malpractice reinsurance for healthcare
providers, as well as lawyers and other professionals, and reinsurance and
insurance for a variety of property and casualty risks.
Products
The Company writes casualty and property reinsurance on both a treaty basis
(in which the reinsurer typically agrees to reinsure all, or a specified
portion, of the risks arising under a number of similar policies) and a
facultative basis (in which the reinsurer agrees to reinsure all, or a portion,
of the insurance provided under a single policy). The Company also writes
insurance, particularly for U.S. insureds, on an excess and surplus lines basis.
The Company writes its core casualty contracts predominantly on a
claims-made basis, under which it is liable only for those claims made during
the contract period (generally subject to a limited discovery period), rather
than on an occurrence basis, in which the insurer is liable for losses occurring
during or attributable to the contract period, no matter when reported. This
approach benefits the Company by permitting a faster and more accurate
evaluation of its probable ultimate losses under a contract, which the Company
can utilize in negotiating the terms and pricing of similar new business and of
renewal policies.
Casualty
The core casualty lines written by the Company are professional indemnity
and single industry and/or single state third-party risks coverages. The Company
writes these lines both on a treaty and a facultative reinsurance basis as well
as on a primary insurance basis. The Company's focus on these lines is a natural
outgrowth of its underwriting philosophy, in that these coverages are
predominantly written on a claims-made basis for accounts with clearly-defined
exposure parameters, which generally permit more accurate pricing than do
accounts which consist of casualty exposures arising in a number of different
geographic locations or across a range of industries. Casualty gross premiums
written totaled $106.7 million, or 70% of international premiums in 1997.
The Company's core casualty treaty book is the largest component of its
total international book of business. The significance of the casualty treaty
book has increased since the late 1970's, following the widespread establishment
and growth of mutual and captive insurers which provide insurance for single
state groups of doctors, lawyers and other professionals in a single industry.
Such mutual and captive buyers of reinsurance have been attracted to the London
Market because its underwriters have provided a flexible underwriting approach
where there is homogeneity of risk.
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The largest component of the Company's casualty treaty reinsurance business
is its professional indemnity line, which includes primarily, medical
malpractice and hospital indemnity reinsurance business. The Company's
experience and reputation in the U.S. in the general area of medical malpractice
has enabled it to develop successfully similar lines of U.S. business for, among
others, lawyers, architects, engineers, accountants and insurance agents as well
as a few
specialized sources for D&O business. The insured risks under these treaties are
typically associations of small professional partnerships, many of which have
memberships that are limited to a specific state or other defined geographical
areas in the United States.
In addition to its professional indemnity business, the Company writes other
types of casualty business on a treaty basis. As with its professional indemnity
business, the Company focuses on specific industries and, where practical,
specific states or other defined geographic areas in the U.S. The largest
component of this line is the Company's excess of loss reinsurance of commercial
trucking risks for certain well-established primary insurers that specialize in
this business. The Company also reinsures general liability business written for
ski resorts and a variety of other specialty industries.
In 1997, the main component of the Company's casualty direct and facultative
business was U.S. primary casualty business underwritten on a surplus lines
basis through carefully selected managing general agents. Such business consists
of insurance for small commercial risks, such as restaurants, other commercial
properties and small contractors, as well as a number of individual programs.
Before entering into an agreement with a managing general agent, the Company
carefully evaluates the ability and financial strength of the agent involved and
monitors each of these arrangements closely in order to ensure that the pricing,
terms and quality of the coverage written are consistent with its expectations.
In addition, the Company provides motor liability insurance in Holland,
underwritten on a segmented basis and which has been produced through
telemarketing by a Dutch associate, Polis Direct BV.
The Company writes a book of medical expense business obtained through a
limited number of carefully selected brokers. This business has been maintained
at the same level for the last three years as competition has limited favorable
opportunities. As a book of business, it includes quota share, excess of loss
and stop loss reinsurance provided to insurers who have written health insurance
coverages as well as direct medical reimbursement insurance provided to the
employees of certain specific employers. This book is written on both a
reinsurance and primary insurance basis.
Property
The Company's property reinsurance and insurance business totaled $38.5
million, or 25% of international gross premiums written in 1997. The volume and
type of property business written varies from year to year depending on the
state of the market in the United States, London and elsewhere.
The Company's property treaty book consists of catastrophe and general risk
coverages. These coverages are primarily written on an excess of loss basis,
although some proportional treaties are also written where historical results
and the quality of information provided by the reinsured justify doing so. This
book covers both U.S. and international business. This book consists of
approximately half each of U.S. exposures and international exposures, which are
predominately in the U.K. and Northern Europe and Japan (excluding earthquake).
In its underwriting, the Company seeks to limit its maximum exposure to any
catastrophe in defined geographic areas of the United States and specific
catastrophe regions elsewhere.
The total amount of U.S. catastrophe coverage written by the Company has
been constrained by management's unwillingness to increase aggregate gross
exposure and thereby either become too reliant on purchasing reinsurance, which
is still relatively expensive for a London Market reinsurer buying reinsurance
protection, or to risk too high a proportion of the Company's capital. As
regards international property treaty, specific major zones each with their own
maximum aggregate exposure are: UK and Europe windstorm area; Japanese windstorm
area; Italy; Africa; Australia and the Far East (excluding Japan). Apart from
certain "frequency of loss" reinsurance, the reinsurance program for
catastrophes only applies to the U.S.
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Property direct and facultative business comprises individual non-marine
property and automobile physical damage risks, mainly written on an excess and
surplus lines basis through selected managing general agents. The vast majority
of this business originates from North America.
Lloyds
The Company's majority investment in Jago Capital Limited ("JCL"), which
provided 4.1% of capacity for Lloyd's Non-Marine Syndicate 205, produced gross
premiums written of $6.8 million in 1997. JCL's share of Syndicate 205's 1998
capacity has been increased to approximately 16%.
Distribution
The Company generally writes its business in the London Market. Treaty and
facultative reinsurance business originating in the United States is typically
placed for an insured or reinsured by one or more U.S. reinsurance
intermediaries or brokers and then through a London Market broker to the
Company. Direct insurance business is also generally placed by London Market
brokers, who in turn have received the business directly from a U.S. broker.
Non-United States business is also generally placed by local country brokers
through London Market brokers to the Company. Recently, a small percentage of
European business has been placed with the Company directly by European brokers.
In addition, the Company now provides motor liability insurance in Holland which
has been produced through telemarketing by a Dutch associate, Polis Direct BV.
The Company devotes considerable effort to maintaining and enhancing its
relationships with key London Market and United States brokers, and management
considers relationships with such brokers to be strong. Relationships with
United States brokers are important because certain U.S. brokers control the
placement of material amounts of business in the London Market in the Company's
specialty casualty lines. Further, U.S. brokers frequently work with multiple
London Market brokers and can influence the ultimate placement of business. As
regards U.S. excess of loss business placed by London Market brokers, total
commissions received by the U.S. and London brokers together are generally about
15%. Total commissions for direct and facultative business are up to 25% of
gross premiums and those for primary business are up to 30% of gross premiums.
Underwriting
The Company believes that its core professional indemnity and single
industry and/or single state risks businesses require a high level of technical
underwriting skills and judgment in order to price risks appropriately. Members
of the Company's underwriting team have an average of 14 years experience as
underwriters with the Company. Before joining the Company, most of them were
London Market brokers, an experience that has given them an understanding of the
business acquisition process from both the broker's and the underwriter's
perspective.
A key element of the Company's strategy is its ability, primarily as a
result of the length of service and reputation of its underwriting team in the
London Market, to be one of a limited number of reinsurers involved in the
negotiation of the terms and pricing of nearly all of the specialty casualty
business in which it participates (thereby functioning, in London Market
terminology, as a "lead"). Such involvement allows the Company to gain the most
advantage from its underwriting expertise. As a result, the Company is presented
with opportunities to participate in a high percentage of the reinsurance
programs in its specialized lines of business which are brought to the London
Market. In addition, the Company also has the opportunity to subscribe for a
larger percentage of each of such risks than reinsurers without such expertise.
The Company's underwriting philosophy stresses the underwriting of exposures
within clearly defined parameters which permit the thorough analysis and
appropriate pricing of each individual account. One way in which the Company
limits the parameters of the casualty risks it underwrites in any individual
account is by focusing on the underwriting of risks arising in a defined
geographic area, such as a single state. Although many of its risks are
underwritten on this basis, the Company also seeks to spread its risk through
diversifying its portfolio by underwriting individual accounts in different
geographic areas.
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The Company generally seeks to write the lower or middle layers of excess of
loss reinsurance coverage, which have historically demonstrated more predictable
loss experience and therefore permit more accurate pricing. Higher layers have
historically been less predictable because the frequency of claims is lower and
because it takes longer before reinsurers writing such layers become aware of
losses. In addition, management believes that these lower or middle layers tend
to receive a greater portion of the premium in relation to the risk assumed. In
its direct casualty insurance business, the Company generally emphasizes the
writing of coverage above a significant self-retention by the insured party. The
Company also generally seeks to write business in an amount not exceeding two or
three times the attachment point, since management believes that larger
multiples are less predictable and in many cases do not provide sufficient extra
premium for the greater exposure. To increase further its ability to assess its
risk, the Company focuses on casualty coverages which can be written on a
claims-made basis rather than on a loss occurrence basis.
Claims
In accordance with standard London Market contract conditions, the majority
of claims are made on the Company through the London Market broker that placed
the business. The London Market broker acts as custodian of the claims files and
notifies the Company, and other participants, of claims that have been filed,
either by way of electronic loss advice or by direct visit to the Company's
claims department. In the London Market, it is standard practice for the lead
underwriter on a particular risk to advise the other underwriters on the
handling of the claim, including whether to pursue settlement negotiations or
litigation. However, each following reinsurer retains the right to reject such
advice and pursue alternative approaches.
RATINGS
The Company's ratings as of December 31, 1997 by various agencies are
summarized below:
Capital Securities rating:
Moody's Investors Service....................... a3
Standard & Poor's............................... BBB+
A.M. Best rating:
ACIC............................................ A
Unionamerica.................................... A-
S&P Claims paying ability (Unionamerica). A
RESERVES
The Company establishes balance sheet reserves based on its estimates of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two components:
case reserves and non-case reserves. Case reserves are estimates of future
losses and loss adjustment expenses (LAE) for reported claims. Non-case
reserves, which include a provision for losses that have occurred but have not
been reported to the Company as well as development on reported claims, are the
difference between (i) the sum of case reserves and paid losses and (ii)
actuarially estimated ultimate incurred losses. Ultimate incurred losses are an
actuarially determined estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims and incurred but not reported claims
including amounts already paid.
The process of estimating reserves is inherently uncertain and involves an
evaluation of many variables including social and economic conditions. A
significant period of time may elapse between the report of a claim to the
Company and the ultimate settlement of the claim. The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims. There can be no assurance
that the ultimate liability of the Company will not exceed the amounts reserved.
- 10 -
<PAGE>
The following table presents the development of balance sheet reserve
liability for property and casualty reserves net of reinsurance for the calendar
years 1988 through 1997. The amounts shown for each year on the top line of the
table represent the Company's estimate of its liability for future payments of
losses and LAE as of the balance sheet date as originally reported. The
liability for unpaid losses and LAE as originally reported is presented net of
reinsurance receivables relating to unpaid losses. The upper portion of the
table represents a re-estimate of the original balance sheet liability at the
end of each succeeding period, followed by a line indicating the change from the
original estimate to the most current re-estimate. The lower portion of the
table represents the cumulative amount of the original liability that has been
paid in the succeeding years.
<TABLE>
<CAPTION>
ANALYSIS OF NET LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
December 31,
-------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
losses and LAE, gross 1,008,114 993,957 1,182,431 1,141,697 1,115,342
Deduct reinsurance
receivables 310,190 292,751 263,934 241,270 263,401
------- -------- -------- -------- --------
Liability for unpaid
losses and LAE, net 444,918 511,451 547,993 616,003 644,881 697,924 701,206 918,497 900,427 851,941
Liability
re-estimated
as of:
One year later 453,489 528,216 541,904 616,880 645,937 695,113 699,294 908,855 886,742
Two years later 444,664 524,397 552,882 606,952 641,382 694,590 693,639 897,436
Three years later 444,232 511,236 538,867 591,608 634,813 680,453 658,184
Four years later 431,272 499,258 524,345 593,996 614,590 645,797
Five years later 420,073 494,777 524,664 576,630 586,693
Six years later 419,318 501,074 515,775 562,064
Seven years later 428,468 497,157 502,340
Eight years later 427,747 487,165
Nine years later 426,434
------- ------- ------- ------- ------- ------- -------- -------- --------
Cumulative redundancy
(deficiency), net 18,484 24,286 45,653 53,939 58,188 52,127 43,022 21,061 13,685
Cumulative net
liability
paid as of:
One year later 66,567 106,555 103,849 145,215 123,719 176,319 162,844 204,693 228,561
Two years later 150,239 167,806 201,336 235,776 251,331 309,933 320,828 385,497
Three years later 189,183 257,924 264,043 323,344 349,441 427,157 356,676
Four years later 255,108 305,337 331,625 394,961 416,852 428,801
Five years later 291,783 352,998 381,599 445,555 412,083
Six years later 326,195 386,223 418,146 424,741
Seven years later 353,831 413,270 394,665
Eight years later 377,273 390,466
Nine years later 360,398
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF GROSS LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
December 31,
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Liability for unpaid
<S> <C> <C> <C> <C> <C>
losses and LAE, gross 1,008,114 993,957 1,182,431 1,141,697 1,115,342
Liability
re-estimated as of:
One year later 994,427 1,030,558 1,163,423 1,130,976
Two years later 1,034,565 1,015,670 1,148,545
Three years later 1,019,160 972,955
Four years later 979,057
Cumulative
redundancy, gross 29,057 21,002 33,886 10,721
Cumulative gross
liability paid
as of:
One year later 212,816 210,685 256,518 268,771
Two years later 390,049 411,583 463,042
Three years later 549,149 458,046
Four years later 556,409
</TABLE>
In evaluating the information in the tables above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
tables do not present accident year or policy year development data. Conditions
and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on these tables. In 1997,
net reserve redundancy of $13,685,000 represents a 1.5% decrease in the
Company's estimate of the December 31, 1996 reserve. See Note 7 to the
Consolidated Financial Statements for additional information on incurred and
paid losses and LAE.
- 12 -
<PAGE>
The following table presents a reconciliation of reserves of the Company's
property and casualty operations in accordance with statutory accounting
practices ("SAP") with reserves reflected in the Consolidated Financial
Statements prepared in accordance with generally accepted accounting principles
("GAAP") as of December 31, 1997.
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(IN THOUSANDS)
DECEMBER 31, 1997
-----------------
Liability for losses and LAE on a SAP basis................ $ 494,513
Add:
Unionamerica.............................................. 329,160
Other..................................................... 28,268
---------
Liability for losses and LAE on a GAAP basis (net of
reinsurance receivables of $ 263,401 ).................... $ 851,941
=========
CEDED REINSURANCE
Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance. Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on insurance to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the
premium received by the insurance company. Reinsurance does not discharge the
insurer from its obligation to its insureds. If the reinsurer fails to meet its
obligations, the ceding insurer remains liable to pay the insured.
The Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure. Management seeks to mitigate exposure to
adverse reinsurance pricing conditions and to limit its credit risk by
maintaining a diversity of reinsurers.
Domestic Insurance Operations
For its hospital medical malpractice insurance business, the Company has
reinsurance capacity to write policy limits to $51,000,000. The Company has
reinsurance for all losses in excess of $3,000,000 per occurrence subject to an
$8,000,000 aggregate annual deductible. The Company provides for its estimated
liability relating to this deductible in loss reserves. For its physician
business, the Company has reinsurance capacity to write policy limits up to
$5,000,000 per claim with a $7,000,000 annual aggregate limit. The Company has
reinsurance for losses in excess of $500,000 per claim and $750,000 for
occurrences involving more than one claim. For its group life insurance
business, the Company has reinsurance for losses in excess of $50,000 per life
and for excess medical expense business, the Company cedes 70% of the premiums
and losses for policy limits of $1,000,000 per occurrence and $2,000,000 in the
aggregate.
The Company's Vetting Committee evaluates the credit risk associated with
every reinsurer and reports its findings to the Audit Committee of the Board of
Directors. The Board of Directors has substantially increased the Company's
creditworthiness standards for reinsurers over the past several years. For new
reinsurers, the standards require minimum capital and surplus of $125,000,000 or
one of the following ratings: at least A- or better from A.M. Best, Claims
Paying Ability rating from Standard & Poor's of at least A or a S&P Insurance
Solvency International rating of at least A.
International Insurance Operations
In 1997 and 1998 to date, the Company has limited its maximum exposure to
any one casualty loss (after the benefit of any automatic or individual
facultative reinsurance but before the benefit of treaty reinsurance) in respect
of any single casualty reinsurance or insurance cedant by line of business to
$2,000,000. In addition, the Company purchases treaty reinsurance in order to
reduce its exposure both to individual insured losses and to
- 13 -
<PAGE>
multiple insured losses arising out of one loss event. The reinsurance program
currently purchased provides a maximum of $9,625,000 of coverage exceeding a
$375,000 retention by the Company for each insured loss or loss event. This
program is purchased in several layers, with such layers having varied maximum
recoverable provisions.
In its property business, the Company seeks to limit its maximum exposure
before reinsurance both on any one risk and in any one geographic region. In
1996, the maximum gross exposure (except for trucking terminal automobile fire
theft and collision ("FTC") business) on any one direct or facultative property
risk is limited to $500,000. In the case of trucking terminal FTC business, the
maximum gross exposure for any one terminal is $1,000,000.
The Company purchases catastrophe reinsurance protecting its U.S. direct and
facultative property binding authority account. For 1997 and 1998, the Company
purchased two layers of coverage, collectively totaling a maximum of $3,000,000
of protection in excess of a $1,000,000 retention by the Company on an each loss
basis, with each layer having one reinstatement. Within this band of coverage,
the Company retains net an amount of $150,000 in co-reinsurance.
In addition, the Company also purchases catastrophe reinsurance protecting
its entire U.S. property account (including property treaty as well as direct
and facultative business). For 1997, the Company purchased such catastrophe
coverage in several layers, collectively totaling a maximum of $8,300,000 of
protection in excess of a retention of $1,500,000 on an each loss basis. Within
this band of coverage the Company retains net an amount of $340,000 in
co-reinsurance. Each such layer purchased permits a maximum of one
reinstatement. Furthermore, the Company protects itself against frequency of
catastrophe loss by buying additional coverage against the possibility of it
experiencing a number of losses retained under its $1,500,000 retention under
the Company's principal catastrophe reinsurance coverage described above. This
"frequency of loss" coverage provides the Company with: (a) $500,000 of coverage
above a $500,000 retention on each loss, but only after an aggregate of $750,000
in losses to the layer between $500,000 and $1,000,000 have been borne by the
Company; and (b) $1,000,000 of coverage above a $1,000,000 retention on each
loss, but only after an aggregate of $1,500,000 in losses to the layer between
$1,000,000 and $2,000,000 have been borne by the Company. The only change to the
above for 1998 relates to the "frequency of loss" coverage. The aggregate amount
to be borne by the Company under (a) has been amended from $750,000 to $625,000
in losses to the layer between $500,000 and $1,000,000. Likewise under (b) the
aggregate amount to be borne by the Company has been amended from $1,500,000 to
$1,000,000 in losses to the layer between $1,000,000 and $2,000,000. Each of the
"frequency of loss" protections has one reinstatement.
The Company estimates that its maximum gross exposure in respect of all of
its property coverages with respect to a catastrophe in any one of four U.S.
geographic regions (Northeast, Southeast, West Coast and Mid-West) is
approximately $22,000,000 before reinsurance, reinstatement premiums and tax
benefits, which management believes the Company would not experience except in
connection with a catastrophe producing total insured losses in excess of those
produced by Hurricane Andrew (which produced the largest insured loss in
history). Therefore, the Company estimates that its maximum net exposure to any
such catastrophe would be significantly less than $22,000,000, since it would
have $10,800,000 in catastrophe reinsurance recoverables, in addition to any
reinstatement premiums. The Company would also receive tax benefits to it
arising from the loss. The Company's estimate of its maximum gross exposure to a
catastrophe in respect of all its U.S. property coverages was derived by adding
together three components: (a) the total limits exposed in its catastrophe
treaty business, subject to an adjustment to take account of nationwide treaty
accounts; (b) for property non-catastrophe treaty business, a conservative
proportion, based on the Company's experience, of the total limits exposed; and
(c) for direct and facultative business, an amount representing the largest
exposure by geographic region, taking into account likely loss based on
prevailing type of property construction and spread of risk. International,
non-U.S. property risk is managed by using carefully controlled aggregate
exposure limits for each designated geographical zone. The maximum aggregate
exposure is monitored carefully to ensure that, despite its minimal reinsurance
protection, it will not yield a catastrophe loss of more than $10,500,000. The
Company would however receive the tax benefits arising from such a loss.
- 14 -
<PAGE>
The following table sets forth ceded premiums for the year ended December
31, 1997 to principal reinsurers and retrocessionaires participating in the
Company's reinsurance and retrocession program:
<TABLE>
<CAPTION>
CEDED PREMIUMS
(IN THOUSANDS)
Ceded
Reinsurer or retrocessionaire Premiums Rating Source of Rating
- ----------------------------- --------- ------ ----------------
<S> <C>
Hannover Reinsurance Company $ 10,301 A+ A.M. Best Company
Lloyd's Underwriters 10,110 A "
Sun Life Assurance Company of Canada 4,830 A++ "
CNA Reinsurance Company Limited 3,461 A "
American Reinsurance Company 2,437 A+ "
Other 43,345
---------
Total $ 74,484
=========
</TABLE>
The following table sets forth the Company's principal reinsurers and
retrocessionaires and reinsurance receivables with respect to paid and unpaid
losses and LAE as of December 31, 1997.
<TABLE>
<CAPTION>
REINSURANCE RECEIVABLES
(IN THOUSANDS)
Reinsurance
Reinsurer or retrocessionaire Receivables Rating Source of Rating
- ----------------------------- ------------ ------ ----------------
<S> <C>
Lloyd's Underwriters $ 51,082 A A.M. Best Company
Hannover Reinsurance Company 29,630 A+ "
CIGNA Reinsurance Company 21,439 B+ "
National Reinsurance Company 18,920 A+ "
Munich Reinsurance Company 16,597 A++ "
Other 162,409
------------
Total $ 300,077
============
</TABLE>
INVESTMENTS
The Company invests principally in investment grade fixed income securities
and preferred stocks. The Investment Committee of the Company's Board of
Directors meets quarterly with management to set investment policy and review
performance of internal and external investment managers. The Company's Board of
Directors approves investment policy which currently authorizes a maximum
average effective duration of six years. The Company's investment managers
select specific bond issues within these guidelines. The investment policy
limits holdings in private placements, common stocks, preferred stocks and
international stocks and bonds, cumulatively, to 5% of invested assets.
In general, the investment policy of the Company is to maximize after-tax
total return, subject to constraints on investment quality, maturity and
liquidity. The Company's investment policy establishes a range for the
appropriate allocation among asset classes. The precise allocation varies
depending on an evaluation of the economic environment and on the Company's tax
position. As of December 31, 1997, the securities in the Company's fixed income
portfolio had an average rating of Aa as rated by Moody's Investors Services,
Inc. ("Moody's"). Standard & Poor's Corporation ("S&P"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service Inc. ("Fitch") ratings are used for
securities not rated by Moody's.
All fixed maturity and preferred stock securities are classified as
available-for-sale and carried at estimated fair value. For these securities,
temporary unrealized gains and losses, net of tax, are reported directly through
stockholders' equity, and have no effect on net income.
The Company's investment policy emphasizes quality and liquidity. The
Company's current investment objective is to maximize current yield while
preserving principal and maintaining liquidity. At December 31, 1997,
- 15 -
<PAGE>
70% of the Company's $1.14 billion fixed maturity investment portfolio was
invested in bonds rated "A" or higher by S&P or Moody's or issued by
governmental bodies or agencies, and 68% was invested in bonds rated "AA" or
higher or issued by such bodies or agencies. The Company's policy continues to
be to attempt to match the durations and currency mix of its investments as
closely as possible with those of its obligations. See Note 4 to the
Consolidated Financial Statements.
COMPETITION
The Company competes with monoline medical malpractice insurance companies,
specialty reinsurers, large multi-line property and casualty insurers and
reinsurers and providers of risk management and consulting services. The
insurance and reinsurance businesses are highly competitive and in a prolonged
soft market due in part to the level of capital available in the industry. Many
of the Company's competitors have substantially greater financial resources than
the Company and there are many companies that provide risk management and other
services that the Company provides. Among other things, competition may take the
form of lower prices, broader coverage, greater product flexibility or higher
quality service. However, the Company believes that its particular combination
of insurance and reinsurance, risk management services involving clinical risk
management, consulting services, direct access to the client organization,
experienced staff and long-term relationships with its clients provide it with a
competitive advantage in its chosen markets.
REGULATION
Domestic Insurance Operations
The Company's domestic insurance subsidiaries (ACIC, Health Providers
Insurance Company and American Continental Life Insurance Company, collectively,
the "Domestic Insurance Subsidiaries") are subject to the insurance laws and
regulations in each state in which they are licensed to do business, and their
states of domicile which include Missouri and Illinois. Each of the states in
which the Company's Domestic Insurance Subsidiaries are licensed has the duty
and obligation to impose premium taxes and other fees and to regulate rates,
financial data and major business transactions. Also, the subsidiaries must pass
certain solvency tests and meet minimum capital and surplus requirements in each
jurisdiction where they are licensed. Statutory financial statements must be
filed on a quarterly basis and insurance reserves must be certified by an
actuary on an annual basis. The Domestic Insurance Subsidiaries are regulated
with regard to the amount of insurance they may write based upon the amount of
their respective surpluses.
As part of a holding company system, the Domestic Insurance Subsidiaries are
subject to the reporting requirements of their respective states, which require
them to file an annual Holding Company System Registration Statement (Form B).
Form B is required by Missouri, Illinois and several other jurisdictions where
the Insurance Subsidiaries are licensed. Form B must include relevant
information concerning the history, capital structure and significant
transactions of each of the Insurance Subsidiaries, their parent and affiliates.
Pertinent biographical information regarding each director and officer must also
be provided. Transfers of assets and significant transactions between the
Company's subsidiaries within the holding company system also require regulatory
approval.
Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. Various
states also conduct "market conduct examinations" which are periodic,
unscheduled examinations designed to monitor the compliance with state laws and
regulations concerning the filing of rates and forms.
The Domestic Insurance Subsidiaries are required to participate in the
guaranty funds of states in which they are licensed to do business. Assessments
are made by the states to pay amounts to policyholders who were insured by
companies which have become insolvent and are placed into liquidation either
voluntarily or involuntarily by the insurance commissioner. These assessments
vary from state to state and are dependent upon the amount of the insolvencies
in each state during a given year.
- 16 -
<PAGE>
The Missouri and Illinois insurance laws and regulations impose restrictions
on the amount of dividends that may be paid to stockholders by insurance
companies domiciled in the respective states without prior approval of the
Director of Insurance of such states. Collectively in 1997, dividend payments by
the Domestic Insurance Subsidiaries to the Company without prior regulatory
approval may not exceed $31,000,000.
The Missouri and Illinois insurance laws and regulations impose a risk-based
minimum surplus requirement for insurance companies that attempts to measure
statutory capital and surplus needs based on the risks in a company's insurance
business and investment portfolio. As of December 31, 1997, the surplus of each
of the Domestic Insurance Subsidiaries exceeded their respective risk-based
capital requirement under the standards.
The National Association of Insurance Commissioners ("NAIC") annually
calculates a number of financial ratios to assist regulators in monitoring the
financial condition of insurance companies. In 1997, the ratios for ACIC, the
Company's principal domestic insurance subsidiary fell within the "normal" range
for ten of the eleven ratios. ACIC's result for the change in surplus test fell
outside the normal range due to the elimination of loss reserve discounting in
1997.
International Insurance Operations
Authorization To Transact Business. Except as permitted under European
Community law, no person may carry on an insurance business in the United
Kingdom (U.K.) unless authorized to do so under the Insurance Companies Act
1982, as amended from time to time (the "1982 Act"). Authorization is obtained
from HM Treasury Insurance Directorate ("HMTID"). The HMTID, in deciding whether
to grant authorization, has broad discretion to act in the public interest and
is required to determine whether the applicant is a fit and proper entity to be
engaged in insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise and whether the criteria of
sound and prudent management will be fulfilled with respect to the applicant. In
connection with a company's authorization, the HMTID may impose such conditions
as it sees fit relating to the operation of the Company and the writing of
insurance business. These are specific to each insurance company and are set out
in a "Notice of Requirements." In addition, companies incorporated in the U.K.
must comply with certain provisions of the Companies Act 1985 as amended from
time to time (the "Companies Act") requiring them to file and provide their
shareholders with audited financial statements and related reports by their
directors.
Excess and Surplus Lines Insurance in the United States (U.S.). Unionamerica
is an approved or eligible excess and surplus lines insurer in 47 states, as
well as in the District of Colombia, the Commonwealth of Puerto Rico and the
U.S. Virgin Islands. In order to maintain such approvals and eligibilities
Unionamerica has established a U.S. trust fund for the benefit of U.S. surplus
lines policyholders.
Reinsurance Business in the United States. To date, Unionamerica has been
granted trusteed or accredited reinsurer status in 46 U.S. States and the
District of Colombia. Accreditation makes it more convenient for U.S. reinsureds
to do business with Unionamerica, since it allows reinsureds to take credit for
the reinsurance in their statutory financial statements without withholding
funds or requiring Unionamerica to provide letters of credit. The Company has
obtained such status in most of the states in which its significant U.S.
reinsureds are organized and is continuing to seek such a status in all other
U.S. jurisdictions in which the law would permit accreditation of Unionamerica.
Management believes that accreditation provides a marketing advantage with U.S.
clients by emphasizing Unionamerica's commitment to the U.S. market and by
enhancing Unionamerica's reputation for financial stability. As of December 31,
1997, Unionamerica's U.S. Reinsurance Trust for the benefit of its U.S. cedants
is funded with trusteed assets plus accrued interest of $251.9 million. In
addition, as of December 31, 1997, the Unionamerica provided letters of credit
totaling $80.6 million to U.S. cedants on business not currently covered by the
Trust.
- 17 -
<PAGE>
United Kingdom Tax Treatment
Unionamerica is resident in the United Kingdom for the purposes of United
Kingdom taxation and is subject to United Kingdom corporation tax on its
profits. Advance corporation tax ("ACT") is payable in respect of dividends and
other distributions made by Unionamerica. ACT which is paid by Unionamerica on
dividends and other distributions may, in certain circumstances and subject to
certain limits and restrictions, be offset against its liability for United
Kingdom corporation tax. See Note 5 to Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 800 persons.
None of its employees are represented by a labor union, and the Company believes
that its employee relations are excellent.
ITEM 2. PROPERTIES
- -------------------
The Company leases approximately 244,000 square feet of office space
throughout the United States ("U.S.") and three suites in the London
Underwriting Centre in the United Kingdom ("U.K."). The Company's major
leasehold obligation relates to its corporate office located in Deerfield,
Illinois. The Deerfield, Illinois office space consists of 135,000 square feet.
The lease is for a term of fifteen years beginning July 1, 1991. The Company has
the right to terminate this lease in the tenth and eleventh years of the lease
under certain circumstances. In 2001, the Company has the option of renting an
additional 52,000 square feet. The Company's principal regional and subsidiary
offices are in Atlanta, Georgia; San Francisco and San Diego, California;
Independence, Missouri; and Washington, D.C.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is subject to litigation and arbitration in the normal course of
its business. The Company does not believe that any pending litigation or
arbitration will have a material adverse effect on its consolidated financial
position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company held a Special Meeting of Stockholders on December 5, 1997 to
approve a) the issuance of up to 7,685,336 shares of Common Stock in connection
with the acquisition of Unionamerica Holdings plc and b) the adoption of an
amendment to the Company's 1993 Employee Stock Plan to increase, in connection
with the acquisition, the number of shares of Common Stock reserved for issuance
under the plan by 570,845 shares. At the meeting, 8,613,080 votes were cast in
favor of the proposal, 19,760 votes were cast against the proposal, and there
were 7,717 abstentions.
- 18 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MMI". There were 521 holders of record as of December 31, 1997. The
following table sets forth the quarterly high and low daily closing prices
during 1997 and 1996.
High Low
---- ---
1997
- ----
First Quarter $ 32 1/8 $ 22 3/4
Second Quarter 27 1/2 21
Third Quarter 27 11/16 24 5/8
Fourth Quarter 26 15/16 23 3/4
1996
First Quarter $ 30 1/4 $ 22
Second Quarter 31 1/4 26 3/4
Third Quarter 33 1/4 30 1/8
Fourth Quarter 32 1/4 28 1/2
On December 31, 1997 the closing price of the Company's Common Stock was
$25 1/8 per share.
In 1997, the Company declared quarterly dividends of $0.07 per share,
compared to quarterly dividends of $0.06 per share in 1996. See Notes 6 and 8 to
the Consolidated Financial Statements for a description of restrictions on the
ability of the registrant's subsidiaries to transfer funds to the registrant in
the form of dividends.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Selected Consolidated Financial Data on page 13 of the MMI Companies, Inc.
1997 Annual Report to Stockholders is incorporated herein by reference and is
filed in electronic format as Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 14 through 19 of the MMI Companies, Inc. 1997 Annual Report
to Stockholders is incorporated herein by reference and is filed in electronic
format as Exhibit 13.2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Consolidated Financial Statements and Notes thereto and Report of
Independent Auditors on pages 20 through 38 of the MMI Companies, Inc. 1997
Annual Report to Stockholders is incorporated herein by reference and is filed
in electronic format as Exhibit 13.3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
- 19 -
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The "Election of Directors", "Executive Officers" and "Compliance with
Section 16(a) of the Exchange Act" sections on pages 1 through 3 and pages 4
through 5 and page 7 of the Registrant's Proxy Statement relating to the annual
meeting of shareholders to be held on April 16, 1998, are included by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The "Executive Compensation" section on pages 7 through 15 of the
Registrant's Proxy Statement relating to the annual meeting of stockholders to
be held on April 16, 1998, is included herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The "Security Ownership of Certain Beneficial Owners and Management"
section on pages 5 through 6 of the Registrant's Proxy Statement relating to the
annual meeting of stockholders to be held on April 16, 1998, is included herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The "Certain Relationships and Related Transactions" and "Compensation
Committee Interlocks and Insider Participation in Compensation Decisions"
sections on pages 6 and 7 and 12 and 13 of the Registrant's Proxy Statement
relating to the annual meeting of stockholders to be held on April 16, 1998, are
included herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
a. Filed documents
1. Financial statements.
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial statement schedules. An index to financial statement
schedules is on page 23.
3. Exhibits. An index to exhibits to this report is on page 24.
b. Reports on Form 8-K.
On December 23, 1997, the Company filed a Current Report on Form 8-K relating to
the completion of private placement of $125 million in Capital Securities.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant: MMI Companies, Inc.
Date: March 18, 1998 /s/ B. Frederick Becker
------------------------
B. Frederick Becker
Chairman and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 18, 1998 /s/ B. Frederick Becker
------------------------
B. Frederick Becker
Chairman and Chief Executive Officer
Officer and Director
Date: March 18, 1998 /s/ Paul M. Orzech
-------------------
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
Date: March 18, 1998 /s/ Joseph R. Herman
---------------------
Joseph R. Herman
Senior Vice President and Controller
Date: March 18, 1998 /s/ Richard R. Barr
--------------------
Richard R. Barr
Director
Date: March 18, 1998 /s/ George B. Caldwell
-----------------------
George B. Caldwell
Director
Date: March 18, 1998 /s/ K. James Ehlen, M.D.
-------------------------
K. James Ehlen, M.D.
Chairman and Chief Executive Officer
Date: March 18, 1998 /s/ F. Laird Facey, M.D.
-------------------------
F. Laird Facey, M.D.
Director
- 21 -
<PAGE>
Date: March 18, 1998 /s/ Alan C. Guy
----------------
Alan C. Guy
Director
Date: March 18, 1998 /s/ William M. Kelley
----------------------
William M. Kelley
Director
Date: March 18, 1998 /s/ Andrew D. Kennedy
----------------------
Andrew D. Kennedy
Director
Date: March 18, 1998 /s/ Timothy R. McCormick
-------------------------
Timothy R. McCormick
Director
Date: March 18, 1998 /s/ Gerald L. McManis
----------------------
Gerald L. McManis
Director
Date: March 18, 1998 /s/ Scott S. Parker
--------------------
Scott S. Parker
Director
Date: March 18, 1998 /s/ Edward C. Peddie
---------------------
Edward C. Peddie
Director
Date: March 18, 1998 /s/ Joseph D. Sargent
----------------------
Joseph D. Sargent
Director
Date: March 18, 1998 /s/ Ian G. Sinclair
--------------------
Ian G. Sinclair
Director
Date: March 18, 1998 /s/ Robert A. Spass
--------------------
Robert A. Spass
Director
- 22 -
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
II. Condensed Financial Information of Registrant
Condensed Balance Sheets.................................. S-1
Condensed Statements of Income............................ S-2
Condensed Statements of Cash Flows........................ S-3
III. Supplementary Insurance Information............................ S-4
IV. Reinsurance.................................................... S-5
V. Valuation and Qualifying Accounts.............................. S-6
VI. Supplementary Property/Casualty Insurance Information.......... S-7
Schedule I has been omitted because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- 23 -
<PAGE>
EXHIBIT INDEX
3.1 Certificate Of Incorporation of The Registrant. (6)
3.2 Bylaws of the Registrant. (3)
4.1 Specimen stock certificate representing Common Stock. (7)
4.2 Rights Agreement dated as of June 14, 1997 by and between the Registrant
and Chase Mellon Shareholder Services LLC, as Rights Agent. (7)
4.3 Deposit Agreement, dated as of December 1, 1995, among the Company,
Morgan Guaranty Trust Company of New York, as Depositary, and the
holders from time to time of the American Depositary Receipts, as
supplemented by a Supplemental Agreement dated as of February 14, 1996
to the Deposit agreement dated as of December 1, 1995. (9)
4.4 Form of American Depositary Receipt evidencing American Depositary
Shares. (8)
10.1 Credit Agreement dated as of February 20, 1998 among the Registrant,
Various Lenders and Bank of America National Trust and Savings
Association, as Agent for the Lenders.
10.2 Indenture dated December 23, 1997 relating to Junior Subordinated
Debentures. (11)
10.3 Amended and Restated Declaration of Trust of MMI Capital Trust I dated
December 23, 1997. (11)
10.4 Form of Exchange Guarantee of the Company dated December 23, 1997,
relating to the Exchange Capital Securities. (11) 10.5 Registration
Rights Agreement dated December 23, 1997. (11)
10.6 Waiver of Right to Elect Director dated October 21, 1996, between the
Registrant and each of Conning Insurance Capital Limited Partnership,
Conning Insurance Capital International Partnership, Conning Insurance
Capital Limited Partnership II and Conning Insurance Capital
International Partnership (5)
10.7 Lease dated July 1, 1991, between the Registrant and MATAS Corporation
for the Registrant's principal executive offices and First through
Seventh Amendments to Lease, various dates (1)(3)(4)(5)(7)
10.8 Amended and Restated Return on Equity Incentive Plan, effective January
1, 1990. (5) #
10.9 Amended 1993 Employee Stock Plan, effective January 15, 1993.(10) #
10.10 Retirement Equity Plan.(7) #
10.11 1993 Non-Employee Directors' Formula Stock Option Plan, effective
January 15, 1993. #
10.12 Certificates of Insurance for Directors' Life Insurance Program.(1) #
10.13 Amended Board of Directors Retirement Plan, effective January 1, 1993. #
10.14 Amended 1996 Non-Employee Director Stock and Deferred Cash Compensation
Plan. (5) #
10.15 Unionamerica Holdings plc Loan Stock Plans. (8) #
10.16 Unionamerica Holdings Limited Unapproved Executive Share Option Scheme.
(8) #
10.17 The Rules of the Unionamerica Holdings plc 1996 Executive Share Option
Scheme. (12) #
10.18 Employment Agreement, dated as of May 1, 1997, between the Registrant
and its Chief Executive Officer, Mr. B. Frederick Becker. #
10.19 Agreement dated as of January 7, 1998 between the Registrant and Mr.
Steve A. Schleisman.
10.20 Agreements dated as of April 17, 1996 between the Registrant and Ms.
Anna Marie Hajek, Mr. Gerald L. McManis and Mr. Paul M. Orzech.(6) #
10.21 Service Agreement dated September 10, 1993, between Ian G. Sinclair and
UA Management Company. (8) #
10.22 Merger Agreement and Plan of Reorganization dated as of December 30,
1993 among the Registrant, McManis Associates, Inc. and the stockholders
of McManis Associates, Inc.(2)
10.23 Transfer and Forbearance Agreement dated as of December 30, 1993 among
the Registrant and Gerald L. McManis. (2)
10.24 Acquisition Agreement dated June 25, 1997 by and between the Registrant
and Unionamerica Holdings plc (7)
10.25 Share Purchase Agreement, as amended, dated as of June 30, 1993, among
Unionamerica Acquisition Company Ltd., Unionamerica Holdings Ltd. and
The Continental Corporation. (8)
10.26 Tax Indemnification Agreement, dated as of September 10, 1993, by and
among The Continental Corporation and Unionamerica Acquisition Company
Ltd. (8)
12.1 Statement re computation of ratio of earnings to fixed charges
13.1 MMI Companies Inc. 1997 Annual Report to Stockholders - Selected
Consolidated Financial Data
13.2 MMI Companies Inc. 1997 Annual Report to Stockholders - Management's
Discussion and Analysis of Results of Operations and Financial Condition
- 24 -
<PAGE>
13.3 MMI Companies Inc. 1997 Annual Report to Stockholders - Consolidated
Financial Statements and Notes
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consents of KPMG and KPMG Audit Plc.
27.1 Financial data schedule.
99.1 Opinions of KPMG and KPMG Audit Plc.
- --------------------
(1) Incorporated herein by reference to Registration Statement No. 33-59464
on Form S-1 dated June 24, 1993.
(2) Incorporated herein by reference to Report on Form 10-K dated December
31, 1993, Commission File No. 1-11920.
(3) Incorporated herein by reference to Report on Form 10-K dated December
31, 1994, Commission File No. 1-11920.
(4) Incorporated herein by reference to Report on Form 10-K dated December
31, 1995, Commission File No. 1-11920.
(5) Incorporated herein by reference to Report on Form 10-K dated December
31, 1996, Commission File No. 1-11920.
(6) Incorporated herein by reference to Report on Form 10-Q dated June 30,
1996, Commission File No. 1-11920.
(7) Incorporated herein by reference to Registration Statement No. 333-32027
on Form S-4, dated November 4, 1997.
(8) Incorporated by reference to Registration Statement No. 33-99186 on Form
F-1 dated November 9, 1995.
(9) Incorporated by reference to Registration Statement No. 333-05858 on
Form S-8.
(10) Incorporated by reference to Registration Statement No. 333-46889 on
Form S-8, dated February 25, 1998.
(11) Incorporated herein by reference to Registration Statement No. 333-44565
on Form S-4, dated January 20, 1998
(12) Incorporated herein by reference to Report on Form 10-Q dated June 30,
1996, Commission File No. 1-14112.
# Compensatory plans or arrangements.
- 25 -
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31,
---------------------------
1997 1996
------------- ------------
ASSETS
INVESTMENTS
<S> <C> <C>
Investment in subsidiaries......................................... $ 403,200 $ 358,192
Short-term investments............................................. 835 15,460
Fixed maturities................................................... 31,855 24,822
Preferred stocks................................................... 2,000 --
------------- ------------
437,890 398,474
OTHER ASSETS
Cash............................................................... 161 128
Furniture and equipment - at cost, less accumulated
depreciation: 1997 - $4,298; 1996 - $5,719.................... 5,501 3,964
Due from affiliates................................................ 78,164 17,805
Deferred income taxes.............................................. 8,888 5,924
Other.............................................................. 4,888 2,148
------------- ------------
$ 535,492 $ 428,443
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities............................. $ 15,484 $ 14,039
Due to affiliates.................................................. 2,282 1,238
Company-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company.......................... 118,724 --
Long-term notes payable............................................ -- 58,000
------------- ------------
136,490 73,277
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: 1997 and 1996 - 30,000
Issued and outstanding shares: 1997 - 18,857; 1996 - 18,681.... 1,886 1,868
Additional paid-in capital.......................................... 217,855 215,091
Retained earnings................................................... 154,929 124,751
Unrealized gains on investments, net of taxes:
1997 - $12,812; 1996 - $7,217................................... 24,332 13,456
------------- ------------
399,002 355,166
------------- ------------
$ 535,492 $ 428,443
============= ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
Year Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
REVENUES
<S> <C> <C> <C>
Management fees from subsidiaries ............................... $ 28,450 $ 24,550 $ 19,100
Dividends received from subsidiaries ............................ 29,750 11,000 6,000
Net investment income ........................................... 1,578 752 375
Net realized gains on investments ............................... 16 22 --
---------- ---------- ----------
59,794 36,324 25,475
EXPENSES
Administrative and other ........................................ 24,394 23,193 19,558
Interest expense ................................................ 3,712 3,397 2,767
---------- ---------- ----------
28,106 26,590 22,325
---------- ---------- ----------
Income from continuing operations before income taxes,
extraordinary loss and equity in undistributed net
income of subsidiaries ................................. 31,688 9,734 3,150
Income taxes (credit) ........................................... 381 (396) (932)
---------- ---------- ----------
Income from continuing operations before
extraordinary loss and equity in
undistributed net income of subsidiaries ............... 31,307 10,130 4,082
Extraordinary loss, net of taxes ................................ 141 -- --
---------- ---------- ----------
Income from continuing operations before
equity in undistributed net income
of subsidiaries ........................................ 31,166 10,130 4,082
Loss from discontinued operations ............................... -- (5,100) --
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiaries ......................................... 31,166 5,030 4,082
Equity in undistributed net income of subsidiaries .............. 3,194 35,090 25,312
---------- ---------- ----------
Net income .................................................. $ 34,360 $ 40,120 $ 29,394
========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net cash provided (used) by operating activities ..................... $ (17,619) $ 3,558 $ (46,306)
Investing activities:
Net sale (purchase) of short-term investments ................... 14,649 (14,769) 121
Purchases of fixed maturities ................................... (43,108) (38,833) --
Sales of fixed maturities ....................................... 33,133 8,706 --
Maturities of fixed maturities .................................. 1,588 5,430 --
Capital contribution to subsidiaries ............................ (20,000) (10,003) (5,000)
Furniture and equipment additions ............................... (3,200) (2,174) (1,770)
Acquisition of subsidiaries ..................................... (21,006) (11,074) (25,097)
---------- ---------- ----------
Net cash used by investing activities ........................ (37,944) (62,717) (31,746)
Financing activities:
Issuance of Common Stock ........................................ 1,899 56,725 66,626
Issuance of Capital Securities .................................. 124,551 -- --
Common Stock repurchased ........................................ (2,840) -- --
Costs incurred in connection with securites offering ............ (5,832) (3,119) (6,176)
Payments on notes payable ....................................... (58,000) (750) (1,250)
Proceeds from notes payable including short-term borrowings ..... -- 9,000 21,000
Dividends ....................................................... (4,182) (2,864) (2,061)
---------- ---------- ----------
Net cash provided by financing activities .................... 55,596 58,992 78,139
---------- ---------- ----------
Increase (decrease) in cash .................................. 33 (167) 87
Cash at beginning of year ............................................ 128 295 208
---------- ---------- ----------
Cash at end of year .......................................... $ 161 $ 128 $ 295
========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
December 31,
---------------------------------------------------------
Loss and
Deferred Loss
Policy Adjustment Unearned Future
Acquisition Expense Premium Policy
Segment Costs Reserves Reserves Benefits
------------ ------------ ------------ ------------
1997
<S> <C> <C> <C> <C>
Domestic insurance $ 7,462 $ 625,114 $ 67,147 $ 8,723
International insurance 19,077 500,032 67,041 --
Consulting and fees -- -- -- --
------------ ------------ ------------ ------------
$ 26,539 $ 1,125,146 $ 134,188 $ 8,723
============ ============ ============ ============
1996
Domestic insurance $ 7,117 $ 631,573 $ 55,679 $ 8,578
International insurance 16,006 518,345 50,796 --
Consulting and fees -- -- -- --
------------ ------------ ------------ ------------
$ 23,123 $ 1,149,918 $ 106,475 $ 8,578
============ ============ ============ ============
1995
Domestic insurance $ 5,660 $ 638,815 $ 52,951 $ 8,982
International insurance 11,233 561,055 43,330 --
Consulting and fees -- -- -- --
------------ ------------ ------------ ------------
$ 16,893 $ 1,199,870 $ 96,281 $ 8,982
============ ============ ============ ============
<FN>
See Note 13 to the consolidated financial statements for a discussion of the
reclassification of segment information.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
[CONTINUED]
Year Ended December 31,
---------------------------------------------------------------------------------------
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other Net
Premium Investment Settlement Acquisition Operating Premiums
Segment Revenues Income Expenses Costs Expenses Written
------------ ------------ ------------ ------------ ------------ ------------
1997
<S> <C> <C> <C> <C> <C> <C>
Domestic insurance $ 159,579 $ 47,171 $ 132,948 $ 15,805 $ 36,885 $ 168,607
International insurance 118,658 28,319 66,813 33,244 30,469 129,082
Consulting and fees -- -- -- -- 47,055 --
------------ ------------ ------------ ------------ ------------ ------------
$ 278,237 $ 75,490 $ 199,761 $ 49,049 $ 114,409 $ 297,689
============ ============ ============ ============ ============ ============
1996
Domestic insurance $ 164,409 $ 44,274 $ 135,786 $ 14,024 $ 34,753 $ 167,392
International insurance 116,982 29,407 72,990 27,811 16,258 122,725
Consulting and fees -- -- -- -- 31,646 --
------------ ------------ ------------ ------------ ------------ ------------
$ 281,391 $ 73,681 $ 208,776 $ 41,835 $ 82,657 $ 290,117
============ ============ ============ ============ ============ ============
1995
Domestic insurance $ 155,191 $ 39,850 $ 130,088 $ 11,353 $ 31,932 $ 161,188
International insurance 117,712 23,086 76,220 28,050 19,474 137,207
Consulting and fees -- -- -- -- 20,537 --
------------ ------------ ------------ ------------ ------------ ------------
$ 272,903 $ 62,936 $ 206,308 $ 39,403 $ 71,943 $ 298,395
============ ============ ============ ============ ============ ============
<FN>
See Note 13 to the consolidated financial statements for a discussion of the
reclassification of segment information.
</FN>
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(DOLLARS IN THOUSANDS)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1997:
<S> <C> <C> <C> <C> <C>
Life insurance inforce at end of year................... $ 992,060 $ 302,889 $ - $ 689,171 -%
========== ========== ========== ==========
Premiums:
Medical malpractice .................................. $ 173,025 $ 32,946 $ 14,018 $ 154,097 9.10%
International ........................................ 43,583 19,586 94,661 118,658 79.78%
Other ................................................ 17,854 14,185 1,813 5,482 33.07%
---------- ---------- ---------- ----------
Total premiums .................................. $ 234,462 $ 66,717 $ 110,492 $ 278,237
========== ========== ========== ==========
Year Ended December 31, 1996:
Life insurance inforce at end of year................... $1,265,506 $ 300,385 $ - $ 965,121 -%
========== ========== ========== ==========
Premiums:
Medical malpractice .................................. $ 171,058 $ 29,504 $ 15,168 $ 156,722 9.68%
International ........................................ 49,915 21,040 88,107 116,982 75.32%
Other ................................................ 21,001 15,481 2,167 7,687 28.19%
---------- ---------- ---------- ----------
Total premiums .................................. $ 241,974 $ 66,025 $ 105,442 $ 281,391
========== ========== ========== ==========
Year Ended December 31, 1995:
Life insurance inforce at end of year................... $1,397,274 $ 344,807 $ - $1,052,467 -%
========== ========== ========== ==========
Premiums:
Medical malpractice .................................. $ 169,760 $ 33,115 $ 10,990 $ 147,635 7.44%
International ........................................ 41,822 21,358 97,248 117,712 82.62%
Other ................................................ 17,032 13,653 4,177 7,556 55.28%
---------- ---------- ---------- ----------
Total premiums .................................. $ 228,614 $ 68,126 $ 112,415 $ 272,903
========== ========== ========== ==========
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance At
Beginning Balance at
Description of Year Additions Deductions End of Year
- ----------- ---------- ---------- ---------- ----------
Year Ended December 31, 1997:
<S> <C> <C> <C> <C>
Accumulated amortization of goodwill ..................... $ 5,788 $ 3,314 $ -- $ 9,102
Accumulated depreciation of furniture and
equipment ........................................... 11,626 4,647 5,574 10,699
Year Ended December 31, 1996:
Accumulated amortization of goodwill ..................... $ 3,777 $ 2,011 $ -- $ 5,788
Accumulated depreciation of furniture and
equipment ........................................... 7,733 4,143 250 11,626
Year Ended December 31, 1995:
Accumulated amortization of goodwill ..................... $ 3,096 $ 681 $ -- $ 3,777
Accumulated depreciation of furniture and
equipment ........................................... 5,294 3,242 803 7,733
Accumulated allowance for uncollectible
reinsurance (1) .................................... 11,160 -- 11,160 --
<FN>
(1) Represents the write-off of reinsurance receivables that were fully reserved
prior to 1993.
</FN>
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
December 31,
---------------------------------------------------------
Discount
Loss and Deducted from
Deferred Loss Loss and Loss
Affiliation Policy Adjustment Adjustments
with Acquisition Expense Expenses Premium
Registrant Costs Reserves Reserves Reserves
- ------------------ ------------ ------------ ------------ ------------
1997:
Consolidated
<S> <C> <C> <C> <C>
subsidiaries... $ 26,539 $ 1,113,095 $ -- $ 134,188
1996:
Consolidated
subsidiaries... $ 23,123 $ 1,139,018 $ -- $ 106,475
1995:
Consolidated
subsidiaries... $ 16,893 $ 1,007,204 $ -- $ 96,281
</TABLE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
[CONTINUED]
Year Ended December 31,
------------------------------------------------------------------------------------------------
Loss and Loss
Adjustment Expenses Amortization Paid
Incurred Related to of Deferred Losses and
Affiliation Net -------------------------- Policy Loss Net
with Premium Investment Current Prior Acquisition Adjustment Premiums
Registrant Earned Income Year Year Costs Expenses Written
- ------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1997:
Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
subsidiaries... $ 272,755 $ 74,019 $ 209,367 ($13,685) $ 49,049 $ 243,869 $ 292,205
1996:
Consolidated
subsidiaries... $ 273,704 $ 72,301 $ 213,419 ($9,642) $ 41,835 $ 218,739 $ 282,443
1995:
Consolidated
subsidiaries... $ 265,347 $ 61,632 $ 204,076 ($1,912) $ 39,403 $ 169,223 $ 290,839
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
EXHIBIT 12 - RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIOS)
Year ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Income from continuing operations
<S> <C> <C> <C> <C> <C>
before income taxes and extraordinary losses $ 44,316 $ 55,449 $ 42,213 $ 5,330 $ 43,797
Add fixed charges:
Interest expense 6,489 6,083 10,889 10,084 4,150
Amortization of issuance costs -- 70 -- 123 38
Portion of rents representative of
interest factor 2,150 1,850 1,625 1,345 982
---------- ---------- ---------- ---------- ----------
8,639 8,003 12,514 11,552 5,170
---------- ---------- ---------- ---------- ----------
Income as adjusted $ 52,955 $ 63,452 $ 54,727 $ 16,882 $ 48,967
========== ========== ========== ========== ==========
Fixed charges $ 8,639 $ 8,003 $ 12,514 $ 11,552 $ 5,170
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 6.1 7.9 4.4 1.5 9.5
</TABLE>
<PAGE>
EXHIBIT 10.1
================================================================================
U.S. $100,000,000
CREDIT AGREEMENT,
dated as of February 20, 1998,
among
MMI COMPANIES, INC.,
as the Borrower,
CERTAIN COMMERCIAL LENDING INSTITUTIONS,
as the Lenders,
and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
as the Agent for the Lenders
Arranged by
BANCAMERICA ROBERTSON STEPHENS
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS............................. 1
1.1 Defined Terms.......................................................... 1
1.2 Use of Defined Terms................................................... 19
1.3 Cross-References....................................................... 19
1.4 Accounting and Financial Determinations................................ 19
ARTICLE II
COMMITMENTS and BORROWING PROCEDURES......................... 19
2.1 Commitments............................................................ 19
2.1.1 Commitment of Each Lender....................................... 19
2.1.2 Lenders Not Permitted or Required To Make Loans................. 19
2.2 Reduction of Commitment Amount......................................... 20
2.2.1 Optional........................................................ 20
2.3 Borrowing Procedure.................................................... 20
2.4 Continuation and Conversion Elections.................................. 20
2.5 Funding................................................................ 21
2.6 Loan Accounts.......................................................... 21
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES................... 22
3.1 Repayments and Prepayments............................................. 22
3.2 Interest Provisions.................................................... 23
3.2.1 Rates .......................................................... 23
3.2.2 Post-Maturity Rates............................................. 23
3.2.3 Payment Dates................................................... 23
3.3 Fees................................................................... 24
3.3.1 Facility Fees................................................... 24
3.3.2 Other Fees...................................................... 25
ARTICLE IV
CERTAIN OFFSHORE RATE AND OTHER PROVISIONS................... 25
4.1 Fixed Rate Lending Unlawful............................................ 25
4.2 Deposits Unavailable................................................... 26
4.3 Increased Eurodollar Loan Costs, etc................................... 26
4.4 Funding Losses......................................................... 26
4.5 Increased Capital Costs................................................ 27
4.6 Taxes.................................................................. 27
- i -
<PAGE>
4.7 Payments, Computations, etc............................................ 29
4.8 Sharing of Payments.................................................... 29
4.9 Setoff................................................................. 30
4.10 Use of Proceeds........................................................ 30
ARTICLE V
CONDITIONS TO BORROWING ..................................... 31
5.1 Initial Borrowing...................................................... 31
5.1.1 Resolutions, etc................................................ 31
5.1.2 Organic Documents............................................... 31
5.1.3 Opinion of Counsel.............................................. 31
5.1.4 Closing Fees, Expenses, etc..................................... 31
5.1.5 Other Documents................................................. 32
5.2 All Borrowings......................................................... 32
5.2.1 Compliance with Warranties, No Default, etc..................... 32
5.2.2 Borrowing Request............................................... 33
5.2.3 Satisfactory Legal Form......................................... 33
ARTICLE VI
REPRESENTATIONS AND WARRANTIES............................... 33
6.1 Organization, etc...................................................... 33
6.2 Due Authorization, Non-Contravention, etc.............................. 34
6.3 Government Approval, Regulation, etc................................... 34
6.4 Validity, etc.......................................................... 34
6.5 Financial Statements................................................... 34
6.5.1 GAAP Financial Statements....................................... 34
6.5.2 Statutory Financial Statements.................................. 35
6.6 No Material Adverse Change............................................. 36
6.7 Litigation, Labor Controversies, etc................................... 36
6.8 Subsidiaries........................................................... 37
6.9 Ownership of Properties................................................ 37
6.10 Taxes.................................................................. 37
6.11 ERISA Compliance....................................................... 37
6.12 Insurance Licenses..................................................... 38
6.13 Environmental Warranty................................................. 38
6.14 Regulations G, U and X................................................. 38
6.15 Accuracy of Information................................................ 39
ARTICLE VII
COVENANTS.................................................... 39
7.1 Affirmative Covenants.................................................. 39
7.1.1 Financial Information, Reports, Notices, etc. .................. 39
7.1.2 Compliance with Laws, etc....................................... 43
7.1.3 Maintenance of Properties....................................... 43
7.1.4 Insurance....................................................... 43
- ii -
<PAGE>
7.1.5 Books and Records............................................... 44
7.1.6 Environmental Covenant.......................................... 44
7.2 Negative Covenants..................................................... 44
7.2.1 Business Activities............................................. 44
7.2.2 Liens .......................................................... 44
7.2.3 Financial Condition............................................. 45
7.2.4 Investments..................................................... 46
7.2.5 Restricted Payments, etc........................................ 46
7.2.6 Consolidation, Merger, etc...................................... 47
7.2.7 Transactions with Affiliates.................................... 47
7.2.8 Negative Pledges, Restrictive Agreements, etc. ................. 47
ARTICLE VIII
EVENTS OF DEFAULT............................................ 48
8.1 Listing of Events of Default........................................... 48
8.1.1 Non-Payment of Obligations...................................... 48
8.1.2 Breach of Warranty.............................................. 48
8.1.3 Non-Performance of Certain Covenants and Obligations............ 48
8.1.4 Non-Performance of Other Covenants and Obligations.............. 48
8.1.5 Default on Other Indebtedness................................... 49
8.1.6 Judgments....................................................... 49
8.1.7 Pension Plans................................................... 49
8.1.8 Control of the Borrower......................................... 50
8.1.9 Bankruptcy, Insolvency, etc..................................... 50
8.2 Action if Bankruptcy................................................... 50
8.3 Action if Other Event of Default....................................... 51
ARTICLE IX
THE AGENT.................................................... 51
9.1 Appointment and Authorization.......................................... 51
9.2 Delegation of Duties................................................... 51
9.3 Liability of Agent..................................................... 51
9.4 Reliance by Agent...................................................... 52
9.5 Notice of Default...................................................... 53
9.6 Credit Decision........................................................ 53
9.7 Indemnification........................................................ 54
9.8 Agent in Individual Capacity........................................... 54
9.9 Successor Agent........................................................ 54
9.10 Withholding Tax........................................................ 55
ARTICLE X
MISCELLANEOUS PROVISIONS..................................... 56
10.1 Waivers, Amendments, etc............................................... 56
- iii -
<PAGE>
10.2 Notices............................................................... 57
10.3 Payment of Costs and Expenses......................................... 58
10.4 Indemnification....................................................... 58
10.5 Survival.............................................................. 59
10.6 Severability.......................................................... 59
10.7 Headings.............................................................. 59
10.8 Execution in Counterparts, Effectiveness, etc......................... 59
10.9 Governing Law; Entire Agreement....................................... 60
10.10 Successors and Assigns................................................ 60
10.11 Sale and Transfer of Loans; Participations in Loans................... 60
10.11.1 Assignments.................................................. 60
10.11.2 Participations............................................... 61
10.11.3 Limitation of Rights of any Assignee
Lender or Participant........................................ 62
10.11.4 Tax Matters.................................................. 62
10.11.5 Information.................................................. 63
10.11.6 Federal Reserve Bank......................................... 63
10.12 Confidentiality....................................................... 63
10.13 Other Transactions.................................................... 63
10.14 Forum Selection and Consent to Jurisdiction........................... 64
10.15 Waiver of Jury Trial.................................................. 64
SCHEDULE I - Disclosure Schedule
SCHEDULE II - Business Activities of the Borrower and its
Subsidiaries
EXHIBIT A - Form of Borrowing Request
EXHIBIT B - Form of Continuation/Conversion Notice
EXHIBIT C - Form of Lender Assignment Agreement
EXHIBIT D - Form of Note
EXHIBIT E - Form of Opinion of Wayne A. Sinclair, General
Counsel to the Borrower
EXHIBIT F - Form of Officer's Certificate of the Borrower
- iv -
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of February 20, 1998, among MMI
COMPANIES, INC., a Delaware corporation (the "Borrower"), the various financial
--------
institutions parties hereto (collectively, the "Lenders"), and BANK OF AMERICA
-------
NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as agent (in such capacity, the
"Agent") for the Lenders.
-----
W I T N E S S E T H:
WHEREAS, the Borrower is engaged through its various subsidiaries in
the business of insurance and providing risk management services and products;
and
WHEREAS, the Lenders have agreed to make available to the Borrower a
revolving credit facility upon the terms and conditions set forth in this
Agreement; and
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION I.1 Defined Terms The following terms (whether or not
--------------
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"ACIC" means American Continental Insurance Company, a Missouri
----
insurance company.
"ACLIC" means American Continental Life Insurance Company, a Missouri
-----
insurance company.
"Affiliate" means, as to any Person, any other Person which, directly
---------
or indirectly, is in control of, is controlled by or is under common control
with, such Person. A Person shall be deemed to be controlled by another Person
if the controlling Person possesses, directly or indirectly, the power to direct
or cause the direction of the management and policies of such Person whether
through the ownership of voting securities, by contract or otherwise.
<PAGE>
"Agent" means BofA in its capacity as agent for the Lenders hereunder,
-----
and any successor agent arising under Section 9.9.
-----------
"Agent-Related Persons" means BofA and any successor agent arising
under Section 9.9, together with their respective Affiliates (including, in the
-----------
case of BofA, the Arranger), and the officers, directors, employees, agents and
attorneys-in-fact of such Persons and Affiliates.
"Agreement" means, on any date, this Credit Agreement as originally in
---------
effect on the Effective Date and as thereafter from time to time amended,
supplemented, amended and restated, or otherwise modified and in effect on such
date.
"Alternate Reference Rate" means, for any day, the higher of: (a) .50%
-------------------------
per annum above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by BofA in San
Francisco, California, as its "reference rate." (The "reference rate" is a rate
set by BofA based upon various factors including BofA's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate.)
"Annual Statement" means the annual financial statement of any
-----------------
insurance company as required to be filed with the applicable Department
together with all exhibits or schedules filed therewith, prepared in conformity
with SAP. With respect to the Annual Statements for U.S. domiciled Insurance
Subsidiaries, references to amounts on particular exhibits, schedules, lines,
pages and columns of such Annual Statement are based on the format promulgated
by the NAIC for 1996 life insurance company annual statements or 1996
property-casualty insurance company annual statements, whichever is applicable.
If the format of any Annual Statement is changed in future years so that
different information is contained in such items or they no longer exist, it is
understood that the reference is to information consistent with that reported in
the referenced item in the 1996 Annual Statement of the insurance company.
"Applicable Margin" means a percentage determined on the basis of the
------------------
higher of the S&P Rating and the Moody's Rating, as follows:
- 2 -
<PAGE>
||
|------------------------------------------------------------------------------|
| If the higher of the | |
| S&P Rating and the | Then the Applicable |
| Moody's Rating is: | Margin shall be: |
|------------------------|-----------------------| |
| S&P Rating | Moody's Rating | |
|------------------------|-----------------------|-----------------------------|
| A or higher | A2 or higher | .13% |
|------------------------|-----------------------|-----------------------------|
| A- | A3 | .165% |
|------------------------|-----------------------|-----------------------------|
| BBB+ | Baa1 | .20% |
|------------------------|-----------------------|-----------------------------|
| BBB | Baa2 | .235% |
|------------------------|-----------------------|-----------------------------|
| BBB- or lower | Baa3 or lower | .27% |
|------------------------|-----------------------|-----------------------------|
||
Any change in the Applicable Margin as a result of a change in either
the S&P Rating and/or the Moody's Rating shall be effective for purposes of this
definition as of the day immediately following such change; provided, further,
-------- -------
that for purposes of determining the higher of the S&P Rating and the Moody's
Rating, the A, A-, BBB+, BBB and BBB- rating levels of S&P shall correspond to
and be deemed the equivalent of the A2, A3, Baa1, Baa2 or Baa3 rating levels,
respectively, of Moody's. If only one of a Moody's Rating and an S&P Rating
exists at any time, then the Applicable Margin during such time shall be
determined as set forth above based on such existing rating. If at any time
there exists neither a Moody's Rating nor an S&P Rating, the Applicable Margin
during such time shall be .27%.
"1996 Annual Statements" is defined in Section 6.5.2(b).
---------------------- ----------------
"Arranger" means BancAmerica Robertson Stephens, a Delaware
--------
Corporation.
"Assignee Lender" is defined in Section 10.11.1.
--------------- ---------------
"Assignment" is defined in Section 10.11.1.
---------- ---------------
"Attorney Costs" means and includes all fees and disbursements of any
---------------
law firm or other external counsel, the allocated cost of internal legal
services (without duplication) and all disbursements of internal counsel.
- 3 -
<PAGE>
"Authorized Officer" means, relative to the Borrower, those of its
-------------------
officers whose signatures and incumbency shall have been certified to the Agent
and the Lenders pursuant to Section 5.1.1.
-------------
"BofA" means Bank of America National Trust and Savings Association, a
----
national banking association.
"Borrower" is defined in the preamble.
-------- --------
"Borrowing" means the Loans of the same type and, in the case of
---------
Eurodollar Loans, having the same Interest Period made by all Lenders on the
same Business Day and pursuant to the same Borrowing Request in accordance with
Section 2.3.
- -----------
"Borrowing Request" means a loan request and certificate duly executed
------------------
by an Authorized Officer of the Borrower, substantially in the form of Exhibit A
---------
hereto.
"Business Day" means
------------
(a) any day which is neither a Saturday or Sunday nor a legal
holiday on which banks are authorized or required to be closed in
Chicago, Illinois; and
(b) relative to the making, continuing, prepaying or repaying
of any Eurodollar Loans, any day on which dealings in Dollars are
carried on in the interbank eurodollar market in London.
"Capital" means Net Worth plus Debt.
-------
"Capital Securities" means the Capital Securities issued by the Capital
------------------
Trust containing substantially the terms described in the Capital Trust Offering
Memorandum.
"Capital Trust" means the MMI Capital Trust I, a special purpose
--------------
Delaware business trust established by the Borrower, of which the Borrower holds
all the common securities, which has issued the Capital Securities, and which
has loaned to the Borrower (such loan being evidenced by the Capital Trust
Debentures) the net proceeds of the issuance and sale of the Capital Securities.
"Capital Trust Debentures" means the Junior Subordinated Deferrable
-------------------------
Interest Debentures issued by the Borrower to the Capital Trust containing
substantially the terms described in the Capital Trust Offering Memorandum.
- 4 -
<PAGE>
"Capital Trust Offering Memorandum" means the Offering Memorandum dated
---------------------------------
December 18, 1997 for $125,000,000 of Capital Securities issued by the Capital
Trust.
"Change in Control" means the acquisition by any Person, or two or more
-----------------
Persons acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 35% or more of the outstanding shares of voting stock of the
Borrower.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
----
otherwise modified from time to time.
"Commitment" means, relative to any Lender, such Lender's obligation to
----------
make Loans pursuant to Section 2.1.1 in an amount not to exceed the amount set
--------------
forth opposite such Lender's name on the signature pages hereto.
"Commitment Amount" means, on any date, $100,000,000, as such amount
------------------
may be reduced from time to time pursuant to Section 2.2.
-----------
"Commitment Termination Date" means the earliest of
---------------------------
(a) February 20, 2003;
(b) the date on which the Commitment Amount is terminated in
full or reduced to zero pursuant to Section 2.2; and
-----------
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described in clause (b) or (c), the Commitments
---------- ---
shall terminate automatically and without further action.
"Commitment Termination Event" means
----------------------------
(a) the occurrence of any Default described in clauses (a)
-----------
through (d) of Section 8.1.9 with respect to the Borrower or any
--- --------------
Significant Subsidiary; or
(b) the occurrence and continuance of any other Event of
Default and either
(i) the declaration of the Loans to be due and
payable pursuant to Section 8.3, or
-----------
- 5 -
<PAGE>
(ii) in the absence of such declaration, the giving
of notice by the Agent, acting at the direction of the Required Lenders, to the
Borrower that the Commitments have been terminated.
"Contingent Liability" means any agreement, undertaking or arrangement
--------------------
by which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) the indebtedness,
obligation or any other liability of any other Person (other than by
endorsements of instruments in the course of collection), or guarantees the
payment of dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability shall
(subject to any limitation set forth therein) be deemed to be the outstanding
principal amount (or maximum principal amount, if larger) of the debt,
obligation or other liability guaranteed thereby.
"Continuation/Conversion Notice" means a notice of continuation or
-------------------------------
conversion and certificate duly executed by an Authorized Officer of the
Borrower, substantially in the form of Exhibit B hereto.
---------
"Controlled Group" means all members of a controlled group of
------------------
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower, are treated as a single employer under Section 414(b) or 414(c) of the
Code or Section 4001 of ERISA.
"Debt" means the consolidated Indebtedness of the Borrower and its
----
Subsidiaries; provided, however, that for the purpose of determining the Debt to
Capital Ratio in Section 7.2.3(a), (i) any contingent obligation with respect to
----------------
undrawn letters of credit shall not constitute Debt, and (ii) the Capital
Securities, the Capital Trust Debentures and the related agreements shall not be
considered Debt of the Capital Trust or the Borrower.
- 6 -
<PAGE>
"Debt to Capital Ratio" means the ratio of
---------------------
(a) Debt
to
(b) Capital.
"Default" means any Event of Default or any condition, occurrence or
-------
event which, after notice or lapse of time or both, would constitute an Event of
Default.
"Department" is defined in Section 6.5.2.
---------- -------------
"Disclosure Schedule" means the Disclosure Schedule attached hereto as
--------------------
Schedule I, as it may be amended, supplemented or otherwise modified from time
- ----------
to time by the Borrower with the written consent of the Agent and the Required
Lenders, provided, however, that no such consent shall be required to amend,
-------- -------
supplement or modify the Disclosure Schedule to report any of the following:
(a) a stock dividend as permitted under Section 7.2.5;
-------------
(b) a stock acquisition as permitted under Sections 7.2.4 and
--------------
7.2.6; or
-----
(c) the addition of a Subsidiary acquired in a transaction
permitted under Sections 7.2.4 and 7.2.6.
-------------- -----
"Dollar" and the sign "$" mean lawful money of the United States.
------ -
"Domestic Office" means, relative to any Lender, the office of such
----------------
Lender designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender (or any successor or
assign of such Lender) within the United States as may be designated from time
to time by notice from such Lender, as the case may be, to each other Person
party hereto.
"Effective Date" means the date this Credit Agreement becomes effective
--------------
pursuant to Section 10.8.
------------
"Environmental Laws" means all federal, state or local laws, statutes,
------------------
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements
- - 7 -
<PAGE>
with, any Governmental Authorities, in each case relating to environmental,
health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
-----
regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
-----------------
incorporated) under common control with the Borrower within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a Pension
------------
Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon the Borrower or any ERISA Affiliate.
"Eurodollar Reserve Percentage" has the meaning specified in the
-------------------------------
definition of "Offshore Rate."
"Eurodollar Loan" means a Loan bearing interest, at all times during an
---------------
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the Offshore Rate.
"Eurodollar Office" means, relative to any Lender, the office of such
------------------
Lender designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender as designated from time to
time by notice from such Lender to the Borrower and the Agent, whether or not
outside the United States, which shall be making or maintaining Eurodollar Loans
of such Lender hereunder.
- 8 -
<PAGE>
"Event of Default" is defined in Section 8.1.
---------------- -----------
"Federal Funds Rate" means, for any day, the rate set forth in the
--------------------
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including any
such successor, "H.15(519)") on the preceding Business Day opposite the caption
"Federal Funds (Effective)"; or, if for any relevant day such rate is not so
published on any such preceding Business Day, the rate for such day will be the
arithmetic mean as determined by the Agent of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on
that day by each of three leading brokers of Federal funds transactions in New
York City selected by the Agent.
"Fiscal Quarter" means any quarter of a Fiscal Year.
--------------
"Fiscal Year" means any period of twelve consecutive calendar months
-----------
ending on December 31; references to a Fiscal Year with a number corresponding
to any calendar year (e.g. the "1996 Fiscal Year") refer to the Fiscal Year
---
ending on the December 31 occurring during such calendar year.
"F.R.S. Board" means the Board of Governors of the Federal Reserve
-------------
System or any successor thereto.
"GAAP" means generally accepted accounting principles in the United
----
States of America as from time to time in effect.
"Governmental Authority" means any nation or government, any state or
-----------------------
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"HPIC" means Health Providers Insurance Company, an Illinois
----
corporation.
"Impermissible Qualification" means, relative to the opinion or'
----------------------------
certification of any independent public accountant as to any financial statement
of the Borrower, any qualification or exception to such opinion or certification
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of
matters relevant to such financial statement (other than a
qualification to the effect that such accountant has
- 9 -
<PAGE>
relied on the opinion or certificate of a foreign accountant); or
(c) which relates to the treatment or classification of any
item in such financial statement and which, as a condition to its
removal, would require an adjustment to such item the effect of which
would be to cause the Borrower to be in default of any of its
obligations under Section 7.2.3.
-------------
"Indebtedness" of any Person means, without duplication, (a) all
------------
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to property
acquired by the Person (even though the rights and remedies of the seller or
bank under such agreement in the event of default are limited to repossession or
sale of such property); (f) all obligations with respect to capital leases; (g)
all net obligations with respect to Swap Contracts; (h) all indebtedness
referred to in clauses (a) through (g) above secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien upon or in property (including accounts and contracts
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness; and (i) all Contingent Liabilities
in respect of indebtedness or obligations of others of the kinds referred to in
clauses (a) through (e) above;
provided, however, that payables arising in the ordinary course of business of
the Borrower to any of its Subsidiaries and of any such Subsidiary to any other
Subsidiary of the Borrower or to the Borrower shall not be deemed
"Indebtedness".
For all purposes of this Agreement, the Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer.
"Indemnified Liabilities" is defined in Section 10.4.
----------------------- ------------
- 10 -
<PAGE>
"Indemnified Parties" is defined in Section 10.4.
------------------- ------------
"Insurance Code" means (i) with respect to Insurance Subsidiaries
---------------
domiciled in the State of Missouri or the State of Illinois, the Insurance Code
of the State of Missouri or the State of Illinois, as applicable, and any
successor statutes of similar import, together with the regulations thereunder,
as amended or otherwise modified and in effect from time to time and (ii) with
respect to any Insurance Subsidiary not domiciled in the State of Missouri or
the State of Illinois (including any non-U.S. domiciled Insurance Subsidiaries),
the applicable regulatory requirements of the applicable Department, as amended
or otherwise modified and in effect from time to time. References to sections of
the Insurance Code shall be construed also to refer to successor sections.
"Insurance Subsidiary" means each of ACIC, HPIC, ACLIC and Unionamerica
--------------------
and any other Subsidiary of the Borrower designated as an Insurance Subsidiary
in Item 2 ("Insurance and Significant Subsidiaries") of the Disclosure Schedule,
------
as such Schedule may from time to time be amended, modified, supplemented or
restated.
"Interest Period" means, relative to any Eurodollar Loans, the period
----------------
beginning on (and including) the date on which such Eurodollar Loan is made or
continued as, or converted into, a Eurodollar Loan pursuant to Section 2.3 or
-----------
2.4 and shall end on (but exclude) the day which numerically corresponds to such
- ---
date one, two, three or six months or one year thereafter (or, if such month has
no numerically corresponding day, on the last Business Day of such month), in
either case as the Borrower may select in its relevant notice pursuant to
Section 2.3 or 2.4; provided, however, that
- ----------- --- -------- -------
(a) if any Lender shall determine in good faith that it is
unable to fund a Eurodollar Loan in the interbank eurodollar market
with respect to a six month or one year Interest Period for any reason,
the Borrower shall not be permitted to select such a six month or one
year Interest Period;
(b) the Borrower shall not be permitted to select Interest
Periods to be in effect at any one time which have expiration dates
occurring on more than five different dates;
(c) if such Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall end on the next
- 11 -
<PAGE>
following Business Day (unless such next following Business Day is the
first Business Day of a calendar month, in which case such Interest
Period shall end on the Business Day next preceding such numerically
corresponding day); and
(d) no Interest Period may end later than the Commitment
Termination Date.
"Invested Assets" means, as of any date, (i) with respect to any U.S.
----------------
domiciled Insurance Subsidiary, the amount reported on line 9, page 2, column 4
of the Annual Statement of property-casualty Insurance Subsidiaries and line 11,
page 2, column 4 of the Annual Statement of life Insurance Subsidiaries or any
amount determined in a consistent manner in accordance with SAP for any date
other than one as of which an Annual Statement is prepared and (ii) with respect
to any U.K. domiciled Insurance Subsidiary, the amount reported in the Annual
Return to HM Treasury Insurance Directorate for such Insurance Subsidiary that
is comparable to the amount reported as "Invested Assets" for U.S. domiciled
Insurance Subsidiaries. Notwithstanding the foregoing, if the format of the
Annual Statement is changed in future years so that different information is
contained in such line or such line no longer exists, it is understood that the
foregoing reference is to information consistent with that reported in the 1996
Annual Statement of the relevant Insurance Subsidiary.
"Investment" means, relative to any Person,
----------
(a) any loan or advance made by such Person to any other
Person (excluding commission, travel and similar advances to directors,
officers, employees and independent contractors made in the ordinary
course of business);
(b) any Contingent Liability of such Person; and
(c) any ownership or similar interest held by such Person in
any other Person;
provided, however, that (i) trade accounts receivables arising in the ordinary
- --------
course of business, (ii) receivables arising in the ordinary course of business
of the Borrower to its Subsidiaries and of any Subsidiary to any other
Subsidiary or the Borrower (not including Indebtedness or equity investments),
(iii) quarterly tax payments due from or advanced by the Subsidiaries to the
Borrower under the terms of the tax allocation agreement, (iv) payments made by
ACIC to MMI Agency, Inc., to temporarily cover expenses incurred before
commissions are earned, (v) management fees due from or advanced by the
Subsidiaries to the
- 12 -
<PAGE>
Borrower, (vi) the Borrower's ownership interest in any of its Subsidiaries,
(vii) Indebtedness of the Borrower to any of its Subsidiaries and Indebtedness
of any Subsidiary of the Borrower to the Borrower or any other Subsidiary of the
Borrower; and (viii) any guarantee of the Borrower relating to the Capital
Securities shall not be deemed "Investments". The amount of any Investment shall
be the original principal or capital amount thereof less all returns of
principal or equity thereon (and without adjustment by reason of the financial
condition of such other Person) and shall, if made by the transfer or exchange
of property other than cash, be deemed to have been made in an original
principal or capital amount equal to the fair market value of such property.
"Investment Grade Securities" means
---------------------------
(a) non-equity securities, convertible securities and
non-perpetual preferred securities rated BBB- or better by S&P, Duff & Phelps
Credit Rating Co. or Fitch Investors Service Inc. or Baa3 or better by Moody's;
(b) U.S. Government Securities;
(c) commercial paper rated A-2 or better by S&P or P-2 or
better by Moody's;
(d) demand deposit accounts or money market accounts that
are maintained in the ordinary course of business with banks or other financial
institutions that are members of the Federal Deposit Insurance Corporation (and
any successors thereto);
(e) certificates of deposit issued by (i) commercial banks
having capital and surplus in excess of $50,000,000 or (ii) any bank or
financial institution; provided that the amount of any such certificate of
deposit shall not exceed the then insured amount per deposit available to such
bank or financial institution by the Federal Deposit Insurance Corporation (and
any successors thereto); and
(f) eurodollar deposits having a maturity of not more than
30 days.
"IRS" means the Internal Revenue Service, and any Governmental
---
Authority succeeding to any of its principal functions under the Code.
- 13 -
<PAGE>
"Lender Assignment Agreement" means a Lender Assignment Agreement
-----------------------------
substantially in the form of Exhibit C hereto.
---------
"Lenders" is defined in the preamble.
------- --------
"Lending Office" means, as to any Lender, the office or offices of such
--------------
Lender specified as its Domestic Office" or "Offshore Office", as the case may
be, or such other office or offices as such Lender may from time to time notify
the Borrower and the Agent.
"Licenses" is defined in Section 6.12.
-------- ------------
"Lien" means any security interest, mortgage, pledge, hypothecation,
----
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement with
respect to property of any kind or nature whatsoever.
"Loan" is defined in Section 2.1.1.
---- -------------
"Loan Document" means this Agreement, any Notes and all other
--------------
agreements, certificates or documents delivered to the Agent or any Lender in
connection herewith.
"Material Adverse Effect" means any change, event, action, condition or
-----------------------
effect which individually or in the aggregate (i) impairs the validity or
enforceability of this Agreement or any Loan Document, (ii) materially and
adversely affects the consolidated business, operations, financial prospects or
condition of the Borrower or any of its Subsidiaries or (iii) materially impairs
the ability of the Borrower to perform its obligations under this Agreement and
the Loan Documents.
"Moody's" means Moody's Investors Services, Inc.
-------
"Moody's Rating" means the actual rating level assigned by Moody's to
---------------
the most senior debt of the Borrower without credit enhancement; provided,
--------
however, that if no senior debt of the Borrower without credit enhancement is
- -------
rated by Moody's (or if the senior debt so rated has been defeased), the Moody's
Rating shall mean the actual rating level assigned by Moody's to the Capital
Securities.
"Multiemployer Plan" means a "multiemployer plan", within the meaning
-------------------
of Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate
makes, is making, or is obligated to make
- 14 -
<PAGE>
contributions or, during the preceding three calendar years, has made, or been
obligated to make, contributions.
"NAIC" means the National Association of Insurance Commissioners, or
----
any successor thereto.
"Net Worth" means the consolidated net worth, calculated in accordance
---------
with GAAP, of the Borrower and its Subsidiaries but excluding aggregate
unrealized gains or losses net of tax as prescribed by FAS 115; provided,
--------
however, that for the purpose of determining the Debt to Capital Ratio in
- -------
Section 7.2.3(a), the net proceeds of the issuance and sale of the Capital
- -----------------
Securities shall not be included in the calculation of Net Worth of the
Borrower.
"Note" means a promissory note executed by the Borrower in favor of a
----
Lender pursuant to Section 2.6, substantially in the form of Exhibit D hereto.
----------- ---------
"Obligations" means all obligations (monetary or otherwise) of the
-----------
Borrower arising under or in connection with this Agreement and each other Loan
Document.
"Offshore Rate (Reserve Adjusted)" means, for any Interest Period, with
--------------------------------
respect to Eurodollar Loans, the rate of interest per annum (rounded upward to
the next 1/16th of 1%) determined by the Agent as follows:
Offshore Rate = IBOR
---------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
-----------------------------
any Interest Period the maximum reserve percentage (expressed
as a decimal, rounded upward to the next 1/16th of 1%) in
effect on such day (whether or not applicable to any Lender)
under regulations issued from time to time by the F.R.S. Board
for determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement)
with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities"); and
"IBOR" means the rate of interest per annum
----
determined by the Agent to be the rate of interest at which
dollar deposits in the approximate amount of the Eurodollar
Loan for such Interest Period would be
- 15 -
<PAGE>
offered by BofA's Grand Cayman Branch, Grand Cayman B.W.I.
(or such other office as may be designated for such purpose
by the Agent), to major banks in the offshore dollar
interbank market at their request at approximately 10:00
a.m. (Chicago time) two Business Days prior to the
commencement of such Interest Period.
The Offshore Rate shall be adjusted automatically as
to all Eurodollar Loans then outstanding as of the effective
date of any change in the Eurodollar Reserve Percentage.
"Organic Document" means, relative to the Borrower or any Subsidiary,
-----------------
its certificate of incorporation, its by-laws and all shareholder agreements,
voting trusts and similar arrangements applicable to any of its authorized
shares of capital stock.
"Other Taxes" means any present or future stamp or documentary taxes or
-----------
any other excise or property taxes, charges or similar levies which arise from
any payment made hereunder or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement or any other Loan Documents.
"Participant" is defined in Section 10.11.2.
----------- ---------------
"Participation" is defined in Section 10.11.2.
------------- ---------------
"PBGC" means the Pension Benefit Guaranty Corporation, or any
----
Governmental Authority succeeding to any of its principal functions under ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2) of
-------------
ERISA) subject to Title IV of ERISA which the Borrower sponsors, maintains, or
to which it makes, is making, or is obligated to make contributions, or in the
case of a multiple employer plan (as described in Section 4064(a) of ERISA) has
made contributions at any time during the immediately preceding five (5) plan
years.
"Percentage" means, relative to any Lender, the percentage set forth
----------
opposite its signature hereto or set forth in the Lender Assignment Agreement,
as such percentage may be adjusted from time to time pursuant to Lender
Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and
delivered pursuant to Section 10.11.
-------------
"Person" means any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or any
- 16 -
<PAGE>
other entity, whether acting in an individual, fiduciary or other capacity.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
----
ERISA) which the Borrower sponsors or maintains or to which the Borrower makes,
is making, or is obligated to make contributions and includes any Pension Plan.
"Quarterly Payment Date" means the last day of each March, June,
------------------------
September, and December or, if any such day is not a Business Day, the next
succeeding Business Day.
"Quarterly Statements" is defined in Section 6.5.2(b).
-------------------- ----------------
"Rating" means the Moody's Rating or the S&P Rating.
------
"Reference Rate Loan" means a Loan bearing interest at a fluctuating
--------------------
rate determined by reference to the Alternate Reference Rate.
"Reportable Event" means, any of the events set forth in Section
-----------------
4043(b) of ERISA or the regulations thereunder, other than any such event for
which the 30-day notice requirement under ERISA has been waived in regulations
issued by the PBGC.
"Required Lenders" means, at any time, Lenders then holding at least
-----------------
61% of the then aggregate unpaid principal amount of the Loans, or, if no
amounts are outstanding, Lenders having at least 61% of the aggregate amount of
the Commitments.
"S&P" means Standard & Poor's Ratings Services, a division of the
---
McGraw-Hill Companies, Inc.
"S&P Rating" means the actual rating level assigned by S&P to the most
----------
senior debt of the Borrower without credit enhancement; provided, however, that
-------- -------
if no senior debt of the Borrower without credit enhancement is rated by S&P (or
if the senior debt so rated has been defeased), the S&P rating shall mean the
actual rating level assigned by S&P to the Capital Securities.
"SAP" means, as to any U.S. or non-U.S. domiciled insurance company,
---
the statutory accounting practices prescribed or permitted by the applicable
Department.
"Significant Subsidiary" means (i) each Subsidiary of the Borrower
-----------------------
designated as a Significant Subsidiary in Item 2 ("Insurance and Significant
------
Subsidiaries") of the Disclosure
- 17 -
<PAGE>
Schedule, as such Schedule may from time to time be amended, modified,
supplemented or restated, and (ii) at any time, any Subsidiary of the Borrower
having a net worth or revenues for the most recent Fiscal Quarter at least equal
to 5% of Net Worth or 5% of the consolidated revenues of the Borrower and its
Subsidiaries for the most recent Fiscal Quarter, respectively.
"Statutory Financial Statements" is defined in Section 6.5.2(a).
------------------------------ ----------------
"Statutory Liabilities" means as of any date, (i) with respect to any
----------------------
U.S. domiciled Insurance Subsidiary, the total amount shown on line 21, page 3,
column 1 of the Annual Statement of property-casualty Insurance Subsidiaries and
line 28, page 3, column 1 of the Annual Statement of life Insurance
Subsidiaries, or an amount determined in a consistent manner for any date other
than one as of which an Annual Statement is prepared and (ii) with respect to
any U.K. domiciled Insurance Subsidiary, the minimum margin required by the
applicable Governmental Authority. Notwithstanding the foregoing, if the format
of the Annual Statement is changed in future years so that different information
is contained in such line or such line no longer exists, it is understood that
the foregoing reference is to information consistent with that reported in the
referenced line in the 1996 Annual Statement of such Insurance Subsidiary.
"Subsidiary" means, with respect to any Person, any corporation,
----------
association, partnership, limited liability partnerships, limited liability
company, joint venture or other business entity of which more than 50% of the
outstanding capital stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether at the time
capital stock of any other class or classes of such corporation shall or might
have voting power upon the occurrence of any contingency), membership interests
or other equity interests (in the case of Persons other than corporations), is
at the time directly or indirectly owned by such Person, by such Person and one
or more other Subsidiaries of such Person, or by one or more other Subsidiaries
of such Person.
"Surety Instruments" means all letters of credit (including standby and
------------------
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"Surplus" means, with respect to ACIC or HPIC as of any date, the total
-------
amount shown on line 25, page 3, column 1 of the Annual Statement of ACIC or
HPIC, as applicable, on an undiscounted basis or an undiscounted amount
determined in a
- 18 -
<PAGE>
consistent manner in accordance with SAP for any date other than one as of which
an Annual Statement is prepared. Notwithstanding the foregoing, if the format of
the Annual Statement is changed in future years so that different information is
contained in such line or such line no longer exists, it is understood that the
foregoing reference is to information consistent with that reported in the
referenced line in the 1996 Annual Statement of ACIC or HPIC, as applicable.
"Swap Contract" means any agreement (including any master agreement
-------------
and' any agreement, whether or not in writing, relating to any single
transaction) that is an interest rate swap agreement, basis swap, forward rate
agreement, commodity swap, commodity option, equity or equity index swap or
option, bond option, interest rate option, forward foreign exchange agreement,
rate cap, collar or floor agreement, currency swap agreement, cross-currency
rate swap agreement, swaption, currency option or any other, similar agreement
(including any option to enter into any of the foregoing).
"Taxes" means any and all present or future taxes, levies, imposts,
-----
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and the Agent, such taxes (including
income taxes or franchise taxes) as are imposed on or measured by each Lender's
net income by the jurisdiction (or any political subdivision thereof) under the
laws of which such Lender or the Agent, as the case may be, is organized or
maintains a lending office.
"Type" means relative to any Loan, the portion thereof, if any, being
----
maintained as a Reference Rate Loan or a Eurodollar Loan.
"U.K." means the United Kingdom.
----
"Unfunded Pension Liability" means the excess of a Plan's benefit
----------------------------
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.
"Unionamerica" means Unionamerica Insurance Company, Limited, a United
------------
Kingdom insurance company.
"United States" or "U.S." means the United States of America, its fifty
------------- ----
States and the District of Columbia.
- 19 -
<PAGE>
"United States Person" means any citizen, national or resident of the
---------------------
United States, any corporation or other entity created or organized in or under
the laws of the United States or any political subdivision thereof or any estate
or trust, in each case that is not subject to withholding of United States
federal income taxes or other taxes on payment of interest, principal or fees
hereunder.
"U.S. Government Securities" means obligations of the United States
----------------------------
Government, any agency thereof or any United States Government-sponsored
entities.
SECTION I.2 Use of Defined Terms. Unless otherwise defined or the
----------------------
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Disclosure Schedule and in
each Borrowing Request, Continuation/Conversion Notice, Loan Document, notice
and other communication delivered from time to time in connection with this
Agreement or any other Loan Document.
SECTION I.3 Cross-References. Unless otherwise specified, references in
----------------
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.
SECTION I.4 Accounting and Financial Determinations. Unless otherwise
----------------------------------------
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, all accounting determinations and computations hereunder or
thereunder (including under Section 7.2.3) shall be made, and all financial
--------------
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with GAAP.
ARTICLE II
COMMITMENTS and BORROWING PROCEDURES
SECTION II.1 Commitments. On the terms and subject to the conditions of
-----------
this Agreement (including Article V), each Lender severally agrees to make Loans
---------
pursuant to the Commitments described in this Section 2.1.
-----------
SECTION II.1.1 Commitment of Each Lender. From time to time on any
---------------------------
Business Day occurring prior to the Commitment Termination
- 20 -
<PAGE>
Date, each Lender will make Loans (relative to such Lender, its "Loans") to the
-----
Borrower equal to such Lender's Percentage of the aggregate amount of the
Borrowing of Loans requested by the Borrower to be made on such day. The
Commitment of each Lender described in this Section 2.1.1 is herein referred to
-------------
as its "Commitment." On the terms and subject to the conditions hereof, the
----------
Borrower may from time to time borrow, prepay and reborrow Loans.
SECTION II.1.2 Lenders Not Permitted or Required To Make Loans. No
-------------------------------------------------
Lender shall be permitted or required to make any Loan if, after giving effect
thereto, the aggregate outstanding principal amount of all Loans
(a) of all Lenders would exceed the Commitment Amount,
or
(b) of such Lender would exceed such Lender's Percentage of
the Commitment Amount.
SECTION II.2 Reduction of Commitment Amount. The Commitment Amount is
-------------------------------
subject to reduction from time to time pursuant to this Section 2.2.
-----------
SECTION II.2.1 Optional. The Borrower may, from time to time on any
--------
Business Day subject to the conditions set forth in Section 3.1, voluntarily
------------
reduce the Commitment Amount; provided, however, that all such reductions shall
-------- -------
require at least three Business Days' prior notice to the Agent and be
permanent, and any partial reduction of the Commitment Amount shall be in a
minimum amount of $1,000,000 and in an integral multiple of $500,000.
SECTION II.3 Borrowing Procedure. By delivering a written Borrowing
--------------------
Request to the Agent on or before 11:00 a.m., Chicago time, on a Business Day,
the Borrower may from time to time irrevocably request, (i) with respect to
Reference Rate Loans, on not less than one nor more than three Business Days'
notice and (ii) with respect to Eurodollar Loans, on not less than three nor
more than five Business Days' notice, that a Borrowing be made in a minimum
amount of $1,000,000 and an integral multiple of $500,000, or, if less, in the
unused amount of the Commitments. On the terms and subject to the conditions of
this Agreement, each Borrowing shall be comprised of the type of Loans, shall be
made on the Business Day and, with respect to Eurodollar Loans, shall be for the
Interest Period, specified in such Borrowing Request. On or before 12:00 noon
(Chicago time) on such Business Day each Lender shall deposit with the Agent
same day funds in an
- 21 -
<PAGE>
amount equal to such Lender's Percentage of the requested Borrowing. Such
deposit will be made to an account which the Agent shall specify from time to
time by notice to the Lenders. To the extent funds are received from the
Lenders, the Agent shall make such funds available to the Borrower by wire
transfer to the accounts the Borrower shall have specified in its Borrowing
Request. No Lender's obligation to make any Loan shall be affected by any other
Lender's failure to make any Loan.
SECTION II.4 Continuation and Conversion Elections. By delivering a
---------------------------------------
Continuation/Conversion Notice to the Agent, the Borrower may from time to time
irrevocably elect that all, or any portion in an aggregate minimum amount of
$1,000,000 and an integral multiple of $500,000, of any Loans be, in the case of
Reference Rate Loans, converted into Eurodollar Loans or, in the case of
Eurodollar Loans, be converted into Reference Rate Loans or continued as
Eurodollar Loans; provided, however, that (i) each such conversion or
-------- -------
continuation shall be pro rata among the applicable outstanding Loans of all
Lenders, and (ii) no portion of the outstanding principal amount of any Loans
may be continued as, or be converted into, Eurodollar Loans when any Default has
occurred and is continuing. Such Continuation/ Conversion Notice shall be
delivered on or before 11:00 a.m., Chicago time, on a Business Day (i) with
respect to Loans being converted into or continued as Reference Rate Loans, on
not less than one nor more than three Business Days' notice and (ii) with
respect to Loans being converted into or continued as Eurodollar Loans, on not
less than three nor more than five Business Days' notice (in the absence of
delivery of a Continuation/Conversion Notice with respect to any Eurodollar Loan
at least two Business Days before the last day of the then current Interest
Period with respect thereto, such Eurodollar Loan shall, on such last day,
automatically convert to a Reference Rate Loan).
SECTION II.5 Funding. Each Lender may, if it so elects, fulfill its
-------
obligation to make, continue or convert Eurodollar Loans hereunder by causing
one of its foreign branches or Affiliates (or an international banking facility
created by such Lender) to make or maintain such Eurodollar Loan; provided,
--------
however, that such Eurodollar Loan shall nonetheless be deemed to have been made
- -------
and to be held by such Lender, and the obligation of the Borrower to repay such
Eurodollar Loan shall nevertheless be to such Lender for the account of such
foreign branch, Affiliate or international banking facility. In addition, the
Borrower hereby consents and agrees that, for purposes of any determination to
be made for purposes of Sections 4.1, 4.2, 4.3 or 4.4, it shall be conclusively
------------ --- --- ---
assumed that each Lender elected
- 22 -
<PAGE>
to fund all Eurodollar Loans by purchasing Dollar deposits in its Eurodollar
Office's interbank eurodollar market.
SECTION II.6 Loan Accounts. (a) The Loans made by each Lender shall be
-------------
evidenced by one or more loan accounts or records maintained by such Lender in
the ordinary course of business. The loan accounts or records maintained by the
Agent and each Lender shall be conclusive absent manifest error of the amount of
the Loans made by the Lenders to the Borrower and the interest and payments
thereon. Any failure so to record or any error in doing so shall not, however,
limit or otherwise affect the obligation of the Borrower hereunder to pay any
amount owing with respect to the Loans.
(b) Upon the request of any Lender made through the Agent, the Loans
made by such Lender may be evidenced by one or more Notes, instead of loan
accounts. Each such Lender shall endorse on the schedules annexed to its Note(s)
the date, amount and maturity of each Loan made by it and the amount of each
payment of principal made by the Borrower with respect thereto. Each such Lender
is irrevocably authorized by the Borrower to endorse its Note(s) and each
Lender's record shall be conclusive absent manifest error; provided, however,
-------- -------
that the failure of a Lender to make, or an error in making, a notation thereon
with respect to any Loan shall not limit or otherwise affect the obligations of
the Borrower hereunder or under any such Note to such Lender.
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
SECTION III.1 Repayments and Prepayments. The Borrower shall repay in
---------------------------
full the unpaid principal amount of each Loan upon the Commitment Termination
Date therefor. Prior thereto, the Borrower
(a) may, from time to time on any Business Day, make a
voluntary prepayment, in whole or in part, of the outstanding principal
amount of any Loans; provided, however, that
-------- -------
(1) any such prepayment shall be made pro rata among
Loans of the same type and, if applicable, having the same
Interest Period of all Lenders;
(2) all such voluntary prepayments shall require at
least three but no more than five Business
- 23 -
<PAGE>
Days' prior written notice to the Agent and shall specify type
of Loan being prepaid; and
(3) all such voluntary partial prepayments shall be
in an aggregate minimum amount of $1,000,000 and an integral
multiple of $500,000;
provided further, that any prepayment of Loans may be reborrowed
-------- -------
subject to the terms of this Agreement; and
(b) shall, on each date when any reduction in the Commitment
Amount shall become effective, including pursuant to Section 2.2, make
-----------
a mandatory prepayment of all Loans equal to the excess, if any, of the
aggregate, outstanding principal amount of all Loans over the
Commitment Amount as so reduced;
(c) shall, immediately upon any acceleration of the Commitment
Termination Date of any Loans pursuant to Section 8.2 or Section 8.3,
----------- -----------
repay all Loans, unless, pursuant to Section 8.3, only a portion of all
-----------
Loans is so accelerated.
Each prepayment of any Loans made pursuant to this Section shall be without
premium or penalty, except as may be required by Section 4.4. No voluntary
------------
prepayment of principal of any Loans shall cause a reduction in the Commitment
Amount.
SECTION III.2 Interest Provisions. Interest on the outstanding
---------------------
principal amount of Loans shall accrue and be payable in accordance with this
Section 3.2.
SECTION III.2.1 Rates. Pursuant to an appropriately delivered Borrowing
-----
Request or Continuation/Conversion Notice, the Borrower may elect that Loans
comprising a Borrowing accrue interest at a rate per annum:
(a) on that portion maintained from time to time as a
Reference Rate Loan, equal to the Alternate Reference Rate from time to
time in effect; and
(b) on that portion maintained as a Eurodollar Loan, during
each Interest Period applicable thereto, equal to the sum of the
Offshore Rate for such Interest Period plus the Applicable Margin.
SECTION III.2.2 Post-Maturity Rates. After the date any principal
--------------------
amount of any Loan is due and payable (whether on the Commitment Termination
Date, upon acceleration or otherwise), or
- 24 - 1
<PAGE>
after any other monetary Obligation of the Borrower shall have become due and
payable, the Borrower shall pay, but only to the extent permitted by law,
interest (after as well as before judgment) on such amounts at a rate per annum
equal to the Alternate Reference Rate plus a margin of 2%.
SECTION III.2.3 Payment Dates. Interest accrued on each Loan shall be
-------------
payable, without duplication:
(a) on the Commitment Termination Date therefor;
(b) with respect to Reference Rate Loans, on each Quarterly
Payment Date occurring after the date of the initial Borrowing
hereunder;
(c) with respect to Eurodollar Loans, the last day of each
applicable Interest Period (and, if such Interest Period shall exceed
three months, at three month intervals) and on the date of any payment
or prepayment, in whole or in part, of principal outstanding on such
Loan; and
(d) on that portion of any Loans the Commitment Termination
Date of which is accelerated pursuant to Section 8.2 or Section 8.3,
----------- ------------
immediately upon such acceleration.
Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date such amount is due and
payable (whether on the Commitment Termination Date, upon acceleration or
otherwise) shall be payable upon demand.
SECTION III.3 Fees. The Borrower agrees to pay the fees set forth in
this Section 3.3. All such fees shall be non-refundable.
-----------
SECTION III.3.1 Facility Fees. The Borrower shall pay to the Agent for
-------------
the account of each Lender a facility fee (the "Facility Fee") on the daily
-------------
amount of such Lender's Commitment (whether or not used), computed on a daily
basis, which Facility Fee shall be determined on the basis of the higher of the
S&P Rating and the Moody's Rating as follows:
- 25 -
<PAGE>
|------------------------------------------------------------------------------|
| If the higher of the | Then the Facility Fee |
| S&P Rating and the | for such day shall be |
| Moody's Rating is: | calculated on the basis |
|------------------------|-----------------------| of a percentage rate per |
| S&P Rating | Moody's Rating | annum equal to: |
|------------------------|-----------------------|-----------------------------|
| A or higher | A2 or higher | .07% |
|------------------------|-----------------------|-----------------------------|
| A- | A3 | .08% |
|------------------------|-----------------------|-----------------------------|
| BBB+ | Baa1 | .095% |
|------------------------|-----------------------|-----------------------------|
| BBB | Baa2 | .11% |
|------------------------|-----------------------|-----------------------------|
| BBB- or lower | Baa3 or lower | .125% |
|------------------------|-----------------------|-----------------------------|
Any change in the percentage rate per annum on the basis of which the
Facility Fee is calculated, resulting from a change in either the S&P Rating
and/or the Moody's Rating, shall be effective for purposes of calculating the
Facility Fee as of the day immediately following such change; provided, further,
-------- -------
that for purposes of determining the higher of the S&P Rating and the Moody's
Rating, the A, A-, BBB+, BBB and BBB- rating levels of S&P shall correspond to
and be deemed the equivalent of the A2, A3, Baa1, Baa2 and Baa3 rating levels,
respectively, of Moody's. If only one of a Moody's Rating and an S&P Rating
exists at any time, then the percentage rate per annum on the basis of which the
Facility Fee is calculated during such time shall be determined as set forth
above based on such existing rating. If at any time there exists neither a
Moody's Rating nor an S&P Rating, the percentage rate per annum on the basis of
which the Facility Fee is calculated during such time shall be .125%.
Such Facility Fee shall accrue from the Closing Date to the Commitment
Termination Date and shall be due and payable on each Quarterly Payment Date
occurring after the date of the initial Borrowing hereunder, through the
Commitment Termination Date, with the final payment to be made on the Commitment
Termination Date; provided that, in connection with any reduction or termination
--------
of Commitments under Section 2.2, the accrued Facility Fee calculated for the
-----------
period ending on such date shall also be paid on the date of such reduction or
termination, with the following quarterly payment being calculated on the basis
of the period from such reduction or termination date to such
- 26 -
<PAGE>
quarterly payment date. The Facility Fees provided in this subsection shall
accrue at all times after the above-mentioned commencement date, including at
any time during which one or more conditions in Article V are not met.
---------
SECTION III.3.2 Other Fees. The Borrower shall pay an arrangement fee
----------
to the Arranger for the Arranger's own account, and shall pay an agency fee to
the Agent for the Agent's own account, as referenced in the term sheet dated
January 16, 1998 or as shall be agreed to, in writing, by the Borrower from time
to time.
ARTICLE IV
CERTAIN OFFSHORE RATE AND OTHER PROVISIONS
SECTION IV.1 Fixed Rate Lending Unlawful. If any Lender shall determine
---------------------------
in good faith (which determination shall, upon notice thereof to the Borrower
and the Lenders, be conclusive and binding on the Borrower) that the
introduction of or any change in or in the interpretation of any law makes it
unlawful, or any central bank or other Governmental Authority asserts that it is
unlawful, for such Lender to make, continue or maintain any Loan as, or to
convert any Loan into, a Eurodollar Loan, the obligations of all Lenders to
make, continue, maintain or convert any such Loans shall, upon such
determination, forthwith be suspended until such Lender shall notify the Agent
that the circumstances causing such suspension no longer exist, and all
Eurodollar Loans shall automatically convert into Reference Rate Loans at the
end of the then current Interest Periods with respect thereto or sooner, if
required by such law or assertion.
SECTION IV.2 Deposits Unavailable. If the Agent shall have determined
---------------------
in good faith that by reason of circumstances affecting BofA's relevant market,
adequate means do not exist for ascertaining the interest rate applicable
hereunder to Eurodollar Loans, then, upon notice from the Agent to the Borrower
and the Lenders, the obligations of all Lenders under Section 2.3 and Section
----------- -------
2.4 to make or continue any Loans as, or to convert any Loans into, Eurodollar
- ---
Loans shall forthwith be suspended until the Agent shall notify the Borrower and
the Lenders that the circumstances causing such suspension no longer exist.
SECTION IV.3 Increased Eurodollar Loan Costs, etc. The Borrower agrees
-------------------------------------
to reimburse each Lender for any increase in the cost to such Lender of, or any
reduction in the amount of any sum receivable by such Lender in respect of,
making, continuing or
- 27 -
<PAGE>
maintaining (or of its obligation to make, continue or maintain) any Loans as,
or of converting (or of its obligation to convert) any Loans into, Eurodollar
Loans; it being understood that the Borrower shall not be required to reimburse
any Lender for any costs of maintaining reserves that have been incorporated
into the calculation of the Offshore Rate. Such Lender shall promptly notify the
Agent and the Borrower in writing of the occurrence of any such event, such
notice to state, in reasonable detail, the reasons therefor and the additional
amount required fully to compensate such Lender for such increased cost or
reduced amount; provided, that such Lender shall not be entitled to
--------
reimbursement for any period more than thirty days prior to such notice (other
than a notice of a change in law or regulation having a retroactive impact, in
which case such Lender shall be entitled to reimbursement only if notice is
given within thirty days after the adoption of such law or regulation);
provided, further, that if such Lender shall make a claim for any increased
- -------- -------
costs under this Section 4.3 and thereafter such costs shall decrease, the
-----------
Borrower shall be entitled to the benefit of any such decrease in costs. Such
additional amounts shall be payable by the Borrower directly to such Lender
within five days of its receipt of such notice, and such notice shall, in the
absence of manifest error, be conclusive and binding on the Borrower.
SECTION IV.4 Funding Losses. In the event any Lender shall incur any
---------------
loss or expense (including any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Lender
to make, continue or maintain any portion of the principal amount of any Loan
as, or to convert any portion of the principal amount of any Loan into, a
Eurodollar Loan) as a result of
(a) any conversion or repayment or prepayment of the principal
amount of any Eurodollar Loans on a date other than the scheduled last
day of the Interest Period applicable thereto, whether pursuant to
Section 3.1 or otherwise;
-----------
(b) any Loans not being made as Eurodollar Loans in accordance
with the Borrowing Request therefor; or
(c) any Loans not being continued as, or converted into,
Eurodollar Loans in accordance with the Continuation/ Conversion Notice
therefor,
then, upon the written notice of such Lender to the Borrower (with a copy to the
Agent), the Borrower shall, within five days of its receipt thereof, pay
directly to such Lender such amount
- 29 -
<PAGE>
as will (in the reasonable determination of such Lender) reimburse such Lender
for such loss or expense. Such written notice (which shall include calculations
in reasonable detail) shall, in the absence of manifest error, be conclusive and
binding on the Borrower.
SECTION IV.5 Increased Capital Costs. If any change in, or the
-------------------------
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation (other than any law or regulation presently
in effect which provides for a phase-in of increased capital requirements),
directive, guideline, decision or request (whether or not having the force of
law) of any court, central bank, regulator or other Governmental Authority
affects the amount of capital required or expected to be maintained by any
Lender or any Person controlling such Lender, and such Lender determines (in its
sole and absolute discretion) that the rate of return on its or such controlling
Person's capital as a consequence of its Commitment or the Loans made by such
Lender is reduced to a level below that which such Lender or such controlling
Person could have achieved but for the occurrence of any such circumstance,
then, in any such case upon notice from time to time by such Lender to the
Borrower, the Borrower shall immediately pay directly to such Lender additional
amounts sufficient to compensate such Lender or such controlling Person for such
reduction in rate of return. A statement of such Lender as to any such
additional amount or amounts (including calculations thereof in reasonable
detail) shall, in the absence of manifest error, be conclusive and binding on
the Borrower; it being understood that the Borrower shall not be required to
reimburse any Lender for any costs reimbursed by the Borrower to such Lender
pursuant to Section 4.3. In determining such amount, such Lender may use any
-----------
method of averaging and attribution that it (in its sole and absolute
discretion) shall deem applicable.
SECTION IV.6 Taxes. (a) Any and all payments by the Borrower to each
-----
Lender or the Agent under this Agreement and any other Loan Document shall be
made free and clear of, and without deduction or withholding for any Taxes. In
addition, the Borrower shall pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless each Lender and
the Agent for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section)
paid by the Lender or the Agent and any liability (including penalties,
interest, additions to tax and expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. Payment under this indemnification shall be
- 29 -
<PAGE>
made within 30 days after the date the Lender or the Agent makes written demand
therefor. Upon receipt of notice by any Lender or the Agent of any Taxes or
Other Taxes for which indemnification would be available under this Section 4.6,
---
such Lender or the Agent shall notify the Borrower so that the Borrower may have
the opportunity to cooperate with such Lender or the Agent to contest such Taxes
or Other Taxes.
(c) If the Lender shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any
Lender or the Agent, then:
(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including
deductions and withholdings applicable to additional sums payable under
this Section) such Lender or the Agent, as the case may be, receives an
amount equal to the sum it would have received had no such deductions
or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or
withheld to the relevant taxing authority or other authority in
accordance with applicable law; and
(iv) the Borrower shall also pay to each Lender or the Agent
for the account of such Lender, at the time interest is paid, all
additional amounts which the respective Lender specifies as necessary
to preserve the after-tax yield the Lender would have received if such
Taxes or Other Taxes had not been imposed.
(d) Within 30 days after the date of any payment by the Borrower of
Taxes or Other Taxes, the Borrower shall furnish the Agent the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment satisfactory to the Agent.
(e) If the Borrower is required to pay additional amounts to any Lender
or the Agent pursuant to subsection (c) of this Section, then such Lender shall
use reasonable efforts (consistent with legal and regulatory restrictions) to
change the jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Lender which may thereafter accrue, if such change in
the judgment of such Lender is not otherwise disadvantageous to such Lender.
- 30 -
<PAGE>
SECTION IV.7 Payments, Computations, etc. Unless otherwise expressly
-----------------------------
provided herein or therein, all payments by the Borrower pursuant to this
Agreement or any other Loan Document shall be made by the Borrower to the Agent
for the pro rata account of the Lenders entitled to receive such payment. All
such payments required to be made to the Agent shall be made, without setoff,
deduction or counterclaim, not later than 11:00 a.m., Chicago time, on the date
due, in same day or immediately available funds, to such account as the Agent
shall specify from time to time by notice to the Borrower. Funds received on
said Business Day but after such time shall be deemed to have been received by
the Agent on the next succeeding Business Day. The Agent shall promptly remit in
same day funds to each Lender its share, if any, of such payments received by
the Agent for the account of such Lender. All interest and fees shall be
computed on the basis of the actual number of days (including the first day but
excluding the last day) occurring during the period for which such interest or
fee is payable over a year comprised of 360 days. Whenever any payment to be
made shall otherwise be due on a day which is not a Business Day, such payment
shall (except as otherwise required by clause (c) of the definition of the term
----------
"Interest Period" with respect to Eurodollar Loans) be made on the next
----------------
succeeding Business Day and such extension of time shall be included in
computing interest and fees, if any, in connection with such payment.
SECTION IV.8 Sharing of Payments. If any Lender shall obtain any
---------------------
payment or other recovery (whether voluntary, involuntary, by application of
setoff or otherwise) on account of any Loan (other than pursuant to the terms of
Sections 4.3, 4.4 4.5 and 4.6) in excess of its pro rata share of payments then
- ------------- --- --- --- --- ----
or therewith obtained by all Lenders, such Lender shall purchase from the other
Lenders such participations in Loans made by them as shall be necessary to cause
such purchasing Lender to share the excess payment or other recovery ratably
with each of them; provided, however, that if all or any portion of the excess
-------- -------
payment or other recovery is thereafter recovered from such purchasing Lender,
the purchase shall be rescinded and each Lender which has sold a participation
to the purchasing Lender shall repay to the purchasing Lender the purchase price
to the ratable extent of such recovery together with an amount equal to such
selling Lender's ratable share (according to the proportion of
(a) the amount of such selling Lender's required repayment to
the purchasing Lender
to
- --
- 31 -
<PAGE>
(b) the total amount so recovered from the purchasing Lender)
of any interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. The Borrower agrees that any Lender so
purchasing a participation from another Lender pursuant to this Section may, to
the fullest extent permitted by law, exercise all its rights of payment
(including pursuant to Section 4.9) with respect to such participation as fully
-----------
as if such Lender were the direct creditor of the Borrower in the amount of such
participation. If under any applicable bankruptcy, insolvency or other similar
law, any Lender receives a secured claim in lieu of a setoff to which this
Section applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the rights
of the Lenders entitled under this Section to share in the benefits of any
recovery on such secured claim.
SECTION IV.9 Setoff. Each Lender shall, upon the occurrence of any
------
Default described in clauses (a) through (d) of Section 8.1.9 with respect to
----------- --- --------------
the Borrower or any Subsidiary or, with the consent of the Required Lenders,
upon the occurrence of any other Event of Default, have the right to appropriate
and apply to the payment of the Obligations owing to it (whether or not then
due), and (as security for such Obligations) the Borrower hereby grants to each
Lender a continuing security interest in, any and all balances, credits,
deposits, accounts or moneys of the Borrower then or thereafter maintained with
such Lender; provided, however, that any such appropriation and application
-------- -------
shall be subject to the provisions of Section 4.8. Each Lender agrees promptly
-----------
to notify the Borrower and the Agent after any such setoff and application made
by such Lender; provided, however, that the failure to give such notice shall
-------- -------
not affect the validity of such setoff and application. The rights of each
Lender under this Section are in addition to other rights and remedies
(including other rights of setoff under applicable law or otherwise) which such
Lender may have.
SECTION IV.10 Use of Proceeds. The Borrower shall apply the proceeds of
---------------
each Borrowing for general corporate purposes and working capital purposes of
the Borrower and its Subsidiaries; after applying the proceeds of any proposed
Borrowing, not more than 25% of the value (as determined by any reasonable
method) of the consolidated total assets of the Borrower is represented by
"margin stock", as defined in F.R.S. Board Regulation U.
- 32 -
<PAGE>
ARTICLE V
CONDITIONS TO BORROWING
SECTION V.1 Initial Borrowing. The effectiveness of the amendment and
------------------
restatement hereof and the obligations of the Lenders to fund the initial
Borrowing shall be subject to the prior or concurrent satisfaction of each of
the conditions precedent set forth in this Section 5.1.
-----------
SECTION V.1.1 Resolutions, etc. The Agent shall have received from the
-----------
Borrower a certificate substantially in the form of Exhibit F, dated the date of
---------
the initial Borrowing, of its Secretary or Assistant Secretary as to
(a) resolutions of its Board of Directors or its Executive
Committee then in full force and effect authorizing the execution,
delivery and performance of this Agreement and each other Loan Document
to be executed by it; and
(b) the incumbency and signatures of those of its officers
authorized to act with respect to this Agreement and each other Loan
Document executed by it,
upon which certificate, Agent and each Lender may conclusively rely until it
shall have received a further certificate of the Secretary or Assistant
Secretary of the Borrower canceling or amending such prior certificate.
SECTION V.1.2 Organic Documents. The Agent shall have received the
------------------
articles or certificate of incorporation and the bylaws of the Borrower as in
effect on the Effective Date, certified by the Secretary or Assistant Secretary
of the Borrower as of the Closing Date.
SECTION V.1.3 Opinion of Counsel. The Agent shall have received an
------------------
opinion, dated the date of the initial Borrowing and addressed to the Agent and
all Lenders, from Wayne A. Sinclair, General Counsel for the Borrower,
substantially in the form of Exhibit E hereto.
---------
SECTION V.1.4 Closing Fees, Expenses, etc. The Agent shall have
------------------------------
received for its own account, or for the account of each Lender, as the case may
be, all fees, costs and expenses due and payable pursuant to Sections 3.3 and
------------
10.3, if then invoiced.
- ----
- 33 -
<PAGE>
SECTION V.1.5 Other Documents. The Agent shall have received such other
---------------
approvals, opinions, documents or materials as the Agent, counsel to the Agent
or any Lender may reasonably request.
SECTION V.2 All Borrowings. The obligation of each Lender to fund any
---------------
Loan on the occasion of any Borrowing (including the initial Borrowing) shall be
subject to the satisfaction of each of the conditions precedent set forth in
this Section 5.2.
-----------
SECTION V.2.1 Compliance with Warranties, No Default, etc. Both before
--------------------------------------------
and after giving effect to any Borrowing (but, if any Default of the nature
referred to in Section 8.1.5 shall have occurred with respect to any other
--------------
Indebtedness, without giving effect to the application, directly or indirectly,
of the proceeds thereof) the following statements shall be true and correct.
(a) the representations and warranties set forth in, Article
-------
VI (excluding, however, those contained in Section 6.7), shall be true
-- -----------
and correct with the same effect as if then made (unless stated to
relate solely to an earlier date, in which case such representations
and warranties shall be true and correct as of such earlier date);
(b) except as disclosed by the Borrower to the Agent and the
Lenders pursuant to Section 6.7,
-----------
(1) no labor controversy, litigation, arbitration or
governmental investigation or proceeding (other than such a
controversy, litigation, arbitration, investigation or
proceeding in the ordinary course of business of the Insurance
Subsidiaries) shall be pending or, to the knowledge of the
Borrower, threatened against the Borrower or any of its
Subsidiaries which might materially adversely affect (it being
agreed that for the purpose of this Section 5.2.1(b), any such
----------------
labor controversy, litigation, arbitration or governmental
investigation or proceeding having an effect equal to or less
than 10% of Net Worth shall not be deemed material) the
Borrower's consolidated business, operations, assets,
revenues, properties or prospects or which purports to affect
the legality, validity or enforceability of this Agreement or
any other Loan Document; and
- 34 -
<PAGE>
(2) no development shall have occurred in any labor
controversy, litigation, arbitration or governmental
investigation or proceeding disclosed pursuant to Section 6.7
-----------
which might materially adversely affect the consolidated
businesses, operations, assets, revenues, properties or
prospects of the Borrower and its Subsidiaries; and
(c) no Default shall have then occurred and be continuing, and
the Borrower shall not be in material violation of any law or
governmental regulation or court order or decree.
SECTION V.2.2 Borrowing Request. The Agent shall have received a
------------------
Borrowing Request for such Borrowing. Each of the delivery of a Borrowing
Request and the acceptance by the Borrower of the proceeds of such Borrowing
shall constitute a representation and warranty by the Borrower that on the date
of such Borrowing (both immediately before and after giving effect to such
Borrowing and the application of the proceeds thereof) the statements made in
Section 5.2.1 are true and correct.
- -------------
SECTION V.2.3 Satisfactory Legal Form. All documents executed or
-------------------------
submitted pursuant hereto by or on behalf of the Borrower or any of its
Subsidiaries shall be satisfactory in form and substance to the Agent and its
counsel; the Agent and its counsel shall have received all information,
approvals, opinions, documents or instruments as the Agent or its counsel may
reasonably request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and the Agent to enter into this
Agreement and to make Loans hereunder, the Borrower represents and warrants unto
the Agent and each Lender as set forth in this Article VI.
----------
SECTION VI.1 Organization, etc. The Borrower and each of its
--------------------
Subsidiaries is a corporation validly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation, is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction where the nature of its business requires such qualification
except where the failure to qualify would not have a Material Adverse Effect,
and has full power and authority and holds all requisite
- 35 -
<PAGE>
governmental licenses, permits and other approvals to enter into and perform its
Obligations under this Agreement and each other Loan Document to which it is a
party and to own and hold under lease its property and to conduct its business
substantially as currently conducted by it (except where the failure to hold any
government license, permit or approval required for the Borrower or any of its
Subsidiaries to own or hold under lease its property or to conduct its business
substantially as currently conducted by it would not have a Material Adverse
Effect).
SECTION VI.2 Due Authorization, Non-Contravention, etc. The execution,
-------------------------------------------
delivery and performance by the Borrower of this Agreement and each other Loan
Document executed or to be executed by it, are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action, and do not
(a) contravene the Borrower's Organic Documents;
(b) contravene any contractual restriction, law or
governmental regulation or court decree or order binding on or
affecting the Borrower; or
(c) result in, or require the creation or imposition of, any
Lien on any of the Borrower's properties.
SECTION VI.3 Government Approval, Regulation, etc. No authorization,
----------------------------------------
consent or approval or other action by, and no notice to or filing with, any
Governmental Authority or regulatory body or other Person is required for the
due execution, delivery or performance by the Borrower of this Agreement or any
other Loan Document. Neither the Borrower nor any of its Subsidiaries is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, or a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
SECTION VI.4 Validity, etc. This Agreement constitutes, and each other
--------------
Loan Document executed by the Borrower will, on the due execution and delivery
thereof, constitute, the legal, valid and binding obligations of the Borrower
enforceable in accordance with their respective terms.
SECTION VI.5 Financial Statements.
--------------------
SECTION VI.5.1 GAAP Financial Statements. The audited consolidated and
-------------------------
unaudited consolidating balance sheets as at
- 36 -
<PAGE>
December 31, 1996 and the unaudited consolidated and consolidating balance
sheets as at September 30, 1997 of the Borrower and each of its Subsidiaries and
the related statements of earnings and cash flow of the Borrower and each of its
Subsidiaries, copies of which have been furnished to the Agent and each Lender,
have been prepared in accordance with GAAP consistently applied, and present
fairly the consolidated financial condition of the corporations covered thereby
as at the dates thereof and the results of their operations for the periods then
ended.
SECTION VI.5.2 Statutory Financial Statements.
------------------------------
(a) The Annual Statements of each Insurance Subsidiary
including, without limitation, the provisions made therein for
investments and the valuation thereof, reserves, policy and contract
claims and Statutory Liabilities, as filed with the appropriate
Governmental Authority of its state of domicile or, with respect to any
non-U.S. domiciled Insurance Subsidiary with the applicable non-U.S.
Governmental Authority (the "Department") and delivered to each Lender
----------
prior to the execution and delivery of this Agreement, as of and for
the 1996 Fiscal Year, and as of and for the Fiscal Quarter ended
September 30, 1997 (collectively, the "Statutory Financial
---------------------
Statements"), have been prepared in accordance with SAP applied on a
----------
consistent basis (except as noted therein). Each such Statutory
Financial Statement was in compliance with applicable law when filed.
The Statutory Financial Statements fairly present the financial
position, the results of operations, changes in equity and changes in
financial position of the Insurance Subsidiaries as of and for the
respective dates and periods indicated therein in accordance with SAP
applied on a consistent basis, except as set forth in the notes thereto
or in Item 6.5.2(a) ("Unreported Changes in Financial Position") of the
-------------
Disclosure Schedule. Except for liabilities and obligations, including,
without limitation, reserves, policy and contract claims and Statutory
Liabilities (all of which have been computed in accordance with SAP),
disclosed or provided for in the Statutory Financial Statements, the
Insurance Subsidiaries did not have, as of the respective dates of each
of such financial statements, any liabilities or obligations (whether
absolute or contingent and whether due or to become due) which, in
conformity with SAP, applied on a consistent basis, would have been
required to be or should be disclosed or provided for in such financial
statements. All books of account of the Insurance Subsidiaries fully
and fairly disclose, in all
- 37 -
<PAGE>
material respects, all of the transactions, properties, assets,
investments, liabilities and obligations of the Insurance Subsidiaries
and all of such books of account are in the possession of such
Insurance Subsidiaries and are true, correct and complete in all
material respects.
(b) The investments reflected in the Annual Statements filed
with the Department by the Insurance Subsidiaries with respect to the
1996 Fiscal Year (the "1996 Annual Statements") and the September 30,
-----------------------
1997 Quarterly Statement of the Insurance Subsidiaries (the "Quarterly
---------
Statement") comply in all material respects with all applicable
---------
requirements of the applicable Department relating to investments in
respect of which it may invest its funds.
(c) The provisions made in the 1996 Annual Statements and in
the Quarterly Statement for reserves, policy and contract claims and
Statutory Liabilities are in compliance in all material respects with
the requirements of the applicable Department, and have been computed
in accordance with SAP.
(d) Cash and Invested Assets (i) for U.S. domiciled Insurance
Subsidiaries, as reflected in line 9, page 2, column 4 of the 1996
Annual Statements of property-casualty Insurance Subsidiaries and line
11, page 2, column 4 of the Annual Statements of life Insurance
Subsidiaries and in the Quarterly Statement and (ii) for non-U.S.
domiciled Insurance Subsidiaries, as reflected in the Annual Return to
HM Treasury Insurance Directorate of such Insurance Subsidiaries, are
valued at cost, amortized cost or market value, as noted on such
Statutory Financial Statements and as required by applicable law.
(e) Except as set forth in Item 6.5.2(e) ("Unreported Stock
--------------
Dividends and Stock Acquisitions") of the Disclosure Schedule, no
dividends or other distributions have been declared, paid or made upon
any shares of capital stock of any Insurance Subsidiary or the
Borrower, nor have any shares of such capital stock been redeemed,
retired, purchased or otherwise acquired since September 30, 1997,
other than as reflected in the consolidated balance sheet of such
Insurance Subsidiary or the Borrower.
SECTION VI.6 No Material Adverse Change. Since the date of the
-----------------------------
financial statements described in Section 6.5, there has been no material
------------
adverse change in the financial condition,
- 38 -
<PAGE>
operations, assets, business, properties or prospects of the Borrower and its
Subsidiaries on a consolidated basis.
SECTION VI.7 Litigation, Labor Controversies, etc. There is no pending
--------------------------------------
or, to the knowledge of the Borrower, threatened litigation, action, proceeding,
or labor controversy affecting the Borrower or any of its Subsidiaries, or any
of their respective properties, businesses, assets or revenues, which may
materially adversely affect (it being agreed that for the purpose of this
Section 6.7, any such litigation, action, proceeding or labor controversy having
- -----------
an effect equal to or less than 10% of Net Worth shall not be deemed material)
the financial condition, operations, assets, business, properties or prospects
of the Borrower or any Subsidiary or which purports to affect the legality,
validity or enforceability of this Agreement, the Notes or any other Loan
Document, except as disclosed in Item 6.7 ("Litigation") of the Disclosure
--------
Schedule.
SECTION VI.8 Subsidiaries. The Borrower has no Subsidiaries, except
------------
those Subsidiaries
(a) which are identified in Item 6.8 ("Existing Subsidiaries")
--------
of the Disclosure Schedule; or
(b) which are permitted to have been acquired in accordance
with Sections 7.2.4 and 7.2.6.
-------------- -----
SECTION VI.9 Ownership of Properties. The Borrower and each of its
-------------------------
Subsidiaries owns good and marketable title to all of its properties and assets,
real and personal, tangible and intangible, of any nature whatsoever (including
patents, trademarks, trade names, service marks and copyrights), free and clear
of all Liens, charges or claims (including infringement claims with respect to
patents, trademarks, copyrights and the like) except as permitted pursuant to
Section 7.2.2.
- -------------
SECTION VI.10 Taxes. The Borrower and each of its Subsidiaries has
-----
filed all tax returns and reports required by law to have been filed by it and
has paid all taxes and governmental charges thereby shown to be owing, except
(i) any such taxes or charges which are being diligently contested in good faith
by appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books or (ii) any such taxes or charges
where the failure to pay such taxes or charges would not have a Material Adverse
Effect.
SECTION VI.11 ERISA Compliance. (a) Each Plan is in compliance in all
-----------------
material respects with the applicable
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<PAGE>
provisions of ERISA, the Code and other federal or state law. Each Plan which is
intended to qualify under Section 401(a) of the Code has received a favorable
determination letter from the IRS and to the best knowledge of the Borrower,
nothing has occurred which would cause the loss of such qualification. The
Borrower and each ERISA Affiliate has made all required contributions to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of the Code
has been made with respect to any Plan.
(b) There are no pending or, to the best knowledge of Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Plan which
has resulted or could reasonably be expected to result in a Material Adverse
Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the
Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur,
any liability under Title IV of ERISA with respect to any Pension Plan (other
than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA, would result in such liability) under Section 4201
or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the
Borrower nor any ERISA Affiliate has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA.
SECTION VI.12 Insurance Licenses. Except as set forth in Item 6.12
------------------- ---------
("Suspension or Revocation of Insurance Licenses") of the Disclosure Schedule,
no license (including, without limitation, licenses or certificates of authority
from applicable insurance departments), permits or authorizations of the
Borrower or any of its Subsidiaries to transact insurance and reinsurance
business (collectively, the "Licenses") is the subject of a proceeding for
suspension or revocation or any similar proceedings, there is no sustainable
basis for such a suspension or revocation, and no such suspension or revocation
is threatened by any state insurance department or any other Governmental
Authority.
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<PAGE>
SECTION VI.13 Environmental Warranty. All facilities and property owned
----------------------
or leased by the Borrower or any of its Subsidiaries have been, and continue to
be, owned or leased by the Borrower and its Subsidiaries in material compliance
with all Environmental Laws and the Borrower and its Subsidiaries have no
material liability with respect to Environmental Laws; provided that with
--------
respect to any facilities or property leased by the Borrower or any of its
Subsidiaries, this Section shall not be deemed breached unless the Borrower or
any of its Subsidiaries shall have a material liability with respect thereto.
SECTION VI.14 Regulations G, U and X. The Borrower is not engaged in
-----------------------
the business of extending credit for the purpose of purchasing or carrying
margin stock, and no proceeds of any Loans will be used for a purpose which
violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X.
Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or
any regulations substituted therefor, as from time to time in effect, are used
in this Section with such meanings.
SECTION VI.15 Accuracy of Information. To the best of the Borrower's
------------------------
knowledge, all factual information heretofore or contemporaneously furnished by
or on behalf of the Borrower in writing to the Agent or any Lender for purposes
of or in connection with this Agreement or any transaction contemplated hereby
is, and all other such factual information hereafter furnished by or on behalf
of the Borrower to the Agent or any Lender will be, true and accurate in every
material respect on the date as of which such information is dated or certified
and as of the date of execution and delivery of this Agreement by the Agent and
such Lender, and such information is not, or shall not be, as the case may be,
incomplete by omitting to state any material fact necessary to make such
information not misleading.
ARTICLE VII
COVENANTS
SECTION VII.1 Affirmative Covenants. The Borrower agrees with the Agent
---------------------
and each Lender that, until all Commitments have terminated and all Obligations
have been paid and performed in full, the Borrower will perform the obligations
set forth in this Section 7.1, except as otherwise agreed by the Required
------------
Lenders and the Agent in accordance with Section 10.1.
------------
SECTION VII.1.1 Financial Information, Reports, Notices, etc. The
------------------------------------------------
Borrower will furnish,
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<PAGE>
or will cause to be furnished, to the Agent, and the Agent will distribute to
each Lender, copies of the following financial statements, reports, notices and
information:
(a) as soon as available and in any event within 45 days after
the end of each of the first three Fiscal Quarters of each Fiscal Year
of the Borrower, consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as of the end of such Fiscal Quarter and
consolidated and consolidating statements of earnings and cash flow of
the Borrower and its Subsidiaries for such Fiscal Quarter and for the
period commencing at the end of the previous Fiscal Year and ending
with the end of such Fiscal Quarter, certified by the Authorized
Officer of the Borrower, all prepared in accordance with GAAP;
(b) as soon as available and in any event within 100 days
after the end of each Fiscal Year of the Borrower, a copy of the annual
audit report for such Fiscal Year for the Borrower and its
Subsidiaries, including therein consolidated balance sheets of the
Borrower and its Subsidiaries as of the end of such Fiscal Year and
audited consolidated and unaudited consolidating statements of earnings
and cash flow of the Borrower and its Subsidiaries for such Fiscal
Year, all prepared in accordance with GAAP and in the case of the
annual audit report, the consolidated balance sheets and the
consolidated statements of earnings and cash flow of the Borrower and
its Subsidiaries, certified (without any Impermissible Qualification)
in a manner acceptable to the Agent and the Required Lenders by Ernst &
Young LLP or other independent public accountants acceptable to the
Agent and the Required Lenders;
(c) as soon as possible, but in any event within 60 days after
the end of each U.S. domiciled Insurance Subsidiary's Fiscal Year and
within six months after the end of each U.K. domiciled Insurance
Subsidiary's Fiscal Year, as applicable, a copy of the Annual Statement
of each Insurance Subsidiary for such Fiscal Year prepared in
accordance with SAP and accompanied by the certification of the chief
financial Authorized Officer or chief executive officer of such
Insurance Subsidiary that such financial statement is complete and
correct and presents fairly in accordance with SAP the financial
position of such Insurance Subsidiary for the period then ended;
(d) as soon as possible, but in any event within 45 days after
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<PAGE>
the end of each of the first three Fiscal Quarters of each Fiscal Year,
a copy of the quarterly statement of each Insurance Subsidiary for such
Fiscal Quarter, all prepared in accordance with SAP and accompanied by
the certification of the chief financial officer or chief executive
officer of such Insurance Subsidiary that all such financial statements
are complete and correct and present fairly in accordance with SAP the
financial position of such Insurance Subsidiary for the periods then
ended;
(e) within 90 days after the close of each Fiscal Year, a copy
of each Insurance Subsidiary's "Statement of Actuarial Opinion" if such
a statement is required to be provided to the Department (or equivalent
information for each U.S. domiciled Insurance Subsidiary should the
Department no longer require such a statement) as to the adequacy of
loss reserves of such Insurance Subsidiary, which opinion shall be in
the format prescribed by the Insurance Code;
(f) the following certificates and other information related
to the Borrower and each of its Subsidiaries:
(1) not later than 30 days after the end of each
Fiscal Year, a copy of the Borrower's operating budget for the
next succeeding Fiscal Year.
(2) not later than 30 days after received, a copy of
any financial examination reports or market conduct
examination reports by a Governmental Authority with respect
to the Borrower or any of its Subsidiaries relating to the
insurance business of the Borrower or such Subsidiary (when,
and if, prepared); provided, that the Borrower or such
--------
Subsidiary shall not have to deliver any interim report
hereunder so long as a final report is issued and delivered to
the Agent within 90 days of such interim report;
(3) within 13 Business Days of such notice, notice of
actual suspension, termination or revocation of any material
License of the Borrower or any of its Subsidiaries by any
Governmental Authority or of receipt of notice from any
Governmental Authority notifying the Borrower or any of its
Subsidiaries of a hearing (which is not withdrawn within 10
days) relating to such a suspension, termination or
revocation, including any request by a Governmental Authority
which commits the Borrower or any of its Subsidiaries to take,
or refrain from taking, any
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<PAGE>
action or which otherwise materially and adversely affects the
authority of the Borrower or any of its Subsidiaries to
conduct its business;
(4) within three Business Days of such notice, notice
of any material pending or threatened investigation or
regulatory proceeding (other than routine periodic
investigations or reviews) by any Governmental Authority
concerning the business, practices or operations of the
Borrower or any of its Subsidiaries, including any agent or
managing general agent thereof; and
(5) promptly, notice of any actual material changes
in the Insurance Code governing the investment or dividend
practices of any Insurance Subsidiary;
(g) as soon as available and in any event within 45 days after
the end of each of the first three Fiscal Quarters of each Fiscal Year
and within 100 days of the end of each Fiscal Year, a certificate,
executed by the chief financial Authorized Officer of the Borrower,
showing (in reasonable detail and with appropriate calculations and
computations in all respects satisfactory to the Agent and the Required
Lenders) compliance with the financial covenants set forth in Section
-------
7.2.3;
-----
(h) as soon as possible and in any event within three days
after the discovery of the occurrence of each Default, a statement of
the chief financial Authorized Officer of the Borrower setting forth
details of such Default and the action which the Borrower has taken and
proposes to take with respect thereto;
(i) within 30 days after the end of each Fiscal Quarter,
notice of the occurrence of any material adverse development with
respect to any litigation, action, proceeding, or labor controversy
described in Section 6.7 (other than any litigation, action or
------------
proceeding in the ordinary course of the business of the Insurance
Subsidiaries) during such Fiscal Quarter; or as soon as possible after
the commencement of any material labor controversy, litigation, action
or proceeding of the type described in Section 6.7 during such Fiscal
-----------
Quarter, notice thereof, and, upon the request of the Agent, copies of
all documentation relating to any of the foregoing;
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<PAGE>
(j) as soon as possible and in any event within three days
after the entry of any judgment with respect to any litigation, action,
proceeding or labor controversy described in Section 6.7, notice
------------
thereof and copies of all documentation relating thereto;
(k) promptly after the sending or filing thereof, copies of
all reports which the Borrower sends to any of its security holders,
and all significant reports and registration statements which the
Borrower or any of its Subsidiaries files with the Securities and
Exchange Commission or any national securities exchange;
(l) promptly after the occurrence of any of the following
events affecting the Borrower or any ERISA Affiliate (but in no event
more than 10 days after such event), any notice with respect to such
event that is filed with a Governmental Authority and any notice
delivered by a Governmental Authority to the Borrower or any ERISA
Affiliate with respect to such event:
(i) an ERISA Event;
(ii) a material increase in the Unfunded Pension
Liability of any Pension Plan;
(iii) the adoption of, or the commencement of
contributions to, any Plan subject to Section 412 of the Code
by the Borrower or any ERISA Affiliate; or
(iv) the adoption of any amendment to a Plan subject
to Section 412 of the Code, if such amendment results in a
material increase in contributions or Unfunded Pension
Liability; and
(m) such other information respecting the condition or
operations, financial or otherwise, of the Borrower or any of its
Subsidiaries as any Lender through the Agent may from time to time
reasonably request.
SECTION VII.1.2 Compliance with Laws, etc. The Borrower will, and will
--------------------------
cause each of its Subsidiaries to, comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include
(without limitation):
(a) the establishment of all insurance reserves required to be
established under SAP and applicable laws
- 45 -
<PAGE>
restricting the investments of the Borrower or any of its Subsidiaries;
and
(b) the maintenance and preservation of its corporate
existence and qualification as a foreign corporation except where
failure to maintain such existence and qualification would not have a
Material Adverse Effect on the business and operations of the Borrower;
and
(c) the payment, before the same becomes delinquent, of all
taxes, assessments and governmental charges imposed upon it or upon its
property except to the extent being diligently contested in good faith
by appropriate proceedings and for which adequate reserves in
accordance with GAAP shall have been set aside on its books.
SECTION VII.1.3 Maintenance of Properties. The Borrower will, and will
-------------------------
cause each of its Subsidiaries to, maintain, preserve, protect and keep its
properties in good repair, working order and condition, ordinary wear and tear
excepted, and make necessary and proper repairs, renewals and replacements so
that its business carried on in connection therewith may be properly conducted
at all times unless the Borrower determines in good faith that the continued
maintenance of any of its properties is no longer economically desirable.
SECTION VII.1.4 Insurance. The Borrower will, and will cause each of
---------
its Subsidiaries to, maintain or cause to be maintained with responsible
insurance companies insurance with respect to its properties and business
(including added expense coverage insurance) against such casualties and
contingencies and of such types and in such amounts as is customary in the case
of similar businesses and will, upon request of the Agent, furnish to each
Lender and the Agent at reasonable intervals a certificate of an Authorized
Officer of the Borrower setting forth the nature and extent of all insurance
maintained by the Borrower and its Subsidiaries in accordance with this Section.
SECTION VII.1.5 Books and Records. The Borrower will, and will cause
-----------------
each of its Subsidiaries to, keep books and records which accurately reflect all
of its business affairs and transactions and permit the Agent and each Lender or
any of their respective representatives, at reasonable times and intervals, to
visit all of its offices, to discuss its financial matters with its officers and
independent public accountant (and the Borrower hereby authorizes such
independent public accountant to discuss the Borrower's financial matters with
each Lender or its representatives whether or not any representative of the
Borrower
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<PAGE>
is present; provided, however that the Borrower does not hereby waive any
--------- -------
applicable privilege of said accountant and no discussion may be required
hereunder with said accountant if the effect thereof would be to waive said
privilege) and to examine (and, at the reasonable expense of the Borrower,
photocopy extracts from) any of its books or other corporate records. The
Borrower shall pay any reasonable fees of such independent public accountant
incurred in connection with the Agent's or any Lender's exercise of its rights
pursuant to this Section.
SECTION VII.1.6 Environmental Covenant. The Borrower will, and will
-----------------------
cause each of its Subsidiaries to, conduct its operations and keep and maintain
its properties in compliance with all Environmental Laws.
SECTION VII.2 Negative Covenants. The Borrower agrees with the Agent
-------------------
and each Lender that, until all Commitments have terminated and all Obligations
have been paid and performed in full, the Borrower will perform the obligations
set forth in this Section 7.2, except as otherwise agreed by the Required
------------
Lenders and the Agent in accordance with Section 10.1.
------------
SECTION VII.2.1 Business Activities. The Borrower will not, and will
--------------------
not permit any of its Subsidiaries to, engage in any type of business activity
except the businesses that the Borrower and any of its Subsidiaries are
presently engaged in which are listed on Schedule II, and such activities as may
-----------
be incidental or related thereto.
SECTION VII.2.2 Liens. The Borrower will not, and will not permit any
-----
of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon
any of its property, revenues or assets, whether now owned or hereafter
acquired, except:
(a) Liens securing payment of the Obligations, granted
pursuant to any Loan Document;
(b) Liens for taxes, assessments or other governmental charges
or levies not at the time delinquent or thereafter payable without
penalty or being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books;
(c) Liens of carriers, warehousemen, mechanics, materialmen
and landlords incurred in the ordinary course of business for sums not
overdue or being diligently contested in good faith by appropriate
proceedings and for which
- 47 -
<PAGE>
adequate reserves in accordance with GAAP shall have been set aside on
its books;
(d) Liens incurred in the ordinary course of business in
connection with workmen's compensation, unemployment insurance or other
forms of governmental insurance or benefits, or to secure performance
of tenders, statutory obligations, leases and contracts (other than for
borrowed money) entered into in the ordinary course of business or to
secure obligations on surety or appeal bonds;
(e) judgment Liens in existence less than 15 days after the
entry thereof or with respect to which execution has been stayed or is
not otherwise permitted under the law of the applicable jurisdiction or
the payment of which is covered in full (subject to a customary
deductible) by insurance maintained with responsible insurance
companies;
(f) Liens granted to secure payment of Indebtedness which is
incurred by the Borrower or any of its Subsidiaries to a vendor of any
assets to finance its acquisition of such assets and covering only
those assets acquired with the proceeds of such Indebtedness; provided
that the aggregate amount of all such Liens shall not exceed $10
million; and
(g) Liens listed in Item 7.2.2(g) ("Other Permitted Liens") of
the Disclosure Schedule.
SECTION VII.2.3 Financial Condition. The Borrower will not permit:
-------------------
(a) its Debt to Capital Ratio to be greater than .35:1.
(b) the sum of (i) ACIC's Surplus, (ii) HPIC's Surplus and
(iii) Unionamerica's net worth as reflected in its most recent
quarterly report to the Department of Trade and Industry at any time to
be less than $245,000,000.
(c) (i) The adjusted surplus of any Insurance Subsidiary
calculated as of the end of any Fiscal Year (as determined under NAIC
risk based capital guidelines) to be less than 100% (or in the case of
ACIC 150%) of the Company Action Level (as defined under NAIC risk
based capital guidelines), or (ii) the margin of solvency of
Unionamerica to be less than the minimum required by any applicable
Governmental Authority regulating United Kingdom insurance companies.
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<PAGE>
SECTION VII.2.4 Investments. The Borrower will not, and will not permit
-----------
its Subsidiaries to make, incur, assume or suffer to exist any Investment in any
other Person unless it meets the following requirements:
(a) all Investments by the Insurance Subsidiaries will be in
compliance with the Insurance Code; and
(b) at least eighty-five percent (85%) of the Investments of
the Borrower and its Subsidiaries (excluding Investments incurred in
order to consummate acquisitions otherwise permitted pursuant to the
first proviso of Section 7.2.6), will be invested in Investment Grade
----- ------- -------------
Securities.
SECTION VII.2.5 Restricted Payments, etc. On and at all times after the
------------------------
Effective Date:
(a) the Borrower will not declare, pay or make any dividend or
distribution (in cash, property or obligations) on any shares of any
class of capital stock (now or hereafter outstanding) of the Borrower
or on any warrants, options or other rights with respect to any shares
of any class of capital stock (now or hereafter outstanding) of the
Borrower (other than dividends or distributions payable in its common
stock or warrants to purchase its common stock or splitups or
reclassifications of its stock into additional or other shares of its
common stock) or apply, or permit any of its Subsidiaries to apply, any
of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of, or agree or permit any of its Subsidiaries
to purchase or redeem, any shares of any class of capital stock (now or
hereafter outstanding) of the Borrower, or warrants, options or other
rights with respect to any shares of any class of capital stock (now or
hereafter outstanding) of the Borrower; except that, so long as no
Default has occurred and is continuing or would occur after giving
effect thereto, (i) the Borrower may purchase its common stock for
contribution to its employee profit sharing program and its employee
stock investment program, (ii) the Borrower may declare dividends on
its common stock and/or preferred stock or repurchase shares of its
capital stock in an amount not to exceed in the aggregate for each
Fiscal Year 50% of the average of the Borrower's consolidated net
earnings after taxes for the three most recent Fiscal Years and may in
one Fiscal Year during the term of this Agreement pay an amount of
dividends up to the amount paid in the prior Fiscal Year
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<PAGE>
without regard to the amount of the average of its consolidated net
earnings after taxes in such prior three Fiscal Years and (iii) the
Borrower may repurchase, pursuant to agreements presently existing and
previously disclosed to the Lenders, shares of its capital stock (A)
owned by members of the senior management of the Borrower, at such time
as the employment of such members of the senior management may be
terminated or (B) owned by directors of the Borrower and previously
issued as compensation to said directors, upon termination of their
services as directors.
(b) the Borrower will not, and will not permit any Subsidiary
to, make any deposit for any of the foregoing purposes.
SECTION VII.2.6 Consolidation, Merger, etc. The Borrower will not, and
---------------------------
will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate
with, or merge into or with, any other corporation, or purchase or otherwise
acquire all or substantially all of the assets of any Person (or of any division
thereof); provided, however, that the Borrower and its Subsidiaries shall be
-------- -------
permitted to acquire assets or stock of other Persons the cash portion of the
purchase price of which shall not exceed 35% of the sum of (i) the combined
Surplus of the Insurance Subsidiaries (excluding Unionamerica) (as reflected on
their most recent Annual Statements without duplication) plus (ii) the net worth
of Unionamerica as reported in its most recent quarterly report to the
Department of Trade and Industry in the aggregate for all such assets or stock
acquired after the date hereof, less the cash portion of the aggregate amount of
any acquisitions made pursuant to the proviso of Section 7.2.4; provided,
-------------- --------
however, that Subsidiaries other than Significant Subsidiaries may be liquidated
- -------
or dissolved in the Borrower's discretion.
SECTION VII.2.7 Transactions with Affiliates. The Borrower will not,
-----------------------------
and will not permit any of its Subsidiaries to, enter into any transaction with
any Affiliate of the Borrower, except upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than the Borrower or such
Subsidiary would obtain in a comparable arm's-length transaction with a Person
not an Affiliate of the Borrower or such Subsidiary.
SECTION VII.2.8 Negative Pledges, Restrictive Agreements, etc. The
--------------------------------------------------
Borrower will not, and will not permit any of its Significant Subsidiaries to,
enter into any agreement (excluding this Agreement or any other Loan Document)
prohibiting
- 50 -
<PAGE>
(a) the creation or assumption of any Lien upon its
properties, revenues or assets, whether now owned or hereafter
acquired, or the ability of the Borrower to amend or otherwise modify
this Agreement or any other Loan Document; or
(b) the ability of any Significant Subsidiary to make any
payments, directly or indirectly, to the Borrower by way of dividends,
advances, repayments of loans or advances, reimbursements of management
and other intercompany charges, expenses and accruals or other returns
on investments, or any other agreement or arrangement which restricts
the ability of any such Significant Subsidiary to make any payment,
directly or indirectly, to the Borrower.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION VIII.1 Listing of Events of Default. Each of the following
-----------------------------
events or occurrences described in this Section 8.1 shall constitute an "Event
----------- -----
of Default".
- ----------
SECTION VIII.1.1 Non-Payment of Obligations. The Borrower shall default
--------------------------
in the payment or prepayment when due of any principal of or interest on any
Loan, or the Borrower shall default (and such default shall continue unremedied
for a period of five days) in the payment when due of any commitment fee or of
any other Obligation.
SECTION VIII.1.2 Breach of Warranty. Any representation or warranty of
------------------
the Borrower made or deemed to be made hereunder or in any other Loan Document
or any other writing or certificate furnished by or on behalf of the Borrower to
the Agent or any Lender for the purposes of or in connection with this Agreement
or any such other Loan Document (including any certificates delivered pursuant
to Article V) is or shall be incorrect when made in any material respect.
---------
SECTION VIII.1.3 Non-Performance of Certain Covenants and Obligations.
----------------------------------------------------
The Borrower shall default in the due performance and observance of any of its
obligations under Section 7.2 (excluding, however, those under Sections 7.2.4
----------- --------------
and 7.2.8).
-----
SECTION VIII.1.4 Non-Performance of Other Covenants and Obligations.
---------------------------------------------------
The Borrower shall default in the due performance and observance of any other
agreement contained herein or in any
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<PAGE>
other Loan Document, and such default shall continue unremedied for a period of
30 days after notice thereof shall have been given to the Borrower by the Agent
or any Lender.
SECTION VIII.1.5 Default on Other Indebtedness. A default shall occur
------------------------------
in the payment when due (subject to any applicable grace period), whether by
acceleration or otherwise, of any Indebtedness (other than Indebtedness
described in Section 8.1.1) of the Borrower or any of its Subsidiaries having a
-------------
principal amount, individually or in the aggregate, in excess of $5,000,000, or
a default shall occur in the performance or observance of any obligation or
condition with respect to such Indebtedness if the effect of such default is to
accelerate the maturity of any such Indebtedness or such default shall continue
unremedied for any applicable period of time sufficient to permit the holder or
holders of such Indebtedness, or any trustee or agent for such holders, to cause
such Indebtedness to become due and payable prior to its expressed maturity.
SECTION VIII.1.6 Judgments. Any judgment or order for the payment of
---------
money in excess of $5,000,000 shall be entered against the Borrower or any of
its Subsidiaries and either
(a) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order; or
(b) there shall be any period of 60 consecutive days during
which (i) a stay of enforcement of such judgment or order, by reason of
a pending appeal or otherwise, shall not be in effect or is not
otherwise permitted by the law of the applicable jurisdiction, or (ii)
such judgment has not been paid; or
(c) a judgment Lien shall be entered and remain in existence
for 15 days or more in respect of such judgment.
SECTION VIII.1.7 Pension Plans. (i) An ERISA Event shall occur with
--------------
respect to a Pension Plan or Multiemployer Plan which has resulted or could
reasonably be expected to result in liability of the Borrower under Title IV of
ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount
in excess of $1,500,000; (ii) the aggregate amount of Unfunded Pension Liability
among all Pension Plans at any time exceeds $1,500,000; or (iii) the Borrower or
any ERISA Affiliate shall fail to pay when due, after the expiration of any
applicable grace period, any installment payment with respect to its withdrawal
liability under Section 4201 of ERISA under a
- 52 -
<PAGE>
Multiemployer Plan in an aggregate amount in excess of $5,000,000.
SECTION VIII.1.8 Control of the Borrower. Any Change in Control shall
-----------------------
occur.
SECTION VIII.1.9 Bankruptcy, Insolvency, etc. The Borrower or any of
-----------------------------
its Significant Subsidiaries shall
(a) become insolvent or generally fail to pay, or admit in
writing its inability or unwillingness generally to pay, debts as they
become due;
(b) apply for, consent to, or acquiesce in, the appointment of
a trustee, receiver, sequestrator or other custodian for the Borrower
or any of its Significant Subsidiaries or any property of any thereof,
or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or
acquiescence, permit or suffer to exist the appointment of a trustee,
receiver, sequestrator or other custodian for the Borrower or any of
its Significant Subsidiaries or for a substantial part of the property
of any thereof, and such trustee, receiver, sequestrator or other
custodian shall not be discharged within 60 days, provided that the
Borrower and each Significant Subsidiary hereby expressly authorizes
the Agent and each Lender to appear in any court conducting any
relevant proceeding during such 60-day period to preserve, protect and
defend their rights under the Loan Documents;
(d) permit or suffer to exist the commencement of any
bankruptcy, reorganization, debt arrangement or other case or
proceeding under any bankruptcy or insolvency law, or any dissolution,
winding up or liquidation proceeding, in respect of the Borrower or any
of its Significant Subsidiaries, and, if any such case or proceeding is
not commenced by the Borrower or such Significant Subsidiary, such case
or proceeding shall be consented to or acquiesced in by the Borrower or
such Significant Subsidiary or shall result in the entry of an order
for relief or shall remain for 60 days undismissed, provided that the
Borrower and each Significant Subsidiary hereby expressly authorizes
the Agent and each Lender to appear in any court conducting any such
case or proceeding during such 60-day period to preserve, protect and
defend their rights under the Loan Documents; or
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(e) take any action authorizing, or in furtherance of, any of
the foregoing.
SECTION VIII.2 Action if Bankruptcy. If any Event of Default described
--------------------
in clauses (a) through (d) of Section 8.1.9 shall occur with respect to the
------------ --- --------------
Borrower or any Significant Subsidiary, the Commitments (if not theretofore
terminated) shall automatically terminate and the outstanding principal amount
of all outstanding Loans and all other Obligations shall automatically be and
become immediately due and payable, without notice or demand.
SECTION VIII.3 Action if Other Event of Default. If any Event of
-----------------------------------
Default (other than any Event of Default described in clauses (a) through (d) of
----------- ---
Section 8.1.9 with respect to the Borrower or any Significant Subsidiary) shall
- -------------
occur for any reason, whether voluntary or involuntary, and be continuing, the
Agent, upon the direction of the Required Lenders, shall by notice to the
Borrower declare all or any portion of the outstanding principal amount of the
Loans and other Obligations to be due and payable and/or the Commitments (if not
theretofore terminated) to be terminated, whereupon the full unpaid amount of
such Loans and other Obligations which shall be so declared due and payable
shall be and become immediately due and payable, without further notice, demand
or presentment, and/or, as the case may be, the Commitments shall terminate.
ARTICLE IX
THE AGENT
SECTION IX.1 Appointment and Authorization. Each Lender hereby
--------------------------------
irrevocably (subject to Section 9.9) appoints, designates and authorizes the
Agent to take such action on its behalf under the provisions of this Agreement
and each other Loan Document and to exercise such powers and perform such duties
as are expressly delegated to it by the terms of this Agreement or any other
Loan Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.
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<PAGE>
SECTION IX.2 Delegation of Duties. The Agent may execute any of its
---------------------
duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.
SECTION IX.3 Liability of Agent. None of the Agent-Related Persons
-------------------
shall (i) be liable for any action taken or omitted to be taken by any of them
under or in connection with this Agreement or any other Loan Document or the
transactions contemplated hereby (except for its own gross negligence or willful
misconduct), or (ii) be responsible in any manner to any of the Lenders for any
recital, statement, representation or warranty made by the Borrower or any
Subsidiary or Affiliate of the Borrower, or any officer thereof, contained in
this Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Agent under or in connection with, this Agreement or any other Loan Document, or
the validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document, or for any failure of the Borrower or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower or any
of the Borrower's Subsidiaries or Affiliates.
SECTION IX.4 Reliance by Agent. The Agent shall be entitled to rely,
-----------------
and shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to the Borrower), independent accountants and other experts selected by the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Lenders as it deems
appropriate and, if it so requests, it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
Agent shall in all cases be fully protected in acting, or in
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refraining from acting, under this Agreement or any other Loan Document in
accordance with a request or consent of the Required Lenders and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all of the Lenders.
(b) For purposes of determining compliance with the conditions
specified in Section 5.1, each Lender that has executed and delivered this
------------
Agreement shall be deemed to have consented to, approved or accepted or to be
satisfied with, each document or other matter either sent by the Agent to such
Lender for consent, approval, acceptance or satisfaction, or required thereunder
to be consented to or approved by or acceptable or satisfactory to the Lender.
SECTION IX.5 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default or Event of Default, except
with respect to defaults in the payment of principal, interest and fees required
to be paid to the Agent for the account of the Lenders, unless the Agent shall
have received written notice from a Lender or the Borrower referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default". The Agent will notify the Lenders of its
receipt of any such notice. The Agent shall take such action with respect to
such Default or Event of Default as may be requested by the Required Lenders in
accordance with Article VIII; provided, however, that unless and until the Agent
------------ -------- -------
has received any such request, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable or in the best interest
of the Lenders.
SECTION IX.6 Credit Decision. Each Lender acknowledges that none of the
---------------
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Borrower and its Subsidiaries, shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Lender. Each Lender represents to
the Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and creditworthiness of the
Borrower and its Subsidiaries, and all applicable bank regulatory laws relating
to the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Borrower hereunder. Each Lender also
represents that it will,
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independently and without reliance upon any Agent-Related Person and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Borrower. Except for notices, reports and other
documents expressly herein required to be furnished to the Lenders by the Agent,
the Agent shall not have any duty or responsibility to provide any Lender with
any credit or other information concerning the business, prospects, operations,
property, financial and other condition or creditworthiness of the Borrower
which may come into the possession of any of the Agent-Related Persons.
SECTION IX.7 Indemnification. Whether or not the transactions
---------------
contemplated hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Borrower and without limiting the obligation of the Borrower to do so), pro
---
rata, from and against any and all Indemnified Liabilities; provided, however,
- ---- -------- -------
that no Lender shall be liable for the payment to the Agent-Related Persons of
any portion of such Indemnified Liabilities resulting solely from such Person's
gross negligence or willful misconduct. Without limitation of the foregoing,
each Lender shall reimburse the Agent upon demand for its ratable share of any
costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent
in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Borrower. The undertaking in
this Section shall survive the payment of all Obligations hereunder and the
resignation or replacement of the Agent.
SECTION IX.8 Agent in Individual Capacity. BofA and its Affiliates may
----------------------------
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Borrower and its
Subsidiaries and Affiliates as though BofA were not the Agent hereunder and
without notice to or consent of the Lenders. The Lenders acknowledge that,
pursuant to such activities, BofA or its Affiliates may receive information
regarding the Borrower or
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its Affiliates (including information that may be subject to confidentiality
obligations in favor of the Borrower or such Subsidiary) and acknowledge that
the Agent shall be under no obligation to provide such information to them. With
respect to its Loans, BofA shall have the same rights and powers under this
Agreement as any other Lender and may exercise the same as though it were not
the Agent, and the terms "Lender" and "Lenders" include BofA in its individual
capacity.
SECTION IX.9 Successor Agent. The Agent may, and at the request of the
----------------
Required Lenders shall, resign as Agent upon 30 days' notice to the Lenders and
Borrower. If the Agent resigns under this Agreement, the Required Lenders shall
appoint from among the Lenders a successor agent for the Lenders. If no
successor agent is appointed prior to the effective date of the resignation of
the Agent, the Agent may appoint, after consulting with the Lenders and the
Borrower, a successor agent from among the Lenders. Upon the acceptance of its
appointment as successor agent hereunder, such successor agent shall succeed to
all the rights, powers and duties of the retiring Agent and the term "Agent"
shall mean such successor agent and the retiring Agent's appointment, powers and
duties as Agent shall be terminated. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5
---------- ------------- ----
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under this Agreement. If no successor agent has accepted
appointment as Agent by the date which is 30 days following a retiring Agent's
notice of resignation, the retiring Agent's resignation shall nevertheless
thereupon become effective and the Lenders shall perform all of the duties of
the Agent hereunder until such time, if any, as the Required Lenders appoint a
successor agent as provided for above.
SECTION IX.10 Withholding Tax. (a) If any Lender is a "foreign
----------------
corporation, partnership or trust" within the meaning of the Code and such
Lender claims exemption from, or a reduction of, U.S. withholding tax under
Sections 1441 or 1442 of the Code, such Lender agrees with and in favor of the
Agent, to deliver to the Agent:
(i) if such Lender claims an exemption from, or a reduction
of, withholding tax under a United States tax treaty, properly
completed IRS Forms 1001 and W-8 before the payment of any interest in
the first calendar year and before the payment of any interest in each
third succeeding calendar year during which interest may be paid under
this Agreement;
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(ii) if such Lender claims that interest paid under this
Agreement is exempt from United States withholding tax because it is
effectively connected with a United States trade or business of such
Lender, two properly completed and executed copies of IRS Form 4224
before the payment of any interest is due in the first taxable year of
such Lender and in each succeeding taxable year of such Lender during
which interest may be paid under this Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required under the
Code or other laws of the United States as a condition to exemption
from, or reduction of, United States withholding tax.
Such Lender agrees to promptly notify the Agent of any change in circumstances
which would modify or render invalid any claimed exemption or reduction.
(b) If any Lender claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Lender
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Borrower to such Lender, such Lender agrees to notify the
Agent of the percentage amount in which it is no longer the beneficial owner of
Obligations of the Borrower to such Lender. To the extent of such percentage
amount, the Agent will treat such Lender's IRS Form 1001 as no longer valid.
(c) If any Lender claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells, assigns, grants a participation
in, or otherwise transfers all or part of the Obligations of the Borrower to
such Lender, such Lender agrees to undertake sole responsibility for complying
with the withholding tax requirements imposed by Sections 1441 and 1442 of the
Code.
(d) If any Lender is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Lender
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Lender not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.
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<PAGE>
(d) If the IRS or any other Governmental Authority of the United States
or other jurisdiction asserts a claim that the Agent did not properly withhold
tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because such
Lender failed to notify the Agent of a change in circumstances which rendered
the exemption from, or reduction of, withholding tax ineffective, or for any
other reason) such Lender shall indemnify the Agent fully for all amounts paid,
directly or indirectly, by the Agent as tax or otherwise, including penalties
and interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs and expenses
(including Attorney Costs). The obligation of the Lenders under this subsection
shall survive the payment of all Obligations and the resignation or replacement
of the Agent.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION X.1 Waivers, Amendments, etc. The provisions of this Agreement
-------------------------
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Required Lenders; provided, however, that no such
-------- -------
amendment, modification or waiver which would:
a. modify any requirement hereunder that any particular action
be taken by all the Lenders or by the Required Lenders shall be
effective unless consented to by each Lender;
b. modify this Section 10.1, change the definition of
-------------
"Required Lenders", increase the Commitment Amount or the Percentage of
----------------
any Lender, reduce any fees described in Article III (other than
------------
Section 3.3.2), change the schedule of repayments provided for in
--------------
Section 3.1, release any collateral security, except as otherwise
------------
specifically provided in any Loan Document or extend the Commitment
Termination Date shall be made without the consent of each Lender;
c. extend the due date for, or reduce the amount of, any
scheduled repayment or prepayment of principal of or interest on any
Loan (or reduce the principal amount of or rate of interest on any
Loan) shall be made without the consent of any Lender affected thereby;
or
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d. affect adversely the interests, rights or obligations of
the Agent qua the Agent shall be made without consent of the Agent.
No failure or delay on the part of the Agent or any Lender in exercising any
power or right under this Agreement or any other Loan Document shall operate as
a waiver thereof, nor shall any single or partial exercise of any such power or
right preclude any other or further exercise thereof or the exercise of any
other power or right. No notice to or demand on the Borrower in any case shall
entitle it to any notice or demand in similar or other circumstances. No waiver
or approval by the Agent or any Lender under this Agreement or any other Loan
Document shall, except as may be otherwise stated in such waiver or approval, be
applicable to subsequent transactions. No waiver or approval hereunder shall
require any similar or dissimilar waiver or approval thereafter to be granted
hereunder.
SECTION X.2 Notices. All notices and other communications provided to
-------
any party hereto under this Agreement or any other Loan Document shall be in
writing or by Telex or by facsimile and addressed, delivered or transmitted to
such party at its address, Telex or facsimile number set forth below its
signature hereto or set forth in the Lender Assignment Agreement or at such
other address, Telex or facsimile number as may be designated by such party in a
notice to the other parties. Any notice, if mailed and properly addressed with
postage prepaid or if properly addressed and sent by pre-paid courier service,
shall be deemed given when received or if refused, when delivery is attempted;
any notice, if transmitted by Telex or facsimile, shall be deemed given when
transmitted (answerback confirmed in the case of Telexes).
SECTION X.3 Payment of Costs and Expenses. The Borrower agrees to pay
-----------------------------
on demand all direct out-of-pocket expenses of the Agent (including reasonable
Attorney Costs incurred by the Agent) in connection with
a. the negotiation, preparation, execution and delivery of
this Agreement and of each other Loan Document, including schedules and
exhibits, and any amendments, waivers, consents, supplements or other
modifications to this Agreement or any other Loan Document as may from
time to time hereafter be required, whether or not the transactions
contemplated hereby are consummated, and
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b. the preparation and review of the form of any document or
instrument relevant to this Agreement or any other Loan Document.
The Borrower further agrees to pay, and to save the Agent and the Lenders
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Agreement, the borrowings
hereunder or any other Loan Documents. The Borrower also agrees to reimburse the
Agent and each Lender upon demand for all reasonable out-of-pocket expenses
(including Attorney Costs) incurred by the Agent or such Lender in connection
with (x) the negotiation of any restructuring or "work-out", whether or not
consummated, of any Obligations and (y) the enforcement of any Obligations.
SECTION X.4 Indemnification. In consideration of the execution and
---------------
delivery of this Agreement by each Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender
and each of their respective officers, directors, employees and agents
(collectively, the "Indemnified Parties") free and harmless from and against any
-------------------
and all actions, causes of action, suits, losses, costs, liabilities and
damages, and expenses incurred in connection therewith (irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought), including Attorney Costs (collectively, the "Indemnified
-----------
Liabilities"), incurred by the Indemnified Parties or any of them as a result
- -----------
of, or arising out of, or relating to
a. any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of any Loan; or
b. the entering into and performance of this Agreement and any
other Loan Document by any of the Indemnified Parties;
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct. If and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.
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SECTION X.5 Survival. The obligations of the Borrower under Sections
-------- --------
4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under
- --- --- --- --- ---- ----
Section 9.7, shall in each case survive any termination of this Agreement, the
- -----------
payment in full of all Obligations and the termination of all Commitments. The
representations and warranties made by the Borrower in this Agreement and in
each other Loan Document shall survive the execution and delivery of this
Agreement and each such other Loan Document.
SECTION X.6 Severability. Any provision of this Agreement or any other
------------
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.
SECTION X.7 Headings. The various headings of this Agreement and of
--------
each other Loan Document are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement or such other Loan Document or
any provisions hereof or thereof.
SECTION X.8 Execution in Counterparts, Effectiveness, etc. This
---------------------------------------------------
Agreement may be executed by the parties hereto in several counterparts, each of
which shall be executed by the Borrower and the Agent and be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement shall become effective when counterparts hereof
executed on behalf of the Borrower and each Lender (or notice thereof
satisfactory to the Agent) shall have been received by the Agent, the conditions
in Section 5.1 have been satisfied or waived by each Lender, and notice thereof
-----------
shall have been given by the Agent to the Borrower and each Lender.
SECTION X.9 Governing Law; Entire Agreement. THIS AGREEMENT AND EACH
---------------------------------
OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. This Agreement and the
other Loan Documents constitute the entire understanding among the parties
hereto with respect to the subject matter hereof and supersede any prior
agreements, written or oral, with respect thereto.
SECTION X.10 Successors and Assigns. This Areement shall be binding
----------------------
upon and shall inure to the benefit of the
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parties hereto and their respective successors and assigns; provided, however,
that:
a. the Borrower may not assign or transfer its rights or
obligations hereunder without the prior written consent of the Agent
and all Lenders; and
b. the rights of sale, assignment and transfer of the Lenders
are subject to Section 10.11.
-------------
SECTION X.11 Sale and Transfer of Loans; Participations in Loans. Each
----------------------------------------------------
Lender may assign, or sell participations in, its Loans and Commitment to one or
more other Persons in accordance with this Section 10.11.
-------------
SECTION X.11.1 Assignments.
-----------
(a) Each Lender shall have the right, subject to the further
provisions of this Section 10.11.1, to sell or assign all or any part
----------------
of its Commitments, Loans and other rights and obligations under this
Agreement and the other Loan Documents (such transfer, an "Assignment")
----------
to any commercial lender, other financial institution or other entity
(an "Assignee Lender"). Upon such Assignment becoming effective as
----------------
provided in Section 10.11.1(b), the assigning Lender shall be relieved
------------------
from the portion of the Commitments, obligations to indemnify the Agent
and other obligations hereunder to the extent assumed and undertaken by
the Assignee Lender, and to such extent the Assignee Lender shall have
the rights and obligations of a "Lender" hereunder. Notwithstanding the
foregoing, unless otherwise consented to by the Borrower and the Agent
or unless its Assignment is to a Lender or an Affiliate of a Lender,
(i) each Assignment shall be of a constant, and not a varying,
percentage of the Commitment Amount, and (ii) each Assignment shall be
in the initial principal amount of not less than $5,000,000 in the
aggregate for all Loans and Commitments assigned or an integral
multiple of $5,000,000 if above such amount. Each Assignment shall be
documented by a Lender Assignment Agreement;
(b) An Assignment shall become effective hereunder when all of
the following shall have occurred: (i) the Agent and the Borrower shall
have been given at least five days' prior written notice of the
Assignment, together with payment instructions, addresses and related
information with respect to such Assignee Lender, and shall have given
prior written consent to such Assignment (which consent shall not
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be unreasonably withheld) unless the Assignee Lender is already a
Lender or an Affiliate under this Agreement, (ii) the Assignee Lender
shall have paid a processing fee of $3,000 to the Agent for its own
account, (iii) the assigning Lender shall have submitted in form
satisfactory to the Agent, the relevant Lender Assignment Agreement in
which the Assignee Lender shall have agreed in writing to have
irrevocably assumed and undertaken the transferred portion of the
assigning Lender's obligations hereunder (including without limitation
the obligations to indemnify the Agent hereunder), to the Agent with a
copy for the Borrower, and shall have provided to the Agent information
which the Agent shall have reasonably requested to make payment to the
Assignee Lender, and (iv) the assigning Lender and the Agent shall have
agreed upon a date upon which the Assignment shall become effective.
Upon the Assignment becoming effective, (x) if requested by the
assigning Lender, the Agent and the Borrower shall make appropriate
arrangements so that new Notes are issued to the assigning Lender and
the Assignee Lender and (y) the Agent shall forward all payments of
interest, principal, fees and other amounts that would have been made
to the assigning Lender, in proportion to the percentage of the
assigning Lender's rights transferred, to the Assignee Lender.
SECTION X.11.2 Participations. Each Lender shall have the right,
--------------
subject to the further provisions of this Section 10.11.2, to grant or sell a
----------------
participation in all or any part of its Loans and Commitments (a
"Participation") to any commercial lender, other financial institution or other
-------------
entity (a "Participant") without the consent of the Lender, the Agent or any
-----------
other party hereto. The Borrower agrees that if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of setoff in respect of its Participation in
amounts owing under this Agreement to the same extent as if the amount of its
Participation were owing directly to it as a Lender under this Agreement;
provided, that such right of setoff shall be subject to the obligation of such
Participant to share with the Lenders, and the Lenders agree to share with such
Participant, as provided in Section 4.9. The Borrower also agrees that each
------------
Participant shall be entitled to the benefits of Sections 4.3, 4.5 and 4.6 with
------------ --- ---
respect to its Participation, provided, that no Participant shall be entitled to
receive any greater amount pursuant to such Sections than the transferor Lender
would have been entitled to receive in respect of the amount of the
Participation transferred
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by such transferor Lender to such Participant had no such transfer occurred.
SECTION X.11.3 Limitation of Rights of any Assignee Lender or
-----------------------------------------------------
Participant. Notwithstanding anything in the foregoing to the contrary, except
- -----------
in the instance of an Assignment that has become effective as provided in
Section 10.11.1(b), (i) no Assignee Lender or Participant shall have any direct
- ------------------
rights hereunder, (ii) the Borrower, the Agent and the Lenders other than the
assigning or selling Lender shall deal solely with the assigning or selling
Lender and shall not be obligated to extend any rights or make any payment to,
or seek any consent of, the Assignee Lender or Participant, (iii) no Assignment
or Participation shall relieve the assigning or selling Lender from its
Commitment to make Loans hereunder or any of its other obligations hereunder and
such Lender shall remain solely responsible for the performance thereof, and
(iv) no Assignee Lender or Participant, other than an Affiliate of the assigning
or selling Lender, shall be entitled to require such Lender to take or omit to
take any action hereunder, except that such Lender may agree with such Assignee
Lender or Participant that such Lender will not, without such Assignee Lender's
or Participant's consent, take any action which would, in the case of any
principal, interest or fee in which the Assignee Lender or Participant has an
ownership or beneficial interest: (w) extend the final maturity of any Loans or
extend the termination of any Commitment, (x) reduce the interest rate on the
Loans or the rate of fees paid on the Commitment, or (y) forgive any principal
of, or interest on, the Loans or any fees.
SECTION X.11.4 Tax Matters. No Lender shall be permitted to enter into
-----------
any Assignment or Participation with any Assignee Lender or Participant who is
not a United States Person unless such Assignee Lender or Participant represents
and warrants to such Lender that, as at the date of such Assignment or
Participation, it is entitled to receive interest payments without withholding
or deduction of any taxes and such Assignee Lender or Participant executes and
delivers to such Lender and the Agent, on or before the date of execution and
delivery of documentation of such Participation or Assignment, a United States
Internal Revenue Service Form 1001 or 4224, or any successor to either of such
forms, as appropriate, properly completed and claiming complete exemption from
withholding and deduction of all federal income taxes.
SECTION X.11.5 Information. Each Lender may furnish any information
-----------
concerning the Borrower in the possession of such
- 66 -
<PAGE>
Lender from time to time to Assignee Lenders and Participants and potential
Assignee Lenders and Participants.
SECTION X.11.6 Federal Reserve Bank. Nothing herein stated shall limit
--------------------
the right of any Lender to assign any interest herein to a Federal Reserve Bank.
SECTION X.12 Confidentiality. The Lenders shall hold all non-public
---------------
information (which has been identified as such by the Borrower) obtained
pursuant to the requirements of this Agreement confidential and shall not
disclose it to any third person, except that the Lenders may make disclosure to
any of their examiners, Affiliates, outside auditors, counsel and other
professional advisors in connection with this Agreement or as reasonably
required by any bona fide transferee, participant or assignee or proposed
---- ----
transferee, participant or assignee or as required or requested by any
governmental agency or representative thereof or pursuant to legal process;
provided, however, that
- -------- -------
a. unless specifically prohibited by applicable law or court
order, each Lender shall notify the Borrower of any request by any
governmental agency or representative thereof (other than any such
request in connection with an examination of the financial condition of
such Lender by such governmental agency) for disclosure of any such
non-public information prior to disclosure of such information;
b. prior to any such disclosure pursuant to this Section
-------
10.12, each Lender shall require any such bona fide transferee,
----- ---- ----
participant or assignee or proposed transferee, participant or assignee
receiving a disclosure of non-public information to agree in writing
(i) to be bound by this Section 10.12; and
-------------
(ii) to require such Person to require any other
Person to whom such Person discloses such non-public
information to be similarly bound by this Section 10.12; and
-------------
c. except as may be required by an order of a court of
competent jurisdiction and to the extent set forth therein, no Lender
shall be obligated or required to return any materials furnished by the
Borrower or any Subsidiary.
SECTION X.13 Other Transactions. Nothing contained herein shall
-------------------
preclude the Agent or any other Lender from engaging
- 67 -
<PAGE>
in any transaction, in addition to those contemplated by this Agreement or any
other Loan Document, with the Borrower or any of its Affiliates in which the
Borrower or such Affiliate is not restricted hereby from engaging with any other
Person.
SECTION X.14 Forum Selection and Consent to Jurisdiction. ANY
-------------------------------------------------
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE
LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE
AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE
PREPAID, TO MMI COMPANIES, INC., 540 LAKE COOK ROAD, DEERFIELD, ILLINOIS 60015,
ATTENTION: WAYNE A. SINCLAIR, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE
OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER
MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT
REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER
THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER
HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS.
SECTION X.15 Waiver of Jury Trial. THE AGENT, THE LENDERS AND THE
---------------------
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
- 68 -
<PAGE>
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE
BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH
OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT
AND EACH SUCH OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be executed by their respective officers thereunto duly
authorized as of the day and year first above written.
- 69 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
MMI COMPANIES, INC.
By /S/ Philip J. Fiskow
----------------------------------
Title: Treasurer
---------------------------
Address:
540 Lake Cook Road
Deerfield, IL 60015
Attention: Paul Orzech
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Agent
By /S/ Gary Peet
----------------------------------
Title: Senior Vice President
---------------------------
Address:
231 South LaSalle Street
Chicago, IL 60697
Facsimile: (312) 987-0889
Attention: Gary Peet
Commitment Percentage BANK OF AMERICA NATIONAL TRUST
- ---------- ---------- ANDASSOCIATION, as a
$25,000,000 25.0% Lender
By /S/ Gary Peet
----------------------------------
Title: Senior Vice President
---------------------------
Domestic and Eurodollar Office:
231 South LaSalle Street
Chicago, IL 60697
Facsimile: (312) 987-0889
Attention: Gary Peet
- S-1 -
<PAGE>
Commitment Percentage LASALLE NATIONAL BANK
- ---------- ----------
$25,000,000 25.0%
By /S/ George L. Kumis
----------------------------------
Title: Senior Vice President
---------------------------
Domestic and Eurodollar Office:
135 South LaSalle Street
Chicago, IL 60603
Facsimile: (312) 904-6189
Attention: George L. Kumis
Commitment Percentage FLEET NATIONAL BANK
- ---------- ----------
$25,000,000 25.0%
By /S/ Leonard Lapolice
----------------------------------
Title: A.V.P.
---------------------------
Domestic and Eurodollar Office:
CT MO 0250
777 Main Street
Hartford, CT 06115-2000
Facsimile: (806) 986-1264
Attention: Mildred Chavarria-Jones
Commitment Percentage FIRST UNION NATIONAL BANK
- ---------- ----------
$25,000,000 25.0%
By /S/ Jane W. Workman
----------------------------------
Title: Senior Vice President
---------------------------
Domestic and Eurodollar Office:
301 S. College St., DC 5
Charlotte, NC 28288-0735
Facsimile: (704) 383-7611
Attention: Robert C. Mayer, Jr.
- S-2 -
<PAGE>
EXHIBIT 10.11
MMI COMPANIES, INC.
1993 NON-EMPLOYEE DIRECTORS'
FORMULA STOCK OPTION PLAN
1. The Purpose of the Plan. The purpose of the MMI Companies, Inc.
------------------------
1993 Non-Employee Directors' Formula Stock Option Plan (the "Plan") is to
promote the interests of MMI Companies, Inc. (the "Corporation") and its
subsidiaries by providing an incentive for non-employee directors to join and
remain on the Board of Directors of the Corporation.
2. Eligibility for Participation. Awards under the Plan shall be made
-----------------------------
to each non-employee director of the Corporation in the form of a non-qualified
stock option to acquire shares of the Corporation's common stock. A non-employee
director is a director who is not an officer or employee of the Corporation or
any of its subsidiaries.
3. Shares Available. Subject to adjustments as provided in Section 7,
----------------
the Corporation shall reserve for issuance under the Plan 187,500 shares of the
Corporation's common stock. Such shares may be authorized but unissued shares or
treasury shares. If any option granted hereunder shall expire or terminate for
any reason without having been exercised in full, the shares subject to such
option shall again be available for issuance under the Plan.
4. Awards Under the Plan.
---------------------
A. Initial One-Time Grant. If the Corporation sells any of its
----------------------
securities to the public for its own account pursuant to an effective
registration statement under the Securities Act of 1933, as amended, and the
rules and regulations thereunder (the "initial public offering"), then, as of
the date that such registration statement is declared effective by the SEC, each
non-employee director shall be granted a non-qualified option to purchase 4,125
shares of the Corporation's common stock at the offering price of the
Corporation's common stock in the initial public offering. Thereafter, as of the
date that any new non-employee director is elected or appointed to the Board,
such nonemployee director shall be granted a non-qualified option to purchase
4,125 shares of the Corporation's common stock at an exercise price equal to the
fair market value of the Corporation's common stock on the date of such
appointment or election.
B. Annual Grant. From and after the initial public offering,
------------
each non-employee director who is serving on the Board of Directors on December
31 of any year shall be granted a nonqualified option to purchase 1,375 shares
of the Corporation's common stock. The grant date of such options shall be the
date of the annual meeting of shareholders for the next year. The option
exercise price shall equal the fair market value per share of the Corporation's
common stock on the date immediately prior to the grant date. Although a
non-employee director must be serving as a director on December 31 of a given
year to be eligible to receive an option with respect to such year, a director
need not be serving as a director on the grant date to be granted such option.
C. Annual Performance Option Grant. Each non-employee director
-------------------------------
who is serving on the Board of Directors on January 1 of any year commencing
January 1, 1998 shall be granted a nonqualified Performance Option to purchase
2,500 shares of the Corporation's common stock. Notwithstanding the foregoing,
(1) if the minimum Earnings Per Share goal incorporated into the Chief Executive
Officer's objective for that year is not achieved, or (2) if the director is not
also serving as a director on December 31 of the target performance year, the
Performance Options for that year will be forfeited. The grant date of such
Performance Options shall be as of January 1 of the target performance year,
except that for 1998 the grant date shall be March 2, 1998. The Performance
Option exercise price shall equal the fair market value per share of the
Corporation's common stock on the grant date.
5. Option Terms. Options granted under the Plan shall be exercisable
------------
for a term of 10 years from the date of grant, except as set forth below, and
shall be evidenced by stock option agreements. As used herein, the fair market
value of the Corporation's common stock means either (i) if, on the date an
option is granted the common stock is traded on a national securities exchange,
then on the basis of the closing sale price on the
<PAGE>
exchange on which the Corporation's common stock may then be traded or, if there
is no such sale on such date, then on the last previous day on which a sale was
reported; or (ii) if, on the date an option is granted, the Corporation's common
- 2 -
<PAGE>
stock is not listed on any securities exchange, but is publicly traded and
reported on NASDAQ, then on the basis of the average between the closing bid and
asked quotations as reported by NASDAQ. Options shall not be contingent on
continued board service and shall remain exercisable following resignation or
removal from the Board. Upon the death of a non-employee director, his or her
options may be exercised by the executor, administrator, personal representative
or distribute of the deceased non-employee director through a period to be
determined by the Board of Directors of the Corporation, but not to exceed the
date on which such options expire or six months after the death of such
non-employee director, whichever is earlier. No option granted under the Plan
shall be assignable or transferable, other than by will, by the laws of descent
and distribution or by a qualified domestic relations order as defined by the
Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement
Income Security Act, or the rules thereunder.
Notwithstanding the foregoing, from and after March 1, 1997, a
Non-Employee Director may transfer all or a portion of the options granted to
such Non-Employee Director (including options outstanding on the date hereof) to
(i) the spouse, descendants (including adopted descendants and grandchildren),
or the spouses of children or grandchildren of the Non-Employee Director
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, or (iii) a partnership or limited liability
company in which such Immediate Family Members are the only partners or members,
provided that (x) there may be no consideration for any such transfer (except
issuance of a partnership or limited liability company interest in case of
transfer to a family limited partnership or limited liability company), (y) the
stock option agreement pursuant to which such options are granted must be
approved by the Committee, and must expressly provide, or be amended to provide,
for transferability in a manner consistent with this Section, and (z) subsequent
transfers of transferred options shall be prohibited except by will or the laws
of descent and distribution. Following transfer, any such options shall continue
to be subject to the same terms and conditions as were applicable immediately
prior to transfer. The Committee may, in its discretion, permit transfers to
other persons or entities on substantially the same terms.
6. Adjustments Upon Changes in Capitalization. The number of shares of
------------------------------------------
the Corporation's common stock with respect to which stock options shall be
granted under the Plan and the prices at which such stock options may be
exercised shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of common stock resulting from the subdivision or
combination of shares of common stock, other capital adjustments, or the payment
of a stock dividend. Adjustments under this section shall be made by the Board
of Directors and shall be final, binding and conclusive.
7. Effective Date. The Plan shall become effective on January 15,
---------------
1993, subject to the approval thereof by the affirmative votes of the holders of
a majority of the shares of common stock of the Corporation present, in person
or by proxy, and entitled to vote at the 1993 annual meeting of the shareholders
of the Corporation, or any adjournment of such meeting.
8. Amendment. The Plan may be amended only by an effective resolution
---------
of the Board of Directors of the Corporation. In addition, any amendment that
would materially increase the benefits accruing to participants under the Plan,
materially increase the number of securities which may be issued under the Plan
or materially modify the requirements as to eligibility for participation in the
Plan shall be subject to the approval of the holders of a majority of the shares
of common stock of the Corporation present, in person or by proxy, at an annual
or special meeting of the shareholders. The provisions of the Plan shall not be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Security Act, or the rules
thereunder.
9. Term of the Plan. The Plan shall terminate 10 years after the date
----------------
on which it becomes effective and no award shall thereafter be made under the
Plan. Notwithstanding the foregoing, all options issued and outstanding under
the Plan prior to such date shall remain in effect until such options have been
exercised or terminated in accordance with their terms.
As amended through February 26, 1998
- 3 -
<PAGE>
EXHIBIT 10.13
MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN
PREAMBLE
The principal objective of this Board of Directors' Retirement Plan
(the "Plan") is to ensure the payment of a competitive level of retirement
income in order to attract, retain and motivate Directors. The Plan is designed
to provide a benefit which, when added to other retirement income of the Board
member, will meet the objective described above. Eligibility for participation
in the Plan shall be limited to non-employee Directors ("Director"), serving on
or after the date of the Plan. This Plan will become effective on January 1,
1993, and will be effective as to each participant on the date he or she is, or
was, designated as such hereunder.
SECTION I
DEFINITIONS
1.1 "Committee" means the Personnel and Compensation Committee of the Board of
Directors of the Company, which has been given authority by the Board of
Directors to administer the Plan.
1.2 "Company" means MMI Companies, Inc.
1.3 "Participant" means a non-employee Director of the Company. A Director shall
become a Participant in the Plan as of the date he or she is elected or
appointed to the Board.
1.4 "Plan" means the Company's Board of Directors Retirement Plan.
1.5 "Plan Termination Date" shall mean February 26, 1998.
1.6 "Retirement" means the termination of a Participant's tenure as a Director
provided that he or she has served at least one full three (3) year term in the
class to which he or she was elected as a non-employee Director if such
director's Retirement has occurred prior to the Plan Termination Date, or has
served at least one (1) full year prior to the Plan Termination Date if the
Participant is a director on such date.
1.7 "Retirement Benefit Date" means the first day of the month following the
Director's Retirement or the first day of the month following the Director's
attaining age 59 and 1/2, whichever is later. Notwithstanding the foregoing, in
the case of Participants who are serving on the Company's Board of Directors on
the Plan Termination Date, the Retirement Benefit Date shall be the first day of
the month following a Participant's Retirement.
SECTION II
<PAGE>
ELIGIBILITY FOR BENEFITS
2.1 Each Participant is eligible to receive a benefit under this Plan beginning
on his or her Retirement Benefit Date.
2.2 If any Participant entitled to a benefit under this Plan is removed from the
Board, or enters into competition with the Company, or interferes with the
relations between the Company and any customer, the rights of such Participant
to a benefit under this Plan, including the rights of a Surviving Spouse to a
benefit, will be forfeited, unless the Committee determines that such activity
is not detrimental to the best interests of the Company.
2.3 No benefits are payable under this Plan if a Participant ceases his or her
tenure as a Director for any reason prior to his or her completing a full three
(3) year term as a non-employee director in the class to which he or she was
elected if such director's Retirement has occurred prior to the Plan Termination
Date, or at least one (1) full year of service prior to the Plan Termination
Date if Retirement of a director serving on the Plan Termination Date occurs
thereafter.
SECTION III
AMOUNT AND FORM OF RETIREMENT BENEFIT
Amount of Benefit
- -----------------
3.1 The annual retirement benefit payable at the Retirement Benefit Date under
the Plan will equal the annual retainer fee in effect at the time of the
Retirement. The number of annual benefit payments will be equal to the number of
years of Board service provided that the maximum number of years of service for
purposes of this calculation shall be ten (10). Notwithstanding the foregoing,
all non-employee directors serving on the Board on the Plan Termination Date who
complete at least one full year of service prior to such date will receive
$15,000 per full year or partial year (for the then-current term year) served on
the Board of Directors to the Plan Termination Date, but no more than ten (10)
years of service.
Form of Benefit
- ---------------
3.2(a) The benefits determined under this Plan will be payable in any of the
following as is elected by the Participant: (1) annual lump sum, (2) straight
life annuity, (3) 50% joint survivorship annuity, (4) 75% joint survivorship
annuity, or (5) 100% joint survivorship annuity. Payments under (1) annual lump
sum are terminated following the number of benefit years, as defined under 3.1,
or upon death, whichever comes earlier.
- 2 -
<PAGE>
3.2(b) Notwithstanding the foregoing, the only benefits payable under this Plan
to directors serving on the Plan Termination Date shall be payable either:
(i) in the form of a lump-sum payment of cash upon Retirement from the
Board (which may also be deferred over any period of time beginning
with the Retirement Benefit Date but not to exceed ten years); or
(ii) Directors may irrevocably elect, at only one time, to exchange their
entire current cash benefit payable under this Retirement Plan for
unregistered MMI stock at 85% of fair market value (closing price on
the most recent trading day prior to receipt of the director's
election), such stock to be held for the director until Retirement in
a Stock Plan Account on the books of the Company and which shall only
be in the name of the Director. Dividends will accrue on stock held in
such Stock Plan Account and stock equivalents shall be credited to the
Stock Plan Account in the amount of such dividends. At Retirement, a
stock certificate shall be issued to the director in the amount of the
whole number of shares appearing in the Stock Plan Account and a check
shall be issued in lieu of fractional shares, however, a director may
elect to defer receipt of such shares over any period of time
beginning with Retirement Benefit Date but not to exceed ten years,
provided however, that the director elects such deferral at least six
months prior to Retirement. Stock in the Stock Plan Account may not be
sold or transferred prior to Retirement but shares may be issued and
exchanged for shares related to an offer of purchase or merger
extended to other shareholders. Such stock may, in the Company's sole
discretion, be held for an additional six (6) months following the
contemplated issue date to comply with the federal securities laws.
A director's election to receive cash or unregistered stock may be made at any
time before benefits are paid under this Retirement Plan. The annuity options of
Section 3.2(a) are eliminated for all directors whose Retirement occurs after
the Plan Termination Date.
SECTION IV
PAYMENT OF RETIREMENT BENEFITS
4.1 Benefits payable in accordance with Section III will commence on the
Participant's Retirement Benefit Date in accordance with the provisions of the
election.
- 3 -
<PAGE>
SECTION V
MISCELLANEOUS
5.1 The Committee may, in its sole discretion, terminate, suspend or amend this
Plan at any time, or from time to time, in whole or in part, with the approval
of the full Board of Directors. However, no amendment or suspension of the Plan
will affect a retired Participant's right or the right of a Surviving Spouse to
continue to receive a benefit in accordance with this Plan as in effect on the
date such Participant commenced to receive a benefit under this Plan.
5.2 Nothing contained herein will confer upon any Participant the right to be
retained as a Director of the Company, nor will it interfere with the right of
the Company or its shareholders to remove or otherwise deal with Participants
without regard to the existence of this Plan.
5.3 The Plan is unfunded, and the Company will make Plan benefit payments solely
on a current reimbursement basis.
5.4 To the maximum extent permitted by law, no benefit under this Plan shall be
assignable or subject to any manner to alienation, sale, transfer, claims of
creditors, pledge, attachment or encumbrances of any kind.
5.5 The Committee may adopt rules and regulations to assist it in the
administration of the Plan.
5.6 Each Participant shall receive a copy of the Plan. The Committee will make
available for inspection by any Participant a copy of the rules and regulations
used by the Committee in administering the Plan.
5.7 This Plan is established under and will be construed according to the laws
of the State of Illinois.
5.8 Any decisions made by the full Board of Directors, with respect to the Plan,
in whole or in part, are binding.
Effective January 1, 1993
Amended December 8, 1993
Amended April 17, 1996
Amended February 26, 1998
- 4 -
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of May 1, 1997 by and between MMI COMPANIES,
INC. (the "Company"), with offices at Deerfield, Illinois, and B. FREDERICK
BECKER of Lake Forest, Illinois (the "Employee").
WHEREAS, the Company wishes to assure itself of the services
of the Employee upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual promises and
agreement set forth herein, the parties agree as follows:
1. Employment
----------
Subject to the terms and conditions hereinafter provided, the
Company hereby employs and engages the services of the Employee to serve in the
capacity of Chairman and Chief Executive Officer of the Company, and such other
offices and positions as the Board may from time to time designate, during the
term of employment set forth in Paragraph 2 of this Agreement and at the
compensation and benefits hereinafter stated. The Employee hereby accepts such
employment and agrees to render to the Company services consistent with those of
Chairman and Chief Executive Officer, and such other commensurate offices and
positions as designated, faithfully, diligently and to the best of his ability
and to discharge the responsibilities thereof.
2. Term of Employment
------------------
The expression "Term of Employment," as used in this Agreement, shall
mean the period beginning on May 1, 1997 and ending on the date the Employee's
employment relationship with the Company is terminated pursuant to the
provisions of Paragraph 6 hereof.
3. Salary
------
(a) The Company shall pay or cause to be paid to the Employee during
the Term of Employment a salary of not less than five hundred thirty-one
thousand and three hundred Dollars ($531,300) per annum, payable in
approximately equal monthly installments during such term or in such other
installments as the Company and Employee may agree to adopt from time to time.
(b) The amount of salary payable hereunder shall be subject to periodic
review by the Company. Such review shall occur not less frequently than
annually, with the first annual review to occur in April of 1998. The Employee's
annual salary may not be reduced, and in the event the salary hereunder is
increased, such annual salary shall thereafter be the minimum salary payable
under this Agreement.
<PAGE>
4. Annual Bonus
------------
The Company shall have adopted a formal annual bonus plan that
will provide for the payment of an annual cash bonus to the Employee during the
Term of Employment based upon the achievement of a limited number of financial,
operational and managerial goals mutually agreed to by the Compensation
Committee of the Company and the Employee. Such objectives will be weighted
according to their importance. Objectives and weightings may be revised by
mutual consent of the Employee and the Compensation Committee during the fiscal
year if warranted by changes in economic conditions, accounting regulations or
other unforeseen circumstances.
Upon successful achievement of the agreed upon goals, such annual bonus
will equal up to 60% of the Employee's annual salary ("Maximum Bonus").
The level of the Employee's performance for determining actual bonus
payments will be measured by the Compensation Committee based on a thorough
review of the Employee's performance vis-a-vis the established objectives,
taking into consideration extraordinary events that may have either positively
or negatively impacted on the ability to achieve such objectives.
The Maximum Bonus level shall be subject to periodic review by the
Company to ensure that the bonus opportunity remains consistent with the
practices of companies of comparable size and business focus. Such review shall
occur at least every three years.
5. Other Benefits
--------------
(a) During the Term of Employment, the Employee shall be entitled to
participate and be included in any retirement plan adopted by the Company and in
any group life insurance, hospitalization, disability, or similar programs of
the Company now existing and/or as established and offered from time to time
during the Term of Employment, to the extent that he is eligible under the
general provisions thereof or at such earlier time as the Company shall have
consented thereto. These benefits shall include all employee benefits generally
provided to senior executives of the Company, including, but not limited to, the
Company's Return on Equity Plan, the Retirement Equity Plan (to be effective
July 1, 1997) and the Nonqualified Stock Option Plan. The Employee shall also be
entitled to full reimbursement for his health club membership, without regard to
any annual limitation that applies generally to Company officers or other
employees.
(b) The Company shall provide to the Employee an annual allowance
("Perquisite Allowance") of thirty five thousand dollars ($35,000) to be
allocated by the Employee at his discretion among the following perquisites
based on the actual cost of providing each perquisite: an automobile and related
operating costs, including insurance, gas, oil, and repairs and maintenance;
country and luncheon club memberships, including initiation fees and annual
dues; life and disability insurance above the level provided by Company programs
offered to key employees; reimbursement of family medical expenses, including
vision and dental, not covered by Company programs offered to key employees;
financial counseling and tax preparation assistance;
- - 2 -
<PAGE>
and spouse travel in addition to such travel required in the normal course of
conducting the Company's business.
The Perquisite Allowance must be used for the purposes described above
and will be made available only upon the Company's receipt of satisfactory
evidence that the funds are being used in accordance with such purposes. Any
portion of the Perquisite Allowance that is unused during a fiscal year shall be
forfeited.
At the Employee's election, initiation fees associated with club
memberships may be financed by a loan from the Company to the Employee or by a
loan from a financial institution arranged and guaranteed by the Company. In
such cases, the Perquisite Allowance will be charged annually for interest
payments due on the loan as well as payments of principal (whether or not
required by the lender) sufficient to amortize the loan balance in ten years.
Charges to the Perquisite Allowance for loan principal in excess of reductions
in such principal required by the lender will be applied to prepay the loan
balance.
In the case of the Employee's death (as defined in Paragraph 6(a)) or
permanent disability (as defined in Paragraph 6(b)) or involuntary termination
for any reason except for Cause (as Cause is defined in Paragraph 6(c)), the
Company will be responsible for the payment of any remaining loan balance and
accrued interest thereon associated with club memberships obtained through the
Perquisite Allowance. Upon the Employee's termination for any other reason
(including for Cause), the Employee will be required to repay fully any
outstanding loan balance and accrued interest thereon within 90 days of
termination.
The Employee will be personally responsible for any tax liability
resulting from any actual or imputed income associated with the Perquisite
Allowance.
(c) Reasonable authorized, ordinary and necessary expenses, meals and
other travel and entertainment expenses incurred by the Employee in connection
with his duties hereunder shall be reimbursed upon presentation of receipts and
vouchers in the form required by the Company and in accordance with the policies
of the Company, as those requirements and policies may from time to time be
amended or changed. The Employee shall not be reimbursed under this Paragraph
5(c) for any costs associated with any vehicle owned or leased to the Employee
or that is regularly available for his use (but may elect to be reimbursed under
Paragraph 5(b)).
(d) For each calendar year or part thereof that this Agreement is in
effect, the Employee shall be entitled to vacation and holidays (without
deduction of salary or other compensation) for such period as is in conformity
with the Company's policy regarding vacations and holidays for officer
employees, such vacations to be taken at such time or times during the year as
may be mutually agreed upon between the Company and the Employee.
(e) For each calendar year or part thereof that this Agreement is in
effect, the Employee agrees to obtain a comprehensive "executive" physical
examination (which shall include not only an in depth physical examination, but
also appropriate nutrition, weight, exercise, and other health related
counseling) at the Greenbriar Clinic (or an equivalent clinic). The Company
- 3 -
<PAGE>
agrees to pay all of the Employee's costs (including all reasonable medical,
transportation and lodging costs) associated with Employee obtaining this annual
comprehensive physical examination.
6. Termination
-----------
(a) The Employee may terminate his employment for any reason upon
ninety (90) days' prior written notice to the Company. In the event of the
Employee's death, the Employee's employment shall terminate and any unpaid
salary, accrued incentive compensation, and stock options will be paid to his
estate on the last day of the month during which the Employee's death occurs. In
addition, in the event of the Employee's death during the term of this
agreement, the Employee shall be entitled to a benefit under Section 6(e). The
Company will continue for 18 months payment of health insurance premiums under
the Company's then existing plan for benefits provided to the Employee's covered
dependents as of his date of death.
(b) In the event of the Employee's permanent disability (as defined in
this Paragraph 6(b)), the Employee's employment may terminate six months after
the last day of the month during which such disability occurs. The Employee
shall at the Company's request, submit to a physical examination in order to
confirm such disability and its continuance (subject to reasonable limitations
as to the frequency of required examinations). The Employee shall be deemed to
be permanently disabled if it shall have been certified to the Company, by a
physician acceptable to the Company, that the Employee's disability is such that
it will substantially impair the Employee's ability to perform his essential
duties hereunder for more than 180 days. In addition, in the event of the
Employees' permanent disability during the term of this Agreement, the Employee
shall be entitled to a benefit under Section 6(e).
(c) The Company may terminate the Employee's employment for Cause as
set forth in this Paragraph 6(c). Cause shall be defined to include, without
limitation:
(i) The commission of fraud, embezzlement, dishonesty, or
crimes of a similar nature, and
(ii) The Employee's substantial default in the performance of
his material obligations hereunder for a period of ten (10) days after
the Employee is advised in writing of such default and the Employee's
failure to cure such default within the ten (10) day period, the
Employee's refusal to follow the reasonable directions or orders of the
Board of Directors of the Company, drunkenness which affects the
Employee's job performance, use of illegal drugs, misconduct or
malfeasance of office, or acts of a similar character.
Subject to the ten (10) day cure period in (ii) above, the Company may
immediately terminate the Employee for committing or attempting to commit the
acts enumerated in Paragraph 6(c)(i) hereof. The Company may not terminate the
Employee for committing or attempting to commit the acts enumerated in Paragraph
6(c)(ii) hereof unless it sends to the Employee written notice of its intent to
so discharge the Employee, along with the reasons therefor.
- 4 -
<PAGE>
(d) Except as provided in Paragraph 6(c) hereof, this Agreement shall
renew automatically for successive one year terms, unless the Company notifies
the Employee in writing at least 90 days prior to the date that it intends to
terminate the Employee's employment relationship with the Company. Once
notified, pursuant to this Paragraph, that the Company intends to discontinue
its employment relationship with the Employee on the date set forth in the
written notice required by this Paragraph, the Employee shall be permitted to
take such reasonable time away from his duties hereunder as may be necessary to
secure other employment.
(e) Except as a result of the Employee's termination following a Change
of Control (as defined in Paragraph 7) or the Employee's termination for Cause
(as defined in Paragraph 6(c)), if the Company terminates the Employee (either
through dismissal during the term or through written notification not to renew
this Agreement) or if the Employee dies or becomes permanently disabled (as
defined in Paragraph 6(b)) during the term of this Agreement, the Employee will
be entitled to severance pay in an amount equal to one and one-half times the
Employee's then current annual salary. Such amount will be paid in cash within
60 days of termination. The Employee will continue to receive life and health
benefits at then existing levels of premiums and benefits for himself and
covered dependents for 18 months.
(f) At the Employee's option, following his termination of employment
(other than for Cause), the Company shall furnish an office and access to
administrative assistance for a period not to exceed one year at a mutually
acceptable location.
(g) The Employee's termination of employment shall result in a
"qualifying event" for purposes of determining his eligibility for continuing
health coverage under the Consolidated Omnibus Budget Reconciliation Act
("COBRA"), and any period during which continued health benefits are provided by
the Company pursuant to this Paragraph 6 (i.e, Paragraph 6(a) and (e)) shall run
concurrently with the Employee's applicable COBRA eligibility period.
7. Change of Control
-----------------
(a) In the event of a Change of Control of the Company and the
occurrence of any one or more of the four events described in Paragraph 7(b)
below within twelve (12) months following such Change of Control, the Employee
shall be entitled to a payment equal to two times his then current annual
salary, plus an amount equal to two times his then current Maximum Bonus. In
addition, unvested shares of Restricted Stock and cash payments related to the
associated tax liability on such Restricted Stock will vest and be paid in
accordance with the provisions of said Restricted Stock Plan and Restricted
Stock Agreement.
(b) Occurrences resulting in payments to the Employee under Paragraph
7(a) shall be:
(i) Involuntary termination of employment, except upon death,
permanent disability or Cause (as defined in Paragraph 6(c)); and
(ii) Voluntary termination of employment within 60 days
following any one of the following:
- 5 -
<PAGE>
o A significant reduction in the Employee's
responsibilities, or title;
o A reduction in the Employee's salary, Maximum Bonus,
Perquisite Allowance or other benefits (unless
benefits that are generally available to all
employees and/or senior executives are similarly
changed for all other of such employees and/or senior
executives);
o Relocation of the Company's principal place of
business in excess of 75 miles from its existing
location.
(c) For purposes of this Agreement, Change of Control will be defined
as:
(i) The purchase or other acquisition by any person, entity or
group of persons, within the meaning of Sections 13(d) or 14(d) of the
Securities Exchange Act of 1934 ("Act"), or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Act) of 50 percent or more of either the
outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote
generally; or,
(ii) The approval by the stockholders of the Company of:
o a reorganization, merger, or consolidation, in each
case, with respect to which persons who were
stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not,
immediately thereafter, own more than 50 percent of
the combined voting power entitled to vote generally
in the election of directors of the reorganized,
merged or consolidated Company's then outstanding
securities;
o a liquidation or dissolution of the Company; or
o of the sale of all or substantially all of the
Company's assets.
8. Confidential Information
------------------------
(a) The Company and the Employee acknowledge that the Employee, in
performing the terms and conditions of the Employee's employment, will directly
or indirectly gain access to confidential business information about the Company
and its operations, including, but not limited to, its modes and methods of
conducting its business and producing and marketing its products, its employee,
customer, vendor and referral sources lists, its trade secrets, its copyrighted
and non-copyrighted or non-protected computer software programs, its techniques
of operation, its financial structure, and its weaknesses, if any ("Confidential
Information").
(b) The Company and the Employee agree that all Confidential
Information shall be deemed to be highly confidential, shall constitute the
Company's trade secrets and shall remain the
- 6 -
<PAGE>
sole property of the Company. The Employee agrees not to in any way communicate,
reveal or divulge any Confidential Information to any person or entity not
employed by the Company, unless the Executive Committee of the Company's Board
of Directors has given its advance, written approval to such communication.
(c) Upon termination of employment with the Company for any reason, or
at any other time the Company demands, the Employee shall deliver promptly to
the Company all Company property then in his possession, including without
limitation all memoranda, notes, records, reports, manuals, drawings,
blueprints, employee lists, customer lists, referral source lists, vendor
service lists, software, programs, and any other documents and copies thereof
and all material relating to Confidential Information belonging to the Company.
(d) The Employee acknowledges and agrees that the Company has a duty to
its shareholders to protect its assets, and in fulfilling this duty, the Company
reserves the right to question its employees, generally and specifically,
regarding Confidential Information.
(e) The Employee agrees that the terms of this Section 8 shall survive
termination of the Employee's employment. The Employee agrees to execute and
abide by the Company's Confidentiality Agreement and such additional obligations
of confidentiality as are set forth in the Company's policies and procedures or
promulgated from time to time.
9. Notices
-------
All notices under this Agreement shall be in writing and shall be
deemed effective when delivered in person (in the Company's case, to its
Secretary) or 72 hours after deposit in the U.S. Mail, postage prepaid,
addressed to the Employee at his address as last recorded in the Company
personnel records; and if to the Company at 540 Lake Cook Road, Deerfield,
Illinois; or such other address as either may give by notice.
10. Assignment and Successors
-------------------------
The rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the successors of the Company.
This Agreement may be assigned by the Company only to an affiliate of the
Company, provided that no such assignment shall relieve the Company of its
obligation to provide compensation and benefits to the Employee as outlined in
this Agreement.
11. Binding Arbitration - Attorney's Fees
-------------------------------------
The Company and the Employee agree that any and all disputes
which may arise between the parties hereto regarding all aspects of the
Employee's future employment and association with the Company, the terms of this
Agreement and/or the Employee's rights hereunder shall be subject to and
determined by arbitration in the City of Chicago, Illinois in accordance with
the employment arbitration rules of the American Arbitration Association
("AAA"). In that regard, the Company and the Employee acknowledge and agree that
- 7 -
<PAGE>
(i) arbitration is final and binding on both parties on all claims which are
raised or could be raised concerning all aspects of the Employee's future
employment and association with the Company or this Agreement, including, but
not limited to, claims of employment discrimination, wrongful discharge, and
breach of contract; (ii) both parties waive their rights to seek any remedies in
court, including the right to a jury trial; (iii) reasonable pre-arbitration
discovery is available to both parties, but may be more limited and focused than
that in court proceedings; (iv) the arbitrator's award is required to be written
and include findings of ultimate fact and reasoning; and (v) a party's right to
appeal or to seek modification of the arbitrator's rulings is strictly limited
by law and will be as limited as possible to permit enforcement under applicable
state or federal law. The arbitrator is to apply Illinois law as to liability
and damages except where a claim arises under the laws of the United States, in
which case United States' substantive law as to liability and damages shall
apply.
The arbitrator shall be empowered to award attorney's fees,
out-of-pocket costs or disbursements, and any and all charges which may be made
for the cost of the arbitration and the fees of the arbitrator to be paid by the
losing party or to be borne equally by the parties in his or her discretion. The
provisions of this Agreement will survive any termination of the Employee's
employment or other association with the Company, and the existence of any claim
or cause of action by the Employee against the Company, whether predicated on
this Agreement or otherwise, will not constitute a defense to the enforcement of
the covenants and agreements of this Agreement in AAA proceedings.
12. Amendment
---------
This Agreement may be amended only by a written instrument signed by
both the Employee and the Company. Nothing in this Agreement, express or
implied, is intended to confer upon any third person any rights or remedies
under or by reason of this Agreement. No amendment or modification of this
Agreement requires the consent of any individual, partnership, corporation, or
other entity not a party to this Agreement
13. Construction
------------
This Agreement shall be construed under the laws of the State of
Illinois. Paragraph headings are for convenience only and shall not be
considered a part of the terms and provisions of the Agreement
14. Severability
------------
The provisions of this Agreement are severable and, in the
event that any provision hereof shall be found by any court to be unenforceable,
in whole or in part, the remainder of this Agreement shall nonetheless remain
enforceable and binding upon the Company and the Employee.
- 8 -
<PAGE>
15. Waiver of Breach
----------------
No waiver of any breach of any term or provision of this
Agreement shall be construed to be, nor shall be, a waiver of any other breach
of this Agreement. No waiver shall be binding unless in writing and signed by
the party waiving the breach.
16. Entire Agreement
----------------
This Agreement shall constitute the entire agreement between
the Company and the Employee and supersede all prior and contemporaneous
agreements, representations and understandings of the parties.
IN WITNESS WHEREOF, MMI Companies, Inc. has caused this Agreement to be
executed by its duly authorized officers, and Employee has hereunto set his hand
and seal. this day of , 1997.
MMI COMPANIES, INC.
BY:___________________________________
Joseph D. Sargent, Chairman of the
Personnel and Compensation
Committee
___________________________________
B. Frederick Becker
- 9 -
<PAGE>
EXHIBIT 10.19
January 7, 1998
Via Hand Delivery
Mr. Stephan A. Schleisman
871 Woodstream Court
Lake Forest, IL 60045
Dear Steve:
This letter confirms our discussion of the terms of a mutual agreement regarding
your resignation from MMI Companies, Inc. (the "Company"). In order for you and
the Company to complete this agreement as a full and binding resolution of all
matters relating to your employment with and separation from the Company, it is
understood that you and the Company agree as follows:
1. Resignation. You agree to resign and the Company agrees to accept your
------------
resignation effective January 7, 1998 (the "Separation Date").
2. Separation Payment. In consideration of the terms and conditions set
-------------------
out in the paragraphs that follow, the Company will make a special
separation payment and provide benefits as follows:
a. The Company will make a special separation payment of
$255,000.00 (less deductions for social security insurance,
federal, state and other taxes and other payroll
withholdings), a sum equal to 12 months of your regular
annualized base salary. This separation payment will be made
to you semi-monthly in equal installments with the first
payment to be made on the first normal payday after the
expiration of the seven day revocation period described below
in Paragraph 6. The period of time during which you are
receiving separation pay is referred to as the "Pay Period."
b. Through the end of the Pay Period or until you secure
employment elsewhere, whichever occurs first, you shall be
entitled to participate at the Company's expense in the
medical, dental and vision group insurance plans in which you
presently participate, provided such medical, dental and
vision benefits continue to be available for similarly
situated employees within the Company. Your COBRA rights, to
medical benefits will commence on the Separation Date and will
run for eighteen months from February 1, 1998. The Company
will cover your COBRA payments, if any, from February 1, 1998
through January 31, 1999.
<PAGE>
c. The Company will provide outplacement assistance, for a
period of 12 months or until you secure employment, whichever
occurs first, with Drake, Beam, Morin, at a location
acceptable to the Company.
d. Payments under this Paragraph 2 shall not be included as
compensation for purposes of the Company Savings and Profit
Sharing Plan (401(k))(the "Plan"). You will be entitled to
receive the Company match for your 1997 contributions to the
Plan.
e. All unvested stock options previously granted will lapse on
the Separation Date. Vested but unexercised stock options are
subject to the terms of your option agreement.
f. The Company will provide you with a payment of
$1,000,000.00 upon attainment of age 65 or death, whichever
occurs first, subject to all applicable taxes as required by
law.
g. The Company will forgive all relocation expenses incurred
and reimbursed up through the Separation Date.
h. Your contributions to the Retirement Equity Plan and
applicable match will paid to you in the April 15, 1998,
payroll, subject to all applicable taxes as required by law.
i. Your eligibility to participate in the Plan and the ESIP
will terminate as of your resignation date.
You understand and agree that the total of the payments and benefits
described in Paragraphs 2(a) through 2(h) are in consideration of the
terms you agree to in this agreement and exceed in amount any payments
or benefits the Company would have otherwise owed you, but for this
agreement. You further acknowledge and understand that you are entitled
to no payments or benefits other than those enumerated in the Paragraph
2.
3. Release.
--------
a. You (as defined below in Paragraph 3(b)) waive your right
to assert and release and discharge the Company, and each of
the Company's successors, assigns, divisions, subsidiaries,
current or prior parents, affiliates, directors, officers,
agents, employees, representatives, and attorneys (and agents,
directors, officers, employees, representatives, and attorneys
of any divisions, current or prior parents, subsidiaries and
affiliates), from any and all claims of any sort, known or
unknown, which you now have or have ever had that in any way
relate to your employment relationship with the Company or the
termination of your employment (the "Release"). This Release
specifically
<PAGE>
includes, but is not limited to, any claims under the Age
Discrimination in Employment Act ("ADEA"), Title VII of the
Civil Rights Act of 1964, the Employee Retirement Income
Security Act ("ERISA"), the Americans With Disabilities Act
("ADA"), the Civil Rights Act of 1991, the Fair Labor
Standards Act, the Family and Medical Leave Act, the Illinois
Human Rights Employment Act, each as amended, or under any
other federal, state or local statute, law, regulation or
ordinance banning any type of employment discrimination or in
any way regulating employment relationships as well as any
claim of unlawful retaliation, wrongful discharge, breach of
contract (express or implied), breach of good faith and fair
dealing, emotional distress, injury to personal reputation,
any equitable or any other type of claim whatsoever in any way
related to your employment or termination of employment. You
also waive and agree not to accept any award of money from any
lawsuit or administrative proceeding which might be brought on
your behalf by someone else.
b. For purposes of this Release "You" shall include your
spouse, issue, agents, representatives, guardians, assigns,
dependents, heirs, executors, administrators, and attorneys.
c. You represent that you have not filed, and promise never to
file, any lawsuit, petition, charge of discrimination,
grievance or action of any nature against the Company, or
anyone else released above, asserting any claims that are
released in Paragraph 3(a).
4. Confidential Information. You agree that the success of the Company's
-------------------------
business depends in large part on the development, use and protection
of certain Confidential Information and acknowledge that during the
course of your employment, you have become aware of certain
Confidential Information, such as business methods, techniques,
research data, marketing and sales information, customer lists,
know-how of the Company and its parent and affiliates, their manner of
operation, plans or other data, which constitute valuable trade secrets
of the Company. You agree to hold such information in strict confidence
and not to publish or disseminate any Confidential Information to any
third party. Confidential Information shall mean any information which
is not disclosed to the general public and which relates to: (i) the
business of the Company, its parent or affiliates, (ii) any client of
the Company, its parent or affiliates or (iii) any product, service,
methodology, tool, or software of the Company, its parent or
affiliates. Confidential Information does not include information that:
(i) is or becomes published or otherwise available to the public
through no act or no fault of your own; or (ii) has previously been
disclosed to you by a source other than the Company, as evidenced by
your written records; or (iii) hereafter comes into your possession
from a third party with the legal right to use and disclose the same.
You agree not to make any use whatsoever, either now or in the future,
of the Confidential Information, for your own personal use or the use
of any business or venture with
<PAGE>
which you are or may become associated, whether through employment,
investment, contractual relationship, or otherwise.
5. Consultation with Legal Counsel. You acknowledge that the Company has
--------------------------------
advised you in writing to consult with counsel and has granted you at
least 21 days to consider this agreement, including the Release, before
signing it.
6. Revocation Period. Following your execution of this Release, you will
-----------------
have seven days during which to revoke your agreement to this Release.
If you choose not to so revoke your agreement, this Release shall
become effective and enforceable and the payment described above in
Paragraph 2 will then be made to you.
7. Non-Solicitation. You acknowledge that the Company has a highly
----------------
qualified and loyal work force and a consequent valuable and strong
interest in maintaining that work force and agree that, for a period of
two years after the Separation Date, you will not contact any employees
of the Company, directly, indirectly or through a third party, for the
purpose of soliciting or inducing them in any fashion to quit at any
time their employment with the Company for any purpose.
8. Cooperation. You agree that, at the request of the Company, you will
-----------
cooperate with the Company and its subsidiaries and affiliates and
their officers, directors and counsel in connection with any
investigation, claim or litigation relating to any matter in which you
were involved during your employment with the Company or of which you
have knowledge. The Company agrees to reimburse you for all reasonable
expenses incurred by you in providing such assistance and to pay a
reasonable per diem rate for any services requested of you in
connection therewith.
9. Breach. In the event you breach Paragraphs 4, 7 or 8, you agree that
------
effective with such breach the Company's obligation to make any
payments to you or to provide you with any benefits pursuant to
Paragraph 2 shall cease immediately, without prejudice to the Company's
right to seek any other remedy, including injunctive relief.
10. Recovery of Expenses and Fees. If you should assert any claims which
------------------------------
you have released under this agreement, you agree that the Company
(and/or any other party released) shall be entitled to recover from you
all costs, expenses and attorneys' fees it or they may reasonably incur
in defending against those claims.
11. Final Settlement of Claims and Employment. You understand and agree
-------------------------------------------
that any claims or disputes in any way related to your employment
relationship and separation from the Company are fully compromised,
settled and released on the effective date of this agreement.
12. No Admission of Fault. You acknowledge and understand that nothing in
---------------------
this agreement is an admission of fault or wrongdoing by the Company.
<PAGE>
13. Voluntary Nature of Agreement. Both parties acknowledge that they have
-----------------------------
read this agreement before executing it, understand its terms and have
voluntarily chosen to enter into this agreement. The parties also
acknowledge that no promise or representation has been made by you to
the Company or by the Company to you other than as set out in this
agreement.
14. Resignation. You agree that you are resigning from the Company and that
-----------
if asked about your separation from the Company, you and any authorized
Company representative will respond that you resigned for reasons and
on terms mutually acceptable to you and the Company. You agree that you
will not apply for employment with the Company, its subsidiaries or
affiliates in the future and that if you do, the Company, its
subsidiaries or affiliates will have no obligation to consider you.
15. Confidentiality. You agree not to disclose the terms and provisions of
---------------
this agreement to anyone other than your immediate family, attorney or
tax advisor. You further agree that because of the difficulty of
enforcing this provision, and harm to the Company, the Company is
entitled to injunctive relief against any breach.
16. Severability. This Agreement is expressly made subject to the
------------
provisions of applicable federal laws and the internal laws of the
State of Illinois without regard to its choice of law rules. If any
provision of this Agreement is invalidated or held unenforceable
because of any conflict with any such law (or any other law deemed
applicable), the remaining provisions hereof shall not be affected but
shall continue to be valid and enforceable to the fullest extent
permitted by law.
17. Company Property. You represent that you have returned all Company
-----------------
files, documents, proprietary information, and Company owned equipment,
including but not limited to pagers, telephones, facsimile equipment
and computers.
18. Securities Issues. You agree that you will comply with the restrictions
-----------------
outlined in the attached memorandum regarding the purchase and sale of
the Company's stock and the exercise of stock options by "insiders" or
"affiliates", including specifically, the pooling accounting rules
applicable because of the Unionamerica acquisition.
The Company acknowledges its agreement to the terms and conditions contained
above by having a duly authorized officer sign below.
If you agree to these terms and conditions, sign and date this agreement below
and postmark an executed copy to the attention of Merrilee Hepler no later than
January 28, 1998. We again bring to your attention the fact that this document
is a legal document and, therefore, you may desire to consult with an attorney.
Very truly yours,
- ----------------------------------
<PAGE>
B. Frederick Becker
Chairman & CEO
Acknowledged and agreed to this
______ day of _________, 1998
- -------------------------------
Stephan A. Schleisman
Notary Attestation:
Signed and sworn to before me
this ___ day of ___, 1998
<PAGE>
EXHIBIT 13.1
The following selected financial data are derived from the Company's
consolidated financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PREMIUMS AND INCOME DATA (1):
<S> <C> <C> <C> <C> <C>
Gross premiums written $ 372,173 $ 357,718 $ 366,802 $ 323,071 $ 305,274
Net premiums earned 278,237 281,391 272,903 267,976 241,988
Consulting and fee income 51,626 34,535 22,336 18,602 6,962
Net investment income 75,490 73,681 62,936 51,150 53,207
Net realized gains/(losses) on investments 2,182 (890) 1,692 (35,261) 7,144
Total revenues 407,535 388,717 359,867 302,467 309,301
Income from continuing operations (2) 35,067 45,220 34,131 6,798 32,937
Per share (5) 1.81 2.50 2.54 0.54 2.92
Operating income (3)(6) $ 33,657 $ 45,816 $ 33,024 $ 30,365 $ 28,186
Per share (5) 1.74 2.53 2.46 2.40 2.50
Cash dividends per common share 0.22 0.17 0.15 0.11 0.09
Weighted average number of common
and common equivalent shares (5) 19,396 18,087 13,446 12,634 11,265
BALANCE SHEET DATA (AT END OF YEAR) (1):
Investments $ 1,230,800 $ 1,212,556 $ 1,166,825 $ 849,049 $ 853,148
Total assets 1,884,067 1,804,421 1,741,758 1,401,315 1,432,457
Loss and loss adjustment expense reserves 1,125,146 1,149,918 1,199,870 1,002,839 1,018,129
Long-term notes payable - 93,000 89,000 97,000 92,000
Mandatorily redeemable preferred capital securities 118,724 - - 16,899 15,437
Unrealized gains (losses) on investments (4) 24,332 13,456 22,709 (9,470) -
Stockholders' equity (4) 399,002 355,166 272,266 136,952 137,435
Book value per share (4) 21.16 19.01 16.39 11.04 11.09
GAAP RATIOS (7):
Loss ratio 71.8% 74.2% 75.6% 74.8% 79.6%
Expense ratio 41.8% 33.0% 33.3% 28.5% 27.7%
----------------------------------------------------------------------------
Combined ratio 113.6% 107.2% 108.9% 103.3% 107.3%
============================================================================
<FN>
(1) The Company acquired Unionamerica Holdings plc in December 1997 in a
transaction accounted for as a pooling of interests. As such, the
consolidated financial statements include Unionamerica's balance sheet and
results of operations for all periods presented.
(2) Income from continuing operations in 1996 excludes a loss from discontinued
operations of $5,100,000, net of tax, related to a former affiliate. See
Note 15 to the Consolidated Financial Statements.
(3) Operating income represents income from continuing operations before
extraordinary losses of $707,000 in 1997 and $4,737,000 in 1995 and
after-tax realized investments gains (losses) of $1,410,000 in 1997,
$(596,000) in 1996, $1,106,000 in 1995, $(23,567,000) in 1994 and $4,751,000
in 1993.
(4) The Company adopted new standards on accounting for investments in 1994.
(5) The Company adopted a new standard on earnings per share in 1997. All
earnings per share amounts have been restated to conform to the new
requirements. Per share and weighted average shares are presented on a
diluted basis.
(6) In 1997, operating income includes a charge, net of tax, of $8,937,000 or
$.46 per share related to the acquisition of Unionamerica.
(7) GAAP ratios have been derived from the results of the Company's domestic and
international insurance segments. The 1997 expense ratio includes 3.5
percentage points related to expenses incurred in connection with the
Unionamerica acquisition.
</FN>
</TABLE>
<PAGE>
EXHIBIT 13.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this report. The
Company's financial statements reflect the acquisition of Unionamerica Holdings
plc (Unionamerica) in December 1997. The acquisition has been accounted for as a
pooling of interests and as such, the financial statements have been restated to
include Unionamerica's results of operations for all periods presented.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Revenues. Gross premiums written increased by 4.1% to $372.2 million in
1997 from $357.7 million in 1996. Medical malpractice gross premiums written
increased 5.0% to $200.5 million in 1997 from $191.0 million, international
gross premiums written increased 6.0% to $152.0 million in 1997 from $143.4
million in 1996 and other gross premiums written decreased 15.5% to $19.7
million in 1997 from $23.3 million in 1996. Net premiums written increased by
2.6% to $297.7 million in 1997 from $290.1 million in 1996.
Net premiums earned decreased by 1.1% to $278.2 million in 1997 from $281.4
million in 1996. Medical malpractice net premiums earned decreased by 1.7% to
$154.1 million in 1997 from $156.7 million in 1996. International net premiums
earned increased 1.5% to $118.7 million from $117.0 million and other net
premiums earned decreased 28.6% to $5.5 million from $7.7 million. An extremely
competitive environment continues to exist in the medical malpractice and
international insurance marketplaces which exerts a negative influence on price
levels. The small decline from 1996 to 1997 in the Company's net earned premiums
reflects this pricing environment. Other premiums decreased due to the Company's
non-renewal of a large account.
Consulting and fee income increased by 49.6% to $51.6 million in 1997 from
$34.5 million in 1996. Of the growth in consulting and fee income, 28.9
percentage points of the 49.6% increase is attributable to the inclusion of the
results of Equifax Medical Credentials Verification Services (EMCVS) and
Professional Risk Management, Inc. (PRM) from their date of acquisition, January
1, 1997. The balance of the increase is due to internally generated growth.
Consulting and fee income as a percentage of net premiums earned and consulting
and fee income was 15.7% in 1997 compared to 10.9% in 1996.
Net investment income increased by 2.4% to $75.5 million in 1997 from $73.7
million in 1996. Investment income growth is due to a higher average level of
invested assets in 1997 versus 1996 combined with a shift in the average asset
allocation from municipal securities to higher yielding preferred stocks and
taxable fixed income securities. The Company had net realized gains on
investments of $2.2 million in 1997 compared to losses of $0.9 million in 1996.
Losses and expenses. Losses and loss adjustment expenses ("LAE") decreased
by 4.3% to $199.8 million in 1997 from $208.8 million in 1996. Medical
malpractice liability losses and LAE decreased by 1.5% to $128.9 million in 1997
from $130.8 million in 1996. International losses and LAE decreased 8.5% to
$66.8 million in 1997 from $73.0 million principally due to the Company's
downward revision of estimates for prior years surplus lines premium and losses
as well as an increased percentage of casualty business, which tends to have
lower loss ratios and higher expense ratios than property business. Other losses
and LAE decreased 18.0% to $4.1 in 1997 from $5.0 million in 1996 due to a
decease in other earned premium.
<PAGE>
Insurance and administrative expenses increased by 32.6% to $157.0 million
in 1997 from $118.4 million in 1996. Of the increase in administrative expense,
$15.4 million is attributable to internal growth in the Company's consulting and
fee segment and the inclusion of acquired consulting and fee businesses and
$23.6 million is attributable to an 8.8 percentage point increase in the
insurance segment expense ratio. The increase in insurance expenses includes
$9.7 million of expenses related to the Company's acquisition of Unionamerica,
which was completed in December 1997 as well as an $8.0 million increase in
commission expense.
The combined ratio, which includes the sum of losses and LAE and insurance
segment expenses, divided by earned premiums, increased to 113.6% 1997 compared
to 107.2% in 1996. The effect on the expense ratio of expenses related to the
acquisition of Unionamerica amounted to an increase of 3.5 percentage points.
The loss ratio decreased by 2.4 percentage points and the expense ratio
increased by 8.8 percentage points in 1997, as compared to 1996. Also
contributing to the increase in the expense ratio were increased commissions on
excess casualty business written in the international segment which carries
higher acquisition expenses than the other international lines of business.
Interest expense increased by 6.6% to $6.5 million in 1997 from $6.1
million in 1996 due to an increase in outstanding debt relating to the Company's
increased investment in a Lloyd's managing agency in July, 1997.
Income taxes. Income taxes were $9.2 million in 1997 compared to $10.2
million in 1996 due to lower pre-tax income in 1997 partially offset by an
increase in tax on net capital gains in 1997 versus net capital losses in 1996.
Extraordinary loss, net of tax. In connection with the repayment of the
bank lines of credit in December, 1997, the Company wrote off deferred financing
costs totaling $707,000, net of tax.
Loss from discontinued operations. In February, 1997, MMI settled two
lawsuits related to its former subsidiary, Ludgate Insurance Company, Limited
(Ludgate) and recorded the settlement in its 1996 financial statements as a loss
from discontinued operations. The pre-tax loss was $7.8 million, with a
corresponding tax benefit of $2.7 million, resulting in a charge of $5.1
million.
Net income. Net income decreased by 14.2% to $34.4 million in 1997 from
$40.1 million in 1996 as a result of expenses related to the acquisition of
Unionamerica and a decline in the rate of growth of insurance premium and an
increase in the combined ratio partially offset by the loss from discontinued
operations in 1996.
Net income per share. Diluted net income per common and common equivalent
share decreased to $1.77 in 1997 from $2.22 in 1996. Included in the 1997 amount
is a reduction of $.46 per share for the expenses, net of tax, incurred in
connection with the Unionamerica acquisition. Also included is a gain of $.07 in
1997 versus a loss of $.03 in 1996 related to net realized gains and losses on
investments, net of tax, as well as an extraordinary loss of $.04 in 1997 and a
loss from discontinued operations of $.28 in 1996. Diluted weighted average
shares and equivalents outstanding increased due to the Company's stock offering
in September and October 1996.
1996 COMPARED WITH 1995
Revenues. Gross premiums written decreased by 2.5% to $357.7 million in
1996 from $366.8 million in 1995. Medical malpractice gross premiums written
increased 0.8% to $191.0 million in 1996 from $189.4 million in 1995,
international gross premiums written decreased 8.1% to $143.4 million in 1996
from $156.1 million in 1995 and other gross premiums written increased 9.4% to
$23.3 million in 1996 from $21.3 million in 1995. Net premiums written decreased
by 2.8% to $290.1 million in 1996 from $298.4 million in 1995.
- 2 -
<PAGE>
Net premiums earned increased by 3.1% to $281.4 million in 1996 from $272.9
million in 1995. Medical malpractice net premiums earned increased by 6.2% to
$156.7 million in 1996 from $147.6 million in 1995. International net premiums
earned decreased 0.6% to $117.0 million in 1996 from $117.7 million and other
net premiums earned increased 1.3% to $7.7 million from $7.6 million.
Competitive market conditions and softness in pricing throughout 1996
contributed to a decline in the rate of growth in the Company's premium income.
Consulting and fee income increased by 54.7% to $34.5 million in 1996 from
$22.3 million in 1995. Of the growth in consulting and fee income, 26.3
percentage points are attributable to the inclusion of the results of Management
Science Associates, Inc. (MSA) from the date of its acquisition, April 1, 1996.
The balance of the increase is due to internally generated growth. Consulting
and fee income as a percentage of net premiums earned and consulting and fee
income was 10.9% in 1996 compared to 7.6% in 1995.
Net investment income increased by 17.2% to $73.7 million in 1996 from
$62.9 million in 1995. Investment income growth is due to growth in invested
assets. In December 1995, the Company commuted an aggregate excess of loss
reinsurance policy and received $63.1 million as consideration for the
assumption of previously ceded liabilities. The Company had net realized losses
on investments of $.9 million in 1996 compared to gains of $1.7 million in 1995.
Losses and expenses. Losses and LAE increased by 1.2% to $208.8 million in
1996 from $206.3 million in 1995. Medical malpractice liability losses and LAE
increased by 3.9% to $130.8 million in 1996 from $125.9 million in 1995 due to
the increase in medical malpractice net earned premiums. International losses
and LAE decreased by 4.2% to $73.0 million from $76.2 million and other losses
and LAE increased by 22.0% to $5.0 million in 1996 from $4.1 million in 1995.
Insurance and administrative expenses increased by 17.8% to $118.4 million
in 1996 from $100.5 million in 1995. Of the increase in administrative expense,
$11.1 million is attributable to internal growth in the Company's consulting and
fee segment and the inclusion of the Company's acquired employee relations
consulting business from the date of its acquisition in April 1996. The
remainder of the increase in expenses is due to internal growth and the addition
of expenses resulting from changes following Unionamerica becoming publicly
traded in late 1995.
The combined ratio declined to 107.2% in 1996 compared to 108.9% in 1995
due to a 1.4 percentage point improvement in the loss ratio and a 0.3 percentage
point decrease in the expense ratio.
Interest expense decreased by 44.0% to $6.1 million in 1996 from $10.9
million in 1995 due to a reduction in the amount of debt outstanding in
connection with the repayment of debt with the proceeds of Unionamerica's
initial public offering in December, 1995.
Income taxes. Income taxes were $10.2 million in 1996 compared with $8.1
million in 1995 due to an increase in pre-tax income.
Extraordinary loss. In 1995 an extraordinary loss was recognized totaling
$4.7 million, net of tax, in connection with the write-off of deferred financing
costs and premium on early redemption of subordinated loan notes.
Loss from discontinued operations. In 1992, MMI sold Ludgate at a loss,
which was reported in discontinued operations. Subsequently, the Company was
named in two lawsuits connected with the sale. In February 1997, MMI settled
both lawsuits and commuted the stop-loss reinsurance agreement provided by MMI
to Ludgate in connection with the sale. The settlement of all these matters is
recorded in the accompanying 1996 statement of income as a loss from
discontinued operations. The pre-tax loss is $7.8 million with a corresponding
tax benefit of $2.7 million, resulting in a charge of $5.1 million.
- 3 -
<PAGE>
Net income. Net income increased by 36.4% to $40.1 million in 1996 from
$29.4 million in 1995 due to the aforementioned reasons.
Net income per share. Diluted net income per common and common equivalent
share increased to $2.22 in 1996 from $2.19 in 1995. Included in the 1996 amount
is a loss of $0.28 from discontinued operations as well as a loss of $.03 in
1996 related to net realized gains and losses on investments net of taxes.
Included in the 1995 amount is an extraordinary loss of $.35 as well as a gain
of $.08 related to net realized gains and losses on investments net of taxes.
Diluted weighted average shares and equivalents outstanding increased in 1996
due to the Company's stock offering in September and October 1996.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company's assets consist primarily of the stock
of its subsidiaries. The Company's principal sources of operating funds are
management fees and dividends from its subsidiaries. In 1997, the Company
received dividends from its subsidiaries of $29.8 million, compared to $11.0
million in 1996 and $6.0 million in 1995. Of the 1997 dividend, $20.0 million
was a special dividend paid by Health Providers Insurance Company to the Company
in December 1997 in connection with an intercompany assumption reinsurance
transaction. The Company then contributed the $20.0 to American Continental
Insurance Company's statutory surplus. The Company received management fees from
its subsidiaries of $28.5 million in 1997, $24.6 million in 1996 and $19.1
million in 1995. The Company's principal uses of funds are operating expenses,
acquisitions, debt service and dividends to stockholders.
On a consolidated basis, the Company's principal sources of operating funds
are premiums, investment income, fees and recoveries from reinsurers. Funds are
used to pay claims, operating expenses, reinsurance premiums, acquisition
related expenditures, debt service requirements, taxes and dividends to
stockholders.
Cash flow. On a consolidated basis, the Company has had positive cash flow
from operations in each of the last three years. The level of positive cash flow
has decreased over the last two years due to the decline in the rate of growth
in premiums. Also contributing to positive cash flow besides premiums is the
timing difference between the collection of premiums and payment of claims and
expenses. Because of uncertainty related to the timing of payment of claims,
cash from operations for a casualty insurance company can vary substantially
from year to year and quarter to quarter. Cash provided by operating activities
was $6.5 million in 1997, $25.0 million in 1996 and $112.1 million in 1995. Cash
provided in 1995 includes $63.1 million received in connection with a
reinsurance commutation. Cash from operations decreased principally due to a
decrease in the growth rate of net premiums written and an acceleration in paid
losses.
Investing activities, substantially in fixed income securities, have been
the principal use of cash flow from operations. Cash used by investing
activities was $24.4 million in 1997, $88.4 million in 1996 and $156.6 million
in 1995. The Company has no material commitments for capital expenditures.
Financing activities provided $19.8 million in cash in 1997, $54.0 million
in 1996 and $32.2 million in 1995. In July 1997, the Company increased its
borrowings by $10.0 million to finance an investment in additional Lloyd's
underwriting capacity. In December 1997, the Company completed a private
placement of Trust Preferred Capital Securities and received net proceeds of
$118.7 million. Concurrent with the receipt of the proceeds, the Company repaid
the full outstanding amounts under its credit agreements totaling $103.0
million. The Company had no outstanding bank debt at December 31, 1997.
Cash provided by financing activities in 1996 includes $53.6 million, net
of expenses, from the issuance of Common Stock, of which $46.3 million related
to the Company's stock offering in September and October 1996. In April 1996,
the Company increased its borrowings by $8.0 million in connection
- 4 -
<PAGE>
with the acquisition of its employee relations consulting subsidiary. Long-term
debt totaled $93.0 million as of December 31, 1996.
Invested assets. The Company invests in investment grade fixed income
securities and preferred stocks. The estimated fair value of preferred stocks
was less than 3.5% of the fair value of total invested assets as of December 31,
1997. The estimated fair value of the Company's short-term, fixed maturity and
preferred stock investments was $1,230.8 million as of December 31, 1997,
compared with $1,212.6 million as of December 31, 1996. The December 31, 1997
amount includes net unrealized gains of $37.1 million, which represent the
amount by which the estimated fair value of the investment portfolio exceeds
amortized cost. Unrealized gains were $20.7 million as of December 31, 1996. The
increase in unrealized gains during 1996 was due to an decrease in the general
level of interest rates.
The Company maintains a portion of its investment portfolio in high
quality, short-term securities to meet its short-term operating liquidity
requirements, including the payment of claims and expenses. Short-term
investments totaled $52.2 million or 4.2% of invested assets as of December 31,
1997, compared with $59.7 million or 4.9% of invested assets as of December 31,
1996. The Company believes that all of its invested assets are readily
marketable.
Trust Preferred Capital Securities. In December 1997, MMI completed a
private placement of $125.0 million in 30 year non-callable Capital Securities
of MMI Capital Trust I, a subsidiary of MMI. The Capital Securities are rated a3
by Moody's Investor Service and BBB+ by Standard & Poor's Rating Services. The
Capital Securities will pay cumulative distributions at the annual rate of 7
5/8% semiannually in arrears beginning June 15, 1998 and have a maturity date of
December 15, 2027. Payments on the Capital Securities are fully and
unconditionally guaranteed by MMI. Total proceeds from the private placement,
net of expenses, were $118.7 million. In connection with the receipt of the
private placement proceeds, the Company repaid all of its outstanding bank debt
totaling $103.0 million.
Line of credit. In February 1998, the Company obtained an unsecured
revolving credit line of $100.0 million. The Company has not borrowed against
this line of credit. The credit agreement provides for interest at a fixed rate
equal to the Interbank Offered Rate for periods of up to one year plus a margin
of 20 to 40 basis points, and contains financial covenants with respect to
minimum net worth and statutory surplus, maximum debt to total capitalization,
and minimum risk-based capital levels. The credit agreement also restricts the
Company's ability to pay stockholder's dividends in a single year in excess of
50% of the average of the prior three years' net income.
Stockholders' equity. The Company's stockholders' equity was $399.0 million
as of December 31, 1997, compared to $355.2 million as of December 31, 1996.
Changes in stockholders' equity are primarily attributable to net income of the
Company, dividends to stockholders, changes in unrealized gains or losses on
investments and issuances of Common Stock. Cash dividends to stockholders
totaled $4.2 million in 1997, $2.9 million in 1996 and $2.1 million in 1995. As
of December 31, 1997, estimated unrealized gains on investments were $37.1
million net of deferred tax liability of $12.8 million, thereby increasing
stockholders' equity by $24.3 million. As of December 31, 1996 the Company had
an unrealized gain, net of taxes, of $13.5 million.
Risk-based capital. The NAIC has adopted risk-based capital solvency
standards for domestic property and casualty and life and health insurers. Under
these standards, several solvency thresholds are calculated based on the
underwriting, credit, and investment risks of a company. As of December 31, 1997
the statutory capital and surplus of each of the Company's domestic insurance
subsidiaries exceeded its risk-basedcapital requirements.
Minimum solvency margin. Under the Insurance Companies Act of 1982, the
Department of Trade and Industry (DTI) authorizes companies in the United
Kingdom to engage in the insurance business. Under the 1982 Act, companies
authorized to transact business are required to maintain a minimum solvency
margin. As of December 31, 1997, Unionamerica's minimum solvency margin was
estimated
- 5 -
<PAGE>
at $25.7 million and its net assets were estimated at $133.7 million. The DTI
typically expects an insurance company to maintain net assets at least 2.5 times
greater than its solvency margin.
ACQUISITIONS
On December 11, 1997, the Company acquired 99% of the issued and
outstanding Ordinary Shares of Unionamerica, all of which were represented by
Unionamerica American Depository Shares (ADSs). MMI is in process of applying
the compulsory acquisition procedures set forth in the Companies Act 1985 of
Great Britain to acquire all of the remaining Unionamerica ADSs. Founded in
1977, Unionamerica is a specialty casualty and property reinsurer and insurer
operating in the London-based reinsurance and insurance market. MMI issued 7.1
million shares of Common Stock at the exchange ratio of 0.836 MMI shares for
each Unionamerica ADS. The acquisition was accounted for as a pooling of
interests, and, as such, the Company's financial statements have been restated
for all periods presented as if the acquisition had occurred at the beginning of
the earliest period presented.
On July 23, 1997, MMI acquired a 39% interest in JMA Holdings Limited
(JMAHL), the parent company of Jago Managing General Agency Limited, a Lloyd's
managing agency, for consideration of $9.1 million. The consideration was
comprised of $5.9 million in cash and $3.2 million of short-term notes payable.
Effective January 1, 1997, the Company purchased substantially all of the
net assets of Equifax Medical Credentials Verification Services (EMCVS), a unit
of Atlanta-based Equifax, Inc., and acquired by merger all of the outstanding
stock of Professional Risk Management, Inc. (PRM), a privately held California
third-party administrator that specializes in managing enterprise liability risk
for organizations that self-insure. The total purchase price for these
acquisitions was $8.3 million in cash and $2.0 million in MMI Common Stock.
These acquisitions were accounted for as purchases and the operations of EMCVS
and PRM are included in the Company's consolidated financial statements since
their date of acquisition.
Effective April 1, 1996, the Company purchased substantially all of the net
assets of Management Science Associates (MSA). MSA provides employee relations
and human resource consulting services to healthcare organizations and had
revenues of approximately $6.6 million in 1995. The purchase price for MSA was
$8.3 million in cash, which was funded principally by an increase in borrowings
under the Company's credit agreement.
YEAR 2000
The Company has developed a workplan to address year 2000 issues across all
MMI technology platforms. A companywide assessment of year 2000 exposures has
been completed and workplan priorities and schedules are in place and are
expected to be completed in mid-1998. Additionally, system-wide year 2000
simulations are scheduled throughout 1999. The workplan includes system
modification and conversion as well as alignment with vendors and third parties.
The cost to address year 2000 issues is not expected to be material and is being
expensed as incurred.
EFFECT OF INFLATION
The primary effect of inflation on the Company is implicitly considered in
pricing and estimating reserves for unpaid losses and loss adjustment expenses,
particularly for claims where there is a long period between reporting and
settlement. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
rate-making process adequately incorporate the effects of inflation.
- 6 -
<PAGE>
EXHIBIT 13.3
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
----------------------------------------
1997 1996
---- ----
ASSETS
INVESTMENTS (Note 4 )
Short-term investments -- at fair value (amortized cost: 1997 -
<S> <C> <C>
$52,210; 1996 - $59,664)................................. $ 52,219 $ 59,695
Fixed maturities-- at fair value (amortized cost: 1997 -
$1,101,970; 1996 - $1,111,425) ........................... 1,135,702 1,130,597
Preferred Stock. -- at fair value (amortized cost: 1997 -
$39,476; 1996 - $20,794)..................................
42,879 22,264
------------------ -------------------
1,230,800 1,212,556
OTHER ASSETS
Cash ........................................................ 6,698 4,839
Premiums and fees receivable ................................ 165,906 158,303
Reinsurance receivables (Note 3) ............................ 300,077 283,577
Prepaid reinsurance premiums (Note 3) ....................... 21,514 13,175
Accrued investment income ................................... 17,045 16,788
Cost in excess of net assets of purchased
subsidiaries, less accumulated amortization (Notes 1 and 2) 37,257 21,084
Furniture and equipment - at cost,
less accumulated depreciation (Note 1) .................... 14,258 12,027
Deferred income taxes (Note 5) .............................. 42,979 45,750
Other .......................................................
47,533 36,322
------------------ -------------------
$ 1,884,067 $ 1,804,421
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves (Note 7):
Medical malpractice ..................................... $ 613,063 $ 620,673
International ........................................... 500,032 518,345
Other ................................................... 12,051 10,900
------------------ -------------------
1,125,146 1,149,918
Unearned premium reserves ................................. 134,188 106,475
Future life policy benefits ............................... 8,723 8,578
------------------ -------------------
1,268,057 1,264,971
Accrued expenses and other liabilities .................... 50,071 48,421
Amounts due to reinsurers (Note 3) ........................ 48,213 42,863
Long-term notes payable (Note 6) ..........................
-- 93,000
Company-obligated, mandatorily redeemable preferred capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Company (Note 6)........ 118,724 --
------------------ -------------------
1,485,065 1,449,255
Contingencies (Notes 3 and 11)
STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common stock, par value $.10 per share:
Authorized shares: 30,000
Issued and outstanding shares:
1997 - 18,857; 1996 - 18,681 ................................ 1,886 1,868
Additional paid-in capital .................................... 217,855 215,091
Retained earnings ............................................. 154,929 124,751
Unrealized gains on investments, net of taxes:
1997 - $12,812; 1996 - $7,217 ...............................
24,332 13,456
------------------ -------------------
399,002 355,166
------------------ -------------------
$ 1,884,067 $ 1,804,421
================== ===================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES
Insurance premiums earned (Note 3):
<S> <C> <C> <C>
Medical malpractice .............................. $ 154,097 $ 156,722 $ 147,635
International..................................... 118,658 116,982 117,712
Other............................................. 5,482 7,687 7,556
----------------- ----------------- ----------------
278,237 281,391 272,903
Consulting and fee income ........................... 51,626 34,535 22,336
Net investment income (Note 4) ...................... 75,490 73,681 62,936
Net realized gains (losses) on investments (Note 4) . 2,182 (890) 1,692
----------------- ----------------- ----------------
TOTAL REVENUES ............................... 407,535 388,717 359,867
LOSSES AND EXPENSES
Losses and loss adjustment expenses (Notes 3 and 7):
Medical malpractice .............................. 128,869 130,787 125,944
International..................................... 66,813 72,990 76,220
Other............................................. 4,079 4,999 4,144
----------------- ----------------- ----------------
199,761 208,776 206,308
Insurance and administrative expenses (Note 3) ...... 156,969 118,409 100,457
Interest expense .................................... 6,489 6,083 10,889
----------------- ----------------- ----------------
TOTAL LOSSES AND EXPENSES .................... 363,219 333,268 317,654
----------------- ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY LOSS........... 44,316 55,449 42,213
Income taxes (Note 5) ............................... 9,249 10,229 8,082
----------------- ----------------- ----------------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
LOSS.......................................... 35,067 45,220 34,131
Extraordinary losses, net of tax (Note 6)............ 707 -- 4,737
----------------- ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS 34,360 45,220 29,394
Loss from discontinued operations, net of tax........ -- 5,100 --
----------------- ----------------- ----------------
NET INCOME ................................... $ 34,360 $ 40,120 $ 29,394
================= ================= ================
Earnings per common and common equivalent share (Note 9):
Basic
Income from continuing operations before extraordinary
loss............................................ $ 1.87 $ 2.61 $ 2.63
Extraordinary losses, net of tax................ (0.04) -- (0.37)
Loss from discontinued operations, net of tax... -- (0.30) --
----------------- ----------------- ----------------
Net income...................................... $ 1.83 $ 2.31 $ 2.26
================= ================= ================
Diluted
Income from continuing operations before
extraordinary loss.............................. $ 1.81 $ 2.50 $ 2.54
Extraordinary losses, net of tax................ (0.04) -- (0.35)
Loss from discontinued operations, net of tax... -- (0.28) --
----------------- ----------------- ----------------
Net income...................................... $ 1.77 $ 2.22 $ 2.19
================= ================= ================
Weighted average number of common and
common equivalent shares:
Basic.......................................... 18,751 17,336 12,895
Diluted ....................................... 19,396 18,087 13,446
================= ================= ================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
Preferred Stock Common Stock Additional
--------------- ------------
Number Par Number Par Paid-In
of Shares Value of Shares Value Capital
--------- ----- --------- ----- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ....................... -- $ -- 12,409 $ 1,247 $ 85,589
Year ended December 31, 1995
Net income
Issuance of Common Stock of pooled
entity, net of expenses of $6,178........ 3,200 320 58,522
Issuance of Preferred Stock in connection
with acquisition of subsidiary .............. 903 18,061 (2,709)
Conversion of Preferred to Common Stock ....... (903) (18,061) 941 94 17,967
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 110 10 1,,568
Change in unrealized gains, net of
taxes of $17,028.............................
Retirement of Treasury Stock .................. (62) (6) (734)
Common cash dividends ($.15 per share) ........
Common stock dividend ($.18 per share) ........ 9 1 163
Preferred cash dividends ($.14 per share)......
-------- -------- -------- -------- --------
Balance at December 31, 1995 ..................... -- -- 16,607 1,666 160,396
Year ended December 31, 1996:
Net income ....................................
Issuance of Common Stock, net of
expenses of $2,866 .......................... 1,750 170 48,280
Issuance of Common Stock in connection
with acquisition of subsidiaries ............ 65 7 1,284
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 259 25 5,131
Change in unrealized gains, net of
taxes of $4,557..............................
Common cash dividends ($.17 per share) ........
-------- -------- -------- -------- --------
Balance at December 31, 1996 ..................... -- -- 18,681 1,868 215,091
Year ended December 31, 1997:
Net income ....................................
Issuance of Common Stock in connection
with acquisition of subsidiary .............. 85 9 1,942
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 212 21 3,650
Common Stock repurchased...................... (121) (12) (2,828)
Change in unrealized gains, net of
taxes of $5,595..............................
Common cash dividends ($.22 per share) ........
-------- -------- -------- -------- --------
Balance at December 31, 1997 ..................... -- $ -- 18,857 $ 1,886 $217,855
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
(CONTINUED)
Unrealized
Gains (Losses)
on Total
Retained Treasury Investments, Stockholders'
Earnings Stock Net of Taxes Equity
--------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 ....................... $ 60,326 $ (740) $ (9,470) $ 136,952
Year ended December 31, 1995
Net income .................................... 29,394 29,394
Issuance of Common Stock of pooled
entity, net of expenses of $6,178........ 58,872
Issuance of Preferred Stock in connection
with acquisition of subsidiary .............. 15,352
Conversion of Preferred to Common Stock ....... --
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 1,578
Change in unrealized gains, net of
taxes of $17,028 ............................ 32,179 32,179
Retirement of Treasury Stock .................. 740 --
Common cash dividends ($.15 per share) ........ (1,931) (1,931)
Common stock dividend ($.18 per share) ........ (164) --
Preferred cash dividends ($.14 per share) ..... (130) (130)
--------- --------- --------- ---------
Balance at December 31, 1995 ..................... 87,495 -- 22,709 272,266
Year ended December 31, 1996:
Net income .................................... 40,120 40,120
Issuance of Common Stock, net of
expenses of $2,866 .......................... 48,450
Issuance of Common Stock in connection
with acquisition of subsidiaries ............ 1,291
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 5,156
Change in unrealized gains, net of
taxes of $4,557 ............................. (9,253) (9,253)
Common cash dividends ($.17 per share) ........ (2,864) (2,864)
--------- --------- --------- ---------
Balance at December 31, 1996 ..................... 124,751 -- 13,456 355,166
Year ended December 31, 1997:
Net income .................................... 34,360 34,360
Issuance of Common Stock in connection
with acquisition of subsidiary .............. 1,951
Issuance of Common Stock in connection
with employee benefit plans and exercise
of employee stock options ................... 3,671
Common Stock repurchased...................... (2,840)
Change in unrealized gains, net of
taxes of $5,595 ............................. 10,876 10,876
Common cash dividends ($.22 per share) ........ (4,182) (4,182)
--------- --------- --------- ---------
Balance at December 31, 1997 ..................... $ 154,929 $ -- $ 24,332 $ 399,002
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income .......................................... $ 34,360 $ 40,120 $ 29,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in policy liabilities ................... 2,978 (33,912) 59,583
Change in reinsurance balances ................. (19,380) 24,858 41,785
Increase in premiums and fees receivable........ (6,600) (15,162) (17,781)
Increase in deferred tax asset ................. (2,686) (2,255) (6,054)
Change in accrued investment income
and other assests ............................. (8,398) 134 555
Increase in accrued expenses and other
liabilities ................................... 1,961 5,279 2,947
Net realized (gains) losses on investments ..... (2,182) 890 (1,692)
Depreciation and amortization 6,453 5,042 3,372
---------------- ---------------- -----------------
Net cash provided by operating activities .... 6,506 24,994 112,109
INVESTING ACTIVITIES
Net sale (purchase) of short-term investments .... 8,660 (8,103) 37,033
Purchase of available for sale investments ....... (721,863) (715,649) (1,024,490)
Sale of available for sale investments ........... 644,791 579,531 649,805
Maturities of available for sale investments 71,916 73,575 211,543
Acquisition of subsidiaries ...................... (21,006) (11,074) (25,097)
Furniture and equipment additions ................ (6,915) (6,679) (5,402)
---------------- ---------------- -----------------
Net cash used by investing activities ........ (24,417) (88,399) (156,608)
FINANCING ACTIVITIES
Issuance of Common Stock ......................... 1,899 56,725 66,626
Issuance of Capital Securities.................... 124,551 -- --
Common Stock repurchased.......................... (2,840) -- --
Redemption of preference shares................... -- -- (16,899)
Costs incurred in connection with
securities offerings ........................... (5,832) (3,119) (6,176)
Finance costs of long-term debt................... (826) -- --
Payments on notes payable......................... (103,000) (5,750) (30,250)
Proceeds from notes payable....................... 10,000 9,000 21,000
Dividends ........................................ (4,182) (2,864) (2,061)
---------------- ---------------- -----------------
Net cash provided by financing activities .... 19,770 53,992 32,240
---------------- ---------------- -----------------
Increase (decrease) in cash .................. 1,859 (9,413) (12,259)
Cash at beginning of year............................ 4,839 14,252 26,511
---------------- ---------------- -----------------
Cash at end of year .......................... $ 6,698 $ 4,839 $ 14,252
================ ================ =================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
MMI Companies, Inc. (MMI) is a specialty company that offers insurance products
and risk management and consulting services primarily to the healthcare
industry. MMI writes its medical malpractice liability insurance and property
and casualty insurance and reinsurance through its principal subsidiaries,
American Continental Insurance Company (ACIC) and Unionamerica Insurance Company
Ltd. (Unionamerica). MMI provides its products and services in all 50 states and
in Europe. Information on MMI's operations by segment is included in Note 13.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include the
accounts and operations of MMI and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the prior years' financial statements in
order to conform to the current year presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that can affect the amounts
reported in the consolidated financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.
INVESTMENTS
MMI classifies all of its fixed maturity and preferred stock investments as
"available for sale," requiring that these investments be carried at fair value,
with unrealized gains and losses, less related deferred income taxes, excluded
from earnings and reported as a separate component of stockholders' equity.
Realized gains and losses on sales of investments are recognized on the specific
identification basis. Realized losses also include losses for fair value
declines that are considered to be other than temporary.
FAIR VALUE INFORMATION
The fair values of investments are reported in Note 4. The fair values of other
financial instruments, principally accrued investment income, premiums and fees
receivable, accrued expenses and other liabilities, amounts due to reinsurers,
notes payable and trust preferred capital securities approximate their December
31, 1997 and 1996 carrying values.
PREMIUM REVENUES
Premiums are earned pro rata over the terms of the policies which are generally
one year. Adjustments to estimated premiums are made in the period in which it
is determined an adjusment is warranted. Unearned premiums are calculated using
the monthly pro rata basis.
CONSULTING AND FEE INCOME
Consulting and fee income is derived from fixed fee contracts and projects
performed on a per diem basis. Fixed fee contracts are for a specific period of
time, generally one year, in which MMI provides services that are delivered over
the entire contract term. Ratable recognition of fixed fee contract revenue
results in a matching with expenses incurred as the related expenses are
principally employee compensation and benefits. Revenues from projects are
recognized as the services are rendered.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs that vary with, and are primarily related to, the
production of new and renewal business have been deferred and are amortized over
the period of the related insurance policies. Such unamortized amounts included
in other assets amounted to $26,500,000 and $23,100,000 at December 31, 1997 and
1996, respectively. Amortization of such costs are included in insurance and
administrative expenses and amounted to $49,000,000 in 1997, $41,800,000 in 1996
and $39,400,000 in 1995.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for unpaid losses and loss adjustment expenses represent the
estimated liability for claims reported to MMI plus claims incurred but not yet
reported and the related estimated adjustment expenses. The liabilities for
losses and related loss adjustment expenses are determined using case-basis
evaluations and statistical analyses. Although considerable variability is
inherent in such estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are reasonable. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations.
FUTURE POLICY BENEFITS
The liability for future policy benefits principally represents reserves related
to disability policies.
REINSURANCE
Reinsurance premiums, commissions, expense reimbursements and liabilities
related to reinsurance, assumed and ceded, are accounted for on bases consistent
with those used in accounting for the original policies issued and with the
terms of the reinsurance contracts. Premiums assumed from other companies have
been reported as an increase to premium revenues. Premiums ceded to other
companies have been reported as a reduction of premium revenues. Expense
allowances received and paid in connection with reinsurance ceded and assumed,
respectively, have been accounted for as an adjustment of the related deferred
policy acquisition costs and are deferred and amortized accordingly. Reinsurance
receivables and prepaid reinsurance premiums are reported as assets in the
accompanying balance sheets.
FURNITURE AND EQUIPMENT
The costs of furniture and equipment are depreciated over their estimated useful
lives of three to seven years using an accelerated method. As of December 31,
1997 and 1996, accumulated amortization amounted to $10,700,000 and $11,600,000
respectively.
GOODWILL
Costs in excess of net assets of purchased subsidiaries are being amortized on a
straight-line basis over periods ranging from ten to twenty years. As of
December 31, 1997 and 1996, accumulated amortization amounted to $9,100,000 and
$5,800,000, respectively.
INCOME TAXES
MMI and its United States subsidiaries file a consolidated federal income tax
return. Unionamerica and its subsidiaries file tax returns with Inland Revenue
in the United Kingdom. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be in
effect when the differences reverse.
STOCK BASED COMPENSATION
MMI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. MMI
recognizes no compensation expense for the stock option grants. Additional stock
option information is included in Note 10.
EARNINGS PER SHARE
On December 31, 1997, MMI adopted Statement of Financial Accounting Standards
No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Refer to Note 9 for more information.
CASH FLOWS
In the consolidated statements of cash flows, cash includes principally demand
deposit accounts. Also, sales and purchases of short-term investments presented
on a net cash basis include investments with original maturities of three months
or less.
EFFECT OF NEW PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income", which is effective for years beginning after December 15, 1997. SFAS
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. SFAS
130 will require that enterprises (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the stockholders' equity section of the
consolidated balance sheets. SFAS 130 will not have any impact on MMI's
consolidated results of operations, financial position or cash flows.
In 1997, the FASB also issued Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related
Information", which is effective for years beginning after December 15, 1997.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
major customers. MMI has not completed all of the analyses required to determine
the full impact of SFAS 131.
2. BUSINESS COMBINATIONS
On December 11, 1997, MMI acquired 99% of the issued and outstanding
capital stock of Unionamerica Holdings plc (Unionamerica Holdings), which is
represented by American Depositary Shares (ADSs), in exchange for 7,100,000
shares of MMI Common Stock. MMI intends to compulsorily acquire all of the
remaining ADSs outstanding. Unionamerica Holdings' principal subsidiary,
Unionamerica, is a United Kingdom-domiciled insurance and reinsurance company.
The acquisition was accounted for as a pooling of interests and, accordingly,
the accompanying consolidated financial statements were restated to include the
consolidated operations of Unionamerica Holdings for all periods presented.
The following table summarizes the restatement to reflect the
acquisition of Unionamerica Holdings (in thousands, except per share):
<TABLE>
<CAPTION>
Unionamerica
MMI Holdings Restated
--- -------- --------
1997:
<S> <C> <C> <C>
Revenues $260,794 $146,741 $407,535
Net income before extraordinary losses 26,339 8,728 35,067
Extraordinary losses, net of taxes 141 566 707
Net income 26,198 8,162 34,360
Dividends per share $0.28 $0.05 $0.22
1996:
Revenues $243,178 $145,539 $388,717
Income from continuing operations 26,115 19,105 45,220
Loss from discontinued operations 5,100 - 5,100
Net income 21,015 19,105 40,120
Dividends per share $0.24 $0.05 $0.17
1995:
Revenues $218,744 $141,123 $359,867
Net income before extraordinary losses 22,695 11,436 34,131
Extraordinary losses, net of taxes - 4,737 4,737
Net income 22,695 6,699 29,394
Dividends per share $0.20 $ - $0.15
</TABLE>
Effective January 1, 1997, MMI purchased substantially all of the net
assets of Equifax Medical Credentials Verification Services (EMCVS), a unit of
Atlanta-based Equifax, Inc. and acquired by merger all of the outstanding stock
of Professional Risk Management (PRM), a privately held California third party
administrator that specializes in managing enterprise liability risk for
organizations that self-insure. The total purchase price of EMCVS and PRM was
$8,300,000 in cash and $2,000,000 million of MMI Common Stock.
On July 23, 1997, the Company acquired a 39% interest in JMA Holdings
Limited ("JMAHL), the parent company of Jago Managing General Agency Limited, a
Lloyd's managing agency, for total consideration of $9,100,000 . The
consideration was comprised of $5,900,000 cash and $3,200,000 of short-term
notes payable.
Effective April 1, 1996, MMI purchased substantially all of the assets
of Management Science Associates, Inc. (MSA). MSA provides employee relations
and human resource consulting services to healthcare organizations. The purchase
price for MSA, including expenses, was $8,300,000 in cash, which was funded
principally by an increase in borrowings under MMI's credit agreement.
On May 9, 1995, MMI acquired all of the outstanding capital stock of
Health Providers Insurance Company (HPIC). HPIC is an Illinois-domiciled
insurance company that writes medical malpractice insurance for healthcare
organizations and assumes reinsurance from healthcare-sponsored insurance
companies. Total consideration was $30,700,000 with $15,300,000 in cash and the
balance in the form of Series A Convertible Preferred Stock that was converted
into 941,000 shares of Common Stock on September 5, 1995.
The EMCVS, PRM, MSA and HPIC acquisitions were accounted for as
purchases, and the operations of the acquired businesses are included in MMI's
consolidated financial statements since the dates of acquisition. Assets
acquired, liabilities assumed, and the excess of cost over net assets purchased
were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cost in excess of net assets purchased $ 18,252 $ 7,155 $ -
Cash 566 395 -
Invested assets - - 138,612
Other assets 2,570 1,758 31,654
Liabilities (689) (955) (139,954)
-------------------------------------------
$ 20,699 $8,353 $30,672
===========================================
</TABLE>
The pro forma impact of the purchased businesses on results of
operations was not material.
3. REINSURANCE
MMI's insurance subsidiaries are involved in the cession of reinsurance to other
domestic and foreign companies, which permits the recovery of a portion of the
gross losses. MMI's insurance subsidiaries would remain liable to the extent
that these reinsurance companies are unable to meet their obligations under
these arrangements.
Insurance premiums earned are composed of the following (in thousands):
Year Ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
Direct $ 234,462 $ 241,974 $ 228,614
Assumed 110,492 105,442 112,415
Ceded (66,717) (66,025) (68,126)
------- -------- --------
$ 278,237 $281,391 $ 272,903
========= ======== =========
MMI evaluates the financial condition of its reinsurers and monitors the
geographic spread of risk to minimize the exposure to losses from reinsurer
insolvencies. The reinsurers with the largest recoverable balance due to MMI as
of December 31, 1997 are identified as follows (in thousands):
Reinsurance
Reinsurer Recoverable
-------------------------------------------- -----------
Lloyd's Underwriters* $ 51,082
Hannover Reinsurance Company* 29,630
CIGNA Reinsurance Company 21,439
National Reinsurance Company 18,920
Munich Reinsurance Company* 16,597
Transatlantic Reinsurance Company 8,186
Royal Reinsurance Company* 8,105
TIG Reinsurance Company 6,585
CNA Reinsurance Company Limited* 6,187
Terra Nova Insurance Ltd.* 5,883
All others 127,463
--------
Total $300,077
========
* Represents a foreign insurer.
In 1997, 1996 and 1995 respectively, MMI's losses and loss adjustment expenses
were net of reinsurance ceded of $64,000,000, $33,100,000 and $73,900,000.
4. INVESTMENTS
The amortized cost and fair value of investments, which are available for sale,
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1997:
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government and agencies ........... $ 182,638 $ 2,552 $ (112) $ 185,078
State and political subdivisions ....... 437,512 21,534 (232) 458,814
Foreign governments .................... 28,571 2,509 (427) 30,653
Corporate securities ................... 261,248 5,254 (573) 265,929
Mortgage-backed securities ............. 192,001 3,500 (273) 195,228
------------ ------------ ------------ ------------
1,101,970 35,349 (1,617) 1,135,702
Short-term investments .................... 52,210 9 -- 52,219
Preferred stocks .......................... 39,476 3,445 (42) 42,879
------------ ------------ ------------ ------------
$ 1,193,656 $ 38,803 $ (1,659) $ 1,230,800
============ ============ ============ ============
December 31, 1996:
Fixed maturities:
U.S. Government and agencies ........... $ 166,528 $ 1,034 $ (645) $ 166,917
State and political subdivisions........ 438,139 13,228 (684) 450,683
Foreign governments .................... 35,958 1,606 (52) 37,512
Corporate securities ................... 274,168 4,880 (1,379) 277,669
Mortgage-backed securities ............. 196,632 2,380 (1,196) 197,816
------------ ------------ ------------ ------------
1,111,425 23,128 (3,956) 1,130,597
Short-term investments .................... 59,664 31 -- 59,695
Preferred stocks .......................... 20,794 1,540 (70) 22,264
------------ ------------ ------------ ------------
$ 1,191,883 $ 24,699 $ (4,026) $ 1,212,556
============ ============ ============ ============
</TABLE>
Fair values of investments are principally based on quoted market prices.
Short-term investments are comprised principally of corporate and municipal
securities.
The amortized cost and fair value of fixed maturities at December 31, 1997, by
contractual maturity, are as follows (in thousands):
Amortized Fair
Cost Value
------------ ------------
Due in 1998 $ 45,945 $ 45,224
Due in 1999 through 2002 253,283 257,542
Due in 2003 through 2007 211,086 221,289
Due in 2008 and thereafter 399,655 416,419
-------- ---------
909,969 940,474
Mortgage-backed securities 192,001 195,228
---------- ---------
$ 1,101,970 $ 1,135,702
=========== ===========
The expected maturities may differ from contractual maturities in the foregoing
table because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties, or MMI may have the right to put
obligations back to the issuer prior to stated maturity.
The changes in unrealized gains and losses, which are recorded in stockholders'
equity were as follows (in thousands):
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
Fixed maturities and
short-term investments $ 14,538 $(14,229) $ 48,676
Preferred stocks . 1,933 419 531
-------- -------- --------
$ 16,471 $(13,810) $ 49,207
======== ======== ========
Net realized gains(losses) on investments are comprised of the following (in
thousands):
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
Fixed maturities
Gross gains $ 2,771 $ 5,590 $ 13,096
Gross losses (1,270) (6,660) (11,404)
-------- -------- --------
1,501 (1,070) 1,692
-------- -------- --------
Preferred stocks:
Gross gains 726 206 --
Gross losses (45) (26) --
-------- -------- --------
681 180 --
-------- -------- --------
$ 2,182 $ (890) $ 1,692
======== ======== ========
Major categories of net investment income are as follows (in thousands):
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Fixed maturities $72,520 $69,825 $59,834
Short-term investments and cash 4,586 6,594 6,603
Preferred stocks 2,215 983 196
------- ------- -------
Total investment income 79,321 77,402 66,633
Expenses 3,831 3,721 3,697
------- ------- -------
Net investment income $75,490 $73,681 $62,936
======= ======= =======
At December 31, 1997, investments with a fair value of $12,996,000 were on
deposit to meet statutory requirements.
Certain investments of the international segment are held in a trust fund set up
as collateral for holders of United States insurance policies. At December 31,
1997 and 1996, the fair value of fixed maturities in the trust fund amounted to
$6,507,000 and $6,286,000 respectively. The required minimum trust fund was
$5,400,000 for 1997 and 1996.
Fixed maturities of the international segment of $251,900,000 in 1997 and
$203,600,000 in 1996 were held in a trust fund required by virtue of status as
an accredited reinsurer in a number of United States jurisdictions.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of MMI's
deferred tax assets and liabilities as of December 31, 1997 and 1996 are as
follows (in thousands):
December 31,
--------------------
1997 1996
-------- --------
Deferred tax assets:
Tax-basis loss reserve adjustment $ 39,329 $ 42,696
Tax-basis unearned premium
reserve adjustment 3,855 3,261
Accrued expenses 914 4,238
Alternative minimum tax
credit carryforward 12,647 5,584
Other 4,161 4,317
-------- --------
Total deferred tax assets 60,906 60,096
-------- --------
Deferred tax liabilities:
Unrealized investment gains (12,814) (7,215)
Deferred policy acquisition costs (2,563) (2,453)
Receivables (561) (2,115)
Other (1,989) (2,563)
-------- --------
Total deferred tax liabilities (17,927) (14,346)
-------- --------
Net deferred tax asset $ 42,979 $ 45,750
======== ========
MMI expects adequate future taxable income to realize the deferred tax asset.
Accordingly, no valuation reserve is considered necessary.
Significant components of the provision for income taxes are as follows (in
thousands):
Year Ended December 31,
-------------------------------
Current: 1997 1996 1995
-------- -------- --------
Federal $ 2,720 $ 431 $ 7,017
Foreign 8,505 9,338 7,124
-------- -------- --------
Total current 11,225 9,769 14,141
-------- -------- --------
Deferred (credit):
Federal (959) 423 (4,878)
Foreign (1,017) 37 (1,181)
-------- -------- --------
Total deferred (1,976) 460 (6,059)
-------- -------- --------
Provision for income tax $ 9,249 $ 10,229 $ 8,082
======== ======== ========
A reconciliation of income tax computed at the United States federal statutory
tax rate of 35% to income tax expense in the accompanying financial statements
is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------------------ --------------- ----------------
Amount % Amount % Amount %
--------- ------- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. Statutory rate $ 15,511 35 % $19,407 35 % $15,306 35%
Non-taxable investment income (8,431) (19) (7,896) (14) (6,187) (14)
Acquisition costs 2,603 6 -- -- -- --
Other (434) (1) (1,282) (3) (1,037) (2)
--------- ------- -------- ----- -------- ------
Net provision $ 9,249 21 % $10,229 18 % $ 8,082 19 %
========= ======= ======== ===== ======== ======
</TABLE>
Federal income taxes have not been provided on the difference between the amount
for financial reporting and the tax basis in the stock of the foreign
subsidiaries because management intends to
indefinitely invest that difference in these subsidiaries. Determination of the
amount of the unrecognized deferred United States income tax liability is not
practicable.
MMI's net payments of income taxes were $9,302,000, $5,572,000, and $13,467,000
during 1997, 1996 and 1995, respectively.
6. TRUST PREFERRED CAPITAL SECURITIES AND NOTES PAYABLE
In December 1997, the Company completed a private placement of $125,000,000
30-year, mandatorily redeemable preferred capital securities (Capital
Securities) of MMI Capital Trust I, a subsidiary of MMI. The Capital Securities
will pay a dividend of 7 5/8% semiannually in arrears beginning June 30, 1998
and have a maturity date of December 15, 2027. Payments on the Capital
Securities are fully and unconditionally guaranteed by MMI. Total proceeds were
$118,700,000 net of expenses. The effective rate of the Capital Securities is
8.06%.
With the proceeds from the Capital Securities, MMI repaid its $103,000,000 in
bank debt and has no long-term notes payable as of December 31, 1997. At
December 31, 1996, the Company had $93,000,000 in long-term notes payable. This
amount was increased by $10,000,000 in July 1997 and was retired in December
1997. In connection with the extinguishment of the notes payable in the second
and fourth quarters of 1997, costs of $700,000 net of taxes of $400,000, that
were deferred when paid and amortized over the terms of the notes were expensed
and are classified as an extraordinary item in the 1997 financial statements.
In February 1998, MMI obtained an unsecured bank line of credit. The interest
rate called for by this agreement is equal to the Interbank Offer Rate for
periods of up to one year plus a margin of 20 to 40 basis points. The bank
agreement subjects MMI and its subsidiaries to certain covenants and
restrictions with respect to minimum net worth and statutory surplus, maximum
debt to total capitalization, and minimum risk based capital levels. The
agreement also restricts MMI's ability to pay stockholders' dividends and
repurchase shares in a single year in excess of 50% of the average of the prior
three years' net income. The credit agreement expires on February 20, 2003.
Total interest paid in 1997, 1996 and 1995 was $6,400,000, $5,900,000 and
$10,500,000, respectively.
7. LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following table presents a reconciliation of beginning and ending
property/casualty loss and loss adjustment expense (LAE) reserve balances for
the years indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------------------------------
Liability for losses and LAE at beginning of year (net of reinsurance
<S> <C> <C> <C>
receivables: 1997 --$241,270; 1996 -- $263,934; 1995 -- $297,847) $900,427 $ 918,497 $ 701,206
Liability for losses and LAE for HPIC at date of acquisition ($124,651)
and Accord Re commutation ($61,106) -- -- 185,757
Add provision for losses and LAE for claims occurring in:
Current year 209,367 213,419 204,076
Prior years (13,685) (9,642) (1,912)
--------- --------- ---------
Total incurred losses and LAE 195,682 203,777 202,164
Less losses and LAE payments for claims occurring in:
Current year from continuing operations 13,108 17,974 8,625
Prior years from continuing operations 230,761 200,765 160,598
Prior years from discontinued operations 299 3,108 1,407
--------- --------- ---------
Total paid losses and LAE 244,168 221,847 170,630
--------- --------- ---------
Liability for losses and LAE at end of year (net of reinsurance
receivables: 1997 -- $263,401; 1996 -- $241,270; 1995 -- $263,934) $ 851,941 $ 900,427 $ 918,497
========= ========= =========
</TABLE>
The portion of the provision for losses and LAE in the foregoing schedule for
the years ended December 31, 1997, 1996 and 1995 that relate to prior years from
continuing operations each represent less than 2% of the respective prior years'
liabilities for losses and LAE. MMI's loss and LAE reserves and related
provision for prior years' losses attributable to health business are
immaterial.
8. STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed or permitted by regulatory
authorities for MMI's insurance subsidiaries differ in some respects from GAAP.
Prior to 1997, ACIC discounted loss and LAE reserves for statutory reporting
purposes as permitted by regulatory authorities. Reconciliations of
statutory-basis capital and surplus and net income of its domestic insurance
operations to MMI's GAAP-basis amounts included in the accompanying financial
statements are as follows (in thousands):
December 31,
---------------------
1997 1996
------ ------
Statutory-basis capital and surplus $ 191,548 $ 225,945
Additions (deductions):
Unionamerica 118,562 103,200
Statutory-basis loss reserve discount -- (52,176)
GAAP-basis deferred income taxes 33,085 38,122
Other, including non-insurance company amounts 55,807 40,075
--------- ---------
GAAP-basis consolidated stockholders' equity of MMI $ 399,002 $ 355,166
========= =========
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory-basis combined net income $ 27,763 $ 32,685 $ 25,763
Additions (deductions):
Unionamerica 8,162 19,105 6,699
Statutory-basis loss reserve discount -- (1,994) (6,607)
GAAP-basis deferred income taxes (786) (5,986) 6,938
Other, including non-insurance company amounts (779) (3,690) (3,399)
-------- -------- --------
GAAP-basis consolidated net income of MMI $ 34,360 $ 40,120 $ 29,394
======== ======== ========
</TABLE>
The above statutory-basis capital and surplus amounts relate to MMI's direct
domestic insurance subsidiaries, ACIC and HPIC. The capital and surplus amounts
for ACIC include the capital and surplus of American Continental Life Insurance
Company (ACLIC), a life insurance company owned by ACIC, in the amount of
$15,500,000 at December 31, 1997 and $15,200,000 at December 31, 1996. Statutory
net income of ACLIC amounted to $300,000 in 1997, $400,000 in 1996 and $500,000
in 1995.
The maximum amount of dividends that can be paid from ACIC to MMI without
regulatory approval is the lesser of net investment income or 10% of ACIC's
statutory-basis capital and surplus, each as of the preceding December 31. For
HPIC, the maximum amount of dividends that can be paid to MMI without regulatory
approval is the greater of net income or 10% of capital and surplus, each as of
the preceding December 31. Accordingly, the maximum total dividend amount is
$31,000,000 in 1998.
Under a Notice of Requirements from its regulatory body in the United Kingdom
(U.K.), the Department of Trade and Industry (DTI), Unionamerica may not pay any
dividends unless it has given the DTI 14 days advance notice and the DTI has not
objected. The DTI has the power to prohibit or require Unionamerica to reduce
the amount of a dividend.
ACIC and HPIC's combined GAAP-basis net assets amounted to $263,000,000 at
December 31, 1997. The excess of these combined net assets over ACIC and HPIC's
maximum dividend amount represents restricted consolidated net assets.
MMI has authorized and unissued 5,000,000 shares of $20 par value Preferred
Stock.
On June 14, 1997, the Board of Directors declared a dividend distribution to
holders of record on June 30, 1997 of one right ("Right") to purchase 1/100
share of one Series B Junior Participating preferred stock on each outstanding
share of MMI Common Stock.
The Rights issued under the Plan become exercisable only when a person or group
acquires or announces its intention to acquire more than 15% of the Common Stock
of MMI. Under certain conditions, each Right would, upon exercise, entitle
stockholders, other than the third party acquirer, to buy $150 worth of a MMI
Common Stock equivalent at an exercise price of $75.
If MMI is acquired in a merger or other business combination transaction that
has not been approved by the Board of Directors, each Right will entitle its
holder to acquire common stock of the acquiring company with a market value
equal to two times the exercise price of the Right, a purchase value of $150 of
the common stock of the acquiring company for $75. At any time prior to the
distribution date, the Board of Directors retains the right to amend the Rights
Plan and to redeem the Rights at $.01 per Right. The Rights will expire in ten
years. MMI has reserved 300,000 shares of Preferred Stock in connection with the
Rights Plan.
9. EARNINGS PER SHARE
On December 31, 1997, MMI adopted SFAS 128 which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes the
effect of stock options. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Where appropriate, all earnings per
share amounts for all periods have been restated to conform to the requirements
of SFAS 128.
Earnings per share are computed based on the weighted average number of
outstanding shares of common stock and equivalents, including incremental shares
from dilutive stock options since the date of grant using the treasury stock
method.
As described in Note 2, MMI issued Preferred Stock in May 1995 that was
converted into Common Stock in September 1995. For basic earnings per share,
earnings are net of Preferred Stock dividends of $293,000 in 1995. For diluted
earnings per share, weighted average common and common equivalent shares in 1995
are computed assuming the Preferred Stock was converted as of the May 1995
Preferred Stock issue date.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations $ 34,360 $ 45,220 $ 29,394
Preferred stock dividends -- -- (293)
---------- ---------- ----------
Income available to common shareholders
for basic earnings per share 34,360 45,220 29,101
Effect of dilutive securities:
Preferred stock dividends -- -- 293
---------- ---------- ----------
Numerator for diluted earnings per share-
income available to common shareholders
after assumed conversions $ 34,360 $ 45,220 $ 29,394
========== ========== ==========
Weighted average shares for basic
earnings per share 18,751 17,336 12,895
Effect of dilutive securities:
Employee stock options 645 751 551
---------- ---------- ----------
Adjusted weighted average shares
for diluted earnings per share 19,396 18,087 13,446
========== ========== ==========
Basic earnings per share $ 1.83 $ 2.61 $ 2.26
========== ========== ==========
Diluted earnings per share $ 1.77 $ 2.50 $ 2.19
========== ========== ==========
</TABLE>
Options to purchase 143,000, 18,000 and 18,000 shares of Common Stock were
outstanding during 1997, 1996 and 1995, respectively, but were not included in
the computation of the dilutive effect of stock options. These options were
excluded from the computation because the options' exercise prices were greater
than the average market price of the common shares and, therefore, would be
antidilutive.
10. STOCK OPTION PLANS
MMI has an employee stock plan that authorizes the issuance, subject to
directors' approval, of nonqualified stock options and restricted stock, and a
nonqualified stock option plan for non-employee directors. The directors plan
provides for the issuance of 1,375 options each year for each director and 4,125
options to a new director joining MMI's Board of Directors, with exercise prices
equal to fair value at the grant date. All options have 10-year terms and
generally vest and become fully exercisable six months after the date of grant.
A summary of the MMI stock option activity, and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- ---------------------------------- ----------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------- ----------------- ---------------- ----------------- ---------------- -----------------
Oustanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 1,580,916 $14.98 1,298,185 $11.97 1,215,614 $10.78
Granted
(at fair value) 130,625 25.30 531,319 21.89 146,750 20.32
Exercised (121,079) 10.57 (213,338) 12.56 (59,788) 8.93
Cancelled ( 1,100) 24.25 (35,250) 23.09 (4,391) 5.36
--------------- ----------------- ---------------- ----------------- ---------------- -----------------
1,589,362 $16.15 1,580,916 $14.98 1,298,185 $11.97
=============== ================= ================ ================= ================ =================
Options exercisable
at year-end 1,534,862 $15.76 1,164,722 $13.34 1,136,685 $11.06
Shares available for
grant at end of
year 650,392 229,900 418,525
</TABLE>
Other information regarding options outstanding and exercisable as of December
31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.36 271,342 2.69 $ 5.36 271,342 $ 5.36
$13.13 to $18.63 927,420 5.79 15.26 927,420 15.26
$22.75 to $32.00 390,600 6.90 25.79 336,100 25.53
------- ---- ----- ------- -----
1,589,362 5.54 $16.15 1,534,862 $15.76
========= ==== ====== ========= ======
</TABLE>
Pro forma information regarding net income and net income per share has been
determined as if MMI had accounted for its stock option grants since January 1,
1995 under the plan using the fair value method of SFAS No. 123, "Accounting for
Stock-Based Compensation." For these purposes, the fair value for the stock
option grants was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995: risk-free interest rate of 6%, a volatility factor of 29%,
expected life of the option of four years and a 1% annual dividend yield.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
MMI's employee and director stock options have characteristics significantly
different from those of traded options, and because changes in the selected
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' six month vesting period. MMI's pro
forma information is as follows:
1997 1996 1995
---------- ---------- ----------
Pro forma net income (in thousands) $ 33,216 $ 36,361 $ 29,063
Pro forma net income per common and
common equivalent share:
Basic $ 1.77 $ 2.10 $ 2.25
Diluted 1.71 2.01 2.16
The pro forma disclosures only include the effect of options granted subsequent
to January 1, 1995. Accordingly, the effects of applying the SFAS No. 123 pro
forma disclosures to future periods may not be indicative of future effects.
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
MMI is engaged in various legal actions incident to the nature of its business.
Management is of the opinion that the outcome of the litigation will not have a
material effect on MMI's financial position or results of operations.
MMI leases its office space and certain equipment under noncancelable leases.
Rental expense for 1997, 1996 and 1995 was $8,600,000, $7,400,000 and
$6,500,000, respectively. As of December 31, 1997, aggregate minimum rental
commitments under noncancelable leases amounted to $7,700,000 in 1998,
$6,400,000 in 1999, $5,500,000 in 2000, $5,200,000 in 2001, $1,800,000 in 2002
and $4,500,000 thereafter.
<PAGE>
12. EMPLOYEE BENEFIT PLANS
MMI has a defined-contribution pension plan that covers substantially all
domestic employees who have attained age 21 and completed three months of
service. MMI contributes 4% of salary for all employees who have completed 1,000
hours of service in the plan year and who are employed at December 31. In
addition, MMI contributes the greater of 75% of the first $2,000 of employee
contributions or 50% of employee contributions up to 4% of salary. Additional
MMI contributions are made at the discretion of MMI's Board of Directors. MMI's
contributions charged to operations were $2,700,000 in 1997, $2,200,000 in 1996
and $1,600,000 in 1995.
MMI operates a non-contributory, defined pension plan (the "Plan"), principally
for its international employees. The Plan provides for monthly retirement
benefits, normally at ages between 60 to 65, to eligible employees based on
employee compensation and length of employment.
The actuarial assumptions used to develop the components of pension expense for
the years ended December 31, 1997, 1996 and 1995 were:
Rate per annum %
----------------
1997 1996 1995
---- ---- ----
Discount rate 6.50% 7.75% 7.75%
Return on assets 8.00 8.00 8.00
Salary progression 5.50 5.50 5.50
The following table sets forth the Plan's estimated funded status and
amounts recognized in the accompanying consolidated financial statements (in
thousands):
1997 1996
-------- --------
Accumulated benefit obligation $ 11,526 $ 9,118
Projected benefit obligation 12,553 9,118
Plan assets at fair value 12,894 10,802
-------- --------
Funded status 341 1,684
Unrecognized net gain(loss) 886 (665)
Unrecognized prior service cost (902) (992)
-------- --------
Prepaid pension amount $ 325 $ 27
======== ========
Net pension expense included the following components (in thousands):
Year ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
Service cost $ 704 $ 677 $ 487
Interest cost 656 551 424
Actual return on plan assets (1,883) (1,409) (518)
Net amortization and deferral 1,005 736 (94)
-------- ------- -------
Net pension expense $ 482 $ 555 $ 299
======== ======= =======
The assets of the Plan are principally invested in equity securities of United
Kingdom companies.
<PAGE>
13. INDUSTRY SEGMENTS
In December 1997, MMI acquired Unionamerica Holdings in a pooling of interests
and, as a result, redefined their industry segments. All years presented have
been restated to include the revenues, pre-tax income and assets of Unionamerica
Holdings. MMI's operations are classified and summarized into domestic
insurance, international insurance and consulting and fees. The domestic
insurance segment principally includes professional and general liability
insurance and reinsurance for hospitals, healthcare systems and healthcare
providers. The international insurance segment, principally located in the
United Kingdom, includes the international insurance and reinsurance business.
The consulting and fee segment includes clinical risk management consulting,
strategic healthcare consulting, employee relations consulting, professional
liability claims administration, healthcare credential verifications services
and billing, compliance and reimbursement services. Investment income and
expense allocations are based on estimates and certain assets have been
allocated to segments by formulas. Information by segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
----------------------------------------------
Revenues:
<S> <C> <C> <C>
Domestic insurance $ 209,168 $ 208,643 $ 196,408
International insurance 146,741 145,539 141,123
Consulting and fees 51,626 34,535 22,336
---------- ---------- ----------
Total $ 407,535 $ 388,717 $ 359,867
========== ========== ==========
Income from continuing operations before
income taxes and extraordinary losses:
Domestic insurance $23,530 $ 24,080 $ 23,036
International insurance (1) 16,216 28,480 17,379
Consulting and fees 4,570 2,889 1,798
---------- ---------- ----------
Total $ 44,316 $ 55,449 $ 42,213
========== ========== ==========
December 31,
------------
1997 1996 1995
----------------------------------------------
Identifiable assets at end of year:
Domestic insurance $ 1,074,189 $1,037,791 $ 966,286
International insurance 784,650 750,081 765,118
Consulting and fees 25,228 16,549 10,354
---------- ---------- ----------
Total $1,884,067 $1,804,421 $1,741,758
========== ========== ==========
<FN>
(1) 1997 reflects $9,745 in expenses related to the acquisition of Unionamerica Holdings.
</FN>
</TABLE>
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended,
-------------------
3/31/97 6/30/97 9/30/97 12/31/97
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ............................................................. $ 102,185 $ 103,832 $ 94,370 $ 107,148
Income before extraordinary losses.................................... 10,625 11,082 12,230 1,130
Extraordinary losses, net of taxes ................................... -- (267) -- (440)
------------------------------------------------------
Net income ....................................................... $ 10,625 $ 10,815 $ 12,230 $ 690
======================================================
Earnings per common and common equivalent share:
Basic:
Income before extraordinary losses ........................... $ .57 $ .59 $ .65 $ .06
Extraordinary losses, net of taxes ........................... -- (.01) -- (.02)
------------------------------------------------------
Net income ................................................... $ .57 $ .58 $ .65 $ .04
======================================================
Diluted:
Income before extraordinary losses ........................... $ .55 $ .57 $ .63 $ .06
Extraordinary losses, net of taxes ........................... -- (.01) -- (.02)
------------------------------------------------------
Net income ................................................... $ .55 $ .56 $ .63 $ .04
======================================================
Three Months Ended,
-------------------
3/31/96 6/30/96 9/30/96 12/31/96
--------------------------------------------------
Revenues ............................................................. $ 101,283 $ 100,103 $ 94,694 $ 92,637
Income from continuing operations .................................... 12,221 11,100 10,391 11,508
Loss from discontinued operations .................................... -- -- -- (5,100)
------------------------------------------------------
Net income ..................................................... $ 12,221 $ 11,100 $ 10,391 $ 6,408
======================================================
Earnings per common and common equivalent share:
Basic:
Income from continuing operations .............................. $ .73 $ .66 $ .61 $ .62
Loss from discontinued operations .............................. -- -- -- (.27)
------------------------------------------------------
Net income .................................................... $ .73 $ .66 $ .61 $ .35
======================================================
Diluted:
Income from continuing operations .............................. $ .70 $ .63 $ .58 $ .59
Loss from discontinued operations .............................. -- -- -- (.26)
------------------------------------------------------
Net income ..................................................... $ .70 $ .63 $ .58 $ .33
======================================================
</TABLE>
The above information, prior to the quarter ended December 31,1997, has been
restated for the acquisition of Unionamerica Holdings, accounted for using the
pooling of interests method, and the required adoption on December 31, 1997 of a
new accounting standard on earnings per share.
15. DISCONTINUED OPERATIONS
In 1992, MMI sold Ludgate Insurance Company Limited ("Ludgate") at a loss, which
was reported in discontinued operations. The Company has been involved in two
lawsuits connected with the sale. Also at issue was a stop-loss reinsurance
agreement provided by MMI to Ludgate in connection with the sale. In February
1997, a United Kingdom court rendered a judgment against MMI.
In February 1997, MMI settled both lawsuits and commuted the stop-loss
reinsurance agreement. The settlement of all these matters is reflected in the
accompanying 1996 statement of income as a loss from discontinued operations.
The pre-tax loss is $7,800,000 with a corresponding tax benefit of $2,700,000,
resulting in a charge of $5,100,000.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MMI Companies, Inc.
We have audited the accompanying consolidated balance sheets of MMI Companies,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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 did not audit the 1996 and 1995 financial statements of
Unionamerica Holdings plc, a wholly-owned subsidiary, which statements reflect
total assets of $750,081,000 as of December 31, 1996, and total revenues of
$145,539,000 and $141,123,000 for the years ended December 31, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Unionamerica Holdings plc, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MMI Companies, Inc.
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
February 26, 1998
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21.1
- ------------
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
Company Domicile
- ------- --------
<S> <C>
MMI Companies, Inc. Delaware
AmCon Reinsurance, Inc. Cayman Islands, B.W.I.
American Continental Insurance Company Missouri
American Continental Life Insurance Company Missouri
Health Providers Insurance Company Illinois
Healthcare Credentials Management Services, Inc. Delaware
Healthcare Risk Underwriters Ltd. United Kingdom
Management Science Associates, Inc. Delaware
McManis Associates, Inc. Delaware
MMI Agency, Inc. Illinois
MMI Risk Management Resources, Inc. Illinois
Healthcare Risk Resources International Ltd. United Kingdom
MMedica Insurance Limited - (80% owned) Ireland
Professional Risk Management, Inc. Delaware
MMI Capital Trust I - (3% (100% of common stock) owned) Delaware
Unionamerica Holdings, plc United Kingdom
Unionamerica Intermediate Company Limited United Kingdom
Unionamerica Acquisition Company Limited United Kingdom
Unionamerica Insurance Company Limited United Kingdom
UA Management Company - (99% owned) United Kingdom
UA Combined Investment Company Limited - (80% owned) United Kingdom
Jago Dedicated Limited - (89% owned) United Kingdom
Jago Capital Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of MMI Companies, Inc. of our report dated February 26, 1998, included in the
1997 Annual Report to Shareholders of MMI Companies, Inc.
Our audits also included the financial statement schedules of MMI Companies,
Inc. listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. We did not audit the 1996 and 1995 financial statements of Unionamerica
Holdings plc, a wholly-owned subsidiary, which statements reflect total assets
of $750,081,000 as of December 31, 1996, and total revenues of $145,539,000 and
$141,123,000 for the years ended December 31, 1996 and 1995, respectively. We
have been furnished with the report of other auditors with respect to Schedules
II, III, IV, V, and VI of Unionamerica Holdings, plc and our opinion, insofar as
it relates to data included for Unionamerica Holdings plc, is based solely on
the report of the other auditors. In our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
pertaining to the MMI Companies, Inc. Savings and Profit Sharing Plan (401(k))
Form S-8 No. 33-72786), in the Registration Statement pertaining to the MMI
Companies, Inc. 1993 Employee Stock Plan, and 1993 Non-employee Director's
Formula Stock Option Plan (Form S-8 No. 33-46889) and the Registration Statement
pertaining to the 1995 Employee Stock Investment Plan (Form S-8 No. 33-87356),
and in the related Prospectuses, of our report dated February 26, 1998, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedules included in this Annual Report (Form 10-K) of
MMI Companies, Inc.
ERNST & YOUNG LLP
Chicago, Illinois
March 18, 1998
<PAGE>
Exhibit 23.2
March 18, 1998
The Board of Directors
Unionamerica Holdings plc
We consent to the incorporation by reference in the registration statements
(Nos. 33-72786,33-81228 and 33-87356) on Form S-8, of MMI Companies, Inc. of our
report dated 18 March 1996 with respect to the consolidated statement of
operations, shareholders' equity and cash flows of Unionamerica Holdings plc for
the year ended 31 December 1995, which report appears in the 31 December 1997
Form 10-K of MMI Companies, Inc.
KPMG
Chartered Accountants
Registered Auditor
London, England
<PAGE>
March 18, 1998
The Board of Directors
Unionamerica Holdings plc
We consent to the incorporation by reference in the registration statements
(Nos. 33-72786, 33-81228 and 33-87356) on Form S-8, of MMI Companies, Inc. of
our report dated 11 March 1997 with respect to the consolidated balance sheet of
Unionamerica Holdings plc as of 31 December 1996, and the related consolidated
statement of operations, shareholders' equity and cash flow for the year then
ended, which report appears in the 31 December 1997 Form 10-K of MMI Companies,
Inc.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of MMI Companies, Inc. and subsidiaries for
the twelve month period ended December 31, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 1,135,702 1,130,597 1,100,441
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 42,879 22,264 4,029
<MORTGAGE> 0 0 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 1,230,800 1,212,556 1,166,825
<CASH> 6,698 4,839 14,252
<RECOVER-REINSURE> 25,962 33,617 33,037
<DEFERRED-ACQUISITION> 26,539 23,123 16,893
<TOTAL-ASSETS> 1,844,067 1,804,421 1,741,758
<POLICY-LOSSES> 1,133,869 1,158,496 1,208,852
<UNEARNED-PREMIUMS> 134,188 106,475 96,281
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 118,724 93,000 89,000
<COMMON> 1,886 1,868 1,666
0 0 0
0 0 0
<OTHER-SE> 397,116 353,298 270,600
<TOTAL-LIABILITY-AND-EQUITY> 1,884,067 1,804,421 1,741,758
278,237 281,391 272,903
<INVESTMENT-INCOME> 75,490 73,681 62,936
<INVESTMENT-GAINS> 2,182 (890) 1,692
<OTHER-INCOME> 51,626 34,535 22,336
<BENEFITS> 199,761 208,776 206,308
<UNDERWRITING-AMORTIZATION> 49,049 41,835 39,403
<UNDERWRITING-OTHER> 107,920 76,574 61,054
<INCOME-PRETAX> 44,316 55,449 42,213
<INCOME-TAX> 9,249 10,229 8,082
<INCOME-CONTINUING> 35,067 45,220 34,131
<DISCONTINUED> 0 (5,100) 0
<EXTRAORDINARY> (707) 0 (4,737)
<CHANGES> 0 0 0
<NET-INCOME> 34,360 40,120 29,394
<EPS-PRIMARY> 1.83 2.31 2.26
<EPS-DILUTED> 1.77 2.22 2.19
<RESERVE-OPEN> 900,427 918,497 701,206
<PROVISION-CURRENT> 209,367 213,419 204,076
<PROVISION-PRIOR> (13,685) (9,642) (1,912)
<PAYMENTS-CURRENT> 13,108 17,974 8,625
<PAYMENTS-PRIOR> 230,761 200,765 160,598
<RESERVE-CLOSE> 851,941 900,427 918,497
<CUMULATIVE-DEFICIENCY> (13,685) (9,642) (1,912)
</TABLE>
EXHIBIT 99.1
The Board of Directors
Unionamerica Holdings plc
We have audited the consolidated balance sheet of Unionamerica Holdings plc and
subsidiaries as of 31 December 1996 and the related consolidated statement of
operations, shareholders' equity and cash flow for the year then ended. In
connection with our audit of the consolidated financial statements, we have also
audited the financial statement schedules I, II, IV, and VI, (none of which
aforementioned consolidated financial statements and financial statement
schedules are separately presented herein). These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unionamerica
Holdings plc and subsidiaries as of 31 December 1996, and the results of their
operations and their cash flows for the year ended 31 December 1996, in
conformity with generally accepted accounting principles in the United States of
America. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
11 March 1997
<PAGE>
The Board of Directors
Unionamerica Holdings plc
We have audited the consolidated statement of operations, shareholders' equity
and cash flow of Unionamerica Holdings plc for the year ended 31 December 1995.
In connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules IV and VI, (none of which
aforementioned financial statements and financial statement schedules are
separately presented herein). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of Unionamerica Holdings Plc and
subsidiaries operations and their cash flows for the year ended 31 December
1995, in conformity with generally accepted accounting principles in the United
States of America. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG
Chartered Accountants
Registered Auditor
London, England
18 March 1996
<PAGE>
