<PAGE> 1
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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ____
COMMISSION FILE NO. 0-15886
THE NAVIGATORS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE
(State or other jurisdiction of 13-3138397
incorporation or organization) (I.R.S. employer identification no.)
123 WILLIAM STREET, NEW YORK, NEW YORK 10038
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (212) 406-2900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.10 PAR VALUE
(Title of Class)
Indicate by 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 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 _____
Aggregate market value of voting stock held by non-affiliates as of March 26,
1997 - $68,878,145
Common shares outstanding March 26, 1997 - 8,280,400
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Proxy Statement are incorporated by reference
in Part III, Items 10, 11, 12 and 13 of this Form 10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Navigators Group, Inc. (the "Group") is a holding company with 15
wholly owned subsidiaries. Unless the context otherwise requires, the term
"Company" as used herein means the Group and its subsidiaries.
Two of the Company's subsidiaries are insurance companies: Navigators
Insurance Company and NIC Insurance Company. Navigators Insurance Company is
the Company's largest insurance company subsidiary and has been active since
1983. It specializes principally in underwriting marine, aviation, property
(primarily inland marine) insurance and certain lines of specialty reinsurance
and non-marine insurance. NIC Insurance Company is a wholly owned subsidiary
of Navigators Insurance Company, was licensed in 1989 and began operations in
1990. It underwrites a small book of surplus lines property insurance in
certain states and, pursuant to an intercompany reinsurance pooling agreement,
cedes 100% of its gross direct writings from this business to Navigators
Insurance Company in exchange for assuming 10% of the total retained business
of Navigators Insurance Company. Navigators Insurance Company and NIC
Insurance Company are collectively referred to herein as "Navigators".
Another subsidiary, Navigators Corporate Underwriters Limited ("NCUL"),
which was formed in the fourth quarter of 1996, is admitted to underwrite
marine and related lines of business at Lloyd's of London as a corporate member
with limited liability, commencing with the 1997 year of account.
Nine of the Company's subsidiaries are a group of underwriting management
companies: Somerset Marine, Inc., Somerset of Georgia, Inc., Somerset Insurance
Services of Texas, Inc., Somerset Insurance Services of California, Inc.,
Somerset Insurance Services of Washington, Inc., Somerset Re Management, Inc.,
Somerset Marine (UK) Limited ("Somerset (UK)"), Somerset Asia Pacific Pty
Limited ("Somerset Asia") and Navigators Management Corporation ("NMC")
(collectively, the "Somerset Companies"). The Somerset Companies produce,
manage and underwrite insurance and reinsurance for Navigators and ten other
unrelated insurance companies.
Somerset Asia, a wholly-owned subsidiary, was created in the third quarter
of 1996 and will operate from an office in Sydney, Australia. This office will
concentrate on marine, energy and construction business primarily in Indonesia,
Thailand, Malaysia, China and Vietnam. The Australia office began writing
business in early 1997.
Somerset (UK) Limited, formed in the fourth quarter of 1996, will serve as
an agency office for Navigators and ten other unrelated insurance companies and
will concentrate on business segments within marine, aviation, energy and
construction business. Navigators expects to be authorized to operate a U.K.
branch in mid 1997.
The other subsidiaries of the Company are Somerset Casualty Agency, Inc.,
Somerset Property, Inc. and Somerset Marine Aviation Property Managers, Inc.,
which are either inactive or in runoff.
The Somerset Companies other then "Somerset (UK) and Somerset Asia (the
"Acquired Somerset Companies") were acquired by the Company in 1994 pursuant to
mergers (the "Mergers") that were approved by the stockholders of the Company
at a special meeting held June 30, 1994. The Company accounted for the
transfer of the Acquired Somerset Companies' assets and liabilities at
historical cost under a method of accounting similar to "a pooling of
interests" and, accordingly, has reported results of operations as if the
Company and the Acquired Somerset Companies had been combined since inception.
The Company's revenue is primarily comprised of premiums, commissions and
investment income. Navigators derives substantially all of its business from
the Somerset Companies through either business written specifically for
Navigators or direct participation in, or by reinsuring certain
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members of, insurance pools managed by the Somerset Companies. The insurance
business and operations of Navigators are managed by NMC which is being merged
into Somerset Marine, Inc. in 1997 with Somerset Marine, Inc. as the surviving
company.
The Somerset Companies specialize principally in the following lines of
business: marine, aviation, property (primarily inland marine) insurance and
certain lines of specialty reinsurance and non-marine
insurance. In 1996 the Somerset Companies underwrote the marine business
through a syndicate of insurance companies, Navigators having the largest
participation in the syndicate. They derive their revenue from commissions,
investment income, service fees and cost reimbursement arrangements from
Navigators and other insurers. Commissions are earned both on a fixed
percentage of premiums and on underwriting profits on business placed with the
participating insurance companies within the syndicate. Property and casualty
insurance premiums are cyclical in nature and, accordingly, during a "hard
market" demand for property and casualty insurance exceeds supply, or capacity,
and as a result, premiums and commissions may increase. On the downturn of the
property and casualty cycle, supply exceeds demand, and as a result, premiums
and commissions may decrease.
Navigators and the Somerset Companies earn investment income on cash
balances and invested assets. The Somerset Companies also earn investment
income on fiduciary funds. Such fiduciary funds are invested, subject to
applicable insurance regulations, primarily in short-term instruments.
In addition to its wholly-owned subsidiaries, as of December 31, 1995 the
Company had a 21% ownership interest in Riverside Underwriters plc (formerly
known as Navigators Underwriters plc) ("Riverside"). This ownership interest
increased to 27% as of January 1, 1996 and had decreased to approximately 8% at
December 31, 1996. Riverside, a U.K. corporation, owns 100% of Riverside
Corporate Underwriters Limited, a U.K. corporation, which has been admitted to
underwrite at Lloyd's of London as a corporate name with limited liability.
The transaction to reduce the Company's ownership in Riverside did not produce
a material capital gain or loss. The Company will, however, remain entitled to
receive from Riverside an amount equal to the aggregate dividends that it would
have received if it had continued to hold its original investment to the extent
such dividends are attributable to writings at Lloyd's by Riverside Corporate
Underwriters Limited during the 1994, 1995 and 1996 years of account. In
connection with the reduction of the Company's investment, NMC will no longer
be manager of Riverside and Riverside Corporate Underwriters Limited, although
NMC will remain entitled to profit commissions with respect to the 1994, 1995
and 1996 years of account.
The Group, a Delaware corporation, was incorporated in November, 1982.
Navigators Insurance Company and NIC Insurance Company were incorporated in New
York in July, 1981, and December, 1988, respectively. The Group directly owns
100% of Navigators Insurance Company, which in turn directly owns 100% of NIC
Insurance Company.
LINES OF BUSINESS
Navigators underwrites principally marine, aviation, property (primarily
inland marine) insurance and certain lines of specialty reinsurance and
non-marine insurance. As underwritten by Navigators, marine insurance includes
hull, energy, liability and cargo; aviation insurance includes hull and
liability on commercial aircraft and on aircraft manufactures; property
insurance includes primarily inland marine at present, but prior to 1995
primarily included large commercial and industrial "all risk" coverages;
reinsurance includes property and casualty assumed business which has been in
runoff since December 31, 1995 with only a few specialty treaties renewed in
1996; and non-marine insurance includes non-marine program business developed
to augment Navigators' reinsurance book. In 1996, Navigators began to
underwrite onshore energy primarily covering property damage and machinery
breakdown. See the table set forth in "Management's Discussion and Analysis -
Results of Operations - Revenues" for Navigators' gross written premium by line
of business and net written premium in the aggregate for the periods indicated.
2
<PAGE> 4
MARINE INSURANCE
Navigators obtains its marine business through its direct participation in
the pool managed by certain Somerset Companies and through its reinsurance of
one or more members of this pool. The composition of the pool and the level of
participation of each member changes from time to time.
As of December 31, 1996, members of the marine pool consisted, in addition
to Navigators, of Christiania General Insurance Corporation of New York,
Colonia Insurance Company, Employers Mutual Casualty Co., Farmers Mutual Hail
Insurance Company of Iowa, Harleysville Mutual Insurance Company, National
Liability and Fire Insurance Co., Pennsylvania Lumbermens Mutual Insurance
Company, Insurance Corporation of New York, Worcester Insurance Company and
Sorema North America Reinsurance Company as participants. Navigators' net
participation in the marine pool was approximately 41% in 1996, 42% in 1995 and
48% in 1994.
The Somerset Companies in 1996, 1995 and 1994 received commissions equal
to 7.5% of the gross premium earned on marine insurance. They also are
entitled to receive a 20% contingent commission on net underwriting profits.
AVIATION INSURANCE
Since October 1, 1995, Navigators writes 100% of the aviation business
produced by the Somerset Companies. Through September 30, 1995, Navigators
received its aviation business both as a direct participant, and as a reinsurer
of the same pool members as participate in the marine pool. Navigators' net
share of the aviation pool was approximately 56% for the first nine months of
1995 and 48% in 1994. The aviation pool is managed by one of the Somerset
Companies, which received commissions equal to 7.5% of the gross earned
premiums, and is entitled to receive a 20% contingent commission on net
underwriting profits.
PROPERTY AND INLAND MARINE INSURANCE
In 1996, Navigators wrote 100% of the property business (primarily inland
marine) produced by the Somerset Companies. In 1995, Navigators received its
property insurance through direct participation in a pool managed by certain
Somerset Companies. Navigators' participation in the pool was 85% in 1995 and
1994. The remaining 15% was written by an unaffiliated insurance company.
This business consists primarily of inland marine risks, although prior to 1995
this business consisted primarily of large commercial and industrial property
risks. The Somerset Companies in 1995 and 1994 received commissions on
property insurance equal to 10% of gross earned premiums and were entitled to
receive a 20% contingent commission on net underwriting profits. The Somerset
Companies received commissions on inland marine insurance equal to 7.5% in 1996
and 1995 and 10% in 1994, of gross earned premiums and were entitled to receive
a 20% commission on net underwriting profits. In late 1994, Navigators decided
to cease writing large commercial and industrial property risks and therefore
written premium volume in this line in 1995 and 1996 was significantly less
than in 1994.
ONSHORE ENERGY
In 1996, Navigators began to underwrite onshore energy business which
principally focuses on the oil and gas, chemical and petrochemical, and power
generation industries with coverages primarily for property damage and
machinery breakdown.
3
<PAGE> 5
SPECIALTY REINSURANCE AND NON-MARINE INSURANCE
Navigators receives its reinsurance business through direct participation
in a book of business managed by one of the Somerset Companies. Navigators'
participation in this business was 100% in 1996 and 1995, and 95% in 1994. The
remaining 5% in 1994 was written by an unaffiliated insurance company. This
reinsurance premium consists primarily of excess of loss and quota share
property, surety, and other specialty reinsurance lines. The managing company
in 1996, 1995, and 1994 received commissions of 7.5% of gross earned premium
and was entitled to a contingent commission of 20% of net underwriting profits.
During 1995 Navigators began writing 100% of a book of non-marine program
business managed by the same Somerset Company.
REINSURANCE CEDED
Navigators utilizes reinsurance principally to reduce its net liability on
individual risks, to protect against catastrophic losses, to maintain desired
ratios of net premiums written to statutory surplus and to stabilize loss
ratios.
The ceding of reinsurance does not discharge the original insurer from its
primary liability to the policyholder. The ceding company is required to pay
the losses even if the assuming company fails to meet its obligations under the
reinsurance agreement.
Reinsurance is generally written under treaty contracts in which coverage
is either on a proportional basis, where the reinsurer shares proportionately
in premiums and losses, or on an excess of loss basis, where only losses above
a fixed point are reinsured.
Navigators, both directly and through the syndicates in which it
participates, is protected by various treaty and facultative reinsurance
agreements. Navigators diversifies its reinsurance by reinsuring with a number
of different reinsurers, principally in the United States and European
reinsurance markets. This coverage is placed on behalf of Navigators by a
number of different reinsurance intermediaries, each of which is employed
because of its expertise in placing a particular type of coverage. All such
intermediaries are compensated by the reinsurers.
Navigators' reinsurance security committee continually monitors the
financial strength of its reinsurers and the amounts of reinsurance receivables
from those reinsurers. To the extent that it is determined that the ultimate
amount collectible is less than the amount recorded on a receivable, a reserve
is established. At each of December 31, 1996 and 1995, the Company had an
allowance for uncollectible reinsurance of $800,000.
RESERVES
Insurance companies are required to maintain reserves for unpaid losses
and unpaid loss adjustment expenses ("LAE") for all lines of business. These
reserves are intended to cover the probable ultimate cost of settling all
losses incurred and unpaid, including those incurred but not reported. The
determination of reserves for losses and LAE for insurance companies such as
Navigators is dependent upon the receipt of information from the various pools
in which such companies participate. Generally, there is a lag between the
time premiums are written and related losses and LAE are incurred, and the time
such events are reported to the pools and, subsequently, to Navigators.
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<PAGE> 6
Navigators establishes reserves for reported claims when Navigators first
receives notice of the claim. In the case of direct business and assumed
excess of loss reinsurance, reserves are established by Navigators on a
case-by-case basis by evaluating several factors, including the type of risk
involved, knowledge of the circumstances surrounding such claim, severity of
injury or damage, the potential for ultimate exposure, experience of Navigators
with the insured and the broker on the line of business, and the policy
provisions relating to the type of claim. Navigators also establishes reserves
for proportional treaty claims based on reports received from ceding insurers
or pools in which they participate. Reserves for incurred but not reported
losses for all of Navigators' business are determined, in part, on the basis of
statistical information and in part on industry experience.
At any time, loss reserves are only estimates of what the insurer or
reinsurer expects to pay on claims, based on facts and circumstances then
known, and it is possible that the ultimate liability may exceed or be less
than such estimates. Such estimates are based, among other things, on
predictions of future events and estimates of future trends in claim severity
and frequency. During the loss settlement period, which, in some cases, may
last several years, additional facts regarding individual claims may become
known and, accordingly, it often becomes necessary to refine and adjust the
estimates of liability on a claim upward or downward. Even then, the ultimate
liability may exceed or be less than the revised estimates. The reserving
process is intended to provide implicit recognition of the impact of inflation
and other factors affecting loss payments by taking into account changes in
historical payment patterns and perceived probable trends. There is generally
no precise method, however, for the subsequent evaluation of the adequacy of
the consideration given to inflation or to any other specific factor, because
the eventual deficiency or redundancy of reserves is affected by many factors,
some of which are interdependent.
Navigators records only those premiums which are reported to it through
the end of each calendar year. However, Navigators does estimate premiums
related to quarterly reports from the pool manager which have not been received
prior to preparation of the financial statements. There are two types of
premium reporting lags to which Navigators may be subject. First, there is an
inherent delay in the reporting of treaty reinsurance due to the fact that
there is a lag between the time that premium and loss activity is recorded on
the books of the reinsureds and the time the reinsured reports those activities
to the reinsurer. Second, a substantial portion of the premiums Navigators
derives is from international business. In this business, there is a
significant time lag from the time the policy is bound overseas to the receipt
of the policy by the pool manager, at which time the pool manager records the
premium in its records. Considerable premium relating to a fiscal year is
reported in subsequent years at the pool level and, therefore, at Navigators as
well. To the extent a lag exists in the reporting of, and Navigators'
accounting for, such premiums, a comparable lag occurs in this recording of
related incurred but not reported losses and LAE which properly matches
recorded revenue with related expenses.
Navigators does not discount its reserves in an attempt to estimate the
present value of losses or LAE that may eventually be paid or for any other
reason. The accompanying tables present an analysis of losses and LAE.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year .............................................. $138,761 $135,377 $103,176
Provision for losses and LAE for
claims occurring in the current year .......................... 51,429 54,030 97,145
Increase (decrease) in estimated losses and
LAE for claims occurring in prior years......................... (2,452) 7,023 1,130
-------- -------- -------
Incurred losses and LAE .................................................. 48,977 61,053 98,275
-------- -------- -------
Losses and LAE payments for claims
occurring during:
Current year .......................................................... (15,439) (10,482) (33,374)
Prior years ........................................................... (39,741) (47,187) (32,700)
-------- -------- -------
Losses and LAE payments ............................................... (55,180) (57,669) (66,074)
-------- -------- -------
Net reserves for losses and LAE at end of year.................... 132,558 138,761 135,377
Reinsurance receivables on unpaid losses and LAE .............. 137,043 135,093 179,521
-------- -------- -------
Gross reserves for losses and LAE at end of year ................ $269,601 $273,854 $314,898
========= ========= =========
</TABLE>
The table below presents the development of Navigators' GAAP balance sheet
reserves for 1986 through 1996. The line "Net reserves for losses and LAE"
reflects the net reserves at the balance sheet date for each of the indicated
years and represents the estimated amount of losses and LAE arising in all
prior years that are unpaid at the balance sheet date. The "Reserves
re-estimated" lines of the table reflect the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years. The "Cumulative
redundancy (deficiency)" lines of the table reflect the cumulative amounts
developed as of successive years with respect to the aforementioned reserve
liability. The cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years.
For each calendar year end, the net reserves for losses and LAE are not
adjusted in the table to reflect additional premiums reported to Navigators in
subsequent calendar years. However, the remainder of the table allocates
losses and LAE reported and recorded in subsequent years to all prior years
starting with the year in which the loss was incurred. For example, assume
that a loss occurred in 1994 and was not reported to Navigators until 1996, the
amount of such loss will appear as a deficiency in both 1994 and 1995, although
the premiums related to the policy may not be reported in income until 1995.
Conditions and trends that have affected development of the liability 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.
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<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for losses
and LAE................... $30,412 $51,364 $54,326 $59,477 $70,457 $77,507 $89,361 $103,176 $135,377 $138,761 $132,558
Reserves for losses and
LAE re-estimated as of:
One year later........... 30,645 52,018 53,841 61,449 71,643 80,478 94,785 104,306 142,400 136,309
Two years later.......... 30,579 51,795 53,466 62,206 73,849 80,937 98,062 102,831 139,139
Three years late ........ 31,644 49,163 51,297 61,255 73,441 81,322 98,338 101,537
Four years later......... 30,717 47,023 49,356 60,062 73,349 80,652 97,257
Five years later......... 29,256 45,775 48,105 60,476 72,706 79,469
Six years later.......... 29,453 44,699 48,056 60,490 71,730
Seven years later........ 28,602 44,701 48,176 60,382
Eight years later ...... 28,486 44,355 48,157
Nine years later ........ 28,383 43,947
Ten years later ........ 29,099
Net cumulative redundancy
(deficiency).............. 1,313 7,417 6,169 (905) (1,273) (1,962) (7,896) 1,639 (3,762) 2,452
Net cumulative paid as of:
One year later.......... 9,872 15,214 13,772 17,593 22,784 25,741 37,998 32,700 47,187 39,741
Two years later.......... 15,712 23,531 22,354 29,694 36,532 43,688 54,552 53,603 69,960
Three years later........ 19,131 27,810 29,134 37,032 47,060 51,753 65,997 62,769
Four years later ........ 20,650 32,625 33,178 43,270 51,769 59,308 72,063
Five years later ........ 22,945 34,289 37,255 46,066 57,421 63,138
Six years later.......... 23,780 37,337 38,299 50,456 60,291
Seven years later ....... 25,171 37,492 41,705 52,521
Eight years later ....... 24,990 39,738 43,120
Nine years later ....... 26,178 40,261
Ten years later ........ 26,736
Gross liability-end of year ..................................................... 224,191 247,346 314,898 273,854 269,601
Reinsurance recoverable ........................................................ 134,830 144,170 179,521 135,093 137,043
Net liability-end of year ...................................................... 89,361 103,176 135,377 138,761 132,558
Gross re-estimated latest ...................................................... 285,082 273,988 351,314 291,373
Re-estimated recoverable latest ................................................ 187,825 172,451 212,175 155,064
Net re-estimated latest ........................................................ 97,257 101,537 139,139 136,309
Gross cumulative (deficiency) .................................................. (60,891) (26,642) (36,416) (17,519)
</TABLE>
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The net cumulative deficiencies for the years ended December 31, 1989
through 1992 resulted primarily from the allocation of losses to the
appropriate calendar years without regard to any additional premiums relating
to such calendar years which were reported to and recorded by Navigators in
subsequent periods. These deficiencies are offset, in part, by additional net
earned premiums for such respective calendar years reported and recorded by
Navigators in subsequent years. The net deficiency for 1994 resulted from
further development of losses from the Northridge, California earthquake
(discussed below). The Company had net cumulative redundancies for the
remainder of the years shown in the table.
The gross cumulative deficiencies for the years ended December 31, 1992
through the year 1995, resulted primarily from a settlement during 1996 of the
Exxon Valdez loss occurring in 1989, of approximately $11,300,000, development
during 1995 of approximately $26,000,000 for the 1994 Northridge Earthquake
loss and other losses that developed to a lesser extent during this period. A
majority of the development of these losses was reinsured.
Management believes that Navigators' reserves for losses and LAE are
adequate to cover the ultimate cost of losses and LAE on reported and
unreported claims.
ENVIRONMENTAL POLLUTION AND ASBESTOS RELATED CLAIMS
In 1996 and 1995, Navigators paid a gross amount of $2,794,000 and
$2,251,000 and a net amount of $425,000 and $117,000, respectively, for
environmental pollution and asbestos related claims. As of December 31, 1996
and 1995, Navigators carried a gross reserve of $5,421,000 and $4,783,000,
respectively, and net reserve of $1,042,000 and $876,000, respectively, for the
potential exposure of Navigators to such claims. Management believes that its
reserves for such claims are adequate, because Navigators' participation in
such risks is generally in the higher excess layers and, based on a continuing
review of such claims, management believes that a majority of these claims will
be unlikely to penetrate such high excess layers of coverage. For the year
ended December 31, 1996 and 1995, open claims with environmental pollution and
asbestos exposure amounted to 2,024 and 1,594, respectively. Management will
continue to review its exposure to and reserves for such claims. Management
believes that any potential exposure of Navigators to these claims exists
predominately in connection with the marine business.
INVESTMENT POLICY
The investments of the Company's various subsidiaries must comply with the
insurance laws of New York State, the domiciliary state of Navigators Insurance
Company and NIC Insurance Company. These laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred stocks and common stocks, real estate mortgages and real
estate. Navigators has no investment in derivatives, and its investment
guidelines preclude the acquisition of derivatives.
Navigators' investments are subject to the direction and control of its
Board of Directors and are reviewed on a quarterly basis. The investments are
managed by various professional fixed income and equity portfolio managers.
Current investment objectives are to maximize annual after tax income in the
context of preserving and enhancing capital and statutory surplus. Navigators
seeks to obtain these objectives by investing principally in municipal bonds
and, U.S. Government obligations, corporate bonds, and preferred and common
stock. Due to the Company being in an alternative minimum tax ("AMT")
position, the Finance Committee of the Board of Directors is reviewing the
Company's concentration in municipal bonds and is likely to reduce the
municipal bond portfolio in 1997. Navigators' investment guidelines require
that at least 90% of the fixed income portfolio be rated "A-" or better by a
nationally recognized rating organization. Up to 25%
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of the total portfolio may be invested in equity securities including
preferred stocks rated at BBB-/Baa-.
In order to achieve the above-mentioned investment objectives, fixed
maturity securities are held for an indefinite period of time. These
securities may be sold in response to changes in interest rates, prepayments,
regulatory requirements, or credit risk.
The majority of the investment income of the Somerset Companies is derived
from fiduciary funds invested in accordance with the guidelines of various
state insurance departments. These guidelines typically require investments in
short-term instruments.
The following tables reflect the consolidated investments of the Company.
The table set forth below reflects investments and income earned thereon for
the Company on a consolidated basis, for Navigators Insurance Company and NIC
Insurance Company together as a group (including an incidental amount from the
parent company), and for the Somerset Companies together as a group, for the
three years ended December 31, 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
The Company Consolidated
- ------------------------
Average investments ......................................... $252,618 $247,391 $228,749
Net investment income ...................................... 13,614 14,143 13,034
Average yield ................................................... 5.39% 5.72% 5.70%
Navigators Insurance Company and
- --------------------------------
NIC Insurance Company
- ---------------------
Average investments ......................................... $231,111 $217,639 $189,296
Net investment income ...................................... 12,578 12,422 11,650
Average yield .................................................... 5.44% 5.71% 6.15%
The Somerset Companies(1)
- -------------------------
Average investments ......................................... $ 21,507 $ 29,752 $ 39,453
Net investment income ...................................... 1,087 1,721 1,384
Average yield .................................................... 5.05% 5.78% 3.51%
</TABLE>
(1) Included in the Somerset Companies average investments are fiduciary cash
and short-term investments, not included in the balance sheet, on which the
Somerset Companies earn investment income. See Note 6 to the Company's
Consolidated Financial Statements.
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The following table summarizes the consolidated non-affiliated cash and
investments of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
Carrying Value Percent
(in thousands) of Total
---------------- ---------
<S> <C> <C>
Cash and short-term investments ................................. $ 13,286 5%
U.S. Treasuries ................................................. 9,738 4
Municipal bonds ................................................ 176,931 74
Mortgage backed securities ..................................... 21,792 9
Asset backed securities ......................................... 4,131 2
Corporate bonds .................................................. 1,192 1
Redeemable preferred stocks........................................ 1,288 1
Common stocks...................................................... 10,281 4
--------- ----
Total ............................................................. $238,639 100%
======== ====
</TABLE>
REGULATION
The Company and its insurance subsidiaries are subject to regulation under
the insurance statutes, including holding company statutes, of various states.
These regulations vary from state to state but generally require insurance
holding companies, and insurers that are subsidiaries of holding companies, to
register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Such regulations also
generally require prior regulatory agency approval of changes in control of an
insurer and of transactions within the holding company structure. The
regulatory agencies of each state have statutory authorization to enforce their
laws and regulations through various administrative orders and enforcement
proceedings.
The Insurance Department of the State of New York (the "New York
Department") is the Company's principal regulatory agency. In 1996, Navigators
Insurance Company was deemed to be "commercially domiciled" in California based
on past premium volume written in the state and, as a result, the Company was
subject to certain provisions of the California insurance holding company laws,
particularly those governing changes in control, the payment of stockholder
dividends and intercompany transactions. An insurer's status as "commercially
domiciled" is determined annually under a statutory formula. The statutory
formula was revised in California effective January 1, 1997, and as a result,
Navigators Insurance Company is no longer deemed to be "commercially domiciled"
in California as of such date.
The New York Insurance Law provides that no corporation or other person
may acquire control of the Company, and thus indirect control of Navigators,
unless it has given notice to Navigators, and obtained prior written approval
of the Superintendent of Insurance of the State of New York for such
acquisition. In New York, any purchaser of 10% or more of the outstanding
shares of the Company's common stock would be presumed to have acquired control
of the Company, unless such presumption is rebutted.
10
<PAGE> 12
Navigators Insurance Company and NIC Insurance Company may pay dividends
only out of their statutory earned surplus under New York law. Generally, the
maximum amount of dividends Navigators Insurance Company and NIC Insurance
Company may pay without regulatory approval in any twelve-month period is the
lesser of adjusted net investment income or 10% of statutory surplus.
Under insolvency or guaranty laws in most states in which Navigators
Insurance Company and NIC Insurance Company operate, insurers doing business in
those states can be assessed up to prescribed limits for policyholder losses of
insolvent insurance companies.
Navigators Insurance Company is licensed to engage in the insurance and
reinsurance business in 47 states, the District of Columbia and Puerto Rico and
is an approved reinsurer in two of the remaining three states. NIC Insurance
Company is licensed to engage in the insurance and reinsurance business in the
State of New York and is an approved surplus lines insurer in 29 other states
and the District of Columbia.
As part of its general regulatory oversight process, the New York
Department conducts detailed examinations of the books, records and accounts of
New York insurance companies every three to five years. Navigators Insurance
Company and NIC Insurance Company are currently being examined by the New York
Department for the years 1991 through 1995.
The Insurance Regulatory Information System ("IRIS") was developed by the
National Association of Insurance Commissioners ("NAIC") and is intended
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies eleven industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
of the ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurer's business. As of December
31, 1994 and 1995, due primarily to losses from the Northridge Earthquake
(discussed in item 7), the Company's results were outside of the usual value
for one ratio (the "Two-Year Overall Operating" ratio). As of December 31,
1996, the Company's results were within the usual values for all IRIS ratios.
From time to time various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry, some of which could have an
effect on reinsurers. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers
and proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. The Company is unable to predict whether any
of these laws and regulations will be adopted, the form in which any such laws
and regulations would be adopted, or the effect, if any, these developments
would have on the operations and financial condition of the Company.
State insurance departments have adopted a methodology developed by the
NAIC for assessing the adequacy of statutory surplus of property and casualty
insurers which includes a risk-based capital formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential weakly capitalized companies. Under
the formula, a company determines its "risk-based capital" ("RBC") by taking
into account certain risks related to the insurer's assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). The risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" of RBC. Based on
calculations made by the Company, the risk-based capital level for the
Company's insurance subsidiaries exceeds a level that would trigger regulatory
attention. In their respective 1996 statutory financial statements, the
Company's insurance subsidiaries have complied with the NAIC's risk-based
capital reporting requirements.
11
<PAGE> 13
In addition to regulations applicable to insurance agents generally, the
Somerset Companies are subject to Managing General Agents Acts in their
domicile jurisdictions and in certain jurisdictions where they do business.
COMPETITION
The property and casualty insurance industry is highly competitive. The
demand for low-cost, high quality service has created difficult conditions in
the domestic property and casualty market, including a leveling or reduction in
premium rates in certain lines of business in which the Company competes, which
the Company believes will not improve dramatically in the foreseeable future.
Navigators faces competition from both domestic and foreign marine,
aviation and non-marine insurers, some of whom have longer operating histories
and greater financial, marketing and management resources. Competition in the
types of insurance in which Navigators is engaged is based on many factors,
including the perceived overall financial strength of Navigators, pricing and
other terms and conditions of products and services offered, business
experience, marketing and distribution arrangements, agency and broker
relationships, levels of customer service (including speed of claims payments),
product differentiation and quality, operating efficiencies and underwriting.
Furthermore, insureds tend to favor large, financially strong insurers, and
Navigators faces the risk that it will lose market share to more highly rated
insurers.
No single insured or reinsured accounted for 10% or more of the Company's
gross written premium in 1996.
EMPLOYEES
As of December 31, 1996, the Company employed 119 people.
ITEM 2. PROPERTIES
The Company's administrative offices are occupied pursuant to a lease
which expires May 14, 2000, from an unaffiliated company, in a building located
at 123 William Street, New York, New York. Each of the Somerset Companies has
various noncancellable operating leases for its office facilities. The Company
does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to or the
subject of, any material pending legal proceedings which depart from the
ordinary routine litigation incident to the kinds of business conducted by the
Company and its subsidiaries.
In November 1988, the voters of the State of California approved
Proposition 103, which required most property and casualty insurance companies,
among other things, to reduce rates charged to California insureds to a level
20% below November 8, 1987 levels. On March 19, 1996, the Company agreed with
the California Insurance Department to settle its rollback liability under
Proposition 103. The settlement cost the Company approximately $2.0 million
net of recoveries from reinsurers of which $1.0 million was recorded in each of
1995 and 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock is traded over-the-counter (The Nasdaq National Market)
under the symbol NAVG. Over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
The high and low bid prices for the four quarters of 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter ................ $20.25 $15.63 $19.75 $13.17
Second Quarter ............ $19.50 $15.75 $15.75 $12.75
Third Quarter ............... $19.63 $16.00 $18.50 $13.50
Fourth Quarter ............. $20.25 $17.75 $19.50 $16.75
</TABLE>
STOCKHOLDERS
There were approximately 100 holders of record of shares of Common Stock
as of March 28, 1997. However, Management believes there are in excess of
1,000 beneficial owners of the Company's common stock.
DIVIDENDS
The Company has not paid or declared any cash dividends on its common
stock. While there presently is no intention to pay cash dividends on the
common stock in the foreseeable future, future declarations, if any, and the
amounts of such dividends will be dependent upon, among other factors, the
earnings of the Company, its financial condition and business needs,
restrictive covenants under debt arrangements, the capital and surplus
requirements of its subsidiaries and applicable government regulations.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial information
of the Company for each of the years in the five-year period ended December 31,
1996. The information for the five years ended December 31, 1996 has been
derived from the audited consolidated financial statements of the Company. See
the Consolidated Financial Statements of the Company including notes thereto
included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ---------------- ------------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
OPERATING INFORMATION
Revenues:
Net earned premium ............. $ 78,731 $87,908 $90,483 $96,843 $69,802
Commission income .............. 8,798 10,659 10,857 9,889 8,865
Net investment income .......... 13,614 14,143 13,034 11,588 11,323
Net realized gains (losses) 503 291 (863) 521 1,909
Other income ................... 1,142 713 381 112 114
-------- -------- ------- ------- --------
Total revenues ........... 102,788 113,714 113,892 118,953 92,013
-------- -------- ------- ------- --------
Operating expenses:
Net losses and loss adjustment
expenses incurred ........... 48,977 61,053 98,275 66,544 51,654
Commission expense ............ 12,171 12,228 17,219 6,194 3,197
Other operating expenses....... 20,417 22,534 22,212 20,824 19,528
Interest expense .............. 1,737 2,336 2,080 273 186
Merger expenses ............... -- -- 5,680 -- --
-------- -------- ------- ------- --------
Total expenses ......... 83,302 98,151 145,466 93,835 74,565
-------- -------- ------- ------- --------
Operating income (loss) before
income taxes .................. $ 20,874 $15,563 $(31,574) $25,118 $17,448
Net income (loss)(1) $ 16,752 $12,582 $(20,495) $21,585 $15,963
Average common and common
equivalent shares
outstanding ................... 8,301 8,219 8,209 8,346 8,337
Net income per share ........... $ 2.02 $1.53 $(2.50) $2.59 $ 1.91
BALANCE SHEET INFORMATION
(AT END OF PERIOD)
Total investments(2) ........... $239,261 $ 228,126 $202,373 $198,145 $174,407
Total assets ................... 457,095 435,552 474,031 431,028 376,371
Loss reserves .................. 269,601 273,854 314,898 247,346 224,191
Total liabilities .............. 341,553 336,476 396,508 313,751 273,330
Total stockholders' equity(2) .. 115,542 99,076 77,523 117,277 103,041
Book value per share(2) ........ $ 14.03 $12.12 $9.51 $14.39 $ 12.68
</TABLE>
(1) Net income from 1993 and subsequent reflects the adoption of SFAS 113 and
EITF Issue No. 93-6.
(2) Investments and stockholders' equity for 1994 and subsequent reflect the
adoption of SFAS 115.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a holding company with twelve active wholly-owned
subsidiaries. See "BUSINESS-General" included herein for a description of the
Company.
The Company's revenue is primarily comprised of premiums, commissions and
investment income. Navigators derives substantially all of its business from
direct participation in, or by reinsuring certain members of, insurance pools
managed by the Somerset Companies. The insurance business and operations of
Navigators are managed by NMC, one of the Somerset Companies.
The Somerset Companies specialize principally in the following lines of
business: marine, aviation and property (primarily inland marine) insurance
and certain lines of specialty reinsurance and non-marine insurance. In 1996,
Navigators began to underwrite onshore energy business primarily covering
property damage and machinery breakdown. In 1996, the Somerset Companies
underwrote the marine business through a syndicate of insurance companies,
Navigators having the largest participation in the syndicate. The Somerset
Companies derive their revenue from commissions, investment income, service
fees and cost reimbursement arrangements from Navigators and other insurers.
Commissions are earned both on a fixed percentage of premiums and on
underwriting profits on business placed with the participating insurance
companies within the syndicate. Property and casualty insurance premiums are
cyclical in nature and, accordingly, during a "hard market" demand for property
and casualty insurance exceeds supply, or capacity, and as a result, premiums
and commissions may increase. On the downturn of the property and casualty
cycle, supply exceeds demand, and as a result, premiums and commissions may
decrease.
Navigators and the Somerset Companies earn investment income on cash
balances and invested assets. The Somerset Companies also earn investment
income on fiduciary funds. Such fiduciary funds are invested, subject to
applicable insurance regulations, primarily in short-term instruments.
RESULTS OF OPERATIONS
General The 1994 results of operations of the Company were dominated by
the Northridge, California earthquake, which occurred on January 17, 1994 (the
"Northridge Earthquake"). The Company's pre-tax loss (including direct
property losses of $35,388,000, reinsurance reinstatement premiums of
$1,925,000 and reinsurance assumed losses of $1,952,000, but net of
reinsurance) in 1994 from the Northridge Earthquake totalled $39,265,000. As a
result of this loss, management restructured the Company by withdrawing from
the large commercial and industrial property business which produced most of
the earthquake loss, emphasizing its core ocean marine and aviation business,
and developing its inland marine business as well as a new non-marine program
book of business.
The results of 1996 and 1995 reflect this restructuring in that written
premiums have been reduced while the continuing book of business has produced
profits. However, the 1995 results also reflect the further development of
losses from the Northridge Earthquake. During 1995 the total reported gross
losses on direct property claims arising from the Northridge Earthquake
increased approximately $18,340,000 from $125,361,000 to $143,701,000. The
Company also added gross bulk reserves of $11,000,000 at September 30, 1995,
which are expected to cover any further deterioration of losses from the
Northridge Earthquake. On a net basis, the incurred losses relating to the
Northridge Earthquake represented pre-tax charges of approximately $10,721,000
in 1995. There was no further development of the losses from the Northridge
15
<PAGE> 17
Earthquake in 1996, however, there can be no assurance given that additional
losses will not be reported or adjustments made to existing reserves.
Revenues Gross written premium decreased from $189.6 million in 1994 to
$148.9 million in 1995 to $142.5 million in 1996. The following table sets
forth the Company's gross written premium by line of business and net written
premium in the aggregate for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994
----------------------------- --------------- -----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marine ............................ $ 51,948 36% $ 61,684 42% $ 65,046 34%
Aviation .......................... 41,142 29% 51,286 34% 48,482 26%
Property and Inland
Marine .......................... 14,539 10% 11,620 8% 45,989 24%
Onshore Energy .............. 6,902 5% __ __ __ __
Specialty Reinsurance
and Non-Marine
Program Insurance ......... 27,993 20% 24,317 16% 30,035 16%
Total Gross
Written Premium....... 142,524 100% 148,907 100% 189,552 100%
Ceded Written Premium..... (58,356) (67,639) (98,001)
Total Net
Written Premium....... $ 84,168 $ 81,268 $ 91,551
</TABLE>
Marine Premiums. Navigators' gross marine premium decreased 5% from 1994
to 1995 and 16% from 1995 to 1996. The 1995 decrease was due to Navigators'
reduced participation in the marine pool along with premium rate decreases.
The 1996 decrease was due primarily to decreases in premium rates. The
competition causing premium rates to decrease affects the gross written premium
in that less premium is received for the policies written or the Company may
decide to not write the policy. Management believes pricing in marine premium
is subject to increased competition.
Aviation Premiums. Navigators' aviation gross written premium increased
6% from 1994 to 1995 reflecting the increase in Navigators' participation in
the aviation pool from approximately 56% for the first nine months of 1995 to
100% beginning October 1, 1995. The 20% reduction in Navigators' aviation
gross written premium from 1995 to 1996 was due to Navigators withdrawing from
the general aviation business in order to concentrate on the major airlines and
manufacturers, to price competition and to a general decrease in the amount of
exposure per risk.
Property and Inland Marine Premium. Navigators' gross property and inland
marine premium decreased 75% from 1994 to 1995. In 1994, this business
consisted primarily of large commercial and industrial property risks, which
was essentially a property catastrophe book of business, with a relatively
small amount of inland marine risks. In late 1994, Navigators decided to cease
writing large commercial and industrial property risks and to concentrate on
inland marine risks and, therefore, 1995 gross written premium is primarily
inland marine. The 25% increase in this line of business from 1995 to 1996
reflects the emphasis placed on inland marine in 1996. However, due to heavy
price competition and possible adverse selection in competing with the major
carriers, less emphasis will be placed on inland marine going forward.
16
<PAGE> 18
Onshore Energy. In 1996, Navigators began to underwrite onshore energy
business which principally focuses on the oil and gas, chemical and
petrochemical, and power generation industries with coverages primarily for
property damage and machinery breakdown.
Specialty Reinsurance and Non-Marine Insurance Premium. During the early
part of 1996, Navigators' management decided to discontinue writing assumed
reinsurance, with the exception of a few specialty contracts. The reduction in
reinsurance premium was partially offset in 1996 by an expansion of the
specialty program business.
Net Written Premium. Navigators net written premium decreased 11% from
1994 to 1995 primarily due to the decrease in the property premium. The 4%
increase in net written premium from 1995 to 1996 was primarily due to
Navigators increasing its participation in the aviation pool to 100% at October
1, 1995 and to less premium being ceded. The decreases in the ceded premium
are reflective of decreases in the gross written premium but are also due to
price competition in the reinsurance business.
Net Earned Premium. The 3% decrease in net earned premium from 1994 to
1995 was due to the decrease in the net written premium partially offset by the
run-off of the property business cancelled in 1994 and 1995. The 10% decrease
in net earned premium from 1995 to 1996 was primarily due to the decrease in
the 1995 net written premium and the effect that the property business run-off
had on the 1995 net earned premium.
Commission Income. Commission income decreased 17% to $8.8 million in
1996 from $10.7 million in 1995 primarily due to Navigators increasing its
participation to 100% at October 1, 1995 in the aviation business managed by
the Somerset Companies, which eliminated commission income paid by the former
participants in the aviation insurance pool. The 1996 commission income
includes $826,000 of profit commissions earned under the Company's management
agreement with Riverside. Commission income decreased 2% to $10.7 million in
1995 from $10.9 million in 1994 reflecting the withdrawal from the property
catastrophe business. The commission income is also affected by profit
commissions from the marine pool.
Net Investment Income. Net investment income decreased 4% to $13.6
million in 1996 from $14.1 million in 1995 due to decreased fiduciary funds
held by the Somerset Companies, the effect on invested assets from payments of
earthquake losses and generally lower yields. Net investment income increased
9% to $14.1 million in 1995 from $13.0 million in 1994 due primarily to an
increased amount of invested assets.
Reinsurance Ceded. In the ordinary course of business, Navigators
reinsures certain insurance risks with unaffiliated insurance companies for the
purpose of limiting its maximum loss exposure, protecting against catastrophic
losses, and maintaining desired ratios of net premiums written to statutory
surplus. Ceded written premium decreased from $98.0 million in 1994 to $67.6
million in 1995 to $58.4 million in 1996 reflecting decreases in gross written
premium and lower prices in the reinsurance market.
Expenses. The ratio of loss and loss adjustment expenses incurred to net
earned premium was 62.2%, 69.5% and 108.6% in 1996, 1995 and 1994,
respectively. The 1994 loss ratio was adversely impacted by the Northridge
Earthquake. The loss ratio improved in 1995 compared to 1994, even though 1995
included significant adverse development from the Northridge Earthquake losses.
This was due primarily to a return to more normal experience in comparison to
the 1994 losses from the Northridge Earthquake, various airline losses and
reinsurance costs in 1994. The Northridge Earthquake increased the loss ratio
by 12.2% and 43.4% in 1995 and 1994, respectively. The improved loss ratio in
1996 compared to 1995 was due primarily to a return to more normal experience.
The lower rates in the marine business was partially offset by lower costs for
reinsurance.
17
<PAGE> 19
Commission expense as a percentage of net earned premium was 15.5%, 13.9%
and 19.0% for 1996, 1995 and 1994, respectively. The decrease in 1995 compared
to 1994 was due primarily to a reduction in the amount of Northridge Earthquake
reinstatement premiums incurred during the year. The reinstatement premiums in
1994 caused earned premiums to decline but did not result in corresponding
ceding commissions. The increase in the 1996 commission expense ratio compared
to 1995 was primarily due to the reversal of approximately $519,000 of
contingent commissions receivable recorded in 1995 on certain ceded contracts
which had loss development during 1996.
Other operating expenses as a percentage of net earned premium were 24.5%,
25.6% and 24.0% for 1996, 1995 and 1994, respectively. Severance charges as a
result of a reduction in staff accounted for approximately $968,000 of the
operating expenses in 1995 partially offset by a commensurate decrease in salary
expense. The decrease from 1995 to 1996 reflected the staff cuts in 1995
partially offset by the opening of the new offices in London and Australia in
late 1996.
Interest expense is due primarily to funds borrowed in 1994 to replace
capital as a result of losses from the Northridge Earthquake. The decrease in
the interest expanse from 1995 to 1996 is due primarily to paying down part of
the loan balance and lower interest rates. The 1996 and 1995 interest expense
includes $368,000 and $380,000 of interest expense on the Company's rollback
liability under California Proposition 103.
Income Taxes. The income tax expense was $4.7 million for 1996 and $3.0
million for 1995. There was an income tax benefit of $11.0 million for 1994
primarily attributable to the losses from the Northridge Earthquake. The
effective tax rates for 1996, 1995 and 1994 were 20%, 19% and (35%),
respectively. The Company had net operating loss carryforwards of $4.9 million
at December 31, 1994 and $3.0 million at December 31, 1995 which was fully
utilized in 1996. The Company had alternative minimum tax ("AMT")
carryforwards of $5.8 million, $3.1 million and $0.8 million at December 31,
1996, 1995 and 1994, respectively. The AMT carryforwards were primarily
attributable to the tax benefits from the municipal bond interest. The Company
is reviewing its investment philosophy and will most likely reduce its
municipal bond portfolio.
As of December 31, 1996 the net deferred Federal tax asset was $9.5
million as compared to $8.9 million at December 31, 1995. At December 31, 1995
the Company had a $775,000 valuation allowance against its deferred Federal tax
asset. Management believes that it is more likely than not that the net
deferred Federal tax asset recorded at December 31, 1996 is realizable and
therefore, has not provided for any valuation allowance at December 31, 1996.
This belief stems from a long history of taxable income prior to the Northridge
Earthquake in 1994, the immediate actions management took to prevent another
loss of such magnitude, and the inclusion of taxable income generated by the
Somerset Companies in the Federal income tax return beginning July 1, 1994.
Equity Income in Affiliated Company. The Company holds an equity interest
in Riverside, which through its wholly-owned subsidiary, Riverside Corporate
Underwriters Limited, is admitted to underwrite at Lloyd's of London as a
corporate name with limited liability. The Company records its share of
Riverside's underwriting results when sufficient information becomes available
to provide reasonable estimates of earned premiums and losses. During 1996,
primarily in the third quarter, the Company recorded its share of the 1994 and
1995 underwriting earnings amounting to $1,387,942 after tax.
Net Income. The Company's net income improved in 1995 to income of $12.6
million from a loss of $20.5 million in 1994. The 1994 loss was primarily
attributable to the Northridge Earthquake which also adversely impacted 1995
earnings as previously discussed. The 1996 net
18
<PAGE> 20
income of $16.8 million reflects
more normal experience even with the rate decreases in the marine business.
In November 1988, the voters of the State of California approved
Proposition 103, which required most property and casualty insurance companies,
among other things, to reduce rates charged to California insureds to a level
20% below November 8, 1987 levels. On March 19, 1996, the Company agreed with
the Commissioner to settle its rollback liability under Proposition 103. The
settlement cost the Company approximately $2.0 million net of recoveries from
reinsurers of which approximately $1.0 million was recorded in each of 1995 and
1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $7.3 million, $26.6 million and $5.3 million
for 1996, 1995 and 1994, respectively. Operating cash flow has been used
primarily to acquire additional investment assets with net purchases during
1996, 1995 and 1994 of $11.5 million, $12.8 million and $11.2 million,
respectively.
At December 31, 1996, there were no material commitments for capital
expenditures, although the Company has committed approximately $1.0 million to
enhance its hardware and software computer systems in 1997.
Invested assets and cash (excluding fiduciary funds held by the Somerset
Companies) have grown from $203.1 million at December 31, 1994 to $235.5
million at December 31, 1995 to $240.7 million at December 31, 1996.
Investment income during this period was $13.0 million in 1994, $14.1 million
in 1995 and $13.6 million in 1996. The average yield of the portfolio,
excluding net realized capital gains, was 5.7% in 1994 and 1995 and decreased
to 5.4% in 1996, reflecting the prevailing interest rates during those years.
As of December 31, 1996, all debt and equity securities held by the Company
were classified as available-for-sale securities.
The majority of the invested assets are in municipal bonds rated "A" or
better by Standard & Poor's or Moody's, or are in U.S. Treasury Bonds.
Navigators has avoided investing in high yield bonds. Therefore, the Company
has no significant exposure to credit risk since the Company's fixed maturity
investment portfolio does not contain any non-investment grade bonds. The
portfolio has an average maturity of less than seven years. Management
continually monitors the composition and cash flow of the investment portfolio
in order to maintain the appropriate levels of liquidity. This ensures the
Company's ability to satisfy claims or expenses as they become due.
The Company's credit agreement, which was amended on November 19, 1996
(the "Amended Credit Agreement"), provides for a $20 million revolving credit
loan facility of which $17 million was being utilized at December 31, 1996 and
a $30 million letter of credit facility of which $27.1 million (In Pounds
Sterling 15.8 million)
was being utilized at December 31, 1996. The letters of credit consist of
In Pounds Sterling 2,585,000 for the Company's portion of the business
conducted by Riverside and In Pounds Sterling 7,000,000 and In Pounds Sterling
6,250,000 for 1997 capacity being provided for two separate Lloyd's of London
marine syndicates. The Amended Credit Agreement is collateralized by shares of
common stock of the active subsidiaries of the Company other than NIC Insurance
Company and Somerset Asia Pacific Pty Limited. The Amended Credit Agreement
contains covenants common to agreements of this type. The aggregate amounts
available under the revolving credit loan facility decrease in quarterly
increments in the amount of $500,000 commencing with the quarter beginning
January 1, 1997 through the quarter ended September 30, 1999, and in varying
increments thereafter through December 31, 2002. See Note 4 to the Company's
Consolidated Financial Statements.
Total stockholders' equity was $115.5 million at December 31, 1996, a
16.6% increase for the year primarily as the result of the Company's earnings
in 1996.
19
<PAGE> 21
As of December 31, 1996, the Company has paid approximately $128.4 million
of claims related to the Northridge Earthquake, of which approximately $94.8
million is subject to indemnification by reinsurers. To date the Company has
experienced no significant difficulties collecting reinsured losses.
The Company was not in compliance with the NAIC's IRIS "Two-Year Overall
Operating" ratio in 1995. The exceptional value derived from this ratio was
primarily due to the underwriting losses resulting from the Northridge
Earthquake. If the Two-Year Overall Operating ratio is 100% or more, the NAIC
deems such results to be exceptional. During 1995, the Company's Two-Year
Overall Operating ratio was 115%. The Company was within the usual values for
all IRIS ratios as of December 31, 1996.
The Company's reinsurance has been placed with various U.S. companies
rated "A" or better by A.M. Best Company, Inc., as well as with foreign
insurance companies and with selected syndicates of Lloyd's of London
("Lloyd's"). Certain syndicates at Lloyd's ("Loss Syndicates") and the Lloyd's
market as a whole have reported significant losses in recent years. The
Company has not placed any material amounts of reinsurance with these Loss
Syndicates. Pursuant to the implementation of Lloyd's Plan of Reconstruction
and Renewal, a significant portion of the Company's recoverables from the Loss
Syndicates are now reinsured by Equitas (a separate U.K. Department of Trade
authorized reinsurance company established to reinsure outstanding liabilities
of all Lloyd's members for all risks written in the 1992 or prior years of
account).
The Company believes that the cash flow generated by the operating
activities of the Company's subsidiaries, including the Somerset Companies,
will provide sufficient funds for the Company to meet its liquidity needs over
the next twelve months. Beyond the next twelve months, cash flow available to
the Company may be influenced by a variety of factors, including general
economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
ECONOMIC CONDITIONS
The Company is a specialty insurance company and periods of moderate
economic recession or inflation tend not to have a significant direct effect on
the Company's underwriting operations. They do, however, impact the Company's
investment portfolio. In 1996, the Company's yield on its invested assets
declined and the Company's investment income was negatively impacted by lower
yields.
Management considers the potential impact of these economic trends in
estimating Navigators' loss reserves. Management believes that the
underwriting controls it maintains, plus the fact that the majority of
Navigators' business is in lines of insurance which have relatively short loss
payout patterns, both assist in estimating more accurately ultimate claim costs
and lessen the potential adverse impact of the economy on Navigators.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section
are submitted as part of Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and the executive officers of the
Group is contained under "Election of Directors" in the Company's 1997 Proxy
Statement, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under
"Compensation of Directors and Executive Officers" in the Company's 1997 Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of the directors and
officers of the registrant is contained under "Election of Directors" in the
Company's 1997 Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and related transactions of the
directors and officers of the Company is contained under "Certain Relationships
and Related Transactions" in the Company's 1997 Proxy Statement, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS AND SCHEDULES: The financial statements and
schedules listed in the accompanying Index to Consolidated Financial
Statements and Schedules on page F-1
2. EXHIBITS: The exhibits listed on the accompanying Index to Exhibits on
the page which immediately follows page S-8.
The Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(a)(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during
the last quarter of the period covered by this Form 10-K.
21
<PAGE> 23
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.
The Navigators Group, Inc.
(Registrant)
Dated: March 28, 1997 By:/s/ BRADLEY D. WILEY
--------------------------
Bradley D. Wiley
Senior Vice President, CFO
and Secretary
Pursuant to the requirements 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ TERENCE N. DEEKS President, Chairman and CEO
- -------------------- (Principal Executive Officer) March 28, 1997
Terence N. Deeks
/s/ BRADLEY D. WILEY Senior Vice President, CFO & Secretary
- -------------------- (Principal Financial Officer) March 28, 1997
Bradley D. Wiley
/s/ SALVATORE A. MARGARELLA Vice President & Treasurer
- --------------------------- (Principal Accounting Officer) March 28, 1997
Salvatore A. Margarella
/s/ ROBERT M. DEMICHELE
- ----------------------- Director March 28, 1997
Robert M. DeMichele
/s/ LEANDRO S. GALBAN, JR.
- -------------------------- Director March 28, 1997
Leandro S. Galban, Jr.
/s/ JOHN F. KNIGHT
- ------------------ Director March 28, 1997
John F. Knight
/s/ MARC M. TRACT
- ----------------- Director March 28, 1997
Marc M. Tract
/s/ WILLIAM D. WARREN
- --------------------- Director March 28, 1997
William D. Warren
/s/ ROBERT F. WRIGHT
- -------------------- Director March 28, 1997
Robert F. Wright
</TABLE>
22
<PAGE> 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 ............................................... F-3
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1996 .......................................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1996 ........................................................... F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996 ............................................................... F-6
Notes to Consolidated Financial Statements .............................................................. F-7
SCHEDULES:
Schedule I Summary of Consolidated Investments--other than
investments in related parties ..................................................... S-1
Schedule II Condensed Financial Information of Registrant ...................................... S-2
Schedule III Supplementary Insurance Information ................................................ S-5
Schedule IV Reinsurance ........................................................................ S-6
Schedule V Valuation and Qualifying Accounts .................................................. S-7
Schedule VI Supplementary Insurance Information Concerning
Property/Casualty Insurance Operations ............................................. S-8
</TABLE>
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited the consolidated financial statements of The Navigators
Group, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedules as listed in the
accompanying index. 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 audits.
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 provide 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 The
Navigators Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. 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.
As discussed in Note 1 to the consolidated financial statements, The
Navigators Group, Inc. and subsidiaries changed their method of accounting for
certain investments in debt and equity securities in 1994.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 14, 1997.
F-2
<PAGE> 26
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
------ ------
ASSETS
<S> <C> <C>
Investments and cash:
Fixed maturities, available for sale, at fair value
(amortized cost: 1996, $210,041,568; 1995, $203,468,088) ... $215,072,441 $210,697,423
Equity securities, at fair value (cost: 1996, $7,538,008;
1995, $5,587,344) .......................................... 10,281,459 7,861,813
Short-term investments, at cost which approximates fair value 11,826,126 7,290,638
Cash ........................................................ 1,459,775 7,332,698
----------- -----------
Total non-affiliated investments and cash .............. 238,639,801 233,182,572
Investment in affiliated company 2,080,651 2,277,048
----------- -----------
Total investments and cash ............................ 240,720,452 235,459,620
Premiums in course of collection .............................. 35,108,297 17,971,529
Commissions receivable ........................................ 6,781,996 6,048,440
Accrued investment income ..................................... 3,301,635 3,349,030
Prepaid reinsurance premiums .................................. 11,539,842 9,814,146
Reinsurance receivable on paid and unpaid loss and
loss adjustment expenses ..................................... 143,345,057 147,356,684
Federal income tax recoverable ................................ 32,788 --
Net deferred Federal income tax benefit ....................... 9,517,521 8,873,030
Deferred policy acquisition costs ............................. 3,657,718 2,523,180
Other assets .................................................. 3,090,013 4,156,755
----------- -----------
Total assets ............................................ $457,095,319 $435,552,414
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for loss and loss adjustment expenses ............... $269,601,050 $273,854,054
Unearned premiums ............................................ 33,916,832 26,753,920
Reinsurance balances payable ................................. 11,580,770 6,411,746
Loans payable to banks ....................................... 17,000,000 19,500,000
Federal income tax payable ................................... -- 1,243,364
Deferred state and local income taxes ........................ 1,118,962 1,382,881
Note payable to shareholder .................................. 942,034 1,007,976
Accounts payable and other liabilities ....................... 7,393,235 6,322,266
----------- -----------
Total liabilities ............................................. 341,552,883 336,476,207
----------- -----------
Commitments and contingencies .................................. -- --
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares,
no shares issued ............................................. -- --
Common stock, $.10 par value, authorized 10,000,000 shares,
issued and outstanding 8,237,900 in 1996 and 8,172,401
in 1995 ...................................................... 823,790 817,240
Additional paid-in capital .................................... 36,201,654 35,321,339
Net unrealized gains on securities available-
for-sale (net of income taxes of $2,643,270 in 1996
and $3,231,293 in 1995) ...................................... 5,131,054 6,272,511
Foreign currency translation adjustment ....................... 78,568 110,185
Retained earnings ............................................. 73,307,370 56,554,932
---------- ----------
Total stockholders' equity ............................. 115,542,436 99,076,207
----------- ----------
Total liabilities and stockholders' equity ............ $457,095,319 $435,552,414
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 27
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net earned premiums ..................................... $ 78,731,102 $ 87,907,784 $ 90,482,619
Commission income ....................................... 8,797,849 10,658,508 10,857,147
Net investment income ................................... 13,614,475 14,142,842 13,034,384
Net realized capital gains (losses) ..................... 503,319 290,919 (862,789)
Other income 1,141,609 714,244 380,871
------------ ----------- ------------
Total revenues .................................... 102,788,354 113,714,297 113,892,232
------------ ----------- ------------
Operating expenses:
Net losses and loss adjustment expenses
incurred ............................................... 48,976,951 61,053,384 98,275,358
Commission expense ...................................... 12,171,208 12,227,956 17,218,799
Other operating expenses ................................ 20,417,251 22,534,095 22,212,279
Interest expense ........................................ 1,736,534 2,335,589 2,080,086
Merger expenses ......................................... -- -- 5,679,697
----------- ----------- ------------
Total operating expenses .......................... 83,301,944 98,151,024 145,466,219
----------- ----------- ------------
Equity income in affiliated company, net of income tax ... 1,387,942 -- --
Operating income (loss) before income taxes .............. 20,874,352 15,563,273 (31,573,987)
Income tax expense (benefit):
Current ................................................. 4,279,611 2,846,957 (5,309,050)
Deferred (157,697) 133,849 (5,769,738)
----------- ---------- ------------
Total income tax expense (benefit) ................. 4,121,914 2,980,806 (11,078,788)
----------- ---------- ------------
Net income (loss) ........................................ $ 16,752,438 $12,582,467 $(20,495,199)
=========== ========== ============
Per share data:
Average common and common equivalent shares
outstanding ............................................ 8,301,029 8,219,118 8,208,794
Net Income (loss) ........................................ $ 2.02 $ 1.53 $ (2.50)
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 28
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Preferred Stock
Balance at beginning of year ................... $ -- $ -- $ --
Issuance of preferred stock .................... -- -- --
------------ ---------- -----------
Balance at end of year ......................... $ -- $ -- $ --
============= ========== ===========
Common Stock
Balance at beginning of year ................... $ 817,240 $ 815,140 $ 815,044
Issuance of common stock ....................... 6,550 2,100 96
------------- --------- -----------
Balance at end of year ......................... $ 823,790 $ 817,240 $ 815,140
============= ========== ===========
Additional Paid-In Capital
Balance at beginning of year ................... $ 35,321,339 $ 34,983,877 $ 33,219,001
Issuance of common stock ....................... 880,315 337,462 9,390
Capitalization of Somerset
undistributed earnings ........................ -- -- 1,755,486
------------ ----------- -----------
Balance at end of year ......................... $ 36,201,654 $ 35,321,339 $ 34,983,877
============= =========== ===========
Unrealized gains (losses) on
securities available-for-sale
Balance at beginning of year ................... $ 6,272,511 $ (2,353,281) $ 697,272
Cumulative unrealized gains at 1/1/94
due to implementation of SFAS 115 ............. -- -- 4,609,808
Change in unrealized gains
(losses) ...................................... (1,141,457) 8,625,792 (7,660,361)
------------- ------------ ------------
Balance at end of year ......................... $ 5,131,054 $ 6,272,511 $ (2,353,281)
============= ============ ============
Foreign Currency Translation Adjustment
Balance at beginning of year ................... $ 110,185 $ 105,033 $ --
Change in foreign translation .................. (31,617) 5,152 105,033
------------- ------------ ------------
Balance at end of year ......................... $ 78,568 $ 110,185 $ 105,033
============= ============ ============
Retained Earnings
Balance at beginning of year ................... $ 56,554,932 $ 43,972,465 $ 82,546,149
Net income (loss) .............................. 16,752,438 12,582,467 (20,495,199)
Capitalization of Somerset
undistributed earnings ........................ -- -- (1,755,482)
Distribution to "S" Corporation shareholders ... -- -- (16,323,003)
------------- -------------- -------------
Balance at end of year ......................... $ 73,307,370 $ 56,554,932 $ 43,972,465
============= ============== =============
Total Stockholders' Equity
at end of year ................................. $ 115,542,436 $ 99,076,207 $ 77,523,234
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 29
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) ............................................. $16,752,438 $12,582,467 $(20,495,199)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization ................................... 593,250 713,512 646,054
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses ..................... 4,011,627 52,531,532 (48,407,613)
Reserve for losses and loss adjustment
expenses ................................................ (4,253,004) (41,044,029) 67,551,697
Prepaid reinsurance premiums .................................. (1,725,696) 2,410,626 11,970,330
Unearned premiums ............................................. 7,162,912 (8,967,093) (10,985,803)
Premiums in course of collection .............................. (17,136,768) 6,637,414 6,168,555
Commissions receivable ........................................ (733,556) (921,487) (357,059)
Deferred policy acquisition costs ............................. (1,134,538) 387,242 (71,906)
Accrued investment income ..................................... 47,395 (399,690) (96,286)
Reinsurance balances payable .................................. 5,169,024 (4,590,480) 4,868,240
Federal income tax ............................................ (1,276,152) 7,649,704 (6,243,834)
Net deferred Federal income tax ............................... (56,468) 98,186 (6,090,437)
Net realized (gains) losses on investments ................... (503,319) (290,919) 862,789
Other ......................................................... 348,193 (178,835) 5,945,268
------------ ------------ -------------
Net cash provided by operating activities .................... 7,265,338 26,618,150 5,264,796
------------ ------------ -------------
Investing activities:
Fixed maturities available for sale
Redemptions and maturities ................................... $ 14,683,000 $ 9,512,604 $ 9,406,440
Sales ........................................................ 35,273,240 67,196,132 24,333,595
Purchases .................................................... (57,212,182) (101,294,720) (45,540,645)
Equity securities
Sales ........................................................ 2,340,485 1,530,894 3,521,508
Purchases .................................................... (3,891,492) (2,229,379) (1,236,196)
Payable for securities purchased .............................. 1,267,615 386,197 42,943
Net sales (purchases) of short-term
investments .................................................. (4,532,823) 12,353,175 (799,210)
Investment in affiliate ....................................... 819,836 -- --
Purchase of property and equipment ............................ (272,805) (209,868) (895,425)
------------ ------------ -------------
Net cash (used in) investing activities ...................... (11,525,126) (12,754,965) (11,166,990)
------------ ------------ -------------
Financing activities:
Proceeds from bank loans ...................................... -- 2,000,000 51,000,000
Repayment of bank loans ....................................... (2,500,000) (8,000,000) (32,770,000)
Proceeds from exercise of stock options ....................... 886,865 339,562 9,485
Notes payable to shareholders, net ............................ -- (1,600,096) 2,608,072
Distribution to shareholders .................................. -- -- (16,323,003)
------------ ------------ -----------
Net cash (used in) provided by financing activities (1,613,135) (7,260,534) 4,524,554
------------ ----------- -----------
Increase (decrease) in cash .................................... (5,872,923) 6,602,651 (1,377,640)
Cash at beginning of year ...................................... 7,332,698 730,047 2,107,687
------------ ----------- --------
Cash at end of year ............................................ $ 1,459,775 $ 7,332,698 $ 730,047
============ =========== ========
</TABLE>
Actual federal taxes paid in the years 1996, 1995 and 1994 amounted to
$4,928,159, $1,000,000 and $0, respectively. State and local taxes paid in the
years 1996, 1995 and 1994 amounted to $307,427, $894,204 and $1,432,000,
respectively. Interest paid during 1996, 1995 and 1994 amounted to $2,069,235,
$1,889,087, and $2,105,919, respectively.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 30
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements, which include the
accounts of The Navigators Group, Inc. (the "Group" or the "Company") and its
subsidiaries, are prepared on the basis of generally accepted accounting
principles. All significant intercompany transactions and balances are
eliminated.
On June 30, 1994, the stockholders of the Group approved eight
substantially identical agreements of merger providing for the acquisition by
the Group of eight affiliated underwriting agencies, Somerset Marine, Inc.,
Somerset of Georgia, Inc., Somerset Insurance Services of Texas, Inc., Somerset
Insurance Services of California, Inc., Somerset Insurance Services of
Washington, Inc., Somerset Property, Inc., Somerset Re Management, Inc. and
Navigators Management Corporation (collectively known as the "Acquired Somerset
Companies").
The Group issued 2,875,000 shares of its common stock for all the
outstanding common stock of the Acquired Somerset Companies. The mergers were
accounted for under a method of accounting similar to "pooling of interests."
Prior to the mergers, the consolidated financial statements of the Group and
subsidiaries included the accounts of Navigators Insurance Company and NIC
Insurance Company (collectively known as the "Insurance Companies"). As of the
date of the mergers and for all prior periods presented, the consolidated
financial statements of the Group and subsidiaries include the accounts of the
Insurance Companies and the Acquired Somerset Companies.
The Company is a holding company which owns the Insurance Companies, the
Acquired Somerset Companies and five other subsidiaries: Somerset Asia Pacific
Pty Limited ("Somerset Asia"), an agency office located in Sydney, Australia;
Somerset Marine (UK) Limited ("Somerset (UK)"), agency office located in
London, England; Navigators Corporate Underwriters Limited, a corporate member
admitted to underwrite at Lloyd's of London with limited liability; and
Somerset Casualty Agency, Inc. and Somerset Aviation Property Managers, Inc.,
which are inactive. The Acquired Somerset Companies (other than Somerset
Property, Inc. which is inactive), Somerset Asia and Somerset (UK) are
hereinafter referred to collectively as the "Somerset Companies". The Somerset
Companies specialize in underwriting marine, aviation and property (primarily
inland marine) insurance and certain lines of specialty reinsurance and
non-marine insurance. The Insurance Companies derive substantially all of
their business from the Somerset Companies through either business written
specifically for the Insurance Companies or direct participation in, or by
reinsuring certain members of, insurance pools managed by the Somerset
Companies. In addition to the Insurance Companies' participation in the
insurance pools, ten other non-affiliated insurance companies participate, for
which commission income is earned as reflected in the consolidated income
statement. Commission expense as reflected in the consolidated income
statements represents the Insurance Companies' portion of acquisition costs
incurred by the Somerset Companies from non-affiliated brokers and agents.
INVESTMENTS
Effective January 1, 1994, the Company adopted the Financial Accounting
Statements Board's ("FASB") Statement of Financial Accounting Standard ("SFAS")
115 "Accounting for Certain Investments in Debt and Equity Securities." pSFAS
115 addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and all investments in debt
securities. Under SFAS 115, investments are classified into three categories.
Held-to-maturity securities are debt securities that the Company has the
positive intent and ability to hold to maturity and are reported at amortized
cost. Trading securities are debt and equity securities that are bought and
held principally for the purpose of selling them in the near term and are
reported at fair value, with unrealized gains and losses included in earnings.
Available-for-sale securities are debt and equity securities not classified as
either held-to-maturity securities or trading securities and are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. As of December 31,
1996 and 1995, all debt and equity securities held by the Company were
classified as available-for-sale securities.
F-7
<PAGE> 31
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-term investments are carried at cost, which approximates fair value.
Short-term investments mature within one year from the purchase date.
Realized gains and losses on sales of investments are determined on the
basis of the specific identification method. When a decline in fair value of
investments is considered to be "other than temporary," the investments are
written down to net realizable value. The write down is considered a realized
loss in the consolidated statement of income.
PREMIUM REVENUES
Insurance and reinsurance premiums are recognized as income by the
Insurance Companies during the terms of the related policies based on reports
received from the Somerset Companies and ceding reinsurers. Unearned premium
reserves are established to cover the unexpired portion of premiums written.
COMMISSION INCOME
Commission income, based on estimated gross premiums earned from
non-affiliated insurers, is recognized over the terms of the related policies.
Contingent commission income, based on estimated net underwriting results from
non-affiliated insurers, is recognized when ascertained and is included within
commission income in the accompanying consolidated financial statements.
Changes in prior estimates of commission income and contingent commission
income are recorded when such changes become known.
DEFERRED POLICY ACQUISITION COSTS
Costs of acquiring business which vary with and are directly related to
the production of business are deferred and amortized ratably over the period
that the related premiums are recognized as earned. Such costs primarily
include commission expense, certain management fees and premium taxes. The
method of computing deferred policy acquisition costs limits the deferral to
their estimated net realizable value based on the related unearned premiums and
takes into account anticipated losses and loss adjustment expenses based on
historical and current experience and anticipated investment income.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Unpaid losses and loss adjustment expenses are determined on an individual
basis for reported claims from insureds, from reports received from ceding
insurers for insurance assumed from such insurers and on estimates based on
Company and industry experience for incurred but not reported claims and loss
adjustment expenses. The provision for unpaid losses and loss adjustment
expenses has been established to cover the estimated unpaid cost of claims
incurred. Management believes that the unpaid losses and loss adjustment
expenses are adequate to cover the ultimate unpaid claims incurred; however,
such provisions are necessarily based on estimates and, accordingly, no
representation is made that the ultimate liability will not exceed such
amounts.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares of
common stock outstanding, and, if dilutive, shares issuable under stock option
plans.
REINSURANCE CEDED
With respect to reinsurance ceded which transfers risk, premiums,
commissions and recoveries on losses incurred are reflected as reductions of
the respective income and expense accounts. Unearned premiums ceded and
estimates of amounts recoverable from reinsurers on paid and unpaid losses are
reflected as assets.
F-8
<PAGE> 32
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES
The Company files a consolidated Federal tax return, which includes the
taxable income of its subsidiaries. For 1994, taxable income excluded the
Acquired Somerset Companies taxable income from the beginning of the period,
January 1, 1994, to the date of the consummation of the mergers, June 30, 1994
(see Note 7). The Company applies the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values for fixed maturity securities are based on independent pricing
services. The fair values for equity securities are based on quoted market
prices. Fair values of short-term investments are carried at cost, which
approximates fair value. The fair value of the loans payable to banks
approximates carrying value since the interest rate charged is computed using
market rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 2.--INVESTMENTS
The Company's non-affiliated invested assets and cash at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST OR COST GAIN (LOSS) VALUE
- ----------------- ------------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government, government
agencies and authorities ......................... $ 9,714,952 $ 96,775 $ (73,313) $ 9,738,414
States, municipalities and political
subdivisions ..................................... 172,302,733 4,813,164 (184,707) 176,931,190
Mortgage and asset backed ......................... 25,599,210 443,725 (120,036) 25,922,899
Corporate bonds ................................... 1,142,618 50,632 (1,400) 1,191,850
Redeemable preferred stock ........................ 1,282,055 7,379 (1,346) 1,288,088
------------ --------- --------- -----------
Total fixed maturities ........................ 210,041,568 5,411,675 (380,802) 215,072,441
------------ --------- --------- -----------
Equity securities - Common stocks .................... 7,538,008 2,771,689 (28,238) 10,281,459
Short-term investments ............................... 11,826,126 -- -- 11,826,126
Cash ................................................. 1,459,775 -- -- 1,459,775
------------ ---------- --------- -----------
Total non-affiliated investments
and cash ..................................... $ 230,865,477 $ 8,183,364 $ (409,040) $ 238,639,801
============ ========== ========== ============
</TABLE>
F-9
<PAGE> 33
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST OR COST GAIN (LOSS) VALUE
- ----------------- ------------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government, government
agencies and authorities ......................... $ 9,131,245 $ 331,227 $ (926) $ 9,461,546
States, municipalities and political
subdivisions .................................... 167,980,435 6,427,308 (88,074) 174,319,669
Mortgage and asset backed ........................... 25,206,267 622,824 (154,783) 25,674,308
Corporate bonds ..................................... 1,150,141 91,759 -- 1,241,900
----------- --------- --------- -----------
Total fixed maturities ......................... 203,468,088 7,473,118 (243,783) 210,697,423
------------ --------- --------- -----------
Equity securities - Common stocks ..................... 5,587,344 2,383,371 (108,902) 7,861,813
Short-term investments ................................ 7,290,638 -- -- 7,290,638
Cash .................................................. 7,332,698 -- -- 7,332,698
------------ ---------- ----------- -----------
Total non-affiliated investments
and cash ........................................ $ 223,678,768 $ 9,856,489 $ (352,685) $ 233,182,572
============ ========== ============ ===========
</TABLE>
The table set forth below indicates the composition of the Group's fixed
maturities and short-term investments by year of maturity as of December 31,
1996:
<TABLE>
<CAPTION>
PERIOD FROM CARRYING (FAIR) PERCENT PERCENT
DECEMBER 31, 1996 VALUE OF AMORTIZED COST OF
TO MATURITY (IN THOUSANDS) PORTFOLIO (IN THOUSANDS) PORTFOLIO
----------- ------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
One year or less ............................ $ 18,605 8% $ 18,510 8%
One year to five years ...................... 55,871 24 54,565 24
Five years to ten years ..................... 92,767 41 90,175 41
More than ten years ......................... 33,732 15 33,019 15
Mortgage and asset backed securities 25,923 12 25,599 12
------- --- ------ ---
Total ...................................... $ 226,898 100% $ 221,868 100%
</TABLE>
Net investment income of the Company was derived from the following
sources:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities ..................................... $ 12,480,651 $ 12,011,656 $ 11,271,357
Equity securities .................................... 266,339 224,279 194,179
Short-term investments ............................... 1,529,077 2,567,400 2,072,858
---------- ---------- ----------
14,276,067 14,803,335 13,538,394
Investment expenses .................................. (661,592) (660,493) (504,010)
------------ ---------- ----------
Net investment income ................................ $13,614,475 $14,142,842 $13,034,384
============ =========== ===========
</TABLE>
F-10
<PAGE> 34
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table set forth below indicates the gross realized gains and losses on
sales and writedowns of fixed maturities and equity securities:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Fixed maturities:
Gross gains ...................................... $ 479,047 $ 966,072 $ 356,455
Gross losses ..................................... (375,384) (968,549) (1,262,015)
Equity securities:
Gross gains ...................................... 456,507 293,396 234,854
Gross losses ..................................... (56,851) -- (192,083)
-------- ---------- -----------
Net realized gains (losses) ...................... $503,319 $ 290,919 $ (862,789)
======== ========= ==========
</TABLE>
During 1994 realized losses of $926,000 were recognized on securities in
which the decline in fair value was other than temporary. There were no such
declines in 1996 or 1995.
At December 31, 1996 and 1995, fixed maturities with a face value of
$6,480,000 and $5,230,000 were on deposit with the various State Insurance
Departments.
Also, at December 31, 1996 and 1995, fixed maturities with a face value of
approximately $841,000 were pledged as security under a reinsurance treaty.
At December 31, 1996, the Company did not have a material concentration of
financial instruments in a single investee.
NOTE 3.--NORTHRIDGE EARTHQUAKE
On January 17, 1994, an earthquake (the "Northridge Earthquake") occurred
in the vicinity of the Northridge area of Los Angeles, California. The
Company's pre-tax loss (including direct property losses of $35,388,000,
reinsurance reinstatement premiums of $1,925,000 and reinsurance assumed losses
of $1,952,000, but net of reinsurance) in 1994 from the Northridge Earthquake
totalled $39,265,000. During 1995, the Company incurred an additional
$10,721,000 pre-tax charge including a $4,500,000 net general reserve
established at the end of the third quarter of 1995. The estimated total gross
reported loss on direct property claims is $143,701,000 at December 31, 1995
and $149,681,000 at December 31, 1996. There can be no assurance given that
additional losses will not be reported or adjustments made to existing
reserves.
NOTE 4.--NOTES PAYABLE AND LOANS
In conjunction with the mergers, the Acquired Somerset Companies
distributed $5,280,263 in the form of notes payable to the then existing
shareholders of the Acquired Somerset Companies. These notes represent certain
pre-merger income to such shareholders and were interest free through December
31, 1994. The remainder, $942,034 is due to the holder on demand.
On August 5, 1994, the Company entered into a Credit Agreement (the
"Credit Agreement") with three banks. The Credit Agreement provided for (i)
revolving credit loans up to $5,000,000 through August 5, 1997 (the "Revolving
Credit Loans"), (ii) a term loan of $25,000,000, the principal of which was
payable in quarterly installments due on June 30, 1997 (the "Term Loan"), and
(iii) and irrevocable stand-by letter of credit issued by one of the banks for
the benefit of Society of Lloyd's in the amount of L.2,585,0000 for the account
of the Company. The Term Loan's principal was $17,500,000 and Revolving Credit
Loans were $2,000,000 at December 31, 1995.
F-11
<PAGE> 35
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On November 19, 1996, the Company amended and restated the Credit
Agreement (as amended and restated, the "Amended Credit Agreement"). The
Amended Credit Agreement provides for (i) a $20 million revolving credit loan
facility, under which the aggregate amount available will be reduced by
$500,000 for the first eleven quarters, and by varying amounts for the last
eight quarters, with the facility terminating on December 31, 2002 (the
"Revolving Credit Facility"), and (ii) a $30 million letter of credit facility
(the "Letter of Credit Facility"). The Revolving Credit Facility bears
interest, at the election of the Company, at either the base commercial lending
rate of one of the banks or at LIBOR plus 1%. Any amounts drawn under the
Letter of Credit Facility and not repaid bear interest at the base commercial
lending rate of one of the banks. At December 31, 1996, $17 million in loans
were outstanding under the Revolving Credit Facility (at an interest rate of
6.5%) and letters of credit with an aggregate face amount of L.15,835,000
(approximately U.S. $27,100,000 at the exchange rate as of December 31, 1996)
were issued under the Letter of Credit Facility. No amounts were drawn under
the Letter of Credit Facility during the year.
The Revolving Credit Facility and the Letter of Credit Facility are
collateralized by shares of common stock of the active subsidiaries of the
Company other than NIC Insurance Company and Somerset Asia Pacific Pty Limited.
The Amended Credit Agreement contains covenants common to transactions of this
type, including restrictions on indebtedness and liens, limitations on mergers
and the sale of assets, maintenance of consolidated total stockholders' equity,
statutory surplus, minimum liquidity, loss reserves and other financial ratios.
NOTE 5.--INVESTMENT IN AFFILIATE
The investment in affiliate represents the Group's ownership interest in
Riverside Underwriters plc (formerly known as Navigators Underwriters plc)
("Riverside"). The Group's original ownership interest was 21% at December 31,
1995 which increased to 27% as of January 1, 1996 and decreased to
approximately 8% at December 31, 1996. Riverside, a U.K. corporation, owned
100% of Riverside Corporate Underwriters Limited, a U.K. corporation, which has
been admitted to underwrite at Lloyd's of London as a corporate name with
limited liability. The transaction to reduce the Company's ownership in
Riverside did not produce a material capital gain or loss. The Company will,
however, remain entitled to receive from Riverside an amount equal to the
aggregate dividends that it would have received if it had continued to hold its
original investment to the extent such dividends are attributable to writings
at Lloyd's by Riverside Corporate Underwriters Limited during the 1994, 1995
and 1996 years of account. In connection with the reduction of the Company's
investment, Navigators Management Corporation ("NMC") has agreed to cease being
manager of Riverside and Riverside Corporate Underwriters Limited, although NMC
will remain entitled to profit commissions with respect to the 1994, 1995 and
1996 underwriting years. Prior to December 31, 1996, the investment was
carried under the equity method of accounting. At December 31, 1996, the
investment is recorded at cost due to the reduction in ownership interest. In
addition, the Company's Letter of Credit Facility (see Note 4) includes
L.2,585,000 (approximately U.S. $4,427,000 at the exchange rate as of December
31, 1996) to collateralize the investment in accordance with Lloyd's of London
requirements.
Included in 1996 income is $1,387,942 of equity income, net of tax. The
Company records its share of Riverside's earnings from underwriting when
sufficient information becomes available to provide reasonable estimates of
earned premiums and losses. During 1996, information about Riverside's profits
for two years, 1994 and 1995, became available enabling the Company to record
the above income.
NOTE 6.--FIDUCIARY FUNDS
The Somerset Companies maintain separate fiduciary accounts which record
all the underlying insurance transactions of the insurance pools which they
manage. These transactions primarily include collecting premiums from the
insured, collecting paid recoverables from reinsurers, paying claims as losses
become payable, paying reinsurance premiums to reinsurers and remitting net
account balances to member insurance companies. Unremitted amounts to members
of the insurance pools are held in a fiduciary capacity and interest income
earned on such funds inure to the benefit of the Somerset Companies.
F-12
<PAGE> 36
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the fiduciary accounts as of December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
--------------------- ------------------
<S> <C> <C>
Cash and short-term investments ............ $ 18,857,000 $ 29,967,000
Premiums receivable ........................ 95,136,000 92,774,000
Reinsurance balances receivable ............ 6,582,000 9,885,000
--------------------- ------------------
Total assets .............................. $120,575,000 $132,626,000
===================== ==================
Due to insurance companies ................. $120,575,000 $ 32,626,000
--------------------- ------------------
Total liabilities ......................... $120,575,000 $132,626,000
===================== ==================
</TABLE>
The fiduciary accounts above were not included in the accompanying
consolidated balance sheets.
NOTE 7. --INCOME TAXES
The components of current and deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- ------------------ ---------------------
<S> <C> <C> <C>
Current:
Federal .............................................. $3,652,007 $2,293,504 $(6,379,379)
State and Local ...................................... 627,604 553,453 1,070,329
-------------------- ------------------ ---------------------
Total ................................................ $4,279,611 $2,846,957 $(5,309,050)
==================== ================== =====================
Deferred:
Federal ............................................... $ (56,469) $ 96,893 $(6,090,662)
State and Local ....................................... (101,228) 36,956 320,924
-------------------- ------------------ ---------------------
Total ................................................ $ (157,697) $ 133,849 $(5,769,738)
==================== ================== =====================
</TABLE>
A reconciliation of total income taxes applicable to pre-tax operating
income and the amounts computed by applying the Federal statutory income tax
rate to the pre-tax operating income is as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax
expense (benefit) ........................ $7,306,023 35% $ 5,447,146 35% $(11,050,895) (35%)
Tax exempt interest ....................... (2,793,702) (13) (2,694,475) (17) (2,385,517) (8)
Dividends received
deduction ................................ (58,973) (48,686) (188,248) (1)
State & local income taxes, net of
Federal income tax ....................... 347,408 2 389,670 2 800,293 3
Net effect of merger
of the Group and the
Somerset Companies ....................... __ __ (206,628) (1)
Merger expenses ........................... -- __ 809,497 3
Valuation allowance ....................... (775,000) (4) 775,000 3
Other ..................................... 96,158 __ (112,849) (1) 367,710 1
------------ ----- --------------- --- ---------------- -----
$4,121,914 20% $ 2,980,806 19% $(11,078,788) (35%)
============ ===== ============== === ================ ======
</TABLE>
F-13
<PAGE> 37
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The mergers between the Group and the Somerset Companies were consummated
on June 30, 1994. A business combination between an S Corporation and a
tax-paying corporation automatically terminates the S Corporation election.
The Somerset Companies prior to the mergers were S Corporations and as a result
of the mergers their tax status changed to C Corporations. Accordingly, a
charge to earnings of $1,279,445 was recorded at June 30, 1994 to reflect taxes
on income previously earned but not yet taxed. Therefore, as of July 1, 1994
and thereafter, taxable income of the Group includes all consolidated
subsidiaries.
The tax effects of temporary differences that give rise to Federal
deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loss reserve discount ................................................... $ 6,832,980 $ 7,191,340
Unearned premium reserves ............................................... 1,521,635 1,151,905
Net operating loss carryforward ......................................... -- 3,022,374
Alternative minimum tax carryforward .................................... 5,782,958 3,069,083
Deferred state and local income taxes ................................... 387,939 429,847
Allowance for uncollectible reinsurance ................................. 272,000 272,000
Deferred compensation ................................................... 499,598 225,524
Leasehold amortization .................................................. 25,096 101,174
----------- -----------
Total gross deferred tax assets .......................................... 15,322,206 15,463,247
Less valuation allowance ................................................. -- (775,000)
----------- -----------
Net deferred tax assets .................................................. 15,322,206 14,688,247
----------- -----------
Deferred tax liabilities:
Deferred acquisition costs .............................................. (1,243,624) (857,881)
Deferred taxes on unrealized gain ....................................... (2,643,270) (3,231,293)
Contingent commission receivable ........................................ (1,809,478) (1,509,418)
Commission income ....................................................... (108,313) (216,625)
------------ -----------
Total deferred tax liabilities ........................................... (5,804,685) (5,815,217)
----------- -----------
Net deferred tax asset ................................................... $ 9,517,521 $ 8,873,030
=========== ===========
</TABLE>
A valuation allowance in the amount of $775,000 was established in 1994
due to the uncertainty associated with the realization of the gross deferred
tax asset. In 1996, the Company utilized the balance of its NOL carryforward.
Management believes that it is more likely than not that the net deferred
Federal tax asset is realizable and therefore, has not provided for any
valuation allowance at December 31, 1996.
F-14
<PAGE> 38
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8.--RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the activity in the Insurance Companies'
reserve for loss and loss adjustment expenses during the three most recent
fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
(in thousands)
Net reserves for losses and LAE at
beginning of year ............................................ $138,761 $135,377 $103,176
-------------------- --------------------- ---------------------
Provision for losses and LAE for
claims occurring in the current year ......................... 51,429 54,030 97,145
Increase (decrease) in estimated losses and
LAE for claims occurring in prior years....................... (2,452) 7,023 1,130
-------------------- --------------------- ---------------------
Incurred losses and LAE ....................................... 48,977 61,053 98,275
-------------------- --------------------- ---------------------
Losses and LAE payments for claims
occurring during:
Current year ................................................. (15,439) (10,482) (33,374)
Prior years .................................................. (39,741) (47,187) (32,700)
Losses and LAE payments ....................................... (55,180) (57,669) (66,074)
-------------------- --------------------- ---------------------
Net reserves for losses and LAE at end of year................. 132,558 138,761 135,377
Reinsurance receivables on unpaid losses and LAE .............. 137,043 135,093 179,521
-------------------- --------------------- ---------------------
Gross reserves for losses and LAE at end of year .............. $269,601 $273,854 $314,898
==================== ===================== =====================
</TABLE>
The development of prior year incurred losses during 1995 was primarily
attributable to the loss development from Northridge Earthquake.
During 1996, 1995 and 1994, the Insurance Companies paid a gross amount of
$2,794,000, $2,251,000 and $181,000, respectively, and a net amount of
$425,000, $117,000 and $83,000, respectively for environmental pollution and
asbestos related claims. As of December 31, 1996 and 1995, the Insurance
Companies carried a gross reserves of $5,421,000 and $4,783,000, respectively,
and a net case reserve of $1,042,000 and $876,000, respectively, for the
potential exposure of the Insurance Companies to such claims. For the year
ended December 31, 1996 and 1995, open claims with environmental pollution and
asbestos exposure amounted to 2,024 and 1,594, respectively. Management
believes that its reserves for such claims are adequate, because the Insurance
Companies participation in such risks was generally in the higher excess layers
and, based on a continuing review of such claims, management believes that a
majority of these claims will be unlikely to penetrate such high excess layers
of coverage; however, due to the significant assumptions inherent in estimating
these exposures, actual liabilities could differ from current estimates.
F-15
<PAGE> 39
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9.--REINSURANCE
The following table summarizes premiums earned:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- -------------------- --------------------
<S> <C> <C> <C>
Direct .......... $ 86,917,153 $ 93,497,238 $ 126,006,187
Assumed ......... 48,444,376 64,376,261 74,461,310
Ceded ........... (56,630,427) (69,965,715) (109,984,878)
------------------- ------------------- --------------------
Net ............. $ 78,731,102 $ 87,907,784 $ 90,482,619
=================== ==================== ===================
</TABLE>
The following table summarizes premiums written:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
-------------------- ------------ ------------
<S> <C> <C> <C>
Direct .......... $ 92,260,897 $ 87,542,455 $113,729,150
Assumed .... 50,262,744 61,364,751 75,822,542
Ceded ......... (58,355,325) (67,639,613) (98,000,822)
-------------------- ------------ ------------
Net ............. $ 84,168,316 $ 81,267,593 $ 91,550,870
==================== ============ ============
</TABLE>
Ceded losses and loss adjustment expenses incurred were $61,964,370,
$43,551,046 and $158,225,000 in 1996, 1995, and 1994, respectively.
A contingent liability exists with respect to reinsurance ceded, since the
Insurance Companies would be required to pay losses in the event the assuming
reinsurers are unable to meet their obligations under their reinsurance
agreements with the Insurance Companies.
At December 31, 1996 the Company had reinsurance receivables from the
following five reinsurers which are in excess of 5% of the insurance companies
surplus: Underwriters at Lloyds, $27,143,000; SCOR Reinsurance Company,
$7,701,000; Chiyoda Fire and Marine Insurance, $7,372,000; Insurance
Corporation of New York, $7,105,000; Frankona Ruckversicherungs A.G,
$5,029,000.
The Company's reinsurance security committee continually monitors the financial
strength of its reinsurers and the amounts of reinsurance receivables from
those reinsurers. An allowance is established to the extent that it is
determined that the ultimate amount collectible is less than the amount
recorded as a receivable. At December 31, 1996 and 1995, an allowance for
uncollectible reinsurance of $800,000 was recorded. The expense recorded for
uncollectible reinsurance was $0, $688,000 and $1,209,000 for 1996, 1995 and
1994, respectively.
10. --FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------------------------ -------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Financial assets:
Non-affiliated investments $237,180,026 $237,180,026 $225,849,874 $225,849,874
Commissions receivable $ 6,781,996 $ 6,490,617 $ 6,048,440 $ 5,750,450
Financial liabilities:
Loans payable to banks $ 17,000,000 $ 17,000,000 $ 19,500,000 $ 19,500,000
</TABLE>
F-16
<PAGE> 40
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts shown in the table are included in the Consolidated
Balance Sheets under the indicated captions.
The carrying amounts of cash and premium receivables approximate fair
value because of the short maturity of those instruments. The fair values of
debt securities and equity investments are based on quoted market prices at the
reporting date for those or similar investments.
Included within commissions receivable is contingent commissions
receivable which is billed by the Somerset Companies to participants of the
insurance pools two calendar years subsequent to a given underwriting year and,
as a result, fair value is less than carrying value. Fair value of contingent
commissions receivable is estimated based on the present value of anticipated
cash flows based on interest rates of debt instruments with similar maturities.
The fair value of the Company's loans payable to banks approximates
carrying value since the interest rate charged is computed using market rates.
NOTE 11. --STOCK OPTION PLANS
The Company has an Incentive Stock Option Plan and a Non Qualified Stock
Option Plan which allow for the grant to key employees of the Group, its
subsidiaries and affiliates, of options to purchase an aggregate of 900,000
shares of common stock. Under the Non Qualified Stock Option Plan, stock
appreciation rights may also be granted.
All options are granted at exercise prices which approximate the fair
market value of the common stock on the date of the grant. No amounts are
charged to expense upon the granting of options under the plans.
Common stock options outstanding at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ---------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year ...................... 783,800 $18.68 703,625 $21.13 593,125 $22.51
Granted ................................. -- -- 222,300 14.75 120,000 14.00
Exercised ............................... (65,499) 13.54 (21,000) 16.17 (1,000) 10.00
Canceled ................................ (94,300) 22.15 (121,125) 26.16 (8,500) 18.00
Options outstanding at
end of year ............................ 624,001 18.73 783,800 18.68 703,625 21.13
No. of shares
exercisable ............................ 402,126 20.12 391,400 19.01 386,975 18.73
</TABLE>
The Company granted 166,000 and 111,500 stock appreciation rights at $17,
the approximate fair market value of the common stock on the date of the grant
in 1996 and 1995, receptively. The amounts charged to expense in 1996 and 1995
were $45,586 and $0 respectively.
Effective January 1, 1996, the Company adopted the provisions of SFAS 123
"Accounting for Stock Based Compensation" which requires the Company to either
record compensation expense or provide additional disclosures with respect to
stock awards and stock option grants made after December 31, 1994. As
permitted under the statement, the company continued to apply the provisions of
APB Opinion No. 25 "Accounting for Stock issued to Employees." Had
compensation expense for the Company stock option awards been determined in
accordance with SFAS 123, the effect on the Company's 1996 and 1995 net
earnings would not have been material.
F-17
<PAGE> 41
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Outstanding Average Remaining Average Exercisable Average Exercise
Price Range Shares Contract Life Exercise Price Shares Price
- ----------- --------------- -------------------- ---------------- -------------- --------------------
<S> <C> <C> <C> <C> <C>
$10-12 84,501 1.1 $10.99 84,501 $10.99
14-15 303,000 8.3 14.42 101,500 14.37
16-19 72,250 3.7 18.07 72,250 18.07
28-34 164,250 6.2 30.98 143,875 30.55
</TABLE>
NOTE 12.--EMPLOYEE BENEFITS
The Somerset Companies sponsor a defined contribution plan covering
substantially all employees. Contributions are equal to 15% of each eligible
employee's gross pay (plus bonus of up to $2,500) up to the amount permitted by
certain Federal regulations. Employees are fully vested after six years of
service. Plan expense, included within operating expenses, amounted to
$839,467, $990,556 and $1,080,960 in 1996, 1995 and 1994, respectively.
NOTE 13.--MERGER EXPENSES
Expenses of $5,679,697 related to the merger of the Acquired Somerset
Companies with the Company were expensed in the second quarter of 1994.
NOTE 14.--DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
The Insurance Companies may pay dividends to the Group out of its
statutory earned surplus pursuant to statutory restrictions imposed under the
New York Insurance Law. The maximum amount available for the payment of
dividends by the Insurance Companies during 1997 without prior regulatory
approval is approximately $9,607,000. The Insurance Companies paid no
dividends to the Group in 1996 or 1995 but did pay dividends of $5,300,000 in
1994.
Combined net income (loss) and policyholders' surplus of the Insurance
Companies determined in accordance with statutory accounting practices and as
filed with insurance regulatory authorities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
----------- ------------ -------------------
<S> <C> <C> <C>
Net income (loss) ...................................... $13,286,389 $ 8,523,962 $(26,799,263)
Policyholders' surplus ............................... $96,074,907 $85,534,521 $ 73,697,863
</TABLE>
The Insurance Companies, domiciled in New York State, prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New York State Insurance Department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Insurance
Companies do not apply any permitted accounting practices.
As part of its general regulatory oversight process, the New York State
Insurance Department conducts detailed examinations of the books, records and
accounts of New York Insurance companies every three to five years. Navigators
Insurance Company and NIC Insurance Company are currently being examined by the
New York State Insurance Department for the years 1991 through 1995.
F-18
<PAGE> 42
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. -- LEASES
Future minimum annual rental commitments at December 31, 1996, under
various noncancellable operating leases for the Company's office facilities,
which expire at various dates through May 2000, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1997 ........................................ $1,422,000
1998 ........................................ 1,335,000
1999 ........................................ 1,208,000
2000 ........................................ 479,000
----------
Total ................................ $4,444,000
=========
</TABLE>
The Company is also liable for additional payments to the landlords for
certain annual cost increases. Rent expense for the years ended December 31,
1996, 1995, and 1994 was $1,576,565, $1,437,446 and $1,592,743, respectively.
NOTE 16. -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for the quarterly periods during 1996 and 1995
are as follows. Due to changes in the number of shares outstanding, quarterly
per share amounts may not add to the total for the year.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net premiums earned .......... $19,188,829 $18,214,764 $19,848,886 $21,478,623
Commission income ............ 2,066,826 2,322,093 2,482,030 1,926,900
Net investment income ........ 3,563,297 3,554,411 3,251,188 3,245,579
Net realized gains ........... 174,838 170,960 30,843 126,678
Other income ................. 203,234 124,000 181,216 633,159
------------------- ------------------- ------------------- -------------------
Total revenues ............... 25,197,024 24,386,228 25,794,163 27,410,939
Total operating expenses ..... 19,761,428 19,265,283 20,880,955 23,394,278
Equity income (loss) in
affiliated company, net of
income tax ................... -- -- 1,408,220 (20,278)
Income tax expense ........... 1,223,649 1,323,849 1,069,374 505,042
-------------------- ------------------- ------------------- -------------------
Net income ................... $4,211,947 $3,797,096 $5,252,054 $3,491,341
==================== =================== =================== ===================
Per share data:
Average common and
common equivalent
shares outstanding ........... 8,296,617 8,299,301 8,304,630 8,341,282
Net income per share ......... $ 0.51 $ 0.46 $ 0.63 $ 0.42
</TABLE>
F-19
<PAGE> 43
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net Premiums earned ............. $17,718,090 $20,933,858 $24,908,174 $24,347,662
Commission income ............... 2,594,170 2,879,776 2,588,599 2,595,963
Net investment income ........... 3,412,370 3,441,732 3,508,621 3,780,119
Net realized gains (losses) ..... (62,147) 376,517 (283,795) 260,344
Other income (expense) .......... 217,123 272,641 248,907 (24,427)
------------------- ------------------- ------------------- -------------------
Total revenues .................. 23,879,606 27,904,524 30,970,506 30,959,661
Total operating expenses ........ 21,627,019 24,042,501 27,025,934 25,455,570
Income tax ...................... 226,859 856,399 864,824 1,032,724
------------------- ------------------- ------------------- -------------------
Net income ...................... $2,025,728 $3,005,624 $3,079,748 $4,471,367
=================== =================== =================== ===================
Per share data:
Average common and common
equivalent shares outstanding ... 8,205,946 8,176,309 8,202,123 8,292,219
Net income per share ............ $ 0.25 $ 0.37 $ 0.38 $ 0.54
</TABLE>
F-20
<PAGE> 44
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1996
<TABLE>
<CAPTION>
Amount at which
shown in the
Cost or consolidated
Type of Investment amortized cost Fair value balance sheet
- ------------------ -------------- ------------- ---------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government,
government agencies
and authorities ........................... $ 9,714,952 $ 9,738,414 $ 9,738,414
States, municipalities
and political subdivisions.................. 172,302,733 176,931,190 176,931,190
Mortgage and asset backed .................. 25,599,210 25,922,899 25,922,899
Corporate bonds ............................ 1,142,618 1,191,850 1,191,850
Redeemable preferred stock ................. 1,282,055 1,288,088 1,288,088
-------------- ------------- ---------------
Total fixed maturities ..................... 210,041,568 215,072,441 215,072,441
-------------- ------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other ............................. 7,538,008 10,281,459 10,281,459
-------------- ------------- ---------------
Short-term investments ..................... 11,826,126 11,826,126 11,826,126
-------------- ------------- ---------------
Total investments .......................... $229,405,702 $237,180,026 $237,180,026
============== ============= ===============
</TABLE>
S-1
<PAGE> 45
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE NAVIGATORS GROUP, INC.
BALANCE SHEETS
(Parent Company)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
A S S E T S 1996 1995
--------------- --------------
<S> <C> <C>
Cash ............................................................. $ 103,100 $ 1,438,257
Investment in wholly-owned subsidiaries, at
equity .......................................................... 126,629,651 114,818,292
Investment in affiliate .......................................... 2,080,651 2,277,048
Short-term investments ........................................... 933,000 --
Other ............................................................ 4,448,118 2,131,967
--------------- --------------
Total Assets ..................................................... $134,194,520 $120,665,564
=============== ==============
L I A B I L I T I E S
Bank loan payable ................................................ $ 17,000,000 $ 19,500,000
Accounts payable and other liabilities ........................... 1,652,084 2,089,357
--------------- --------------
Total liabilities ................................................ 18,652,084 21,589,357
--------------- --------------
Commitments and contingencies .................................... -- --
S T O C K H O L D E R S ' E Q U I T Y
Preferred stock, $.10 par value, authorized
1,000,000 shares, no shares issued .............................. -- --
Common stock, $.10 par value, authorized
10,000,000 shares, issued and outstanding
8,237,900 in 1996 and 8,172,401 in 1995 ......................... 823,790 817,240
Additional paid-in capital ....................................... 36,201,654 35,321,339
Net unrealized gains (losses) on
available-for-sale securities,
net of income taxes ............................................. 5,131,054 6,272,511
Foreign currency translation adjustment .......................... 78,568 110,185
Retained earnings ................................................ 73,307,370 56,554,932
--------------- --------------
Total stockholders' equity ....................................... 115,542,436 99,076,207
--------------- --------------
Total liabilities and stockholders' equity ....................... $134,194,520 $120,665,564
=============== ==============
</TABLE>
S-2
<PAGE> 46
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME
(Parent Company)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Net investment income ............................ $ 13,959 $159,108 $104,883
Dividends received from wholly-owned
subsidiaries .................................... 4,818,958 2,923,767 8,325,376
Other Income ..................................... 513,498 -- --
Operating expenses and income taxes .............. (2,934,734) (3,392,857) (5,702,798)
------------- ------------- --------------
Gain (loss) before equity in
undistributed net income
of wholly-owned subsidiaries .................... 2,411,681 (309,982) 2,727,461
Equity (loss) in undistributed
net income of wholly-owned subsidiaries .......... 12,952,815 12,892,449 (23,222,660)
Equity in undistributed net
income of affiliated company ..................... 1,387,942 -- --
------------- ------------- --------------
Net income (loss) ................................ $16,752,438 $12,582,467 $(20,495,199)
============= ============= ==============
</TABLE>
S-3
<PAGE> 47
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS
(Parent Company)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) ....................................... $16,752,438 $12,582,467 $(20,495,199)
Adjustments to reconcile net income (loss)
to net cash provided by (used in ) operations:
Equity in undistributed net income of wholly-owned
subsidiaries ............................................ (12,952,815) (12,892,449) 23,222,659
Other ................................................... (3,408,481) 5,701,849 (3,260,450)
-------------- -------------- --------------
Net cash provided by (used in) operating activities ..... 391,142 5,391,867 (532,990)
-------------- -------------- --------------
Investing Activities:
Investment in Affiliate ................................ 819,836 -- (22,823,750)
Sale of fixed maturities ................................ -- -- 1,527,150
Net (increase) decrease in short-term
investments ............................................. (933,000) 1,631,090 (1,424,889)
-------------- -------------- --------------
Net cash provided by (used in) investing activities ..... (113,164) 1,631,090 (22,721,489)
-------------- -------------- --------------
Financial Activities:
Bank loan proceeds ...................................... -- 2,000,000 51,000,000
Repayment of bank loans ................................. (2,500,000) (8,000,000) (27,770,000)
Proceeds from exercise of stock
options ................................................. 886,865 339,562 9,485
-------------- -------------- --------------
Net cash provided by (used in)
financing activities .................................... (1,613,135) (5,660,438) 23,239,485
-------------- -------------- --------------
Increase (decrease) in cash ............................. (1,335,157) 1,362,519 (14,994)
Cash Beginning of Period ................................ 1,438,257 75,738 90,732
-------------- -------------- --------------
Cash End of Period ...................................... $103,100 $1,438,257 $75,738
============== ============== ==============
</TABLE>
S-4
<PAGE> 48
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Deferred Reserve Other policy claims
policy for losses and Net
acquisition and loss adjustment Unearned benefits premiums
Period costs expenses Premiums payable earned
- ------------------------------------------ ----------- -------------------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property-Casualty ..................... $3,657,718 $269,601,050 $33,916,832 $ -- $78,731,102
----------- -------------------- ----------- -------------------- -----------
Year ended December 31, 1995
Property-Casualty ..................... $2,523,180 $273,854,054 $26,753,920 $ -- $87,907,784
----------- -------------------- ----------- -------------------- -----------
Year ended December 31, 1994
Property-Casualty ..................... $2,910,422 $314,898,083 $35,721,013 $ -- $90,482,619
----------- -------------------- ----------- -------------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Losses Amortization
and loss of deferred
Net adjustment policy Other Net
investment expenses acquisition operating premiums
Period income(1) incurred costs(2) expenses(1) written
- ------------------------------------------ ----------- --------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property-Casualty ..................... $12,513,904 $48,976,951 $22,793,347 $2,507,433 $84,168,316
----------- ----------- ------------ ----------- -----------
Year ended December 31, 1995
Property-Casualty ..................... $12,360,748 $61,053,384 $26,512,776 $2,669,916 $81,267,593
----------- ----------- ------------ ----------- -----------
Year ended December 31, 1994
Property-Casualty ..................... $11,545,176 $98,275,358 $34,528,424 $3,524,289 $91,550,870
----------- ----------- ------------ ----------- -----------
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance subsidiaries.
A portion of these costs is eliminated upon consolidation.
S-5
<PAGE> 49
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
REINSURANCE
Premium Written
<TABLE>
<CAPTION>
Ceded to Assumed Percentage
Direct other from other Net of amount
Amount companies companies Amount assumed to net
------ --------- --------- ------ --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property-Casualty ............. $ 92,260,897 $58,355,325 $50,262,744 $84,168,316 60%
------------ ----------- ------------ ------------ ----
Year ended December 31, 1995
Property-Casualty ............. $ 87,542,455 $67,639,613 $61,364,751 $81,267,593 76%
------------ ----------- ------------ ------------ ----
Year ended December 31, 1994
Property-Casualty ............. $113,729,150 $98,000,822 $75,822,542 $91,550,870 83%
------------ ----------- ------------ ------------ ----
</TABLE>
S-6
<PAGE> 50
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. C
Col. A Col. B Additions Col. D Col. E
- -------------------- ----------- ---------------------------------- -------------- ------------
Balance at Balance at
January 1, Charged to Charged to Deductions -- December 31,
Description 1996 Costs and Expenses Other Accounts Describe 1996
- -------------------- ----------- ------------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible
reinsurance ... $800,000 $ -- $ -- $ -- $800,000
----------- ------------------ -------------- -------------- ------------
Valuation allowance
in deferred taxes. $775,000 $ -- $ -- $(775,000) $ --
----------- ------------------ -------------- ------------- ------------
</TABLE>
S-7
<PAGE> 51
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
Deferred Reserve
Affiliations policy for losses Discount, Net Net
with acquisition and loss adjustment if any, Unearned premiums investment
Registrant costs expenses deducted premiums earned income(1)
- -------------------------- ----- -------------------- -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated subsidiaries
- -------------------------
Year ended December 31, 1996 $3,657,718 $269,601,050 $-- $33,916,832 $78,731,102 $12,513,904
----------- -------------------- ------------- ----------- ----------- ------------
Year ended December 31, 1995 $2,523,180 $273,854,054 $-- $26,753,920 $87,907,784 $12,360,748
----------- -------------------- ------------- ----------- ----------- ------------
Year ended December 31, 1994 $2,910,422 $314,898,083 $-- $35,721,013 $90,482,619 $11,545,176
----------- -------------------- ------------- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Affiliations Losses and loss policy Other Net
with adjustment expenses acquisition operating premiums
Registrant incurred related to costs(2) expenses(1) written
- ------------------------ ------------------------- ----------- ------------ --------
Current Prior
year years
---- ------------
<S> <C> <C> <C> <C> <C>
Consolidated subsidiaries
- -------------------------
Year ended December 31, 1996 $51,428,951 $(2,452,000) $22,793,347 $2,507,433 $84,168,316
----------- ----------- ------------ ----------- --------------
Year ended December 31, 1995 $54,030,109 $ 7,023,275 $26,512,776 $2,669,916 $81,267,593
----------- ----------- ------------ ----------- --------------
Year ended December 31, 1994 $97,145,358 $ 1,130,000 $34,528,424 $3,524,289 $91,550,870
----------- ----------- ------------ ----------- --------------
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance subsidiaries. A portion
of these costs is eliminated upon consolidation.
S-8
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C> <C>
2 Form of Agreement and Plan of Merger, dated October 26,
1993, by and among The Navigators Group, Inc., the
respective acquisition subsidiary, the respective
Affiliated Company and the respective stockholders of such
Affiliated Company (a)
3-1 Restated Certificate of Incorporation (b)
3-2 By-laws, as amended (b)
10-1 Management Agreement between Navigators Insurance Company
and Navigators Management Corporation (b)
10-2 Agreement between The Navigators Group, Inc. and
Navigators Management Corporation (b)
10-3 Stock Option Plan (b)(c)
10-4 Non-Qualified Stock Option Plan (a)(c)
10-5 Employment Agreement with Terence N. Deeks (d)
10-6 Employment Agreement with W. Allen Barnett (d)
10-7 Letter Agreement with Michael J. Abdallah
10-8 Consulting Agreement between The Navigators Group, Inc.
and Robert F. Wright Associates, Inc. (d)
10-9 Amended and Restated Credit Agreement dated as of November
19, 1996, among The Navigators Group, Inc., as Borrower,
Brown Brothers Harriman & Co., NBD Bank, First Union
National Bank of North Carolina, as Lenders, First
National Bank of Chicago, as Issuing Bank, and Brown
Brothers Harriman & Co., as Agent.
11-1 Statement re Computation of Per Share Earnings
21-1 Subsidiaries of Registrant
23-1 Consent of Independent Auditor
27-1 Financial Data Schedule
28-1 Information from reports furnished to state insurance
regulatory authorities (e)
- ---------
</TABLE>
(a) Previously filed under Commission File No. 33-75918 as part of Form S-4,
incorporated herein by reference thereto.
(b) Previously filed under Commission file No. 33-5667 as part of Form S-1,
incorporated herein by reference thereto.
(c) Management contracts of compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K,
previously filed as indicated and incorporated herein by reference.
(d) Previously filed with the Company's Form 10-K for the year ended December
31, 1994, incorporated herein by reference thereto.
(e) Submitted in paper format under cover of Form SE.
<PAGE> 1
EXHIBIT 10-7
July 30, 1996
Mr. Michael J. Abdallah
48 Ince Road
Burwood Park
Walton on Thames
Surrey KT 125BJ
England
Dear Mike:
This letter confirms our agreement to the terms and conditions applying to your
employment as President of the Somerset Companies.
I. RESPONSIBILITY
You will have the responsibility for the Group's worldwide Marine, Aviation,
Offshore and Onshore Energy and related activities, which currently account
for approximately eighty percent of our existing insurance and reinsurance
business. You will be expected to report directly to me. You will also be
responsible for our London and International operations, as well as having
joint responsibility (as part of the Senior Management Team) for managing
outwards reinsurance for the Group.
II. COMPENSATION AND BENEFITS
A. Your base salary will be $250,000 per annum.
B. As a member of the executive committee, you will participate in our
executive incentive bonus program, based upon an earnings formula, where
you can earn up to a further one hundred percent of your base salary.
Insofar as we are halfway through the year, we have agreed we will pay
you a flat $125,000 bonus for 1996 and then for future years you will be
on the same formula basis as the rest of the staff. These bonuses are
generally paid in March, once the results are finalized.
C. To compensate you for the loss of bonus from CIGNA, which you have
told me was $55,000 after tax last year, we will pay you a one time sum
of $80,000.
D. You will receive twenty working days vacation each year.
III. MONEY PURCHASE PLAN
You will participate in the Company's Money Purchase Plan which is invested
on a tax deferred basis for you. Please refer to the Employee Manual for
more details on how the plan works and for the many other benefits provided
by the Company.
In addition, in the event of your termination prior to your being fully
vested, we will pay you a bonus equivalent to the difference between the
amount vested and the fully vested amount at that point in time.
IV. STOCK OPTIONS
The company has an stock option program and as an incentive to you, you will
be granted 50,000 options, or warrants, on Navigators' stock. Depending on
your performance, and the company's results, you can expect to receive
further options as circumstances permit.
As a general rule, these "options" have been granted at a price approximately
10% below the market price at the time of the grant.
<PAGE> 2
V. MOVING EXPENSES
A. The Company will provide you and your family with business class
airfare and reimburse your travel expenses for your relocation to the
United States. It is understood that, insofar as for the first few
months you wish to rent a house before deciding to purchase one, we will
likely be picking up moving costs twice. For a period of up to two
months, while you search for your rental accommodation, we will
reimburse you for reasonable temporary hotel accommodation.
When you decide to purchase your first house, we will reimburse you for
the reasonable closing costs and lawyers fees.
B. The Company will pay for packing and shipping your household and
personal effects, furniture and furnishings to the United States.
C. To help you and your family assimilate into a new community and
culture, until the end of 1998, the Company will assist you with the
expenses of domestic help.
VI. EMERGENCY HOME LEAVE
In the event of a death or serious illness of a member of your or your
spouse's immediate family, or other personal emergency requiring your and
your spouse's presence in Sydney, Australia, emergency leave and
transportation expenses will be provided.
VII. TAX RETURN PREPARATION
The Company's accounting firm will assist you in the preparation and filing
of your United States, U.K., and Australian income tax returns. The fees for
this service will be paid by the Company.
VIII. TERMINATION
Your employment will be continuous subject to six months prior written notice
by either party of termination, except for reasons of sexual harassment or
suspected dishonesty. We further both agree, except for the aforementioned
reasons, that no notice will be given prior to January 1, 1999, unless, you
decide to leave the company, against our wishes but for your own family
reasons. If this occurs before January 1, 1999, we will pay you three months
salary to help you get relocated back to Sydney, Australia.
IX. RELOCATION COSTS
In the event of termination of your employment, either at your own, or the
Company's initiative, the Company will pay for moving you, your family, and
your household goods back to Sydney, Australia subject to a maximum of
$50,000. These expenses will be paid providing that you return to your home
Country within 30 days of termination and do not accept other employment in
the insurance business within a six month period.
If you find these terms satisfactory, would you please sign and return a Copy
of this letter to me, retaining the Original for your own records.
Sincerely,
- -------------------------------------- -----------------
President, Somerset Marine, Inc. Date
- -------------------------------------- -----------------
Michael J. Abdallah Date
<PAGE> 1
EXECUTION COPY
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of November 26, 1996
among
THE NAVIGATORS GROUP, INC.,
as Borrower,
and
BROWN BROTHERS HARRIMAN & CO.,
NBD BANK,
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
as Lenders,
THE FIRST NATIONAL BANK OF CHICAGO,
as Issuing Bank
and
BROWN BROTHERS HARRIMAN & CO.,
as Agent
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS, ACCOUNTING TERMS................................... 1
Section 1.01. Definitions......................................... 1
Section 1.02. Accounting Terms.................................... 22
Section 1.03. Computation of Time Periods......................... 22
Section 1.04. Rules of Construction............................... 22
ARTICLE II. REVOLVING CREDIT LOANS......................................... 23
Section 2.01. Revolving Credit.................................... 23
Section 2.02. Notice and Manner of Borrowing...................... 23
Section 2.03. Non-Receipt of Funds by the Agent................... 24
Section 2.04. Interest............................................ 25
Section 2.05. Interest Periods; Conversions; Renewals............. 25
Section 2.06. Fees ............................................. 26
Section 2.07. Revolving Credit Notes.............................. 27
Section 2.08. Prepayments......................................... 27
Section 2.09. Method of Payment................................... 27
Section 2.10. Use of Proceeds..................................... 28
Section 2.11. Minimum Amounts..................................... 28
Section 2.12. Additional Costs.................................... 29
Section 2.13. Limitation on Types of Loans........................ 30
Section 2.14. Illegality.......................................... 31
Section 2.15. Treatment of Affected Loans......................... 31
Section 2.16. Risk-Based Capital.................................. 31
Section 2.17. Certain Compensation................................ 32
Section 2.18. Capital Adequacy.................................... 32
Section 2.19. Taxes ............................................. 33
ARTICLE III. LETTERS OF CREDIT............................................. 34
Section 3.01. Letters of Credit................................... 34
Section 3.02. Reimbursement Obligation............................ 35
Section 3.03. Payment of Commissions, Expenses and
Interest..................................... 36
Section 3.04. Proper Drawing; the Issuing Bank's
Honoring..................................... 37
Section 3.05. Amendment, Change, Modification; No
Waiver....................................... 38
Section 3.06. U.C.P.; Agreements and Acknowledgements;
Indemnifications............................. 38
Section 3.07. Continuing Rights and Obligations................... 40
Section 3.08. Instructions; No Liability.......................... 40
Section 3.09. Amended Agreement................................... 41
............................................. 41
Section 3.10. Letter of Credit Overdrafts......................... 41
Section 3.11. Obligation Absolute. .............................. 41
Section 3.12. Change in Law....................................... 42
Section 3.13. Liability of the Issuing Bank....................... 43
Section 3.14. Termination of Obligations.......................... 43
Section 3.15. Notice of Request for Extension..................... 44
ARTICLE IV. PARTICIPATIONS................................................. 44
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Section 4.01. Participating Lenders' Pro Rata Shares.............. 44
Section 4.02. Sale and Purchase of Participations................. 44
Section 4.03. Participation in Fees and Collateral;
Relationship................................. 44
Section 4.04. Procedures.......................................... 45
Section 4.05. Collections and Remittances......................... 46
Section 4.06. Sharing of Setoffs and Collections.................. 47
Section 4.07. Indemnification; Costs and Expenses................. 47
Section 4.08. Administration; Standard of Care.................... 48
Section 4.09. Independent Investigation by the
Participating Lenders........................ 49
Section 4.10. Participating Lenders' Ownership of
Interests in the Participations. ........... 50
ARTICLE V. CONDITIONS PRECEDENT............................................ 50
Section 5.01. Conditions Precedent to the Effectiveness
of this Agreement and Initial Use of a
Credit Facility on and after the Second
Closing Date................................. 50
Section 5.02. Conditions Precedent to Each Use of a
Credit Facility after the Second Closing
Date......................................... 52
Section 5.03. Deemed Representation............................... 52
ARTICLE VI. REPRESENTATIONS AND WARRANTIES................................. 53
Section 6.01. Incorporation, Good Standing and Due
Qualification................................ 53
Section 6.02. Corporate Power and Authority; No
Conflicts.................................... 53
Section 6.03. Legally Enforceable Agreements...................... 53
Section 6.04. Litigation.......................................... 53
Section 6.05. Financial Statements................................ 54
Section 6.06. Statutory Financial Statements...................... 55
Section 6.07. Ownership and Liens................................. 56
Section 6.08. Taxes ............................................. 56
Section 6.09. ERISA ............................................. 57
Section 6.10. Operation of Business............................... 57
Section 6.11. Insurance Licenses.................................. 57
Section 6.12. No Default on Outstanding Judgments or
Orders....................................... 58
Section 6.13. No Defaults on Other Agreements..................... 58
Section 6.14 Subsidiaries and Ownership of Stock................. 58
Section 6.15. Governmental Regulation............................. 59
Section 6.16. Partnerships........................................ 59
Section 6.17. Environmental Protection............................ 59
Section 6.18. Solvency............................................ 60
Section 6.19. Governmental Approvals.............................. 60
Section 6.20. Lines of Business................................... 60
Section 6.21. Reinsurance Practices............................... 60
ARTICLE VII. AFFIRMATIVE COVENANTS......................................... 60
Section 7.01. Maintenance of Existence............................ 60
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Section 7.02. Conduct of Business................................. 60
Section 7.03. Maintenance of Properties........................... 61
Section 7.04. Maintenance of Records.............................. 61
Section 7.05. Maintenance of Insurance............................ 61
Section 7.06. Compliance with Laws................................ 61
Section 7.07. Right of Inspection................................. 61
Section 7.08. Reporting Requirements.............................. 61
Section 7.09. Compliance With Environmental Laws.................. 68
Section 7.10. Borrower's Accounts................................. 69
ARTICLE VIII. NEGATIVE COVENANTS........................................... 70
Section 8.01. Debt ............................................. 70
Section 8.02. Guaranties.......................................... 70
Section 8.03. Liens ............................................. 71
Section 8.04. Sale of Assets...................................... 72
Section 8.05. Transactions with Affiliates........................ 72
Section 8.06. Mergers............................................. 73
Section 8.07. Leases ............................................. 73
Section 8.08. Investments......................................... 73
Section 8.09. Fiscal Year......................................... 74
Section 8.10. Changes, Amendments or Modifications................ 74
Section 8.11. Changes in Business................................. 74
Section 8.12. Capital Expenditures................................ 74
ARTICLE IX. FINANCIAL COVENANTS............................................ 75
Section 9.01. Minimum Consolidated Tangible Net Worth............. 75
Section 9.02. Navigators' and NIC's Statutory Surplus............. 75
Section 9.03. Fixed Charge Coverage Ratio......................... 75
Section 9.04. Minimum Liquidity of Borrower....................... 76
Section 9.05. Loss Reserves....................................... 76
Section 9.06. Minimum Consolidated Net Income..................... 76
Section 9.07. Risk Based Capital Ratio............................ 76
ARTICLE X. EVENTS OF DEFAULT............................................... 77
Section 10.01. Events of Default.................................. 77
Section 10.02. Remedies........................................... 81
ARTICLE XI. THE AGENT...................................................... 81
Section 11.01. Appointment, Powers and Immunities of the
Agent........................................ 81
Section 11.02. Reliance by the Agent.............................. 82
Section 11.03. Defaults........................................... 82
Section 11.04. Rights of the Agent as a Lender.................... 82
Section 11.05. Indemnification of the Agent....................... 83
Section 11.06. Non-Reliance on the Agent and the other
Lenders...................................... 83
Section 11.07. Failure of the Agent to Act........................ 84
Section 11.08. Resignation or Removal of the Agent................ 84
Section 11.09. Amendments Concerning Agency Function.............. 84
Section 11.10. Liability of the Agent............................. 85
Section 11.11. Transfer of Agency Function........................ 85
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ARTICLE XII. MISCELLANEOUS................................................. 85
Section 12.01. Amendments and Waivers............................. 85
Section 12.02. Usury ............................................. 85
Section 12.03. Expenses; Indemnification.......................... 85
Section 12.04. Assignment; Participation.......................... 86
Section 12.05. Notices............................................ 86
Section 12.06. Setoff............................................. 87
Section 12.07. Jurisdiction; Immunities........................... 87
Section 12.08. Governing Law...................................... 88
Section 12.09. Counterparts....................................... 88
Section 12.10. Exhibits and Schedules............................. 88
Section 12.11. Table of Contents; Headings........................ 88
Section 12.12. Severability....................................... 88
Section 12.13. Integration........................................ 89
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EXHIBITS
Exhibit 1.01A Counter Indemnity Agreement
Exhibit 1.01B Form of Request for Letter of Credit
Exhibit 2.07 Form of Revolving Credit Note
SCHEDULES
Schedule 1.01A Investment Guidelines
Schedule 1.01B Navigators' Accepted Credit List
Schedule 1.01C Tier-1 Reinsurer
Schedule 1.01D Tier-2 Reinsurer
Schedule 6.11 Insurance Licenses
Schedule 6.14 Subsidiaries and Ownership of Stock
Schedule 6.16 Partnerships
Schedule 6.20 Lines of Business
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<PAGE> 7
AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 26,
1996 among THE NAVIGATORS GROUP, INC. (the "Borrower"), BROWN BROTHERS HARRIMAN
& CO., ("BBH&Co."), NBD BANK ("NBD"), FIRST UNION NATIONAL BANK OF NORTH
CAROLINA ("First Union"), (each of BBH&Co., NBD and First Union a "Lender" and,
collectively, the "Lenders"), THE FIRST NATIONAL BANK OF CHICAGO, as issuer of
Letters of Credit (as defined below) ("Issuing Bank"), and BROWN BROTHERS
HARRIMAN & CO., as agent for the Lenders and the Issuing Bank (in such capacity,
together with its successors in such capacity, the "Agent"), amending and
restating the Credit Agreement dated as of August 5, 1994 among the Borrower,
the Lenders, and the Agent, as amended by a letter dated September 23, 1994, as
further amended by an Amendment to Credit Agreement and Pledge Agreement dated
as of January 1, 1995, and as further amended by a Third Amendment and Waiver to
Credit Agreement dated as of September 30, 1995, as further amended by a letter
dated June 24, 1996, and as further amended by a Fourth Amendment and Waiver
dated as of September 30, 1996.
PRELIMINARY STATEMENTS
1. References. Reference is made to the Credit Agreement dated
as of August 5, 1994 among the Borrower, the Lenders, and the Agent, as amended
by a letter dated September 23, 1994, as further amended by an Amendment to
Credit Agreement and Pledge Agreement dated as of January 1, 1995, as further
amended by a Third Amendment and Waiver to Credit Agreement dated as of
September 30, 1995, as further amended by a letter dated June 24, 1996, and as
further amended by a Fourth Amendment and Waiver to Credit Agreement dated as of
September 30, 1996 (as amended, the "1994 Credit Agreement").
2. Amendment and Restatement. To the extent this Amended and
Restated Credit Agreement amends the 1994 Credit Agreement, the 1994 Credit
Agreement is amended, and to the extent this Amended and Restated Credit
Agreement restates the 1994 Credit Agreement, the 1994 Credit Agreement is
restated.
The parties hereto agree as follows:
ARTICLE I. DEFINITIONS, ACCOUNTING TERMS AND RULES OF
CONSTRUCTION
Section 1.01. Definitions. As used in this Agreement the
following terms have the following meanings (terms defined in the singular to
have a correlative meaning when used in the plural and vice versa):
"Additional Costs" has the meaning specified in
Section 2.12.
<PAGE> 8
"Affected Loans" has the meaning specified in Section
2.15.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is controlled by, or is under common control
with such Person; provided, that, for the avoidance of doubt, as to the Borrower
the term "Affiliate" shall specifically include Somerset Bermuda Ltd., a Bermuda
corporation. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Agent" means BBH&Co., when acting in its capacity as the
agent under any of the Loan Documents, and any successor thereto.
"Agency Fee" has the meaning specified in Section
2.06.
"Agent's Office" means the Agent's address as set forth on the
signature page of this Agreement, or such other address as the Agent may
designate by written notice to the Borrower, the Lenders and the Issuing Bank.
"Agreement" means this Amended and Restated Credit
Agreement.
"A.M. Best" means A.M. Best Company, Inc.
"Amendment Fee" has the meaning specified in Section
2.06.
"Annual Statement" means the annual financial statement of an
Insurance Subsidiary as required to be filed with the insurance commissioner (or
similar authority) in such Insurance Subsidiary's state of domicile, together
with all exhibits or schedules filed therewith, prepared in conformity with SAP.
"Applicable Insurance Regulatory Authority" means, when used
with respect to any Regulated Company, the insurance department or similar
administrative authority or agency located in (1) each state in which such
Regulated Company is domiciled and (2) to the extent asserting regulatory
jurisdiction over such Regulated Company, the insurance department, authority or
agency in each state in which such Regulated Company is licensed, eligible as an
excess or surplus line insurer or accredited as a reinsurer and shall include
any Federal insurance regulatory department, authority or agency that may be
created and that asserts regulatory jurisdiction over such Regulated Company.
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<PAGE> 9
"Applicable Lending Office" means, for each Lender and for
each type of Loan, the lending office of such Lender (or of an affiliate of such
Lender) designated as such for such type of Loan on its signature page hereof,
or such other office of such Lender (or of an affiliate of such Lender) as such
Lender may from time to time specify to the Agent and the Borrower as the office
by which its Loan of such type are to be made and maintained.
"Applicable Margin" means: with respect to a LIBOR Loan, (1)
from the First Closing Date to and including May 31, 1996, two percent (2.00%),
and (2) from June 1, 1996 to and including the Revolving Credit Termination
Date, one percent (1.00%).
"Approved Reinsurer" means a Tier-1 Reinsurer, a
Tier-2 Reinsurer or a Tier-3 Reinsurer.
"Authorized Person" means any officer or employee, or
combination thereof of the Borrower as authorized pursuant to the terms and
conditions of the corporate certificate provided to the Issuing Bank by the
Borrower for such purpose from time to time.
"Base Rate" means that rate of interest from time to
time announced by BBH&Co. at its Head Office as its base
commercial lending rate.
"Base Rate Loan" means all or any portion of a Loan when and
to the extent the interest rate therefor is determined by reference to the Base
Rate.
"BBH&Co." means Brown Brothers Harriman & Co., New
York.
"BBH&Co. Letter of Credit" has the meaning specified
in Section 3.01.
"Benchmark Statement" means, as of any date, with respect to
any Insurance Subsidiary, an annual financial statement of such Insurance
Subsidiary as would be prepared as of such date utilizing the identical format
utilized by such Insurance Subsidiary in preparing its 1995 Annual Statement
filed with the insurance commissioner (or similar authority) in such Insurance
Subsidiary's state of domicile (or, if such Insurance Subsidiary did not prepare
an Annual Statement in 1995, that format utilized by Navigators in preparing
Navigators' 1995 Annual Statement), with each page, line item and column of a
Benchmark Statement to contain the same type of information, computed in the
same manner, as contained in the identically numbered page, line item and column
of such 1995 Annual Statement, provided, however, if the format is changed
for the Annual Statement filed with the insurance commission
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<PAGE> 10
(or similar authority) and such change results in a change to the page, line
item or column from that used in the 1995 Annual Statement then changes in page,
line item or column, as the case may be, will be made in this Agreement to
ensure that the same substantive items continue to be measured under this
Agreement.
"Board of Governors" means the Board of Governors of
the Federal Reserve System.
"Borrower Depreciation" means, for any period,
depreciation and amortization of Borrower alone, all as
determined in accordance with GAAP.
"Borrower Earnings Before Depreciation" means, for
any period, Borrower Net Income plus Borrower Depreciation.
"Borrower Expense" means, for any period, total operating
expenses of Borrower alone, all as determined in accordance with GAAP.
"Borrower Liquid Assets" means, as of any date, the sum of (1)
each of the following owned by the Borrower free and clear of any Lien: (a)
cash, whether on hand or on deposit in a bank listed in the most recent
Navigator's Accepted Credit List, plus (b) the Fair Market Value of all open
market commercial paper of any corporation incorporated under the laws of the
United States of America or any state thereof and not an Affiliate of the
Borrower, which commercial paper is rated "P-1" or better by Moody's and "A-1"
or better by S&P plus (c) the Fair Market Value of all negotiable certificates
of deposit issued by any financial institution (or any Subsidiary thereof)
listed in the most recent Navigators' Accepted Credit List and maturing within
180 days from the date of acquisition thereof, (d) the Fair Market Value of all
bankers' acceptances created by any financial institution (or any Subsidiary
thereof) listed in the most recent Navigators' Accepted Credit List, plus (2)
the amount of Navigators' Allowable Dividends as of such date.
"Borrower Net Income" means, for any period, net income of the
Borrower alone, all as determined in accordance with GAAP.
"Borrower Pledge Agreement" means the Pledge Agreement dated
as of August 5, 1994, delivered by the Borrower on the First Closing Date, as
amended by the Amendment to Credit Agreement and Pledge Agreement dated as of
January 1, 1995.
"Borrower Pledge Agreement (Navigators)" means the
Pledge Agreement (Navigators) dated as of August 5, 1994.
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<PAGE> 11
"Borrowing Notice" means a notice given pursuant to, and in
accordance with, Section 2.02.
"Broken Funding Fee" means, with respect to a LIBOR Loan
either not borrowed or prepaid in whole or in part, an amount equal to the
present value (as of the date of such failure to borrow or prepayment and based
upon an interest rate equal to the rate under item (2) of this definition) of
the difference (which may not be a negative number) between (1) the amount of
interest which otherwise would have accrued on the principal amount of the LIBOR
Loan not borrowed or so prepaid over the period equal to the remaining portion
of the applicable Interest Period and (2) the amount of interest that the Lender
would earn if such principal amount were reinvested for all of or such remaining
portion, as the case may be, of the applicable Interest Period in Dollar
deposits in the London interbank market in an amount equal to the unborrowed or
the prepaid, as the case may be, principal amount and with a maturity
approximately equal to all or such remaining portion, as the case may be, of the
applicable Interest Period.
"Business Day" means: (1) any day other than a Saturday,
Sunday, or other day on which commercial banks in New York City are authorized
or required to close under the laws of the State of New York; and (2) if the
applicable day relates to a LIBOR Loan, an Interest Period with respect to a
LIBOR Loan, or notice with respect to any LIBOR Loan, a day on which dealings in
Dollar deposits are also carried on in the London interbank market and banks are
open for business in London.
"Capital Expenditures" means the Dollar amount of gross
expenditures (including the principal portion of payments under Capital Leases)
made for real property, fixed assets, property, plant and equipment, and all
renewals, improvements and replacements thereto (including, but not limited to,
maintenance and repairs thereof which should be capitalized in accordance with
GAAP) incurred or paid by the Borrower or any of its Subsidiaries.
"Capital Lease" means any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Cash Collateral" means (1) a deposit by the Borrower, made in
immediately available funds, to a savings, checking or time deposit account at
Agent or (2) the purchase by the Borrower of a certificate of deposit issued by
Agent and the execution of all documents and the taking of all steps required to
give Agent a perfected security interest in such deposit or certificate of
deposit or (3) the purchase by the Borrower of open market commercial paper of
any corporation incorporated under the laws of the United States of America or
any state thereof and not an Affiliate of the Borrower, which
5
<PAGE> 12
commercial paper is rated "P-1" or better by Moody's and "A-1" or better by S&P,
or (4) the purchase by the Borrower of direct obligations of the United States
of America or any agency thereof backed by the full faith and credit of the
United States government with maturities of one (1) year or less from the date
of acquisition, and, in each case, the execution of all documents and the taking
of all steps required to give Agent a perfected security interest in such
commercial paper or such direct obligations, as the case may be.
"Code" means the Internal Revenue Code of 1986, including any
rules and regulations promulgated thereunder.
"Collateral" means any and all of the securities pledged
pursuant to the Borrower Pledge Agreement and the Borrower Pledge Agreement
(Navigators).
"Commitment" means, collectively, the Revolving Credit
Commitment and the Letter of Credit Commitment.
"Commitment Fee" has the meaning specified in Section 2.06.
"Consolidated Current Portion of Long Term Debt" means, as of
any date, the sum of (1) the portion of Consolidated Long Term Debt required to
be paid within one (1) year of such date, plus (2) the aggregate principal
amount of all Revolving Credit Loans that will be required to be prepaid within
one (1) year of such date so that the aggregate principal amount of all
outstanding Revolving Credit Loans does not exceed the then effective Revolving
Credit Commitment.
"Consolidated Long Term Debt" means, as of any date, the long
term debt of the Borrower and its Consolidated Subsidiaries, on a consolidated
basis, all as determined in accordance with GAAP plus (without duplication) the
aggregate unpaid principal amount of all Revolving Credit Loans.
"Consolidated Net Income" means, for any period, the net
income of the Borrower and its Consolidated Subsidiaries, on a consolidated
basis, all as determined in accordance with GAAP.
"Consolidated Net Investment Income" means, for any period,
net investment income of the Borrower and its Consolidated Subsidiaries, on a
consolidated basis, all as determined in accordance with GAAP.
"Consolidated Subsidiaries" means all Subsidiaries of the
Borrower that should be included in the Borrower's consolidated financial
statements, all as determined in accordance with GAAP.
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<PAGE> 13
"Consolidated Tangible Net Worth" means the excess of (1)
Consolidated Total Tangible Assets, over (2) Consolidated Total Liabilities.
"Consolidated Total Assets" means the total assets of Borrower
and its Consolidated Subsidiaries, on a consolidated basis, all as determined in
accordance with GAAP.
"Consolidated Total Intangible Assets" means, at any time, all
intangible assets of the Borrower and its Consolidated Subsidiaries, on a
consolidated basis, including, but not limited to, goodwill, patents,
trademarks, tradenames, copyrights and franchises, all as determined in
accordance with GAAP.
"Consolidated Total Liabilities" means total liabilities of
Borrower and its Consolidated Subsidiaries, on a consolidated basis, all as
determined in accordance with GAAP.
"Consolidated Total Operating Expenses" means, for any period,
total operating expenses of the Borrower and its Consolidated Subsidiaries, on a
consolidated basis, all as determined in accordance with GAAP.
"Consolidated Total Revenues" means, for any period, the total
revenues of the Borrower and its Consolidated Subsidiaries, on a consolidated
basis, all as determined in accordance with GAAP.
"Consolidated Total Tangible Assets" means, at any time,
Consolidated Total Assets minus Consolidated Total Intangible Assets.
"Consolidated Underwriting Losses" means, for any period, the
total of each of the following for such period (1) Consolidated Total Revenues,
minus (2) Consolidated Net Investment Income, minus (3) Consolidated Total
Operating Expenses, provided, however, in no event will such total exceed
zero Dollars ($0).
"Counter Indemnity Agreement" means a Counter Indemnity
Agreement substantially in the form of Exhibit 1.01A, to be delivered by the
Borrower under the terms of this Agreement.
"Credit Facilities" means the Revolving Credit Loans and the
Letters of Credit, or both, all as the context may require.
"Debt" means: (1) indebtedness or liability for borrowed
money, or for the deferred purchase price of property or services (including
trade obligations); (2) obligations as lessee under Capital Leases; (3) current
liabilities in respect
7
<PAGE> 14
of unfunded vested benefits under any Plan; (4) obligations under or related to
letters of credit issued for the account of any Person; (5) all obligations
arising under bankers' or trade acceptance facilities of any Person; (6) all
guarantees, endorsements (other than for collection or deposit in the ordinary
course of business), and other contingent obligations to purchase any of the
items included in this definition, to provide funds for payment, to supply funds
to invest in any Person, or otherwise to assure a creditor against loss; (7) all
obligations secured by any Lien on property owned by such Person, whether or not
the obligations have been assumed; (8) all obligations under any agreement
providing for a swap, ceiling rates, ceiling and floor rates, contingent
participation or other hedging mechanisms with respect to interest payable on
any of the items described above in this definition; and (9) all forward foreign
exchange contracts.
"Default" means any event which with the giving of notice or
lapse of time, or both, would become an Event of Default.
"Default Rate" means, with respect to an amount of any Loan
not paid when due, a rate per annum equal to: (1) if such Loan is a Base Rate
Loan, a variable rate one and one-half percent (1.5%) above the rate of interest
then in effect thereon; and (2) if such Loan is a LIBOR Loan, a fixed rate one
and one-half percent (1.5%) above the rate of interest in effect thereon
(including the Applicable Margin) at the time of default until the end of the
then current Interest Period therefor and, thereafter, a variable rate one and
one-half percent (1.5%) above the rate of interest for a Base Rate Loan.
"Dollars" and the sign "$" mean lawful money of the United
States of America.
"Environmental Discharge" means any discharge or release of
any Hazardous Materials in violation of any applicable Environmental Law.
"Environmental Law" means any Law relating to pollution or the
environment, including Laws relating to noise or to emissions, discharges,
releases or threatened releases of Hazardous Materials into the workplace, the
community or the environment, or otherwise relating to the generation,
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials.
"Environmental Notice" means any complaint, order, citation,
letter, inquiry, notice or other written communica tion from any Person (1)
affecting or relating to the Borrower's compliance with any Environmental Law in
connection with any activity or operations at any time conducted by the
Borrower, (2) relating to the occurrence or presence (as
8
<PAGE> 15
defined below) of or exposure to or possible or threatened or alleged occurrence
or presence (as defined below) of or exposure to Environmental Discharges or
Hazardous Materials at any of the Borrower's locations or facilities, including,
without limitation: (a) the existence of any contamination or possible or
threatened contamination at any such location or facility; and (b) remediation
of any Environmental Discharge or Hazardous Materials at any such location or
facility or any part thereof; and (3) any violation or alleged violation of any
relevant Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of
1974, including any rules and regulations promulgated thereunder.
"ERISA Affiliate" means any entity required to be aggregated
with the Borrower under Section 414(b), (c), (m), or (o) of the Code.
"Event of Default" has the meaning specified in Section 10.01.
"Existing Lines of Business" has the meaning set forth in
Section 6.20.
"Existing Revolving Credit Loans" means, as of the Second
Closing Date, all Revolving Credit Loans outstanding under and as defined in the
1994 Credit Agreement.
"Existing Term Loan" means, as of the Second Closing Date, the
Term Loan outstanding under and as defined in the 1994 Credit Agreement.
"Fair Market Value" means with respect to any security the
price at which such security in the same or similar amount and with the same or
similar terms is then trading in the applicable markets for such security.
"Federal Funds Rate" means, for any day, the rate per annum
(calculated on the basis of the actual number of days elapsed in a year of 360
days) equal to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day, the
arithmetic average of the quotations for such day on such transactions received
by the Lenders from three (3) federal funds brokers of recognized standing
selected by the Agent.
"First Closing Date" means August 5, 1994.
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<PAGE> 16
"First Union" means First Union National Bank of North
Carolina.
"Fiscal Quarter" means each period from one Quarterly Date to
the next Quarterly Date.
"Fiscal Year" means each period from January 1 to December 31.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the financial statements
referred to in Section 6.05.
"Good Faith Contest" means the contest of an item if: (1) the
item is diligently contested in good faith by approp riate proceedings timely
instituted; (2) adequate reserves are established with respect to the contested
item; (3) during the period of such contest, the enforcement of any contested
item is effectively stayed; and (4) the failure to pay or comply with the
contested item could not reasonably be expected to result in a Material Adverse
Change.
"Governmental Approvals" means any authorization, consent,
approval, license, permit, certification, or exemption of, registration or
filing with or report or notice to, any Governmental Authority.
"Governmental Authority" means any nation or govern ment, any
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
government.
"Gross Premiums Written" means, for any period, the sum of (1)
the aggregate amount of premiums written by the Insurance Subsidiaries during
such period, all as determined in accordance with GAAP plus (2) two times the
aggregate face amount (measured in Dollars) of all Letters of Credit outstanding
as of the last day of such period.
"Hazardous Materials" means any pollutant, effluents,
emissions, contaminants, toxic or hazardous wastes or sub stances, as any of
those terms are defined from time to time in or for the purposes of any relevant
Environmental Law, inclu ding asbestos fibers and friable asbestos,
polychlorinated biphenyls, and any petroleum or hydrocarbon-based products or
derivatives.
"Head Office" means the then principal office of BBH&Co.,
which is currently located at 59 Wall Street, New York, New York, 10005.
10
<PAGE> 17
"Independent Actuary" means the independent actuarial firm
performing the actuarial review of the Annual Statement of each Insurance
Subsidiary.
"Instructions" means oral or written instructions or
instructions transmitted by teleprocess given on behalf of the Borrower by one
or more Authorized Persons.
"Instrument" means with respect to any Letter of Credit any
draft, receipt, acceptance, teletransmission, including, but not limited to,
telex or cable, or other written demand for payment under such Letter of Credit.
"Insurance Business" means the business of selling, issuing or
underwriting insurance or reinsurance, as an insurer, reinsurer, agent, broker,
manager or intermediary.
"Insurance Subsidiary" means each of Navigators, NIC and any
other Subsidiary of the Borrower which engages in, or is authorized to engage
in, the Insurance Business as an insurer or reinsurer.
"Interest Period" means, with respect to any LIBOR Loan, the
period commencing on the date such LIBOR Loan is made and ending, as the
Borrower may select pursuant to Section 2.05, on the numerically corresponding
day in the first, second, third or sixth calendar month thereafter; provided,
that each such Interest Period which commences on the last Business Day of a
calendar month (or on any day for which there is no numerically corresponding
day in the appropriate subsequent calendar month) shall end on the last Business
Day of the appropriate calendar month.
"Investment Grade" means, with respect to any debt securities,
(1) a rating of Baa3 (or its equivalent) or better by Moody's, if rated by
Moody's, and (2) a rating of BBB- (or its equivalent) or better by S&P, if rated
by S&P.
"Investment Guidelines" means the guidelines for investments
by Insurance Subsidiaries set forth on Schedule 1.01A, as such Schedule may be
amended (in writing) with the consent of the Required Lenders.
"Issuing Bank" means The First National Bank of
Chicago.
"Law" means any federal, state or local statute, law, rule,
regulation, ordinance, order, code, or rule of common law, now or hereafter in
effect, and any judicial or administrative interpretation thereof by a
Governmental Authority or otherwise, including any judicial or administrative
order, consent decree, judgment or circular letter.
11
<PAGE> 18
"Lender" or "Lenders" has the meaning specified in
the preamble to this Agreement.
"Lender Parties" means the Agent, the Issuing Bank,
and each of the Lenders.
"Letter of Credit" has the meaning specified in
Section 3.01.
"Letter of Credit Commitment" has the meaning
specified in Section 3.01.
"Letter of Credit Fee" has the meaning specified in
Section 3.03.
"Letter of Credit Obligations" means at any time an amount
equal to the sum of: (1) the aggregate unused face amount of all outstanding
Letters of Credit, plus (2) the aggregate amount of all unreimbursed obligations
on Letters of Credit, plus (3) the aggregate amount of all overdrafts created to
satisfy any of the foregoing obligations.
"Letter of Credit Termination Date" means January 2,
1998.
"LIBOR Base Rate" means, with respect to any LIBOR Loan for
any Interest Period therefor, a rate per annum equal to the London interbank
offered rate for Dollar deposits, that appears on the display designated as page
"3750" of the Telerate Service (or such other page as may replace the 3750 page
on that service or such other service or services as may be maintained by the
British Bankers' Association for the purpose of displaying London interbank
offered rates for Dollar deposits) as of 11:00 a.m. New York time on the day
that is two (2) Business Days prior to the first day of such Interest Period for
a period, and in an amount, comparable to such Interest Period.
"LIBOR Interest Rate" means for any LIBOR Loan, a rate per
annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by
the Agent to be equal to the quotient of (1) the LIBOR Base Rate for such Loan
for the Interest Period therefor divided by (2) one minus the LIBOR Reserve
Requirement for such Interest Period.
"LIBOR Loan" means all or any portion of the Revolving Credit
Loan when and to the extent the interest rate therefor is determined by
reference to the LIBOR Interest Rate.
"LIBOR Reserve Requirement" means, for any LIBOR Loan, the
average maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during the Interest Period for
such Loan under
12
<PAGE> 19
Regulation D by member banks of the Federal Reserve System in New York City with
deposits exceeding One Billion Dollars ($l,000,000,000) against "Eurocurrency
liabilities" (as such term is used in Regulation D). Without limiting the effect
of the foregoing, the LIBOR Reserve Requirement shall also reflect any other
reserves required to be maintained by such member banks by reason of any
Regulatory Change against (1) any category of liabilities which includes
deposits by reference to which the LIBOR Base Rate is to be determined or (2)
any category of extensions of credit or other assets which include LIBOR Loans.
"Licenses" has the meaning specified in Section 6.11.
"Lien" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrange ment, encumbrance, lien
(statutory or other), or preference, priority, or other security agreement or
preferential arrange ment, charge, or encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substan tially the same economic
effect as any of the foregoing, and the filing of any financing statement under
the Uniform Commer cial Code or comparable Law of any jurisdiction to evidence
any of the foregoing).
"Loan Document(s)" means this Agreement, the Notes, the
Letters of Credit, the Borrower Pledge Agreement, the Borrower Pledge Agreement
(Navigators), and the Counter Indemnity Agreement.
"Loss Reserves" means, at any date, with respect to any
Insurance Subsidiary, the sum of the following items: (1) losses, including
incurred but unreported losses (the total amount as shown on line 1, page 3,
column 1 of a Benchmark Statement for such Insurance Subsidiary) plus (ii) loss
adjustment expenses (the total amount as shown on line 2, page 3, column 1 of a
Benchmark Statement of such Insurance Subsidiary), all as determined in
accordance with SAP.
"Material Adverse Change" means either (1) a material adverse
change in the status of the business, assets, liabilities, results of
operations, condition (financial or otherwise), or property of any of (a) the
Borrower or (b) the Insurance Subsidiaries taken as a whole or (c) the
Subsidiaries of the Borrower (other than the Insurance Subsidiaries) taken as a
whole, or (2) any event or occurrence of whatever nature which could have a
material adverse effect on the Borrower's ability to perform its obligations
under the Loan Documents.
"Maximum Potential Loss" means the maximum possible reduction
of the consolidated surplus as regards policyholders of the Insurance
Subsidiaries (without regard to any
13
<PAGE> 20
Reinsurance Agreement or any Retrocession Agreement under which any such
Insurance Subsidiary is a cedent) which could result from any event or
occurrence, as reasonably estimated by the management of the Borrower.
"Monthly Date(s)" means the first Business Day of each month
occurring on or after the First Closing Date.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a Plan defined as such in
Section 3(37) of ERISA.
"NAIC" means the National Association of Insurance
Commissioners or any successor organization thereto.
"NAIC Tests" means the ratios and other financial measurements
developed by the NAIC under its Insurance Regulatory Information System, as in
effect from time to time.
"Navigators" means Navigators Insurance Company, a New York
corporation and a wholly-owned Subsidiary of the Borrower.
"Navigators' Accepted Credit List" means the list attached
hereto as Schedule 1.01B, as such list may be amended (in writing) from time to
time with the approval of the Required Lenders.
"Navigators' Allowable Dividends" means, for any period, the
maximum amount of dividends that can be paid by Navigators to its shareholder
without obtaining the approval of any Applicable Insurance Regulatory Authority.
"NBD" means NBD Bank.
"NCUL" means Navigators Corporate Underwriters Limited, and
such entity will be in the business of underwriting at Lloyd's of London as a
corporate name with limited liability.
"Net Tax Payments" means, for any period, the total of (1) the
aggregate amount of all funds received by the Borrower from any of its
Subsidiaries during such period where such funds are to be used by the Borrower
to pay taxes of the Borrower or any of its Subsidiaries, less (2) the aggregate
amount of all tax payments made by the Borrower to any Governmental Authority
during such period.
"NIC" means NIC Insurance Company, a New York corporation and
a direct wholly-owned Subsidiary of Navigators.
14
<PAGE> 21
"Obligations" means (1) each and every obligation, covenant
and agreement of the Borrower now or hereafter existing contained in this
Agreement and any of the other Loan Documents, whether for principal,
reimbursement obligations, interest, fees, expenses, indemnities or otherwise,
and any amendments or supplements thereto, extensions or renewals thereof or
replacements therefor, including but not limited to all indebtedness,
obligations and liabilities of the Borrower to the Agent and any Lender or the
Issuing Bank now existing or hereafter incurred under or arising out of or in
connection with the Notes, the Letter of Credit, this Agreement, the other Loan
Documents, and any documents or instruments executed in connection therewith,
(2) all sums advanced in accordance with either the Borrower Pledge Agreement or
the Borrower Pledge Agreement (Navigators) by or on behalf of the Agent or any
Lender or the Issuing Bank to protect any of the Collateral purported to be
covered thereby, (3) any amounts paid by the Agent or any Lender or the Issuing
Bank as to which the Agent or such Lender or the Issuing Bank has the right to
reimbursement from the Borrower, and (4) any amounts paid by the Agent or any
Lender or the Issuing Bank in preservation of any of the Agent's or Lenders' or
Issuing Bank's rights or interest in the Collateral or Cash Collateral, together
with interest on such amounts from the date such amounts are paid until
reimbursement in full at a rate per annum equal at all times to the Default Rate
on Base Rate Loans; in each case whether direct or indirect, joint or several,
absolute or contingent, liquidated or unliquidated, now or hereafter existing,
renewed or restructured, whether or not from time to time decreased or
extinguished and later increased, created or incurred, and including all
indebtedness of the Borrower under any instrument now or hereafter evidencing or
securing any of the foregoing.
"Parent" means, with respect to any Lender, any
Person controlling such Lender.
"Participating Lenders" means each Lender.
"Participation" has the meaning specified in Section
4.01.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Permitted Investments" means (1) direct obligations of the
United States of America or any agency thereof backed by the full faith and
credit of the United States government with maturities of one (1) year or less
from the date of acquisition, (2) all open market commercial paper of any
corporation incorporated under the laws of the United States of America or any
state thereof and not an Affiliate of the
15
<PAGE> 22
Borrower, which commercial paper is rated "P-1" or better by Moody's and "A-1"
or better by S&P, (3) time deposits or all negotiable certificates of deposit
issued by any financial institution (or any Subsidiary thereof) listed in the
most recent Navigators' Accepted Credit List and maturing within one hundred
eighty (180) days from the date of acquisition thereof, (4) all bankers'
acceptances created by any financial institution (or any Subsidiary thereof)
listed in the most recent Navigators' Accepted Credit List, and (5) all cash
management or other money market accounts provided by BBH&Co., First Union and
NBD.
"Permitted Reinsurance Percentage" means (1) with respect to a
Tier-1 Reinsurer, fifty percent (50%); (2) with respect to a Tier-2 Reinsurer,
fifteen percent (15%); and (3) with respect to a Tier-3 Reinsurer, five percent
(5%).
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or other entity of whatever nature.
"Plan" means any plan, agreement, arrangement or commitment
which is an employee benefit plan, as defined in Section 3(3) of ERISA,
maintained by the Borrower or any ERISA Affiliate or with respect to which the
Borrower or any ERISA Affiliate at any relevant time has any liability or
obligation to contribute.
"Pounds" and the sign "(pound)" mean lawful money of the
United Kingdom.
"presence", when used in connection with any Environmental
Discharge or Hazardous Materials, means and includes presence, generation,
manufacture, installation, treatment, use, storage, handling, repair,
encapsulation, disposal, transportation, spill, discharge and release.
"Principal Office" means the principal office of the Issuing
Bank, presently located at Suite 0236, Chicago, Illinois 60670.
"Projected Dividends" means as of the date of determination
four (4) times the aggregate amount of all dividends paid by the Borrower in the
most recent fiscal quarter in which dividends were paid by Borrower.
"Pro Rata Share" means (1) with respect to each Lender's share
of the Revolving Credit Commitment and such Lender's share of each of the
Commitment Fees and the Revolving Credit Amendment Fee, a fraction, the
numerator of which is such Lender's portion of the Revolving Credit Commitment
and the denominator of which is the Revolving Credit Commitment,
16
<PAGE> 23
and (2) with respect to each payment to a Lender on the Revolving Credit Loans,
a fraction, the numerator of which is the outstanding principal amount of all
such Revolving Credit Loans owed to such Lender, and the denominator of which is
the outstanding principal amount of all such Revolving Credit Loans owed to all
Lenders.
The amount of each Lender's portion of the Revolving Credit
Commitment and its Pro Rata Share of the Revolving Credit Commitment as of the
Second Closing Date is as follows:
<TABLE>
<CAPTION>
Lender Commitment Pro Rata Share
- ----------------------------- ---------------------------- ------------------------
<S> <C> <C>
BBH&Co. $ 3,333,334.00 16.666667%
NBD $10,000,000.00 50.000000%
First Union $ 6,666,666.00 33.333333%
------------- ----------
Total Revolving
Credit Commitment $20,000,000.00 100%
</TABLE>
"Prohibited Transaction" means any transaction prohibited
under Section 406 of ERISA or Section 4975 of the Code.
"Quarterly Date(s)" means the last Business Day of each March,
June, September and December occurring on or after the Closing Date.
"Quarterly Period" means the period from the day after any
Quarterly Date to the immediately following Quarterly Date.
"RBC Model Act" has the meaning specified in Section
9.07.
"Readily Marketable Securities" means any security which can
be sold without restriction or limitation in a recognized market for the sale of
such security.
"Regulated Company" means any Subsidiary of the Borrower,
whether now owned or hereafter acquired, that is authorized, licensed, admitted
or declared eligible to carry on or transact Insurance Business in any
jurisdiction and is regulated by the insurance department or similar regulatory
authority of such jurisdiction.
"Regulatory Change" means, with respect to any Lender, any
change after the First Closing Date in United States Federal law, state law or
foreign law or regulations (including, without limitation, Regulation D, G, T,
U, or X of the Board of Governors) or the adoption or making after such date of
any interpretation, directive or request applying to a class of banks including
such Lender of or under any United
17
<PAGE> 24
States Federal law, state law or foreign law or regulations (whether or not
having the force of law) by any court or governmental or monetary authority
charged with the interpretation or administration thereof.
"Reinsurance Agreement" means any agreement, contract, treaty
or other arrangement whereby one or more insurers, as reinsurers, assume
liabilities under insurance policies or agreements issued by another insurance
or reinsurance company or companies.
"Reinsurance Plan" means the reinsurance plan of Navigators
and NIC provided to the Lenders on or prior to the First Closing Date pursuant
to Section 5.01(g), together with all changes to such plan of which the Agent
and the Lenders receive notice pursuant to Section 7.08(16).
"Replacement Letter of Credit" has the meaning specified in
Section 3.01.
"Reportable Event" means any of the events set forth in
Section 4043(b) of ERISA or in the regulations thereunder.
"Request for Letter of Credit" means a form of Request for a
Letter of Credit substantially in the form of Exhibit 1.01B, to be delivered by
the Borrower to the Issuing Bank in accordance with the terms of this Agreement.
"Required Lenders" means all the Lenders, except with regard
to Section 10.02 "Remedies" where it means at least two (2) Lenders.
"Retrocession Agreement" means any agreement, contract, treaty
or other arrangement whereby one or more insurers or reinsurers, as
retrocessionaires, assume liabilities of reinsurers under a Reinsurance
Agreement or other retrocessionaires under another Retrocession Agreement.
"Revolving Credit Amendment Fee" has the meaning specified in
Section 2.06.
"Revolving Credit Commitment" means for each period specified
below the amount specified for such period:
<TABLE>
<CAPTION>
================================================================================
Period Amount
- --------------------------------------------------------------------------------
<S> <C>
From the Second Closing $20,000,000
Date to and including
December 31, 1996
- --------------------------------------------------------------------------------
From January 1, 1997 to and $19,500,000
including March 31, 1997
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 25
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
From April 1, 1997 to and $19,000,000
including June 30, 1997
- --------------------------------------------------------------------------------
From July 1, 1997 to and $18,500,000
including September 30,
1997
- --------------------------------------------------------------------------------
From October 1, 1997 to and $18,000,000
including December 31, 1997
- --------------------------------------------------------------------------------
From January 1, 1998 to and $17,500,000
including March 31, 1998
- --------------------------------------------------------------------------------
From April 1, 1998 to and $17,000,000
including June 30, 1998
- --------------------------------------------------------------------------------
From July 1, 1998 to and $16,500,000
including September 30,
1998
- --------------------------------------------------------------------------------
From October 1, 1998 to and $16,000,000
including December 31, 1998
- --------------------------------------------------------------------------------
From January 1, 1999 to and $15,500,000
including March 31, 1999
- --------------------------------------------------------------------------------
From April 1, 1999 to and $15,000,000
including June 30, 1999
- --------------------------------------------------------------------------------
From July 1, 1999 to and $14,500,000
including September 30,
1999
- --------------------------------------------------------------------------------
From October 1, 1999 to and $13,000,000
including December 31, 1999
- --------------------------------------------------------------------------------
From January 1, 2000 to and $11,000,000
including March 31, 2000
- --------------------------------------------------------------------------------
From April 1, 2000 to and $ 9,000,000
including June 30, 2000
- --------------------------------------------------------------------------------
From July 1, 2000 to and $ 7,000,000
including September 30,
2000
- --------------------------------------------------------------------------------
From October 1, 2000 to and $ 5,000,000
including December 31, 2000
- --------------------------------------------------------------------------------
From January 1, 2001 to and $ 4,250,000
including March 31, 2001
- --------------------------------------------------------------------------------
From April 1, 2001 to and $ 3,500,000
including June 30, 2001
- --------------------------------------------------------------------------------
From July 1, 2001 to and $ 2,750,000
including September 30,
2001
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 26
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
From October 1, 2001 to and $ 2,000,000
including December 31, 2002
================================================================================
</TABLE>
"Revolving Credit Loan(s)" has the meaning specified
in Section 2.01.
"Revolving Credit Note(s)" has the meaning specified
in Section 2.07.
"Revolving Credit Termination Date" means December
31, 2002.
"SAP" means with respect to any Insurance Subsidiary, the
accounting procedures and practices prescribed or permitted by the Applicable
Insurance Regulatory Authority of the state in which such Insurance Subsidiary
is domiciled.
"S&P" means Standard & Poor's Rating Group.
"Second Closing Date" means November 26, 1996.
"Secured Parties" means the Agent and each of the
Lenders.
"Semi-Annual Date" means each June 30 and
December 31.
"Share" has the meaning specified in Section 4.01.
"Solvent" means, when used with respect to any Person, that
(1) the fair value of the property of such Person, on a going concern basis, is
greater than the total amount of liabilities (including, without limitation,
contingent liabilities) of such Person, (2) the present fair saleable value of
the assets of such Person, on a going concern basis, is not less than the amount
that will be required to pay the probable liabilities of such Person on its
debts as they become absolute and matured, (3) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature, and (4) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's property would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged. Contingent liabilities
will be computed at the amount that, in light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.
20
<PAGE> 27
"Somerset Companies" means, collectively, Somerset Marine,
Inc., a New York corporation; Somerset of Georgia, Inc., a Georgia corporation;
Somerset Insurance Services of California, Inc., a California corporation;
Somerset Insurance Services of Texas, Inc., a Texas corporation; Somerset
Insurance Services of Washington, Inc., a Washington corporation; Somerset
Property, Inc., a New York corporation; Somerset Re Management, Inc., a Delaware
corporation; Navigators Management Corporation, a New York corporation; Somerset
Asia Pacific Pty. Ltd., an Australian corporation; and in the event any or all
of the foregoing corporations merge into each other in accordance with the terms
of this Agreement the surviving corporation of such merger.
"Somerset Depreciation" means, for any period, depreciation
and amortization of the Somerset Companies, on a combined basis, all as
determined in accordance with GAAP.
"Somerset Earnings Before Depreciation" means, for
any period, Somerset Net Income plus Somerset Depreciation.
"Somerset Net Income" means, for any period, net income of the
Somerset Companies, on a combined basis, all as determined in accordance with
GAAP.
"Statutory Financial Statements" has the meaning
specified in Section 6.06.
"Statutory Surplus" means, at any date, with respect to any
Insurance Subsidiary, the surplus as regards policyholders of such Insurance
Subsidiary (the total amount as would be shown on line 25, page 3, column 1 of a
Benchmark Statement for such Insurance Subsidiary prepared as of such date), all
as determined in accordance with SAP.
"Subsidiary" means, as to any Person, a corporation of which
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the time owned,
or the management of which is otherwise controlled, directly, or indirectly
through one or more intermediaries, or both, by such Person.
"Surplus Relief Reinsurance Transaction" shall mean any
"financing-type" Retrocession Agreement or Reinsurance Agreement in which an
Insurance Subsidiary cedes business, which Retrocession Agreement or Reinsurance
Agreement does not involve significant transfer of risk, and is deemed not to
qualify as reinsurance, under GAAP at the time such Agreement is entered into.
21
<PAGE> 28
"Tier-1 Reinsurer" means each Person listed on Schedule 1.01C
and having the word "YES" set forth opposite its name in the "Approved" column
of such Schedule, as such Schedule may be amended (in writing) from time to time
with the consent of the Required Lenders.
"Tier-2 Reinsurer" means each Person (1) listed on Schedule
1.01D and having the word "YES" set forth opposite its name in the "Approved"
column of such Schedule, as such Schedule may be amended (in writing) from time
to time with the consent of the Required Lenders, and (2) rated "A-" or higher
by A.M. Best, if rated by A.M. Best or, if not rated by A.M. Best, which passes
a minimum of five (5) of the Insurance Services Institute tests.
"Tier-3 Reinsurer" means each Person rated "A-" or higher by
A.M. Best, if rated by A.M. Best or, if not rated by A.M. Best, which passes a
minimum of five (5) of the Insurance Services Institute tests.
"Uniform Customs and Practices" means, with regard to the
Letter of Credit, the Uniform Customs and Practices for Documentary Letters or
Credit (1993 Revisions), International Chamber of Commerce Publication No. 500,
and any subsequent revision thereof adhered to by the Issuing Bank.
Section 1.02. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP, and all
financial data required to be delivered hereunder shall be prepared in
accordance with GAAP, except as otherwise specifically provided herein.
References in the Annual Statements to amounts on particular
exhibits, schedules, lines, pages and columns of the Annual Statement are based
on the format promulgated by the NAIC for 1995 Annual Statements. If such format
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 1995
Annual Statement of Navigators.
Section 1.03. Computation of Time Periods. Except as otherwise
provided herein, in this Agreement, in the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including" and words "to" and "until" each means "to but excluding".
Section 1.04. Rules of Construction. When used in this
Agreement: (1) "or" is not exclusive; (2) a reference to a Law includes any
amendment or modification to such Law; (3) a reference to a Person includes its
permitted successors and permitted assigns; and (4) a reference to an agreement,
instrument or document shall include such agreement, instrument or document as
the same may be amended, modified or
22
<PAGE> 29
supplemented from time to time in accordance with its terms and as permitted by
the Loan Documents.
ARTICLE II. REVOLVING CREDIT LOANS
Section 2.01. Revolving Credit. The Borrower and each Lender
acknowledge that as of the opening of business on the Second Closing Date there
are outstanding Existing Revolving Credit Loans in the amount of Two Million
Dollars ($2,000,000) and Existing Term Loans in the amount of Fifteen Million
Dollars ($15,000,000). The Borrower and the Lenders agree that on the Second
Closing Date the Existing Revolving Credit Loan will continue as Revolving
Credit Loans under this Agreement and the Existing Term Loans will be converted
into Revolving Credit Loans under this Agreement.
Subject to the terms and conditions of this Agreement, each of
the Lenders severally agrees to make loans (the "Revolving Credit Loans") pro
rata according to each such Lender's Pro Rata Share of the Revolving Credit
Commitment, to the Borrower from time to time during the period from the Second
Closing Date up to but not including the Revolving Credit Termination Date,
provided that the aggregate principal amount of all Revolving Credit Loans
outstanding at any time does not exceed the then effective Revolving Credit
Commitment. Each Revolving Credit Loan which shall not utilize the Revolving
Credit Commitment in full shall be in the minimum amount set forth in Section
2.11. Within the limits of the Revolving Credit Commitment, the Borrower may
borrow, make an optional prepayment pursuant to Section 2.08, and reborrow under
this Section 2.01.
The failure of any Lender to make any requested Revolving
Credit Loan to be made by it on the date specified for such Revolving Credit
Loan shall not relieve any other Lender of its obligation (if any) to make its
Pro Rata Share of such Revolving Credit Loan on such date, but no Lender shall
be responsible for the failure of any other Lender to make such Revolving Credit
Loans to be made by such other Lender.
Section 2.02. Notice and Manner of Borrowing. The Borrower
shall give the Agent at least three (3) Business Days' written or telegraphic or
facsimile notice (effective upon receipt) of any Revolving Credit Loan to which
the LIBOR Interest Rate applies. The Borrower shall give the Agent written or
telegraphic or facsimile notice (effective upon receipt) of any Revolving Credit
Loan to which the Base Rate applies by not later than 10:00 A.M. (New York time)
one (1) Business Day before the date of such Loan. Each of the foregoing notices
(a "Borrowing Notice") must specify: (1) the date and the amount of such
Revolving Credit Loan; (2) either that the Revolving Credit Loan will bear
interest at (a) the
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Base Rate or (b) the LIBOR Interest Rate plus the Applicable Margin; and (3) in
the case of a LIBOR Loan, the initial Interest Period applicable thereto. The
Agent will promptly notify each Lender of receipt by the Agent of a Borrowing
Notice and of the contents thereof. Not later than 10:00 A.M. (New York time) on
the date of a LIBOR Loan and 2:00 P.M. (New York time) on the date of a Base
Rate Loan, each Lender will make available to the Agent at the Head Office in
immediately available funds such Lender's Pro Rata Share of such Loan. After the
Agent's receipt of such funds, not later than noon (New York time) on the date
of a LIBOR Loan and 3:00 P.M. (New York time) on the date of a Base Rate Loan,
and upon fulfillment of the applicable conditions set forth in Article V the
Agent will make such Revolving Credit Loan available to Borrower in immediately
available funds by crediting the amount thereof to Borrower's account with the
Agent.
Section 2.03. Non-Receipt of Funds by the Agent. Unless the
Agent shall have received notice from a Lender prior to the date on which such
Lender is to provide funds to the Agent for a Revolving Credit Loan to be made
by such Lender that such Lender will not make available to the Agent such funds,
the Agent may assume that such Lender has made such funds available to the Agent
on the date of such Revolving Credit Loan and the Agent, in its sole discretion,
may, but shall not be obligated to, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent such Lender shall not have made such funds available to the Agent, such
Lender agrees to repay the Agent forthwith on demand such corresponding amount
together with interest thereon, for each day from the date such amount is made
available to the Borrower until the date such amount is repaid to the Agent, at
the Federal Funds Rate. If such Lender shall repay to the Agent such
corresponding amount, such amount so repaid shall constitute such Lender's
Revolving Credit Loan for purposes of this Agreement. If such Lender does not
pay such corresponding amount forthwith upon the Agent's demand therefor, the
Agent shall promptly notify the Borrower, and the Borrower shall immediately pay
such corresponding amount to the Agent with the interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent, at the rate of interest applicable at the time to
such proposed Revolving Credit Loan.
Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to any Lender hereunder that the
Borrower will not make any payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent,
in its sole discretion, may, but shall not be obligated to, in reliance upon
such assumption, cause to be distributed to each Lender on such due date an
amount equal to the amount then due
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such Lender. If and to the extent the Borrower shall not have so made such
payment in full to the Agent, each Lender shall repay to the Agent forthwith on
demand such amount distributed to such Lender together with interest thereon,
for each day from the date such amounts are distributed to such Lender until the
date such Lender repays such amount to the Agent, at the Federal Funds Rate.
Section 2.04. Interest. The Borrower shall pay interest to the
Agent for the account of the Lenders on the outstanding and unpaid principal
amount of the Revolving Credit Loan at a rate per annum as follows: (1) for a
Base Rate Loan at a rate equal to the Base Rate; and (2) for a LIBOR Loan at a
rate equal to the LIBOR Interest Rate plus the Applicable Margin. Any principal
amount and any interest not paid when due (at maturity, by acceleration or
otherwise) shall bear interest thereafter, payable on demand, at the Default
Rate.
The interest rate on each Base Rate Loan shall change when the
Base Rate changes. Interest on each Revolving Credit Loan shall not exceed the
maximum amount permitted under applicable Law and shall be calculated on the
basis of a year of three hundred sixty (360) days for the actual number of days
elapsed.
Accrued interest on each Base Rate Loan shall be due and
payable on each Monthly Date in arrears. Accrued interest on each LIBOR Loan
shall be due and payable on the last day of the Interest Period for such Loan,
and, in the case of an Interest Period greater than three (3) months, at three
(3) month intervals after the first day of such Interest Period. Interest
accruing at the Default Rate shall be due and payable on demand.
LIBOR Loans shall be in minimum amounts of One Million Dollars
($1,000,000) and incremental multiples of Two Hundred Fifty Thousand Dollars
($250,000).
Section 2.05. Interest Periods; Conversions; Renewals. In the
case of each LIBOR Loan, the Borrower shall select an Interest Period of any
duration which is in accordance with the definition of "Interest Period" in
Section 1.01, subject to the following limitations; (1) no Interest Period may
extend beyond the Revolving Credit Termination Date; (2) no Interest Period
shall have a duration of less than one month, and if any such proposed Interest
Period would otherwise be for a shorter period, such Interest Period shall not
be available; and (3) if an Interest Period would end on a day which is not a
Business Day, such Interest Period shall be extended to the next Business Day.
The Borrower may elect from time to time to convert all or a
part of one type of Revolving Credit Loan into another
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type of Revolving Credit Loan or to renew all or part of a Revolving Credit Loan
by giving the Agent notice at least one (1) Business Day before conversion into
a Base Rate Loan, and at least three (3) Business Days before the conversion
into or renewal of a LIBOR Loan, specifying (1) the renewal or conversion date;
(2) the amount of the Revolving Credit Loan to be converted or renewed; and (3)
in the case of renewals of or a conversion into LIBOR Loans, the duration of the
Interest Period applicable thereto; provided, that LIBOR Loans can be converted
only on the last day of the Interest Period for such Loan. All notices given
under this Section 2.05 shall be irrevocable and shall be given not later than
11:00 a.m., New York time, on the day which is not less than the number of
Business Days specified above for such notice. If the Borrower shall fail to
give the Agent the notice as specified above for the renewal of a LIBOR Loan
prior to the end of the Interest Period with respect thereto, such LIBOR Loan
shall automatically be converted into a Base Rate Loan on the last day of the
Interest Period for such Loan. The Borrower agrees that no more than five (5)
Interest Periods can be in effect at any one time.
Section 2.06. Fees. The Borrower agrees to pay to the Agent
for the account of the Lenders on the Second Closing Date all Commitment Fees
(as defined in the 1994 Credit Agreement) accrued and unpaid as of the Second
Closing Date. Upon receipt of such Commitment Fees the Agent will promptly
thereafter cause to be distributed to the Lenders their respective Pro Rata
Share of such Commitment Fees.
The Borrower agrees to pay to the Agent for the account of the
Lenders a commitment fee on the average daily difference between (1) the sum of
(a) the Revolving Credit Commitment plus (b) the Letter of Credit Commitment and
(2) the sum of (a) the aggregate outstanding principal amount of all Revolving
Credit Loans plus (b) the aggregate undrawn face amount of all Letters of
Credit, at the rate of fifteen hundredths of one percent (0.15%) per annum,
based on a year of three hundred sixty (360) days, payable in arrears on each
Quarterly Date during the period from the Second Closing Date to the Revolving
Credit Termination Date, commencing September 30, 1996, and ending on the
Revolving Credit Termination Date (the "Commitment Fee"). Upon receipt of any
such Commitment Fee the Agent will promptly thereafter cause to be distributed
to the Lenders their respective Pro Rata Share of such Commitment Fee.
The Borrower agrees to pay to the Agent on the Second Closing
Date for the account of the Lenders an amendment fee of One Hundred Twenty-Five
Thousand Dollars ($125,000) (the "Revolving Credit Amendment Fee"). Upon receipt
of such Amendment Fee the Agent will promptly thereafter cause to be
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distributed to the Lenders their respective Pro Rata Share of such Amendment
Fee.
The Borrower agrees to pay to the Agent on or before the
Second Closing Date and on each anniversary of the Second Closing Date until the
payment in full of all Loans and the termination of all Commitments for the
account of the Agent a non-refundable agency fee of Forty Thousand Dollars
($40,000) (the "Agency Fee").
Section 2.07. Revolving Credit Notes. All Revolving Credit
Loans made by each Lender under this Agreement shall be evidenced by, and repaid
with interest in accordance with, a single amended and restated promissory note
of the Borrower for each Lender, each in substantially the form of Exhibit 2.07,
duly completed, in the principal amount equal to such Lender's Pro Rata Share of
the Revolving Credit Commitment, dated the Second Closing Date, payable to such
Lender and maturing as to principal on the Revolving Credit Termination Date
(the "Revolving Credit Notes"). Each Lender is hereby authorized by the Borrower
to endorse on the schedule attached to the Revolving Credit Note held by it the
amount of each Revolving Credit Loan, and each payment of principal amount
received by such Lender on account of the Revolving Credit Loans, which
endorsement shall, in the absence of manifest error, be conclusive as to the
outstanding balance of the Revolving Credit Loans made by such Lender; provided,
however, that the failure to make such notation with respect to any Revolving
Credit Loan or payment shall not limit or otherwise affect the obligations of
the Borrower under this Agreement or the Revolving Credit Note held by such
Lender. Each Lender agrees that, prior to any assignment of the Revolving Credit
Note held by it, it will properly and completely endorse the schedule attached
to such Revolving Credit Note.
Section 2.08. Prepayments. The Borrower may, upon at least one
(1) Business Day's notice to the Lenders in the case of Base Rate Loans, and at
least three (3) Business Days' notice to each Lender in the case of LIBOR Loans,
prepay the Revolving Credit Notes, in whole or in part with accrued interest to
the date of such prepayment on the amount prepaid; provided, that: (1) each
partial prepayment shall be in a principal amount of not less than Five Hundred
Thousand Dollars ($500,000); and (2) LIBOR Loans may be prepaid only on the last
day of the Interest Period for such Loan, unless the Borrower pays the Lenders
the Broken Funding Fee for such prepayment.
If at any time the aggregate principal amount of all
outstanding Revolving Credit Loans exceeds the then effective Revolving Credit
Commitment, then the Borrower shall immediately prepay the Revolving Credit
Loans in the amount of such excess.
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Section 2.09. Method of Payment. The Borrower shall make each
payment under this Agreement and under the Revolving Credit Notes not later than
11:00 A.M. (New York time) on the date when due in Dollars to the Agent at the
Agent's Office in immediately available funds. The Agent will promptly
thereafter cause to be distributed to each Lender, to the extent of such payment
received from the Borrower, (1) such Lender's Pro Rata Share of the payments of
principal and interest in like funds, and (2) fees payable to such Lender in
accordance with the terms of this Agreement.
The Borrower hereby authorizes the Agent, if and to the extent
payment of the Revolving Credit Loans or interest thereon, or the Commitment Fee
or any other amount due by the Borrower to the Agent or any Lender under this
Agreement or under the Revolving Credit Notes or any other Loan Document, is not
made when due under this Agreement or under the Revolving Credit Notes or any
other Loan Document, to charge from time to time against any account it
maintains with the Agent or any Lender any such amount so due to the Agent
and/or the Lenders. The Agent will promptly thereafter cause to be distributed
to each Lender, to the extent of such payment (1) such Lender's Pro Rata Share
of the payments of principal and interest, and (2) fees payable to such Lender
in accordance with the terms of this Agreement.
Except to the extent provided in this Agreement, whenever any
payment to be made under this Agreement or under the Revolving Credit Notes
shall be stated to be due on any day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of the payment of interest and
the Commitment Fee, and other fees, as the case may be.
Section 2.10. Use of Proceeds. The proceeds of the Revolving
Credit Loan shall be used by the Borrower for general corporate purposes. The
Borrower will not, directly or indirectly, use any part of such proceeds for the
purpose of purchasing or carrying any margin stock within the meaning of
Regulation G, T, U or X of the Board of Governors or to extend credit to any
Person for the purpose of purchasing or carrying any such margin stock.
Section 2.11. Minimum Amounts. The Revolving Credit Loans and
each conversion shall, in the case of Base Rate Loans, be in an amount at least
equal to One Hundred Thousand Dollars ($100,000) and in integral multiples of
One Hundred Thousand Dollars ($100,000) and in the case of LIBOR Loans, be in an
amount at least equal to One Million Dollars ($1,000,000) and in integral
multiples of Two Hundred Fifty Thousand Dollars ($250,000) (LIBOR Loans having
different Interest Periods at the same time hereunder to be deemed separate
Loans and
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Conversions for purposes of the foregoing, one for each Interest Period).
Anything in this Agreement to the contrary notwithstanding, the aggregate
principal amount of LIBOR Loans having the same Interest Period shall be at
least equal to One Million Dollars ($1,000,000) and integral multiples thereof
of Two Hundred Fifty Thousand Dollars ($250,000) and, if any LIBOR Loan would
otherwise be in a lesser principal amount for any period, such LIBOR Loan shall
be a Base Rate Loan during such period.
Section 2.12. Additional Costs. The Borrower shall pay
directly to each Lender from time to time on demand such amounts as such Lender
may determine to be necessary to compensate it for any increased costs which
such Lender determines are attributable to its making or maintaining any LIBOR
Loan, or its obligation to convert any Base Rate Loan to a LIBOR Loan hereunder,
or any reduction in any amount receivable by such Lender hereunder in respect of
any of such LIBOR Loans or such obligation (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"),
resulting, in each case, from any Regulatory Change which:
(i) subjects such Lender to any tax of any kind whatsoever
with respect to, or changes the basis of taxation of any amounts
payable to such Lender under this Agreement or the Revolving Credit
Note in respect of any of such LIBOR Loans (other than changes in the
rate of taxes imposed on or measured by the overall net income of such
Lender or of its Applicable Lending Office for any of such LIBOR Loans
by the jurisdiction in which such Lender has its principal office or
such Applicable Lending Office); or
(ii) (other than to the extent of the LIBOR Reserve
Requirement, taken into account in determining the LIBOR Interest Rate
at the commencement of the applicable Interest Period) imposes or
modifies any reserve, special deposit, deposit insurance or assessment,
minimum capital, capital ratio or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, such Lender (including any LIBOR Loans, or any deposits
referred to in the definition of "LIBOR Interest Rate" in Section
1.01), or any commitment of the Lender; or
(a) imposes any other condition affecting this Agreement or
the Revolving Credit Note (or any of such extensions of credit or
liabilities).
Without limiting the effect of the provisions of the first
paragraph of this Section 2.12, in the event that, by reason of any Regulatory
Change, any Lender either (1) incurs
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Additional Costs based on or measured by the excess above a specified level of
the amount of a category of deposits of other liabilities of such Lender which
includes deposits by reference to which the LIBOR Interest Rate is determined as
provided in this Agreement or a category of extensions of credit or other assets
of such Lender which includes loans based on the LIBOR Interest Rate or (2)
becomes subject to restrictions on the amount of such a category of liabilities
or assets which it may hold, then, if such Lender so elects by notice to the
Borrower, the obligation of such Lender to make or continue, or to convert Base
Rate Loans into LIBOR Loans shall be suspended until such Regulatory Change
ceases to be in effect (in which case the provisions of Section 2.15 shall be
applicable).
Without limiting the effect of the foregoing provisions of
this Section 2.12 (but without duplication), the Borrower shall pay directly to
each Lender from time to time on request such amounts as such Lender may
determine to be necessary to compensate such Lender for any costs which it
determines are attributable to the maintenance by such Lender (or any Applicable
Lending Office), pursuant to any law or regulation or any interpretation,
directive or request (whether or not having the force of law and whether in
effect on the date of this Agreement or thereafter) of any court or governmental
or monetary authority of capital in respect of the Revolving Credit Loan (such
compensation to include, without limitation, an amount equal to any reduction of
the rate of return on assets or equity of such Lender (or any Applicable Lending
Office) to a level below that which such Lender (or any Applicable Lending
Office) could have achieved but for such law, regulation, interpretation,
directive or request).
Determinations and allocations by such Lender for purposes of
this Section 2.12 of the effect of any Regulatory Change pursuant to the first
or second paragraph of this Section 2.12 or of the effect of capital maintained
pursuant to the third paragraph of this Section 2.12, on its costs or rate of
return of maintaining the Revolving Credit Loan or on amounts receivable by it
in respect of the Revolving Credit Loan, and the amounts required to compensate
such Lender under this Section 2.12, shall be conclusive absent manifest error.
Section 2.13. Limitation on Types of Loans. Anything herein to
the contrary notwithstanding, if, on or prior to the determination of the LIBOR
Interest Rate for any Interest Period the Required Lenders determine (which
determination shall be conclusive) that (1) the relevant rates of interest
referred to in the definition of "LIBOR Interest Rate" in Section 1.01 upon the
basis of which the rate of interest for LIBOR Loans for such Interest Period is
to be determined do not adequately cover the cost to the Lenders of making or
maintaining such LIBOR Loans for such Interest
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Period; or (2) quotations of interest rates for the relevant deposits referred
to in the definition of LIBOR Interest Rate are not being provided in the
relevant amounts or for the relevant maturities for purposes of determining the
rate of interest on a LIBOR Loan as provided in this Agreement; then the Agent
shall give the Borrower prompt notice thereof, and so long as such condition
remains in effect, the Lenders shall be under no obligation to make LIBOR Loans,
convert Loans into LIBOR Loans, or continue LIBOR Loans, and the Borrower shall,
on the last day(s) of the then current Interest Period(s) for the outstanding
LIBOR Loans, either prepay such LIBOR Loans or convert such LIBOR Loans into
Base Rate Loans.
Section 2.14. Illegality. Notwithstanding any other provision
of this Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain LIBOR
Loans hereunder or convert Base Rate Loans into LIBOR Loans, then such Lender
shall promptly notify the Borrower thereof and such Lender's obligation to make
or continue LIBOR Loans shall be suspended until such time as such Lender may
again make and maintain LIBOR Loans (in which case the provisions of Section
2.15 shall be applicable); provided, however, that each Lender agrees to change
its Applicable Lending Office if the illegality referred to in this Section 2.14
can be cured by such a change without disadvantage or detriment to such Lender
(as determined in such Lender's sole discretion).
Section 2.15. Treatment of Affected Loans. If the obligations
of any Lender to make or continue LIBOR Loans, or to convert Base Rate Loans
into LIBOR Loans are suspended pursuant to Section 2.12, 2.13 or 2.14 (LIBOR
Loans so affected being herein called "Affected Loans") such Lender's Affected
Loans shall be automatically converted into Base Rate Loans on the last day(s)
of the then current Interest Period(s) for the Affected Loans (or, in the case
of a conversion required by Section 2.12, 2.13 or 2.14, on such earlier date as
such Lender may specify to the Borrower).
To the extent that such Lender's Affected Loans have been so
converted, all payments and prepayments of principal which would otherwise be
applied to such Lender's Affected Loans shall be applied instead to its Base
Rate Loans. All Loans which would otherwise be made or continued by such Lender
as LIBOR Loans shall be made or continued instead as Base Rate Loans and all
Base Rate Loans of such Lender which would otherwise be converted into LIBOR
Loans, shall remain as Base Rate Loans.
Section 2.16. Risk-Based Capital. With respect to LIBOR Loans,
in addition to the rights granted under any other provision of this Agreement,
in the event that any Lender determines that (1) compliance with any judicial,
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administrative, or other governmental interpretation of any law or regulation or
(2) compliance by such Lender or any corporation controlling such Lender with
any guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law) has the effect of requiring an increase
in the amount of capital required or expected to be maintained by such Lender or
any corporation controlling such Lender, and such Lender determines that such
increase is based upon its obligations hereunder, and other similar obligations,
the Borrower shall pay to such Lender such additional amount as shall be
certified by such Lender to be the amount allocable to such Lender's obligations
to the Borrower hereunder. Each Lender will notify the Borrower of any event
occurring after the date of this Agreement that will entitle such Lender to
compensation pursuant to this Section 2.16 as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation.
Determinations by each Lender for purposes of this Section
2.16 of the effect of any increase in the amount of capital required to be
maintained by such Lender and of the amount allocable to such Lender's
obligations to the Borrower hereunder shall be conclusive, absent manifest
error.
Section 2.17. Certain Compensation. The Borrower shall pay to
the Agent for the account of the applicable Lender, upon the request of such
Lender through the Agent, such amount or amounts as shall be sufficient (in the
reasonable opinion of such Lender) to compensate it for any loss, cost or
expense which such Lender determines is attributable to:
(1) any payment, prepayment, conversion or continuation of a
LIBOR Loan made by such Lender on a date other than the last day of an
Interest Period for such Loan whether by reason of acceleration or
otherwise; or
(2) any failure by the Borrower for any reason to borrow,
convert or continue a LIBOR Loan to be borrowed, converted or continued
by such Lender on the date specified therefor in the relevant notice
issued by the Borrower.
Without limiting the foregoing, such compensation shall
include an amount equal to the Broken Funding Fee. A determination of any Lender
as to the amounts payable pursuant to this Section 2.17 shall be conclusive
absent manifest error.
Section 2.18. Capital Adequacy. Without duplication of the
requirements of Section 2.12, if any Lender shall have determined that, after
the date hereof, the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any Governmental Authority, central
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bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such Governmental Authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on capital of such Lender (or its Parent) as a consequence of such Lender's
obligations hereunder to a level below that which such Lender (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies with respect to capital adequacy) by an amount
deemed by such Lender to be material, then from time to time, within fifteen
(15) days after demand by such Lender (with a copy to the Agent), the Borrower
shall pay to such Lender such additional amount or amounts as will compensate
such Lender (or its Parent) for such reduction. A certificate of any Lender
claiming compensation under this Section 2.18, setting forth in reasonable
detail the basis therefor, shall be conclusive in the absence of manifest error.
The Borrower is only required to make payments under this Section 2.18 to the
Lender that requires the payment of such additional amount or amounts.
Section 2.19. Taxes. (a) All payments made by the Borrower
under this Agreement and the other Loan Documents shall be made free and clear
of, and without deduction or withholding for or on account of, any present or
future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority, excluding, in the case of
the Agent and each Lender, any net income taxes and franchise taxes (imposed in
lieu of net income taxes) imposed on the Agent or such Lender, as the case may
be, by the United States or any state, local or foreign taxing authority (all
such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"). If any Taxes are required to be
withheld from any amounts payable to the Agent or any Lender hereunder or under
the other Loan Documents, the amounts so payable to the Agent or such Lender
shall be increased to the extent necessary to yield to the Agent or such Lender
(after payment of Taxes) interest or any such other amounts payable hereunder at
the rates or in the amounts specified in this Agreement and the other Loan
Documents. Whenever any Taxes are payable by the Borrower, as promptly as
possible thereafter the Borrower shall send to the Agent or such Lender, as the
case may be, a certified copy of an original official receipt received by the
Borrower showing payment thereof. If the Borrower fails to pay any Taxes when
due to the appropriate taxing authority or fails to remit to the Agent or such
Lender, as the case may be, the required receipts or other required documentary
evidence, the Borrower shall indemnify the Agent and such Lender for any
incremental taxes, interest or
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penalties that may become payable by the Agent or such Lender as a result of any
such failure.
(b) Each Lender represents to the Borrower and the Agent that
it is entitled to receive any payments to be made to it hereunder without the
withholding of any tax and will furnish to the Agent such forms, certifications,
statements and other documents as the Agent may reasonably request from time to
time to evidence such Lender's exemption from the withholding of any tax imposed
by any jurisdiction or to enable the Agent to comply with any applicable laws or
regulations relating thereto. Without limiting the effect of the foregoing, if
any Lender is not created or organized under the laws of the United States or
any state thereof, such Lender will furnish to the Agent Form 4224 or Form 1001
of the Internal Revenue Service, or such other forms, certifications, statements
or documents, duly executed and completed by such Lender as evidence of such
Lender's exemption from the withholding of U.S. tax with respect thereto. The
Agent shall not be obligated to make any payments hereunder to such Lender in
respect of any Loan or such Lender's Revolving Credit Commitment until such
Lender shall have furnished to the Agent the requested form, certification,
statement or document.
ARTICLE III. LETTERS OF CREDIT
Section 3.01. Letters of Credit. BBH&Co. has issued an
irrevocable standby letter of credit dated December 14, 1993 for the benefit of
Society of Lloyd's in the amount of Two Million Five Hundred Eighty-Five
Thousand Pounds ((pound)2,585,000) (as amended, the "BBH&Co. Letter of Credit")
for the account of the Borrower. Within sixty (60) days from the Second Closing
Date, the Issuing Bank shall issue for the benefit of the Society of Lloyd's a
replacement letter of credit for the BBH&Co. Letter of Credit (the "Replacement
Letter of Credit").
In addition to the Replacement Letter of Credit, subject to
the approval of all the Lenders as set forth below, the Issuing Bank agrees, on
the terms and conditions hereinafter set forth, to issue standby letters of
credit for the account of the Borrower to support NCUL's obligations with
respect to specific syndicates at the Society of Lloyd's (all such letters of
credit together with the Replacement Letter of Credit, the "Letters of Credit"),
from time to time during the period from the Second Closing Date to the Letter
of Credit Termination Date, provided that at the time of the issuance of such
Letter of Credit the aggregate face amount of all outstanding Letter of Credit
Obligations does not exceed at any time Thirty Million Dollars ($30,000,000)
(the "Letter of Credit Commitment"). The Issuing Bank will not be required to
issue a Letter of Credit with a maturity date more than five (5) years from the
date of issuance of such Standby Letter of
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Credit. In addition, the Issuing Bank will not issue a Letter of Credit unless
all Lenders in their sole discretion approve the issuance of the proposed Letter
of Credit to support such obligation to such syndicate. The Borrower agrees that
after a Letter of Credit is issued to support an obligation to a specific
syndicate the Borrower will not change the syndicate receiving the benefit of
such Letter of Credit without the consent of all the Lenders.
Notwithstanding the foregoing, with the consent of all the
Lenders the Letter of Credit Termination Date can be extended beyond January 2,
1998 and the maturity date of any Letter of Credit can be extended beyond
December 31, 2002.
In addition to the requirements noted above, the Issuing Bank
will not be required to issue a Letter of Credit unless the Borrower submits to
the Issuing Bank a Request for Letter of Credit at least two (2) Business Days
before the requested date to issue such Letter of Credit. Each Letter of Credit
will be subject to the terms and provisions of this Agreement, including but not
limited to those set forth in this Article III.
For purposes of determining usage and availability under this
Section 3.01 when a Letter of Credit is issued in Pounds, such Pounds will be
converted to Dollars upon issuance, and at the end of each calendar quarter, and
at any time thereafter as requested by the Agent or any Lender or the Issuing
Bank and such determination shall be made by the Agent in its sole determination
based upon the spot exchange rate between Dollars and Pounds as quoted by the
Agent's foreign exchange desk as of such date of determination. Notwithstanding
any other provisions of this Agreement, if at any time, after giving effect to
the conversion of pounds into Dollars as set forth above, the aggregate face
amount of all outstanding Letters of Credit is greater than Thirty Million
Dollars ($30,000,000) ("Conversion Differential") then Borrower must prepay the
Revolving Credit Loans to the extent required so that the difference between the
then effective Revolving Credit Commitment and the aggregate principal amount of
all outstanding Revolving Credit Loans is equal to or greater than the
Conversion Differential and, in the event the Conversion Differential exceeds
the then effective Revolving Credit Commitment, then the Borrower will provide
Cash Collateral in the amount of such difference.
On December 31, 2001 the Borrower agrees to provide Cash
Collateral to the Agent for the benefit of the Issuing Bank and the Lenders in
an amount equal to Fifteen Million Dollars ($15,000,000).
Section 3.02. Reimbursement Obligation. The Borrower will pay
the Issuing Bank, on demand at the Issuing
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<PAGE> 42
Bank's Principal Office, in immediately available funds, the amount required to
reimburse the Issuing Bank in respect of the Issuing Bank's payment of each
Instrument. Such reimbursement shall be made with interest from the date of the
Issuing Bank's payment of such Instrument to the date which is two (2) Business
Days after the date of such demand at the Base Rate, and thereafter at the
Default Rate until the date of reimbursement. Such reimbursement shall be in
Dollars at the Issuing Bank's selling rate for cable transfers to the place of
payment of the Instrument current on the date of payment or of the Issuing
Bank's settlement of its obligation, as the Issuing Bank may require or, at the
Issuing Bank's election, in the currency in which the Issuing Bank was required
to pay such Instrument. If, for any cause, on the date of payment or settlement,
as the case may be, there is no selling rate or other rate of exchange generally
current in New York for effecting such transfers, the Borrower will pay the
Issuing Bank on demand an amount in Dollars equivalent to the Issuing Bank's
actual cost of settlement of its obligation however or whenever the Issuing Bank
shall make such settlement, with interest at the Base Rate for Base Rate Loans
from the date of settlement to the date of payment. The Borrower will comply
with all governmental exchange regulations now or hereafter applicable to each
Letter of Credit or Instrument or payments related thereto and will pay the
Issuing Bank, on demand, in Dollars, such amount as the Issuing Bank may be or
may have been required to expend on account of such regulations. The Issuing
Bank may debit or direct any other Lender to debit any account or accounts
maintained by the Borrower with any office of the Issuing Bank or any other
Lender or any of their respective Subsidiaries or Affiliates (now or in the
future) and apply the proceeds to the payment of any and all amounts owed by the
Borrower to the Issuing Bank hereunder, and such Lender, Subsidiary or Affiliate
shall be authorized to act in accordance herewith and shall treat this
authorization as irrevocable. If the due date for reimbursement by the Borrower
pursuant to this Section 3.02 shall be extended by operation of Law or
otherwise, interest shall continue to accrue and be payable at the applicable
rate set forth in this Section 3.02.
Section 3.03. Payment of Commissions, Expenses and Interest.
The Borrower will pay the Issuing Bank, on demand, the Issuing Bank's commission
and all charges, costs, and expenses paid or incurred by the Issuing Bank in
connection with any Letter of Credit, and interest where chargeable, including
fees and charges of counsel and costs allocated by the Issuing Bank's internal
legal department in connection with the preparation, performance, or enforcement
of this Agreement or any Letter of Credit. Unless otherwise agreed:
(a) administrative fees payable hereunder shall be
at the rate customarily charged by the Issuing Bank at the time
in like circumstances;
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<PAGE> 43
(b) interest payable under this Article III on amounts not
paid when due shall be at the lesser of (A) the maximum rate permissible under
applicable law or (B) the Base Rate; and
(c) in addition to commissions, fees and amounts otherwise
payable with respect to the issuance of a Letter of Credit, the Borrower shall
pay to the Issuing Bank on demand such amounts as the Issuing Bank in its sole
discretion determines are necessary to compensate it for any cost attributable
to its issuing or having outstanding such Letter of Credit resulting from the
application of any Law or regulation applicable to the Issuing Bank regarding
any reserve, assessment, capital adequacy or similar requirements relating to
letters of credit or the reimbursement agreements with respect thereto or to
similar liabilities or assets of the Issuing Bank whether existing at the time
of issuance of the Letter of Credit or adopted thereafter; including, without
limitation, to those related to or as a result of the sale of a Participation
under Section 4.02 hereof. The Borrower acknowledges that there may be various
methods of allocating costs to the Letter of Credit and agrees that the Issuing
Bank's allocation for purposes of determining the costs referred to above shall
be conclusive and binding upon the Borrower.
The Borrower shall pay to the Agent for the account of the
Issuing Bank on each Semi-Annual Date a fee in the amount of one-half of one
percent (1/2%) of the aggregate undrawn face amount of all Letters of Credit as
of such Semi-Annual Date, provided, however, upon the occurrence and during the
continuance of a Default or Event of Default the fee specified in this sentence
will be increased to an annual fee of two and one-half percent (2.5%) (the
"Letter of Credit Fee"). The Agent will remit their respective portions of such
Letter of Credit Fee to the Issuing Bank and each of the Lenders in accordance
with the provisions of Section 4.03 "Participation in Fees and Collateral;
Relationship".
Section 3.04. Proper Drawing; the Issuing Bank's Honoring. The
Issuing Bank may accept or pay any Instrument presented to it on or before the
expiration date set forth in a Letter of Credit. In addition:
(a) the Issuing Bank may honor the related Instrument(s) in an
amount or amounts not exceeding the amount of such Letter of Credit, and
(b) the Issuing Bank may honor, as complying with the terms of
such Letter of Credit, any Instrument or other document otherwise in order,
signed or issued by a person purporting to be an administrator, executor,
trustee in bankruptcy, debtor in possession, assignee for the benefit of
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<PAGE> 44
creditors, liquidator, receiver or other legal representative of the party
authorized under such Letter of Credit to draw or issue such Instruments or
other documents, regardless of any notice or information to the contrary.
Section 3.05. Amendment, Change, Modification; No Waiver. In
the event of any amendment, change or modification relating to a Letter of
Credit or any Instruments or documents called for thereunder, including waiver
of noncompliance of any such Instruments or documents with such terms of the
Letter of Credit, this Agreement shall be binding upon the Borrower with regard
to such Letter of Credit as so amended, changed, or modified, and to any action
taken by the Issuing Bank or any of its correspondents reacting thereto. No
amendment, change, waiver or modification to which the Issuing Bank has
consented shall be deemed to mean that the Issuing Bank will consent or has
consented to any other or subsequent request to amend, change, modify or waive a
term of such Letter of Credit. The Issuing Bank shall not be deemed to have
waived any of its rights hereunder, unless the Issuing Bank or its authorized
agent shall have signed such waiver in writing. No such waiver, unless expressly
stated therein, shall be effective as to any transaction which occurs subsequent
to the date of such waiver, nor as to any continuance of a breach after such
waiver.
Section 3.06. U.C.P.; Agreements and Acknowledgements;
Indemnifications. The Uniform Customs and Practices shall be binding on the
Borrower and the Issuing Bank, except to the extent it is otherwise expressly
agreed. The Borrower and the Issuing Bank also agree that:
(a) user(s) of a Letter of Credit shall not be deemed agents
of the Issuing Bank;
(b) none of the Issuing Bank, its Affiliates, Subsidiaries, or
its correspondents shall be responsible for:
(i) failure of any Instrument to bear any reference to the
related Letter of Credit or inadequate reference in any Instrument to
such Letter of Credit, or failure of any document (other than documents
expressly required to be presented under such Letter of Credit) to
accompany any Instrument at negotiation, or failure of any person to
note the amount of any Instrument on the reverse of the Letter of
Credit, or to surrender or take up the Letter of Credit or to forward
documents apart from Instruments as required by the terms of such
Letter of Credit, each of which provisions, if contained in a Letter of
Credit itself, it is agreed may be waived by the Issuing Bank;
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<PAGE> 45
(ii) the validity, sufficiency or genuineness of any
Instrument, even if such instrument shall in fact prove to be invalid,
insufficient, fraudulent or forged;
(iii) errors, omissions, interruptions or delays in
transmission, or delivery of any message, by mail, telex, cable,
telegraph, wireless or other teletransmission or by oral instructions,
whether or not they may be in cipher; or
(iv) any failure or inability of the Issuing Bank or anyone
else to perform in accordance with the terms of the Letter of Credit by
reason of any control or restriction rightfully or wrongfully exercised
by any de facto or de jure Governmental Authority, or for any
consequences arising from causes beyond the control of the Issuing Bank
or its correspondents;
(c) the Issuing Bank shall not be responsible for any act,
error, neglect or default, omission, insolvency or failure in business of any of
its correspondents;
(d) the occurrence of any one or more of the contingencies or
events referred to in the Uniform Customs and Practices or in the preceding
subsections (b) and (c) shall not affect, impair, or prevent the vesting of any
of the Issuing Bank's rights or powers hereunder or the Borrower's obligation to
make payment;
(e) the Borrower will promptly examine:
(i) any copy of a Letter of Credit (and of any amendments
thereof) sent to it by the Issuing Bank; and
(ii) all Instruments and documents delivered to it from time
to time, and, in the event of any claim of noncompliance with the
Borrower's Instructions or other irregularity, the Borrower will
immediately notify the Issuing Bank thereof in writing, the Borrower
being conclusively deemed to have waived any such claim against the
Issuing Bank and its correspondents unless such notice is given as
aforesaid;
(f) any action, inaction or omission on the part of the
Issuing Bank or any of its correspondents, under or in connection with the
Letter of Credit or the related Instruments, documents or property, if in good
faith, shall be binding upon the Borrower and shall not place the Issuing Bank
or any of its correspondents under any liability to the Borrower.
The Borrower agrees to hold the Issuing Bank, each Affiliate
and Subsidiary of the Issuing Bank, its
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<PAGE> 46
correspondents and each Participating Lender indemnified and harmless against
any and all claims, loss, liability or damage, including reasonable counsel
fees, howsoever arising from or in connection with any Letter of Credit,
including, without limitation, any such claim, loss, liability or damage arising
out of any transfer, sale, delivery, surrender or endorsement of any document at
any time(s) held by the Issuing Bank, any of its Affiliates or Subsidiaries or
any Participating Lender, or held for the account of any one of them by any
correspondent of any of them, or arising out of any action for injunctive or
other judicial or administrative relief arising out of or in connection with any
Letter of Credit and affecting, directly or indirectly, the Issuing Bank, such
Affiliate or Subsidiary or any Participating Lender, or arising out of any bond
or undertaking into which the Issuing Bank or its correspondents may be required
to enter; provided, that the Borrower shall not be required to indemnify any
such party to the extent that the Borrower proves that such claims, loss,
liability or damage of such party was caused by such party's willful misconduct
or gross negligence.
Section 3.07. Continuing Rights and Obligations. The Issuing
Bank's rights hereunder shall continue unimpaired, and the Borrower shall be and
remain obligated in accordance with the terms and provisions hereof,
notwithstanding the release and/or substitution of any property which may be
held as Collateral at any time(s), or of any rights or interest therein. No
delay, extension of time, renewal, compromise or other indulgence which may
occur or be granted by the Issuing Bank shall impair the Issuing Bank's rights
or powers hereunder.
Section 3.08. Instructions; No Liability. Instructions may be
honored by the Issuing Bank when received from anyone purporting to be an
Authorized Person. The Borrower may furnish the Issuing Bank with written
confirmation of any such Instruction, but the Issuing Bank's responsibility with
respect to any Instruction shall not be affected by its failure to receive or
the content of such confirmation. The Issuing Bank shall have no responsibility
to notify the Borrower of any discrepancies between the Borrower's Instructions
and its written confirmation, and in the event of any such discrepancy, the
original Instruction shall govern. The Issuing Bank shall be fully protected in,
and shall incur no liability to the Borrower for, acting upon any Instructions
or any oral, written, telephone, teleprocess, electronic, or other amendments
thereto which the Issuing Bank in good faith believes to have been given by any
Authorized Person, and in no event shall the Issuing Bank be liable for special,
consequential, or punitive damages. The Issuing Bank may, at its option, use any
means of verifying any Instruction received by it. The Issuing Bank also may, at
its option, refuse to act upon any Instruction or other communication or any
part
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thereof, without incurring any responsibility for any loss, liability or expense
arising out of such refusal. All such authorizations and Instructions shall
continue in full force and effect unless the Issuing Bank may elect to act upon
additional Instructions delivered to it by the Borrower prior to the issuance of
a Letter of Credit in reliance upon the original Instructions.
Section 3.09. Amended Agreement. In the event that the Issuing
Bank shall revise its standard reimbursement agreement executed by each
applicant for a letter of credit, the Borrower shall execute and deliver to the
Issuing Bank an amendment to this Agreement incorporating such changes, promptly
upon request therefor from the Issuing Bank.
Section 3.10. Letter of Credit Overdrafts. To the extent that
the Issuing Bank creates an overdraft in any account of the Borrower to satisfy
the Borrower's reimbursement obligation or any other obligation on or related to
any Letter of Credit, such overdraft will, from the Business Day immediately
following the creation of such overdraft, accrue interest at the Default Rate
and both such overdraft and the interest thereon are immediately due and
payable.
Section 3.11. Obligation Absolute. The obligations of the
Borrower under this Agreement with regard to each Letter of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letter of Credit, under all
circumstances whatsoever, including, without limitation, the following
circumstances:
(a) any lack of validity or enforceability of any of the Loan
Documents or any other agreement or instrument relating thereto;
(b) any amendment or waiver of or any consent to departure
from all or any of the Loan Documents or any other agreement or instrument
relating thereto (except to the extent, and only to the extent, expressly agreed
to by the Issuing Bank in such amendment or waiver);
(c) the existence of any claim, setoff, defense or other
rights which the Borrower may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom any
beneficiary or any such transferee may be acting), the Issuing Bank (other than
the defense of full and timely payment to the Issuing Bank in accordance with
the terms of this Agreement) or any other Person, whether in connection with the
Loan Documents or any other agreement or instrument related thereto or any
related or unrelated transaction;
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<PAGE> 48
(d) any statement or other document or demand presented under
any Letter of Credit (or any endorsement thereon) proving to be forged,
fraudulent, invalid, unenforceable or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;
(e) payment by the Issuing Bank under any Letter of Credit
against presentation of a sight draft, certificate or demand by the beneficiary
which does not comply with the terms of such Letter of Credit, including,
without limitation, the circumstances referred to in clause (d) above, or the
failure of any document to bear reference or to bear adequate reference to such
Letter of Credit, except in the case of the Issuing Bank's gross negligence or
willful misconduct in determining whether the documents presented under such
Letter of Credit comply with the terms of such Letter of Credit;
(f) any act or omission of the beneficiary in connection with
the use of any Letter of Credit;
(g) any failure to preserve or protect any Collateral, any
failure to perfect or preserve the perfection of any Lien thereon, or the
release of any of the Collateral securing the performance or observance of the
terms of the Loan Documents or any other agreement related thereto;
(h) any other circumstances or happening whatsoever, whether
or not similar to any of the foregoing.
Section 3.12. Change in Law. In addition to the provisions
under Section 3.03(c), if any change in any Law after the Second Closing Date
shall impose, modify or deem applicable any reserve, special deposit, capital
maintenance, deposit insurance premium or assessment, or similar requirement
against letters of credit issued by or assets held by, or sales of
participations in letters of credit or deposits with or for the account of the
Issuing Bank, or impose on the Issuing Bank any other condition regarding this
Agreement or any Letter of Credit or the Participations, or subject the Issuing
Bank to any tax, charge, fee, deduction or withholding of any kind whatsoever
not imposed as of the Second Closing Date (other than taxes imposed on the
overall net income of the Issuing Bank), and the result of any such event shall
be to increase the cost to the Issuing Bank of the issuance or maintenance of
any Letter of Credit or the reimbursement obligations of the Borrower under this
Agreement, or the Participations or reduce the amount of principal, interest, or
any fee or compensation receivable by the Issuing Bank in respect of any Letter
of Credit or this Agreement, or the Participations then, upon demand of the
Issuing Bank, the Borrower shall immediately pay to the Issuing Bank, from time
to time as specified by the Issuing Bank, all additional amounts which are
necessary to compensate the Issuing Bank for such increased cost or
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reduction incurred by the Issuing Bank. All payments of compensation for such
increased cost or reduction shall be accompanied by interest thereon from the
date of notice of such change until payment in full thereof at the Base Rate.
the Issuing Bank hereby agrees that it will promptly notify the Borrower in
writing of any such increased cost or reduction incurred by the Issuing Bank A
certificate as to such increased cost incurred by the Issuing Bank showing the
manner of calculation thereof shall be submitted by the Issuing Bank to the
Borrower and shall be conclusive (absent manifest error) as to the amount
thereof.
Section 3.13. Liability of the Issuing Bank The Borrower
assumes all risks of the acts or omissions of the beneficiary and transferee of
each Letter of Credit with respect to its use of such Letter of Credit. As
between the Borrower and the Issuing Bank, neither the Issuing Bank nor any of
its officers or directors shall be liable or responsible for: (a) the use which
may be made of any Letter of Credit or for any acts or omissions of the
beneficiary and any transferee in connection therewith; (b) the validity,
sufficiency or genuineness of documents, or of any indorsement(s) thereon, even
if such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; (c) payment by the Issuing Bank against
presentation of documents which do not comply with the terms of a Letter of
Credit; or (d) any other circumstance whatsoever in making or failing to make
payment under any Letter of Credit, except only that the Borrower shall have a
claim against the Issuing Bank, and the Issuing Bank shall be liable to the
Borrower, to the extent, but only to the extent, of any direct, as opposed to
consequential, damages suffered by the Borrower which the Borrower proves were
caused by the Issuing Bank's willful misconduct or gross negligence in
determining whether documents presented under a Letter of Credit comply with the
terms of such Letter of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
Section 3.14. Termination of Obligations. Upon both (1) the
payment in full of all Revolving Credit Loans and the termination of the
Revolving Credit Commitment and (2) December 31, 2002 to the extent any Letters
of Credit are outstanding as of such date, the Borrower shall provide Cash
Collateral for its obligations pursuant to this Article III in an amount
acceptable to the Issuing Bank and at least equal to the undrawn face amount of
all outstanding Letters of Credit, and shall execute all documents and take all
steps required to give the Issuing Bank a perfected first priority security
interest in such collateral (in each case to the reasonable satisfaction of the
Issuing Bank). Upon compliance with the
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terms of the preceding sentence, the Borrower shall be released from its
obligations pursuant to these Articles VI, VII, VIII and IX. At such time, the
Issuing Bank shall have the right to adjust the rates of interest to be charged
with respect to reimbursements pursuant to Section 3.02 and the commissions and
fees charged pursuant to Section 3.03.
Section 3.15. Notice of Request for Extension. During the
period from October 1, 1998 to October 31, 1998, the Borrower will deliver to
the Agent, the Lenders and the Issuing Bank written notice of whether or not it
will request (1) extension of the Letter of Credit Termination Date beyond
January 2, 1998, or (2) the extension of the expiration date of any outstanding
Letter of Credit beyond December 31, 2002.
ARTICLE IV. PARTICIPATIONS
Section 4.01. Participating Lenders' Pro Rata Shares. Subject
to the terms and conditions hereinafter set forth in this Article IV, the
Issuing Bank hereby agrees to sell and each Participating Lender hereby agrees
to purchase a participation ("Participation") from the Issuing Bank in each
Letter of Credit (and all overdrafts created in connection with any of the
foregoing) to the extent of the percentage (the "Share") set forth below
opposite such Lender's name:
<TABLE>
<CAPTION>
Bank Share
---- -----
<S> <C>
BBH&Co. 16.666667%
First Union 33.333333%
NBD 50.000000%
</TABLE>
Notwithstanding the foregoing, prior to the issuance of the
Replacement Letter of Credit, BBH&Co. hereby agrees to sell and each of First
Union and NBD agree to purchase a participation from BBH&Co. in the BBH&Co.
Letter of Credit to the extent set forth above opposite First Union's and NBD's
name so that if there is a draw under the BBH&Co. Letter of Credit and the
Borrower fails to reimburse BBH&Co. in the amount of such draw, NBD and First
Union agree to transmit to BBH&Co. their respective Share of such draw or
payment in accordance with the instructions set forth in Section 6.04 of the
1994 Credit Agreement. In addition, prior to the issuance of the Replacement
Letter of Credit and with respect to the BBH&Co. Letter of Credit, the rights
and obligations set forth in this Article IV applicable to a Participating
Lender shall apply to NBC and First Union as participating lenders in the
BBH&Co. Letter of Credit and the rights and obligations set forth in this
Article IV applicable to the Issuing Bank shall apply to BBH&Co. as the issuing
bank of the BBH&Co. Letter of Credit.
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Section 4.02. Sale and Purchase of Participations. Subject to
Section 4.01, each Participating Lender hereby irrevocably and unconditionally
agrees to purchase and the Issuing Bank hereby agrees to sell and transfer to
each Participating Lender, an undivided fractional interest equal to such
Participating Lender's Share in each Letter of Credit and each draw thereunder
upon such drawing and the obligations of the Borrower in respect of each such
Letter of Credit under this Agreement (including all related payments and
recoveries to which such Participating Lender is entitled pursuant to Section
4.05 hereof).
Section 4.03. Participation in Fees and Collateral;
Relationship. Each Participating Lender will be entitled to receive a share of
the Letter of Credit Fee, at the time each payment of the Letter of Credit Fee
is paid by the Borrower pursuant to Section 3.03, equal to the total of (1) such
Letter of Credit Fee multiplied by seven eighths of one percent (.875%)
multiplied by (2) its Share (determined at the time such Fee is payable to the
Issuing Bank pursuant to Section 3.03). Agent shall pay the Issuing Bank and
each Participating Lender the portion of the Letter of Credit Fee to which it is
entitled within three (3) Business Days of receipt by Agent of such Fee.
In addition to the foregoing, each Participating Lender hereby
purchases, and the Issuing Bank hereby sells to each Participating Lender, an
undivided fractional participation interest equal to such Participating Lender's
Share in the Collateral and any Cash Collateral and all the other Loan
Documents, as well as all additional security specifically assigned to the
Issuing Bank to secure the Letters of Credit.
The relationship between the Issuing Bank (in its capacity as
seller of Participations pursuant to this Article IV) and each Participating
Lender (in its capacity as purchaser of Participations pursuant to this Article
IV) is and shall be that of a purchaser and seller of a property interest and
not a creditor-debtor relationship or joint venture. The Issuing Bank (in its
capacity as seller of Participations pursuant to this Article IV) shall owe each
Participating Lender (in its capacity as purchaser of Participations pursuant to
this Article IV) no duty except as specifically set forth in this Article IV.
Section 4.04. Procedures. Whenever a draw shall be made under
a Letter of Credit and the Borrower shall fail to reimburse the Issuing Bank
therefor in accordance with this Agreement, the Issuing Bank will promptly
notify each Participating Lender regarding such draw as follows: (1) the date of
such draw, and (2) the amount of such draw. Although the Issuing Bank shall be
responsible for paying each such draw
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on a Letter of Credit, each Participating Lender shall bear its Share of the
credit risk associated with each such draw. Accordingly, in the event that the
amount of any such draw is not paid in full by or on behalf of the Borrower when
required in accordance with the terms of this Agreement, for any reason, the
Issuing Bank shall give prompt notice by telephone (promptly confirmed in
writing) or telex to each Participating Lender of such event. Upon receipt of
such telephone or telex notice, each Participating Lender shall cause to be
transmitted to the Issuing Bank, via CHIPS or, if transmission via CHIPS is not
possible, via federal funds transfer, in accordance with the instructions set
forth below an amount in immediately available funds equivalent to its Share of
such draw or payment in such manner to ensure that such funds are received by
the Issuing Bank, and available to the Issuing Bank by 3:00 p.m., New York City
time, on the date demand therefor was made by the Issuing Bank (if demand was
made by 12:00 noon, New York City time) or by 10:00 a.m., New York City time, on
the Business Day following the date demand therefor was made (if demand was made
after 12:00 noon, New York City time).
If via federal funds transfer:
Wire to: Issuing Bank
ABA No. 071000013
For the account of: The First National
Bank of Chicago
Account No. 7521 7657
Attn: LC Department
Section 4.05. Collections and Remittances. Whenever the
Issuing Bank receives any payment, interest, reimbursement, collection, or
recovery on account of a Letter of Credit whether from the Borrower, the
Collateral, the Cash Collateral, or otherwise, it shall allocate such receipts
as follows:
(a) To the payment of taxes, assessments, insurance
premiums, or for similar purposes as required by the
applicable Letter of Credit or any other Loan Document, and,
if previously paid by the Issuing Bank, such sums shall be
retained by the Issuing Bank; and
(b) In the event the Borrower fails to reimburse the
Issuing Bank for any draw under a Letter of Credit when due
and the Issuing Bank receives a payment of or on account of
such defaulted amount as to which a Participating Lender has
paid the Issuing Bank the amount of its Share pursuant to
Section 4.04, that portion of the amount received shall be
allocated between each such Participating Lender and the
Issuing Bank pro rata, with each such
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Participating Lender's percentage of the principal amount
based on its Share.
After the Issuing Bank receives a payment on account of a
Letter of Credit and makes the allocations required by the preceding paragraph,
it shall give notice to each Participating Lender not later than 11:30 a.m. New
York City time, by telephone and promptly remit to each Participating Lender (or
credit to the Participating Lender's account with the Issuing Bank, if any), the
amount to which each such Participating Lender is entitled; provided, however,
that the Issuing Bank may retain and deduct from such payment to any such
Participating Lender any amounts owed the Issuing Bank by such Participating
Lender pursuant to this Article IV.
If any payment received by the Issuing Bank and distributed or
credited to a Participating Lender is later rescinded or is otherwise returned
by the Issuing Bank for whatever reason (including, without limitation,
settlement of an alleged claim), each such Participating Lender, upon demand by
the Issuing Bank, shall immediately pay to the Issuing Bank such Participating
Lender's Share of the principal amount so returned plus interest and/or
commission on such amount at the rate specified above in Section 3.03. The
covenants contained in this paragraph shall survive the termination of this
Agreement.
Section 4.06. Sharing of Setoffs and Collections. Each
Participating Lender agrees that to the extent any payment is received by it on
any of the Borrower's obligations under a Letter of Credit, whether by
counterclaim, setoff, banker's lien, by realizing on collateral or otherwise and
such payment results in such Participating Lender receiving a greater payment
than it would have been entitled to under Section 4.05 had the total amount of
such payment been paid directly to the Issuing Bank for disbursement according
to that Section, then such Participating Lender shall immediately purchase for
cash from the Issuing Bank an additional Participation and a participation from
the other Participating Lenders in such Letter of Credit (subject to the same
terms and conditions provided for herein), sufficient in amount so that such
payment shall effectively be shared pro rata with the Issuing Bank and the other
Participating Lenders in accordance with the amount, and to the extent, of their
respective interests in the Letter of Credit; provided, however, that if all or
any portion of such payment is thereafter recovered from such Participating
Lender at any time, the purchase shall be rescinded and the purchase price
returned to the extent of such recovery, but without interest or other return
thereon.
Section 4.07. Indemnification; Costs and Expenses. To the
extent not reimbursed by the Borrower, and without limiting the obligation of
the Borrower to do so, each
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Participating Lender agrees to reimburse the Issuing Bank for, indemnify the
Issuing Bank against, and hold the Issuing Bank harmless from, on demand (and
the Issuing Bank is authorized to debit each such Participating Lender's
account, if any, with the Issuing Bank for the same), to the extent of each such
Participating Lender's Share of any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or disbursements
of any kind whatsoever (including, without limitation, disbursements necessary,
in the judgment of the Issuing Bank, to preserve or protect the Collateral or
Cash Collateral), that may at any time be imposed on, incurred by, or asserted
against the Issuing Bank in any way relating to this Agreement, a Letter of
Credit, the Collateral, the Cash Collateral or any other Loan Document or other
instrument relating to any of the foregoing, or the transactions contemplated
thereby and hereby, or any action taken or omitted by the Issuing Bank under or
in connection with any of the foregoing; provided, however, that no
Participating Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses, or disbursements resulting from the Issuing Bank's gross
negligence or willful misconduct. The covenants contained in this Section 4.07
shall survive the termination of this Agreement.
Section 4.08. Administration; Standard of Care. The Issuing
Bank will administer the Letter of Credit in the ordinary course of business and
in accordance with its usual practices, modified from time to time as it deems
appropriate under the circumstances. Except as expressly set forth in the third
paragraph of this Section 4.08, the Issuing Bank shall be entitled to use its
discretion in taking or refraining from taking any actions in connection with
any of the foregoing as if it were the sole party involved in any of the
foregoing and no Participations existed.
Each Participating Lender acknowledges that its Participations
hereunder are without recourse to the Issuing Bank and that each such
Participating Lender expressly assumes all risk of loss in connection with its
Participation in the Letters of Credit as if such Participating Lender had
directly provided such Letters of Credit. The Issuing Bank shall have no
liability, express or implied, for any action taken or omitted to be taken by
the Issuing Bank or for any failure or delay in exercising any right or power
possessed by the Issuing Bank under any of the Loan Documents except for actual
losses, if any, suffered by any Participating Lender that are proximately caused
either by the Issuing Bank's gross negligence or by the Issuing Bank's willful
misconduct. Without limiting the foregoing, the Issuing Bank (1) may consult
with legal counsel, independent public accountants, appraisers, and other
experts, selected by the Issuing Bank,
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and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such persons, (2) shall be entitled
to rely on, and shall incur no liability by acting upon, any conversation,
notice, consent, certificate, statement, order, or any document or other writing
(including, without limitation, telegraph, telex, telecopy, TWX, or other
telecommunication device) believed by the Issuing Bank to be genuine and correct
and to have been signed, sent, or made by the proper person, (3) makes no
warranty or representation of any kind of character relating to the Borrower,
the Collateral or the Cash Collateral, and shall not be responsible for any
warranty or representation made in or in connection with any of the Loan
Documents, (4) makes no warranty or representation as to, and shall not be
responsible for the correctness as to form, the due execution, legality,
validity, enforceability, genuineness, sufficiency, or collectability of any of
the Loan Documents, for any failure by the Borrower or any Person to perform its
obligations thereunder, for the Borrower's use of the proceeds therefrom, or for
the preservation of the Collateral, the Cash Collateral, or the loss,
depreciation, or release thereof, (5) makes no warranty or representation as to,
and assumes no responsibility for, the authenticity, validity, accuracy, or
completeness of any notice, financial statement, or other document or
information received by the Issuing Bank or any Participating Lender in
connection with, or otherwise referred to in, any of the Loan Documents, and (6)
shall not be required to make any inquiry concerning the observance or
performance of any agreement contained in, or conditions of, any of the Loan
Documents, or to inspect the property, books, or records of the Borrower or any
Person.
Notwithstanding the provisions of the first paragraph of this
Section 4.08, the Issuing Bank agrees that it will not knowingly take any of the
following actions without the written consent of each Participating Lender: (1)
waive any default by the Borrower involving the payment of money to the Issuing
Bank pursuant to any of the Loan Documents; (2) extend the time of payment of
interest on the Borrower's obligations to the Issuing Bank with respect to any
Letter of Credit; (3) extend the maturity date of a Letter of Credit beyond
December 31, 2002 without the consent of all the Participating Lenders; (4)
increase the amount of any Letter of Credit; (5) reduce the Letter of Credit
Fee; or (6) release any Collateral, except as otherwise contemplated in any Loan
Documents. the Issuing Bank shall be fully justified in failing or refusing to
take any action under any of the Loan Documents unless it shall first receive
such advice or concurrence of the Participating Lenders as the Issuing Bank
shall deem appropriate.
the Issuing Bank may lend money to, accept deposits from, and
generally engage in any kind of business with the
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Borrower as freely as though no Participations had been granted to a
Participating Lender.
Section 4.09. Independent Investigation by the Participating
Lenders. Each Participating Lender acknowledges (1) that the Issuing Bank has
provided such Participating Lender with copies of all of the Loan Documents and
the Borrower has provided or granted such Participating Lender access to certain
financial data and other information pertaining to the Borrower that such
Participating Lender has requested in order to enable it to make an independent,
informed judgment with respect to the desirability of purchasing Participations
in the Letters of Credit, (2) that the Issuing Bank has not made any
representations or warranties to such Participating Lender and that no prior or
future act by the Issuing Bank, including, without limitation, any review of the
affairs of the Borrower, shall be deemed to constitute a representation or
warranty of the Issuing Bank, and (3) that such Participating Lender has
independently, without reliance upon the Issuing Bank, and based on such
information as such Participating Lender has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial condition, and general creditworthiness of the Borrower, made its own
analysis of the value and Lien status of any Collateral or Cash Collateral, and
made its own decision to execute this Agreement and thereby purchase
Participations in accordance with this Article IV in the Letters of Credit. Each
Participating Lender agrees that, independently and without reliance upon the
Issuing Bank or any representations or statements of the Issuing Bank, and based
on such information as such Participating Lender deems appropriate at the time,
it will continue to make and rely upon its own credit analysis and decisions in
taking or not taking any action under this Article IV or any of the Loan
Documents.
Section 4.10. Participating Lenders' Ownership of Interests in
the Participations. Each Participating Lender hereby represents and warrants to
the Issuing Bank that the purchase of its Participation in the Letters of Credit
(1) is a legal investment pursuant to the laws under which such Participating
Lender is organized and operates, (2) has been duly authorized and approved by
all necessary action of the management of such Participating Lender, and (3) is
made for such Participating Lender's own account for the purpose of investment
only and with no present intention of disposing of the same.
ARTICLE V. CONDITIONS PRECEDENT
Section 5.01. Conditions Precedent to the Effectiveness of
this Agreement and Initial Use of a Credit Facility on and after the Second
Closing Date. The effectiveness of this Agreement and obligations of the Lenders
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on and after the Second Closing Date to make a Revolving Credit Loan or for the
Issuing Bank to issue a Letter of Credit is subject to the condition precedent
that the Lenders shall have received on or before the Second Closing Date each
of the following documents, in form and substance satisfactory to the Lenders
and their counsel, and each of the following requirements shall have been
fulfilled:
(a) Evidence of Due Organization and all Corporate Actions by
the Borrower. A certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Second Closing Date, attesting to the
certificate of incorporation and by-laws of the Borrower and all
amendments thereto and to all corporate actions taken by the Borrower,
including resolutions of its board of directors, authorizing the
execution, delivery and performance of the Loan Documents, and each
other document to be delivered pursuant to the Loan Documents;
(b) Incumbency and Signature Certificates of the Borrower. A
certificate of the Secretary or Assistant Secretary of the Borrower,
dated the Second Closing Date, certifying the names and true signatures
of the officers of the Borrower authorized to sign the Loan Documents
to which it is a party, and the other documents to be delivered
pursuant to the Loan Documents;
(c) Evidence of Good Standing with Insurance Departments. A
certificate, dated reasonably near the Second Closing Date, from the
insurance department or similar authority of the state of domicile of
each Insurance Subsidiary certifying as to the good standing of each
Insurance Subsidiary and as to the status of all licenses of each such
Insurance Subsidiary;
(d) Revolving Credit Notes. The Revolving Credit Notes duly
executed and delivered by the Borrower;
(e) Counter Indemnity Agreement. The Counter Indemnity
Agreement duly executed and delivered by the parties thereto;
(f) Opinions of Counsel for the Borrower. A favorable opinion
of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Borrower
dated the Second Closing Date;
(g) Reinsurance Plan. The reinsurance plan of Navigators and
NIC as in effect on the Second Closing Date;
(h) Payment of Fees. Payment in full of all fees required to
be paid in accordance with the Loan Documents;
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(i) Best Rating. Navigators and NIC continue to be rated "A"
by A.M. Best and such rating is not currently under review by A.M.
Best;
(j) Officer's Certificate. The following statements shall be
true and the Agent shall have received a certificate signed by a duly
authorized officer of the Borrower dated the date hereof stating that:
(i) The representations and warranties contained in
this Agreement and in each of the other Loan Documents are
correct on and as of the Second Closing Date as though made on
and as of such date; and
(ii) No Default or Event of Default has occurred and
is continuing;
(k) Lien Searches. The results of lien searches against the
Borrower in the State of New York with respect to filings regarding
security interests and tax liens shall have been received by the
Lenders, and such results shall be satisfactory to the Lenders; and
(l) Additional Documentation. Such other approvals, opinions
or documents as the Agent or any Lender may reasonably request.
Section 5.02. Conditions Precedent to Each Use of a Credit
Facility after the Second Closing Date. The obligations of the Lenders to
provide each Revolving Credit Loan or of the Issuing Bank to issue a Letter of
Credit shall be subject to the further conditions precedent that on the date of
providing such Credit Facility:
(1) The following statements shall be true:
(a) all the representations and warranties
contained in this Agreement and in each of
the other Loan Documents are correct on and
as of the date of providing such Credit
Facility as though made on and as of such
date; and
(b) no Default or Event of Default has occurred
and is continuing, or could result from
providing such Credit Facility;
(2) In the case of a Revolving Credit Loan, the
Agent shall have timely received a Borrowing
Notice;
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(3) In the case of a Letter of Credit, the Issuing
Bank shall have timely received a Request for
Letter of Credit; and
(4) The Agent shall have received such other approvals,
opinions or documents as the Agent or any Lender may
reasonably request.
Section 5.03. Deemed Representation. Each request for a Credit
Facility and acceptance by the Borrower of the proceeds of the applicable
Revolving Credit Loan or the issuance of the requested Letter of Credit, as the
case may be, shall constitute a representation and warranty that the statements
contained in Section 5.02(1) are true and correct both on the date of such
notice or request, as the case may be, and as of the date of the providing of
such Revolving Credit Loan or issuance of such Letter of Credit, as the case may
be.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
Section 6.01. Incorporation, Good Standing and Due
Qualification. The Borrower and each of its Subsidiaries are duly incorporated,
validly existing and in good standing under the laws of the respective
jurisdictions of their incorporation, have the corporate power and authority to
own their assets and to transact the business in which they are now engaged or
proposed to be engaged, and are duly qualified as foreign corporations and in
good standing under the laws of each other jurisdiction in which such
qualification is required, except to the extent that its failure to be so
qualified could not reasonably be expected to result in a Material Adverse
Change.
Section 6.02. Corporate Power and Authority; No Conflicts.
The execution, delivery and performance by the Borrower of the Loan Documents
have been duly authorized by all necessary corporate action and do not and will
not: (1) require any consent or approval of its stockholders; (2) contravene its
certificate of incorporation or by-laws; (3) violate any provision of, or
require any filing, registration, consent or approval under, any Law (including,
without limitation, Regulations G, T, U and X of the Board of Governors), order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to the Borrower or any of its Subsidiaries; (4) result in a
breach of or constitute a default under or require any consent under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower or any of its Subsidiaries is a party or by
which it or its properties may be bound or affected; (5) result in, or require,
the creation or imposition
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of any Lien (other than as created under the Borrower Pledge Agreement or the
Borrower Pledge Agreement (Navigators)), upon or with respect to any material
properties now owned or hereafter acquired by the Borrower or any of its
Subsidiaries; or (6) cause the Borrower or any of its Subsidiaries to be in
default under any such Law, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
Section 6.03. Legally Enforceable Agreements. Each Loan
Document to which the Borrower is a party is a legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in accordance with
its terms.
Section 6.04. Litigation. There are no actions, suits or
proceedings (private or governmental) pending or, to the knowledge of the
Borrower, threatened, against or affecting the Borrower or any of its
Subsidiaries before any Governmental Authority or arbitrator, which could, in
any one case or in the aggregate, reasonably be expected to result in a Material
Adverse Change.
Section 6.05. Financial Statements. The consolidated balance
sheets of the Borrower and the Consolidated Subsidiaries as of December 31,
1995, the related consolidated statements of income, consolidated statements of
stockholders' equity, and consolidated statements of cash flows of the Borrower
and such Consolidated Subsidiaries for the Fiscal Year then ended, and the
accompanying footnotes, together, with the opinion thereon, dated March 12, 1996
(except for Note 16 which is as of March 19, 1996) of KPMG Peat Marwick,
independent certified public accountants, copies of which have been furnished to
the Lenders, fairly present the financial condition of the Borrower and the
Consolidated Subsidiaries as at such dates and the results of the operations of
the Borrower and Consolidated Subsidiaries for the periods covered by such
statements, all in accordance with GAAP consistently applied, and since December
31, 1995 there has been no Material Adverse Change.
The combined balance sheets of the Somerset Companies as of
December 31, 1995 and the related combined statements of income, copies of which
have been furnished to the Lenders, fairly present the financial condition of
the Somerset Companies as of such dates and the results of the operations of the
Somerset Companies for the periods covered by such statements, all in accordance
with GAAP consistently applied.
The consolidated balance sheets of the Borrower and the
Consolidated Subsidiaries as of September 30, 1996 and the related consolidated
statements of income, consolidated statements of stockholders' equity, and
consolidated statements of cash flows of the Borrower and such Consolidated
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Subsidiaries for the Fiscal Quarter then ended, copies of which have been
furnished to the Lenders, fairly present the financial condition of the Borrower
and the Consolidated Subsidiaries as at such dates and the results of the
operations of the Borrower and Consolidated Subsidiaries for the periods covered
by such statements, all in accordance with GAAP consistently applied (subject to
changes resulting from normal year-end audit adjustments) and since September
30, 1996 there has been no Material Adverse Change.
The combined balance sheets of the Somerset Companies as of
September 30, 1996 and the related combined statements of income, copies of
which have been furnished to the Lenders, fairly present the financial condition
of the Somerset Companies as of such dates and the results of the operations of
the Somerset Companies for the periods covered by such statements, all in
accordance with GAAP consistently applied (subject to changes resulting from
normal year-end audit adjustments).
There are no liabilities of the Borrower or any of the
Consolidated Subsidiaries, fixed or contingent, which are material but are not
reflected in the most recent financial statements referred to above or in the
notes thereto, other than liabilities arising in the ordinary course of business
since September 30, 1996. No information, exhibit, or report furnished by the
Borrower or any Consolidated Subsidiaries to the Agent or any Lender in
connection with the negotiation of this Agreement and the other Loan Documents
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statements contained therein, in light of the
circumstances under which they were made, and at the time they were made, not
materially misleading.
Section 6.06. Statutory Financial Statements. The Annual
Statement of each of the Insurance Subsidiaries (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 (the "Department")
and delivered to each Lender prior to the execution and delivery of this
Agreement, as of and for the 1993, 1994 and 1995 Fiscal Years, and as of and for
the Fiscal Quarter ended September 30, 1996 (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 each such
Insurance Subsidiary as of and for the respective dates and period indicated
therein in accordance with SAP
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applied on a consistent basis, except as set forth in the notes thereto. 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 each of the Insurance Subsidiaries fully and fairly disclose all of
the material transactions, properties, assets, investments, liabilities and
obligations of such Insurance Subsidiary and all of such books of account are in
the possession of each such Insurance Subsidiary and are true, correct and
complete in all material respects.
The investments of Insurance Subsidiaries reflected in the
Annual Statements filed with the respective Departments with respect to the 1995
Fiscal Year (the "1995 Annual Statement") and the September 30, 1996 Quarterly
Statement (the "1996 Quarterly Statement") complied in all material respects, as
of the dates of such statements, with all applicable requirements of the
Department with respect to each such Insurance Subsidiary as well as those of
any other applicable jurisdiction relating to investments in respect of which it
may invest its funds.
The provisions made by each Insurance Subsidiary in its 1995
Annual Statement and in its 1996 Quarterly Statement for reserves, policy and
contract claims and Statutory Liabilities were in compliance in all material
respects, as of the dates of such statements, with the requirements of the
applicable Department as well as those of any other applicable jurisdiction, and
have been computed in accordance with SAP.
Marketable securities and short term investments reflected in
the 1995 Annual Statement and in the 1996 Quarterly Statement of each Insurance
Subsidiary are valued at cost, amortized cost or market value, as required by
applicable law as of the date of such statements.
Since December 31, 1995, there has been no adverse change in
the business, assets, operations or financial condition of the Borrower or any
Subsidiary which has or could reasonably be expected to result in a Material
Adverse Change. No dividends or other distributions have been declared, paid or
made upon any shares of capital stock of the Borrower, nor have any shares of
capital stock of the Borrower been redeemed, retired, purchased or otherwise
acquired by the Borrower since
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December 31, 1995, except to the extent permitted under the terms of this
Agreement.
Section 6.07. Ownership and Liens. The Borrower and each of
its Subsidiaries has title to, or valid leasehold interests in, all of their
properties and assets, real and personal, including the properties and assets,
and leasehold interests reflected in the financial statements referred to in
Section 6.05 (other than any properties or assets disposed of in the ordinary
course of business), and none of the properties and assets owned by the Borrower
and none of its leasehold interests are subject to any Lien, except as may be
permitted under this Agreement.
Section 6.08. Taxes. The Borrower and each of its
Subsidiaries has filed all tax returns and reports (federal, state, local and
foreign) required to be filed and have paid all taxes, assessments and
governmental charges and levies reported thereon to be due, including interest
and penalties, except to the extent they are the subject of a Good Faith
Contest.
Section 6.09. ERISA. Each Plan is administered in compliance
in all material respects with its terms and all applicable provisions of ERISA
and the Code. No Plan is subject to Title IV of ERISA; neither the Borrower nor
any other Person, including any fiduciary, has engaged in any Prohibited
Transaction which could reasonably be expected to subject the Borrower or any of
its Subsidiaries, or any entity which they have an obligation to indemnify, to
any material tax or penalty imposed under Section 4975 of the Code or Section
502(i) of ERISA; no Plan has been terminated and, to the best knowledge of the
Borrower, no notice of intent to terminate a Plan has been filed which, as a
result thereof could reasonably be expected to result in liability to the
Borrower or any of its Subsidiaries; no Plan is a Multiemployer Plan and neither
the Borrower nor any ERISA Affiliate has completely or partially withdrawn under
Section 4201 or 4204 of ERISA from a Multiemployer Plan which, as a result
thereof could reasonably be expected to result in liability to the Borrower or
any of its Subsidiaries, or incurred liability with respect to Section 515 of
ERISA; the Borrower has met the applicable minimum funding requirements under
ERISA with respect to all of its Plans and there has been no material failure on
the part of the Borrower's ERISA Affiliates to meet such requirements; a
favorable determination letter from the IRS has been received with respect to
each Plan intended to be qualified under Section 401(a) or 401(k) of the Code
and nothing has occurred which could reasonably be expected to adversely affect
such determination; there is no lien outstanding or security interest given in
connection with a Plan; and neither the Borrower nor any ERISA Affiliate has
liability for retiree medical, life insurance or other death benefits
(contingent or
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otherwise) other than as a result of a continuation of medical coverage required
under Section 4980B of the Code.
Section 6.10. Operation of Business. The Borrower and each of
its Subsidiaries possesses all licenses, permits, franchises, and trade names,
or rights thereto, to conduct its business substantially as now conducted and as
presently proposed to be conducted, and neither the Borrower nor any of its
Subsidiaries is in violation of any valid rights of others with respect to any
of the foregoing, except to the extent such failure or violation could not
reasonably be expected to result in a Material Adverse Change.
Section 6.11. Insurance Licenses. Schedule 6.11 lists all of
the jurisdictions in which any of the Regulated Companies hold valid and
effective licenses (including, without limitation, licenses or certificates of
authority from Applicable Insurance Regulatory Authorities), permits or
authorizations to transact insurance and reinsurance business (as an insurer,
reinsurer, agent, broker, manager or intermediary) including eligibility to act
as an excess or surplus line insurer or an accredited reinsurer (collectively,
the "Licenses"). Except as set forth on Schedule 6.11, to the best of the
Borrower's knowledge, no such License is the subject of a proceeding for
suspension, revocation or limitation or any similar proceedings, there is no
sustainable basis for such a suspension, revocation or limitation, and no such
suspension, revocation or limitation is threatened by any Applicable Insurance
Regulatory Authority. Schedule 6.11 indicates the line or lines of insurance
which each such Regulated Company is permitted to be engaged in with respect to
each License therein listed. The Regulated Companies do not transact any
Insurance Business, directly or indirectly, requiring any license, permit,
governmental approval, consent or other authorization other than those listed on
Schedule 6.11.
Section 6.12. No Default on Outstanding Judgments or Orders.
The Borrower and each of its Subsidiaries has satisfied all judgments and the
Borrower is not in default with respect to any judgment, writ, injunction,
decree, rule or regulation of any court, arbitrator or federal, state, municipal
or other Governmental Authority, commission, board, bureau, agency or
instrumentality, domestic or foreign.
Section 6.13. No Defaults on Other Agreements. Neither the
Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit
agreement or any lease or other agreement, including, without limitation, any
undertaking with any state insurance department or other Governmental Authority,
or instrument or subject to any certificate of incorporation or corporate
restriction which could reasonably be expected to result in a Material Adverse
Change. Neither the Borrower nor
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any of its Subsidiaries is in default in any respect in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any agreement or instrument where such failure to perform, observe
or fulfill could reasonably be expected to result in a Material Adverse Change.
Section 6.14 Subsidiaries and Ownership of Stock. Set forth in
Schedule 6.14 is a complete and accurate list of the Subsidiaries of the
Borrower, showing the jurisdiction of incorporation of each and showing the
percentage of the Borrower's ownership of the outstanding stock of each
Subsidiary. All of the outstanding capital stock of each such Subsidiary has
been validly issued, is fully paid and nonassessable, and is owned by the
Borrower free and clear of Liens, except for Liens permitted under the terms of
this Agreement.
There are no restrictions on the Borrower or any of its
Subsidiaries which prohibit or otherwise restrict the transfer of cash or other
assets owned by any Subsidiary of the Borrower to the Borrower, other than
prohibitions or restrictions existing under or by reason of (i) this Agreement
or the other Loan Documents, (ii) the Law, (iii) customary nonassignment
provisions in contracts entered into in the ordinary course of business and
consistent with past practices, (iv) purchase money obligations for property
acquired in the ordinary course of business, so long as such obligations are
permitted under this Agreement, and (v) any documents or instruments governing
the terms of any Indebtedness or other obligations secured by Liens permitted by
Section 8.03; provided, that such prohibitions or restrictions apply only to the
assets subject to such Liens.
Section 6.15. Governmental Regulation. Neither the Borrower
nor any of its Subsidiaries is subject to regulation under the Public Utility
Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate
Commerce Act, the Federal Power Act or any statute or regulation limiting its
ability to incur indebtedness for money borrowed as contemplated hereby.
Section 6.16. Partnerships. Except as disclosed in Schedule
6.16, neither the Borrower nor any of its Subsidiaries is a partner of any
partnership.
Section 6.17. Environmental Protection. The Borrower and all
of its Subsidiaries have all permits, licenses and other authorizations which
are required under all Environmental Laws, except to the extent failure to have
any such permit, license or authorization could not reasonably be expected to
result in a Material Adverse Change. As of the date hereof, neither the Borrower
nor any of its Subsidiaries
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is required to obtain any permits, licenses, or other authorizations under any
Environmental Law. The Borrower and all of its Subsidiaries are in compliance
with all Environmental Laws and the terms and conditions of the required
permits, licenses and authorizations, and is also in compliance with all other
limitations, restrictions, obligations, schedules and timetables contained in
those Laws or contained in any plan, order, decree, judgment, injunction, notice
or demand letter issued, entered, promulgated or approved thereunder, except to
the extent failure to comply could not reasonably be expected to result in a
Material Adverse Change.
Section 6.18. Solvency. The Borrower and each of its
Subsidiaries is Solvent.
Section 6.19. Governmental Approvals. No Governmental Approval
is required to authorize or is required in connection with (i) the execution,
delivery and performance of this Agreement or any other Loan Document, or any of
the transactions contemplated hereby or thereby, or (ii) the legality, validity,
binding effect or enforceability of this Agreement or any other Loan Document,
except that approval of the New York Insurance Department, the California
Insurance Department and/or one or more other state insurance departments, would
be required in order for the Lenders to acquire control of Navigators and NIC;
and provided, that the authorization of the California Insurance Department was
required in connection with the execution, delivery and performance of the
Borrower Pledge Agreement (Navigators).
Section 6.20. Lines of Business. Schedule 6.20 sets forth a
complete statement of each line of business conducted as of the date hereof by
the Borrower and each of its Subsidiaries (the "Existing Lines of Business").
Section 6.21. Reinsurance Practices. The business of each
Insurance Subsidiary is being conducted in all material respects in accordance
with the Reinsurance Plan.
ARTICLE VII. AFFIRMATIVE COVENANTS
So long as any of the Revolving Credit Notes shall remain
unpaid or any Lender shall have a Commitment hereunder or any Letter of Credit
remains outstanding, or any other amount is owing by the Borrower to any Lender
Party hereunder or under any other Loan Document, the Borrower shall:
Section 7.01. Maintenance of Existence. Preserve and maintain,
and cause each of its Subsidiaries to preserve and maintain, its corporate
existence and good standing in the jurisdiction of its incorporation, qualify
and remain qualified as a foreign corporation in each jurisdiction in which such
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qualification is required, maintain its Licenses in its jurisdiction of
incorporation and in each other jurisdiction where any such License is required
for the conduct of its business, except to the extent that its failure to so
qualify or maintain such Licenses could not reasonably be expected to result in
a Material Adverse Change.
Section 7.02. Conduct of Business. Continue, and cause each of
its Subsidiaries to continue, to engage in an efficient and economical manner in
the Existing Lines of Business.
Section 7.03. Maintenance of Properties. Maintain, keep and
preserve, and cause each of its Subsidiaries to maintain, keep and preserve, all
of its properties, (tangible and intangible) necessary or used in the proper
conduct of its business in good working order and condition, ordinary wear and
tear excepted.
Section 7.04. Maintenance of Records. Keep, and cause each of
its Subsidiaries to keep, adequate records and books of account, in which
complete entries will be made in accordance with GAAP and, as applicable, SAP,
reflecting all of its and their respective financial transactions.
Section 7.05. Maintenance of Insurance. Maintain, and cause
each of its Subsidiaries to maintain, insurance with financially sound and
reputable insurance companies or associations in such amounts and covering such
risks as are usually carried by companies engaged in the same or a similar
business and similarly situated and such other insurance as is reasonably
required by the Lenders.
Section 7.06. Compliance with Laws. Comply, and cause each of
its Subsidiaries to comply, in all respects with all applicable Laws, such
compliance to include, without limitation, paying before the same become
delinquent all taxes, assessments and governmental charges imposed upon it or
upon its property, except (1) in the case of the failure to pay taxes, such
taxes which are the subject of a Good Faith Contest, and (2) to the extent that
its failure to so comply could not reasonably be expected to result in a
Material Adverse Change.
Section 7.07. Right of Inspection. During normal business
hours and upon reasonable notice, permit the Agent or any Lender or any agent or
reasonable representative thereof, to examine or make copies and abstracts from
the records and books of account of, and visit the properties of, the Borrower
or any Subsidiary of the Borrower, and to discuss the affairs, finances and
accounts of the Borrower or any of its Subsidiaries with any of their respective
officers and directors and independent accountants.
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Section 7.08. Reporting Requirements. Furnish directly to each
of the Lenders:
(1) Annual Financial Statements. (a) As soon as available and
in any event within ninety-five (95) days after the end of each Fiscal
Year of the Borrower, (x) the consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as at the end of such Fiscal
Year and the related consolidated statements of income, of
stockholders' equity and of cash flows for such Fiscal Year, (y) the
balance sheet of the Borrower (on a stand alone basis) as at the end of
such Fiscal Year and the related statements of income and of
stockholder's equity for such Fiscal Year, and (z) the consolidating
balance sheet of the Borrower and each of its Consolidated Subsidiaries
as at the end of such Fiscal Year and the related consolidating
statements of income and of stockholders' equity for such Fiscal Year;
in each case prepared in accordance with GAAP consistently applied and
setting forth comparative figures for the preceding Fiscal Year, and,
in the case of such consolidated financial statements, examined by a
firm of independent certified public accountants reasonably
satisfactory to the Lenders whose opinion shall not be qualified as to
the scope of audit or as to the status of the Borrower or of any of its
Consolidated Subsidiaries as a going concern, together with a
certificate of such accounting firm stating that in the course of its
regular audit of business of the Borrower and its Subsidiaries, which
audit was conducted in accordance with generally accepted auditing
standards, such accounting firm has obtained no knowledge of any
Default or Event of Default which has occurred and is continuing or, if
in the opinion of such accounting firm such a Default or Event of
Default has occurred and is continuing, a statement as to the nature
thereof.
(b) As soon as available and in any event (w) within sixty
(60) days after the close of each Fiscal Year of each Insurance
Subsidiary, the Annual Statement of such Insurance Subsidiary for such
Fiscal Year as filed with the insurance commissioner (or similar
authority) in such Insurance Subsidiary's state of domicile, together
with (x) within sixty (60) days after the close of each Fiscal Year of
each Insurance Subsidiary, the opinion thereof of the Chief Financial
Officer of the Borrower stating that such Annual Statement presents the
financial condition and results of operations of such Insurance
Subsidiary in accordance with SAP, (y) on or prior to each June 1 after
the close of each Fiscal Year of each Insurance Subsidiary, the opinion
of a firm of certified public accountants reasonably satisfactory to
the Lenders, who shall have examined such Annual Statement and whose
opinion shall not be qualified as to the scope of audit or
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as to the status of such Insurance Subsidiary as a going concern, and
(z) within one hundred twenty (120) days after the close of each
Fiscal Year of each Insurance Subsidiary, a written review of and
favorable opinion on the methodology and assumptions used to calculate
such Loss Reserves of such Insurance Subsidiary at the end of such
Fiscal Year (as shown on the Annual Statement of such Insurance
Subsidiary prepared in accordance with SAP) and, based on the
application of the methodology and assumptions to the information
provided to such firm, the conclusions contained therein, in form and
substance satisfactory to the Agent and the Required Lenders, by
either the firm of independent certified public accountants providing
the opinion referred to in clause (1)(a) above in respect of such
Fiscal Year or an independent actuarial consulting firm reasonably
satisfactory to the Agent, which firm shall be provided access to or
copies of all reserve analyses and valuations relating to the
insurance business of each Insurance Subsidiary in the possession of
or available to the Borrower or its Subsidiaries.
(c) As soon as available and in any event on or prior to each
May 1 after the close of each Fiscal Year of the Insurance
Subsidiaries, the Consolidated Annual Statement of the Insurance
Subsidiaries for such Fiscal Year, prepared in accordance with SAP and
filed with the New York Insurance Department.
(2) Quarterly Financial Statements. (i) As soon as available
and in any event within fifty (50) days after the close of each of the
first three Fiscal Quarters in each Fiscal Year of the Borrower, (y)
the consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as at the end of such Fiscal Quarter and the related
consolidated statements of income, of stockholder's equity and of cash
flows for such Fiscal Quarter and for the elapsed portion of the Fiscal
Year ended with the last day of such Fiscal Quarter, and (z) the
consolidating balance sheet of the Borrower and each of its
Consolidated Subsidiaries as at the end of such Fiscal Quarter and the
related consolidating statements of income and of stockholder's equity
for such Fiscal Quarter and for the elapsed portion of the Fiscal Year
ended with the last day of the Fiscal Quarter; in each case prepared in
accordance with GAAP consistently applied and setting forth comparative
figures for the related periods in the prior Fiscal Year, and all of
which shall be certified by the Chief Financial Officer of the
Borrower, subject to changes resulting from normal year-end audit
adjustments.
(ii) As soon as available and in any event within fifty (50)
days after the close of each of the first three
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Fiscal Quarters in each Fiscal Year of each Insurance Subsidiary, (y)
quarterly financial statements of such Insurance Subsidiary (prepared
in accordance with SAP) for such Fiscal Quarter and as filed with the
insurance commissioner (or similar authority) in such Insurance
Subsidiary's state of domicile, together with the opinion thereon of
the Chief Financial Officer of the Borrower stating that such financial
statements present the financial condition and results of operations of
such Insurance Subsidiary in accordance with SAP, and (z) a certificate
of the Chief Financial Officer of such Insurance Subsidiary affirming
that (A) to the best of his knowledge, the Loss Reserves do not
understate the liabilities of such Insurance Subsidiary as at the end
of such Fiscal Quarter, and (B) the Loss Reserves for such Fiscal
Quarter are calculated using the same methodology as for the prior
Fiscal Quarter and the prior Fiscal Year end (as shown on its financial
statements prepared in accordance with SAP).
(iii) As soon as available and in any event within fifty (50)
days after the close of each Fiscal Quarter of each Insurance
Subsidiary, a report certified by the Chief Financial Officer of the
Borrower setting forth, in a format satisfactory to the Agent, the
statutory carrying value (determined in accordance with SAP) and the
fair market value of the investment portfolio of such Insurance
Subsidiary as of the last day of such Fiscal Quarter.
(3) Management Letters. Promptly upon receipt thereof, copies
of any reports submitted to the Borrower by independent certified
public accountants in connection with the examination of the financial
statements of the Borrower and its Consolidated Subsidiaries made by
such accountants.
(4) Certificate of No Default. Within fifty (50) days after
the end of each Fiscal Quarter of the Borrower, a certificate of the
Chief Financial Officer of the Borrower (a) certifying that no Default
or Event of Default has occurred and is continuing or, if a Default or
Event of Default has occurred and is continuing, a statement as to the
nature thereof and the action which is proposed to be taken with
respect thereto, and (b) with computations demonstrating compliance
with the covenants contained in Article IX.
(5) SEC and Other Reports. Promptly upon their becoming
publicly available, a copy of each report (including Forms 8-K, 10-K
and 10-Q), proxy statement and registration statement or prospectus
relating to securities of the Borrower filed with or delivered to any
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securities exchange, the Securities and Exchange Commission or any
successor agency.
(6) Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any
Governmental Authority, affecting the Borrower or any of its
Consolidated Subsidiaries which, if determined adversely to the
Borrower or any of its Consolidated Subsidiaries, could reasonably be
expected to result in a Material Adverse Change.
(7) Notices of Defaults and Events of Default. As soon as
possible and in any event within five (5) Business Days after the
occurrence of each Default or Event of Default a written notice setting
forth the details of such Default or Event of Default and the action
which is proposed to be taken by the Borrower with respect thereto.
(8) ERISA Reports. As soon as possible and in any event within
ten (10) days after the Borrower knows or has reason to know that any
Reportable Event has occurred with respect to any Plan or that a
Prohibited Transaction has occurred resulting in material liability to
the Borrower or any of its Subsidiaries or to any entity which they
have an obligation to indemnify or that the PBGC or the Borrower or any
of its Subsidiaries has instituted or will institute proceedings under
Title IV of ERISA to terminate any Plan or to appoint a trustee to
administer any Plan or that the Borrower or any of its Subsidiaries or
any ERISA Affiliate has completely or partially withdrawn from a
Multiemployer Plan or that a Plan which is a Multiemployer Plan is in
reorganization (within the meaning of Section 4241 of ERISA), is
insolvent (within the meaning of Section 4245 of ERISA) or is
terminating, or that a plan intended to qualify under Section 401(a) or
401(k) of the Code fails to so qualify or that the waiver of the
minimum funding standard under Section 412 of the Code has been applied
for with respect to a Plan or that there has been a material failure to
make a required payment or contribution to any Plan or that a Plan has
been amended which has resulted or would result in the imposition of a
lien or requires the granting of a security interest, the Borrower will
deliver to each of the Lenders a certificate of the Chief Financial
Officer of the Borrower setting forth details as to such Reportable
Event or Prohibited Transaction or Plan termination or appointment or
withdrawal or reorganization or insolvency or qualification failure or
waiver or payment or contribution failure or amendment and the action
the Borrower proposes to take with respect thereto.
(9) Reports to Other Creditors. Promptly after the
furnishing thereof, copies of any statement or report
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furnished by the Borrower or any of its Subsidiaries to any other
party pursuant to the terms of any indenture, loan, or credit or
similar agreement and not otherwise required to be furnished to the
Lenders under this Agreement.
(10) Insurance. Upon the occurrence of any casualty, damage or
loss, suffered by the Borrower or any of its Subsidiaries, whether or
not giving rise to a claim under any insurance policy insuring the
Borrower or any Subsidiary of the Borrower (other than an insurance
policy issued by an Insurance Subsidiary to Persons other than the
Borrower or any of its Subsidiaries in the ordinary course of such
Insurance Subsidiary's business), in an amount greater than Two Hundred
Fifty Thousand Dollars ($250,000), notice thereof, together with copies
of any document relating thereto (including copies of any such claim)
in possession or control of the Borrower or any agent of the Borrower;
and immediately after the occurrence thereof, written notice of any
cancellation of any insurance policy required to be maintained by the
Borrower pursuant to Section 7.05.
(11) Material Adverse Change. As soon as possible and in any
event within five (5) Business Days after the occurrence of any event
or circumstance which could reasonably be expected to result in or has
resulted in a Material Adverse Change, written notice thereof.
(12) Environmental Notices. As soon as practicable and in any
event within fifteen (15) Business Days after receipt, copies of all
Environmental Notices received by the Borrower.
(13) Loss Reserve Report. (i) In addition to the requirements
of clause (1)(b)(z) above, as promptly as reasonably practicable
following the request of the Required Lenders, a report prepared by an
independent actuarial consulting firm reasonably acceptable to the
Required Lenders reviewing the adequacy of loss reserves of each
Insurance Subsidiary, which firm shall be provided access to or copies
of all reserve analyses and valuations relating to the insurance
business of each Insurance Subsidiary in the possession of or available
to the Borrower or its Subsidiaries; provided, that, in the event that
the written review required to be provided to the Lenders in respect of
any Fiscal Year pursuant to clause (1)(b)(z) above is provided by an
independent actuarial consulting firm reasonably satisfactory to the
Agent, or a written review of an independent actuarial consulting firm
reasonably satisfactory to the Agent satisfying the requirements set
forth in clause (1)(b)(z) is otherwise delivered to the Lenders at any
time other than pursuant
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to such clause, then the Required Lenders may not request a report
pursuant to this clause (13) until one year after the delivery date of
such report unless, at the time of such request, an Event of Default
is in existence.
(ii) Upon the occurrence thereof, a notice from the
Chief Financial Officer of the Borrower of any event which could
reasonably be expected to cause an increase or decrease of the
consolidated Loss Reserves of the Insurance Subsidiaries of more than
eight percent (8%) from the amount thereof reflected in the most recent
annual or quarterly consolidated statutory financial statements of the
Insurance Subsidiaries delivered pursuant to Section 7.08(1)(c) or
7.08(2)(iii).
(14) Regulatory and Other Statements and Reports. Promptly (A)
after their becoming available, copies of any statutory financial
statements that the Borrower or any Insurance Subsidiary periodically
files with the Applicable Insurance Regulatory Authority of the state
in which it is domiciled or any state in which it is deemed to be
commercially domiciled or any governmental agency or agencies
substituted therefor (including all exhibits and schedules thereto),
(B) after receipt thereof, copies of all regular and periodic reports
of reviews or examinations (including, without limitation, triennial
examinations and risk adjusted capital reports) of any Regulated
Company, delivered to such Regulated Company in draft or final form by
any Applicable Insurance Regulatory Authority, insurance commission or
similar regulatory authority, (C) after receipt thereof, written notice
of any assertion by any Applicable Insurance Regulatory Authority, or
any governmental agency or agencies substituted therefor, as to a
violation of any requirement of Law by any Regulated Company which
could reasonably be expected to result in a Material Adverse Change,
(D) after receipt thereof, a copy of the final report to each Insurance
Subsidiary from the NAIC for each Fiscal Year, as to such Company's
compliance or noncompliance with each of the NAIC Tests, (E) after
receipt thereof, a copy of A.M. Best's rating analysis for each
Insurance Subsidiary for each Fiscal Year, (F) after receipt thereof, a
copy of any notice of termination, cancellation or recapture of any
Reinsurance Agreement or Retrocession Agreement to which an Insurance
Subsidiary is a party to the extent such termination or cancellation
could reasonably be expected to result in a Material Adverse Change,
(G) and in any event not later than seven (7) days after the making of
any such filing, copies of all insurance holding company system act
filings with governmental authorities by an Insurance Subsidiary,
including, without limitation, filings which seek approval of
governmental authorities with respect to transactions between any of
the Regulated
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Companies and any of their respective Affiliates, (H) and in any event
within five (5) Business Days after receipt thereof, copies of any
notice of actual suspension, termination, revocation or limitation of
any License of any Regulated Company by any Applicable Insurance
Regulatory Authority, including any request by an Applicable Insurance
Regulatory Authority which commits a Regulated Company to take or
refrain from taking any action or which otherwise affects the
authority of such Regulated Company to conduct its business (I) after
the Borrower has reason to believe that any Insurance Subsidiary is or
may be deemed to be "commercially domiciled" (or the substantial
equivalent) in a state other than its state of domicile, under the
insurance Law of such state, notice to that effect identifying the
Insurance Subsidiary and the applicable state and (J) and in any event
within five (5) Business Days after the Borrower or any of its
Subsidiaries obtains knowledge thereof, notice of any actual changes
in the insurance laws enacted in any state in which any Regulated
Company is domiciled which could reasonably be expected to cause a
Material Adverse Change.
(15) Credit Rating of Approved Reinsurers. As soon as
possible, notify each Lender if (a) the credit rating given by A.M.
Best to any Approved Reinsurer with a credit rating is downgraded to
below "A-", or (b) any Reinsurer without a credit rating is given a
credit rating by A.M. Best below "A-", or (c) any reductions in credit
rating of an Approved Reinsurer if such rating was already rated below
"A-", or (d) the rating given by Insurance Services Institute to any
Approved Reinsurer which is rated by Insurance Services Institute is
downgraded to below "A", and indicate in such notice the amount of the
reduction to the Insurance Subsidiaries' Loss Reserves attributable to
reinsurance ceded to such Approved Reinsurer as reflected in the most
recent statutory financial statements of the Insurance Subsidiaries.
(16) Reinsurance Plan. As soon as possible, notify the Agent
and each Lender of any material change to the Reinsurance Plan.
(17) Investment Guidelines. As soon as possible, notify the
Agent and each Lender of any material investment made, or approved to
be made, by any Insurance Subsidiary pursuant to any exception
contained in the Investment Guidelines or pursuant to any provision of
the Investment Guidelines authorizing any Person to make an exception
thereto.
(18) General Information. Such other information respecting
the condition or operations, financial or
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otherwise, of the Borrower or any of its Subsidiaries as the Agent
or any Lender may from time to time reasonably request, including
without limitation, additional consolidated or consolidating financial
statements such as statements of income and cash flow statements and
statements of stockholder's equity.
Section 7.09. Compliance With Environmental Laws. Comply, and
cause each of its Subsidiaries to comply, in all respects with all applicable
Environmental Laws where the failure to comply could reasonably be expected to
result in a Material Adverse Effect and immediately pay or cause to be paid, and
cause each of its Subsidiaries to immediately pay or cause to be paid, all costs
and expenses incurred in connection with such compliance.
Section 7.10. Borrower's Accounts. To the extent practicable,
maintain its principal securities accounts in the United States with BBH & Co.
Section 7.11. Reinsurance. Cause the Insurance Subsidiaries to
maintain reinsurance protection with respect to each type of business which in
the event of a Maximum Potential Loss limits the reduction in consolidated
surplus of Insurance Subsidiaries to five percent (5%) of consolidated surplus.
For purposes of this Section 7.11, the term "consolidated surplus" means the
consolidated surplus as regards policyholders of the Insurance Subsidiaries, in
each case determined in accordance with SAP and as reflected in the most recent
consolidated statutory financial statements of the Insurance Subsidiaries
delivered pursuant to Section 7.08(1)(c) or 7.08(2)(iii).
Section 7.12. Amendments to Borrower Pledge Agreement. On or
prior to January 31, 1997, the Borrower shall satisfy the following conditions
with regard to its pledge of the stock of each of Somerset Asia Pacific Pty.
Ltd., NCUL, and Somerset Marine (UK) Limited:
(1) Amendment to Borrower Pledge Agreement. The Borrower shall
execute and deliver an amendment to the Borrower Pledge
Agreement in form and substance satisfactory to the Lenders to
effect a pledge of the stock of each of Somerset Asia Pacific
Pty. Ltd., NCUL, and Somerset Marine (UK) Limited, and the
Borrower will deliver the certificates representing the shares
pledged pursuant to such amendment to Borrower Pledge
Agreement and undated stock powers executed in blank for each
such certificate and the Borrower will take any and all other
actions and execute any other agreements required to give the
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Agent a first priority perfected security interest in such
stock; and
(2) Opinion of Counsel. The Borrower shall deliver an opinion
of counsel, dated the date of such pledge of stock, in a form
acceptable to the Lenders, covering among other items, the
perfection of the Agent's security interest in such stock.
ARTICLE VIII. NEGATIVE COVENANTS
So long as any of the Revolving Credit Notes shall remain
unpaid or any Lender shall have any Commitment hereunder or any Letter of Credit
remains outstanding, or any other amount is owing by the Borrower to any Lender
Party hereunder or under any other Loan Document, the Borrower shall not:
Section 8.01. Debt. Create, incur, assume or suffer to exist,
or permit any Subsidiary to create, incur, assume, or suffer to exist, any Debt,
except:
(1) Debt of the Borrower under this Agreement, the Revolving
Credit Notes, the Letters of Credit or any other Loan Document;
(2) Accounts payable to any Person, and not overdue by more
than forty-five (45) days, for goods and services supplied to the Borrower or
any Subsidiary by such Person in the ordinary course of business;
(3) Debt secured by purchase money Liens permitted by Section
8.03(8);
(4) Guaranties permitted under Section 8.02; and
(5) Debt of the Borrower under the Note dated December 15,
1994 in the aggregate principal amount of Nine Hundred Forty Two Thousand
Thirty-Four Dollars ($942,034) owed to Terence N. Deeks.
Section 8.02. Guaranties. Assume, guarantee, endorse or
otherwise be or become directly or contingently responsible or liable
(including, but not limited to an agreement to purchase any obligation, stock,
assets, goods or services or to supply or advance any funds, assets, goods or
services, or an agreement to maintain or cause such Person to maintain a minimum
working capital or net worth or otherwise to assure the creditors of any Person
against loss) for the obligations of any Person, or permit any Subsidiary to do
so, except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, and
except for the obligations of the Insurance Subsidiaries under insurance
policies issued and
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reinsurance agreements entered into in the ordinary course of business
consistent with the terms of this Agreement; provided, however, that the
Borrower may guarantee the obligations of any person that is its or its
Subsidiary's employee so long as the aggregate amount of all such obligations,
taken together with the aggregate amount of any and all loans to all such
persons permitted by the first proviso to Section 8.08, outstanding at any time
do not in the aggregate exceed Two Hundred Fifty Thousand Dollars ($250,000).
Section 8.03. Liens. Create, incur, assume or suffer to exist,
or permit any Subsidiary to create, assume, or suffer to exist, any Lien, upon
or with respect to any of its real or personal properties (including, without
limitation, leasehold interests, leasehold improvements and any other interest
in real property or fixtures), now owned or hereafter acquired, except:
(1) Liens granted to the Lender Parties under and pursuant to
the Loan Documents;
(2) Liens for taxes or assessments or other government charges
or levies if not yet due and payable or if due and payable if they are the
subject of a Good Faith Contest;
(3) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than sixty (60) days, or which are the subject of a Good Faith
Contest;
(4) Liens under workmen's compensation, unemployment
insurance, social security or similar legislation (other than ERISA);
(5) Liens, deposits or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(6) judgment and other similar Liens arising in connection
with court proceedings; provided, that the execution or other enforcement of
such Liens is effectively stayed and the claims secured thereby are the subject
of a Good Faith Contest;
(7) easements, rights-of-way, restrictions, zoning and other
similar encumbrances which, in the aggregate, do not materially interfere with
the occupation, use and enjoyment by
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the Borrower of the property or assets encumbered thereby in the normal course
of its business or materially impair the value of the property subject thereto;
(8) purchase money Liens on any real property, fixtures or
equipment hereafter acquired or the assumption of any Lien on real property,
fixtures or equipment existing at the time of such acquisition, or a Lien
incurred in connection with any conditional sale or other title retention
agreement or a Capital Lease; provided, that:
(a) any property subject to any of the foregoing is acquired
by the Borrower in the ordinary course of its business and the Lien on
any such property is created contemporaneously with such acquisition;
(b) the Debt secured by any Lien so created, assumed or
existing shall not exceed one hundred percent (100%) of the lesser of
cost or fair market value as of the time of acquisition of the property
covered thereby;
(c) each such Lien shall attach only to the property so
acquired and fixed improvements thereon;
(d) the aggregate amount of all such Debt secured by all such
Liens at any time shall be equal to or less than Two Hundred Fifty
Thousand Dollars ($250,000);
(9) deposits of cash or securities with or on behalf of state
insurance departments reflected in the Insurance Subsidiaries' Statutory
Financial Statements;
(10) deposits of cash or securities by the Borrower with
Lloyd's of London.
Section 8.04. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, or permit any Subsidiary to sell, lease, assign, transfer,
or otherwise dispose of, any of its now owned or hereafter acquired assets,
except for: (1) cash and investment securities disposed of for purposes of
reinvestment or to pay claims, taxes and expenses in the ordinary course of
business or, in the case of any Subsidiary, to pay a dividend; or (2) the sale
or other disposition of tangible personal property which has become economically
obsolete or which has been replaced.
Section 8.05. Transactions with Affiliates. Enter into any
transaction, or permit any Subsidiary to enter into any transaction, including,
without limitation, the purchase, sale or exchange of property or the rendering
of any service,
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with any of its Affiliates or enter into any transaction, or permit any
Subsidiary to enter into any transaction, including, without limitation, the
purchase, sale or exchange of property or the rendering of any service, with any
of its Affiliates, except in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
than it would obtain in a comparable arm's-length transaction with a Person not
an Affiliate of the Borrower or such Subsidiary, as the case may be.
Section 8.06. Mergers. Enter into a merger or consolidate
with, wind up, liquidate or dissolve its affairs, or sell, assign, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its assets (whether now owned or hereafter acquired)
to, any Person, or acquire (whether by purchase, lease or otherwise) all or
substantially all of the assets or the business of any Person (or enter into any
agreement to do any of the foregoing), or permit any of its Subsidiaries to do
any of the foregoing, except that any of the Somerset Companies can merge into
another Somerset Company.
Section 8.07. Leases. Create, incur, assume, or suffer to
exist, or permit any of its Subsidiaries to create, incur, assume, or suffer to
exist, any obligation as lessee for the rental or hire of any real or personal
property except: (1) Capital Leases permitted under Section 8.03(8), and (2) in
addition to leases permitted under exception (1), leases that do not in the
aggregate require the Borrower and its Subsidiaries to make payments (including
taxes, insurance, maintenance, and similar expenses which the Borrower is
required to pay under the terms of the lease but excluding all payments based
upon a percentage of sales or revenues) in any Fiscal Year in excess of Two
Million Dollars ($2,000,000).
Section 8.08. Investments. Permit any Insurance Subsidiary to
have or maintain (1) investments (other than investments in Investment Grade
securities) in capital stock and/or securities with an aggregate Fair Market
Value greater than seven and one-half percent (7 1/2%) of the Fair Market Value
of all investments owned by such Insurance Subsidiary, or (2) investments in
mortgages (for the avoidance of doubt, not to include mortgage-backed securities
which are Investment Grade) or real estate, or (3) investments which are other
than in accordance with the Investment Guidelines.
Make, or permit any Subsidiary to make, any loan or advance to
any Person, or purchase or otherwise acquire, or permit any Subsidiary to
purchase or otherwise acquire, any capital stock, assets, obligations, or other
securities of, make any capital contributions to, or otherwise invest in or
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acquire any interest in any Person, except (1) in the case of the Borrower or
any Subsidiary of the Borrower other than an Insurance Subsidiary, Permitted
Investments, (2) in the case of any Insurance Subsidiary, any such transaction
which is otherwise in accordance with the Investment Guidelines, (3) the
Borrower may make loans to any person that is its or its Subsidiary's employee
so long as the aggregate amount of all such loans, taken together with the
aggregate amount of any and all obligations of all such person guaranteed by the
Borrower pursuant to the first proviso to Section 8.02 outstanding at any time
do not in the aggregate exceed Two Hundred Fifty Thousand Dollars ($250,000),
and (4) in the case of Borrower or any Subsidiary of the Borrower an aggregate
total investment for the Borrower and all of its Subsidiaries taken together of
up to Two Million Dollars ($2,000,000) in NCUL; provided, however, for purposes
of this Section 8.08, Letters of Credit issued hereunder shall not constitute an
investment in NCUL.
Section 8.09. Fiscal Year. Change, or permit any Subsidiary to
change, its fiscal year to a period other than its fiscal year in effect on the
date hereof.
Section 8.10. Changes, Amendments or Modifications. Change,
amend, modify or supplement any of the following: (1) its certificate of
incorporation; or (2) its by-laws.
Section 8.11. Changes in Business. Engage in any business
other than (1) the ownership of the capital stock of Navigators, Navigators
Corporate Underwriters Limited, Riverside Underwriters plc, Somerset Marine (UK)
Limited, the Somerset Companies and Somerset Marine Aviation Property Managers,
Inc., a New Jersey corporation, (2) provisions of management services to its
Subsidiaries, and (3) entering into and performing its obligations under this
Agreement and the other Loan Documents, or permit the Subsidiaries to engage in
any business other than the Existing Lines of Business.
Section 8.12. Capital Expenditures. The Borrower and its
Subsidiaries together will not incur Capital Expenditures in excess of One
Million Dollars ($1,000,000) in the aggregate in any Fiscal Year.
Section 8.13. Reinsurance. Cause or permit an Insurance
Subsidiary to (1) enter into any Surplus Relief Reinsurance Transaction; (2)
enter into or maintain, as a cedent, Reinsurance Agreements or Retrocession
Agreements with any Person other than an Approved Reinsurer; (3) enter into or
maintain, as a cedent, Reinsurance Agreements or Retrocession Agreements with
any Approved Reinsurer which by their terms would result in any such Approved
Reinsurer having exposure in a Maximum Potential Loss exceeding (in the
aggregate, with respect to such Approved Reinsurer) an amount equal to such
Reinsurer's Permitted Reinsurance Percentage of the
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consolidated surplus as regards policyholders of the Insurance Subsidiaries,
determined in accordance with SAP and as reflected in the most recent
consolidated statutory financial statements of the Insurance Subsidiaries
delivered pursuant to Section 7.08(1)(c) or 7.08(2)(iii); or (4) assume
reinsurance which would result in the percentage of the consolidated gross
premium written of the Insurance Subsidiaries, in any Fiscal Quarter,
attributable to reinsurance assumed to exceed thirty percent (30%).
Section 8.14. Stock of Subsidiaries. Sell or otherwise dispose
of (including the granting of any security interest in) any shares of capital
stock of any Subsidiary other than pursuant to the Borrower Pledge Agreement or
Borrower Pledge Agreement (Navigators), or permit any Subsidiary to issue
additional shares of its capital stock, except the minimum number of directors'
qualifying shares required by Law.
ARTICLE IX. FINANCIAL COVENANTS
So long as any of the Revolving Credit Notes shall remain
unpaid or any Lender shall have any Commitment hereunder or any Letter of Credit
remains outstanding, or any other amount is owing by the Borrower to any Lender
Party hereunder or under any other Loan Document:
Section 9.01. Minimum Consolidated Tangible Net Worth. The
Borrower and its Consolidated Subsidiaries shall maintain at all times a
Consolidated Tangible Net Worth of not less than the greatest of (1) One Hundred
Million Dollars ($100,000,000), (2) ninety percent (90%) of the Consolidated
Tangible Net Worth as of the end of the prior Fiscal Year, or (3) the total of
(a) the Consolidated Tangible Net Worth as of the end of the prior Fiscal Year,
plus (b) the greater of (i) sixty percent (60%) of the Consolidated Net Income
for the period from the first day of such current Fiscal Year to the date of
determination, or (ii) zero Dollars ($0), less (c) any negative change on or
after the first day of such current Fiscal Year in the adjustment to equity as
required by the Financial Accounting Standards Board Rule 115.
Section 9.02. Navigators' and NIC's Statutory Surplus. The
Borrower will not permit during any period specified below the sum of (1) the
Statutory Surplus of Navigators (exclusive of any investment in NIC), plus (2)
the Statutory Surplus of NIC to be less than the amount specified below for such
period:
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<TABLE>
<CAPTION>
Period Minimum Amount
------ --------------
<S> <C>
January 1, 1996 to December 31, 1996 $ 84,000,000
January 1, 1997 to December 31, 1997 $ 88,000,000
January 1, 1998 to December 31, 1998 $ 92,000,000
January 1, 1999 to December 31, 1999 $ 96,000,000
January 1, 2000 to December 31, 2000 $100,000,000
January 1, 2001 to December 31, 2001 $104,000,000
January 1, 2002 to December 31, 2002 $108,000,000
</TABLE>
Section 9.03. Fixed Charge Coverage Ratio. The Borrower will
have for each period specified below a ratio of (1) the sum of (a) Navigators'
Allowable Dividends as of the end of such period, plus (b) Somerset Earnings
Before Depreciation for such period, plus (c) Borrower Earnings Before
Depreciation for such period, plus (d) Net Tax Payment for such period, to (2)
the sum of (a) Consolidated Current Portion of Long Term Debt as of the first
day of such twelve (12) month period, plus (b) Borrower Expenses for such
period, plus (c) the projected interest expense of the Borrower and all of its
Subsidiaries for the next twelve (12) months where it is assumed that all Debt
outstanding on such date will remain outstanding for such twelve (12) month
period and the interest rate on all such Debt for such twelve (12) month period
is a fixed rate equal to the LIBOR Interest Rate plus the Applicable Margin with
an Interest Period of three (3) months in effect on the day before the first day
of such twelve (12) month period, plus (d) Projected Dividends, of not less than
the ratio below for such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
For the four quarters (taken together as
a whole) ending on each Quarterly Date
during the period from and including the
Second Closing Date to and including
December 31, 2000 1.75 to 1.00
For the eight quarters (taken together as
a whole) ending on each Quarterly Date
occurring on or after March 31, 2001 1.00 to 1.00
</TABLE>
Section 9.04. Minimum Liquidity of Borrower. The Borrower will
have at all times Borrower Liquid Assets of not less than Two Million Dollars
($2,000,000).
Section 9.05. Loss Reserves. The Borrower will not permit the
ratio of (i) Loss Reserves of any Insurance Subsidiary to (ii) Statutory Surplus
of such Insurance Subsidiary as of the last day of any Fiscal Quarter to be
greater than 3.00 to 1.
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Section 9.06. Minimum Consolidated Net Income. The Borrower
and its Consolidated Subsidiaries will have for each Fiscal Year a Consolidated
Net Income of not less than Eight Million Dollars ($8,000,000).
Section 9.07. Risk Based Capital Ratio. The Total Adjusted
Capital (as defined in the Risk-Based Capital for Insurers Model Act as adopted,
amended or modified from time to time by the NAIC (the "RBC Model Act") of each
of the Insurance Subsidiaries shall not, at any time, be less than three hundred
percent (300%) of the Authorized Control Level RBC (as defined in the RBC Model
Act).
Section 9.08. Ratio of Navigators' to NIC's Statutory Surplus.
The Borrower will not permit the Statutory Surplus of NIC at any time to exceed
twenty-five percent (25%) of the Statutory Surplus of Navigators.
Section 9.09. Consolidated Underwriting Losses to Consolidated
Tangible Net Worth. The Borrower and its Consolidated Subsidiaries will not have
during any Fiscal Year or Quarterly Period an absolute value (ie. to the extent
the number is a negative number it is treated as a positive number) of
Consolidated Underwriting Losses of greater than fifteen percent (15%) of
Consolidated Tangible Net Worth as of the start of such period.
Section 9.10. Gross Premiums Written to Consolidated Tangible
Net Worth. The Borrower will not have during any four quarters (taken as a
whole) Gross Premiums Written that exceed two hundred seventy-five percent
(275%) of its Consolidated Tangible Net Worth as of the last day of such period.
ARTICLE X. EVENTS OF DEFAULT
Section 10.01. Events of Default. Any of the following events
shall be an "Event of Default":
(1) the Borrower shall: (a) fail to pay the principal of any
Note as and when due and payable; (b) fail to pay interest on any Note within
two (2) Business Days of when such interest is due and payable; (c) fail to
reimburse the Issuing Bank on the Letter of Credit or shall fail to pay the
Letter of Credit Fee within two (2) Business Days of when such reimbursement or
Fee is due and payable; or (d) fail to pay within ten (10) days after the
request for payment is made any fees or expenses required to be paid under the
terms of any of the Loan Documents;
(2) any representation or warranty made or deemed made by the
Borrower in this Agreement or in any other Loan Document or which is contained
in any certificate, document,
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opinion, financial or other statement furnished at any time under or in
connection with any Loan Document shall prove to have been incorrect in any
material respect on or as of the date made or deemed made;
(3) the Borrower shall fail to perform or observe any other
term, covenant or agreement contained in Article VIII or Article IX or Section
7.05 or 7.08(7) on its part to be performed or observed; or the Borrower shall
fail to perform or observe any term, covenant or agreement contained in Article
VII (other than Section 7.05 or 7.08(7)) or otherwise contained in this
Agreement or any Loan Document (other than obligations specifically referred to
elsewhere in this Section 10.01) to which it is a party on its part to be
performed or observed and such failure shall remain unremedied for thirty (30)
days after the occurrence thereof;
(4) the Borrower or any of its Subsidiaries shall: (a) fail to
pay all or any portion of a Debt (other than (x) the payment obligations
described in (1) above, or (y) any Debt when the aggregate outstanding amount of
such Debt is Fifty Thousand Dollars ($50,000) or less, or (z) in the case where
such Debt is of the type covered by Section 8.01(2), such Debt is not more than
forty-five (45) days past due), of the Borrower or such Subsidiary when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise); or (b) fail to perform or observe any term, covenant or condition on
its part to be performed or observed under any agreement or instrument relating
to any of the Debt described in the immediately preceding clause (a), when
required to be performed or observed, if the effect of such failure to perform
or observe is to accelerate, or to permit the acceleration of, after the giving
of notice or the lapse of time, or both, of the maturity of such Debt, whether
or not such failure to perform or observe shall be waived by the holder of such
Debt; or any such Debt shall be declared to be due and payable, or required to
be prepaid (other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof;
(5) the Borrower or any of its Subsidiaries: (a) shall
generally not, or be unable to, or shall admit in writing its inability to, pay
its debts as such debts become due; or (b) shall make an assignment for the
benefit of creditors, petition or apply to any tribunal for the appointment of a
custodian, receiver or trustee for it or a substantial part of its assets; or
(c) shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, rehabilitation, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or (d)
shall have had any such petition or application filed or any such proceeding
shall have been commenced, against it, in which an adjudication or appointment
is made or order for relief is
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entered, or which petition, application or proceeding remains undismissed or
unstayed for a period of sixty (60) days or more; or shall be the subject of any
proceeding under which its assets may be subject to seizure, forfeiture or
divestiture; or (e) by any act or omission shall indicate its consent to,
approval of or acquiescence in any such petition, application or proceeding or
order for relief or the appointment of a custodian, receiver, rehabilitator,
liquidator or trustee for all or any substantial part of its property; or (f)
shall suffer any such custodianship, receivership, rehabilitation, liquidation
or trusteeship to continue undischarged for a period of sixty (60) days or more;
(6) one or more judgments, decrees or orders for the payment
of money in excess of Fifty Thousand Dollars ($50,000) in the aggregate shall be
rendered against the Borrower or any of its Subsidiaries, and such judgments,
decrees or orders shall continue unsatisfied and in effect for a period of
thirty (30) days without being vacated, discharged, satisfied or stayed or
bonded pending appeal;
(7) any of the following events shall occur or exist with
respect to the Borrower or any of its Subsidiaries or any ERISA Affiliate: (a)
any Prohibited Transaction which could subject the Borrower or any of its
Subsidiaries, or any entity which they have an obligation to indemnify, to any
tax or penalty imposed under Section 4975 of the Code or Section 502(i) of
ERISA; (b) any Reportable Event shall occur with respect to any Plan; (c) the
filing under Section 4041 of ERISA of a notice of intent to terminate any Plan
or the termination of any Plan; (d) any event or circumstance exists which might
constitute grounds entitling the PBGC to institute proceedings under Section
4042 of ERISA for the termination of, or for the appointment of a trustee to
administer, any Plan, or the institution by the PBGC of any such proceedings;
(e) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a
Multiemployer Plan or the reorganization (within the meaning of Section 4241 of
ERISA), insolvency (within the meaning of Section 4245 of ERISA), or termination
of any Multiemployer Plan; (f) (within the meaning of Section 4241 of ERISA) an
accumulated funding deficiency (as defined in Section 302 of ERISA or section
412 of the Code) exists with respect to a Plan, whether or not waived; (g) the
imposition of liability to enforce Section 515 of ERISA; (h) the failure of a
Plan intended to qualify under Section 401(a) or 401(k) of the Code to so
qualify; or (i) a lien arises or a security interest is given in connection with
a Plan; and in each case above, such event or condition, together with all other
events or conditions, if any, could in the opinion of the Agent or any Lender
subject the Borrower or any ERISA Affiliate to any tax, penalty, or other
liability to a Plan, Multiemployer Plan, the PBGC, or otherwise (or any
combination thereof) which in
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the aggregate exceeds or could reasonably be expected to exceed One Hundred
Thousand Dollars ($100,000);
(8) the Borrower Pledge Agreement or the Borrower Pledge
Agreement (Navigators), shall at any time and for any reason cease: (a) to
create a valid and perfected first priority Lien in and to the property
purported to be subject to the Borrower Pledge Agreement or the Borrower Pledge
Agreement (Navigators), as the case may be; or (b) to be in full force and
effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by the Borrower, or the Borrower shall deny it has
any further liability or obligation under the Borrower Pledge Agreement or the
Borrower Pledge Agreement (Navigators), as the case may be, or the Borrower
shall fail to perform any of its obligations under the Borrower Pledge Agreement
or the Borrower Pledge Agreement (Navigators), as the case may be; or any Lien
under the Borrower Pledge Agreement or the Borrower Pledge Agreement
(Navigators), as the case may be shall at any time and for any reason cease to
be a first priority Lien on the property subject to such Lien;
(9) Terence N. Deeks shall at any time cease to hold the
office of Chief Executive Officer of the Borrower or shall cease to be actively
involved in the operation of the Borrower, unless within ninety (90) days of
such event the Borrower hires or promotes a Person with the skills and abilities
to perform the functions previously performed by Terence N. Deeks, and such
Person is approved by the Required Lenders in their sole discretion;
(10) Terence N. Deeks shall at any time own, or exercise
voting control of, less than thirty-three and one third percent (33 1/3%) of the
issued and outstanding voting stock of the Borrower, or any other Person shall
at any time own, or exercise voting control of, thirty-three and one third
percent (33 1/3%) or more of the issued and outstanding voting stock of the
Borrower;
(11) if any term or provision of the Counter Indemnity
Agreement shall at any time and for any reason cease to be in full force and
effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by NCUL, or NCUL shall deny it has any further
liability or obligations under such Counter Indemnity Agreement or NCUL shall
fail to perform any of its obligations under such Counter Indemnity Agreement;
(12) if at any time Navigators or NIC is not rated
"A-" or better by A.M. Best;
(13) if during any four consecutive Fiscal Quarters
the portion of the Consolidated Net Income derived from either
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(a) Navigators or (b) the Somerset Companies, Somerset Marine (UK) Limited, and
NCUL (taken as a whole) is less than twenty percent (20%) of the total sources
of such Consolidated Net Income;
(14) if at any time the Borrower or any of its Subsidiaries
incurs or becomes subject to action or threatened action of any Governmental
Authority, including, without limitation, a fine, penalty, cease and desist
order or revocation, suspension or limitation of a License, the effect of which
could reasonably be expected to result in a Material Adverse Change; or
(15) there shall occur a Material Adverse Change.
Section 10.02. Remedies. If any Event of Default shall occur
and be continuing, the Agent shall, upon request of the Required Lenders, by
notice to the Borrower, (1) declare the Revolving Credit Commitment to be
terminated, whereupon the same shall forthwith terminate; (2) declare the
outstanding Notes, all interest thereon, and all other amounts payable under
this Agreement, and any other Loan Documents to be forthwith due and payable,
whereupon the Notes, all such interest, and all such amounts due under this
Agreement, and under any other Loan Document shall become and be forthwith due
and payable, without presentment, demand, protest, or further notice of any
kind, all of which are hereby expressly waived by the Borrower; (3) require the
Borrower to provide Cash Collateral in the aggregate face amount of all
outstanding Letters of Credit; (4) exercise any remedies provided in any of the
Loan Documents; and/or (5) exercise any remedies provided by Law; provided,
however, that upon the occurrence of an Event of Default referred to in Section
10.01(5), the Revolving Credit Commitment shall automatically terminate and the
outstanding Notes and any other amounts payable under this Agreement or any of
the other Loan Documents, and all interest on any of the foregoing shall be
forthwith due and payable without presentment, demand, protest or further notice
of any kind, all of which are hereby expressly waived by the Borrower.
ARTICLE XI. THE AGENT
Section 11.01. Appointment, Powers and Immunities of the
Agent. Each Lender hereby irrevocably appoints and authorizes the Agent to act
as its agent hereunder and under any other Loan Document with such powers as are
specifically delegated to the Agent by the terms of this Agreement and any other
Loan Document, together with such other powers as are reasonably incidental
thereto. The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement and any other Loan Document, and shall not
by reason of this Agreement be a trustee for any Lender. The Agent shall
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not be responsible to the Lenders for any recitals, statements, representations
or warranties made by the Borrower or any officer or official of the Borrower or
any other Person contained in this Agreement or any other Loan Document, or in
any certificate or other document or instrument referred to or provided for in,
or received by any of them under, this Agreement or any other Loan Document, or
for the value, legality, validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document or any other document
or instrument referred to or provided for herein or therein, for the perfection
or priority of any Lien securing the Borrower's obligations hereunder or
thereunder or for any failure by the Borrower to perform any of its obligations
hereunder or thereunder. The Agent may employ agents and attorneys-in-fact and
shall not be responsible, except as to money or securities received by it or its
authorized agents, for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. Neither the Agent nor any
of its partners, directors, officers, employees or agents shall be liable or
responsible for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith, except
for its or their own gross negligence or willful misconduct. The Borrower shall
pay any fee agreed to by the Borrower and the Agent with respect to the Agent's
services hereunder.
Section 11.02. Reliance by the Agent. The Agent shall be
entitled to rely upon any certification, notice or other communication
(including any thereof by telephone, telecopy, telex, telegram or cable)
believed by it to be genuine and correct and to have been signed or sent by or
on behalf of the proper Person or Persons, and upon advice and statements of
legal counsel, independent accountants and other experts selected by the Agent.
The Agent may deem and treat each Lender as the holder of the Loans made by it
for all purposes hereof. As to any matters not expressly provided for by this
Agreement or any other Loan Document, the Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
instructions signed by the Required Lenders, and such instructions of the
Required Lenders and any action taken or failure to act pursuant thereto shall
be binding on all of the Lenders and any other holder of all or any portion of
any Loan.
Section 11.03. Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of a Default or Event of Default unless the Agent
has received notice from a Lender or the Borrower specifying such Default or
Event of Default and stating that such notice is a "Notice of Default." In the
event that the Agent receives such a notice of the occurrence of a Default or
Event of Default, the Agent shall give prompt notice thereof to the Lenders. The
Agent shall
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(subject to Section 11.07) take such action with respect to such Default or
Event of Default which is continuing as shall be directed by the Required
Lenders; provided, that, unless and until the Agent shall have received such
directions, the Agent may take such action, or refrain from taking such action,
with respect to such Default or Event of Default as it shall deem advisable in
the best interest of the Lenders; provided, further, that the Agent shall not be
required to take any such action which it determines to be contrary to Law.
Section 11.04. Rights of the Agent as a Lender. With respect
to its Commitment and the Loans provided by it, the Agent in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting as the Agent, and
the term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its capacity as a Lender. The Agent and its affiliates may
(without having to account therefor to any Lender) accept deposits from, lend
money to (on a secured or unsecured basis), and generally engage in any kind of
banking, trust or other business with the Borrower and any of its Affiliates as
if it were not acting as the Agent, and the Agent may accept fees and other
consideration from the Borrower for services in connection with this Agreement
or otherwise without having to account for the same to the Lenders.
Section 11.05. Indemnification of the Agent. Each Lender
agrees to indemnify the Agent (to the extent not reimbursed under Section 12.03
or under the applicable provisions of any other Loan Document, but without
limiting the obligations of the Borrower under Section 12.03 or such provisions)
and its officers, directors, partners, employees and agents, for such Lender's
Pro Rata Share of any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever which may be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of this Agreement, any
other Loan Document or any other documents contemplated by or referred to herein
or the transactions contemplated hereby or thereby (including, without
limitation, the costs and expenses which the Borrower are obligated to pay under
Section 12.03) or under the applicable provisions of any other Loan Document or
the enforcement of any of the terms hereof or thereof or of any such other
documents or instruments; provided, that no Lender shall be liable for any of
the foregoing to the extent they arise from (1) the gross negligence or willful
misconduct of the Agent or (2) a dispute between or among the Agent and one or
more Lenders.
Section 11.06. Non-Reliance on the Agent and the other
Lenders. Each Lender agrees that it has, independently and without reliance on
the Agent or any other Lender, and
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based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Borrower and the decision to enter into this
Agreement and that it will, independently and without reliance upon the Agent or
any other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement or any other Loan Document. The
Agent shall not be required to keep itself informed as to the performance or
observance by the Borrower of this Agreement or any other Loan Document or any
other document referred to or provided for herein or therein or to inspect the
properties or books of the Borrower. Except for notices, reports and other
documents and information expressly required to be furnished to the Lenders by
the Agent hereunder, the Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the affairs,
financial condition or business of the Borrower (or any of its Affiliates) which
may come into the possession of the Agent or any of its Affiliates. The Agent
shall not be required to file this Agreement, any other Loan Document or any
document or instrument referred to herein or therein, for record or give notice
of this Agreement, any other Loan Document or any document or instrument
referred to herein or therein, to anyone.
Section 11.07. Failure of the Agent to Act. Except for action
expressly required of the Agent hereunder, the Agent shall in all cases be fully
justified in failing or refusing to act hereunder unless it shall have received
further assurances (which may include cash collateral) of the indemnification
obligations of the Lenders under Section 11.05 in respect of any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action.
Section 11.08. Resignation or Removal of the Agent. Subject to
the appointment and acceptance of a successor Agent as provided below, the Agent
may resign at any time by giving written notice thereof to the Lenders and the
Borrower, and the Agent may be removed at any time with or without cause by the
Required Lenders; provided, that the Borrower and the other Lenders shall be
promptly notified thereof. Upon any such resignation or removal, the Required
Lenders shall have the right to appoint a successor Agent. If no successor Agent
shall have been so appointed by the Required Lenders and shall have accepted
such appointment within thirty (30) days after the retiring Agent's giving of
notice of resignation or the Required Lenders' removal of the retiring Agent,
then the retiring Agent may, on behalf of the Lenders, appoint a successor
Agent, which shall be a bank which has an office in New York, New York. The
Required Lenders or the retiring Agent, as the case may be, shall upon the
appointment of a successor Agent promptly so notify the Borrower and the other
Lenders. Upon the acceptance of any appointment as the Agent
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hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation or removal
hereunder as the Agent, the provisions of this Article XI shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent.
Section 11.09. Amendments Concerning Agency Function. The
Agent shall not be bound by any waiver, amendment, supplement or modification of
this Agreement or any other Loan Document which affects its duties hereunder or
thereunder unless it shall have given its prior written consent thereto.
Section 11.10. Liability of the Agent. The Agent shall not
have any liabilities or responsibilities to the Borrower on account of the
failure of any Lender to perform its obligations hereunder or to any Lender on
account of the failure of the Borrower to perform its obligations hereunder or
under any other Loan Document.
Section 11.11. Transfer of Agency Function. Without the
consent of the Borrower or any Lender, the Agent may at any time or from time to
time transfer its functions as the Agent hereunder to any of its offices
wherever located; provided, that the Agent shall promptly notify the Borrower
and the Lenders thereof.
ARTICLE XII. MISCELLANEOUS
Section 12.01. Amendments and Waivers. No amendment or waiver
of any provision of this Agreement or any other Loan Document or consent to any
departure by the Borrower therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Required Lenders and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given. No failure on the part of the Agent or any Lender to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof or preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by Law.
Section 12.02. Usury. Anything herein to the contrary
notwithstanding, the obligations of the Borrower under this Agreement and the
Notes shall be subject to the limitation that payments of interest shall not be
required to the extent that receipt thereof would be contrary to provisions of
Law
85
<PAGE> 92
applicable to a Lender limiting rates of interest which may be charged or
collected by such Lender.
Section 12.03. Expenses; Indemnification. The Borrower agrees
to reimburse the Agent, on demand for all costs, expenses, and charges
(including, without limitation, out-of-pocket costs and all reasonable fees and
charges of external legal counsel for the Agent, but not the legal fees for
internal or external legal counsel of the Lenders) incurred by the Agent, in
connection with the preparation of the Loan Documents. The Borrower agrees to
reimburse the Agent and each of the Lenders on demand for all costs, expenses,
and charges (including, without limitation, out-of-pocket costs and all
reasonable fees and charges of internal and external legal counsel for the Agent
and each Lender) incurred by the Agent or Lender in connection with the
performance, or enforcement of this Agreement, the Notes, or any other Loan
Documents. The Borrower agrees to indemnify the Agent and each Lender and their
respective directors, officers, partners, employees and agents from, and hold
each of them harmless against, any and all losses, liabilities, claims, damages
or expenses incurred by any of them arising out of or by reason of any
investigation or litigation or other proceedings (including any threatened
investigation or litigation or other proceedings) relating to any actual or
proposed use by the Borrower of the proceeds of the Loans or to any violation or
alleged violation of any Environmental Law by the Borrower, including, without
limitation, the reasonable fees and disbursements of internal and external
counsel incurred in connection with any such investigation or litigation or
other proceedings (but excluding any such losses, liabilities, claims, damages
or expenses incurred by reason of the gross negligence or willful misconduct of
the Person to be indemnified). If any taxes (excluding taxes imposed upon or
measured by the net income of any Lender) shall be payable on account of the
execution or delivery of this Agreement or the creation of any of the
obligations hereunder by reason of any existing federal or state statute, the
Borrower will pay all such taxes, including any interest and penalties thereon,
and will indemnify and hold the Lenders harmless from and against liability in
connection therewith.
The Borrower authorizes the Agent to debit any of its accounts
maintained with the Agent, any Lender or the Issuing Bank for any fees and
expenses owing to the Agent, any Lender or the Issuing Bank under the terms and
provisions of this Agreement; provided, however, the Agent shall promptly notify
the Borrower in the case of each such debit; provided, further, the Agent's
failure to give such notice shall not affect the validity thereof.
The obligations of the Borrower under this Section 12.03 shall
survive the repayment of the Loans and all amounts
86
<PAGE> 93
due under or in connection with any of the Loan Documents and the termination of
the Commitments.
Section 12.04. Assignment; Participation. This Agreement shall
be binding upon, and shall inure to the benefit of, the Borrower, the Agent, the
Lenders and their respective successors. Neither the Borrower nor the Lenders
may assign or transfer their respective rights or obligations hereunder. Except
as provided in Section 12.06, none of the Lenders may sell participations in its
rights, duties and obligations under this Agreement or any of the other Loan
Documents.
Section 12.05. Notices. Unless the party to be notified
otherwise notifies the other party in writing as provided in this Section 12.05,
and except as otherwise provided in this Agreement, notices shall be given to
the Agent by telephone, confirmed in writing and delivered by hand or confirmed
telecopier, and to the Lenders and to the Borrower by written notice delivered
by hand, overnight courier service or confirmed telecopier addressed to such
party at its address on the signature page of this Agreement. Notices shall be
effective upon receipt.
Section 12.06. Setoff. The Borrower agrees that, in addition
to (and without limitation of) any right of setoff, bankers' lien or
counterclaim a Lender may otherwise have, each Lender shall be entitled, at its
option, to offset balances (general or special, time or demand, provisional or
final) held by it for the account of the Borrower at any of such Lender's
offices, in Dollars or in any other currency, against any amount payable by the
Borrower to such Lender under this Agreement or any of such Lender's Notes, or
any other Loan Document which is not paid when due (regardless of whether such
balances are then due to the Borrower), in which case it shall promptly notify
the Borrower and the Agent thereof; provided, that such Lender's failure to give
such notice shall not affect the validity thereof. Each Lender agrees that to
the extent any such payment is received by it as the result of a set-off or
otherwise and such payment results in such Lender receiving a greater payment
than it would have been entitled to, had the total amount of such payment been
paid directly to the Agent for disbursement to the Lenders, then such Lender
shall immediately purchase for cash from the other Lenders participations in the
loans sufficient in amount so that such payment shall effectively be shared pro
rata with the other Lenders in accordance with the amount, and to the extent, of
their respective interests in all the Loans; provided, however, that, if all or
any portion of such payment is thereafter recovered from such Lender at any
time, the purchase shall be rescinded and the purchase price returned to the
extent of such recovery, but without interest or other return thereon.
87
<PAGE> 94
Section 12.07. Jurisdiction; Immunities. The Borrower hereby
irrevocably submits to the jurisdiction of any New York State or United States
Federal court sitting in New York City over any action or proceeding arising out
of or relating to this Agreement, the Notes or any other Loan Document, and the
Borrower hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal court.
The Borrower irrevocably consents to the service of any and all process in any
such action or proceeding by the mailing of copies of such process to the
Borrower at its address specified in Section 12.05. The Borrower agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. The Borrower further waives any objection to venue in such
State and any objection to an action or proceeding in such State on the basis of
forum non convenience. The Borrower agrees that any action or proceeding brought
against the Agent or any Lender shall be brought only in New York State or
United States Federal court sitting in New York County.
Nothing in this Section 12.07 shall affect the right of the
Agent or any Lender to serve legal process in any other manner permitted by law
or affect the right of the Agent or any Lender to bring any action or proceeding
against the Borrower or its property in the courts of any other jurisdictions.
To the extent that the Borrower has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
from service or notice, attachment prior to judgment, attachment in aid of
execution, 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, the Notes, and any other Loan Document.
Section 12.08. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed entirely within such State.
Section 12.09. Counterparts. This agreement may be executed by
the parties hereto in separate counterparts, each of which, when so executed and
delivered, shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof, each signed by less than all, but together signed by all of
the parties hereto.
Section 12.10. Exhibits and Schedules. The Exhibits and
Schedules hereto are a part of this Agreement as if fully set forth herein. All
references herein to Sections,
88
<PAGE> 95
subsections, clauses, Exhibits and Schedules shall be deemed references to such
parts of this Agreement, unless the context shall otherwise require.
Section 12.11. Table of Contents; Headings. The headings in
the Table of Contents and in this Agreement are for reference only, and shall
not affect the interpretation or construction of this Agreement.
Section 12.12. Severability. If any word, phrase, sentence,
paragraph, provision or section of this Agreement shall be held, declared,
pronounced or rendered invalid, void, unenforceable or inoperative for any
reason by any court of competent jurisdiction, governmental authority, statute
or otherwise, such holding, declaration, pronouncement or rendering shall not
adversely affect any other word, phrase, sentence, paragraph, provision or
section of this Agreement, which shall otherwise remain in full force and effect
and be enforced in accordance with its terms.
Section 12.13. Integration. The Loan Documents set forth the
entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
Section 12.14. Prior Regulatory Approvals. The parties hereto
understand and agree that neither the Agent nor the Lender may exercise control
over NIC without prior approval of the New York Insurance Department in
accordance with the New York Insurance Law.
[INTENTIONALLY LEFT BLANK.]
89
<PAGE> 96
THE BORROWER WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
THE NAVIGATORS GROUP, INC.,
as Borrower
By
-------------------------------
Name:
Title:
Address for Notices:
123 William Street
New York, New York 10038
Attention: Chief Financial Officer
Telecopy No.: (212) 406-3042
per pro BROWN BROTHERS HARRIMAN &
CO., as Lender
By
-------------------------------
Name:
Applicable Lending Office for
Revolving Credit Loans and Address
for Notices:
59 Wall Street
New York, New York 10005
Attention: Commercial Credit
Department
NBD BANK, as Lender
By
-------------------------------
Name:
Title:
[SIGNATURE PAGE]
<PAGE> 97
Applicable Lending Office for
Revolving Credit Loans and Address
for Notices:
611 Woodward Avenue
Detroit, Michigan 48226
Telecopy No.: (313) 225-2649
THE FIRST NATIONAL BANK OF CHICAGO,
as Issuing Bank
By
-------------------------------
Name:
Title:
Applicable Office for Letters of
Credit:
The First National Bank of Chicago
Suite 0236
Chicago, Illinois 60670
Attn: LC Department
Address for Notices:
c/o NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Telecopy No.: (313) 225-2649
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Lender
By
-------------------------------
Name:
Title:
Applicable Lending Office for
Revolving Credit Loans and
Addresses for Notices:
One First Union Center
301 South College Street DC-5
Charlotte, North Carolina 28288-0735
Attention: Jay S. Bullock
91
<PAGE> 98
per pro BROWN BROTHERS HARRIMAN &
CO., as Agent
By
-------------------------------
Name:
Address for Notices:
59 Wall Street
New York, New York 10005
Attention: Commercial Credit
Department
Telecopy No.: (212) 493-7240
92
<PAGE> 1
EXHIBIT 11-1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
Earnings Per Share of Common Stock and Common Stock Equivalents
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994
---------------------- ------------------------ --------
<S> <C> <C> <C>
Net income applicable to common stock $16,752,438 $12,582,467 $(20,495,199)
Average number of common shares outstanding 8,192,526 8,154,214 8,150,776
Add:
Assumed exercise of stock options and
partially paid stock options exercised(1) 108,503 64,904 58,018
-------------- -------------- -----------
Common and common equivalent shares outstanding 8,301,029 8,219,118 8,208,794
============== ============== ===========
Net income per share assuming exercise of
common stock equivalents $ 2.02 $(1.53) $(2.50)
============== ============== ===========
</TABLE>
(1) Computed for purposes of primary earnings per share. There is no material
difference between earnings per share on a primary or fully diluted basis.
<PAGE> 1
EXHIBIT 21-1
THE NAVIGATORS GROUP, INC.
AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 1996
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION IN
NAME WHICH ORGANIZED
------------------------------------------------ -------------------
<S> <C>
Navigators Insurance Company New York
NIC Insurance Company New York
Somerset Marine, Inc. New York
Somerset of Georgia, Inc. Georgia
Somerset Insurance Services of Texas, Inc. Texas
Somerset Insurance Services of California, Inc. California
Somerset Insurance Services of Washington, Inc. Washington
Somerset Property, Inc. New York
Somerset Re Management, Inc. Delaware
Navigators Management Corporation New York
Somerset Casualty Agency, Inc. New York
Somerset Marine Aviation Property Managers, Inc. New Jersey
Somerset Asia Pacific Pty Limited Sydney, Australia
Somerset Marine (UK) Limited London, UK
Navigators Corporate Underwriters, Ltd. London, UK
</TABLE>
<PAGE> 1
EXHIBIT 23-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
The Navigators Group, Inc. and Subsidiaries:
We consent to incorporation by reference in Registration Statement No. 33-51608
on Form S-8 of The Navigators Group, Inc. and Subsidiaries of our report dated
March 14, 1997 relating to the consolidated balance sheets of The Navigators
Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows and
related schedules for each of the years in the three-year period ended December
31, 1996, which report appears in the December 31, 1996 Annual Report on Form
10-K of The Navigators Group, Inc. and Subsidiaries. Our report refers to The
Navigators Group, Inc. and Subsidiaries change in their method of accounting
for certain investments in debt and equity securities in 1994.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1
<DEBT-CARRYING-VALUE> 215,072,441
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,281,459
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 239,260,677
<CASH> 1,459,775
<RECOVER-REINSURE> 143,345,057
<DEFERRED-ACQUISITION> 3,657,718
<TOTAL-ASSETS> 457,095,319
<POLICY-LOSSES> 269,601,050
<UNEARNED-PREMIUMS> 33,916,832
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 17,942,034
0
0
<COMMON> 823,790
<OTHER-SE> 114,718,646
<TOTAL-LIABILITY-AND-EQUITY> 457,095,319
78,731,102
<INVESTMENT-INCOME> 13,614,475
<INVESTMENT-GAINS> 503,319
<OTHER-INCOME> 11,327,400
<BENEFITS> 48,976,951
<UNDERWRITING-AMORTIZATION> 12,171,208
<UNDERWRITING-OTHER> 20,417,251
<INCOME-PRETAX> 20,874,352
<INCOME-TAX> 4,121,914
<INCOME-CONTINUING> 16,752,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,752,438
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
<RESERVE-OPEN> 138,760,610
<PROVISION-CURRENT> 51,429,000
<PROVISION-PRIOR> (2,452,000)
<PAYMENTS-CURRENT> 15,439,000
<PAYMENTS-PRIOR> 39,741,000
<RESERVE-CLOSE> 132,558,000
<CUMULATIVE-DEFICIENCY> (2,452,000)
</TABLE>
