<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ---------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
--------------
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
----- -----
The number of shares of the Registrant's Common Stock, without par
value, outstanding at August 9, 1999, was 226,638,192.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION ----------
Consolidated Statements of Operations (Unaudited),
Three Months and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets, June 30, 1999
(Unaudited) and December 31, 1998 4
Consolidated Statements of Shareholders' Equity,
Six Months Ended June 30, 1999
(Unaudited) and Twelve Months Ended 6
December 31, 1998
Consolidated Statements of Comprehensive Income
(Unaudited), Six Months Ended June 30, 1999
and 1998 7
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1999 and 1998 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
PART II. OTHER INFORMATION
Item 1 through Item 6 38
Signatures 38
EXHIBIT INDEX 39
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
(In millions, except per share ------------------- -------------------
data) 1999 1998 1999 1998
----- ----- ----- -----
Revenues:
Premiums earned $1,412 1,468 2,815 2,966
Net investment income 402 398 797 795
Asset management 85 75 166 146
Realized investment gains 68 136 133 185
Other 31 23 61 52
----- ----- ----- -----
Total revenues 1,998 2,100 3,972 4,144
----- ----- ----- -----
Expenses:
Insurance losses and loss
adjustment expenses 1,013 1,345 2,048 2,408
Life policy benefits 85 62 152 122
Policy acquisition expenses 359 385 699 761
Operating and administrative 251 596 517 876
----- ----- ----- -----
Total expenses 1,708 2,388 3,416 4,167
----- ----- ----- -----
Income (loss) from
continuing operations
before income taxes
and cumulative effect of
accounting change 290 (288) 556 (23)
Income tax expense (benefit) 69 (95) 135 (34)
----- ----- ----- -----
Income (loss) from
continuing operations
before cumulative effect
of accounting change 221 (193) 421 11
Cumulative effect of
accounting change,
net of taxes - - (30) -
----- ----- ----- -----
Income (loss) from
continuing operations 221 (193) 391 11
Loss from discontinued
operations, net of taxes (17) (81) (22) (90)
----- ----- ----- -----
Net income (loss) $204 (274) 369 (79)
===== ===== ===== =====
Basic earnings (loss) per
common share:
Income (loss) from continuing
operations before cumulative
effect of accounting change $0.97 (0.84) 1.81 0.02
Cumulative effect of
accounting change,
net of taxes - - (0.13) -
----- ----- ----- -----
Income (loss) from
continuing operations $0.97 (0.84) 1.68 0.02
Loss from discontinued
operations, net of taxes (0.08) (0.34) (0.09) (0.38)
----- ----- ----- -----
Net income (loss) $0.89 (1.18) 1.59 (0.36)
===== ===== ===== =====
Diluted earnings (loss) per
common share:
Income (loss) from continuing
operations before cumulative
effect of accounting change $0.91 (0.84) 1.71 0.02
Cumulative effect of
accounting change,
net of taxes - - (0.12) -
----- ----- ----- -----
Income (loss) from
continuing operations 0.91 (0.84) 1.59 0.02
Loss from discontinued
operations, net of taxes (0.07) (0.34) (0.09) (0.38)
----- ----- ----- -----
Net income (loss) $0.84 (1.18) 1.50 (0.36)
===== ===== ===== =====
Dividends declared on
common stock $0.26 0.25 0.52 0.50
===== ===== ===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
June 30, December 31,
ASSETS 1999 1998
- ------ ------------ -------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $20,849 $21,056
Equities, at estimated fair value 1,393 1,259
Real estate and mortgage loans 1,531 1,507
Venture capital, at estimated fair value 640 571
Securities lending collateral 1,822 1,368
Other investments 315 373
Short-term investments, at cost 771 982
-------- --------
Total investments 27,321 27,116
Cash 126 120
Investment banking inventory securities 67 107
Reinsurance recoverables:
Unpaid losses 4,113 3,978
Paid losses 190 157
Ceded unearned premiums 285 288
Receivables:
Underwriting premiums 2,435 2,152
Interest and dividends 368 361
Other 204 117
Deferred policy acquisition expenses 1,007 878
Deferred income taxes 1,339 1,193
Office properties and equipment, at cost less
accumulated depreciation of $478 (1998; $405) 531 518
Goodwill 574 592
Other assets 769 746
-------- --------
Total assets $39,329 $38,323
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ---------- -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,486 $18,458
Future policy benefits 4,604 4,142
Unearned premiums 3,342 3,266
-------- --------
Total insurance reserves 26,432 25,866
Debt 1,506 1,260
Payables:
Reinsurance premiums 346 291
Income taxes 258 221
Accrued expenses and other 1,089 1,238
Securities lending 1,822 1,368
Other liabilities 1,085 940
-------- --------
Total liabilities 32,538 31,184
-------- --------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely convertible
subordinated debentures of the Company 503 503
-------- --------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1.45 shares authorized; 0.9 shares
outstanding in 1999 and 1998 132 134
Guaranteed obligation - PSOP (114) (119)
-------- --------
Total preferred shareholders' equity 18 15
-------- --------
Common:
Common stock, 480 shares authorized;
227 shares outstanding (234 shares in 1998) 2,078 2,128
Retained earnings 3,541 3,480
Accumulated other comprehensive income:
Unrealized appreciation 670 1,027
Unrealized loss on foreign currency translation (19) (14)
-------- --------
Total accumulated other comprehensive income 651 1,013
-------- --------
Total common shareholders' equity 6,270 6,621
-------- --------
Total shareholders' equity 6,288 6,636
-------- --------
Total liabilities, redeemable preferred
securities and shareholders' equity $39,329 $38,323
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Six Twelve
Months Ended Months Ended
June 30 December 31
------------ ------------
1999 1998
------ ------
(Unaudited)
Preferred shareholders' equity:
Series B PSOP convertible preferred stock:
Beginning of period $134 $138
Redemptions during period (2) (4)
------- -------
End of period 132 134
------- -------
Guaranteed obligation - PSOP:
Beginning of period (119) (121)
Principal payments 5 2
------- -------
End of period (114) (119)
------- -------
Total preferred shareholders' equity 18 15
------- -------
Common shareholders' equity:
Common stock:
Beginning of period 2,128 2,057
Stock issued under stock incentive plans 22 70
Stock issued for preferred shares redeemed 3 8
Reacquired common shares (75) (35)
Other - 28
------- -------
End of period 2,078 2,128
------- -------
Retained earnings:
Beginning of period 3,480 3,720
Net income 369 89
Dividends declared on common stock (114) (223)
Dividends declared on preferred
stock, net of taxes (4) (9)
Reacquired common shares (190) (100)
Tax benefit on employee options and awards 2 7
Premium on preferred shares redeemed (2) (4)
------- -------
End of period 3,541 3,480
------- -------
Unrealized appreciation, net of taxes:
Beginning of period 1,027 846
Change during the period (357) 181
------- -------
End of period 670 1,027
------- -------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (14) (23)
Change during the period (5) 9
------- -------
End of period (19) (14)
------- -------
Guaranteed obligation - ESOP:
Beginning of period - (8)
Principal payments - 8
------- -------
End of period - -
------- -------
Total common shareholders' equity 6,270 6,621
------- -------
Total shareholders' equity $6,288 $6,636
======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands)
Net income (loss) $204 $(274) $369 $(79)
----- ----- ----- -----
Other comprehensive income, net of
taxes:
Change in unrealized appreciation (249) (28) (357) 21
Change in unrealized loss on
foreign currency translation (3) (4) (5) -
----- ----- ----- -----
Other comprehensive income (loss) (252) (32) (362) 21
----- ----- ----- -----
Comprehensive income (loss) $(48) $(306) $7 ($58)
===== ===== ===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Six Months Ended
June 30
-----------------------
1999 1998
-------- -------
OPERATING ACTIVITIES
Net income (loss) $369 $(79)
Adjustments:
Change in property-liability
insurance reserves 181 351
Change in reinsurance balances (117) (112)
Change in premiums receivable (341) (58)
Change in asset management balances 16 (3)
Depreciation and amortization 69 64
Realized investment gains (133) (185)
Other (79) 3
----- -----
Net Cash Used by
Operating Activities (35) (19)
----- -----
INVESTING ACTIVITIES
Purchase of investments (3,440) (2,288)
Proceeds from sales and
maturities of investments 2,923 2,433
Change in short-term investments 170 16
Change in open security transactions 54 101
Net purchases of office properties
and equipment (73) (52)
Acquisitions - (98)
Other (20) 107
----- -----
Net Cash Provided (Used) by
Investing Activities (386) 219
----- -----
FINANCING ACTIVITIES
Deposits on universal life
and investment contracts 602 181
Withdrawals on universal life
and investment contracts (56) (131)
Dividends paid on common and preferred stock (123) (103)
Proceeds from issuance of debt 286 36
Repayment of debt (41) (194)
Repurchase of common shares (265) -
Stock options exercised and other 22 27
----- -----
Net Cash Provided (Used) by
Financing Activities 425 (184)
----- -----
Effect of exchange rate changes on cash 2 -
----- -----
Increase in cash 6 16
Cash at beginning of period 120 113
----- -----
Cash at end of period $126 $129
===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 30, 1999
Note 1 - Basis of Presentation
- ------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul), and have been prepared in conformity
with generally accepted accounting principles. The St. Paul
completed its merger with USF&G Corporation (USF&G) in April
1998. The financial statements for all current and prior periods
in this report reflect the combined accounts and results of
operations of The St. Paul and USF&G.
In July 1999, The St. Paul announced an agreement to sell its
standard personal insurance business to MetLife Auto and Home.
The results of the operations sold have been accounted for as
discontinued operations for all current and prior year periods
presented in this report. See Note 9 on page 17 for further
information regarding this sale.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in The St. Paul's annual report to shareholders for
the year ended December 31, 1998. The amounts in those notes
have not changed materially except as a result of transactions in
the ordinary course of business or as otherwise disclosed in
these notes.
Some amounts in the 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on net income or shareholders'
equity, as previously reported.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Share
- ---------------------------
Earnings per common share (EPS) amounts were calculated by
dividing net income, as adjusted, by the average common shares outstanding.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
----- ----- ----- -----
(In millions, except per share data)
EARNINGS
Basic:
Net income (loss), as reported $204 $(274) $369 $(79)
Dividends on preferred stock,
net of taxes (2) (2) (4) (4)
Premium on preferred shares redeemed (1) (1) (2) (2)
----- ----- ----- -----
Net income (loss) available
to common shareholders $201 $(277) $363 $(85)
===== ===== ===== =====
Diluted:
Net income (loss) available
to common shareholders $201 $(277) $363 $(85)
Effect of dilutive securities:
Convertible preferred stock 2 - 3 -
Convertible monthly income
preferred securities 2 - 4 -
Zero coupon convertible notes 1 - 2 -
----- ----- ----- -----
Net income (loss) available
to common shareholders $206 $(277) $372 $(85)
===== ===== ===== =====
COMMON SHARES
Basic:
Weighted average common
shares outstanding 226 235 228 235
===== ===== ===== =====
Diluted:
Weighted average common
shares outstanding 226 235 228 235
Effect of dilutive securities:
Stock options 2 - 2 -
Convertible preferred stock 7 - 7 -
Convertible monthly income
preferred securities 7 - 7 -
Zero coupon convertible notes 3 - 3 -
----- ----- ----- -----
Total 245 235 247 235
===== ===== ===== =====
EARNINGS (LOSS) PER SHARE
Basic $0.89 $(1.18) $1.59 $(0.36)
===== ===== ===== =====
Diluted $0.84 $(1.18) $1.50 $(0.36)
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. A summary of investment transactions is presented
below.
Six Months Ended June 30
------------------------
1999 1998
-------- --------
(In millions)
Purchases:
Fixed maturities $2,519 $1,146
Equities 654 820
Real estate and mortgage loans 110 149
Venture capital 107 86
Other investments 50 87
----- -----
Total purchases 3,440 2,288
----- -----
Proceeds from sales and maturities:
Fixed maturities 2,039 1,230
Equities 675 915
Real estate and mortgage loans 78 173
Venture capital 110 43
Other investments 21 72
----- -----
Total sales and maturities 2,923 2,433
----- -----
Net purchases (sales) $517 $(145)
===== =====
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Six Months Ended Twelve Months Ended
June 30, 1999 December 31, 1998
---------------- -------------------
(In millions)
Fixed maturities $(787) $203
Equities 85 69
Venture capital 27 45
Life deferred policy acquisition
costs and policy benefits 59 (1)
Single premium immediate
annuity reserves 43 (17)
Other - (16)
----- -----
Total change in pretax
unrealized appreciation (573) 283
Change in deferred taxes 216 (102)
----- -----
Total change in unrealized
appreciation, net of taxes $(357) $181
===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
- ---------------------
The components of income tax expense on income from continuing
operations before the cumulative effect of accounting change is
as follows :
Three Months Ended Six Months Ended
June 30 June 30
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions)
Federal current tax
expense (benefit) $ 2 $ (7) $ 14 $ 44
Federal deferred tax
expense (benefit) 59 (93) 105 (93)
----- ----- ----- -----
Total federal income tax
expense (benefit) 61 (100) 119 (49)
Foreign income taxes 6 3 13 10
State income taxes 2 2 3 5
----- ----- ----- -----
Total income tax expense
(benefit) on continuing
operations $69 $(95) $135 $(34)
===== ===== ===== =====
Note 5 - Contingent Liabilities
- -------------------------------
In the ordinary course of conducting business, The St. Paul and
some of its subsidiaries have been named as defendants in various
lawsuits. Some of these lawsuits attempt to establish liability
under insurance contracts issued by those companies. Plaintiffs
in these lawsuits are asking for money damages or to have the
court direct the activities of the company's operations in
certain ways. Although it is possible that the settlement of a
contingency may be material to The St. Paul's results of
operations and liquidity in the period in which the settlement
occurs, The St. Paul believes that the total amounts that it or
its subsidiaries will ultimately have to pay in all of these
lawsuits will have no material effect on its overall financial
position.
In some cases, plaintiffs seek to establish coverage for their
liability under environmental protection laws. See
"Environmental and Asbestos Claims" in Management's Discussion
and Analysis for information on these claims.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
- -------------
Debt consists of the following:
June 30, December 31,
1999 1998
--------------- ---------------
Book Fair Book Fair
Value Value Value Value
----- ------ ----- ------
(In millions)
Medium-term notes $617 $618 $637 $675
Commercial paper 434 434 257 257
8 3/8% senior notes 150 156 150 160
Zero coupon convertible notes 92 97 111 118
7 1/8% senior notes 80 81 80 86
Variable rate borrowings 64 64 - -
Floating rate notes 46 46 - -
Real estate mortgages 15 16 15 16
Nuveen short-term borrowings 8 8 10 10
----- ----- ----- -----
Total debt $1,506 $1,520 $1,260 $1,322
===== ===== ===== =====
A number of The St. Paul's real estate entities are parties to
variable rate loan agreements aggregating $63.8 million. The
borrowings mature in the year 2030, with principal paydowns
starting in the year 2006. The interest rate is set weekly by a
third party, and was 3.8% at June 30, 1999.
Note 7 - Segment Information
- ----------------------------
The St. Paul has seven reportable business segments in its
property-liability insurance operation, consisting of the
Commercial Lines Group, Specialty Commercial, Surety, Specialty
Auto, International, Reinsurance and Investment Operations. (In
July 1999, The St. Paul announced an agreement to sell its
standard personal insurance business to Metropolitan Property and
Casualty Insurance Company in a transaction expected to close
near the end of the third quarter of 1999, subject to regulatory
approval. The results of the operations to be sold have been
accounted for as discontinued operations for all current and
prior year periods presented in this report and are not included
in The St. Paul's segment data). The St. Paul also has a life
insurance segment (Fidelity and Guaranty Life) and an asset
management segment (The John Nuveen Company). The St. Paul
evaluates the performance of its property-liability underwriting
segments based on GAAP underwriting results. The property-
liability investment operation is disclosed as a separate
reportable segment because that operation is managed at the
corporate level and the invested assets, net investment income
and realized gains are not allocated to individual underwriting
segments. The life insurance and asset management segments are
evaluated based on their respective pretax operating results,
which include investment income. The St. Paul does not aggregate
its segments for purposes of reporting segment information.
The reportable underwriting business segments in The St. Paul's
property-liability operation are each managed separately because
each offers insurance products to unique customer classes and
utilizes different underwriting criteria and marketing
strategies. For example, the Commercial Lines Group provides
"commodity-type" insurance products to the extensive, small and
medium-sized commercial markets. It also targets certain large
industry groups, such as the construction industry. By contrast,
the Specialty Commercial segment markets specialized insurance
products and services tailored to meet the individual needs of
specific commercial customer groups, such as doctors, lawyers,
officers and directors, as well as technology firms and
government entities. Customers in the Specialty Commercial
segment generally require specialized underwriting expertise and
claim settlement services.
The tabular information on the following pages provides revenue
and income data for each of The St. Paul's business segments for
the three months and six months ended June 30, 1999 and 1998. In
1999, The St. Paul revised its segment reporting structure to
separately disclose its Surety underwriting operation as a business
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
segment, which differs from its prior classification as a
component of the Commercial Lines Group. This revision reflects
the distinct nature of this operation, which provides surety bond
coverages (primarily for construction contractors). The Surety
operation is managed and evaluated separately from other
components of the Commercial Lines Group, and is also the largest
underwriter of surety bonds in North America, based on 1997
written premium volume. Segment information for 1998 has been
restated to be consistent with the 1999 presentation.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
----- ----- ----- ------
(In millions)
Revenues from Continuing
Operations
Property-liability
insurance:
U.S. Underwriting:
Commercial Lines Group $526 $564 $1,029 $1,155
Specialty Commercial 318 334 679 672
Surety 94 91 184 164
Specialty Auto 56 63 114 120
----- ----- ----- -----
Total U.S. Underwriting 994 1,052 2,006 2,111
International 139 127 260 241
----- ----- ----- -----
Total primary
insurance operations 1,133 1,179 2,266 2,352
Reinsurance 242 263 484 564
----- ----- ----- -----
Total property-liability
premiums earned 1,375 1,442 2,750 2,916
----- ----- ----- -----
Investment operations:
Net investment income 321 331 643 663
Realized investment gains 71 132 132 180
----- ----- ----- -----
Total investment operations 392 463 775 843
Other 27 20 53 42
----- ----- ----- -----
Total property-
liability insurance 1,794 1,925 3,578 3,801
----- ----- ----- -----
Life insurance 110 94 209 184
----- ----- ----- -----
Asset management 86 76 169 149
----- ----- ----- -----
Total reportable segments 1,990 2,095 3,956 4,134
Parent company, other
operations and
consolidating eliminations 8 5 16 10
----- ----- ----- -----
Total revenues from
continuing operations $1,998 $2,100 $3,972 $4,144
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------- ----------------
1999 1998 1999 1998
----- ----- ----- -----
(In millions)
Income (Loss) from
Continuing Operations
Before Income Taxes and
Cumulative Effect
of Accounting Change
Property-liability
insurance:
U.S. Underwriting:
Commercial Lines Group $(77) $(349) $(172) $(427)
Specialty Commercial (26) (42) (43) (47)
Surety 13 19 28 33
Specialty Auto - 1 - (1)
----- ----- ----- -----
Total U.S. Underwriting (90) (371) (187) (442)
International (17) (15) (53) (40)
----- ----- ----- -----
Total primary insurance (107) (386) (240) (482)
Reinsurance 6 2 29 16
----- ----- ----- -----
Total GAAP underwriting
result (101) (384) (211) (466)
----- ----- ----- -----
Investment operations:
Net investment income 321 331 643 663
Realized investment gains 71 132 132 180
----- ----- ----- -----
Total investment
operations 392 463 775 843
Other (1) (190) (21) (217)
----- ----- ----- -----
Total property-
liability insurance 290 (111) 543 160
----- ----- ----- -----
Life insurance 9 (33) 28 (14)
----- ----- ----- -----
Asset management:
Pretax income before
minority interest 40 33 77 64
Minority interest (10) (8) (18) (15)
----- ----- ----- -----
Total asset management 30 25 59 49
----- ----- ----- -----
Total reportable segments 329 (119) 630 195
Parent company, other
operations and
consolidating eliminations (39) (169) (74) (218)
----- ----- ----- -----
Total income from
continuing operations
before income taxes and
cumulative effect of
accounting change $290 $(288) $556 $(23)
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance
- --------------------
The St. Paul's consolidated financial statements reflect the
effects of assumed and ceded reinsurance transactions. Assumed
reinsurance refers to The St. Paul's acceptance of certain
insurance risks that other insurance companies have underwritten.
Ceded reinsurance involves transferring certain insurance risks
The St. Paul has underwritten to other insurance companies who
agree to share these risks. The primary purpose of ceded
reinsurance is to protect The St. Paul from potential losses in
excess of the amount it is prepared to accept.
The St. Paul expects those with whom it has ceded reinsurance to
honor their obligations. In the event these companies are unable
to honor their obligations, The St. Paul will pay these amounts.
The St. Paul has established allowances for possible nonpayment
of amounts due to it.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
is as follows:
Three Months Six Months
Ended June 30 Ended June 30
---------------- ---------------
($ in millions) 1999 1998 1999 1998
----- ----- ----- -----
Written premiums:
Direct $1,201 $1,185 $2,375 $2,465
Assumed 580 426 900 764
Ceded (250) (163) (423) (387)
----- ----- ----- -----
Net premiums written 1,531 1,448 2,852 2,842
===== ===== ===== =====
Earned premiums:
Direct 1,256 1,292 2,506 2,680
Assumed 376 344 710 711
Ceded (220) (168) (401) (425)
----- ----- ----- -----
Net premiums earned 1,412 1,468 2,815 2,966
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 1,051 1,262 2,009 2,248
Assumed 222 264 496 502
Ceded (260) (181) (457) (342)
----- ----- ----- -----
Net insurance
losses and loss
adjustment expenses $1,013 $1,345 $2,048 $2,408
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Discontinued Operations
- --------------------------------
In June 1999, The St. Paul made a strategic decision to sell its
standard personal insurance business. On July 12, 1999 an
agreement was reached to sell this business to Metropolitan
Property and Casualty Insurance Company (Metropolitan) for
approximately $600 million. As a result, the standard personal
insurance operations were accounted for as a discontinued
operation for the second quarter and first six months of 1999,
and prior period results were restated to be consistent with the
1999 presentation. The Specialty Auto line of business, which
was previously aggregated with standard personal insurance to
form The St. Paul's Personal Insurance segment for reporting
purposes, was not included in this sale.
The St. Paul anticipates that this transaction will close near
the end of the third quarter of 1999, subject to regulatory
approval. The St. Paul estimates that it will recognize a modest
gain on this transaction, net of the costs associated with the
sale as well as the estimated loss from operations expected
during the third quarter 1999, which will be recorded on closing.
Proceeds from the sale, to be received on closing, will be used
for general corporate purposes, which may include strategic
acquisitions to augment The St. Paul's existing specialty
insurance and general commercial lines, expansion of specialty
product offerings, and continuation of The St. Paul's common
share repurchase program.
Under the terms of the agreement, Metropolitan will purchase the
Economy Fire & Casualty Company and its wholly-owned subsidiaries
(Economy). Economy's net book value at June 30, 1999
approximates $370 million, including investments and other
assets, loss reserves, unearned premium and other liabilities.
As of June 30, 1999, these balance sheet amounts are included in
the applicable line items of The St. Paul's consolidated balance
sheet. Economy represents a portion of the personal lines business
to be sold.
Additionally, The St. Paul will sell its rights and interests in
those policies constituting the remaining portion of its standard
personal insurance operations and certain related assets. This
business will be transferred to Metropolitan by way of a
reinsurance and facility agreement pursuant to which The St. Paul
will transfer assets, representing the unearned premium on the
inforce policies, of approximately $330 million to Metropolitan.
As a result of the sale, all 1,700 standard personal insurance
employees of The St. Paul will transfer to Metropolitan,
effective on closing. An additional 500 to 600 positions will be
eliminated, commensurate with the expected revenue decline from
the sale. The severance and other costs related to these
terminations will be included in The St. Paul's calculation of
its gain on the sale and recognized at closing.
Note 10 - Cumulative Effect of Accounting Change
- ------------------------------------------------
Effective Jan. 1, 1999, The St. Paul adopted the provisions of
the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) No. 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." The
SOP provides guidance for recognizing and measuring liabilities
for guaranty fund and other insurance-related assessments. The
St. Paul recorded a pretax expense of $46 million ($30 million
after-tax) in the first quarter of 1999 representing the
cumulative effect of adopting the provisions of the SOP. The
majority of the cumulative effect related to assessments for
workers' compensation second-injury funds, with a lesser amount
related to insurance guaranty funds. Second-injury funds provide
reimbursement to insurance carriers or employers for workers'
compensation claims when the cost of a workers' second injury
combined with a prior accident or disability is greater than what
the second injury alone would have produced. Second-injury funds
are established to help ensure that employers are not made to
suffer a greater monetary loss or increased insurance costs
because of hiring previously injured or handicapped employees.
The St. Paul's total accrued pre-tax expense related to insurance
assessments was $74 million at March 31, 1999, which consisted of
the $46 million first quarter cumulative effect of adopting SOP
97-3 and $28 million of previously recorded liabilities. The
accrual was recorded as follows: $53 million in other
liabilities, $16 million in insurance reserves, and $5 million in
other assets as an offset to deferred premium tax recoverable.
The accrued amounts are expected to be disbursed as assessed
during a period of up to 30 years.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Merger with USF&G Corporation
- ---------------------------------------
On April 24, 1998, The St. Paul issued 66.5 million of its
common shares in exchange for all of the outstanding common
stock of USF&G Corporation, a holding company for property-
liability and life insurance operations.
The St. Paul recorded a pretax charge to earnings of $292 million
in the second quarter of 1998 related to the merger, primarily
consisting of severance and other employee-related costs,
facilities exit costs, asset impairments and transaction costs.
The St. Paul estimated that approximately 2,000 positions would
be eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All
levels of employees, from technical staff to senior management,
were affected by the reductions. The number of positions
expected to be reduced by function included approximately 950 in
The St. Paul's property-liability underwriting operation, 350 in
claims and 700 in finance and other administrative positions.
The reductions are occurring throughout the United States.
Through June 30, 1999, approximately 2,100 positions had been
eliminated, and the cost of termination benefits paid was $124
million. The St. Paul expects to realize annualized pretax
expense savings of approximately $210 million as a result of the
merger (as measured against the combined 1997 pre-merger expenses
of The St. Paul and USF&G), primarily due to the reduction in
employee salaries and benefits.
The merger-related charge was determined in accordance with
Emerging Issues Task Force (EITF) Issue No 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity," Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," SFAS
No. 5, "Accounting for Contingencies," and Accounting Principles
Board Opinion No. 16, "Business Combinations."
The following table provides information about the components of
the 1998 charge, payments made and the balance of accrued amounts
remaining at June 30, 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Merger with USF&G Corporation (continued)
- --------------------------------------------------
Pre-tax
Charges to earnings: Charge
- ------------------- ------
(in millions)
USF&G corporate headquarters $36
Long-lived assets 23
Software depreciation acceleration 10
Computer leases and equipment 9
Other equipment and furniture 8
-----
Subtotal 86
-----
Accrued charges subject
to rollforward:
-----------------------
Reserve at
Pre-tax Pay- Adjust- June 30,
Charge ments ments 1999
------- ------ ------ --------
Executive severance 89 $(84) $(2) $3
Other severance 53 (40) 0 13
Branch lease exit costs 34 (5) 0 29
Transaction costs 30 (30) 0 -
----- ----- ----- -----
Accruals subject to rollforward 206 $(159) $(2) $45
----- ===== ===== =====
Total $292
=====
The following discussion provides more information regarding the
rationale for and calculation of certain components of the merger-
related charge:
USF&G Corporate Headquarters
- ----------------------------
After consummating the merger in April 1998, The St. Paul vacated
a significant portion of a building in Baltimore, MD that had
been the site of USF&G's corporate headquarters. Having
developed a plan to lease the space to outside parties, The St.
Paul categorized the building as an "asset to be held or used" as
defined by SFAS No. 121 for purposes of evaluating the potential
impairment of its $64 million carrying value. Based on an
independent appraisal, The St. Paul recorded a $36 million
writedown in its carrying value.
Computer leases and equipment
- -----------------------------
The St. Paul conducted an extensive technology study upon
consummation of the merger which identified redundant computer
hardware. As a result, The St. Paul recorded a $9 million
expense for lease buy-out transactions and disposals of computer
equipment. The expense represented the lease termination fee
obligation (lease buy-outs), calculated as the discounted value
of the remaining computer lease obligations; and the net book
value of redundant computer equipment.
Executive severance
- -------------------
Represents the obligations The St. Paul is required to pay in
accordance with the USF&G Senior Executive Severance Plan in
place at the time of the merger. The merger with USF&G qualified
as a change in control under the Severance Plan, which obligated
The St. Paul to make payments to covered employees on the
occurrence of certain triggering events within two years of the
closing of the merger. Such triggering events, which have
occurred, included the employee's involuntary termination without
cause by the company or the employee's termination for "good
reason" which included such factors as diminution of
responsibilities, change in job title, or being required to
relocate beyond a certain distance. In addition, The St. Paul
had an obligation to certain employees who, although not
terminated, had "good reason" to take action which would trigger
payment under the Severance Plan.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Merger with USF&G Corporation (continued)
- --------------------------------------------------
Other severance
- ---------------
Represents severance and related benefits such as out-placement
counseling, vacation buy-out and medical coverage to be paid to
terminated employees not covered under the USF&G Senior Executive
Severance Plan.
Branch lease exit costs
- -----------------------
As a result of the merger, excess space was created in several
locations due to staff reductions in the combined organization.
The charge for branch lease exit costs was calculated by
determining the percentage of anticipated excess space at each
site and the current lease costs over the remaining lease period.
In certain locations, the lease is expected to be terminated.
For leases not expected to be terminated, the amount of expense
included in the charge was calculated as the percentage of excess
space (20% to 100%) times the net of: remaining rental payments
plus capitalized leasehold improvements less actual sub-lease
income. No amounts were discounted to present value in the
calculation.
Transaction costs
- -----------------
This amount consists of registration fees, costs of furnishing
information to stockholders, consultant fees, investment banker
fees, and legal and accounting fees.
Long-lived assets
- -----------------
Upon consummation of the merger, The St. Paul determined that
several of USF&G's real estate investments were not consistent
with The St. Paul's real estate investment strategy. A plan was
developed to sell a number of apartment buildings and various
other miscellaneous holdings, with an expected disposal date by
year-end 1999. In applying the provisions of SFAS No. 121, it
was determined that four of these miscellaneous investments
should be written down to fair value, based on The St. Paul's
plan to sell them. Fair value was determined based on a
discounted cash flow analysis, or based on market prices for
similar assets. The four investments were as follows:
1) Description of Percentage rents retained after sale
investment: of a portfolio of stores to a third
party
Carrying $21.6 million prior to writedown of
amount: $16.6 million, for current amount of
$5.0 million, with $4.3 million held
in the property-liability segment
and $0.7 million held in the life
segment
2) Description of 138-acre land parcel in New Jersey,
investment: with farm buildings being rented out
Carrying $4.9 million prior to writedown of
amount: $2.1 million, for current amount of
$2.8 million, held in the property-
liability segment
3) Description of Receivable representing cash flow
investment: guarantee payments related to real
estate partnerships.
Carrying $4.8 million prior to writedown of
amount: $1.7 million, sold with no further
gain or loss.
4) Description of Limited partnership interests in
investment: three citrus groves
Carrying $4.5 million prior to writedown of
amount: $2.4 million. Two of the
partnership interests have been
exchanged for an investment in a new
partnership, with one of the
original citrus grove partnership
interests remaining. This
partnership is carried at a current
balance of $.6 million, held in
"parent company and other"
operations
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Fourth Quarter 1998 Restructuring Charge
- --------------------------------------------------
In the fourth quarter of 1998, The St. Paul recorded a pretax
restructuring charge of $34 million. The majority of the charge,
$26 million, related to the anticipated termination of
approximately 520 employees in the following operations: Claims,
Commercial Lines Group, Information Systems, Medical Services and
Professional Markets. The remaining charge of $8 million related
to costs to be incurred to exit lease contracts.
As of June 30, 1999, approximately 300 employees had been
terminated under the restructuring plan, and the cost of
termination benefits paid was $18 million. The remaining reserve
related to severance was written down by $3 million, for a
balance at June 30, 1999 of $5 million. Less than $1 million had
been paid related to branch leases as of June 30, 1999. Actions
to take place under this restructuring plan are expected to be
completed by the end of 1999. The St. Paul anticipates realizing
annualized pretax expense savings of approximately $50 million in
1999 (compared with 1997 levels), primarily as the result of the
reduction in employee salaries and benefits.
Note 13 - Subsequent Event - Cost Reduction Program
- ---------------------------------------------------
In August 1999, The St. Paul announced a cost reduction program
designed to enhance its efficiency and effectiveness in a highly
competitive industry environment. The program includes the
elimination of approximately 1,000 additional employee positions,
primarily staff functions, by year-end 1999. These reductions
are separate from positions to be eliminated as a result of the
sale of The St. Paul's standard personal insurance business to
Metropolitan. The St. Paul expects to record a charge to
earnings in the third quarter of 1999, primarily for severance
and other expenses related to the cost reduction program.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
June 30, 1999
In July 1999, The St. Paul announced an agreement to sell its
standard personal insurance business to Metropolitan Property and
Casualty Insurance Company. The results of the operations to be
sold have been accounted for as discontinued operations for all
current and prior year periods, and are thus excluded from any
table or discussion of continuing operations.
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
second quarter and first six months of 1999 and 1998.
Three Months Six Months
Ended June 30 Ended June 30
-------------- --------------
(in millions,
except per share data) 1999 1998 1999 1998
----- ----- ----- -----
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $(101) $(384) $(211) $(466)
Net investment income 321 331 643 663
Realized investment gains 71 132 132 180
Other (1) (190) (21) (217)
----- ----- ----- -----
Total property-
liability insurance 290 (111) 543 160
Life insurance 9 (33) 28 (14)
Asset management 30 25 59 49
Parent and other (39) (169) (74) (218)
----- ----- ----- -----
Income (loss) from
continuing operations
before income taxes and
cumulative effect of
accounting change 290 (288) 556 (23)
Income tax expense (benefit) 69 (95) 135 (34)
----- ----- ----- -----
Income (loss) from
continuing operations
before cumulative effect
of accounting change 221 (193) 421 11
Cumulative effect of
accounting change, net of taxes - - (30) -
----- ----- ----- -----
Income (loss) from
continuing operations 221 (193) 391 11
Loss from discontinued
operations, net of taxes (17) (81) (22) (90)
----- ----- ----- -----
Net income (loss) $204 $(274) $369 $(79)
===== ===== ===== =====
Diluted net income (loss)
per common share $0.84 $(1.18) $1.50 $(0.36)
===== ===== ===== =====
The St. Paul's pretax income from continuing operations of $290
million in the second quarter of 1999 represented a significant
improvement over the pretax loss of $288 million in the same 1998
period. The 1998 loss included a pretax charge of $292 million
related to The St. Paul's merger with USF&G, primarily for
severance and other employee-related costs and facilities exit
costs. The 1998 pretax loss from continuing operations also
included a $215 million provision to reflect the application of
The St. Paul's loss reserving policies to USF&G's loss and loss
adjustment expense reserves subsequent to the April 1998 merger,
and a $41 million writedown in the carrying value of deferred
acquisition costs in The St. Paul's life insurance segment.
Excluding these charges, which totaled $548 million, pretax
income from continuing operations totaled $260 million in 1998's
second quarter, $30 million less than the equivalent total of
$290 million in this year's second quarter. Earnings growth in
1999 resulted from an improvement in property-liability
underwriting results and a reduction in expenses due to merger-
related efficiencies, which were partially offset by declines in
the property-liability operations' investment income and realized
investment gains. Through the first six months of 1999, pretax
income from continuing operations of $556 million was 6% higher
than comparable 1998 income of $525 million (excluding the
charges referred to above).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results (continued)
-------------------------------
The merger-related efficiencies realized in the first half of
1999 primarily resulted from the elimination of duplicate
functions throughout the combined organization, including the
consolidation of corporate headquarters' functions, and the
elimination of approximately 2,100 employees since the
consummation of the merger. By the end of 1999, The St. Paul
expects to realize pretax annualized expense savings of
approximately $260 million (as measured against the combined 1997
pre-merger expenses of The St. Paul and USF&G) as a result of the
merger and the restructuring of its Commercial Lines Group and
Specialty Commercial underwriting business segments in late 1998.
The St. Paul's net income for the first half of 1999 totaled $369
million, compared with a net loss of $79 million in the same
period of 1998, which reflected the impact of earnings charges
recorded in last year's second quarter. Net income in 1999
included a pretax expense of $46 million ($30 million after-tax),
representing the cumulative effect of adopting the AICPA's
Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." The SOP
provides guidance for recognizing and measuring liabilities for
guaranty and other insurance-related assessments.
In June 1999, The St. Paul made a strategic decision to exit the
standard personal property-liability insurance market, and in
July 1999, announced an agreement to sell those operations to
Metropolitan Property and Casualty Insurance Company
(Metropolitan) in a transaction expected to close near the end of
the third quarter of 1999, subject to regulatory approval.
Accordingly, the results of these operations have been segregated
and presented as discontinued operations for all periods
presented in this report. The loss from discontinued operations
reported for the second quarter and first six months of 1998,
respectively, include a $35 million pretax provision to reflect
the application of The St. Paul's loss reserving policies to
USF&G's loss and loss adjustment expense reserves subsequent to
the April 1998 merger, and also reflect the impact of severe
catastrophe losses resulting from several spring storms in the
second quarter of the year.
Under terms of the sale agreement, Metropolitan will purchase the
Economy Fire & Casualty Company (a wholly-owned subsidiary of The
St. Paul) and its wholly-owned subsidiaries, as well as the
rights and interests in those policies constituting the remaining
standard personal insurance operations of The St. Paul. These
rights and interests will be transferred to Metropolitan by way
of a reinsurance and facility agreement pursuant to which The St.
Paul will transfer assets, representing the unearned premium on
the inforce policies, of approximately $330 million to
Metropolitan.
The sale is a strategic move to focus The St. Paul's property-
liability insurance operations on its business and professional
insurance lines. Proceeds from the sale are expected to total
approximately $600 million, and The St. Paul expects to realize a
modest gain upon completion of the sale. The approximately 1,700
employees of The St. Paul directly involved in the personal
insurance business will be transferred to Metropolitan upon the
closing of the transaction. As a result of the sale, The St.
Paul plans to terminate an additional 500 to 600 employees by the
end of 1999 to maintain expenses at a level commensurate with a
smaller revenue base going forward. The severance and other
related costs associated with the elimination of these positions
will be included in The St. Paul's calculation of its anticipated
gain on the sale to be recorded on the closing.
In August 1999, The St. Paul announced a cost reduction program
designed to enhance its efficiency and effectiveness in a highly
competitive industry environment. The program includes the
elimination of approximately 1,000 additional employee positions,
primarily staff functions, by year-end 1999. This new initiative
is separate from the actions associated with The St. Paul's
pending sale of its standard personal insurance operations to
Metropolitan. The St. Paul expects to record a charge to
earnings in the third quarter of 1999, primarily for severance
and other expenses related to the cost reduction program.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The following summarizes key financial results by property-
liability underwriting business segment (Underwriting results
are presented on a GAAP basis; combined ratios are presented on
a statutory accounting basis):
% of Three Months Six Months
1999 Ended June 30 Ended June 30
($ in millions) Written ------------- -------------
Premiums 1999 1998 1999 1998
-------- ----- ----- ----- -----
Commercial Lines Group:
Written Premiums 35% $507 543 1,007 1,094
Underwriting Result $(77) (349) (172) (427)
Combined Ratio 114.9 165.6 116.3 139.4
Specialty Commercial:
Written Premiums 20% $264 259 578 540
Underwriting Result $(26) (42) (43) (47)
Combined Ratio 111.1 116.1 109.7 111.3
Surety:
Written Premiums 8% $111 109 214 200
Underwriting Result $13 19 28 33
Combined Ratio 80.5 79.4 79.8 79.1
Specialty Auto:
Written Premiums 4% $58 61 124 134
Underwriting Result $- 1 - (1)
Combined Ratio 99.6 99.1 98.9 98.2
----- ----- ----- ----- -----
Total U.S.
Underwriting:
Written Premiums 67% $940 972 1,923 1,968
Underwriting Result $(90) (371) (187) (442)
Combined Ratio 110.1 139.2 110.1 124.0
International:
Written Premiums 12% $236 158 345 279
Underwriting Result $(17) (15) (53) (40)
Combined Ratio 109.9 110.5 118.1 115.1
----- ----- ----- ----- -----
Total Primary
Insurance:
Written Premiums 79% $1,176 1,130 2,268 2,247
Underwriting Result $(107) (386) (240) (482)
Combined Ratio 109.3 135.8 110.9 122.9
Reinsurance:
Written Premiums 21% $355 318 584 595
Underwriting Result $6 2 29 16
Combined Ratio 90.1 95.4 91.4 95.9
----- ----- ----- ----- -----
Total Property-Liability
Insurance:
Written Premiums 100% $1,531 1,448 2,852 2,842
GAAP Underwriting Result $(101) (384) (211) (466)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 73.7 93.3 74.5 82.6
Underwriting Expense Ratio 32.0 35.0 32.9 35.1
----- ----- ----- -----
Combined Ratio 105.7 128.3 107.4 117.7
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Overview
- --------
Consolidated written premiums from continuing operations of $1.53
billion in the second quarter of 1999 were 6% higher than
comparable 1998 premiums of $1.45 billion. Premium volume in The
St. Paul's U.S. Underwriting operations declined 3% from 1998's
second quarter, reflecting the impact of competitive domestic
market conditions, and corrective underwriting and pricing actions
implemented in the Commercial Lines Group aimed at improving the
quality of that book of business. That decline, however, was more
than offset by a significant increase in International volume and
growth in Reinsurance premiums. Year-to-date written premiums of
$2.85 billion were virtually level with the same period of 1998,
with an 8% decline in Commercial Lines Group volume substantially
offset by new business growth in the Surety and International
segments.
The consolidated loss ratio, measuring insurance losses and loss
adjustment expenses as a percentage of earned premiums, was 73.7
for the second quarter of 1999, compared with an adjusted loss
ratio of 78.4 in the same period of 1998, which excludes a 14.9
point impact of the $215 million provision to reflect the
application of The St. Paul's loss reserving policies to USF&G's
loss and loss adjustment expense reserves subsequent to the April
1998 merger. Of the 4.7 point improvement over last
year's adjusted second quarter loss ratio, 1.3 points was
attributable to a decline in catastrophe losses, from $79 million
in 1998 to $58 million in 1999's second quarter. The balance of
the improvement over 1998 reflects the effect of profit improvement
initiatives implemented in the Commercial Lines Group. Through the
first half of 1999, the loss ratio of 74.5 was less than one point
better than the adjusted 1998 six-month ratio of 75.2.
The consolidated expense ratio, measuring underwriting expenses as
a percentage of written premiums, was 32.0 for the 1999 second
quarter, an improvement of three points compared with the 1998
second quarter ratio of 35.0. The expense ratio reduction reflects
cost savings realized as a result of the merger with USF&G, and
efficiencies resulting from the restructuring of the Commercial
Lines Group and Specialty Commercial segments in late 1998. That
restructuring resulted in the elimination of approximately 300
positions from these segments during the first six months of 1999.
These positions are separate from those positions eliminated as a
result of the merger with USF&G. The year-to-date expense ratio of
32.9, over two points better than last year's comparable ratio of
35.1, also reflects the merger-related and restructuring cost
savings initiated in 1998.
Underwriting Results by Segment
- -------------------------------
Commercial Lines Group
- ----------------------
The Commercial Lines Group segment includes The St. Paul's Middle
Market and Small Commercial business centers, and several other
business centers providing specialized products and services for
targeted industry groups. Second quarter 1999 written premiums of
$507 million declined 7% from comparable 1998 premiums of $543
million. The reduction was centered in the Middle Market business
center, where a 16% decline in premium volume reflects the impact
of management's initiatives to improve profitability by refusing to
underwrite inadequately-priced business. Small Commercial premium
volume for the quarter of $116 million increased 4% over the
comparable 1998 total of $112 million. Written premiums in the
Construction business center grew 10% over the second quarter of
1998, primarily due to price increases and the effect of
retroactive premium adjustments on prior year business. Year-to-
date premiums for the total Commercial Lines Group segment were 8%
below comparable 1998 levels, with the Middle Markets business
center accounting for the majority of the decrease.
This segment's underwriting loss of $77 million in the second
quarter of 1999 was a significant improvement over last year's
second quarter loss of $349 million, which included $197 million of
the provision to reflect the application of
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The St. Paul's loss reserving policies to USF&G's loss and loss
adjustment expense reserves subsequent to the April 1998 merger.
Excluding that provision, the 1999 result was still $75 million
better than last year's loss of $152 million, reflecting progress
achieved through corrective underwriting and pricing initiatives, a
decline in catastrophe losses and ongoing expense reductions. The
expense ratio in this segment improved by over three points over
the second quarter of 1998. The year-to-date underwriting loss of
$172 million was $58 million less than the adjusted 1998 loss of
$230 million.
Specialty Commercial
- --------------------
The Specialty Commercial segment includes the Medical Services,
Custom Markets and Professional Markets business centers, all of
which provide specialized insurance products and services tailored
to meet the needs of specific commercial customer groups. Second-
quarter 1999 premium volume totaled $264 million, 2% ahead of
comparable 1998 premiums of $259 million. Medical Services' volume
grew 10% over the second quarter of 1998, largely due to premiums
on a three-year policy recorded during the quarter. Custom
Markets' written premiums of $81 million were virtually level with
the second quarter of 1998, as an increase in Technology volume was
offset by a decline in Surplus Lines production. Professional
Markets posted a 4% decline in premiums compared with last year's
second quarter, primarily due to a reduction in Public Sector
volume. Year-to-date premiums of $578 million in the Specialty
Commercial segment grew 7% over the same period of 1998, but that
rate was inflated by a first-quarter reporting endorsement on an
existing Medical Services account which generated a premium of $37
million. Excluding that amount, six-month 1999 written premiums
were level with the same period of 1998.
Excluding the $18 million provision (to reflect the application of
The St. Paul's loss reserving policies to USF&G's loss and loss
adjustment expense reserves subsequent to the April 1998 merger)
from the 1998 second quarter underwriting loss, Specialty
Commercial's second quarter 1999 underwriting loss of $26 million
was virtually level with 1998. Medical Services' underwriting
result improved $9 million over last year's second quarter, but the
Technology and Financial and Professional Services business
operation experienced a decline in underwriting profitability. The
1999 year-to-date underwriting loss of $43 million in the Specialty
Commercial segment was driven by Medical Services; Custom Markets
and Professional Markets posted breakeven results through the first
half of 1999.
Specialty Auto
- --------------
The Specialty Auto segment provides personal property-liability
insurance products and services to individuals who are unable to
obtain standard coverage due to their inability to meet certain
underwriting criteria. These operations were not included in the
sale of The St. Paul's standard personal insurance business to
Metropolitan. In an increasingly competitive marketplace for these
coverages, written premium volume of $58 million in the second
quarter was slightly below last year's second-quarter total of $61
million. Year-to-date premiums of $124 million fell 7% short of
the comparable 1998 total. This segment posted virtually break-
even underwriting results for the second quarter and first six
months of both 1999 and 1998.
Surety
- ------
The St. Paul is the largest underwriter of surety bonds in North
America, based on 1998 written premiums. Written premiums in
1999's second quarter of $111 million were virtually level with
second-quarter 1998 volume of $109 million. In the first six
months of 1999, written premiums of $214 million grew 7% over the
comparable 1998 total of $200 million. An increase in contract
surety business, driven by the strong economy in the United States
and Mexico which has fueled new construction activity, was the
chief factor in 1999 premium growth. This segment continues to
produce strong results, posting underwriting profits of $13 million
and $28 million in the second quarter and first half of 1999,
respectively.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
International
- -------------
The St. Paul's International segment provides commercial and
personal property-liability insurance products and services in
selected international markets. Premium volume of $236 million in
the second quarter grew almost 50% over the comparable 1998 total
of $158 million. Growth was centered in the Lloyd's of London
operation, where The St. Paul has significantly increased its
underwriting capacity on the syndicates that are managed by the
managing agencies that it owns. New commercial business
opportunities in Europe and a large account recorded in Canada were
also contributing factors to the 1999 growth rate. The strong
second quarter premium total pushed year-to-date premiums to $345
million, 23% higher than those for the same period in 1998. The
second quarter underwriting loss of $17 million was slightly worse
than last year's second quarter loss of $15 million but was
significantly better than the first quarter 1999 loss of $36
million. The six-month 1999 loss of $53 million was $13 million
worse than the year-to-date 1998 result, primarily due to
significant losses in Canada and reserve strengthening in the
Global Marine business center in the first quarter.
Reinsurance
- -----------
The St. Paul's Reinsurance segment underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of business, and provides
products and services to the alternative risk transfer market.
Premium volume in the second quarter of $355 million increased 12%
over the same period of 1998, primarily the result of new
opportunities in non-traditional business as well as changes made
to The St. Paul's estimates of premiums that have been earned, but
not yet reported, by ceding insurers. Excluding that change in
estimate, which added approximately $20 million to the second
quarter total, premium volume increased 5% over the second quarter
of 1998. Worldwide reinsurance markets remain highly competitive,
driven by excess capacity in primary insurance markets which has
put downward pressure on the demand for and price of reinsurance
coverages. Excluding the impact of the change in estimated
premiums, year-to-date volume fell 10% below the comparable 1998
total. The Reinsurance segment posted a $6 million underwriting
profit in the second quarter of 1999, pushing the year-to-date
profit to $29 million. Underwriting profits in the equivalent
periods of 1998 were $2 million and $16 million, respectively.
During the second quarter of 1999, the Reinsurance segment ceded,
under an aggregate excess of loss reinsurance contract, $56 million
in losses, less related ceded premiums of $25 million, for a net
recovery of $31 million.
Investment Operations
- ---------------------
The St. Paul's property-liability insurance operations produced
pretax investment income of $321 million in the second quarter of
1999, 3% below the comparable 1998 total of $331 million. Year-to-
date pretax investment income of $643 million was also 3% below the
1998 six-month total. Negative underwriting cash flows over the
last several quarters (an excess of loss and expense payments over
premium revenues) have resulted in a net reduction in the
underwriting operations' invested assets compared with the same
time in 1998. In addition, merger-related and restructuring
payments of $176 million over the last fourteen months have further
reduced opportunities for growth in the investment portfolio.
Recent investment maturities have also generally been reinvested at
current market yields which are lower than the average yield on the
portfolio. These factors have resulted in a trend of declining
investment income over recent quarters. The St. Paul does not
anticipate substantial improvement in its underwriting cash flow
situation during the remainder of 1999. The pending sale of The
St. Paul's standard personal insurance business, expected to close
near the end of the third quarter of 1999, subject to regulatory
approval, will result in the transfer of approximately $370 million
of net invested assets to Metropolitan, further reducing investment
income in the future.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Investment Operations (continued)
- --------------------------------
Pretax realized investment gains in The St. Paul's property-
liability insurance operations of $71 million in the second quarter
of 1999 declined from gains of $132 million in the same period of
1998. Sales of equity and venture capital investments accounted
for the majority of the 1999 total. In last year's second quarter,
The St. Paul took advantage of favorable market conditions to
restructure its equity portfolio, which resulted in an unusually
high level of realized gains. Pretax gains for the first half of
1999 totaled $132 million, compared with $180 million through the
first six months of 1998.
The $17.2 billion carrying value of the property-liability fixed
maturities portfolio on June 30, 1999 included $405 million of
pretax unrealized appreciation in market value. An upward movement
in market interest rates during the first half of 1999 resulted in
a $611 million pretax decline in the unrealized appreciation of the
bond portfolio since the end of 1998. Approximately 96% of that
portfolio is rated at investment grade (BBB or above). The
weighted average pretax yield on those investments was 6.8% at June
30, 1999.
Environmental and Asbestos Claims
---------------------------------
The St. Paul continues to receive claims alleging injuries from
environmental pollution or alleging covered property damages for
the cost to clean up polluted sites. The company also receives
asbestos injury and property damage claims arising out of product
liability coverages under general liability policies. The vast
majority of these claims arise from policies written many years
ago. The St. Paul's alleged liability for both environmental and
asbestos claims is complicated by significant legal issues,
primarily pertaining to the scope of coverage. In the company's
opinion, court decisions in certain jurisdictions have tended to
broaden insurance coverage beyond the intent of original insurance
policies.
The St. Paul's ultimate liability for environmental claims is
difficult to estimate because of these legal issues. Insured
parties have submitted claims for losses not covered in their
respective insurance policies, and the ultimate resolution of these
claims may be subject to lengthy litigation, making it difficult to
estimate The St. Paul's potential liability. In addition,
variables, such as the length of time necessary to clean up a
polluted site and controversies surrounding the identity of the
responsible party and the degree of remediation deemed necessary,
make it difficult to estimate the total cost of an environmental
claim.
Estimating the ultimate liability for asbestos claims is equally
difficult. The primary factors influencing the estimate of the
total cost of these claims are case law and a history of prior
claim development.
The following table represents a reconciliation of total gross and
net environmental reserve development for the six months ended June
30, 1999, and the years ended Dec. 31, 1998 and 1997. Amounts in
the "net" column are reduced by reinsurance recoverables.
1999
Environmental (six months) 1998 1997
- ------------ ----------- ------ ------
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $783 $645 $867 $677 $889 $676
Incurred losses 8 9 (16) 26 44 58
Paid losses (21) (19) (68) (58) (66) (57)
---- ---- ---- ---- ---- ----
Ending reserves $770 $635 $783 $645 $867 $677
==== ==== ==== ==== ==== ====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
The following table represents a reconciliation of total gross and
net reserve development for asbestos claims for the six months
ended June 30, 1999, and the years ended Dec. 31, 1998 and 1997.
1999
Asbestos (six months) 1998 1997
- -------- ----------- ------ ------
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $402 $277 $397 $279 $413 $304
Incurred losses 3 9 44 13 22 (5)
Paid losses (15) (11) (39) (15) (38) (20)
---- ---- ---- ---- ---- ----
Ending reserves $390 $275 $402 $277 $397 $279
==== ==== ==== ==== ==== ====
The St. Paul's reserves for environmental and asbestos losses at
June 30, 1999 represent its best estimate of its ultimate liability
for such losses, based on all information currently available.
Because of the inherent difficulty in estimating such losses,
however, The St. Paul cannot give assurances that its ultimate
liability for environmental and asbestos losses will, in fact,
match current reserves. The St. Paul continues to evaluate new
information and developing loss patterns, but it believes any
future additional loss provisions for environmental and asbestos
claims will not materially impact The St. Paul's results of
operations, liquidity or financial position.
Total gross environmental and asbestos reserves at June 30, 1999 of
$1.16 billion represented approximately 6% of gross consolidated
reserves of $18.49 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance
--------------
The St. Paul's life insurance segment consists of Fidelity and
Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G
Life's primary products are deferred annuities (including tax-
sheltered annuities and equity indexed annuities), structured
settlement annuities and immediate annuities. F&G Life also
underwrites traditional life insurance products.
Highlights of F&G Life's financial performance for the second
quarter and first six months of 1999 and 1998 were as follows:
Three Months Six Months
Ended June 30 Ended June 30
-------------- --------------
(in millions) 1999 1998 1999 1998
----- ----- ----- -----
Pretax earnings (loss) $9 ($33) $28 ($14)
Sales (annualized premiums) $312 $71 $616 $151
Premiums and policy charges $38 $26 $65 $50
Policy surrenders $52 $62 $100 $114
Net investment income $82 $67 $153 $132
Life insurance in force $11,044 $10,744
F&G Life's pretax earnings in the second quarter and first six
months of 1999 benefited from growing spread from increased assets
under management and strong product sales, offset by realized
investment losses of $9 million and increased product development
and channel expansion expenses. The pretax loss of $33 million in
the second quarter of 1998 was driven by a $41 million writedown in
the carrying value of deferred acquisition costs, and $9 million of
charges (primarily for severance and writedowns in the carrying
value of investments) related to The St. Paul's merger with USF&G.
Excluding realized investment gains and losses in both years and
earnings charges in 1998, pretax earnings of $37 million for the
first half of 1999 were level with the same period of 1998. After-
tax earnings, however, increased slightly over 1998 levels,
reflecting the impact of F&G Life's adoption of an investment
strategy to allocate 1% of its investment portfolio to tax-favored
investments. These investments generate tax credits that have
lowered F&G Life's effective tax rate.
The significant increase in sales volume in the second quarter and
first six months of 1999 compared with the same periods of 1998
resulted from sales of an equity-indexed annuity product introduced
in June 1998. F&G Life has been the leading equity-indexed annuity
producer in the United States for the past nine months. Sales of
that product accounted for $235 million, or 75%, of total sales in
the second quarter, and $485 million, or 79%, of total year-to-date
sales. Credited interest rates on this product are tied to the
performance of the S&P 500 equity index. Sales of fixed interest
rate annuities in 1999 declined due to the negative impact of
continued low levels of market interest rates on F&G Life's fixed
rate products. The demand for annuity products is affected by
fluctuating interest rates and the relative attractiveness of
alternative investments, particularly equity-based products.
In July 1999, F&G Life announced that it will begin to provide its
products to banks and broker-dealers that specialize in offering
annuities and life insurance directly to consumers. The entry into
the institutional marketplace, which will complement existing
distribution channels, is expected to enable F&G Life to distribute
its products in markets to which it has previously had limited
access.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance (continued)
-------------------------
The increase in premiums and policy charges over the second quarter
and first six months of 1998 resulted from an increase in sales of
structured settlement annuities and life-contingent single premium
immediate annuities ("SPIA"). Structured settlement annuities are
sold primarily to property-liability insurers to settle insurance
claims. Sales of structured settlement annuities, annuities with
life contingencies and term life insurance are recognized as
premiums earned under GAAP. However, sales of investment-type
contracts, such as equity-indexed, deferred and tax sheltered
annuities and universal life-type contracts are recorded directly
on the balance sheet and are not recognized as premium revenue
under GAAP. The expansion of the structured settlement program
into The St. Paul's property-liability claim organization led to
the increase in structured settlement sales. The growth in SPIA
sales resulted from an increased emphasis on this product in 1999.
Deferred annuities and universal life products are subject to
surrender by policyholders. Nearly all of F&G Life's surrenderable
annuity policies allow a refund of the cash value balance less a
surrender charge. Surrender activity in 1999 has declined from
1998 levels. Policy surrenders in 1998 reflected surrenders on a
block of single premium deferred annuities ("SPDA") policies sold
through a distributor that ceased doing business with F&G Life in
1997. The decrease in SPDA surrenders in 1999 was partially offset
by an increase in tax-sheltered annuity surrenders.
Net investment income in the second quarter and first half of 1999
grew 22% and 16%, respectively, over the same periods of 1998 as a
result of an increasing asset base generated by positive cash flow.
Asset Management
----------------
The St. Paul's portion of pretax earnings from The John Nuveen
Company (Nuveen) was $30 million in the second quarter of 1999,
compared with $25 million in 1998's second quarter. For the first
half of 1999, The St. Paul's $59 million portion of Nuveen's pretax
earnings was 21% higher than comparable earnings of $49 million in
1998. The company holds a 78% interest in Nuveen.
Nuveen's asset management revenues continue to grow at a strong
rate, accounting for Nuveen's increase in earnings over 1998.
Those revenues totaled $76 million and $149 million for the second
quarter and first six months of 1999, respectively, compared with
$67 million and $132 million in the corresponding periods of 1998.
Total managed assets grew to $59.5 billion at June 30, 1999, a $4.3
billion increase over year-end 1998 and $7.4 billion higher than at
the same time a year ago. The increase was due to new product
sales, particularly managed accounts sold through Rittenhouse
Financial Services, Inc., a Nuveen subsidiary. At the end of June
1999, Nuveen announced the sale of its investment banking division
to U.S. Bancorp Piper Jaffray. The transaction will enable Nuveen
to focus on its asset management business. The transaction is not
expected to have a material impact on the results of Nuveen's
operations.
Capital Resources
-----------------
Common shareholders' equity totaled $6.27 billion at June 30, 1999,
down $350 million from the year-end 1998 total of $6.62 billion,
primarily due to a $506 million decline in the after-tax unrealized
appreciation of the consolidated fixed maturity investment
portfolio and significant common share repurchases, which more than
offset The St. Paul's six-month net income of $369 million. The
St. Paul repurchased 8.3 million of its common shares for a total
cost of $265 million during the first half of 1999, for an average
cost of $32.03 per share. An increase in market interest rates
during the first six months of 1999 led to the decline in the
unrealized appreciation of The St. Paul's bond holdings compared
with year-end 1998.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
Total debt outstanding at June 30, 1999 of $1.51 billion increased
by $246 million over the year-end 1998 total of $1.26 billion,
primarily due to the issuance of commercial paper to finance the
company's common share repurchases. Consolidated debt also
reflects the $64 million of variable rate borrowings entered into
by a number of The St. Paul's real estate entities, and the
February 1999 issuance of $46 million of floating rate notes by a
special purpose offshore entity that is providing reinsurance to a
property-liability subsidiary of The St. Paul. In March 1999, The
St. Paul purchased $33.5 million face amount of its $1,000
principal amount zero coupon convertible notes from note holders
for a total cash consideration of $21 million, which represented
the original issue price plus the original issue discount accrued
to the date of purchase. The St. Paul purchased the notes at the
option of the note holders.
Approximately 41% of The St. Paul's consolidated debt outstanding
at June 30, 1999 consisted of medium-term notes bearing a weighted-
average interest rate of 6.9%. The ratio of total debt to total
capitalization of 18% increased from the year-end 1998 ratio of
15%.
The company anticipates that any major capital expenditures during
the remainder of 1999 would involve further repurchases of its
common shares or acquisitions of existing businesses. At June 30,
1999, The St. Paul had approximately $100 million of capacity to
repurchase additional common shares under the $500 million
repurchase program authorized by the company's board of directors
in November 1998. The St. Paul anticipates that net proceeds from
the sale of its standard personal insurance business will be used
for general corporate purposes, which may include strategic
acquisitions to augment The St. Paul's existing specialty insurance
and general commercial lines, expansion of our specialty product
offerings, and continuation of The St. Paul's common share
repurchase program. There are no major capital improvements
planned for the remainder of the year.
For the first six months of 1999, The St. Paul's ratio of earnings
to fixed charges was 8.06, and the ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 7.29.
For the first six months of 1998, The St. Paul's loss from
continuing operations before income taxes was inadequate to cover
fixed charges by $23 million and combined fixed charges and
preferred stock dividend requirements by $32 million. Fixed
charges consist of interest expense, distributions on capital
securities and that portion of rental expense deemed to be
representative of an interest factor.
Liquidity
---------
Liquidity is a measure of The St. Paul's ability to generate
sufficient cash flows to meet the short- and long-term cash
requirements of its business operations. Net cash outflows from
operating activities totaled $35 million in the first six months of
1999, compared with a net outflow of $19 million in the same period
of 1998. Operational cash flows in both 1999 and 1998 were
negatively impacted by the decline in premium volume and investment
receipts in The St. Paul's property-liability insurance operations,
as well as cash disbursements associated with The St. Paul's merger
with USF&G and the restructuring of the company's commercial
insurance operations. The St. Paul does not anticipate significant
improvement in operational cash flows during the remainder of 1999
due to the expected continuation of the decline in premium volume,
severance payments associated with the elimination of approximately
1,600 employees by the end of the year, and a further reduction in
investment income. On a long-term basis, The St. Paul believes its
operational cash flows will benefit from the corrective pricing and
underwriting actions under way in its property-liability operations
as well as expense control initiatives. The St. Paul's financial
strength and conservative level of debt provide it with the
flexibility and capacity to obtain funds externally through debt or
equity financings on both a short-term and long-term basis should
the need arise.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Market Risk
-----------
Upward movement in market interest rates during the first half of
1999 resulted in a significant decline in the unrealized appreciation
of the bond portfolio since the end of 1998, as discussed in
Property-Liability Insurance - Investment Operations. However, The
St. Paul's portfolio mix, and therefore its exposure to market risk,
has not changed materially from its position at December 31, 1998.
Year 2000 Readiness Disclosure
------------------------------
Many computer systems in the world have the potential of being
disrupted at the turn of the century due to programming limitations
that may cause the two-digit year code of "00" to be recognized as
the year 1900, instead of 2000. The St. Paul is heavily dependent
on its many computer systems, and those of its independent agents
and brokers (The St. Paul "distribution network") and its vendors,
for virtually every aspect of its operations, including
underwriting, claims, investments and financial reporting. Thus,
the "Year 2000" issue involves potentially serious operational
risks for the Company.
For several years, The St. Paul has been evaluating its computer
systems to determine the impact of the Year 2000 issue on its
operations. As compliance evaluation of systems has progressed to
an advanced stage, a shift of emphasis from evaluation to
correction and compliance testing has taken place. The St. Paul
has also been working with vendors and members of its distribution
network in an effort to address Year 2000 issues that such
relationships involve. Finally, The St. Paul has been reviewing
and taking action to address non-systems related issues that may
arise as a result of the Year 2000 problem, including insurance and
reinsurance coverage issues, and it has also been seeking to reduce
the Company's Year 2000-related exposures through the development
of contingency plans.
The following discussion describes The St. Paul's efforts to date
and future plans to deal with the Year 2000 issue. These plans
have been and continue to be updated and revised as additional
information becomes available.
State of Readiness
- ------------------
The St. Paul established a Review Board in the third quarter of
1997 to review the remediation and testing methodology applied to
the hundreds of internally developed and externally sourced systems
used in the Company's corporate headquarters in St. Paul, MN. To
coordinate the Year 2000 remediation efforts, The St. Paul created
the Year 2000 Project Office, which is responsible for the
oversight, coordination and monitoring of Year 2000 efforts
including, among other things, reviewing the compliance status of
information systems in all operating units and subsidiaries, both
foreign and domestic, directing the Year 2000 coordinators assigned
to operating units, and formulating company-wide contingency plans.
Prior to The St. Paul's merger with USF&G in April 1998, a separate
"Y2K Action Committee" was maintained by USF&G, and a comprehensive
program to address each of three identified aspects to the Year
2000 issue (readying USF&G's systems, coordinating with agents and
other third parties with whom USF&G interacts, and managing the
risk of claims from insured parties) had been established. The
Year 2000 program developed by USF&G's Y2K Action Committee has now
been integrated into The St. Paul's overall Year 2000 response.
Information Technology Systems
- ------------------------------
All of The St. Paul's systems, whether internally developed or
externally sourced, are subject to the company-wide comprehensive
testing and compliance standards promulgated by the Company's
Information Services Division (ISD), the oversight and monitoring
of which is the responsibility of the Year 2000 Project Office.
Insofar as internal systems maintained in St. Paul, MN. are
concerned, with few exceptions, Year 2000 compliance was achieved
by December 31, 1998. With few exceptions, initial compliance
validation of all such systems was completed by March 31, 1999.
All subsidiaries not headquartered in Saint Paul, MN or Baltimore,
MD completed initial validation testing of their application
systems on or before June 30, 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
The Year 2000 Project Office's plan for remediation and validation
of externally sourced systems provides for the Company to work with
the vendors of those systems to ensure that those systems become
Year 2000 compliant at the earliest practicable date. Compliance
testing in accordance with ISD standards takes place as and when
compliant versions and/or affirmations of compliance from vendors
are received. The St. Paul has identified what it believes to be
all of its third-party supplied mission critical systems, and, with
few exceptions, expects to receive Year 2000 compliant versions
and/or affirmations of compliance for each of them, and to complete
the validation process, before September 30, 1999.
Third-Party Service Providers and Distribution Network
- ------------------------------------------------------
The St. Paul relies indirectly on the information technology
systems of its service providers and those of its distribution
network. The Year 2000 Project Office is communicating with the
Company's service providers, including financial institutions
providing custody accounts and other services, its independent
agents and brokers, and other entities with which it does business,
to identify and resolve Year 2000 issues and to determine the
potential impact, where relevant, of the possible failure of
certain of such persons to achieve Year 2000 compliance on a timely
basis. Results of this process are expected to be used in The St.
Paul's contingency planning efforts discussed below.
Nuveen Systems
- --------------
Having started the development and implementation of internal four-
digit date code software and system standards in the early 1980s,
Nuveen's Year 2000 program consists primarily of Year 2000
compliance examination and testing of the software packages and
hardware provided by third parties and of the systems and software
of its service providers. Certification of Year 2000 compliance
and testing of critical third-party hardware and software systems
used in trade processing at Nuveen was completed by the end of the
first quarter of 1999. The remaining certification and testing was
completed in the second quarter of 1999. Nuveen is in the process
of developing contingency plans based upon its examination of the
Year 2000 readiness of its third-party supplied systems and its
service providers. Nuveen believes that the costs associated with
its Year 2000 efforts will not be material to its operations and
financial position.
Embedded Chip Issues
- --------------------
Given the nature of its business, and that of its vendors and the
members of its distribution network, The St. Paul believes that its
exposure to embedded chip Year 2000 issues is minimal (other than
its exposure to possible disruptions in electricity,
telecommunications and other essential services provided by public
utilities that are subject to embedded chip-related disruption).
The St. Paul is, where deemed appropriate, coordinating with
vendors to obtain certificates of Year 2000 compliance for the
embedded computer technology equipment that it uses.
Year 2000 Compliance Program Costs
- ----------------------------------
The St. Paul has developed and implemented plans to address the
system modifications required to prepare for the Year 2000, and
does not expect the planning and implementation costs associated
with Year 2000 efforts to be material to its results of operations,
cash flows or consolidated financial position. Through December
31, 1997, the costs of Year 2000 remediation measures incurred,
including costs incurred by USF&G prior to the merger, totaled
approximately $8.7 million. The St. Paul incurred costs of
approximately $11.3 million in 1998, and it anticipates additional
costs of approximately $6.6 million in 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
Contingency Planning
- --------------------
During the first half of 1999, contingency plans were developed by
business and staff units, field offices and subsidiary location
teams in accordance with a model that focuses first on restoring
and maintaining infrastructure, and secondly on business
resumption. Individual teams identified their critical processes
and then identified pre-emptive actions to mitigate the potential
impact of a Year 2000 disruption. Teams also developed plans for
reacting to potential threat and duration scenarios. Plans have
been received and assessed across the organization. Each team has
been advised of any required plan modifications and asked to
incorporate the modifications by the end of July. Test plans are
under development and will encompass integrated testing with a
simulated "command center" providing oversight and coordination.
The St. Paul believes that its most significant Year 2000 exposure
is the potential business disruptions that would be caused by
widespread failure of public utility systems, particularly in the
power generation/distribution and the telecommunication industries.
While the contingency plans The St. Paul is developing will provide
alternative procedures to lessen the impact of short duration
disruptions, prolonged failure of power and telecommunications
systems could have a material adverse effect on the Company's
results of operations, cash flows and consolidated financial
position.
As noted above, The St. Paul indirectly relies on the information
systems of the many components of its distribution network, which
includes thousands of independent agents and brokers. The St. Paul
is aware that some of its independent agents and brokers are
currently Year 2000 non-compliant and expects that a much lesser
number, unknown at this time and expected to consist primarily of
smaller agents, will be non-compliant on January 1, 2000. The St.
Paul believes that Year 2000-related difficulties experienced by
members of its distribution network have the potential to
materially disrupt its business and that such potential disruptions
constitute its second greatest area of potential exposure to the
Year 2000 problem. As part of its contingency planning effort, The
St. Paul has been providing information to members of its
distribution network intended to sensitize them to the Year 2000
issue and to encourage them to take appropriate steps to become
Year 2000 compliant. Although the Company's distribution network
consists of thousands of agents and brokers, the number of
different systems used by the constituent members is far less. For
example, the Company believes that fewer than 20 different types of
agency management systems are used by its property-liability
insurance agents in the United States. Contingency arrangements
are being discussed with distribution network members pursuant to
which the Company may, among other provisional steps, provide data
in alternative formats and institute temporary direct billing
services in the event of a disruption in their individual systems.
The Company notes that the Year 2000 issue by its nature carries
the risk of unforeseen and potentially very serious problems of
internal or external origin. Some commentators believe that the
Year 2000 issue has the potential of destabilizing the global
economy or causing a global recession, either of which could
adversely affect the Company. While The St. Paul believes it is
taking appropriate action with respect to third parties on whose
systems and services it relies to a significant extent, there can
be no assurance that the systems of such third parties will be Year
2000 compliant or that any third party's failure to have Year 2000
compliant systems would not have a material adverse effect on The
St. Paul's earnings, cash flows or financial condition.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
Insurance Coverage
- ------------------
The St. Paul also faces potential Year 2000 claims under coverages
provided by insurance and reinsurance policies sold to insured
parties who may incur losses as a result of the failure of such
parties, or the customers or vendors of such parties, to be Year
2000 compliant. Because coverage determinations depend on unique
factual situations, specific policy language and other variables,
it is not possible to determine in advance whether and to what
extent insured parties will incur losses, the amount of the losses
or whether any such losses would be covered under The St. Paul's
insurance policies. In some instances, coverage is not provided
under the insurance policies or reinsurance contracts, while in
other instances, coverage may be provided under certain
circumstances.
The St. Paul's standard property and inland marine policies
require, among other things, direct physical loss or damage from a
covered cause of loss as a condition of coverage. In addition, it
is a fundamental principle of all insurance that a loss must be
fortuitous to be considered potentially covered. Given the fact
that Year 2000-related losses are not unforeseen, and that The St.
Paul expects that such losses will not, in most if not all cases,
cause direct physical loss or damage, The St. Paul has concluded
that its property and inland marine policies do not generally
provide coverage for losses relating to Year 2000 issues. To
reinforce its view on coverage afforded by such policies, The St.
Paul has developed and is implementing a specific Year 2000
exclusion endorsement. The Company may also face claims from the
beneficiaries of its surety bonds resulting from Year 2000-related
performance failures by the purchasers of the bonds. As with
insurance policies in general, because surety claims depend on
particular factual situations, specific bond language and other
variables, it is not possible to determine in advance whether and
to what extent Year 2000-related claims will arise under surety
bonds issued by The St. Paul, the amount of any such claims or
whether any such claims will by payable under surety bonds issued
by The St. Paul.
The St. Paul is taking a number of actions to address its exposure
to insurance claims arising from its liability coverages, including
individual risk evaluation, communications with insured parties,
the use of exclusions in certain types of policies, and
classification of high hazard exposures that in the Company's view
present unacceptable risk. The St. Paul does not believe that Year
2000-related insurance or reinsurance coverage claims will have a
material adverse effect on its earnings, cash flows or financial
position. However, the uncertainties of litigation are such that
unexpected policy interpretations could compel claim payments
substantially beyond the Company's coverage intentions, possibly
resulting in a material adverse effect on its results of operations
and/or cash flows and a material adverse effect on its consolidated
financial position.
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet,
and measure those instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amended SFAS No. 133 to make it effective
for all quarters of fiscal years beginning after June 15, 2000, and
prohibits retroactive application to financial statements of prior
periods. The St. Paul intends to implement the provisions of SFAS
No. 133 in the first quarter of 2001. The St. Paul currently has
limited involvement with derivative instruments, primarily for
purposes of hedging against fluctuations in market indices, foreign
currency exchange rates and interest rates. The company cannot at
this time reasonably estimate the potential impact of this adoption
on its financial position or results of operations for future
periods.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Impact of Accounting Pronouncements to be Adopted in the Future
(continued)
- ---------------------------------------------------------------
In October 1998, the AICPA issued SOP No. 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk," which provides guidance for
accounting for such contracts. The SOP specifies that insurance
and reinsurance contracts for which the deposit method of
accounting is appropriate should be classified in one of four
categories, and further specifies the accounting treatment for each
of these categories. The SOP is effective for fiscal years
beginning after June 15, 1999. The St. Paul currently intends to
implement the provisions of the SOP in the first quarter of the
year 2000. The company cannot at this time reasonably estimate the
potential impact of this adoption on its financial position or
results of operations for future periods.
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995. Forward-
looking statements are statements other than historical information
or statements of current condition. Words such as expects,
anticipates, intends, plans, believes, seeks or estimates, or
variations of such words, and similar expressions are also intended
to identify forward-looking statements. Examples of these forward-
looking statements include statements about The St. Paul's
expectations concerning: market conditions and their effect on
future premiums, revenues, cash flow and investment income; expense
savings resulting from the USF&G merger and the restructuring
actions announced in 1998 and 1999; the timing of the closing of
the sale of the standard personal insurance business and its impact
on The St. Paul's earnings; and Year 2000 issues and the company's
efforts to address them.
In light of the risks and uncertainties inherent in future
projections, many of which are beyond The St. Paul's control,
actual results could differ materially from those in forward-
looking statements. These statements should not be regarded as a
representation that anticipated events will occur or that expected
objectives will be achieved. Risks and uncertainties include, but
are not limited to, the following: general economic conditions
including changes in interest rates and the performance of
financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or
supply of insurance or reinsurance; catastrophic events of
unanticipated frequency or severity; loss of significant customers;
judicial decisions and rulings; receipt of required approvals and
the satisfaction of the conditions to closing for the sale of the
standard personal insurance business; the pace and effectiveness of
the transfer of that personal insurance business from The St. Paul
to Metropolitan; and various other matters, including the effects
of the merger with USF&G. Actual results and experience relating
to Year 2000 issues could differ materially from anticipated
results or other expectations as a result of a variety of risks and
uncertainties, including the impact of system faults, the failure
to successfully remediate material systems, the time it may take to
remediate system failures once they occur, the failure of third
parties (including public utilities, agents and brokers) to
properly remediate material Year 2000 problems, and unanticipated
judicial interpretations of the scope of the insurance or
reinsurance coverage provided by The St. Paul's policies. The St.
Paul undertakes no obligation to release publicly the results of
any future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated April 30, 1999, relating to the
announcement of its financial results for the
quarter ended March 31, 1999.
2) The St. Paul filed a Form 8-K Current
Report dated July 12, 1999 relating to the
announcement of The St. Paul's sale of its
standard personal insurance underwriting
operations to Metropolitan Property and
Casualty Insurance Company.
SIGNATURES
Pursuant to the requirements 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 ST. PAUL COMPANIES, INC.
(Registrant)
Date: August 12, 1999 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President-Legal Services
(Authorized Signatory)
Date: August 12, 1999 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
----------------
Exhibit
- ---------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession**...................................
(i) Stock and Asset Purchase Agreement Dated as of July 12, 1999
Between St. Paul Fire and Marine Insurance Company and
Metropolitan Property and Casualty Insurance Company......... (1)
(3) (i) Articles of incorporation*....................................
(ii) By-laws*.....................................................
(4) Instruments defining the rights of security holders,
including indentures*.........................................
(10) Material contracts...............................................
(11) Statement re computation of per share earnings**................. (1)
(12) Statement re computation of ratios**............................. (1)
(15) Letter re unaudited interim financial information*...............
(18) Letter re change in accounting principles*.......................
(19) Report furnished to security holders*............................
(22) Published report regarding matters submitted to
vote of security holders*.....................................
(23) Consents of experts and counsel*.................................
(24) Power of attorney*...............................................
(27) Financial data schedule**........................................ (1)
(99) Additional exhibits*.............................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed herewith.
EXECUTION COPY
================================================================================
STOCK AND ASSET PURCHASE AGREEMENT
DATED AS OF JULY 12, 1999
BETWEEN
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
METROPOLITAN PROPERTY & CASUALTY INSURANCE COMPANY
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..............................................................2
2. PURCHASE AND SALE OF SHARES AND ASSETS...................................9
(a) Basic Transaction....................................................9
(b) Closing.............................................................10
(c) Deliveries at the Closing...........................................11
(d) Post-Closing Adjustment.............................................11
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE PARTIES...................13
(a) Representations and Warranties of Seller............................13
(b) Representations and Warranties of Buyer.............................15
(c) Memorandum, Disclaimer of Projections...............................17
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE SPPI AFFILIATES...........18
(a) Organization, Qualification, Corporate Power and Authorization......19
(b) Noncontravention....................................................19
(c) Assets..............................................................21
(d) Capitalization; Subsidiaries........................................22
(e) Financial Information and Statutory Reports.........................22
(f) Events Subsequent to March 31, 1999.................................23
(g) Legal Compliance....................................................25
(h) Tax Matters.........................................................25
(i) Certain Employee Matters............................................26
(j) Licenses and Permits................................................27
(k) Contracts...........................................................28
(l) Owned Real Property.................................................29
(m) Actions and Proceedings.............................................29
(n) Intellectual Property...............................................30
(o) Reinsurance and Coinsurance.........................................31
(p) Agents and Brokers..................................................31
(q) Actuarial Reports...................................................32
(r) IRIS Ratios.........................................................32
(s) Pools and Facility Arrangements; Service Agreements.................32
(t) Bank Accounts.......................................................32
(u) Environmental Matters...............................................32
(v) Insurance Business..................................................34
(w) Employee Relations..................................................34
(x) Insurance...........................................................34
(y) Books and Records...................................................35
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<PAGE>
Page
----
5. PRE-CLOSING COVENANTS...................................................35
(a) General.............................................................35
(b) Regulatory Approvals................................................35
(c) Operation of Business...............................................35
(d) Corporate Examinations and Investigations; Confidentiality..........37
(e) Notice of Developments..............................................37
(f) Reinsurance Matters.................................................37
(g) Other Agreements....................................................37
(h) Additional Financial Statements.....................................38
(i) Pre-Closing Maintenance of Insurance................................38
(j) Preservation of Licenses............................................38
(k) Intercompany Accounts...............................................38
(l) Provision of Services to Seller.....................................38
(m) Year 2000 Matters...................................................38
(n) Florida Hurricane Catastrophe Fund..................................38
(o) Hurricane Catastrophe Records.......................................39
(p) Cooperation.........................................................39
6. POST-CLOSING COVENANTS..................................................39
(a) General; Confidentiality............................................39
(b) Cooperation.........................................................40
(c) Transition to Buyer Policy Forms....................................40
(d) Employees and Employee Benefits.....................................41
(e) Tax Matters.........................................................45
(f) Use of Names........................................................51
(g) Transfer of Data....................................................51
(h) Non-Competition.....................................................52
(i) Agent Incentive Programs............................................53
7. CONDITIONS TO OBLIGATION TO CLOSE.......................................54
(a) Conditions to Obligation of Buyer...................................54
(b) Conditions to Obligation of Seller..................................56
8. REMEDIES FOR BREACHES OF THIS AGREEMENT AND INDEMNITY...................57
(a) Survival of Representations and Warranties..........................57
(b) Indemnification Provisions for Benefit of Buyer.....................57
(c) Indemnification Provisions for Benefit of Seller....................58
(d) Matters Involving Third Parties.....................................59
(e) Mitigation..........................................................60
(f) Determination of Adverse Consequences...............................60
(g) Exclusive Remedy....................................................60
9. TERMINATION.............................................................61
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<PAGE>
Page
----
(a) Termination of Agreement....................................61
(b) Effect of Termination.......................................61
10. MISCELLANEOUS...........................................................61
(a) Press Releases and Public Announcements.....................61
(b) No Third Party Beneficiaries................................62
(c) Entire Agreement............................................62
(d) Succession and Assignment...................................62
(e) Counterparts................................................62
(f) Headings....................................................62
(g) Notices.....................................................62
(h) GOVERNING LAW...............................................64
(i) SUBMISSION TO JURISDICTION..................................64
(j) Amendments and Waivers......................................64
(k) Severability................................................64
(l) Expenses....................................................65
(m) Incorporation of Exhibits, Annexes and Schedules............65
(n) Gender and Number...........................................65
List of Exhibits
Exhibit A-1 - Form of Seller Reinsurance and Facility Agreement
Exhibit A-2 - Form of Buyer Reinsurance and Facility Agreements
Exhibit B-1 - Form of Seller Bill of Sale and Assignment (SPPI Assets)
Exhibit B-2 - Form of Buyer Bill of Sale and Assignment (Retained Business
Assets and Non-SPPI Assets)
Exhibit C - Form of Assumption of Liabilities agreement (Transferred
Liabilities)
Exhibit D - Form of Commutation Agreement
Exhibit E-1 - Form of Master Services Agreement
Exhibit E-2 - Form of Buyer Services Agreement
Exhibit F - Form of Reserve Agreement
Exhibit G - Specified Employees
Exhibit H - Valuation Firms
Exhibit I - Forms of agency agreements
Schedule I - SPPI Entities
-iii-
<PAGE>
STOCK AND ASSET PURCHASE AGREEMENT
This STOCK AND ASSET PURCHASE AGREEMENT, dated as of July 12, 1999 (the
"Agreement"), is entered into by and between ST. PAUL FIRE AND MARINE INSURANCE
COMPANY, a Minnesota insurance corporation ("Seller"), and METROPOLITAN PROPERTY
AND CASUALTY INSURANCE COMPANY, a Rhode Island insurance corporation ("Buyer").
Buyer and Seller are referred to herein collectively as the "Parties."
WITNESSETH:
WHEREAS, Seller wishes to sell, and Buyer wishes to purchase, Seller's SPPI
Business (as defined herein), including the assets principally utilized by
Seller or its affiliates in connection with the SPPI Business, which assets are
identified in ss.1(a) of the Seller Disclosure Schedule;
WHEREAS, the business engaged in by Economy Fire & Casualty Company, an
Illinois stock property-casualty insurance corporation and a direct wholly-owned
subsidiary of Seller ("Economy"), and Economy's wholly-owned subsidiaries
Economy Preferred Insurance Company, an Illinois insurance corporation ("EPIC"),
and Economy Premier Assurance Company, an Illinois insurance corporation ("EPAC"
and, together with EPIC, the "Companies") (Economy and the Companies,
collectively, the "Economy Companies") is primarily related to personal lines
insurance;
WHEREAS, Seller wishes to sell and Buyer wishes to purchase all of the
outstanding shares of common stock (the "Shares") of Economy, pursuant to the
terms and subject to the conditions of this Agreement;
WHEREAS, pursuant to a reinsurance agreement among Economy, EPIC and EPAC,
EPIC and EPAC have ceded all of their policy obligations to Economy;
WHEREAS, Seller wishes to assume and each of the Economy Companies wishes
to cede such companies' liabilities under policies other than SPPI Policies (as
defined herein) written by such companies pursuant to a reinsurance agreement
substantially in the form attached hereto as Exhibit A-1, between Economy and
Seller (the "Seller Reinsurance and Facility Agreement") immediately prior to
Buyer's acquisition of the Shares;
WHEREAS, Seller wishes to cede and Buyer wishes to assume certain of the
liabilities of Seller and its affiliates, other than the Economy Companies,
under SPPI Policies through reinsurance agreements, each substantially in the
form attached hereto as Exhibit A-2 (the "Buyer Reinsurance and Facility
Agreements"); and
WHEREAS, Seller wishes to transfer to Buyer, and Buyer wishes to accept,
Seller's Business Employees (as defined herein);
<PAGE>
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and indemnities set forth in
this Agreement, the Parties agree as follows:
1. DEFINITIONS
"Accrued Bonuses" shall have the meaning set forth in ss.6(d)(v)(E).
"Adverse Consequences" means all actions, suits, proceedings, claims,
injunctions, judgments, orders, decrees, rulings, damages, penalties, fines,
costs, reasonable amounts paid in settlement, liabilities, losses, expenses and
fees, including court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of Code
ss.1504 or any similar group defined under a similar provision of state law.
"Aggregate Purchase Price" has the meaning set forth in ss.2(a).
"Allocation Statement" has the meaning set forth in ss.6(e)(xv).
"Applicable Rate" means LIBOR plus one percent.
"Arbiter" has the meaning set forth in ss.2(d)(v).
"Assumption Agreement" means the Assumption of Liabilities agreement
between Seller and Buyer, substantially in the form attached hereto as Exhibit
C.
"Bills of Sale" means the bills of sale and assignment (or other
appropriate instruments of transfer, including in the case of SPPI IP,
instruments of assignment suitable for recording at the U.S. Patent & Trademark
Office, the U.S. Copyright Office or equivalent agencies in other relevant
jurisdictions where applicable), substantially in the forms attached hereto as
Exhibits B-1 and B-2, respectively, assigning and transferring to Buyer the
SPPI Assets and assigning and transferring to Seller the Non SPPI Assets (as
defined therein).
"Bonus Eligible Employees" shall have the meaning set forth in
ss.6(d)(v)(E).
"Books and Records" means the originals or copies of all records (including
computer generated, recorded or stored records) to the extent relating to the
SPPI Business, including customer lists, policy information, insurance contract
forms and rating plans, claim records, sales records, underwriting records,
financial records, human resources records, including without limitation,
employee ratings, and compliance records in the possession or control of any of
the
-2-
<PAGE>
SPPI Affiliates, including any form of recorded, computer generated or stored
information or process, but excluding any such records that are subject to the
attorney-client or other legal privileges.
"Business Day" means a day other than a Saturday, Sunday or a day on which
banks in New York, New York, are authorized or obligated by law or executive
order to close.
"Business Employees" has the meaning set forth in ss.6(d)(i).
"Buyer DC Plan" has the meaning set forth in ss.6(d)(ii).
"Buyer Y2K Plan" has the meaning set forth in ss.3(b)(viii).
"Buyer Disclosure Schedule" has the meaning set forth in ss.3(b).
"Buyer Indemnitee" has the meaning set forth in ss.8(b)(i).
"Buyer Reinsurance and Facility Agreements" has the meaning set forth in
the recitals to this Agreement.
"Buyer Services Agreement" has the meaning set forth in ss.5(1).
"Closing" has the meaning set forth in ss.2(b).
"Closing Balance Sheet" has the meaning set forth in ss.2(d)(ii).
"Closing Date" has the meaning set forth in ss.2(b).
"COBRA" has the meaning set forth in ss.6(d)(v)(D).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commutation Agreement" means the Commutation Agreement between Economy and
Seller, substantially in the form attached hereto as Exhibit D.
"Companies" has the meaning set forth in the recitals to this Agreement.
"Competition Laws" shall mean statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines, and other laws that are designed
or intended to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade.
"Confidential Information" means, with respect to any Person, any written,
oral or other information relating to it or concerning its business or affairs
other than information which (i) is already in the possession of another Person,
provided that such information is not known by such
-3-
<PAGE>
Person to be subject to a confidentiality agreement with or other obligation of
secrecy to the first Person or another party, or (ii) becomes generally
available to the public other than as a result of a breach of a confidentiality
obligation, or (iii) becomes available to another Person on a non-confidential
basis from a source other than the first Person, provided that such source is
not known by such Person to be bound by a confidentiality agreement with or
other obligation of secrecy to the first Person or another party, or (iv) was or
is independently developed by another Person without use of any material or
information provided by the first Person.
"Economy Companies" has the meaning set forth in the recitals to this
Agreement.
"Economy Returns" has the meaning set forth in ss.4(h).
"Economy's Balance Sheet" has the meaning set forth in ss.2(d)(ii).
"Environmental Law" has the meaning set forth in ss.4(u).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which is under common control with Seller (immediately prior to the Closing
Date) pursuant to ss.414(b) or (c) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Final Determination" has the meaning set forth in ss.6(e)(vii).
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GAAP Statements" has the meaning set forth in ss.4(e)(i).
"Government Entity" means any foreign, federal, state, local, municipal,
county or other governmental, quasi-governmental, administrative or regulatory
authority, body, agency, court, tribunal, commission or other similar entity
(including any branch, department, agency or political subdivision thereof).
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Indemnified Party" has the meaning set forth in ss.8(d)(i).
"Indemnifying Party" has the meaning set forth in ss.8(d)(i).
"Intellectual Property" has the meaning set forth in ss.4(n)(ii).
-4-
<PAGE>
"Knowledge" means actual knowledge, or reason to know, with respect to any
matters within the scope of a Specified Employee's responsibilities.
"Laws" has the meaning set forth in ss.3(a)(iii).
"Leasing Period" has the meaning set forth in ss.6(d)(vi).
"LIBOR" means the arithmetic mean of the offered rates for deposits in
United States dollars for a period of three months which appear on the Reuters
Screen LIBOR Page as of 11:00 A.M., London time, on the day that is two London
banking days prior to the date of determination of LIBOR (converted into
decimals between 0 and 1 if expressed as percentages). "Reuters Screen LIBOR
Page" means the page designated as Page "LIBOR" (or such other page as may
replace Page "LIBOR" for the purpose of displaying London interbank offered
rates of major banks) on the Reuters Monitor Money Rate Service (or such other
nationally recognized information service as may be agreed to by the Parties).
"Licenses" has the meaning set forth in ss.4(j).
"Lien" means any mortgage, pledge, lien, encumbrance, charge, security
interest, conditional sale or title retention arrangement, option or right of
first refusal, other than (a) mechanic's or materialmen's liens and other liens
arising by operation of law, (b) liens for taxes not yet due and payable or for
taxes that the taxpayer is contesting in good faith through appropriate
proceedings, (c) purchase money liens and liens securing rental payments under
capital lease arrangements, and (d) other individual liens arising in the
Ordinary Course of Business, that do not exceed $100,000.
"Master Services Agreement" means the Master Services Agreement between
Seller and Buyer substantially in the form attached as Exhibit E-1 hereto.
"Material Adverse Effect" means, with respect to the SPPI Business or any
specified Person or Persons, a material adverse effect on the financial
condition or business of the SPPI Business or such Person or Persons, as the
case may be.
"New Affiliate" has the meaning set forth in ss.6(h)(iii).
"Ordinary Course of Business" means, with respect to the SPPI Business or
any Person, the ordinary course of business of the SPPI Business or that Person,
as the case may be, consistent with past custom and practice.
"Party" has the meaning set forth in the preface.
"Pension Plan" has the meaning set forth in ss.4(i).
-5-
<PAGE>
"Person" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a Government Entity.
"Personal Lines Agents" has the meaning set forth in ss.6(h)(ii).
"Plans" has the meaning set forth in ss.4(i).
"Post-Closing Tax Period" has the meaning set forth in ss.6(e).
"Reinsurance Agreements" means the Buyer Reinsurance and Facility
Agreements and the Seller Reinsurance and Facility Agreement.
"Reserve Agreement" means the Reserve Agreement between the Parties
substantially in the form attached hereto as Exhibit F.
"Resolution Period" has the meaning set forth in ss.2(d)(iv).
"Retained Business" means all of the insurance business underwritten by the
Economy Companies other than the SPPI Business.
"Revised Statements" has the meaning set forth in ss.6(e)(xv).
"SAP" has the meaning set forth in ss.4(e)(iii).
"Section 338(h)(10) Elections" has the meaning set forth in ss.6(e)(xv).
"Securities Act" means the Securities Act of 1933, as amended.
"Seller DC Plan" has the meaning set forth in ss.6(d)(ii).
"Seller Disclosure Schedule" has the meaning set forth in ss.3(a).
"Seller Indemnitee" has the meaning set forth in ss.8(c)(i).
"Seller Reinsurance and Facility Agreement" has the meaning set forth in
the recitals to this Agreement.
"Seller Retirement Plan" has the meaning set forth in ss.6(d)(iii).
"Seller Returns" has the meaning set forth in ss.4(h).
"Seller Y2K Plan" has the meaning set forth in ss.3(a)(vii).
-6-
<PAGE>
"Shares" has the meaning set forth in the recitals to this Agreement.
"Specified Employees" means the persons listed on Exhibit G hereto.
"SPPI Affiliates" means the Economy Companies and the SPPI Entities.
"SPPI Agents" has the meaning set forth in ss.4(p).
"SPPI Assets" means:
(a) all of Seller's direct and indirect rights to and interest in the
policies, contracts and binders of SPPI Business issued by the SPPI
Entities (the "SPPI Policies"), and all of Seller's direct and indirect
rights to and interest in the expirations and renewals on all SPPI
Policies, including, without limitation, all rights to complete processing
and to bill and/or receive premiums, commissions or other revenues whether
as additional, contingent or bonus commissions or otherwise with respect to
the SPPI Policies, it being acknowledged by the Parties that Seller's and
its Affiliates' agents have ownership rights with respect to their
expirations;
(b) all expiration files and customer account records, one copy of any
other paper or electronic file relating to each SPPI Policy, and, to the
extent there are any, the underwriting, claims, processing and other
manuals, to the extent relating to the SPPI Policies, it being acknowledged
by the Parties that Seller's and its Affiliates' agents have ownership
rights with respect to their business records;
(c) copies of all policy forms and rate filings related to such policy
forms, and all other regulatory filings relating to the SPPI Policies, in
each case since January 1, 1995; and
(d) all of Seller's and the SPPI Entities' assets principally utilized
in connection with the SPPI Business, other than those listed in paragraphs
(a) through (c) of this definition, as identified in ss.1(a) of the Seller
Disclosure Schedule (it being understood that such assets do not include
investment assets).
The terms "expiration" and "renewal" as used in this definition refer to the
ability of an insurance agent, broker or other producer to cause a policy, upon
expiration, to be renewed with the same carrier.
"SPPI Business" means all of the United States personal lines insurance
business of Seller and its subsidiaries, other than: (A) personal lines
insurance business underwritten by (i) the Catastrophe Risk Unit of St. Paul's
Commercial Lines Group (including business currently written by Geovera
Insurance Company and USF&G Specialty Insurance Company), (ii) Victoria Fire &
Casualty Co., (iii) Titan Indemnity Company, (iv) Titan Insurance Company, (v)
Victoria Insurance Co., (vi) Victoria Automobile Insurance Co. and (vii)
Victoria National
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Insurance Co.; and (B) Kentucky personal lines business reinsured by The Ohio
Casualty Company.
"SPPI Entities" means Seller and all Affiliates of Seller, other than the
Economy Companies, carrying out any portion of the SPPI Business, as set forth
in Schedule I hereto, but for purposes of ss.ss.4 and 5 hereof only to the
extent of and in relation to the SPPI Business.
"SPPI IP" has the meaning set forth in ss.4(n)(ii).
"SPPI Policies" has the meaning set forth in the definition of SPPI Assets.
"SPPI Transferred Employees" has the meaning set forth in ss.5(c).
"St. Paul" means The St. Paul Companies, Inc., the parent company of
Seller.
"St. Paul Reinsurance Agreements" has the meaning set forth in ss.4(o).
"Statutory Statements" has the meaning set forth in ss.4(e)(ii).
"Tax Asset" means any net operating loss, net capital loss, foreign tax
credit or any other Tax credit or Tax attribute which could reduce Taxes.
"Tax Benefit" has the meaning set forth in ss.6(e)(x).
"Tax Reserves" has the meaning set forth in ss.6(e)(i).
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto.
"Tax" and "Taxes" mean (i) any federal, foreign, state or local income,
business, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, transfer gains, net worth,
franchise, profits, license, withholding, payroll, employment, salaries,
interest, production, excise, severance, stamp, occupation, premium, property
(real or personal), environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty, addition to tax or additional amount
imposed by any governmental or taxing authority and (ii) any liability of the
relevant person or any subsidiary of the relevant person for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group.
"Third Party Claim" has the meaning set forth in ss.8(d)(i).
"Transaction Documents" means this Agreement, the Master Services
Agreement, the Reinsurance Agreements, the Commutation Agreement, the Reserve
Agreement, the Buyer
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Services Agreement, the Bills of Sale, the Assumption Agreement and any other
material agreement the Parties may enter into prior to Closing in connection
with the transactions contemplated by this Agreement.
"Transfer Date" has the meaning set forth in ss.6(d)(ii).
"Transferred Liabilities" means all liabilities of the SPPI Entities
relating to the SPPI Business other than liabilities relating to the SPPI
Policies, as set forth in ss.1(b) of the Seller Disclosure Schedule.
"Umpire" has the meaning set forth in ss.2(d)(v).
"Unallocated loss adjustment expenses" or "ULAE" means those expenses
necessary for the adjustment of losses other than expenses allocated to a
particular claim.
"Unresolved Changes" has the meaning set forth in ss.2(d)(v).
"Valuation Firms" means one or more valuation firms, as applicable,
selected by Seller and Buyer from the firms listed on Exhibit H hereto, or
otherwise.
2. PURCHASE AND SALE OF SHARES AND ASSETS
(a) Basic Transaction. Subject to the terms and conditions of this
Agreement:
(i) Buyer agrees to purchase from Seller, and Seller agrees to sell,
convey, transfer, assign and deliver to Buyer the Shares;
(ii) Buyer agrees to enter into the Buyer Reinsurance and Facility
Agreements with respect to, among other things, the in-force SPPI Policies
written by the SPPI Entities, to purchase the SPPI Assets from Seller, and
to pay ceding commissions to Seller as set forth in the Buyer Reinsurance
and Facility Agreements;
(iii) Buyer agrees to pay Seller a fee in consideration of Seller's
agreement to facilitate the orderly transfer of business, including
policies and agents, to Buyer;
(iv) Buyer agrees to pay Seller a fee in consideration of Seller's
agreement not to compete with Buyer in the SPPI Business for a period of
five years pursuant to ss.6(h) hereof; and
(v) Buyer agrees to enter into the Assumption Agreement with respect to
the Transferred Liabilities.
(vi) The "Aggregate Purchase Price" paid by Buyer to Seller in
consideration of the transactions referred to in paragraphs (i) through
(iv) above shall be an amount in
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cash equal to (A) $315,000,000 plus (B) the value of Economy's statutory
capital and surplus as of the Closing Date plus (C) the difference (whether
positive or negative) between the market value of the Economy Companies'
invested assets as of the Closing Date, as certified by the Valuation
Firms, and the statutory book value of those invested assets. In addition,
if Buyer does not make a Section 338(h)(10) Election pursuant to
ss.6(e)(xv) hereof, the amount determined under the previous sentence shall
be (x) reduced, in the event that the market value of the invested assets
exceeds the tax basis in such assets, by an amount equal to 35% of such
excess or (y) increased, in the event that the tax basis of such assets
exceeds the market value of such assets, by an amount equal to 35% of such
excess.
(vii) The Aggregate Purchase Price will be allocated among the various
items set forth in the foregoing clauses (i) through (iv) in amounts
mutually agreed by the Parties within 10 days after agreement as to the
Closing Balance Sheet has been reached pursuant to ss.2(d) hereof, but in
no event later than 180 days after the Closing Date. The Parties further
agree that the amount of the Aggregate Purchase Price allocated to the
Shares shall not be less than the higher of (x) $145 million plus the value
of the Economy Companies' statutory capital and surplus as of the Closing
Date before the adjustments in ss.2(a)(vi)(C) and the second sentence of
ss.2(a)(vi) and (y) the amount that would be determined as the Aggregate
Purchase Price under ss.2(a)(vi) if $145,000,000 were substituted for
$315,000,000 in clause (A) thereof.
(b) Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Sullivan & Cromwell at 125
Broad Street, New York, New York 10004 (or such other place as the Parties may
agree in writing) on the soonest date reasonably practicable following the
satisfaction or waiver of all conditions to the obligations of the Parties to
consummate the transactions contemplated hereby (other than conditions with
respect to actions the respective Parties will take at the Closing itself, but
subject to satisfaction or waiver of all such conditions), as such date may
reasonably be agreed in good faith by the Parties; provided, that if the Parties
cannot so agree, the Closing shall take place on the third Business Day after
which the last to be satisfied or waived of the closing conditions shall be
satisfied or waived) (the "Closing Date").
(c) Deliveries at the Closing. At the Closing, (i) Buyer shall pay to
Seller by wire transfer of immediately available funds to the account(s)
designated by Seller an amount equal to (x) $315,000,000 plus (y) the value of
Economy's statutory capital and surplus as of the date of the most recently
prepared (as of the Closing Date) quarterly consolidated balance sheet of
Economy, as adjusted to reflect any dividend paid by Economy subsequent to the
date of such balance sheet and the adjustments to Economy's reserves
contemplated in ss. 5(c)(iii)-(iv) less (z) an amount equal to the unearned
premium reserves referred to in the Buyer Reinsurance and Facility Agreements,
(ii) all intercompany accounts (including intercompany loans), between the
Economy Companies, on the one hand, and Seller and its other Affiliates, on the
other hand, shall be settled in immediately available funds; (iii) Seller shall
deliver to Buyer the various certificates, instruments, and documents referred
to in ss.7(a) and any payments required to be
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made to Buyer by Seller at Closing pursuant to any Transaction Document and not
covered in subparagraph (i) above, (iv) Buyer shall deliver to Seller the
various certificates, instruments, and documents referred to in ss.7(b) and any
payments required to be made to Seller by Buyer at Closing pursuant to any
Transaction Document, and (v) Seller shall deliver to Buyer stock certificates
representing all of the outstanding common stock of Economy, endorsed in blank
or accompanied by duly executed assignment documents and free and clear of any
mortgage, pledge, lien, encumbrance, charge or security interest or restriction
of any kind (other than restrictions imposed under securities and insurance
Laws); the minute books, including minutes of all meetings and actions in lieu
of meetings of the stockholders, boards of directors and committees of the
boards of directors, and stock transfer books of each of the Economy Companies
and stock certificates in the name of Economy for all outstanding capital stock
of each of the Companies; and, to the extent requested by Buyer, written
resignations effective upon acceptance of each of the directors and officers of
the Economy Companies as listed in ss.4(a) of the Seller Disclosure Schedule.
(d) Post-Closing Adjustment.
(i) The amount paid by Seller at the Closing referred to in ss.2(c)
shall be subject to a post-closing adjustment in an amount determined as
set forth in this ss.2(d).
(ii) As soon as reasonably practicable, but in no event later than 75
days following the Closing Date, Seller shall prepare and deliver to Buyer
the consolidated balance sheet of Economy as of the Closing Date,
accompanied by a certification of Seller's chief accounting officer stating
that such balance sheet presents fairly in all material respects the
consolidated financial condition of Economy at the Closing in conformity
with SAP (such closing balance sheet and certification collectively, the
"Closing Balance Sheet"). The Closing Balance Sheet shall be prepared on a
basis consistent in all material respects with the methods, principles,
practices and policies employed in the preparation and presentation of
Economy's consolidated balance sheet as of March 31, 1999 ("Economy's
Balance Sheet"), except that ULAE reserves as shown on the Closing Balance
Sheet shall be equal to 6.0% of the aggregate statutory loss reserves and
allocated loss adjustment expense reserves.
(iii) During the preparation of the Closing Balance Sheet and the
period of any review or dispute within the contemplation of this ss.2(d),
each Party shall (A) provide the other Party and its authorized
representatives with full access at all reasonable times, and in a manner
so as not to interfere with the normal business operations of the Parties
and their Affiliates, to all relevant books, records, work papers,
information and employees of such Persons, and (B) cooperate fully with the
other Party and its authorized representatives, in each case (A) and (B),
as necessary or useful for the preparation, calculation and review of the
Closing Balance Sheet or for the resolution of any dispute between the
Parties relating thereto.
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(iv) After receipt of the Closing Balance Sheet, Buyer shall have 60
days to review it together with the work papers used in preparation
thereof. Unless Buyer delivers written notice to Seller on or prior to the
60th day after Buyer's receipt of the Closing Balance Sheet stating that it
has material objections thereto, Buyer shall be deemed to have accepted and
agreed to the Closing Balance sheet. Buyer shall not object to any method,
principle, practice or policy employed in the preparation of the Closing
Balance Sheet if such method, principle, practice or policy is consistent
in all material respects with that employed in the preparation and
presentation of Economy's Balance Sheet. If Buyer so notifies Seller of its
material objections to the Closing Balance Sheet, the Parties shall in good
faith attempt to resolve, within 30 days (or such longer period as the
Parties may agree) following such notice (the "Resolution Period") their
differences with respect to such material objections and any resolution by
them as to any disputed amounts shall be final, binding and conclusive.
(v) Any amount remaining in dispute at the conclusion of the Resolution
Period ("Unresolved Changes") shall be submitted to arbitration. One
arbiter (each arbiter, an "Arbiter") shall be chosen by the Seller, the
other by the Buyer, and an umpire (the "Umpire") shall be chosen by the two
Arbiters before they enter upon arbitration, all of whom shall be active or
retired disinterested accounting officers of insurance or reinsurance
companies or Lloyd's of London Underwriters. In the event that either Party
should fail to choose an Arbiter within 15 days following a written request
by the other Party to do so, the requesting Party may choose two Arbiters
who shall in turn choose an Umpire before entering upon arbitration. If the
two Arbiters fail to agree upon the selection of an Umpire within 15 days
following their appointment, the Umpire shall be chosen by the American
Arbitration Association.
(vi) Each Party shall present its case to the Arbiters within 60 days
following the date of appointment of the Umpire, unless the parties
mutually agree to an extension of time. The decision of the Arbiters shall
be final and binding on both Parties; but failing to agree, they shall call
in the Umpire and the decision of the majority shall be final and binding
upon both Parties. Judgment upon the final decision of the Arbiters may be
entered in any court of competent jurisdiction.
(vii) Each Party shall bear the expense of its own Arbiter, and shall
jointly and equally bear with the other the expense of the Umpire and of
the arbitration. In the event that the two Arbiters are chosen by one
Party, as above provided, the expense of the Arbiters, the Umpire and the
arbitration shall be equally divided between the two Parties.
(viii) Any arbitration proceedings shall take place at a location
mutually agreed upon by the Parties, or, if they cannot agree, in the City
of New York but notwithstanding the location of the arbitration, all
proceedings pursuant hereto shall be governed by the laws of the State of
New York without giving effect to any choice or conflict of laws provision
or rule (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
State of New York.
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(ix) Arbitration shall not be a condition precedent to any right of
action hereunder.
(x) Once the Closing Balance Sheet has been finalized in accordance
with the above process, the amounts in ss.2(a)(vi)(B) and ss.2(a)(vi)(C)
shall be computed based on the amounts in the Closing Balance Sheet. In the
event the aggregate of such amounts is greater than the amount paid by
Buyer to Seller at the Closing in respect of the adjusted statutory capital
and surplus of Economy, the Buyer shall promptly pay by wire transfer to
the account of the Seller the difference plus interest on such amount at
the Applicable Rate from the Closing Date to the date of such payment. In
the event the aggregate of such amounts is lower than the amount paid by
Buyer to Seller at the Closing in respect of the adjusted statutory capital
and surplus of Economy, the Seller shall promptly pay by wire transfer to
the account of the Buyer the difference plus interest on such amount at the
Applicable Rate from the Closing Date to the date of such payment.
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE PARTIES
(a) Representations and Warranties of Seller. Seller represents and
warrants to Buyer that the statements contained in this ss.3(a) and in the
Disclosure Schedule delivered by Seller to Buyer on the date hereof, attached
hereto and incorporated herein by reference (the "Seller Disclosure Schedule"),
are true and correct as of the date of this Agreement and will be true and
correct as of the Closing Date (other than with respect to those exceptions
disclosed in the Seller Disclosure Schedule).
(i) Corporate Organization. Seller is an insurance corporation duly
organized, validly existing and in good standing under the laws of the
State of Minnesota, and is in good standing in all jurisdictions in which
its failure to qualify or be in good standing could adversely affect the
consummation or the validity of the transactions provided for in this
Agreement.
(ii) Authorization of Transaction. Seller has full corporate power and
authority and has taken all corporate action necessary to execute and
deliver each of the Transaction Documents to which it is a party and to
perform its obligations thereunder. This Agreement has been, and each of
the other Transaction Documents to which Seller is a party will be, duly
executed and delivered by Seller and constitutes or will constitute, as the
case may be, the valid and legally binding obligation of Seller,
enforceable against Seller in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles, including the exercise of judicial
discretion in connection therewith.
(iii) Noncontravention. Assuming compliance with the requirements
referred to in ss.3(a)(vi), neither the execution and the delivery by
Seller of the Transaction Documents to which Seller is a party, nor the
consummation by Seller of the transactions
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contemplated thereby, will (A) contravene, conflict with, or constitute or
result in, a breach or violation of, any statute, regulation, rule, binding
interpretation, injunction, judgment, order, decree, ruling, charge,
arbitration award or ruling or other binding restriction of any Government
Entity ("Laws") to which Seller is subject, the effect of which would,
individually or in the aggregate, have a Material Adverse Effect on the
SPPI Business taken as a whole, or a breach or violation of any provision
of its charter or bylaws or (B) violate, conflict with, result in a breach
of, constitute (or with notice or upon the expiration of applicable grace
or cure periods or both constitute) a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, cancel or require any notice under any agreement, contract, lease,
license or instrument to which Seller is a party or by which it is bound or
to which any of its material properties or assets is subject, or create any
Liens on any properties or assets owned by Seller, the effect of which
would, individually or in the aggregate, have a Material Adverse Effect on
the SPPI Business taken as a whole.
(iv) Brokers' Fees. Neither Seller nor any party acting on its behalf
has paid or has any liability or obligation, contingent or otherwise, to
pay any fees or commissions to any broker, finder, or agent, with respect
to the transactions contemplated by the Transaction Documents for which
Buyer or any of the Economy Companies could become liable or obligated.
(v) Economy Shares. Seller is the sole holder of record and beneficial
owner of 500,000 shares of common stock of Economy free and clear of any
mortgage, pledge, lien, encumbrance, charge or security interest or
restriction of any kind (other than restrictions imposed under securities
and insurance Laws), which constitute all of the issued and outstanding
shares of capital stock of Economy. Seller is not a party to any option,
warrant, purchase right, or other contract or commitment that could require
the sale, transfer, or other disposition of any common stock or other
securities of any of the Economy Companies (other than this Agreement).
Seller is not a party to any voting trust, proxy, or other agreement or
understanding with respect to the voting of any common stock of any of the
Economy Companies.
(vi) Consents. No consent, approval, authorization, order,
registration, expiration of any applicable waiting periods, filing, notice
or qualification of or with any Government Entity is required to be made or
obtained by Seller in connection with the execution and delivery of the
Transaction Documents or the performance by the Parties of their
obligations thereunder or in order to consummate the transactions
contemplated by the Transaction Documents other than (A) the filing of
pre-merger notification and report forms under the Hart-Scott-Rodino Act
with respect to the Agreement, (B) the filings and/or notices required
under the insurance laws of the states identified in ss.3(a)(vi) of the
Seller Disclosure Schedule and (C) such other consents, approvals,
authorizations, orders, registrations, expiration of any applicable waiting
periods, filings, notices and qualifications the failure to make or obtain
which would not, individually or in aggregate, interfere in any material
respect with Seller's ability to effect the Closing, perform its
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obligations under the Transaction Documents to which Seller is a party, or
have a Material Adverse Effect on any of the Economy Companies (limited to
clause (B)) or the SPPI Business taken as a whole.
(vii) Year 2000 Matters. Seller has developed and is actively executing
a plan and implementation strategy ("Seller Y2K Plan") designed to address
the inability of computer programs to recognize the year 2000 so that,
prior to, during and after the year 2000, Seller will continue to provide
to Buyer the services required under this Agreement and the other
Transaction Documents to which Seller is a party without any material
disruption that is due to the year 2000; provided, however, that Seller
makes and has made no representation or warranty to Buyer as to the state
of readiness, with respect to the year 2000 issue, of its vendors and its
independent agents and brokers.
(b) Representations and Warranties of Buyer. Buyer represents and
warrants to Seller that the statements contained in this ss.3(b) and in the
Disclosure Schedule delivered by Buyer to Seller on the date hereof, attached
hereto and incorporated herein by reference (the "Buyer Disclosure Schedule")
are true and correct as of the date of this Agreement and will be true and
correct as of the Closing Date (other than with respect to those exceptions
disclosed in the Buyer Disclosure Schedule).
(i) Corporate Organization. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Rhode Island, and
is in good standing in all jurisdictions in which its failure to qualify or
be in good standing could adversely affect the consummation or the validity
of the transactions provided for in this Agreement or the other Transaction
Documents.
(ii) Authorization of Transaction. Buyer has full power and authority
and has taken all corporate action necessary to execute and deliver each of
the Transaction Documents to which Buyer is a party and to perform its
obligations thereunder. This Agreement has been, and each of the other
Transaction Documents to which Buyer is a party will be, duly executed and
delivered by Buyer and constitutes or will constitute, as the case may be,
the valid and legally binding obligation of Buyer, enforceable against
Buyer in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles, including the exercise of judicial discretion in
connection therewith.
(iii) Noncontravention. Assuming compliance with the requirements
referred to in ss.3(b)(vi), neither the execution and the delivery of the
Transaction Documents to which Buyer is a party, nor the consummation of
the transactions contemplated thereby, will (A) contravene, conflict with,
or constitute or result in, a breach or violation of, any Laws to which
Buyer is subject, the effect of which could adversely affect the
consummation or the validity of the transactions provided for in this
Agreement or the other Transaction Documents to which Buyer is a party, or
a breach or violation of any
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provision of its charter or bylaws or (B) violate, conflict with, result in
a breach of, constitute (or with notice or upon the expiration of
applicable grace or cure periods or both constitute) a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, cancel or require any notice under any agreement,
contract, lease, license or instrument to which Buyer is a party or by
which it is bound or to which any of its properties or assets is subject,
or create any Liens on any material properties or assets owned by Buyer,
the effect of which could adversely affect the consummation or the validity
of the transactions provided for in this Agreement or the other Transaction
Documents.
(iv) Brokers' Fees. Neither Buyer nor any party acting on its behalf
has paid or has any liability or obligation, contingent or otherwise, to
pay any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by the Transaction Documents for which Seller
or its Affiliates could become liable or obligated.
(v) Investment. Buyer is acquiring the Shares for its own account and
not with a view to or for sale in connection with any distribution thereof
within the meaning of the Securities Act. Buyer will not resell, transfer,
assign or distribute the Shares, except in compliance with the registration
requirements of the Securities Act or pursuant to an available exemption
therefrom.
(vi) Consents. No consent, approval, authorization, order,
registration, expiration of any applicable waiting periods, filing, notice
or qualification of or with any Government Entity is required to be made or
obtained by Buyer in connection with the execution and delivery of the
Transaction Documents or the performance by the Parties of their
obligations thereunder or in order to consummate the transactions
contemplated by the Transaction Documents other than (A) the filing of
pre-merger notification and report forms under the Hart-Scott-Rodino Act
with respect to the Agreement, (B) the filings and/or notices required
under the insurance laws of the states identified in the Buyer Disclosure
Schedule and (C) such other consents, approvals, authorizations, orders,
registrations, expirations of any applicable waiting periods, filings,
notices and qualifications the failure to make or obtain which would not,
individually or in aggregate, interfere in any material respect with
Buyer's ability to effect the Closing or otherwise perform its obligations
under the Transaction Documents to which Buyer is a party.
(vii) Sufficient Funds. Buyer will have at the time of Closing cash
available in an amount sufficient to pay to Seller the amounts set forth in
ss.2(a).
(viii) Year 2000 Matters. Buyer has developed and is actively executing
a plan and implementation strategy ("Buyer Y2K Plan") designed to address
the inability of computer programs to recognize year 2000 so that, prior
to, during and after the year 2000, Buyer will continue to provide to
Seller and its Affiliates the services required under this Agreement and
the other Transaction Documents to which Buyer is a party
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without any material disruption that is due to the year 2000; provided,
however, that Buyer makes and has made no representation or warranty to
Seller as to the state of readiness, with respect to the year 2000 issue,
of its vendors and its independent agents and brokers.
(c) Memorandum, Disclaimer of Projections. Buyer acknowledges that neither
Seller nor any Affiliate or representative or advisor of Seller makes or has
made any representation or warranty to Buyer except as specifically made in this
Agreement. In particular, no such person makes or has made any representation or
warranty to Buyer with respect to (i) any information set forth in the
Confidential Memorandum, dated May 1999, distributed by Goldman, Sachs & Co. in
connection with the proposed sale of the SPPI Business or (ii) any financial
projection or forecast relating to the SPPI Business. With respect to any such
projection or forecast delivered by or on behalf of Seller to Buyer, Buyer
acknowledges that (A) there are uncertainties inherent in attempting to make
such projections and forecasts, (B) it is familiar with such uncertainties, (C)
it is taking full responsibility for making its own evaluation of the adequacy
and accuracy of all such projections and forecasts so furnished to it and (D) it
shall have no claim against any person with respect thereto other than a claim
for fraud or bad faith.
Buyer has requested Seller to comment upon the following material reflected
on the Data Room Materials Log:
Data # Document Responsible Officer
------ -------- -------------------
I.C.1 Calendar Year Profitability by Line by Martha Winslow
State including Loss and Expense Ratios
I.D.4 Detailed Premium Information - 1998 Martha Winslow
DWP by Product and 1998 Retention
Ratio by Product
I.D.7 Accident Year Results Martha Winslow
I.D.9 CAS Monthly and Quarterly Reports Gary Homer
I.D.10(i) Senior Management Briefing Reports Steve Klingel
3/31/99
I.D.10(ii) Senior Management Briefing Reports Steve Klingel
12/31/98
Exhibit __ Information Regarding Employee John Clifford
Compensation
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In the letter dated May 27, 1999 from Goldman, Sachs & Co. to the Buyer it
was stated that Seller had endeavored to include in the Evaluation Material (as
defined therein) information known to it which it believed relevant for the
purpose of the Buyer's investigation.
Subject to the statements made in the first and third paragraphs of this
subsection (c), Seller represents and warrants that the responsible officer
referred to in the second paragraph of this subsection (c) has no actual
knowledge or reason to know that the information set forth in each document,
taken as a whole, for which such officer is responsible, is not accurate in all
material respects in light of the purpose for which such information in such
document is presented.
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE SPPI AFFILIATES
Seller represents and warrants to Buyer that the statements contained in
this ss.4 and in the Seller Disclosure Schedule are true and correct as of the
date of this Agreement and will be true and correct as of the Closing Date or
the dates specified in such statements (other than with respect to those
exceptions disclosed in the Seller Disclosure Schedule).
(a) Organization, Qualification, Corporate Power and Authorization. (i)
Each of the Economy Companies is an insurance corporation duly organized,
validly existing, and in good standing under the laws of the State of Illinois.
Each of the Economy Companies is duly qualified or licensed to conduct its
business as presently conducted and is in good standing under the laws of each
jurisdiction in which either the ownership or the use of the properties owned or
used by it, or the nature of the activities conducted by it, requires such
licensing, qualification or good standing, except for such failures to be so
qualified, licensed or in good standing as would not, individually or in the
aggregate, reasonably be expected to (A) have a Material Adverse Effect on the
Economy Companies or the SPPI Business taken as a whole or (B) individually, or
in the aggregate, materially interfere with the ability of the Parties to
consummate the transactions contemplated by this Agreement or the other
Transaction Documents. Each of the Economy Companies has full corporate power
and authority to carry on the businesses in which it is presently engaged and to
own and use the properties owned and used by it. ss.4(a) of the Seller
Disclosure Schedule lists the directors and officers of each of the Economy
Companies. Seller has made available or delivered to Buyer a true and correct
copy of each of the Economy Companies' certificate of incorporation and by-laws,
each as amended to date, and such certificate of incorporation and by-laws are
in full force and effect. The minute books of the Economy Companies accurately
reflect all actions taken at all meetings and consents in lieu of meetings of
the stockholder(s) of the Economy Companies since January 1, 1994, and all
actions taken at all meetings and consents in lieu of meetings of their
respective boards of directors and all committees thereof since January 1, 1994.
(ii) Each SPPI Affiliate (other than Seller) has full corporate power and
authority and has taken all corporate action necessary to execute and deliver
each of the Transaction Documents to which it is a party and to perform its
obligations thereunder. Each of the Transaction Documents to which any of the
SPPI Affiliates (other than Seller) is a party will be
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duly executed and delivered by such SPPI Affiliate and constitutes or will
constitute, as the case may be, the valid and legally binding obligation of such
SPPI Affiliate, enforceable against such SPPI Affiliate in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles, including the exercise of
judicial discretion in connection therewith.
(b) Noncontravention.
(i) Assuming compliance with the requirements referred to in
ss.4(b)(ii), neither the execution and the delivery of the Transaction
Documents to which an SPPI Affiliate (other than Seller) is a party nor the
consummation of the transactions contemplated thereby will:
(A) contravene, conflict with, or constitute or result in a breach
or violation of any provision of the charter or by-laws of such SPPI
Affiliate;
(B) contravene, conflict with, or constitute or result in a breach
or violation of any Laws to which such SPPI Affiliate is subject;
(C) violate, conflict with, result in a breach of, constitute (or
with notice or upon the expiration of applicable grace or cure periods
or both constitute) a default under, result in the acceleration of,
create in any Person the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract, lease,
license or instrument to which such SPPI Affiliate is a party or by
which it is bound or under which it receives material benefits or to
which any of its assets is subject (or result in the imposition of any
Lien upon any of its assets); or
(D) contravene, conflict with, or constitute or result in a breach
or violation of, or a default under, any provision of, or give any
Government Entity the right to revoke, withdraw, suspend, cancel,
terminate or modify, any approval, franchise, certificate of authority,
order, consent, judgment, decree, license, permit, waiver or other
authorization issued, granted, given or otherwise made available by or
under the authority of such Government Entity or pursuant to any Law,
that is held by such SPPI Affiliate;
except in the case of clauses (B), (C) and (D) where the contraventions,
violations, conflicts, breaches, defaults, accelerations, terminations,
modifications, cancellations, failures to give notice, rights, or Liens (x) are
not material, individually or in the aggregate to the Economy Companies (limited
to clauses (B) and (D)) or the SPPI Business taken as a whole, and (y) do not,
individually or in the aggregate, materially interfere with the ability of the
Parties to consummate the transactions contemplated by this Agreement or the
other Transaction Documents.
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(ii) Consents and Approvals. None of the SPPI Affiliates (other than
Seller) is required to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any Government Entity in
connection with the execution and delivery of the Transaction Documents to
which it is a party or the performance by the parties of their obligations
thereunder or in order for the parties thereto to consummate the
transactions contemplated by such Transaction Documents, except (A) any
filings and/or notices which may be required under the insurance laws of
the states identified in the Seller Disclosure Schedule and (B) such other
consents, approvals, authorizations, orders, registrations, expirations of
any applicable waiting periods, filings, notices and qualifications the
failure to make or obtain which would not, individually or in the
aggregate, adversely affect the ability of the SPPI Affiliates (other than
Seller) to conduct their respective businesses in all material respects as
they are presently being conducted or interfere in any material respect
with the SPPI Affiliates' ability to effect the Closing or otherwise
perform their obligations under the Transaction Documents to which they are
a party.
(c) Assets.
(i) Economy Companies Assets. As of the Closing Date, each of the
Economy Companies will have good and marketable title (free and clear of
any Lien) to, or a valid leasehold interest in, or a valid license to use,
the material properties and assets, tangible and intangible, used by them
in their businesses.
(ii) SPPI Assets.
(A) Use of SPPI Assets. As of the Closing Date, the assets of the
Economy Companies and the SPPI Assets will constitute all material
assets and properties principally utilized by the SPPI Affiliates to
conduct, consistent with past practice, the business conducted by the
SPPI Affiliates prior to the Closing.
(B) Title to SPPI Assets. As of the Closing Date, each of the SPPI
Entities that owns SPPI Assets will have good and marketable title to
such SPPI Assets, free and clear of any Lien, and except for the
ownership of policy expirations and business records by Seller's and
the SPPI Entities' agents. The instruments of transfer to be executed
and delivered by Seller on the Closing Date pursuant to ss.2(c) and
ss.7(a)(vi)(A) hereof, will be valid and binding obligations of Seller
and will be sufficient to transfer to the Buyer all right, title and
interest of such SPPI Entities in and to the relevant SPPI Assets free
and clear of any Lien.
(C) Policies of Insurance. The SPPI Policies were sold through
licensed agents of Seller or its Affiliates in compliance in all
material respects with all applicable laws, rules or orders of any
appropriate Government Entity. Seller has no reason to believe that the
SPPI Policies will be terminated before their stated expiration dates,
except for the reasons and in the percentages that
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Seller has historically experienced since January 1, 1998, or that the
SPPI Policies will not be renewed except in the ordinary course upon
their expiration except for the reasons and in the percentages that
Seller has historically experienced since January 1, 1998. Seller does
not represent or warrant that all or any percentage of policies will
renew, it being understood by the Parties that Seller's or its
Affiliates' agents have ownership rights in the policy expirations and
are entitled to renew the SPPI Policies with an insurer other than
Buyer.
(d) Capitalization; Subsidiaries. The authorized capital stock of Economy
consists solely of 1,000,000 shares of common stock, $5.00 par value per share,
of which 500,000 shares are issued and outstanding. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights or other agreements, contracts or commitments or other
rights to purchase any of the authorized but unissued capital stock or other
securities of Economy. Economy is not a party to any agreement which would
require Economy to purchase any of its capital stock or other securities under
any circumstances. ss.4(d) of the Seller Disclosure Schedule sets forth for each
of the Companies: (i) the number of authorized shares of each class of its
capital stock, (ii) the number of issued and outstanding shares of each class of
its capital stock, and (iii) the number of shares of its capital stock held in
treasury. All of the issued and outstanding shares of capital stock of the
Economy Companies have been duly authorized and are validly issued, fully paid,
and nonassessable. Economy is the sole holder of record and beneficial owner of
all of the issued and outstanding shares of capital stock of each of the
Companies free and clear of any mortgage, pledge, lien, encumbrance, charge,
security interest or any other restriction (other than restrictions imposed
under securities and insurance Laws). There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other agreements, contracts or commitments that could
require any of the Economy Companies to issue, sell, transfer, or otherwise
dispose of or cause to become outstanding any capital stock or other securities
of any of the Economy Companies or that could require any of the Economy
Companies to issue, sell, transfer or otherwise dispose of or cause to become
outstanding any of their own capital stock or other securities. There are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of any capital stock of any of the Economy Companies. None of the
Economy Companies have outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or convertible into or
exercisable for securities having the right to vote) with its stockholders on
any matter. All outstanding securities of each of the Economy Companies were
issued in transactions exempt from the registration requirements of federal and
state securities laws. None of the Economy Companies will hold any securities or
ownership interests in any other Person as of the Closing, except capital stock
held in portfolio investments and, in the case of Economy, the capital stock of
the Companies.
(e) Financial Information and Statutory Reports.
(i) Set forth in ss.4(e)(i) of the Seller Disclosure Schedule are
consolidated unaudited (i) balance sheets of Economy as of December 31,
1997 and 1998 and March 31, 1999, and (ii) income statements of Economy for
the years ended
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December 31, 1997 and 1998 and the quarter ended March 31, 1999, each of
which has been prepared in accordance with GAAP (the "GAAP Statements").
(ii) Seller has previously furnished to Buyer the following statutory
statements, in each case together with the exhibits, schedules and notes
thereto and any affirmations and certifications filed therewith
(collectively, the "Statutory Statements"): (A) the annual statement of
each of the Economy Companies as at December 31, 1998, in each case as
filed with the insurance regulatory authority of its respective
jurisdiction of domicile, (B) the quarterly statements of each of the
Economy Companies for the quarterly period ended March 31, 1999, in each
case as filed with the insurance regulatory authority of its respective
jurisdiction of domicile, and (C) audited consolidated statements of
Economy as at December 31, 1998, as filed with the insurance regulatory
authority of its respective jurisdiction of domicile.
(iii) The GAAP Statements and Statutory Statements, respectively,
present fairly the GAAP and statutory financial condition and results of
operations of each of the Economy Companies for the periods therein
specified, were prepared in conformity with GAAP and statutory accounting
principles prescribed or permitted by the applicable insurance regulatory
authority ("SAP") applied on a consistent basis during the periods
presented, as the case may be, except as expressly set forth within the
subject financial statements. No material deficiency has been asserted by
any Government Entity with respect to any of the GAAP Statements or
Statutory Statements in writing (or to the Knowledge of the Specified
Employees, by other means).
(iv) Set forth in ss.4(e)(iv) of the Seller Disclosure Schedule is a
description of all material liabilities of the Economy Companies as of the
date hereof that are not reflected on the face of Economy's Balance Sheet
(as set forth in ss.4(e)(i) of the Seller Disclosure Schedule), together
with a description of all material liabilities of Economy incurred since
that date, other than policy liabilities incurred in the Ordinary Course of
Business.
(f) Events Subsequent to March 31, 1999. Other than the transactions
contemplated by or referred to in the Transaction Documents or as set forth in
ss.4(f) of the Seller Disclosure Schedule, since March 31, 1999 (x) none of the
SPPI Affiliates has engaged in any material practice, taken any material action
or actions or entered into any material transaction or transactions outside of
the Ordinary Course of Business, (y) Seller has not with respect to the business
of the SPPI Affiliates engaged in any material practice, taken any material
action or actions or entered into any material transaction outside the Ordinary
Course of Business, and (z) there has not been any:
(i) (A) material adverse change in the financial condition or business
of the SPPI Business taken as a whole, or (B) to the Knowledge of the
Specified Employees, event or development on or prior to the date of this
Agreement that is reasonably likely to have a Material Adverse Effect on
the SPPI Business taken as a whole (other than in the
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case of (A) or (B), material adverse changes or events or developments
arising from or associated with adverse developments in the
property/casualty personal lines insurance business, or the announcement of
the transactions contemplated by this Agreement or the identity or business
strategy of Buyer);
(ii) (A) change in the authorized or issued capital stock of any of the
Economy Companies; (B) grant of any stock option, warrant, or other right
to purchase shares of capital stock of any of the Economy Companies; (C)
issuance of any security convertible into the capital stock of any of the
Economy Companies; (D) grant of any registration rights in respect of the
capital stock of any of the Economy Companies; (E) reclassification,
combination, split, subdivision, purchase, redemption, retirement,
issuance, sale, or any other acquisition or disposition, directly or
indirectly, by any of the Economy Companies of any shares of the capital
stock of any of the Economy Companies; (F) any amendment of any material
term of any outstanding security of any of the Economy Companies; (G)
declaration, setting aside or payment of any dividend (whether in cash,
securities or other property) or other distribution or payment in respect
of the shares of the capital stock of any of the Economy Companies, except
in respect of satisfaction of intercompany payables and receivables and as
set forth in ss.5(c); or (H) sale or pledge of any stock or other equity
interests owned by any of the Economy Companies;
(iii) (A) amendment or other change in the certificate of incorporation
or bylaws of any of the Economy Companies; (B) merger or consolidation by
any of the Economy Companies with or into any other Person; (C) subdivision
or reclassification of any shares of the capital stock of any of the
Economy Companies; or (D) change or agreement to change in any manner the
rights of the outstanding capital stock of any of the Economy Companies;
(iv) (A) acquisition (including by way of bulk reinsurance, merger,
consolidation or acquisition of stock or assets) by any of the Economy
Companies of any Person or any division thereof or material portion of the
assets thereof; (B) liquidation, dissolution or winding up of, or
disposition of all or substantially all of the assets (including by way of
bulk reinsurance, whether on an indemnity or assumption basis) of any of
the Economy Companies; or (C) organization of any new subsidiary of any of
the Economy Companies;
(v) material change in the policies, practices or principles of any of
the Economy Companies (or the other SPPI Affiliates with respect to the
SPPI Business) with respect to accounting, reserving, hedging, investing or
otherwise engaging in derivatives transactions, underwriting or claims
administration (other than any change required by applicable Law);
(vi) agreement entered into or amended by Seller or any of the Economy
Companies with any labor union or association representing any employee, or
any wage
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or salary increase or bonus (other than in the Ordinary Course of Business)
with respect to any officers, directors or employees of any of the Economy
Companies or, except as contemplated by this Agreement, any SPPI
Transferred Employees, or any adoption or amendment of any stock option,
executive compensation plan, severance pay, 401(k) plan, retirement plan,
employee stock ownership plan or any other employee benefit plan of the
Seller, any Economy Company or any of their Affiliates, other than an
amendment required by Law, with respect to any officers, directors or
employees of any of the Economy Companies or any SPPI Transferred
Employees, or any plan or commitment to do any of the foregoing;
(vii) change, other than in the Ordinary Course of Business, in the
terms for, or policies with respect to, the payment of commissions to any
agent of any of the SPPI Affiliates with respect to the SPPI Business;
(viii) loan made to any SPPI Transferred Employee or agent (other than
agent advances made in the Ordinary Course of Business) of any of the SPPI
Affiliates;
(ix) other contract, agreement or transaction entered into by any of
the Economy Companies that both (A) materially increases the liabilities of
such company and (B) by reason of its size or otherwise, is not in the
Ordinary Course of Business; or
(x) agreement (whether written or oral and express or implied) by any
of the SPPI Affiliates with respect to the SPPI Business to do any of the
foregoing (ii) through (ix).
(g) Legal Compliance.
(i) Each of the SPPI Affiliates is in compliance in all material
respects with all applicable Laws.
(ii) To the Knowledge of the Specified Employees, as of the date hereof
none of the SPPI Affiliates has received any written notice or other
written communication from any Government Entity or arbitrator regarding
any violation by any of the SPPI Affiliates of, or a failure on the part of
any of the SPPI Affiliates to comply in any material respect with, any
Laws.
(h) Tax Matters. Except as set forth in ss.4(h) of the Seller Disclosure
Schedule, (i) Seller or an Affiliate of Seller has filed or caused to be filed,
or will file or cause to be filed on or prior to the Closing Date, all material
Tax Returns (collectively the "Seller Returns"), which are required to be filed
by Seller or such Affiliate with respect to any Affiliated Group that includes
or included the Economy Companies on or prior to the Closing Date; (ii) each of
the Economy Companies has filed or caused to be filed, or will file or cause to
be filed on or prior to the Closing Date, all material Tax Returns (collectively
the "Economy Returns"), which are required to be filed by each of the Economy
Companies on or prior to the Closing Date; (iii) the Seller
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Returns and the Economy Returns are true, complete and accurate in all material
respects; (iv) all material Taxes due and payable by or with respect to any of
the Economy Companies have been, or prior to the Closing Date will be, timely
paid, or to the extent that Taxes relating to any of the Economy Companies are
not due and payable prior to the Closing Date, will be adequately provided for
in Economy's balance sheet as of March 31, 1999 in accordance with the tax
sharing agreement among Seller and the Economy Companies; (v) there is no claim,
audit, action, suit, proceeding or investigation now pending or, to the
Knowledge of the Specified Employees, threatened against or with respect to any
of the Economy Companies with respect to any Tax for which any of the Economy
Companies could be liable; (vi) none of the Economy Companies has granted any
extension or waiver of the statute of limitations period applicable to any
Economy Return, which period (after giving effect to such extension or waiver)
has not yet expired; (vii) none of the Economy Companies is currently under any
obligation to pay any amounts as a result of being party to any tax sharing
agreement other than the tax sharing agreement among Seller and any of the
Economy Companies; (viii) to the Knowledge of the Specified Employees, there are
no Liens for Taxes upon the assets of any of the Economy Companies; (ix) the
amount of unamortized intangible assets of the Economy Companies arising from
the 1993 purchase of the Economy Companies which are available for future
amortization pursuant to section 197 of the Code will not be less than $55.0
million as of the Closing Date (assuming that the Closing Date occurs prior to
December 31, 1999), and the annual amortization of such intangibles for taxable
years beginning after December 31, 1999 will be not more than $7.0 million per
year; and (x) the Economy Companies (A) have complied in all material respects
with the provisions of the Code relating to the withholding and payment of
Taxes, including, without limitation, the withholding and reporting requirements
under Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049,
and any similar provisions under any other laws; (B) have, within the time and
in the manner prescribed by law, withheld from employee wages and paid over to
the proper governmental authorities all amounts required; and (C) have complied
in all material respects with the requirements for classifying persons who
provide services to the Economy Companies as employees for purposes of such tax
withholding requirements. The exclusive remedy for breaches of any
representations and warranties contained in this ss.4(h) shall be pursuant to
the indemnification provisions of ss.6(e) hereof.
(i) Certain Employee Matters. ss.4(i)(i) of the Seller Disclosure Schedule
contains a true and complete list of each employee benefit plan within the
meaning of ss.3(3) of ERISA and all other employee benefits plans, contracts,
agreements, practices, policies or arrangements, whether or not subject to
ERISA, maintained or contributed to for the Business Employees (the "Plans").
Seller has made available or delivered to Buyer an accurate and complete copy of
each such Plan and any amendments thereto, and to the extent applicable, of any
related trust agreement or other funding instrument, the most recent
determination letter if applicable, any summary plan description and summary of
material modification, and for the plan years most recently completed prior to
the date hereof, the Form 5500 and related schedules, audited financial
statements and actuarial valuation reports. Each Plan has been maintained in all
material respects in accordance with its terms and in compliance with the
applicable requirements of the Code, ERISA and other applicable law. Each Plan
which is an "employee pension benefit plan" within the meaning of ss.3(2) of
ERISA ("Pension Plan") and which is
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intended to be qualified under ss.401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service and none of Seller or any
of the Economy Companies is aware of any circumstances likely to result in
revocation of any such favorable determination letter. Neither Seller, the SPPI
Entities nor any of the Economy Companies has incurred, nor does any of them
expect to incur, any liability under Subtitle C or D of Title IV of ERISA (other
than for PBGC premiums which have been paid in the ordinary course), or for
failure to meet the requirements of ss.412 of the Code with respect to any
Pension Plan which is covered by Title IV of ERISA or with respect to any
single-employer plan of an ERISA Affiliate. Neither Seller, the SPPI Entities
nor any of the Economy Companies has an obligation to contribute to, nor has any
of them incurred or expect to incur, any withdrawal liability (whether or not
based on the contribution of an ERISA Affiliate) with respect to a multiemployer
plan under Subtitle E of Title IV of ERISA which has not been satisfied in full.
Neither Seller, the SPPI Entities nor any of the Economy Companies has provided,
or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to ss.401(a)(29) of the
Code. Within the 12-month period prior to the date hereof, no reportable event
(within the meaning of Section 4043 of ERISA) for which the reporting
requirement has not been waived has been required to be filed with respect to
any Pension Plan which would result in a material liability to any of the
Economy Companies. Except as disclosed in ss.4(i)(ii) of the Seller Disclosure
Schedule, there are no actions, suits or proceedings pending against any of
Seller or any of the Economy Companies brought by or on behalf of any Business
Employee relating to any Plan as of the date of this Agreement. There is no
audit, investigation or proceeding pending or, to the Knowledge of the Specified
Employees, threatened involving any Plan before the Internal Revenue Service,
the United States Department of Labor or any other governmental authority.
Neither Seller, the SPPI Entities nor any of the Economy Companies has engaged
in a transaction with respect to any Plan that, assuming the taxable period of
such transaction expired as of the date hereof, could subject any of the Economy
Companies to a tax or penalty imposed by either ss.4975 of the Code or ss.502(i)
of ERISA in an amount which would be material. Except as disclosed in
ss.4(i)(iii) of the Seller Disclosure Schedule or as set forth in ss.6(d) of
this Agreement, the consummation of the transactions contemplated by this
Agreement will not, either by itself or by reason of an associated event, (i)
give rise to any liability for severance pay, unemployment compensation,
termination pay, relocation expenses, subsidized pension or other retirement
benefits to any Business Employee (or their beneficiaries), or (ii) accelerate
the time of funding, payment or vesting or increase the amount of compensation
or benefits due to any to any Business Employee (or their beneficiaries).
(j) Licenses and Permits. Each of the SPPI Affiliates has such
certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations and clearances from appropriate insurance and other Government
Entities ("Licenses") as are necessary to conduct the SPPI Business in which it
is engaged, such Licenses are valid and in full force and effect and such
Licenses are sufficient for the ownership and conduct of such SPPI Business,
subject (except in the case of state insurance licenses) to such exceptions as
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the SPPI Business taken as a whole. ss.4(j) of the
Seller Disclosure Schedule lists, and Seller has furnished or made available to
Buyer copies of, all Licenses of the SPPI Affiliates in any state. None of the
SPPI
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Affiliates have received written notice (or, to the Knowledge of the Specified
Employees, any other communication) of any violation in respect of any such
License (other than alleged violations which have been resolved) and no
proceeding is pending (or, to the Knowledge of the Specified Employees,
threatened) to suspend, revoke or limit any such License. Each of the SPPI
Affiliates is in compliance in all material respects with its obligations under
such Licenses. None of the SPPI Affiliates is operating under a voluntary
agreement with the insurance regulatory authorities of any state in which it now
holds a current Certificate of Authority which restricts its authority to do
business authorized on such Certificate of Authority or which could adversely
impact the consummation of the transactions contemplated hereby.
(k) Contracts. ss.4(k) of the Seller Disclosure Schedule lists all of the
following written contracts to which any of the Economy Companies is a party:
(i) contracts the performance of which is expected to involve
consideration in excess of $500,000 (other than (A) insurance, reinsurance
or indemnity policies, fidelity bonds, surety bonds or similar contracts or
undertakings issued or entered into by the Economy Companies, (B)
commission and agency agreements and (C) contracts for the license or use
of Intellectual Property);
(ii) contracts which restrict in any material respect or contain
material limitations on the ability of any of the Economy Companies to
freely conduct business in the United States;
(iii) contracts which contain any provision or restriction limiting in
any material respect the ability of the Economy Companies to sell any
products or services of any Person or obtain any products or services from
any Person;
(iv) contracts under which any of the Economy Companies have borrowed
money or guaranteed borrowings of money, including any not reflected on
Economy's Balance Sheet;
(v) leases or subleases of real property;
(vi) material contracts with Seller or any of its Affiliates (other
than the Economy Companies);
(vii) contracts pursuant to which any Lien is placed or imposed on any
asset of any of the Economy Companies;
(viii) partnership or joint venture agreements;
(ix) any material indemnification agreement or guarantee;
(x) any material contract not terminable upon 90 days written notice;
or
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(xi) material contracts, including without limitation any loan
agreements with employees of any of the Economy Companies or other Business
Employees other than the Plans or any labor union or association
representing employees.
Each such contract is valid and in full force and effect and is enforceable by
the parties thereto, and none of the Economy Companies nor, to the Knowledge of
the Specified Employees, any other party is in breach of or default (including
after notice or upon the expiration of applicable grace or cure periods) under
any such contract, subject to such exceptions as would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on the
SPPI Business taken as a whole. Seller has made available to Buyer a copy of
each contract and instrument listed in ss.4(k) of the Seller Disclosure
Schedule.
(l) Owned Real Property. ss.4(l) of the Seller Disclosure Schedule sets
forth a complete and correct list of all real property owned by each of the
Economy Companies (together with all improvements or fixtures owned by each of
the Economy Companies and located thereon, the "Owned Real Property") and a
complete and correct list of all easements appurtenant to the Owned Real
Property. One of the Economy Companies, as the case may be, has good and
marketable fee simple title to the Owned Real Property free and clear of any
Lien. There are no outstanding options or rights of first refusal to purchase
the Owned Real Property, or any portion thereof or interest therein.
(m) Actions and Proceedings. ss.4(m) of the Seller Disclosure Schedule sets
forth each instance in which any of the SPPI Affiliates or any of the property
or assets of any of the SPPI Affiliates (i) is subject to any outstanding
injunction, judgment, order, award, decree, or ruling as of the date of this
Agreement or (ii) is a party to any action, suit, proceeding, arbitration,
mediation, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or arbitration panel, including without limitation any claims of
bad faith against any of the SPPI Affiliates as well as class actions, employee
or Alabama litigation related to the Economy Companies or SPPI Entities as to
the SPPI Business ("Actions") as of the date of this Agreement. As of the date
of this Agreement, no Actions have been threatened in writing, or to the
Knowledge of the Specified Employees, by other means, against any of the SPPI
Affiliates (or any of the properties of the SPPI Affiliates), other than (i)
Actions which would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Economy Companies or the SPPI
Business taken as a whole and (ii) Actions that involve or relate to a claim or
dispute under any insurance, reinsurance or indemnity policy, fidelity bond,
surety bond or similar contract or undertaking issued or entered into by any of
the SPPI Affiliates which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the SPPI Business
taken as a whole.
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(n) Intellectual Property.
(i) ss.4(n) of the Seller Disclosure Schedule identifies the following
intellectual property used by Seller in connection with the SPPI Business
or owned or used by any of the SPPI Affiliates in connection with the SPPI
Business: (A) patents and pending patent applications; (B) trademark,
service mark and trade name registrations and applications therefor; (C)
material unregistered trademarks, service marks and trade names; (D)
copyright registrations and applications therefor; (E) material
unregistered copyrights and computer software (including related codes and
documentation) (other than commercially available computer software and
related documents); and (F) licenses and similar agreements for the use of
any material item of intellectual property (including, without limitation,
patents, unpatented inventions and technology, trademarks, service marks
and trade names, copyrights and copyrightable works, computer software,
know-how and trade secrets to which Seller or any of the SPPI Affiliates is
a party, either as licensee or licensor (other than licenses for the use of
commercially available computer software and related documentation).
(ii) For purposes hereof: "Intellectual Property" shall mean and
include the items of intellectual property described in clauses (A) through
(F) of ss.4(n)(i) hereof, and all U.S. or foreign unpatented inventions and
technology, know-how, trade secrets and other intellectual property rights;
and "SPPI IP" shall mean and include all Intellectual Property owned or
used by Seller in connection with the SPPI Business or owned or used by any
of the SPPI Affiliates in connection with the SPPI Business.
(iii) To the Knowledge of the Specified Employees: (A) the Seller or
the relevant SPPI Affiliate is the sole owner, free and clear of any lien
or encumbrance, of, or has a valid license, without the payment of any
royalty except with respect to off-the-shelf software and otherwise on
commercially reasonable terms, to, all of the SPPI IP, and such SPPI IP
includes all of the Intellectual Property currently used for the conduct of
the SPPI Business as now conducted; (B) the rights of Seller or the
applicable SPPI Affiliate in the SPPI IP are valid and enforceable; (C) no
demand, claim or notice from any Person in respect of the SPPI IP which
challenges or threatens to challenge the validity of, or the rights of
Seller or the applicable SPPI Affiliate in, any such SPPI IP has been made
or received, and none of Seller nor any SPPI Affiliate knows of any valid
basis for any such challenge; (D) neither the Seller nor any SPPI Affiliate
is in violation or infringement of, and has not violated or infringed, any
Intellectual Property of any other Person in connection with the conduct of
the SPPI Business; (E) no claim by any third party contesting the validity,
enforceability, use or ownership of any of such Intellectual Property has
been made or is currently outstanding; (F) none of the SPPI Affiliates is
infringing or misappropriating any Intellectual Property rights of any
third party in connection with the SPPI Business; and (G) no SPPI Affiliate
has granted licenses to third parties with respect to "PAK II" or "Premier
Homeowners Policy".
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(iv) The Seller Y2K Plan is designed to address the inability of any
computer system (including hardware and software) being transferred to
Buyer with the Economy Companies or as part of the SPPI Assets to recognize
the year 2000.
(o) Reinsurance and Coinsurance. ss.4(o)(i) of the Seller Disclosure
Schedule contains a list of all reinsurance or coinsurance treaties or
agreements, including retrocessional agreements but excluding reinsurance or
coinsurance unrelated to the SPPI Business, to which any of the SPPI Affiliates
is a party or under which it has any existing rights, obligations or
liabilities, and ss.4(o)(ii) of the Seller Disclosure Schedule contains a list
of all reinsurance treaties or agreements, including facultative certificates,
between any Economy Company and Seller or any of Seller's Affiliates other than
the Economy Companies (the "St. Paul Reinsurance Agreements"). Assuming no
default by any party other than any of the SPPI Affiliates, all such treaties or
agreements set forth in ss.4(o)(i) and ss.4(o)(ii) of the Seller Disclosure
Schedule are in full force and effect to the respective dates noted thereon;
none of the SPPI Affiliates nor, to the Knowledge of the Specified Employees,
any other party thereto is in default in any material respect as to any
provision thereof; and to the Knowledge of the Specified Employees, no such
agreement contains any provision providing that the other party thereto may
terminate such agreement by reason of the transactions contemplated by this
Agreement.
(p) Agents and Brokers.
(i) Set forth in ss.4(p)(i) to the Seller Disclosure Schedule is a list
of each of the SPPI Affiliates' agents, managing general agencies and
brokers as of March 31, 1999 ("SPPI Agents"), and the written premiums,
contract commissions and total amounts of commissions paid to each such
SPPI Agent during the year ended December 31, 1998 and the principal
contact and address information for each such SPPI Agent. Except as set
forth in ss.4(p) of the Seller Disclosure Schedule, each such SPPI Agent
has binding authority on behalf of the SPPI Affiliates subject to specified
dollar limits. Each of the contracts and other agreements between an SPPI
Affiliate and its respective SPPI Agents with respect to the SPPI Business
is valid, binding and in full force and effect in accordance with its
terms, assuming no default by any such SPPI Agent under any such contract
or agreement and except for such contracts the failure of which to be
valid, binding and in full force and effect would not have a Material
Adverse Effect on the SPPI Business taken as a whole. None of the Economy
Companies is in default in any material respect with respect to any such
contract or other agreement and no such contract or other agreement
contains any provision providing that the other party thereto may terminate
the same by reason of the transactions contemplated by this Agreement or
any other provision which would be altered or otherwise become applicable
by reason of such transactions, in each such case, subject to such
exceptions as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the SPPI Business taken as a
whole. No insurance agent or group of related agents accounted for more
than 2% of the gross premium income of the SPPI Affiliates combined with
respect to the SPPI Business for the year ended December 31, 1998.
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(ii) All SPPI Agents have entered into agency agreements with one or
more of the SPPI Affiliates in the form attached hereto as Exhibit I, and
such SPPI Agents have entered into no other material agreements with any of
the SPPI Affiliates with respect to the SPPI Business.
(q) Actuarial Reports. Seller has delivered or made available to Buyer a
true and complete copy of each regularly prepared annual actuarial report
prepared by Seller's internal actuaries with respect to the Economy Companies
with respect to the year 1998.
(r) IRIS Ratios. Seller has delivered or made available to Buyer true and
complete copies of all analyses, reports and other data submitted by the Economy
Companies to the National Association of Insurance Commissioners relating to
IRIS ratios. ss.4(r) of the Seller Disclosure Schedule sets forth a list of the
Economy Companies' IRIS ratios for the years 1996, 1997 and 1998.
(s) Pools and Facility Arrangements; Service Agreements. ss.4(s)(i) of the
Seller Disclosure Schedule sets forth a list of all pools and facility
arrangements (other than "FAIR plans" or similar government-mandated
arrangements) to which any of the Economy Companies have been a party at any
time from January 1, 1997 to the date of this Agreement. ss.4(s)(ii) of the
Seller Disclosure Schedule sets forth a list of all material agreements
providing for insurance services to which any of the Economy Companies or any of
the SPPI Entities as to the SPPI Business are a party as of the date of this
Agreement.
(t) Bank Accounts. ss.4(t) to the Seller Disclosure Schedule sets forth a
list of the bank names, locations and account numbers of all bank and safe
deposit box accounts of each of the Economy Companies including any custodial
accounts for securities owned by any of the Economy Companies and the names of
all persons authorized to draw thereon or to have access thereto.
(u) Environmental Matters. (A) To the Knowledge of the Specified Employees
as of the date of this Agreement, and (B) subject to such exceptions as would
not reasonably be expected to have a Material Adverse Effect on the SPPI
Business taken as a whole:
(i) the Economy Companies have complied at all times with all
applicable Environmental Laws;
(ii) no real property currently or formerly owned or operated by any of
the Economy Companies has been contaminated with any Hazardous Substances
during or prior to their ownership or operation thereof and requiring
remediation under any applicable Environmental Law;
(iii) the Economy Companies have not received any claim for liability
related to any off-site waste disposal or contamination of any property
owned or operated by a third party;
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(iv) the Economy Companies have not received any claims or notices
alleging responsibility or liability under any Environmental Law;
(v) there are no releases of Hazardous Substances or violations of
Environmental Laws involving the Economy Companies that would reasonably be
expected to result in any claims, liabilities or costs or restrictions on
the ownership, use or transfer of, any property in connection with
Hazardous Substances or any Environmental Law; and
(vi) none of the Economy Companies have participated in the management
or operational affairs of any entity or facility in which such Economy
Company either has an equity investment or holds indicia of ownership
primarily to protect a security interest, that would cause them to be
liable under any 42. U.S.C. sections 9607 and 9601(20) or under any other
Environmental Law for contamination by Hazardous Substances caused by such
entity or facility, or present at any location owned or operated by such
entity or facility.
Notwithstanding the foregoing, the representation and warranty contained in this
ss.4(u) constitutes the sole representation of the Seller with respect to any
Environmental Law, but does not apply to, and does not cover, any claims,
liabilities, costs or expenses relating to any insurance, reinsurance or
indemnity policy, fidelity bond, surety bond or similar contract or undertaking
issued or entered into by any of the SPPI Affiliates or claims by policyholders
thereunder. As used herein, "Environmental Law" means any law, regulation,
order, decree, binding opinion having the force of law, common law or written
agency policy, guidance or requirement having the force of law relating to the
protection of the environment, hazardous or toxic materials or wastes or human
health and safety as it relates to Hazardous Substances. "Hazardous Substance"
means any substance that is listed, classified or regulated pursuant to any
Environmental Law including but not limited to any petroleum products, asbestos,
radon, polychlorinated biphenyls or any mixture or material containing such
substances.
(v) Insurance Business. All policy forms issued by the SPPI Affiliates, and
all amendments, applications, brochures, illustrations and certificates
pertaining thereto have, where required by applicable Law, been approved by all
applicable Government Entities or filed with and not objected to by such
Government Entities within the period provided by applicable Law for objection,
subject to such exceptions as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the SPPI Business
taken as a whole. All such forms comply in all material respects with, and have
been administered in all material respects in accordance with, applicable Law.
Any rates of any of the SPPI Affiliates which are required to be filed with or
approved by any Government Entity have been so filed or approved and the rates
used by any of the SPPI Affiliates conform in all material respects thereto. Any
contract or agreement to which any of the SPPI Affiliates is a party and which
is required to be filed with or approved by any Government Entity has been so
filed or approved.
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(w) Employee Relations. None of the Economy Companies, the Seller nor any
SPPI Entity is a party to or bound by any collective bargaining agreement or any
other agreement with respect to employees engaged in the SPPI Business with any
labor union or association representing employees engaged in the SPPI Business,
and no such agreement or contract is currently being negotiated by any of the
Economy Companies, Seller or other SPPI Entities. ss.4(w) of the Seller
Disclosure Schedule describes the status of all union organizing efforts that,
to the Knowledge of the Specified Employees, are now being conducted in respect
of any of the Economy Companies or other SPPI Entities. To the Knowledge of the
Specified Employees, there is no strike, picket, work stoppage or work slowdown
threatened against any of the Economy Companies. None of the Economy Companies
is involved in or threatened with any labor dispute, grievance, unfair labor
practice charge or litigation relating to labor matters involving any employees
engaged in the SPPI Business. The Economy Companies are in material compliance
with all laws relating to labor and employment including, without limitation,
laws relating to fair employment practices, employment discrimination, wage and
hour, safety and health, labor relations and terms and conditions of employment.
None of the Economy Companies has experienced within the past 12 months a "plant
closing" or "mass layoff" within the meaning of the Worker Adjustment and
Retraining Notification Act, 29 U.S.C. ss.ss.2101 et seq.
(x) Insurance. ss.4(x) of the Seller Disclosure Schedule sets forth a list
of all policies and binders of fire, liability, product liability, workers'
compensation, vehicular and other insurance covering any of the Economy
Companies as of the date of this Agreement, other than (a) reinsurance and
coinsurance treaties, and agreements listed on ss.4(k) of the Seller Disclosure
Schedule, and (b) policies in respect of which any of the Economy Companies is
an insured mortgagee or lessor. The policies and binders listed in ss.4(x) of
the Seller Disclosure Schedule are valid and enforceable in accordance with
their terms, are in full force and effect (assuming no default by any such
insurer).
(y) Books and Records. The Books and Records relating to the SPPI Business
are true, complete and correct in all material respects. Seller has provided to
Buyer or made available to Buyer on or prior to the date hereof copies of all
written policies, procedures and guidelines relating to the SPPI Business,
including all underwriting policies, procedures and guidelines, other than those
written policies, procedures and guidelines which are not material to the
conduct or operation of the SPPI Business.
5. PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the date
hereof and the Closing Date.
(a) General. Each Party shall use its reasonable best efforts to take all
actions and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by the Transaction
Documents to which it is a party.
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(b) Regulatory Approvals. Each Party shall use its reasonable best efforts,
and shall reasonably cooperate with each other in such efforts, to obtain the
approvals of all regulatory authorities required to be obtained by Seller or
Buyer or by any Affiliate of Seller or Buyer in order to consummate the
transactions contemplated by the Transaction Documents. Seller and Buyer shall
make and cause their respective subsidiaries to make all necessary filings as
soon as practicable, including, without limitation, those required by the
Hart-Scott-Rodino Act and applicable insurance laws in order to facilitate
prompt consummation of the transactions contemplated by the Transaction
Documents. Each such Party hereby covenants to cooperate with the other such
Party to the extent reasonably necessary to assist in making reasonable
supplemental presentations to the Federal Trade Commission or the Antitrust
Division of the Department of Justice, and if requested by either of them, to
promptly amend or furnish additional information thereunder. Seller and Buyer
shall use reasonable best efforts to provide such information and communications
to Government Entities as such Government Entities may reasonably request. Each
Party shall provide to the other Party copies of all non-confidential portions
of applications filed or submitted with Government Entities in connection with
this Agreement and shall keep the other Party apprised of the status of matters
relating to completion of the transactions contemplated by the Transaction
Documents.
(c) Operation of Business. Prior to the Closing, except (i) as consented to
by Buyer in writing, (ii) for the repayment by St. Paul of loans from Economy,
(iii) that Seller's internal actuaries will undertake a review of the Economy
Companies' reserves shortly prior to the Closing Date and Economy will make such
adjustments to the reserves as such actuaries in good faith deem appropriate to
reflect the most recent information then available (it being understood that
this process may result in a strengthening or releasing of reserves, and that
any release of redundant reserves is expected to involve a dividend by Economy
in an amount up to the amount of the redundancy to Seller), (iv) for an
adjustment to Economy's reserves to ensure that the ULAE reserves attributable
to the portion of the SPPI Business conducted by Economy is equal to 6.0% of the
aggregate statutory loss reserves and allocated loss adjustment expense
reserves, and (v) as otherwise expressly contemplated in the Transaction
Documents, Seller shall, and covenants and agrees to cause each of the SPPI
Affiliates to, conduct the businesses of the SPPI Affiliates (including, without
limitation, underwriting, accounting, loss reserving practices and procedures
and investment practices and procedures) only in the Ordinary Course of
Business, to confer with Buyer concerning operational matters of a material
nature and to use their respective reasonable best efforts to preserve the
current business organization of each of the SPPI Affiliates, keep available the
services of the current officers, employees, agents, brokers and managers of
each of the SPPI Affiliates, and maintain the relationships and goodwill with
policyholders, suppliers, landlords, creditors, employees, agents, brokers,
managers and others having business relationships with any of the SPPI
Affiliates; it being understood that prior to the Closing Date, Seller shall
have transferred to an Economy Company (A) those employees who are primarily
dedicated to the SPPI Business and (B) a number of shared service employees
whose duties relate to, but are not limited to, the SPPI Business, necessary for
the conduct of the SPPI Business, selected in good faith by Seller, who as of
the date hereof are actively employed (within the meaning of ss.6(d)(i)), which
shall aggregate to approximately 1,700 employees (the "SPPI Transferred
Employees"). Prior to the Closing, except as consented to by Buyer in
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writing, and except as otherwise expressly contemplated in the Transaction
Documents, Seller shall, and covenants and agrees to, cause each of the SPPI
Affiliates not to make any material changes in their underwriting, account and
loss reserving practices and procedures and investment practices and procedures
with respect to the SPPI Business, and to maintain the relationships and
goodwill with policyholders, agents, brokers and others having a business
relationship with such SPPI Affiliate in respect of the SPPI Business. Prior to
the Closing, Seller covenants and agrees to cause each of the SPPI Affiliates to
use their reasonable best efforts to maintain the existing employment
relationships with the Business Employees. Without limiting the generality of
the foregoing, prior to the Closing, Seller shall not with respect to any of the
SPPI Affiliates, and covenants and agrees to cause the SPPI Affiliates not to:
(A) undertake any of the actions specified in clauses (ii) through (x)
of ss.4(f);
(B) terminate or amend any of the agreements set forth in ss.5(c)(B) of
the Seller Disclosure Schedule;
(C) induce, encourage or solicit for employment or employ with Seller
or its Affiliates (other than the Economy Companies) any Business
Employees, except as set forth in ss.5(c)(C) of the Seller Disclosure
Schedule;
(D) grant any powers of attorney; or
(E) enter into any agreement which, if existing on the date hereof,
would need to be disclosed on ss.4(k) of the Seller Disclosure Schedule.
(d) Corporate Examinations and Investigations; Confidentiality. Seller
will, and will cause each of the SPPI Affiliates and each of their respective
representatives to (i) permit Buyer and its accountants, counsel and other
authorized representatives of Buyer to have reasonable access during normal
business hours, during the period prior to Closing, and in a manner so as not to
unreasonably interfere with the normal business operations of the SPPI
Affiliates, to business operations, premises, properties, personnel and books of
or pertaining to the SPPI Affiliates, and tax records of the Economy Companies,
(ii) furnish Buyer and its accountants, counsel and other authorized
representatives with such additional financial, technical, operating, and other
data and information as Buyer may reasonably request, (iii) otherwise cooperate,
and cause its and their officers and employees to cooperate fully, with the
investigation by Buyer, and its accountants, counsel and other authorized
representatives, of the SPPI Affiliates in a manner so as not to unreasonably
interfere with the normal business operations of the SPPI Affiliates and (iv)
permit Buyer and its independent certified public accountants to examine all
accounting records and working papers pertaining to Economy's consolidated
balance sheet as of December 31, 1998 and as of the end of any subsequent
calendar quarter preceding the Closing Date and Statutory Statements for the
year ended December 31, 1998 and for any subsequent calendar quarter preceding
the Closing Date in a manner so as not to unreasonably interfere with the normal
business operations of Seller or the SPPI Affiliates. No investigation pursuant
to this ss.5(d) shall affect or be deemed to modify any representation or
warranty made by Seller. All
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requests for information made pursuant to this ss.5(d) shall be directed to an
executive officer of Seller or such other persons as may be designated by
Seller. Buyer will treat and hold as such any Confidential Information it
receives from Seller and the SPPI Affiliates in the course of the reviews
contemplated by this ss.5(d), in accordance with the terms of the
Confidentiality Agreement, dated May 27, 1999 between Buyer and St. Paul (the
"Confidentiality Agreement"). Seller agrees to hold any information so obtained
in confidence to the extent required by, and in accordance with, the provisions
of the Confidentiality Agreement as if Seller were the party obligated under
such agreement.
(e) Notice of Developments. Each Party shall as promptly as reasonably
practicable give notice to the other Party of (i) any fact or condition that
could (except as expressly contemplated herein) cause or constitute a breach of
any of its representations and warranties in ss.3 or ss.4 above and (ii) any
notice or other communication from any third party alleging that the consent of
such third party is or may be required in connection with the transactions
contemplated by the Transaction Documents.
(f) Reinsurance Matters. Seller agrees, and agrees to cause Economy, to
execute at or prior to the Closing the Commutation Agreement, with such changes
as the Parties may hereafter mutually agree. Buyer agrees to cause Economy to
take such actions, following the Closing, as may be required by such agreement
or as reasonably requested by Seller in relation thereto.
(g) Other Agreements. Buyer agrees to execute, and Seller agrees to
execute, and each Party agrees to cause its respective affected Affiliates to
execute, at or prior to the Closing Date, each of the Transaction Documents to
which they are a party in substantially the forms attached hereto, with such
changes as the Parties may hereafter mutually agree, and to execute such other
agreements as may be agreed to by the Parties.
(h) Additional Financial Statements. As soon as reasonably practicable
after they become available in the Ordinary Course of Business, Seller shall
furnish to Buyer any regularly prepared financial statements or Statutory
Statements of any of the Economy Companies with respect to any period ending
subsequent to March 31, 1999 and prior to the Closing Date.
(i) Pre-Closing Maintenance of Insurance. From the date hereof through the
Closing Date, Seller shall cause each of the SPPI Affiliates to maintain in
force (including necessary renewals thereof) the insurance obtained directly in
its name and covering it on the date hereof, except to the extent that such
insurance may be replaced with materially equivalent policies appropriate to
insure the assets, properties and business of the SPPI Affiliates to the same
extent as currently insured.
(j) Preservation of Licenses. From the date hereof up to the Closing Date,
Seller shall cause the SPPI Affiliates to use reasonable best efforts to
preserve their respective Licenses in full force and effect.
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(k) Intercompany Accounts. At least fifteen Business Days prior to the
Closing, Seller shall prepare and deliver to Buyer a statement setting out in
reasonable detail the calculation of all intercompany accounts (other than
accounts relating to or arising under reinsurance contracts) between any of the
Economy Companies, on the one hand, and Seller or any of its other Affiliates
(other than the Economy Companies), on the other hand. On the Closing Date,
Seller shall prepare and deliver to Buyer a statement setting forth any changes
in such accounts from the statement delivered pursuant to the preceding
sentence.
(l) Provision of Services to Seller. Prior to the Closing, the Parties will
negotiate in good faith, and at the Closing the Parties will enter into, a
services agreement, substantially in the form attached hereto as Exhibit E-2
(the "Buyer Services Agreement").
(m) Year 2000 Matters.
(i) Seller will continue to develop and actively execute its Seller Y2K
Plan as contemplated by ss.3(a)(vii).
(ii) Buyer will continue to develop and actively execute its Buyer Y2K
Plan as contemplated by ss.3(b)(viii).
(n) Florida Hurricane Catastrophe Fund. Seller will maintain its current
level of participation in the Florida Hurricane Catastrophe Fund.
(o) Hurricane Catastrophe Records. Seller shall provide to Buyer, within
five (5) Business Days of this Agreement, the data files that contain personal
lines information that is submitted by Seller to Risk Management Solutions, Inc.
for hurricane and earthquake catastrophe modeling.
(p) Cooperation. Upon the terms and subject to the conditions and other
agreements set forth in this Agreement, each Party agrees to use its reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, and to assist and cooperate with the other Party in doing, all things
necessary, proper or advisable to consummate and make effective, as
expeditiously as practicable, the transactions contemplated by the Transaction
Documents and the underwriting of new and renewal policies of SPPI Business by
the Buyer. Without limiting the generality of the foregoing: (i) Seller shall
allow Buyer reasonable access to agents and vendors with respect to the SPPI
Business, shall participate with Buyer in joint communications with
policyholders, agents and vendors (in respect of such business and the
transactions contemplated hereby and, in the case of agents, the arrangements
with respect to incentive plans referred to in ss.6(i)), as well as state
insurance departments having jurisdiction over the Economy Companies or the SPPI
Business, and shall allow Buyer reasonable access to reinsurance records of
Seller and its Affiliates with respect to the SPPI Business; (ii) Seller shall
provide Buyer as soon as practicable after the date hereof with information
concerning the Business Employees with respect to the date of hire, title and
current rate of compensation, including bonus (if any) of each such employee;
and (iii) Buyer and Seller will use their reasonable best efforts to ensure
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that all material SPPI IP licensed to Seller or an SPPI Affiliate is transferred
or licensed to Buyer or a Buyer Affiliate. To the extent satisfactory transfers
or license agreements for material SPPI IP cannot be arranged, the Parties will
work in good faith to ensure that satisfactory alternative arrangements are made
to ensure that Buyer has access to alternative but comparable Intellectual
Property.
Each of Seller and Buyer agree that it or one or more of its Affiliates
will enter into a license agreement effective as of the Closing granting Buyer
and its Affiliates the right to use certain of Seller's and its Affiliates'
corporate names and acronyms (including the "St. Paul" and "USF&G" names or
derivatives thereof) in connection with, and solely incidental to, new issuances
and renewals of SPPI Policies by the SPPI Entities as contemplated by the
Transaction Documents.
6. POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
(a) General; Confidentiality. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each Party will take such further action (including the prompt
furnishing, execution, acknowledgment and delivery of any further assurances,
instruments and documents). Each Party will keep, and will cause its Affiliates
(including its agents, representatives and employees) to keep, confidential any
Confidential Information of the other Party that it receives in the course of
performing its obligations under this Agreement and will not, without the other
Party's written consent, disclose any of such Confidential Information to any
third party, or use any of such Confidential Information except in connection
with performing its obligations hereunder. Notwithstanding the foregoing, to the
extent that a Party may become legally compelled, in connection with its
financial, regulatory or tax reporting, its disclosure obligations under
applicable securities laws or otherwise, such Party may disclose such
information if such Party shall first have used reasonable best efforts to, and
if practicable, shall have afforded the other Party an opportunity to obtain an
appropriate protective order or other assurance of confidential treatment for
the information required to be disclosed, in each case to the reasonable
satisfaction of such other Party. Upon termination of this Agreement, each Party
will return, and will cause its Affiliates (agents, representatives and
employees, as applicable) to return, to the other party all tangible embodiments
(including all copies) of the Confidential Information which are in its
respective possession.
(b) Cooperation. Upon the terms and subject to the conditions and other
agreements set forth in this Agreement, each Party agrees to use its reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, and to assist and cooperate with the other Party in doing, all things
necessary, proper or advisable to consummate and make effective, as
expeditiously as practicable, the transactions contemplated by the Transaction
Documents. Buyer and Seller will use their reasonable best efforts to ensure
that all material SPPI IP licensed to Seller or an SPPI Affiliate is transferred
or licensed to Buyer or a Buyer Affiliate. To the
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extent satisfactory transfers or license agreements for material SPPI IP cannot
be arranged, the Parties will work in good faith to ensure that satisfactory
alternative arrangements are made to ensure that Buyer has access to alternative
but comparable Intellectual Property.
(c) Transition to Buyer Policy Forms. (i) Commencing on the Closing Date
and for a period of three years thereafter, as reasonably requested by Buyer,
Seller shall issue or renew contracts of the type included in the SPPI Business,
provided, that the Seller shall not be required to issue contracts pursuant to
this ss.6(c) in any state if (A) Buyer has completed the modification of systems
used principally in the conduct of the SPPI Business to permit such systems to
input, process and output information in accordance with Buyer's business
practices and (B) Buyer has obtained insurance department approval of its own
rates, forms and rules in such state. Buyer shall use its reasonable best
efforts, with the assistance and cooperation of Seller, to complete the systems
modifications and to obtain the policy rates, forms and rules approvals referred
to in the previous sentence as soon as is reasonably practicable after the
Closing Date.
(d) Employees and Employee Benefits.
(i) For purposes of this Agreement, "Business Employees" shall mean the
SPPI Transferred Employees and the employees who are actively employed by
the Economy Companies on the Closing Date, as listed in ss.6(d)(i) of the
Seller Disclosure Schedule. For purposes of this Agreement, "actively
employed" shall mean employees who as of the Closing Date are currently
performing personal services primarily in the conduct of the SPPI Business,
including employees on temporary leaves of absences and short-term
disability who are reasonably expected to return to active employment, but
excluding former employees, employees on long-term disability and other
employees on leave who are not expected to return to active employment; it
being understood that any employee set forth in ss.6(d)(i) of the Seller
Disclosure Schedule who is on long-term disability as of the Closing Date
and who returns to active employment with Buyer or any of its Affiliates,
within the six-month period following the Closing Date, shall be considered
a "Business Employee" as of the date of such employee's return to active
employment for all purposes hereunder. For at least one year following the
Closing Date, Buyer shall provide or shall cause its Affiliates to provide
to the Business Employees (i) the same or greater base salaries and wages
as in effect prior to the Closing Date (other than reductions based on a
change in responsibilities, position or hours), and (ii) employee benefits
on a basis no less favorable than those provided to similarly situated
employees of Buyer and its Affiliates which are engaged in personal
insurance operations. Notwithstanding the foregoing, during the one-year
period commencing on the Closing Date, Buyer shall provide the Business
Employees with severance benefits that are at least equal to the schedule
of severance benefits set forth in ss.6(d)(ii) of the Seller Disclosure
Schedule. Seller shall be responsible for all accrued salary, wages and
bonuses with respect to the Business Employees, as of the Closing Date, but
Seller shall be entitled to receive payment from the Economy Companies of
any intercompany debt which is outstanding as of the Closing Date, set
forth in ss.6(d)(i) of the Seller Disclosure Schedule, in respect of such
items paid by Seller on or prior to the Closing Date.
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Notwithstanding the foregoing or anything elsewhere in this ss.6(d),
nothing in this Agreement shall be construed as limiting in any way the
right of Buyer or its Affiliates to terminate the employment of any
Business Employee or to modify, amend or terminate any employee benefit
plan.
(ii) Effective on the later of the Closing Date or the expiration of
the Leasing Period (the "Transfer Date"), each Business Employee who is a
participant in The St. Paul Companies, Inc. Stock Ownership Plan and each
Business Employee who is a participant in The St. Paul Companies, Inc.
Executive Savings Plan shall cease to be an active participant therein and
Seller shall take such actions as are necessary to cause the Business
Employees to be vested in his or her account balances thereunder, pro-rated
for the partial year of service in which the Closing Date occurs. Seller
shall amend The St. Paul Companies, Inc. Stock Ownership Plan as necessary
to provide that the Business Employees shall be entitled to share in the
allocation of company matching contributions and performance shares based
on their compensation and pre-tax employee contributions up to the Transfer
Date (subject, with respect to amounts attributable to the Leasing Period,
to Buyer's obligation to reimburse Seller under the provisions of
ss.6(d)(vi)). As soon as practicable following the Transfer Date, Seller
shall offer each of the Business Employees the option of electing a
distribution from The St. Paul Companies, Inc. Stock Ownership Plan and The
St. Paul Companies, Inc. Savings Plus Plan (collectively, "Seller DC
Plans"), which distribution shall be offered and made in compliance with
Section 401(k)(10) of the Code to the extent applicable. Buyer agrees to
cause its tax qualified defined contribution plan to permit each such
Business Employee who is a participant in the Seller DC Plans to effect a
direct rollover of the taxable portion of such participant's accrued
benefits under Seller DC Plans in cash to Buyer's defined contribution plan
("Buyer DC Plan"), provided Buyer determines such distribution constitutes
an "eligible rollover distribution" under Section ss.401(a)(31) of the
Code; it being understood that Buyer may, in its sole discretion, determine
to accept or not accept the direct rollover of outstanding participant
loans held by any Business Employee. Seller and Buyer agree to cooperate in
order to effect the direct rollover of accrued benefits with respect to
those Business Employees who elect a direct rollover of their distribution
from Seller DC Plans to Buyer's DC Plan in accordance with the foregoing.
Buyer agrees to take all actions necessary to cause the Buyer DC Plan to
accept the qualifying direct rollovers elected by the Business Employees in
accordance with the foregoing.
(iii) The St. Paul Companies, Inc. Employees' Retirement Plan (the
"Seller Retirement Plan") shall retain liability for all accrued benefits
of the Business Employees under the Seller Retirement Plan.
(iv) Seller shall retain liability to provide post-retirement welfare
benefits for all employees of the SPPI Entities and the Economy Companies
(and their dependents) who are eligible to receive such benefits as of the
Closing Date and has in fact retired as of such date. Buyer shall provide
post-retirement welfare benefits to all Business Employees who are eligible
for such benefits as of the Closing Date, but who have not
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retired as of the Transfer Date, on the same basis as it provides
post-retirement welfare benefits for its similarly situated employees who
are engaged in personal insurance operations. Seller and Buyer agree that
Seller shall pay Buyer an amount equal to the accrued post-retirement
welfare benefits for Business Employees who are eligible for such benefits
as of the Closing Date, but who have not retired as of the Transfer Date,
calculated on the basis of FAS 106 and the assumptions utilized by Seller
in its most recent financial statements prepared in accordance with GAAP.
Seller shall calculate such amount as soon as practicable following the
Transfer Date, and Buyer shall be entitled to review and approve such
calculation as to its accuracy (but shall not contest the assumptions
stated above). The Parties agree that any such payment shall be made as
soon as practicable thereafter and shall be deemed to be an adjustment to
the portion of the Aggregate Purchase Price allocated to the Shares and
shall be treated by the parties as an adjustment to such purchase price for
purposes of Federal and state taxes; provided, however, that the amount of
such adjustment shall not reduce the portion of the Aggregate Purchase
Price allocated to the Shares to less than the amount determined under
clause (x) of ss. 2(a)(vii) hereof. Notwithstanding the foregoing, if the
Closing Date does not occur during the calendar year 1999, all references
herein to the term "Transfer Date" shall be deemed to be references to the
"Closing Date."
(v) With respect to each Business Employee:
(A) Buyer shall waive pre-existing condition exclusions, evidence
of insurability provisions, waiting period requirements or any similar
provisions under any welfare benefit plan maintained or sponsored by or
contributed to by, Buyer for such Business Employee as of the Transfer
Date; provided such conditions, waiting periods, exclusions or similar
provisions did not preclude coverage for such Business Employee as of
the Transfer Date under the comparable plans of Seller.
(B) Seller's welfare benefit plans shall be responsible for claims
covered by Seller's welfare benefit plans, provided that such claims
were incurred prior to the Transfer Date (subject, in the case of
claims incurred during the Leasing Period, to Buyer's obligation to
reimburse Seller under the provisions of ss.6(d)(vi)); and Buyer shall
assume responsibility for welfare benefit claims relating to Business
Employees incurred on or after the Transfer Date under its welfare
benefit plans. For this purpose, a claim is incurred (i) when the
medical or other service giving rise to the claim is performed, (ii) in
the case of death, at the time of such death, and (iii) in the case of
long-term disability, the date as of which an employee has been
determined to be eligible for long-term disability benefits under the
applicable long-term disability plan (as determined by the relevant
insurance carrier).
(C) Buyer shall recognize the service of each Business Employee
with either Seller or Seller's other Affiliates prior to the Transfer
Date for all purposes
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(other than benefit accrual under Buyer's pension plans) under each of
Buyer's employee benefit plans (including but not limited to vacation
and severance entitlement; provided, however, that in the case of
post-retirement welfare benefits, Buyer shall recognize such service
solely with respect to Business Employees who are eligible for such
benefits as of the Closing Date, but who have not retired as of the
Transfer Date.
(D) Seller shall be responsible for satisfying obligations under
ss.601 et. seq. of ERISA and ss.4980B of the Code ("COBRA"), to provide
continuation coverage to or with respect to any Business Employee in
accordance with law with respect to any "qualifying event" occurring
before the Transfer Date (subject, with respect to qualifying events
occurring during the Leasing Period, to Buyer's obligation to reimburse
Seller under the provisions of ss.6(d)(vi)). Buyer shall be responsible
for satisfying obligations under COBRA to provide continuation coverage
to or with respect to any Business Employee in accordance with law with
respect to any "qualifying event" which occurs on or following the
Transfer Date.
(E) Not later than March 15, 2000, Buyer shall pay the 1999 annual
bonuses for performance in respect of the period from January 1, 1999
through the Closing Date to the SPPI Transferred Employees who remain
employed by Buyer or any of its Affiliates on March 1, 2000 (the "Bonus
Eligible Employees") in an amount specified by Seller based upon each
Bonus Eligible Employee's target bonus adjusted by actual performance
in relation to financial measures and individual objectives under The
St. Paul Companies, Inc. Annual Incentive Plan or The St. Paul
Companies, Inc. Management Annual Incentive Plan, as applicable
(applied by Seller in good faith consistent with past practice),
pro-rated for the number of days from January 1, 1999 through the
Closing Date (the "Accrued Bonuses"). In connection therewith, Buyer
agrees to provide Seller with the names of the Bonus Eligible Employees
promptly following March 1, 2000, but in no event later than March 8,
2000. Seller shall reimburse Buyer for the aggregate amount of the
Accrued Bonuses no later than March 15, 2000.
(vi) Notwithstanding anything to the contrary contained in this
ss.6(d), for the period commencing as of the Closing and ending 12:01 a.m.
Central Standard Time on January 1, 2000 (the "Leasing Period"), Seller
shall retain all Business Employees as employees of Seller and shall lease
the services of such Business Employees to Buyer. Buyer agrees to promptly
reimburse Seller, after receiving written request from Seller setting forth
the details thereof, for all compensation, payroll or other taxes, employee
benefits, out-of-pocket costs, charges, expenses, fees and any other
liability (including any liability for wrongful termination resulting from
a termination of a Business Employee made at the request of Buyer) incurred
by Seller in the ordinary course with respect to Business Employees and
their dependents with respect to the Leasing Period (including the accrual
of additional pension, bonus and vacation entitlement accrued for
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the Leasing Period that is vested and/or paid by Seller during the Leasing
Period); provided that with respect to any Business Employee who has a
"qualifying event" with respect to the continuation coverage requirements
under COBRA prior to the end of the Leasing Period (either with respect to
himself or his spouse or dependents), Buyer also agrees to reimburse Seller
for the amount of claims paid by Seller in excess of $500,000 in the
aggregate per Business Employee (or per each of such Business Employee's
spouse or dependents). All calculations for amounts to be reimbursed
hereunder shall be made in a manner reasonably consistent with Seller's
past practice for intercompany allocation of expenses to the SPPI Entities
and the Economy Companies in the manner to be specifically agreed in
writing by Seller and Buyer within 10 Business Days of the date hereof.
During the Leasing Period, (i) the Business Employees shall remain
participants in the same benefit plans and programs of Seller, under the
same terms and conditions that such Business Employees participated in
immediately prior to the Closing Date, (ii) Seller shall continue to pay
the same regular compensation to the Business Employees as was in effect as
of the Closing Date in a timely manner and consistent with past practices,
(iii) Seller shall be responsible for the payment of all payroll taxes
(FICA, FUTA and withholding) and other applicable Taxes in respect of the
Business Employees, (iv) the Business Employees shall be subject to the
management and direction of Buyer as lessor and (v) Seller shall not
terminate the employment of any Business Employee without the consent of
Buyer, which consent shall not be unreasonably withheld.
(vii) Seller shall be responsible for all deferred compensation due
under Seller's unfunded non-qualified deferred compensation plans with
respect to services rendered prior to the Transfer Date by any Business
Employee (subject, with respect to amounts attributable to the Leasing
Period, to the Buyer's obligation to reimburse Seller under the provisions
of ss.ss.6(d)(vi)).
(viii) Buyer shall indemnify and defend Seller and hold Seller harmless
from and against any Adverse Consequences which may be incurred or suffered
by Seller under the Worker Adjustment and Retraining Notification Act or
any similar state law with respect to the Business Employees arising out
of, or relating to, any actions taken by Buyer or its Affiliates with
respect to the Business Employees on or after the Closing Date.
(ix) On the Closing Date and for a period of two years thereafter, (A)
neither Seller nor any of its Affiliates shall induce, encourage or solicit
for employment with Seller or any of its Affiliates any Business Employees
(except those listed in ss.5(c)(C) of the Seller Disclosure Schedule) and
(B) neither Buyer nor any of its Affiliates shall induce, encourage or
solicit for employment with Buyer or any of its Affiliates any employees of
Seller or Affiliates of Seller.
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(e) Tax Matters.
(i) Seller hereby indemnifies Buyer and each of the Economy Companies
against and agrees to hold them harmless from: (i) any Tax of any of the
Economy Companies with respect to taxable periods ending before the Closing
Date; (ii) with respect to taxable periods beginning before the Closing
Date and ending on, as of the close of, or after the Closing Date, any
Taxes imposed on or in respect of any of the Economy Companies which are
allocable, pursuant to ss.6(e)(ii), to the portion of such period ending on
the Closing Date; (iii) any Taxes imposed on or in respect of any
corporation (other than Taxes imposed in a Post-Closing Tax Period on any
of the Economy Companies, or Buyer or any affiliate of Buyer) with which
any of the Economy Companies filed a Tax Return on a combined or
consolidated basis for any taxable period that includes the Closing Date,
or that ends on, as of the close of or before the Closing Date (including,
without limitation, any Taxes for which any of the Economy Companies would
be liable pursuant to the provisions of Treasury Regulation Section
1.1502-6 (the sum of (i), (ii) and (iii) being referred to herein as a "Tax
Loss"); provided, however, that Seller shall have no obligation to
indemnify Buyer or any of the Economy Companies from any Taxes allocable
under ss.6(e)(ii)(x) and (y) until the aggregate amount of such Taxes
exceeds the aggregate amount of such Taxes accrued and reflected as a
current liability on Economy's statutory balance sheet as of March 31,
1999, adjusted for payments under ss.6(e)(iv), plus prior estimated Tax
payments made by Seller, an Affiliate of Seller or any of the Economy
Companies prior to Closing with respect to such accrued Taxes (the "Tax
Reserves"), in which case Buyer will be entitled to indemnity for the
entire excess amount. Seller shall have no obligation to indemnify Buyer or
any of the Economy Companies from any Taxes allocable under ss.6(e)(ii)(z)
until the aggregate amount of such Taxes exceeds $20,000, in which case
Buyer will be entitled to indemnity for the entire excess amount.
(ii) In the case of Taxes that are payable with respect to a taxable
period that begins before the Closing Date and ends on, as of the close of,
or after the Closing Date, the portion of any such Tax that is allocable to
the portion of the period ending on the Closing Date shall be:
(x) in the case of any Taxes based upon or related to income or
receipts, the amount which would be payable if the taxable year ended
or is treated as ending on the Closing Date;
(y) in the case of any premium tax, the amount which would be
payable with respect to the direct premiums written during the period
that ends on the Closing Date (taking into account the rates and
credits allocable to the pre-Closing period that would be available if
such period were treated as a separate year for premium tax purposes);
and
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(z) in the case of Taxes other than taxes based upon or related to
income or receipts and premium taxes, the amount which would be payable
if the taxable year ended or is treated as ending at the end of the
Closing.
For purposes of this ss.6(e), "Post-Closing Tax Period" means any Tax period
ending after the Closing Date, except that for Tax periods beginning before and
ending after the Closing Date, only the portion of such period beginning after
the Closing Date will be considered to be a "Post-Closing Tax Period."
(iii) Buyer hereby indemnifies Seller against and agrees to hold it
harmless from: (i) any Tax of any of the Economy Companies with respect to
taxable periods that begin after the Closing Date; (ii) with respect to
taxable periods beginning before the Closing Date and ending after the
Closing Date, any Taxes imposed on or in respect of any of the Economy
Companies which are allocable, pursuant to ss.6(e)(ii), to the portion of
such period beginning after the Closing Date (the sum of (i) and (ii) being
referred to herein as a "Tax Loss");
(iv) Buyer shall pay to Seller the amount of the excess, if any, of the
Tax Reserves over the actual amount of such Taxes paid by Buyer (or by or
on behalf of any of the Economy Companies, including any estimated payment
of Taxes). Such payment will be made within thirty (30) days of the date of
filing of the last to be filed of any Tax Return for taxable periods that
begin before and end on or after the Closing Date.
(v) Seller or an Affiliate of Seller shall file or cause to be filed
when due all Tax Returns that are required to be filed by or with respect
to any of the Economy Companies for taxable years or periods ending on or
before the Closing Date and shall pay any Taxes due in respect of such Tax
Returns, and Buyer shall file or cause to be filed when due all Returns
with respect to Taxes that are required to be filed by or with respect to
any of the Economy Companies for taxable years or periods ending after the
Closing Date and shall remit any Taxes due in respect of such Tax Returns.
Seller shall pay Buyer the Taxes for which Seller is liable pursuant to
paragraph (i) but which are payable with Tax Returns to be filed by Buyer
pursuant to the previous sentence by the later of (x) 10 days prior to the
due date for the filing of such Tax Returns and (y) 30 days from the
receipt by Seller of notification from Buyer of the amount due. In order to
assist Buyer in assuming responsibility for the preparation of Tax Returns
which Buyer is obligated to file pursuant to this paragraph (v), Seller
shall prepare and provide to Buyer any such Tax Returns that are required
to be filed within the 90-day period following the Closing Date. The actual
cost related to the preparation and delivery of such Tax Returns shall be
shared equally by Seller and Buyer.
(vi) Seller and Buyer may agree to net the payments to be made pursuant
to paragraphs (iv) and (v).
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(vii) In the event that any Tax liability for which Seller or Buyer, as
the case may be, has made a payment under paragraph (iv) or (v), is
determined pursuant to a Final Determination (as defined below) to be
different than the Tax liability with respect to which such payment was
previously made, then Seller and Buyer shall redetermine the amount of the
payments to be made pursuant to paragraphs (iv) and (v) based on the
redetermined Tax liability, and Seller or Buyer, as the case may be, shall
make a payment to the other party with respect to the redetermined amount.
If Buyer or Seller, as the case may be, makes a payment pursuant to this
paragraph (vii) in respect of an amount previously paid to Buyer or Seller
by the other party, the payment under this paragraph (vii) shall include
interest calculated from the date of the original payment to the date a
payment is made under this paragraph (vii) at the Applicable Rate. For
purposes of this ss.6(e), a "Final Determination" means (x) any final
determination of liability in respect of a Tax that, under applicable law,
is not subject to further appeal, review or modification through
proceedings or otherwise (including the expiration of a statute of
limitations or a period for the filing of claims for refunds, amended
returns or appeals from adverse determinations) or (y) the payment of such
Tax by the party responsible for payment of such Tax under applicable law,
with respect to any item disallowed or adjusted by a taxing authority,
provided that such responsible party determines that no action should be
taken to recoup such payment.
(viii) Any payment by Seller or Buyer, as the case may be, with respect
to any Tax Loss, to the extent not previously made under paragraph (iv),
(v), or (vii), shall be made not later than 30 days after receipt by Seller
or Buyer, as the case may be, of written notice stating that any Tax Loss
has been paid by Buyer or Seller, as the case may be, or any of their
respective affiliates.
(ix) Buyer shall pay to Seller (x) the highest rate provided in Section
11 of the Code multiplied by the amount of any Economy Companies' net
operating loss carryforward to a Post-Closing Tax Period, with respect to
net operating losses arising in any Tax Period ending on or before the
close of business on the Closing Date, which is included in any Tax Return
of Buyer or an Affiliate of Buyer, and (y) 100% of the amount of any
Economy Companies tax credit carryforward, with respect to tax credits
arising in any Tax Period ending on or before the close of business on the
Closing Date, which is included in any Tax Return of Buyer or an Affiliate
of Buyer. Any such payment shall be made within 30 days after the filing of
the applicable Tax Return in which such net operating loss carryforward or
credit carryforward is included. In the event that all or a portion of the
amount of any net operating loss carryforward or credit carryforward for
which Buyer has made a payment to Seller under this paragraph (ix) is
disallowed pursuant to a Final Determination, then Seller and Buyer shall
redetermine the amount of the payment to be made pursuant to this paragraph
(ix) and Seller or Buyer, as the case may be, shall make a payment to the
other Party with respect to the redetermined amount. If Seller or Buyer, as
the case may be, makes a payment pursuant to this paragraph (ix) in respect
of an amount previously paid to Seller by Buyer, the payment under this
paragraph (ix) shall include interest calculated from the date of the
original
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payment to the date a payment based on the redetermined amount is made at
the Applicable Rate.
(x) If Seller's indemnification obligation under this ss.6(e) arises in
respect of an adjustment which makes allowable to Buyer, any of its
Affiliates or, effective upon the Closing, the Economy Companies, any
deduction, amortization, exclusion from income or other allowance (a "Tax
Benefit") which would not, but for such adjustment, be allowable, then
within 30 days after the filing of the applicable Tax Return in which such
Tax Benefit is claimed, Buyer shall pay to Seller the amount as certified
by the Buyer's tax department equal to the excess of (x) the amount of
Taxes that would have been payable by any of the Economy Companies, Buyer
or any Affiliate of Buyer with respect to such Tax period in the absence of
such Tax Benefit over (y) the amount of Taxes actually paid; provided,
however, that Buyer shall be required to make a payment to Seller under
this paragraph (x) only to the extent that Seller has made an actual
indemnity payment to Buyer. If Buyer's indemnification obligation under
this ss.6(e) arises in respect of an adjustment which makes allowable to
Seller, any of its Affiliates or, for Tax periods ending prior to the
Closing, the Economy Companies, any Tax Benefit which would not, but for
such adjustment, be allowable, then within 30 days after the filing of the
applicable Tax Return in which such Tax Benefit is claimed, Seller shall
pay to Buyer the amount as certified by the Seller's tax department equal
to the excess of (x) the amount of Taxes that would have been payable by
any of the Economy Companies, Seller or any Affiliate of Seller with
respect to such Tax period in the absence of such Tax Benefit over (y) the
amount of Taxes actually paid; provided, however, that Seller shall be
required to make a payment to Buyer under this paragraph (x) only to the
extent that Buyer has made an actual indemnity payment to Seller.
(xi) Any tax allocation or tax sharing agreement that may have been
entered into by any of the Economy Companies (other than the agreement
among the Economy Companies) shall be terminated as to all of the Economy
Companies as of the Closing Date, and no payments which are owed by any of
the Economy Companies shall be made thereunder.
(xii) Each Party agrees to provide or cause its Affiliates to provide
at no cost and within a reasonable time any information reasonably
necessary for the preparation of any tax returns or for addressing any
audit issues.
(xiii) It is the intent of Buyer and Seller that Buyer or Seller, as
the case may be, shall make one payment to the other party under ss.6 and
ss.8 of this Agreement in respect of any Tax or any liability, cost,
expense, loss, damage, assessment, settlement or judgment, and once such
payment has been made, such Tax, liability, cost, expense, loss, damage,
assessment, settlement or judgment shall not give rise to any further
payment under ss.6 or ss.8; provided, however, that any such payment shall
be calculated on an after-Tax basis giving effect to the Tax consequences
of the payment, and the loss or expense for which indemnification is being
made, to the indemnified party.
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(xiv) All payments under this ss.6(e) shall be treated by the Parties
as an adjustment to the purchase price.
(xv) At the election of Buyer, Seller and Buyer shall take all actions
necessary and appropriate (including timely filing such forms, Tax Returns,
elections, schedules and other documents as may be required), at each
Party's cost and expense, to effect and preserve a timely Section
338(h)(10) election (including, at the election of Buyer, a Section
338(h)(10) election in respect of any acquired subsidiary) in accordance
with the requirements of Section 338 of the Code (and any corresponding
elections under state or local tax law) (collectively the "Section
338(h)(10) Elections"), and Seller and Buyer shall report the sale of the
Shares pursuant to this Agreement consistently with the Section 338(h)(10)
Elections and shall take no position contrary thereto or inconsistent
therewith in any Tax Return, in any discussion with or proceeding before
any taxing authority, or otherwise. Buyer shall notify Seller in writing of
its decision whether to make a Section 338(h)(10) Election within 60 days
of Buyer's receipt of the Closing Balance Sheet pursuant to ss.2(d)(ii)
hereof. Seller shall deliver to Buyer five copies of an Internal Revenue
Form 8023 ("Election under Section 338 for Corporations Making Qualified
Stock Purchases"), completed as reasonably agreed by the parties and duly
executed by the Seller within 20 days of receipt from Buyer of the written
notification referred to in the previous sentence. Buyer shall be
responsible for the preparation and filing of all forms and documents
required in connection with the Section 338(h)(10) Elections and shall
provide Seller with copies of (A) any necessary corrections, amendments or
supplements to such Form 8023 as reasonably agreed to by the Parties or as
necessary to conform the allocation of the purchase price to the Allocation
Statement (as defined below) or any Revised Statement (as defined below),
(B) all attachments required to be filed therewith pursuant to the
applicable Treasury regulations, and (C) any comparable forms and
attachments with respect to any applicable state or local elections being
made pursuant to the Section 338(h)(10) Elections. At the request of Buyer,
Seller shall execute and deliver to Buyer, within ten days after a request
therefor by Purchaser, such documents or forms as are required by any Tax
laws properly to complete the Section 338(h)(10) Elections. Seller and
Buyer shall cooperate fully with each other and make available to each
other such Tax data and other information as may be reasonably required by
Seller and Buyer in order timely to file the Section 338(h)(10) Elections
and any other required statements or schedules. Seller shall (A) promptly
execute and deliver to Buyer any amendments subsequent to the filing of the
Section 338(h)(10) Elections to Form 8023 (and any comparable state and
local forms) and attachments which are required to be filed under
applicable law and are reasonably requested by Buyer, (B) comply with all
of the requirements of Section 338(h)(10) of the Code and the Treasury
regulations thereunder, and (C) take no action inconsistent with the
requirements for filing the Section 338(h)(10) Elections under the Code and
the applicable Treasury regulations. Buyer shall provide to Seller a
proposed statement (the "Allocation Statement") allocating the purchase
price and any other payments made by Buyer pursuant to this Agreement and
any other items that are treated as additional purchase price for tax
purposes, among the assets of the Economy Companies. Within 20 days
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after the receipt of such Allocation Statement, Seller shall propose to
Buyer any changes to the Allocation Statement or shall indicate its
concurrence therewith. Thereafter, Buyer shall provide to Seller from time
to time revised copies of the Allocation Statement (the "Revised
Statements") so as to report any matters on the Allocation Statement that
need updating (including purchase price adjustments, if any). Within 20
days after the receipt of any Revised Statement, Seller shall propose to
Buyer any changes to such Revised Statement or shall indicate its
concurrence therewith, which concurrence shall not be unreasonably
withheld. Buyer and Seller shall endeavor in good faith to resolve any
differences with respect to the Allocation Statement or any Revised
Statement within 10 days after Buyer's receipt of notice of objections or
suggested changes from Seller. The costs of preparing the Allocation
Statement and any supporting materials, including any appraisals, shall be
borne by Buyer. If Buyer elects to make the Section 338(h)(10) Elections,
Buyer and Seller shall allocate the purchase price in connection therewith
in accordance with the Allocation Statement or, if applicable, the last
Revised Statements, provided by Buyer to Seller and agreed to by Buyer and
Seller pursuant to this paragraph, and subject to the requirements of any
applicable Tax law or election, all Tax Returns and reports filed by Buyer
and Seller shall be prepared consistently with such allocation. If Seller
shall have withheld its consent to such allocation, which consent shall not
be unreasonably withheld, and Buyer and Seller have acted in good faith to
resolve the differences with respect to the items on the Allocation
Statement or any Revised Statement and, thereafter, Buyer and Seller are
unable to resolve such differences which in the aggregate are material in
relation to the aggregate purchase price for the assets, Buyer and Seller
shall, subject to the requirements of any applicable Tax law or election,
file all Tax Returns and reports consistent with the allocation provided in
such schedules except with respect to the items that are the subject of
such material difference.
(f) Use of Names. Notwithstanding any inference or prior course of conduct
to the contrary, and except as necessary in order for Buyer to exercise its
rights and perform its obligations as contemplated by the Buyer Reinsurance and
Facility Agreements and the Buyer Services Agreement, in no event shall Buyer or
any Affiliate of Buyer have any right to use any corporate name or acronym of a
Seller or any of its Affiliates in any jurisdiction, including the names and
acronyms set forth in ss.6(f)(i) of the Seller Disclosure Schedule, or any
registered or unregistered trademark, trade name, or any registered or
unregistered service mark or any application or registration therefor, owned by,
licensed to or used by a Seller or any of its Affiliates or any other name, term
or identification that suggests, simulates or is confusing due to its similarity
to any of the foregoing, except to the extent specified in ss.6(f)(ii) of the
Seller Disclosure Schedule.
(g) Transfer of Data. Seller will fully cooperate with and use its
reasonable best efforts to transfer to Buyer, at Buyer's request, copies of any
and all of its or its Affiliates' documents, data and information (including but
not limited to policy forms, expiration files, customer account records, and
underwriting, claims and processing materials, and any correspondence or other
communications related thereto), whether in written or electronic form, which
are necessary, appropriate or desirable for the Buyer to perform its premium
processing,
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reserving, accounting, investing, compliance, information technology, human
resources, administrative claims handling, underwriting and other functions with
respect to the transferred SPPI Assets. Any such data and information in the
form used by Seller shall be provided to Buyer at no cost.
(h) Non-Competition. Except as contemplated by this Agreement or any of the
Transaction Documents:
(i) For a period of five (5) years following the Closing Date, neither
Seller nor any of its Affiliates shall (A) offer, issue, sell, refer or
promote, directly or indirectly, any lines of insurance included within the
SPPI Business in the United States or its territories; (B) provide
administrative services with respect to any lines of insurance included
within the SPPI Business in the United States or its territories; or (C)
otherwise engage in any lines of insurance included within the SPPI
Business in the United States or its territories; provided, however, that
Seller or its Affiliates may engage in the activities described in the
foregoing clauses (A), (B), or (C) in connection with the sale or servicing
of a line of insurance included within the SPPI Business to the extent they
are immaterial, incidental and an accommodation to specific policies of
commercial insurance written by Seller or an Affiliate;
(ii) For a period of five (5) years following the Closing Date, neither
Seller nor any of its Affiliates shall directly or indirectly offer, issue,
sell, refer or promote nonstandard personal automobile liability insurance
through any of the agents of either Seller or any of the Seller's
Affiliates that, as of any time in the 12 months prior to the Closing,
offered, wrote, produced, issued, sold or promoted any lines of insurance
included within the SPPI Business on behalf of the SPPI Affiliates (the
"Personal Lines Agents"); provided, however, that Seller or its Affiliates
may offer, issue, sell, refer or promote, directly or indirectly, any such
insurance through a Personal Lines Agent of the following Seller Affiliates
with which such entities had a prior relationship: Victoria Fire and
Casualty Co., Titan Indemnity Company, Titan Insurance Company, Victoria
Insurance Co., Victoria Automobile Insurance Co. and Victoria National
Insurance Co.; and provided, further, however, that if on the Closing Date
the number of such Personal Lines Agents (as certified by Seller to Buyer)
exceeds 100, Buyer and Seller will consult and, if Buyer requests, Seller
will terminate the appointment of such number of agents as is necessary to
reduce the number of such agents to a number that is acceptable to Buyer,
which number shall not be less than 100.
(iii) Notwithstanding any other provision of this ss.6(h) to the
contrary, any entity that becomes an Affiliate of Seller following the
Closing Date by means of acquisition, merger, or any other business
combination (a "New Affiliate") may offer, issue, sell, refer or promote,
directly or indirectly, any lines of insurance included within the SPPI
Business in the United States or its territories; provided that the New
Affiliate does not offer, issue, sell, refer or promote, directly or
indirectly, any such insurance though a Personal Lines Agent with which
such New Affiliate did not have a prior
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relationship; the New Affiliate does not use the St. Paul or USF&G name or
any derivative thereof (either alone or in combination with any other name)
in connection with the offer, issuance, sale or promotion of such
insurance; and the New Affiliate was engaged in the offer, issuance, sale
or promotion of personal lies insurance prior to the time of becoming a New
Affiliate. Neither Seller nor any of its Affiliates shall take any action
to promote any such business between any New Affiliate and any Personal
Lines Agent;
(iv) For a period of five (5) years following the Closing Date, neither
Buyer nor any of its Affiliates shall directly or indirectly offer, issue,
sell, refer or promote commercial property and casualty insurance through
any of the Personal Lines Agents, other than in the case of non-systematic
or accommodation exceptions.
Notwithstanding any other provision of this ss.6(h) to the contrary,
neither Seller nor its Affiliates shall be prohibited from making investments in
the Ordinary Course of Business in entities engaging in any lines of insurance
included within the SPPI Business.
This ss.6(h) shall not be binding upon an Affiliate of Seller after the
time such Person ceases to be an Affiliate of Seller. This ss.6(h) also shall
not be binding upon any Person which is not an Affiliate of Seller and which
acquires all or substantially all of the capital stock or assets of St. Paul
through merger, consolidation, tender offer, acquisition of assets or otherwise;
provided that St. Paul and its Affiliates shall not provide information with
respect to the Personal Lines Agents to such Person and such Person shall not
use the St. Paul or USF&G name or any derivative thereof (either alone or in
combination with any other name) in the offer, issuance, sale or promotion of
personal lines insurance which is the subject of the provisions of this ss.6(h).
(i) Agent Incentive Programs. Seller and Buyer shall use their reasonable
efforts to ensure that the agents for the SPPI Business are permitted to
continue to participate in the Seller's agent incentive programs (including,
without limitation, Seller's Top Brass Program, its Agents' Profit Sharing Plan,
its Peak Performers Program and its Sydney Olympics Program) with full credit
being provided to such agents under such programs for their continued sales of
personal lines policies until three years after the Closing Date. Buyer and
Seller agree that each will be responsible for its proportionate share of the
cost of such programs, based upon whether Seller or Buyer owned the SPPI
Business at the time the policies resulting in credits under the respective
incentive programs were issued. After three years the parties will negotiate in
good faith to jointly extend participation in these and/or similar programs for
an additional period of time.
7. CONDITIONS TO OBLIGATION TO CLOSE
(a) Conditions to Obligation of Buyer. The obligation of Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
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(i) the representations and warranties set forth in ss.3(a) and ss.4
above shall be true and correct as of the date of this Agreement and as of
the Closing Date with the same effect as though such representations and
warranties had been made as of the Closing Date (or such earlier date as
specified in the representations or warranties), except for such failures
to be true and correct as have not had, and would not be reasonably
expected to have, individually or in the aggregate, a Material Adverse
Effect on the SPPI Business taken as a whole;
(ii) from the date of this Agreement to the Closing Date, no material
adverse change in the financial condition or business of the SPPI Business
taken as a whole shall have occurred and no event or development shall have
occurred that is reasonably likely to have a Material Adverse Effect on the
SPPI Business taken as a whole;
(iii) Seller shall have performed and complied with all of its
covenants, agreements, undertakings and obligations hereunder in all
material respects through the Closing;
(iv) there shall not be any injunction, judgment, order, decree,
ruling, action or suit in effect, pending or threatened in writing, of or
by any Government Entity that (A) seeks to prevent or prevents consummation
of, or modifies or seeks to modify in any material respect the carrying out
of, any of the transactions contemplated by the Transaction Documents, (B)
seeks or imposes material damages in connection with any of the
transactions contemplated by the Transaction Documents, (C) questions the
validity or legality of any of the transactions contemplated by the
Transaction Documents or (D) seeks to impose material conditions upon the
ownership or operation of any of the Economy Companies or the conduct of
the SPPI Business by Buyer or the operation of Buyer or any Affiliate of
Buyer in connection with the transactions contemplated by this Agreement or
the other Transaction Documents, and neither Party shall have received any
written request for postponement of the Closing from any Government Entity;
(v) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated
and the Parties shall have received all required consents and approvals
from the insurance departments of the states having jurisdiction, including
but not limited to the States of Illinois, Minnesota, Rhode Island and New
York;
(vi) Seller shall have (A) executed and delivered, or caused its
Affiliates to execute and deliver, to Buyer each of the Transaction
Documents to which Seller or such Affiliates are a party and (B) delivered
to Buyer (x) a list of the SPPI Policies, on a computer disk or other
electronic form reasonably acceptable to Buyer, containing the same and (y)
a list of all presently licensed agents of Seller and its Affiliates who,
as of the Closing Date, sold the SPPI Policies;
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(vii) the closing under the Commutation Agreement with Economy shall
have occurred and Seller shall have transferred to Economy consideration as
set forth in the Commutation Agreement;
(viii) Seller shall have delivered to Buyer a certificate signed by a
senior executive officer of Seller to the effect that each of the
conditions specified above in ss.ss.7(a)(i), (ii), (iii), (iv), (v), (vi)
and (vii) is satisfied in all respects;
(ix) Seller shall have delivered to Buyer a certificate of the
secretary or assistant secretary of Seller and the other SPPI Affiliates,
dated as of the Closing Date, as to the resolutions of the Board of
Directors (or other similar governing body) of Seller or an SPPI Affiliate,
as the case may be, authorizing the execution, delivery and performance of
the Transaction Documents to which they are a party, as to the status and
signature of each of their officers who executed and delivered the
Transaction Documents to which they are a party and any other document
delivered by them in connection with the consummation of the transactions
contemplated by the Transaction Documents, and as to the Economy Companies,
a certificate of the secretary or assistant secretary of the Economy
Companies as to the Economy Companies' charters and by-laws (or equivalent
documents) (certified by the applicable Government Entity), and as to their
due organization, existence and good standing;
(x) all material consents of third parties (other than consents of
Government Entities) to the transactions contemplated by this Agreement and
the other Transaction Documents shall have been obtained;
(xi) Seller shall have transferred to Buyer all permits and licenses
required to be transferred prior to the Closing by any Environmental Law;
and
(xii) Buyer shall have received written resignations of each of the
directors and officers of the Economy Companies in accordance with ss.2(c)
hereof.
Buyer may waive any condition specified in this ss.7(a) if it executes a writing
so stating at or prior to the Closing.
(b) Conditions to Obligation of Seller. The obligation of Seller to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in ss.3(b) above shall
be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date with the same effect as though such
representations and warranties had been made as of the Closing Date (or
such earlier date specified in such representation or warranty);
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(ii) Buyer shall have performed and complied with all of its covenants,
agreements, undertakings and obligations hereunder in all material respects
through the Closing Date;
(iii) there shall not be any injunction, judgment, order, decree,
ruling, action or suit in effect, pending or threatened in writing, of or
by any Government Entity that (A) seeks to prevent or prevents consummation
of, or modifies or seeks to modify in any material respect the carrying out
of, any of the transactions contemplated by the Transaction Documents, (B)
seeks or imposes material damages in connection with any of the
transactions contemplated by the Transaction Documents, (C) questions the
validity or legality of any of the transactions contemplated by the
Transaction Documents or (D) seeks to impose material conditions upon the
ownership or operation of Seller or any Affiliate of Seller in connection
with the transactions contemplated by this Agreement or the other
Transaction Documents, and neither Party shall have received any written
request for postponement of the Closing from any Government Entity;
(iv) Buyer shall have executed all of the Transaction Documents to
which it is a party;
(v) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated
and the Parties shall have received all required consents and approvals for
the transactions contemplated herein from the insurance departments of the
relevant states, including but not limited to the States of Illinois,
Minnesota, Rhode Island and New York;
(vi) Buyer shall have delivered to a Seller a certificate of the
secretary or assistant secretary of the Buyer, dated as of the Closing
Date, as to the resolutions of the Board of Directors (or other similar
governing body) of Buyer, authorizing the execution, delivery and
performance of the Transaction Documents to which Buyer is a party, as to
the status and signature of each of its officers who executed and delivered
such Transaction Documents and any other document delivered by it in
connection with the consummation of the transactions contemplated by the
Transaction Documents, and as to its due organization, existence and good
standing;
(vii) Buyer shall have delivered to a Seller a certificate signed by a
senior executive officer of Buyer to the effect that each of the conditions
specified above in ss.ss.7(b)(i), (ii), (iii), (iv) and (v) is satisfied in
all respects; and
(viii) all material consents of third parties (other than consents of
Government Entities) to the transactions contemplated by this Agreement and
the other Transaction Documents shall have been obtained.
Seller may waive any condition specified in this ss.7(b) if it executes a
writing so stating at or prior to the Closing.
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8. REMEDIES FOR BREACHES OF THIS AGREEMENT AND INDEMNITY
(a) Survival of Representations and Warranties. All of the representations
and warranties of the Parties contained in ss.ss.3 and 4 shall survive the
Closing hereunder and continue in full force and effect for a period of two
years thereafter, except (i) that the representations and warranties contained
in ss.4(h) shall survive the Closing and continue in full force and effect until
a period of six (6) months after the expiration of all relevant statutes of
limitations (giving effect to any waiver, mitigation or extension thereof), (ii)
the representations and warranties contained in ss.3(a)(v), ss.4(c)(i),
ss.4(c)(ii)(B) and ss.4(d) shall survive without limitation, and (iii) any claim
based on fraud or bad faith may be asserted at any time within one year after
the party asserting such claim or claim learns of the same.
(b) Indemnification Provisions for Benefit of Buyer.
(i) Subject to the limitations set forth in this ss.8, (A) in the event
Seller breaches any of its representations and warranties contained herein,
and, if there is an applicable survival period pursuant to ss.8(a) above,
provided that Buyer makes a written claim for indemnification against
Seller within such survival period, (B) in the event that any SPPI
Transferred Employee makes a claim, subsequent to the Closing Date, against
Buyer or any of its Affiliates, related to such SPPI Transferred Employee's
transfer from an SPPI Entity to one of the Economy Companies (other than as
otherwise covered by this Agreement, including any claim for severance
arising from post-Closing events, for which Buyer shall be solely
responsible), provided that Buyer makes a written claim for indemnification
against Seller, or (C) in the event that there is a claim against Buyer or
any of its Affiliates relating to the transfer of the non-SPPI Business
from the Economy Companies to an Affiliate of Seller that is not otherwise
covered by the Seller Reinsurance Agreement, provided that Buyer makes a
written claim for indemnification against Seller, then Seller shall
indemnify and hold harmless Buyer (and its respective directors, officers,
Affiliates, successors and assigns) (each, a "Buyer Indemnitee") from and
against any Adverse Consequences a Buyer Indemnitee shall suffer which
arise out of or are related to such breach or claim; provided, however,
that Seller shall not have any liability under this ss.8(b) unless a Buyer
Indemnitee has suffered Adverse Consequences, by reason of the breach of
any representation or warranty of Seller, that in the aggregate are in
excess of $12.6 million, and then only to the extent of any such excess;
provided, further, however, that Seller shall not have any liability under
this ss.8(b) for any individual items where the Adverse Consequences
relating thereto are less than $50,000, and such items shall not be
aggregated for purposes of the immediately preceding proviso; and provided,
further, however, that in any event, the maximum amount for which Seller
shall be liable under this ss.8(b) shall not exceed $236,250,000; provided,
nevertheless, that the limitations contained in the foregoing three
provisos shall not apply to liability by reason of any claim referred to in
clause (B) or clause (C) of this subsection (b)(i) or by reason of any
breach of the representations or warranties contained in ss.3(a)(v),
ss.4(c)(i), ss.4(c)(ii)(B) or ss.4(d). Notwithstanding the foregoing,
remedies for
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breaches of representations and warranties contained in ss.4(h) shall be
limited to indemnification under ss.6(e).
(ii) Notwithstanding anything to the contrary set forth in this
Agreement, in no event shall Buyer be entitled to indemnification under any
representation or warranty of Seller in ss.3(a) and ss.4 of this Agreement
for any Adverse Consequences to the extent such Adverse Consequences will,
under the terms of the Reserve Agreement, be included in the Final
Companies Reserves (as defined in the Reserve Agreement).
(c) Indemnification Provisions for Benefit of Seller.
(i) Subject to the limitations set forth in ss.8(c)(ii), in the event
Buyer breaches any of its representations or warranties in ss.3(b) above,
then Buyer agrees to indemnify and hold harmless Seller and its
subsidiaries (and their respective directors, officers, Affiliates,
successors and assigns) (each, a "Seller Indemnitee") from and against the
entirety of any Adverse Consequences a Seller Indemnitee shall suffer which
arise out of or are related to the breach.
(ii) In the event Buyer breaches any of its representations and
warranties contained herein, and, if there is an applicable survival period
pursuant to ss.8(a) above, provided that Seller makes a written claim for
indemnification against Buyer within such survival period, then Buyer shall
indemnify and hold harmless any Seller Indemnitee from and against any
Adverse Consequences such Seller Indemnitee shall suffer which arise out of
or are related to such breach; provided, however, that Buyer shall not have
any liability under this ss.8(c) unless such Seller Indemnitee has suffered
Adverse Consequences, by reason of the breach of any representation or
warranty of Buyer, that in the aggregate are in excess of $12.6 million,
and then only to the extent of any such excess; provided, further, however,
that Buyer shall not have any liability under this ss.8(c) for any
individual items where the Adverse Consequences relating thereto is less
than $50,000, and such items shall not be aggregated for purposes of the
immediately preceding proviso; and provided, further, however, that in any
event, the maximum amount for which Buyer shall be liable under this
ss.8(c) shall not exceed $236,250,000; provided, nevertheless, that the
limitations contained in the foregoing three provisos shall not apply to
liability by reason of any breach of the representations or warranties
contained in ss.3(b)(v) or ss.3(b)(vii).
(d) Matters Involving Third Parties.
(i) If any third party shall notify a Party (the "Indemnified Party")
with respect to any matter (a "Third Party Claim") which may give rise to a
claim for indemnification against the other Party (the "Indemnifying
Party") under this ss.8, then the Indemnified Party shall promptly (and in
any event within five Business Days after receiving notice of the Third
Party Claim) notify the Indemnifying Party thereof in writing; provided,
however, that failure to provide such notice on a timely basis shall not
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release the Indemnifying Party from any of its obligations under this ss.8
except to the extent the Indemnifying Party is actually prejudiced by such
failure (except that the Indemnifying Party shall not be liable for any
expenses incurred during the period in which the Indemnified Party failed
to give such notice). Thereafter, the Indemnified Party shall deliver to
the Indemnifying Party, within five Business Days after the Indemnified
Party's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnified Party relating to the Third Party
Claim.
(ii) The Indemnifying Party will have the right at any time to assume
and thereafter conduct the defense of the Third Party Claim with counsel of
its choice (who shall also be reasonably satisfactory to the Indemnified
Party); provided, however, that the Indemnifying Party will not consent to
the entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be unreasonably withheld or delayed), unless the judgment or
proposed settlement (x) involves only the payment of money damages against
which the Indemnified Party is indemnified by the Indemnifying Party, (y)
does not impose an injunction or other equitable relief upon the
Indemnified Party and (z) does not involve a finding or admission of any
violation of Law or other wrongdoing by the Indemnified Party. Should the
Indemnifying Party elect to assume the defense of a Third Party Claim, the
Indemnifying Party will not be liable to the Indemnified Party for legal
expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof. Unless and until an Indemnifying Party assumes the
defense of the Third Party Claim, the Indemnified Party may defend against
the Third Party Claim in any manner it reasonably may deem appropriate and
the Indemnifying Party shall be bound by any final determination with
respect to such Third Party Claim prior to such assumption, provided that
the Indemnified Party has defended against such Third Party Claim in a
reasonable manner; provided, however, that the Indemnified Party may not
agree to any settlement without the consent of the Indemnifying Party,
which consent will not be unreasonably withheld or delayed.
(iii) Notwithstanding clause (ii) above, if an Indemnified Party
determines in good faith that there is a reasonable probability that a
Third Party Claim will create adverse legal precedent or materially affect
the ongoing business operations or ongoing business relationships of the
Indemnified Party or its Affiliates, then the Indemnified Party will have
the right to conduct the defense of the Third Party Claim with counsel of
its choice (who shall be reasonably satisfactory to the Indemnifying
Party); provided that the Indemnifying Party shall have the right to
monitor the defense of such Third Party Claim and participate in the
defense thereof at its own expense. The Indemnified Party will not consent
to the entry of any judgment or enter into any settlement with respect to
such Third Party Claim without the prior written consent of the
Indemnifying Party, not to be unreasonably withheld or delayed.
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(iv) In no event will an Indemnified Party consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnifying Party (not to be
withheld unreasonably or delayed).
(e) Mitigation. In the event that a Party suffers damage or loss in respect
of which it has or makes a valid claim against the other Party for
indemnification, it must take reasonable steps to mitigate its loss or damage.
(f) Determination of Adverse Consequences. The Parties shall make
appropriate adjustments for tax benefits and expenses in determining Adverse
Consequences for purposes of this ss.8. All indemnification payments under this
ss.8 shall be deemed adjustments to the Aggregate Purchase Price.
(g) Exclusive Remedy. The Parties hereby acknowledge and agree that their
respective sole and exclusive remedy with respect to any and all claims for
breach of a representation or warranty contained in this Agreement (except for
fraud or bad faith and claims relating to Taxes) against the other Party and its
Affiliates shall be pursuant to the indemni fication provisions contained in
this ss.8. Notwithstanding the indemnification provisions contained in this
ss.8, each Party shall have the right to pursue remedies against the other
outside of this ss.8 to enforce covenants, agreements, undertakings and
obligations contained in this Agreement.
9. TERMINATION
(a) Termination of Agreement. The Parties may terminate this Agreement as
provided below:
(i) Buyer and Seller may terminate this Agreement by mutual written
consent at any time prior to the Closing.
(ii) Buyer may terminate this Agreement by giving written notice to
Seller at any time prior to the Closing (A) in the event a Seller has
breached any material representation, warranty, or covenant contained in
this Agreement or any other Transaction Document in any material respect,
that would cause a condition to Closing to be incapable of satisfaction,
Buyer has notified Seller of the breach, and the breach has continued
without cure for a period of 30 days after the notice of breach or (B) if
the Closing shall not have occurred on or before February 28, 2000, by
reason of the failure of any condition precedent under ss.7(a) hereof
(unless the failure results from Buyer itself breaching its obligations
under this Agreement).
(iii) Seller may terminate this Agreement by giving written notice to
Buyer at any time prior to the Closing (A) in the event Buyer has breached
any material representation, warranty, or covenant contained in this
Agreement or any Transaction Document in any material respect, that would
cause a condition to Closing to be
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incapable of satisfaction, Seller has notified Buyer of the breach, and the
breach has continued without cure for a period of 30 days after the notice
of breach or (B) if the Closing shall not have occurred on or before
February 28, 2000, by reason of the failure of any condition precedent
under ss.7(b) hereof (unless the failure results from Seller breaching its
obligations under this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to ss.9(a) above, all rights and obligations of the Parties hereunder shall
become null and void and terminate without any liability of any Party to any
other Party; provided, however, that (i) the confidentiality provisions
contained in ss.5(d) and ss.6(a), the governing law provisions contained in
ss.10(h), the submission to jurisdiction provisions contained in ss.10(i) and
the expense provisions contained in ss.10(l) shall survive termination and (ii)
nothing herein shall relieve any Party from liability for any direct or
indirect, special or consequential damages resulting from any breach of this
Agreement.
10. MISCELLANEOUS
(a) Press Releases and Public Announcements. Neither Party shall issue any
press release or make any written public announcement relating to the subject
matter of this Agreement prior to the Closing Date without the prior review and
approval of the other Party; provided, however, that any Party may make any
public disclosure it believes in good faith is required by applicable Law or any
listing or trading agreement concerning its publicly-traded securities (in which
case the disclosing Party will use its reasonable best efforts to consult with
the other Party before making the disclosure and to allow the other Party to
review the text of the disclosure before it is made).
(b) No Third Party Beneficiaries. Nothing in this Agreement is intended or
shall be construed to confer any legal or equitable right, remedy or claim under
or in respect of this Agreement or any provision contained herein upon any
Person other than the Parties and their respective successors and permitted
assigns.
(c) Entire Agreement. This Agreement (including the Seller Disclosure
Schedule, the Buyer Disclosure Schedule, Schedules and Exhibits hereto and the
other agreements and written understandings referred to herein or otherwise
entered into by the Parties on the date hereof) and the Confidentiality
Agreement constitute the entire agreement and understanding among the Parties
and supersede any prior understandings, agreements, statements of intent or
representations by or among the Parties, written or oral, with respect to the
subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. Neither Party may assign either this Agreement or any of
its rights, interests, or obligations hereunder without the prior written
approval of the other, except that Buyer may assign its interest hereunder
without the consent of Seller to any wholly owned subsidiary of Buyer;
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provided, however, that no such transfer shall operate to release Buyer of any
of its obligations under this Agreement or any Transaction Document.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, consents, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
consent, or other communication hereunder shall be addressed to the intended
recipient as set forth below:
If to Seller:
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Attn.: General Counsel
With a concurrent copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attn.: Donald R. Crawshaw, Esq.
If to Buyer:
Metropolitan Property & Casualty Insurance Company
700 Quaker Lane
Warwick, Rhode Island 02887
Attn.: Mr. John Lombardo
With concurrent copies to:
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010-3690
Attn: Robert Einstein, Esq.
Dewey Ballantine LLP
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1301 Avenue of the Americas
New York, New York 10019
Attn: James A. FitzPatrick, Jr., Esq.
Any Party may send any notice, request, demand, claim, consent, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, consent, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(i) SUBMISSION TO JURISDICTION. EACH PARTY CONSENTS TO THE NON-EXCLUSIVE
JURISDICTION OF THE FEDERAL COURTS OF THE SOUTHERN DISTRICT OF NEW YORK FOR ANY
LEGAL ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT. EACH PARTY FURTHER WAIVES ANY OBJECTION TO THE LAYING OF VENUE FOR
ANY SUCH SUIT, ACTION, OR PROCEEDING IN SUCH COURTS. EACH PARTY AGREES TO ACCEPT
AND ACKNOWLEDGE SERVICE OF ANY AND ALL PROCESS THAT MAY BE SERVED IN ANY SUIT,
ACTION, OR PROCEEDING. EACH PARTY AGREES THAT ANY SERVICE OF PROCESS UPON IT
MAILED BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED TO SUCH PARTY
AT THE ADDRESS PROVIDED IN ss.10(G) ABOVE SHALL BE DEEMED IN EVERY RESPECT
EFFECTIVE SERVICE OF PROCESS UPON SUCH PARTY IN ANY SUCH SUIT, ACTION, OR
PROCEEDING. EACH PARTY HERETO HEREBY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF
THIS WAIVER, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH
SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SS.10(I).
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(j) Amendments and Waivers. No amendment, modification, superseding or
waiver of any provision, term, covenant or condition of this Agreement shall be
valid unless the same shall be in writing and signed by Buyer and Seller or, in
the case of a waiver, by the Party waiving compliance. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
(l) Expenses. Except as otherwise expressly provided herein, whether or not
the transactions contemplated herein are consummated, Seller and Buyer will bear
its own costs and expenses (including legal fees and expenses) incurred in
connection with the negotiation, preparation, execution and closing of this
Agreement and the transactions contemplated hereby.
(m) Incorporation of Exhibits, Annexes and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(n) Gender and Number. All words or terms used in this Agreement,
regardless of the number or gender in which they are used, shall be deemed to
include any other number and any other gender as the context may require.
"Hereof", "herein", and "hereunder" and words of similar import shall be
construed to refer to this Agreement as a whole, and not to any particular
section or provision, unless expressly so stated.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
ST. PAUL FIRE AND MARINE INSURANCE
COMPANY
/s/ Paul J. Liska
By:-------------------
Name: Paul J. Liska
Title: Executive Vice President and
Chief Financial Officer
METROPOLITAN PROPERTY & CASUALTY
INSURANCE COMPANY
/s/ Catherine A. Rein
By:-----------------------
Name: Catherine A. Rein
Title: President and Chief Executive
Officer
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Exhibit A-1
-----------
SELLER REINSURANCE AND FACILITY AGREEMENT
This REINSURANCE AND FACILITY AGREEMENT is effective as of _________,
1999 and entered into by ECONOMY FIRE & CASUALTY COMPANY, an Illinois stock
property-casualty insurance corporation (the "Company") and ST. PAUL FIRE AND
MARINE INSURANCE COMPANY, a Minnesota insurance corporation and the parent of
the Company (the "Reinsurer");
WHEREAS, pursuant to the terms and conditions of a Stock and Asset
Purchase Agreement dated as of July 12, 1999 (as such agreement may have been,
or may from time to time be, amended, supplemented or otherwise modified, the
"Purchase Agreement"), the Reinsurer has agreed to sell to Metropolitan Property
& Casualty Reinsurance Company ("Buyer") all of its SPPI Business (capitalized
terms used but not defined herein have the respective meanings assigned thereto
in the Purchase Agreement);
WHEREAS, pursuant to the Purchase Agreement, the Reinsurer has agreed
to sell, and Buyer has agreed to purchase, all of the outstanding common stock
of the Company, which in turn is the parent of two wholly-owned subsidiaries,
Economy Preferred Insurance Company, an Illinois insurance corporation, and
Economy Premier Assurance Company, an Illinois insurance corporation;
WHEREAS, in order to effectuate the foregoing, the Reinsurer has agreed
to assume from the Company and to cause the Company to cede to the Reinsurer,
all liabilities of the Company under policies other than the SPPI Policies, and
the Company has agreed to issue renewals of such policies and to write, at the
Reinsurer's request, new policies to the extent contemplated hereby;
NOW, THEREFORE, in consideration of the mutual covenants and promises
and upon the terms and conditions set forth herein, the parties hereto agree as
follows:
ARTICLE I - CLASSES OF BUSINESS REINSURED; RETENTION AND LIMIT
A. The Company obligates itself to cede to the Reinsurer, and the Reinsurer
obligates itself to assume, quota share reinsurance of one hundred percent
(100%) of the Net Liability (as defined in Article I.B) of the Company with
respect to all business, other than the Company's SPPI Business, written,
reinsured or assumed by the Company or its subsidiaries under policies,
contracts and binders of insurance and reinsurance issued prior to the
Effective Time, and all renewals for such policies, contracts and binders
of insurance and all policies written by the Company or its subsidiaries in
connection with such business after the Effective Time at the request of
the Reinsurer as contemplated hereby (collectively, the "Non-SPPI
Policies").
The Reinsurer shall assume and be responsible for one hundred percent
(100%) of the Net Liability.
<PAGE>
B. "Net Liability" as used herein is defined as the Company's gross liability
for all losses, liabilities and expenses under the Non-SPPI Policies, net
of all reinsurance actually recovered under reinsurance agreements with
reinsurers that are not Affiliates of the Reinsurer in effect prior to the
Effective Time.
C. The liability of the Reinsurer with respect to each cession hereunder,
including the obligation to service and issue the Non-SPPI Policies, shall
commence obligatorily and simultaneously with the obligation of the Company
undertaken herein, subject to the terms, conditions and limitations
hereinafter set forth.
D. Notwithstanding anything in this Agreement to the contrary, and
notwithstanding the Reinsurer's intention to fully perform hereunder, in
the event that the Reinsurer shall breach or be in default with respect to
any of its obligations hereunder, the Company shall remain obligated and
liable under the Non-SPPI Policies without diminution as a result of such
breach or default.
ARTICLE II - COMMENCEMENT AND DURATION
A. This contract shall become effective at 12:01 A.M. New York time on
___________, 1999 (the "Effective Time").
B. Reinsurance hereunder shall remain in full force and effect until
expiration or cancellation of all of the Company's Net Liability.
ARTICLE III - EXCLUSIONS
Reinsurance hereunder shall attach only and solely with respect to the Non-SPPI
Policies, and only and solely to the extent described in Article I hereof. No
reinsurance shall attach with respect to any other policies, contracts and/or
binders of insurance or reinsurance of any kind or type whatsoever issued and/or
assumed by the Company, all of which hereby are excluded completely hereunder.
ARTICLE IV - EXTRA CONTRACTUAL OBLIGATIONS
In the event the Company or the Reinsurer is held liable to pay any punitive,
exemplary, compensatory or consequential damages because of alleged or actual
bad faith or negligence related to the handling of any claim under any Non-SPPI
Policy or otherwise in respect of such Non-SPPI Policy, the parties shall be
liable for such damages in proportion to their responsibility for the conduct
giving rise to the damages. Such determination shall be made by the Company and
the Reinsurer, acting jointly and in good faith, and in the event the parties
are unable to reach agreement as to such determination, recourse shall be had to
Article XV hereof.
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<PAGE>
ARTICLE V - TRANSFER OF RESPONSIBILITY; FEES
A. After the Effective Time, the Reinsurer shall assume full responsibility
for servicing and other actions relating to the Non-SPPI Policies,
including but not limited to all policy changes, policy issuance, premium
rate changes, agent commission payments, premium collection, underwriting,
claims and loss adjustment functions.
1. Each party shall use its reasonable efforts to promptly forward to the
other party all telephone messages, correspondence and other
communications related to any loss or liability as to which such other
party has responsibility hereunder.
2. Commencing at the Effective Time, the Reinsurer is authorized to bill
and collect all premiums and other charges related to the Non-SPPI
Policies. In the event that either the Company or the Reinsurer shall
collect premiums or other charges which belong to the other party
hereunder, the collecting party shall remit the premiums and other
charges so collected to the appropriate party, together with a report
showing the policies to which the premiums and charges relate, on a
monthly basis, no later than the thirtieth (30th) day after the close
of each calendar month hereunder.
3. The Company shall deliver to the Reinsurer, on or before the Effective
Time, copies in its possession of any and all of its or its
subsidiaries' documents, data and information (including but not
limited to policy forms, expiration files, customer account records and
underwriting, claims and processing materials, and any correspondence
or other communications related thereto), whether in written or
computer form, which are necessary, appropriate or desirable for the
Reinsurer to perform its claims handling and underwriting functions
with respect to the Non-SPPI Policies and shall transfer to the
Reinsurer title to all such materials in the possession of the
Reinsurer. The Company may retain copies of such materials as
reasonably necessary. Any such delivery shall be made to the Reinsurer
at actual cost to the Company or its subsidiaries. "Actual cost" shall
consist of the Company's or such subsidiary's direct and reasonable
indirect costs, including any capital, start-up, restructuring,
reprogramming or similar costs of the Company and its subsidiaries
incremental to the costs associated with maintaining such documents,
data and information prior to the Effective Time, as certified in good
faith by the Company.
4. The Company shall not underwrite any applications or renewals occurring
on or after the Effective Time, and the Company shall not adjust or pay
any claims as to which the Reinsurer has assumed liability hereunder.
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<PAGE>
5. The Company shall permit the Reinsurer to place one or more of its
employees on-site at the Company, and the Company shall give these
employees access to all of the personnel and records of the Company,
and necessary support related thereto, to enable the Reinsurer to
effect all claims handling, underwriting responsibilities and other
insurance-related services with respect to the reinsured business. The
Company shall have the right to review the qualifications and
experience of Reinsurer's employees prior to providing them with access
to the Company's facilities, systems and policy and claim information.
The Reinsurer and its employees agree that the employees will have
access to the Company's systems, facilities and policy and claim
information and are limited to using such systems, facilities and
information solely and exclusively for the purposes of underwriting
Non-SPPI Policies, adjusting claims for the Non-SPPI Policies,
complying with applicable laws, regulations and requirements of
governmental authorities and otherwise exercising its rights and
fulfilling its obligations hereunder. The Reinsurer and its employees
also agree that the employees shall not attempt to gain access to
underwriting or claim files for policies other than the Non-SPPI
Policies subject to this Agreement. Any information that is not related
to the Non-SPPI Policies shall be considered Confidential Information
and proprietary and the Reinsurer and its employees agree not to use
such information for any purpose and not to disclose the information to
any third parties.
B. Subject to Articles I, III and V hereunder, all losses sustained by the
Company shall be binding upon the Reinsurer, and the Reinsurer agrees to
pay or allow, as the case may be, its proportion of each such settlement
with notification to the Company on forms mutually acceptable to the
parties hereto.
C. The Reinsurer or an affiliate thereof promptly shall make all necessary
policy form, rate and rule filings, if any, to enable it or such affiliate
to issue new policies and/or policy renewals subsequent to the Effective
Time. The Company shall cooperate with and assist the Reinsurer or such
affiliate with respect to such filings, including the attendance at
meetings between the Reinsurer or such affiliate and state insurance
departments upon the request of the Reinsurer or such affiliate. Until such
time as the Reinsurer or such affiliate receives the required approvals,
the Company agrees to issue renewals for existing Non-SPPI Policies and to
issue new Non-SPPI Policies; provided, however, that, after the third
anniversary of the Effective Time, the Company shall in no event be
required to issue renewals for existing Non-SPPI Policies or issue new
Non-SPPI Policies. At such time as the Reinsurer's or such affiliate's
filings are approved, the Reinsurer or such affiliate shall convert each of
the Non-SPPI Policies from the Company's forms, rates and rules to the
Reinsurer's or such affiliate's forms, rates and rules under a process that
complies with the statutes and regulations of the state in which the holder
of each policy is domiciled.
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<PAGE>
ARTICLE VI - SALVAGE AND SUBROGATION
A party to this agreement (Reinsurer or the Company) shall be credited with its
proportionate share of salvage (i.e., reimbursement obtained or recovery made by
the other party, less the actual cost, excluding salaries of officials and
employees of the Company or the Reinsurer and sums paid to attorneys as
retainer, of obtaining such reimbursement or making such recovery) on account of
claims and settlements involving reinsurance hereunder.
ARTICLE VII - ORIGINAL CONDITIONS
A. All reinsurance hereunder shall be subject to the same rates, terms,
conditions, waivers and interpretations and to the same modifications and
alterations as the respective Non-SPPI Policies of the Company. However, in
no event shall this be construed in any way to provide coverage outside the
terms and conditions set forth in this contract. The Reinsurer shall be
credited with its exact proportion of the original premiums received by the
Company with respect to the Non-SPPI Policies.
B. Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer or the Company in favor of any third party or
any persons not parties to this contract.
ARTICLE VIII - PREMIUM, CEDING COMMISSION AND ALLOWANCES
A. Subject to the payment to the Company of ceding commissions and allowances
and other amounts provided for herein, the Company cedes to the Reinsurer
one hundred percent (100%) of all premiums received in respect of the
Non-SPPI Policies for periods following the Effective Time. The Company
shall deduct from such premiums ceded to the Reinsurer all reinsurance
premiums paid by the Company with respect to reinsurance in effect prior to
the Effective Time.
B. At the Effective Time, the Company shall transfer to the Reinsurer cash or
cash equivalents in an amount equal to one hundred percent (100%) of loss
reserves, allocated loss adjustment expense reserves, unallocated loss
adjustment expense reserves and unearned premium reserves established by
the Company, in accordance with SAP applied on a basis consistent with past
practices, as of the Effective Time with respect to the Non-SPPI Policies.
C. No ceding commission shall be paid by the Reinsurer to the Company with
respect to Non-SPPI Policies in force as of the Effective Time; provided,
however, that the Reinsurer shall pay a ceding commission to the Company
for all renewal and new Non-SPPI Policies issued by the Company at the
Reinsurer's request after the Effective Time equal to one hundred percent
(100%) of all costs and expenses incurred by the Company in issuing,
renewing, writing and servicing such policies, including but not limited
to, all agents' commissions, state and local premium taxes,
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guaranty fund premiums and assessments, administrative and overhead
charges, direct and indirect servicing fees and expenses and other
out-of-pocket costs and expenses. After the end of each month hereunder,
the Company shall issue a statement for services rendered to the Reinsurer,
containing such information as the Reinsurer may reasonably request, and
payment shall be made by the Reinsurer within fifteen (15) days of its
receipt of the statement.
ARTICLE IX - REPORTS AND REMITTANCES
A. After the end of each month, the Reinsurer shall report the following for
the Non-SPPI Policies as applicable, in a form reasonably acceptable to the
Company:
1. Gross written premium for the month.
2. Ceded paid loss for the month.
3. Ceded paid loss adjustment expense for the month.
4. Unearned premium reserve as of the end of the month.
5. Outstanding loss and loss adjustment expense reserves as of the end of
the month.
6. All ceding commissions and expense allowances due and owing under
Article VIII hereof.
7. Reinsurance premiums paid by the Company with respect to reinsurance in
effect prior to the Effective Time, if any.
8. Recoveries from reinsurers under reinsurance agreements in effect prior
to the Effective Time, if any.
Payment of amounts, if any, due to the Company shall accompany this report. If
the report indicates that the Company owes amounts to the Reinsurer, the Company
shall pay the amount shown no later than fifteen (15) days after its receipt of
the report.
B. The Company and the Reinsurer shall furnish, in a timely manner, one
another with such information as they may require to complete their
quarterly and annual statutory reports.
ARTICLE X - CREDIT FOR REINSURANCE
If the Company is not permitted, by any jurisdiction in the United States, in
the statements required to be filed with its regulatory authority, to receive
full credit as admitted reinsurance
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for the Reinsurer's assumption of liability under this Agreement, the Reinsurer
shall promptly provide to the Company, in a form reasonably acceptable to the
Company, security sufficient to permit the Company to take full credit for
reinsurance under this Agreement.
ARTICLE XI - OFFSET
Provided in each instance that written notice is given in a timely fashion,
specifying in detail the basis therefor, (a) the Reinsurer may deduct from any
sums it owes to the Company hereunder, any sums it is owed by the Company,
pursuant to this Agreement, and (b) the Company may deduct from any sums it owes
to the Reinsurer hereunder, any sums it is owed by the Reinsurer, pursuant to
this Agreement.
ARTICLE XII - ACCESS TO RECORDS
The Reinsurer, the Company and their designated representatives shall have
access during normal business hours to all records in the possession of the
other party to this Agreement which pertain in any way to this reinsurance, in a
manner so as not to unreasonably interfere with the normal business operations
of such party. Subject to the foregoing, the Reinsurer and the Company shall
have the right to audit the relevant books and records of the other party
pursuant to the auditing party's normal audit procedures. Each party shall, and
shall cause its designated representatives to, treat and hold as Confidential
Information any information it receives or obtains pursuant to this Article XII.
ARTICLE XIII - ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
ARTICLE XIV - INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver, conservator
or statutory successor immediately upon demand, subject to responsible
provision for verification on the basis of the liability of the Company,
without diminution because of the insolvency of the Company or because the
liquidator, receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however, that
the liquidator, receiver, conservator or statutory successor of the Company
shall give written notice to the Reinsurer of the pendency of a claim
against the Company, indicating the policy or bond reinsured, within a
reasonable time after such claim is filed in the conservation or
liquidation proceeding or in the receivership, and that during the pendency
of such claim, the Reinsurer may investigate such claim and interpose, at
its own expense, in the proceeding where
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<PAGE>
such claim is to be adjudicated, any defense or defenses that it may deem
available to the Company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the Company as
part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely as a
result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this contract as though such
expense had been incurred by the Company.
C. It is further understood and agreed that, in the event of the insolvency of
the Company, the reinsurance under this contract shall be payable directly
by the Reinsurer to the Company or to its liquidator, receiver or statutory
successor, except (1) where this contract specifically provides another
payee of such reinsurance in the event of the insolvency of the Company or
(2) where the Reinsurer with the consent of the direct insured or insureds
has assumed such policy obligations of the Company as direct obligations of
the Reinsurer to such payees.
D. Should the Company or the Reinsurer go into liquidation or should a
receiver be appointed, all amounts due either the Company or the Reinsurer
whether by reason of premiums, losses, or otherwise under this contract,
shall be subject to the right of offset at any time and from time to time,
and upon the exercise of the same, only the net balance shall be due.
ARTICLE XV - ARBITRATION
A. In the event of any dispute or difference of opinion hereafter arising with
respect to this contract, it is hereby mutually agreed that such dispute or
difference of opinion may be submitted to arbitration. One Arbiter shall be
chosen by the Company, the other by the Reinsurer, and an Umpire shall be
chosen by the two Arbiters before they enter upon arbitration, all of whom
shall be active or retired disinterested executive officers of insurance or
reinsurance companies or Lloyd's of London Underwriters. In the event that
either party should fail to choose an Arbiter within 15 days following a
written request by the other party to do so, the requesting party may
choose two Arbiters who shall in turn choose an Umpire before entering upon
arbitration. If the two Arbiters fail to agree upon the selection of an
Umpire within 15 days following their appointment, the Umpire shall be
chosen by the American Arbitration Association.
B. Each party shall present its case to the Arbiters within 60 days following
the date of appointment of the Umpire, unless the parties mutually agree to
an extension of time. The decision of the Arbiters shall be final and
binding on both parties; but failing to
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agree, they shall call in the Umpire and the decision of the majority shall
be final and binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent jurisdiction.
C. Each party shall bear the expense of its own Arbiter, and shall jointly and
equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party, as
above provided, the expense of the Arbiters, the Umpire and the arbitration
shall be equally divided between the two parties.
D. Any arbitration proceedings shall take place at a location mutually agreed
upon by the parties to this contract, or, if they cannot agree, in the City
of New York but notwithstanding the location of the arbitration, all
proceedings pursuant hereto shall be governed by the laws of the State of
New York without giving effect to any choice or conflict of laws provision
or rule (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
State of New York.
E. Arbitration shall not be a condition precedent to any right of action
hereunder.
ARTICLE XVI - ASSIGNMENT
Neither the Company nor the Reinsurer may assign any of its rights or
obligations under this Agreement without the express written consent of the
other; provided, however, that any party may assign any rights, interests or
obligations hereunder to any of its Affiliates without the prior written consent
of other parties; and provided, further, that in the event of any such
assignment the assignor shall remain liable with respect to its obligations
hereunder.
ARTICLE XVII - APPLICABLE LAW
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAWS PROVISION OR
RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD
CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF
NEW YORK.
ARTICLE XVIII - INDEMNIFICATION
Each party hereto shall indemnify, defend and hold the other party harmless from
and against all loss, liability and expense arising out of any failure of the
indemnifying party to properly perform its obligations under this Agreement.
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ARTICLE XIX - EQUITABLE RELIEF
Each party hereto acknowledges that if it or its employees violate the terms of
this Agreement, the other party will not have an adequate remedy at law. In the
event of such a violation, the other party shall have the right, in addition to
any other rights that may be available to it, to obtain in any court of
competent jurisdiction injunctive relief to restrain any such violation and to
compel specific performance of the provisions of this Agreement. The seeking or
obtaining of such injunctive relief shall not foreclose or limit in any way
relief against either party hereto for any monetary damage arising out of such
violation.
ARTICLE XX - NOTICES
All notices, requests, demands, claims, consents, and other communications
hereunder will be in writing. Any notice, request, demand, claim, consent, or
other communication hereunder shall be addressed to the intended recipient as
set forth below:
If to the Company:
Metropolitan Property & Casualty Insurance Company
700 Quaker Lane
Warwick, Rhode Island 02887
Attn.: Mr. John Lombardo
With concurrent copies to:
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010-3690
Attn.: Robert Einstein, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attn.: James A. FitzPatrick, Jr., Esq.
If to the Reinsurer:
St. Paul Fire and Marine Insurance Company
c/o The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Attn.: General Counsel
-10-
<PAGE>
With a concurrent copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attn.: Donald R. Crawshaw, Esq.
Any party hereto may send any notice, request, demand, claim, consent, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, consent, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other parties notice in the manner herein set forth.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
ECONOMY FIRE & CASUALTY COMPANY
By:
-----------------------------------
Name:
Title:
-12-
LIST OF OMITTED EXHIBITS*
Exhibit No. Description
- ----------- -------------
1. Form of Seller Reinsurance and Facility Agreement (Exhibit A-1 to
Purchase Agreement)
2. Form of Seller Bill of Sale and Assignment (SPPI Assets) (Exhibit B-1
to Purchase Agreement)
3. Form of Buyer Bill of Sale and Assignment (Non-SPPI Assets) (Exhibit B-
2 to Purchase Agreement)
4. Form of Assumption of Liabilities agreement (Transferred Liabilities)
(Exhibit C to Purchase Agreement)
5. Form of Commutation Agreement (Exhibit D to Purchase Agreement)
6. Form of Master Services Agreement (Exhibit E-1 to Purchase Agreement)
7. Form of Buyer Services Agreement (Exhibit E-2 to Purchase Agreement)
8. Form of Reserve Agreement (Exhibit F to Purchase Agreement)
9. Specified Employees (Exhibit G to Purchase Agreement)
10. Valuation Firms (Exhibit H to Purchase Agreement)
11. Forms of agency agreements (Exhibit I to Purchase Agreement)
12. SPPI Entities (Schedule I to Purchase Agreement)
13. Buyer Disclosure Schedule to Purchase Agreement
14. Seller Disclosure Schedule to Purchase Agreement
* The forms of agreement and schedules listed herein either are immaterial
or their contents are already disclosed in the exhibits being filed
herewith, and therefore, pursuant to paragraph (b)(2) of Regulation S-K,
are being listed herein, but not filed as exhibits to this Form 10-Q. The
St. Paul will furnish supplementally a copy of any omitted schedules and
exhibits to the Commission upon request.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
Three Months Ended Six Months Ended
June 30 June 30
------------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income (loss), as reported $204 $(274) $369 $(79)
Dividends on preferred
stock, net of taxes (2) (2) (4) (4)
Premium on preferred
shares redeemed (1) (1) (2) (2)
----- ----- ----- -----
Net income (loss) available
to common shareholders $201 $(277) $363 $(85)
===== ===== ===== =====
Diluted:
Net income (loss) available
to common shareholders $201 $(277) $363 $(85)
Effect of dilutive securities:
Convertible preferred stock 2 - 3 -
Convertible monthly
income preferred securities 2 - 4 -
Zero coupon convertible notes 1 - 2 -
----- ----- ----- -----
Net income (loss) available
to common shareholders $206 $(277) $372 $(85)
===== ===== ===== =====
COMMON SHARES
Basic:
Weighted average common
shares outstanding 226 235 228 235
===== ===== ===== =====
Diluted:
Weighted average common
shares outstanding 226 235 228 235
Effect of dilutive securities:
Stock options 2 - 2 -
Convertible preferred stock 7 - 7 -
Convertible monthly income
preferred securities 7 - 7 -
Zero coupon convertible notes 3 - 3 -
----- ----- ----- -----
Total 245 235 247 235
===== ===== ===== =====
EARNINGS (LOSS) PER SHARE
Basic $0.89 ($1.18) $1.59 ($0.36)
====== ====== ====== ======
Diluted $0.84 ($1.18) $1.50 ($0.36)
====== ====== ====== ======
<PAGE>
Exhibit 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------ ----- ----- -----
(In millions, except ratios)
EARNINGS:
Income (loss) from continuing
operations before income taxes
and cumulative effect of
accounting change $290 $(288) $556 $(23)
Add: fixed charges 41 49 79 87
----- ----- ----- -----
Income (loss), as adjusted $331 $(239) $635 $64
===== ===== ===== =====
FIXED CHARGES:
Interest expense and amortization $25 $19 $47 $40
Dividends on redeemable
preferred securities 9 9 19 19
Rental expense (1) 7 21 13 28
----- ----- ----- -----
Total fixed charges 41 49 79 87
Preferred stock dividend
requirements 4 4 8 9
----- ----- ----- -----
Total fixed charges and preferred
stock dividend requirements $45 $53 $87 $96
===== ===== ===== =====
Ratio of earnings
to fixed charges (2) 8.01 - 8.06 -
===== ===== ===== =====
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements (2) 7.28 - 7.29 -
===== ===== ===== =====
(1) Interest portion deemed implicit in total rent expense. Amounts
for both periods of 1998 include an $11 million provision representative
of interest included in charge for future lease buy-outs recorded
in the second quarter of 1998 as a result of The St. Paul's
merger with USF&G Corporation.
(2) The second quarter 1998 loss was inadequate to cover
"fixed charges" by $288 million and "combined fixed charges
and preferred stock dividends" by $292 million. The year-to-
date 1998 loss was inadequate to cover "fixed charges" by
$23 million and "combined fixed charges and preferred stock
dividends" by $32 million.
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<DEBT-HELD-FOR-SALE> 20,849 20,843
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,393 1,147
<MORTGAGE> 612 702
<REAL-ESTATE> 919 919
<TOTAL-INVEST> 27,321 26,010
<CASH> 126 129
<RECOVER-REINSURE> 190 127
<DEFERRED-ACQUISITION> 1,007 837
<TOTAL-ASSETS> 39,329 37,463
<POLICY-LOSSES> 23,090 22,523
<UNEARNED-PREMIUMS> 3,342 3,392
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,506 1,076
503 503
18 15
<COMMON> 2,078 2,121
<OTHER-SE> 4,192 4,376
<TOTAL-LIABILITY-AND-EQUITY> 39,329 37,463
2,815 2,966
<INVESTMENT-INCOME> 797 795
<INVESTMENT-GAINS> 133 185
<OTHER-INCOME> 227 198
<BENEFITS> 2,200 2,530
<UNDERWRITING-AMORTIZATION> 699 761
<UNDERWRITING-OTHER> 517 876
<INCOME-PRETAX> 556 (23)
<INCOME-TAX> 136 (34)
<INCOME-CONTINUING> 420 11
<DISCONTINUED> (21) (90)
<EXTRAORDINARY> 0 0
<CHANGES> (30) 0
<NET-INCOME> 369 (79)
<EPS-BASIC> 1.59 (0.36)
<EPS-DILUTED> 1.50 (0.36)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
