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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934
For the Quarterly Period Ended September 30, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-11856
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TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3172455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 East 55th Street, 28th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 446-2700
(Registrant's telephone number, including area code)
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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 _____
Number of shares of Common Stock, $0.01 par value per share,
outstanding as of close of business on September 30, 1997: 51,386,296 excluding
14,937,627 treasury shares.
<PAGE>
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TIG HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed consolidated balance sheets as of
September 30, 1997 (unaudited) and December 31, 1996 ..............3
Condensed consolidated statements of income
for the three and nine months ended September 30, 1997
(unaudited) and September 30, 1996 (unaudited).....................4
Condensed consolidated statement of changes in
shareholders' equity for the nine months ended
September 30, 1997 (unaudited).....................................5
Condensed consolidated statements of cash flow
for the nine months ended September 30, 1997
(unaudited) and September 30, 1996 (unaudited).....................6
Notes to condensed consolidated financial
statements (unaudited).............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................11
2.1 Consolidated Results...............................................11
2.2 Reinsurance........................................................13
2.3 Commercial Specialty...............................................15
2.4 Retail.............................................................16
2.5 Other Lines........................................................18
2.6 Investments........................................................18
2.7 Reserves...........................................................21
2.8 Liquidity and Capital Resources....................................22
2.9 Forward-Looking Statements.........................................24
2.10 Glossary...........................................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
Item 6. Exhibits and Reports on Form 8-K...................................28
Exhibit 11 - Computation of Earnings Per Share (unaudited)...................29
SIGNATURES...................................................................30
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
(In millions, except share data) 1997 1996
- --------------------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Assets (unaudited)
Investments:
Fixed maturities at market
(cost: $4,086 in 1997 and $3,976 in 1996) $4,218 $4,057
Short-term and other investments (cost: $184 in 1997
and $176 in 1996) 187 176
- --------------------------------------------------------------------------- ---------------- -----------------
Total investments 4,405 4,233
Cash 5 19
Accrued investment income 59 57
Premium receivable (net of allowance of: $4 in 1997 and 1996) 480 420
Reinsurance recoverable (net of allowance of: $9 in 1997 and 1996) 1,334 1,264
Deferred policy acquisition costs 171 144
Prepaid reinsurance premium 92 105
Income taxes 46 102
Other assets 240 132
- --------------------------------------------------------------------------- ---------------- -----------------
Total assets $6,832 $6,476
- --------------------------------------------------------------------------- ---------------- -----------------
Liabilities
Reserves for:
Losses $3,238 $3,215
Loss adjustment expenses 453 545
Unearned premium 759 696
- --------------------------------------------------------------------------- ---------------- -----------------
Total reserves 4,450 4,456
Reinsurance premium payable 98 88
Funds withheld under reinsurance agreements 353 255
Notes payable 124 123
Other liabilities 438 322
- --------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 5,463 5,244
- --------------------------------------------------------------------------- ---------------- -----------------
Mandatory redeemable 8.597% capital securities of subsidiary trust 125 -
- --------------------------------------------------------------------------- ---------------- -----------------
Mandatory redeemable preferred stock 25 25
- --------------------------------------------------------------------------- ---------------- -----------------
Shareholders' Equity
Common stock - par value $0.01 per share
(authorized: 180,000,000 shares; issued and outstanding:
66,323,923 shares in 1997 and 64,610,109 shares in 1996) 1,230 1,198
Retained earnings 323 234
Net unrealized gain on fixed maturity investments, net of taxes 88 52
Net unrealized loss on foreign currency, net of taxes (1) (1)
- --------------------------------------------------------------------------- ---------------- -----------------
1,640 1,483
Treasury stock (14,937,627 shares in 1997 and 10,306,000
shares in 1996) (421) (276)
- --------------------------------------------------------------------------- ---------------- -----------------
Total shareholders' equity 1,219 1,207
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Total liabilities and shareholders' equity $6,832 $6,476
- --------------------------------------------------------------------------- ---------------- -----------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
(In millions, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues
Net premium earned $380 $387 $1,091 $1,162
Net investment income 71 74 219 216
Net realized investment gain (loss) 1 (1) 6 (6)
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Total revenues 452 460 1,316 1,372
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Losses and expenses
Net losses and loss adjustment expenses incurred 259 283 761 870
Commissions and premium related expenses 93 88 251 265
Other underwriting expenses 29 23 93 83
Corporate expenses 11 10 30 28
Interest expense 5 3 15 7
Restructuring charges - - - 100
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Total losses and expenses 397 407 1,150 1,353
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Income before income tax (expense) benefit 55 53 166 19
Income tax (expense) benefit (15) (16) (51) 21
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Net income $40 $37 $115 $40
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Net income per common share $0.73 $0.64 $2.07 $0.65
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
Dividend per common share $0.15 $0.05 $0.45 $0.15
- ---------------------------------------------------------- -------------- -------------- -------------- -------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Foreign Total
Unrealized Currency Share-
Common Retained Investment Translation Treasury holders'
(In millions) Stock Earnings Gain Adjustment Stock Equity
- ----------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,198 $234 $52 $(1) $(276) $1,207
Net income 115 115
Common and preferred stock
dividends (26) (26)
Common stock issued 29 29
Amortization of unearned
compensation 3 3
Treasury stock purchased (145) (145)
Change in net unrealized gain on
fixed maturity investments 36 36
- ----------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
Balance at September 30, 1997 $1,230 $323 $88 $(1) $(421) $1,219
- ----------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
(In millions) 1997 1996
------------------------------------------------------------- ----------------- ------------------
<S> <C> <C>
Operating Activities
Net income $115 $40
Adjustments to reconcile net income to cash provided
by operating activities:
Changes in:
Accrued investment income (2) (6)
Premium receivable (60) (18)
Reinsurance recoverable (70) (55)
Deferred policy acquisition costs (27) (8)
Prepaid reinsurance premium 13 12
Income taxes 37 (23)
Loss reserves 23 (31)
Loss adjustment expenses reserves (92) (31)
Unearned premium reserves 63 10
Reinsurance premium payable 10 5
Funds withheld under reinsurance agreements 98 75
Other assets, other liabilities and other (83) 69
------------------------------------------------------------- ----------------- ------------------
Net cash provided by operating activities 25 39
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Investing Activities
Purchases of fixed maturity investments (2,071) (1,448)
Sales of fixed maturity investments 1,896 1,318
Maturities and calls of fixed maturity investments 180 207
Net (decrease) increase in short-term investments (20) 47
Other (14) (4)
------------------------------------------------------------- ----------------- ------------------
Net cash (used in) provided by investing activities (29) 120
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Financing Activities
Common stock issued 29 7
Mandatory redeemable capital securities issued 125 -
Treasury stock purchased (140) (151)
Common stock and preferred stock dividends (26) (10)
Other 2 3
------------------------------------------------------------- ----------------- ------------------
Net cash used in financing activities (10) (151)
------------------------------------------------------------- ----------------- ------------------
Increase (decrease) in cash (14) 8
Cash at beginning of period 19 4
------------------------------------------------------------- ----------------- ------------------
Cash at end of period $5 $12
------------------------------------------------------------- ----------------- ------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS For the Nine Months Ended
September 30, 1997
(Unaudited)
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NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation. TIG Holdings, Inc. ("TIG Holdings") is primarily engaged
in the business of property/casualty insurance and reinsurance through its 15
domestic subsidiaries (collectively "TIG" or the "Company"). The accompanying
unaudited condensed consolidated financial statements include the accounts of
TIG Holdings and its subsidiaries and have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. Financial statements
prepared in accordance with GAAP require the use of management estimates. In the
opinion of management, all adjustments, including normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
reclassifications of prior year amounts have been made to conform with the 1997
presentation.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in TIG's annual report on Form 10-K for the year
ended December 31, 1996.
Earnings per Share ("EPS"). Primary EPS is calculated based upon the weighted
average common shares outstanding ("average shares") during the period. In order
to calculate average shares, unallocated ESOP shares and treasury shares are
deducted from outstanding common shares. Common stock options are considered
common stock equivalents and are included in average share calculations if
dilutive. To obtain net income attributable to common shareholders for EPS
computations, preferred stock dividends are deducted from net income. Refer also
to Exhibit 11 and Note E.
Investments. Fixed maturities are classified as available for sale, as TIG has
no intent to hold such securities until maturity, and are carried at market
value. Short-term investments are carried at cost, which approximates market
value. Market value is principally based upon quoted market prices. Quoted
market prices are available for substantially all securities held by the
Company. The difference between the aggregate market value and amortized cost of
securities, after deferred income tax effect, is reported as unrealized gain or
loss directly in shareholders' equity and, accordingly, has no effect on net
income.
Loss and Loss Adjustment Expense Reserves. The liability for unpaid losses and
loss adjustment expense ("LAE") is based on an evaluation of reported losses and
on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability is reported net of estimated salvage and subrogation
recoverable. Adjustments to the liability resulting from subsequent developments
or revisions to the estimates are reflected in results of operations in the
period in which such adjustments become known. While there can be no assurance
that the reserves at any given date are adequate to meet TIG's obligations, the
amounts reported on the balance sheet are management's best estimate of that
amount.
Treasury Stock. At September 30, 1997, the Board of Directors had authorized the
repurchase of up to 18.75 million shares of TIG Holdings common stock. The
Company uses the cost method to record the purchase of treasury shares.
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(Unaudited)
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NOTE B. MANDATORY REDEEMABLE 8.597% CAPITAL SECURITIES OF SUBSIDIARY TRUST
- --------------------------------------------------------------------------------
In January 1997, TIG Capital Trust I ("TIG Capital" or the "Trust"), a statutory
business trust under Delaware law and a trust subsidiary of TIG Holdings,
completed a private offering for $125 million of 8.597% capital securities. TIG
Holdings is the initial holder of 100% of the common securities of TIG Capital.
Holders of the capital securities of the Trust will have a preference under
certain circumstances over the holders of common securities of the Trust with
respect to cash distributions and amounts payable on liquidation, redemption, or
otherwise. Interest on the 8.597% capital securities is payable semi-annually.
TIG Holdings issued $128.75 million in 8.597% Junior Subordinated Debentures to
TIG Capital Trust I (including approximately $3.75 million with respect to the
capital contributed to the Trust by TIG Holdings). TIG Holdings guaranteed the
payment of distributions and payments on liquidation or redemption of the
capital securities but only in each case, to the extent of funds held by the
Trust. The guarantee does not cover payment of distributions when the Trust does
not have sufficient funds to pay such distributions. All of the net proceeds
received by TIG Holdings from the issuance of the debentures are being used for
general corporate purposes which includes repurchases of TIG Holding's common
stock.
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NOTE C. 1996 ACTIONS
- --------------------------------------------------------------------------------
Restructuring charges. In February 1996, TIG announced the reorganization of its
commercial operations and plans to exit certain lines of business that failed to
meet profitability standards. As a result of this reorganization, TIG took the
following actions: 1) combined its Specialty Commercial and Workers'
Compensation divisions to form a new division called Commercial Specialty, 2)
identified field offices for consolidation and closure, 3) identified lines of
business for non-renewal or cancellation for which 1995 net premium written was
approximately $190 million, 4) formed a run-off division to administer
contractually required policy renewals for run-off lines of business, and 5)
notified approximately 600 employees that their positions would be eliminated.
Net premium written for Other Lines has been reduced to $2 million for the first
nine months of 1997, and management estimates that the last renewals for
remaining policies in force will be processed by late 1997.
TIG recorded a $100 million accrual in first quarter 1996 for estimated
restructuring charges comprised of severance of $17 million; contractual policy
obligations of $37 million; office lease terminations of $18 million; furniture,
equipment and capitalized software write-downs of $12 million; and a reserve for
litigation and credit issues related to terminated producers of $16 million.
TIG re-evaluated the $100 million restructuring charge as of June 30, 1997.
Although the total amount of the restructuring charge remained unchanged, the
components were revised to the following: severance of $13 million; contractual
policy obligations of $43 million; office lease terminations of $16 million;
furniture, equipment and capitalized software write-downs of $10 million; and a
reserve for litigation and credit issues related to terminated producers of $18
million. Severance costs were less than originally estimated due to the
employment of certain TIG associates by third party service providers. The
reduction in severance was effectively offset by increased costs for contractual
policy obligations associated with outsourcing contracts. The revised estimates
for leases, asset write-downs, and producer credit issues reflect minor
adjustments to original assumptions based on activity through June 30, 1997.
Charges against the restructure accrual of $70 million have been recorded since
March 1996 and are comprised of $11 million in severance, $39 million in
contractual policy obligations, $13 million in lease termination costs, and $7
million in asset write-downs
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(unaudited)
- --------------------------------------------------------------------------------
Loss Reserves. In connection with the February 1996 restructuring, TIG completed
a re-evaluation of loss and LAE reserves related to run-off lines using
additional loss development data received during first quarter 1996. This data
confirmed adverse loss development trends observed in the second half of 1995
and was a consideration in the decision to exit certain lines of business as
previously discussed. As a result of this re-evaluation and management's belief
that the restructuring decision will make the claims settlement process for
run-off lines less consistent and more volatile, TIG increased loss and LAE
reserves by $31 million in the first quarter of 1996 for run-off lines,
principally for the Transportation and Large Programs units.
Income Taxes. In March 1996, TIG entered into settlement agreements with the IRS
on several outstanding audit assessments, which resulted in a redetermination of
certain tax liabilities related to tax years prior to TIG's initial public
offering (IPO) of April 27, 1993. As a result of the redetermination, a $20
million deferred tax benefit was recognized in first quarter 1996.
- --------------------------------------------------------------------------------
NOTE D. CONTINGENCIES
- --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims. On January 11, 1994, a Los Angeles County
Superior Court jury returned a verdict of $28 million for punitive damages
against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction,
Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a
surety bond claim on a construction project. On March 28, 1997, the California
Court of Appeal reduced the trial court's punitive damage award to $15 million.
On July 23, 1997, the California Supreme Court granted TIC's petition to review
the Court of Appeal's decision. Management believes that the ultimate liability
arising from the Talbot Case will not materially impact consolidated operating
results.
TIG's Federal income tax returns are routinely audited by the Internal Revenue
Service (IRS) and provisions are made in the financial statements in
anticipation of the results of these audits. Following a routine federal income
tax audit by the IRS, in September 1997 the IRS issued a Statutory Notice of
Deficiency for the tax year 1993 and a Revenue Agent's Report for 1994 asserting
a tax liability of approximately $170 million excluding interest. The IRS's
asserted tax adjustments principally relate to the acquisition made by TIG under
the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's IPO
and primarily generate temporary differences by creating income in 1993 with
corresponding deductions in 1993 and future years. TIG strongly disagrees with
the IRS's position and intends to file a Tax Court Petition challenging it in
the fourth quarter of 1997. While the timing of cash tax payments may be
impacted, management believes that revisions to TIG's recorded tax liability, if
any, arising from the IRS's audit will not materially impact consolidated net
income or the financial condition of the Company.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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NOTE E. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 128 "EARNINGS PER SHARE"
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement 128
"Earnings per Share" ("Statement 128"), which established a new calculation for
earnings per share showing both the "Basic" and "Diluted" earnings per share
effective for periods ending after December 15, 1997. Basic earnings per share
will be calculated using only weighted average shares outstanding with no
dilutive impact from common stock equivalents while the diluted earnings per
share calculation is similar to the current fully diluted earnings per share
calculation. All prior period earnings per share will be restated to be
consistent with the new requirements. If earnings per share had been calculated
in accordance with Statement 128, management estimates that the basic earnings
per share for third quarter 1997 and 1996 would have been $0.77 and $0.67,
respectively, and the first nine months of 1997 and 1996 would have been $2.18
and $0.68, respectively. Management estimates that the diluted earnings per
share according to Statement 128 for third quarter 1997 and 1996 would have been
$0.74 and $0.65, respectively, and for the first nine months of 1997 and 1996
would have been $2.10 and $0.66, respectively.
- --------------------------------------------------------------------------------
NOTE F. PENDING SALE OF INDEPENDENT AGENCY INSURANCE OPERATIONS
- --------------------------------------------------------------------------------
On September 30, 1997, TIG entered into a definitive agreement to sell the
Independent Agents unit of its Retail Division, based in Battle Creek, Michigan,
for $65 million in cash to Nationwide Mutual Insurance Company ("Nationwide").
The purchase price will be adjusted by the surplus of TIG Countrywide Insurance
Company ("CIC"), which is included in the sale, after giving effect to certain
transactions. TIG estimates that there will be no significant capital gain or
loss recognized on the sale. Assuming required regulatory approvals are
obtained, the sale is expected to be effective December 31, 1997. At closing,
TIG will enter into several reinsurance arrangements with CIC and cede all
outstanding loss and LAE reserves, unearned premium reserves and premium
receivables. To allow CIC and Nationwide time to make appropriate regulatory
filings, TIG will continue to write Independent Agents business and cede such
business 100% to CIC for up to two years, or longer, if needed. TIG has also
agreed to provide information system services to Nationwide for the processing
of this business for a period of up to two years. Independent Agents gross
premium written for the first nine months of 1997 and the year ended December
31, 1996 totaled $226 million and $300 million, respectively.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion provides management's assessment of financial results
for the three and nine months ended September 30, 1997 as compared to the three
and nine months ended September 30, 1996 and material changes in financial
position from December 31, 1996 to September 30, 1997 for TIG Holdings, Inc.
("TIG Holdings") and its subsidiaries (collectively "TIG" or the "Company"). The
analysis focuses on the performance of TIG's three major operating divisions,
Reinsurance, Commercial Specialty and Retail, and its investment portfolio and
presents management's expectations for the near future. Lines of business that
have been de-emphasized ("Other Lines") are discussed at Item 2.5. This
discussion updates the "Management's Discussion and Analysis" in the 1996 Annual
Report to Shareholders and should be read in conjunction therewith. Key industry
terms that appear in the Management's Discussion and Analysis and elsewhere in
this document are defined at Item 2.10 - Glossary. Certain reclassifications of
prior years' amounts have been made to conform with the 1997 presentation.
Statements contained in the Management's Discussion and Analysis, and elsewhere
in this document which are based on management's projections, estimates and
assumptions are forward-looking statements. Management would like to caution
readers regarding its forward-looking statements (see Item 2.9 - Forward-Looking
Statements).
- --------------------------------------------------------------------------------
2.1 CONSOLIDATED RESULTS
- --------------------------------------------------------------------------------
Overview. Results of operations for the three and nine months ended September
30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- --- -- ---------------------------
(In millions) 1997 1996 1997 1996
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
<S> <C> <C> <C> <C>
Gross premium written $533 $496 $1,467 $1,472
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Net premium written $410 $396 $1,179 $1,183
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Net premium earned $380 $387 $1,091 $1,162
Less: Net loss and LAE incurred 259 283 761 870
Commission expense 82 77 219 226
Premium related expense 11 11 32 39
Other underwriting expense 29 23 93 83
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Underwriting loss (1) (7) (14) (56)
Net investment income 71 74 219 216
Net realized investment gain (loss) 1 (1) 6 (6)
Corporate expenses 11 10 30 28
Interest expense 5 3 15 7
Restructuring charges - - - 100
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Income before tax (expense) benefit 55 53 166 19
Income tax (expense) benefit (15) (16) (51) 21
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Net income $40 $37 $115 $40
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
Income excluding investment gains (losses)
and restructuring charges $39 $38 $111 $109
- ------------------------------------------------- ------------- ------------- ------ ------------- -------------
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net income of $40 million for third quarter 1997 increased 8.1% over 1996
primarily due to improvements in underwriting results, offset in part by a
slight decline in investment income and increased interest expense. In January
1997, $125 million of mandatory redeemable capital securities were issued (see
Note B to the Condensed Consolidated Financial Statements), the proceeds of
which are being used for general corporate purposes, which includes repurchases
of TIG Holding's common stock.
Net income for the first nine months of 1997 increased by $75 million over 1996
due to restructuring charges of $100 million ($65 million after tax) recorded in
1996 in connection with the reorganization of commercial operations and the
decision to exit certain underperforming programs. Income excluding
restructuring charges and investment gains and losses increased slightly.
Underwriting loss decreased by $42 million in the first nine months of 1997 as
compared to 1996 due to reserve strengthening of $31 million recorded in Other
Lines in first quarter 1996 and decreased property and catastrophe losses in
1997 compared to 1996. The impact of reserve strengthening on 1996 results was
offset by a deferred tax benefit also recorded in first quarter 1996. For
additional information regarding first quarter 1996 restructuring charges,
reserve strengthening and income tax benefit, see Note C to the Condensed
Consolidated Financial Statements. Interest expense increased due to the
aforementioned issuance of $125 million in mandatory redeemable capital
securities in January 1997.
Since mid-1993, TIG has sought to reduce operating expenses and improve
profitability by eliminating lines of business requiring high cost processing on
a policy by policy basis. On September 30, 1997 TIG entered into a definitive
agreement to sell the Independent Agents unit of its Retail Division, based in
Battle Creek, Michigan, to Nationwide Mutual Insurance Company. The business to
be sold consists of individually underwritten personal lines products produced
through a network of independent agents. In conjunction with the sale, TIG
anticipates that the employees that support this unit will be offered employment
with Nationwide Mutual Insurance Company. Upon completion of this sale, which is
expected to be effective December 31, 1997, TIG will have taken another step in
its ongoing efforts to exit administratively intensive businesses in order to
focus on underwriting intensive Specialty business. See Note F for additional
information regarding the pending sale of Independent Agents business.
Premium. Overall market conditions remain extremely competitive in 1997.
Oversupply of capital in the insurance industry has resulted in significant
downward pricing pressure, making it increasingly difficult for TIG to write
business which meets its profitability standards. TIG's marketing focus for all
divisions is to develop program business which caters to market niches. The
following table summarizes net premium written ("NPW") by division:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------- ------------------
(In millions) NPW % NPW % NPW % NPW %
--------------------------- -------- --------- -------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reinsurance $124 30% $139 35% $408 35% $421 35%
Commercial Specialty 179 44% 125 32% 451 38% 340 29%
Retail 108 26% 91 23% 318 27% 270 23%
Other Lines (1) - % 41 10% 2 - % 152 13%
--------------------------- -------- --------- -------- --------- --------- --------- --------- --------
Net premium written $410 100% $396 100% $1,179 100% $1,183 100%
--------------------------- -------- --------- -------- --------- --------- --------- --------- --------
</TABLE>
Third quarter 1997 premium increased $14 million, or 3.5% over third quarter
1996; however, the Company's on-going operating divisions had premium growth of
$56 million, or 15.8%. Growth in Commercial Specialty premium resulted from new
business in the Workers' Compensation and Primary Casualty units as discussed at
Item 2.3. Growth in Retail premium was driven by the Non-standard Auto unit as
well as production from the new Alternative Distribution unit as discussed at
Item 2.4. The premium growth in on-going operating divisions was partially
offset by a $42 million decline in Other Lines premium as a result of the
Company's efforts to non-renew Other Lines business.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Underwriting Results. The following table presents the components of the
Company's statutory combined ratio:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
Statutory ratios 1997 1996 1997 1996
-------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Loss and LAE 68.1 73.0 69.8 74.8
-------------------------------- ----------------- ---------------- ----------------- ----------------
Commission expense 21.3 19.9 19.9 19.8
Premium related expense 2.9 3.0 2.8 3.2
Other underwriting expense 8.2 6.3 8.4 6.8
-------------------------------- ----------------- ---------------- ----------------- ----------------
Total underwriting expense 32.4 29.2 31.1 29.8
Policyholder dividends ratio 0.7 0.8 0.9 1.0
-------------------------------- ----------------- ---------------- ----------------- ----------------
Combined ratio 101.2 103.0 101.8 105.6
-------------------------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
The combined ratio for both the third quarter and first nine months of 1997
improved over 1996. Factors impacting 1997 were lower catastrophe and property
loss activity, and premium tax refunds off-set in part by an increased
commission ratio as a result of higher commission structures on new program
business. The other underwriting expense ratio also increased as a result of
start up costs incurred by all ongoing operating divisions for program
development. For the nine months ended September 30, 1996, the consolidated loss
and LAE ratios were increased by 2.7 percentage points due to reserve
strengthening of $31 million recorded in first quarter 1996 for Other Lines.
<PAGE>
- --------------------------------------------------------------------------------
2.2 REINSURANCE
- --------------------------------------------------------------------------------
TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG
Re") which is based in Stamford, Connecticut. TIG Re operates through eight
business units which employ similar underwriting principles but serve differing
market needs: Specialty Casualty, Traditional Treaty, London Branch, a Lloyd's
Syndicate, Reverse Flow, Specialty Property, Finite Reinsurance and Facultative.
Specialty Casualty emphasizes general liability and professional liability
lines. TIG Re is often a lead underwriter in these transactions which are
usually structured on an excess-of-loss basis. Traditional Treaty reinsures
"standard" property/casualty business. The London Branch focuses on worldwide
property exposures, with casualty underwriting having been introduced in late
1996, while a fully integrated Lloyd's vehicle (underwriting syndicate) was
introduced in December 1996. Reverse Flow is an alternative distribution
mechanism whereby general agents submit program business to TIG Re through an
intermediary, who then works with select reinsurance intermediaries to provide a
primary insurer to issue the policy and then cede a significant portion of the
risk to TIG Re. Specialty Property covers both domestic and international
exposures. Finite Reinsurance provides clients with integrated underwriting
approaches to control the volatility of financial results over time. In late
1996, TIG Re opened nine facultative offices which currently offer casualty
risks, writing both single risk and automatic facility business.
Premium. The following table summarizes TIG Re's premium production:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ------------------ ------------------- ------------------
(In millions) NPW % NPW % NPW % NPW %
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Casualty $38 31% $72 52% $150 37% $257 61%
Traditional Treaty 35 28% 29 21% 75 18% 52 12%
London Branch & Lloyd's 15 12% 7 5% 57 14% 21 5%
Reverse Flow 21 17% 20 14% 50 12% 40 10%
Specialty Property 7 6% 6 4% 33 8% 34 8%
Finite 3 2% 5 4% 27 7% 17 4%
Facultative 5 4% - - % 16 4% - - %
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Net premium written $124 100% $139 100% $408 100% $421 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Gross premium written $147 $151 $459 $446
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Gross premium written declined slightly in third quarter 1997 as compared to
1996 as new business written was not sufficient to offset the non-renewal of
several significant treaties. The slight increase in gross written premium for
the first nine months of 1997 is primarily derived from new business
initiatives. The majority of new business is attributable to production in
marketing segments established during the past two years such as the London
Branch, a Lloyd's syndicate, Reverse Flow, Finite and Facultative. In response
to highly competitive market conditions in its core Specialty Casualty market,
TIG Re has focused on the development of new distribution channels. Increases in
aggregate reinsurance cessions resulted in decreased premium retention. Net
premium written declined by 11% and 3%, respectively, for the third quarter and
the first nine months of 1997.
Approximately 74% of business eligible for renewal for the first nine months of
1997 was retained as compared to 84% for 1996. The decline is primarily
attributable to the non-renewal of two significant Specialty Casualty programs
as a result of re-underwriting initiatives instituted by TIG Re in response to
soft market conditions and re-evaluations of current treaty profitability.
Furthermore, one other Specialty Casualty program was renewed at a reduced
participation in 1997, and one Reverse Flow program has been canceled with an
effective date of January 1, 1998. Net premium related to these four programs
was $13 million and $26 million for the third quarter and the first nine months
of 1997, respectively, as compared to $23 million and $81 million for the
corresponding 1996 periods.
Underwriting Results. The following table summarizes TIG Re's underwriting
results:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
---------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net premium earned $146 $136 $393 $401
Less:
Net loss and LAE incurred 101 98 281 289
Commission expense 40 34 97 100
Other underwriting expense 9 6 28 18
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting loss $(4) $(2) $(13) $(6)
---------------------------------------------- ------------- ------------- ------------- -------------
Statutory ratios
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 69.4 72.5 71.3 72.0
Commission 27.2 25.0 24.2 25.3
Other underwriting 9.1 4.5 7.7 4.5
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 105.7 102.0 103.2 101.8
---------------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
Start up costs for TIG Re's facultative reinsurance unit and the Lloyd's
syndicate, both established in late 1996, are principally responsible for the
increase in other underwriting expense and underwriting loss for both third
quarter 1997 and the first nine months of 1997 as compared to 1996. In addition,
soft market conditions produced slower premium growth than anticipated,
resulting in an increase in the underwriting expense ratio for both the quarter
and year to date over prior year amounts.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.3 COMMERCIAL SPECIALTY
- --------------------------------------------------------------------------------
Commercial Specialty, based in Irving, Texas, provides specialized insurance
products through five main business units: Sports and Leisure, Workers'
Compensation, Lloyd's Syndicates, Primary Casualty and Excess Casualty. The
Sports and Leisure unit offers coverages for professional and amateur sports
events. Coverages include spectator liability and participant legal liability,
including property and liability packages for a variety of entertainment and
leisure activities. Workers' Compensation provides benefits to employees as
mandated by state laws for employment-related accidents, injuries or illnesses.
Commercial Specialty participates in three Lloyd's syndicates which principally
write marine, U.K. property and aviation business. The Primary Casualty unit
focuses on commercial auto, professional liability, construction and marine
programs. These programs generally offer a customized package of coverages
designed for a specific "niche" market and are produced through a limited number
of general agents. The Excess Casualty unit offers lead umbrella and excess
umbrella policies. Lead umbrella policies provide liability protection for
manufacturing, financial, and service related business above the limits of the
primary coverage. Excess umbrella policies provide similar coverage above the
lead excess limits.
Premium. Net premium written increased by 43% for the third quarter of 1997 and
33% for the first nine months of 1997 as compared to the corresponding 1996
periods. This growth was derived primarily from Workers' Compensation, the new
Lloyd's Syndicates and the Primary Casualty units. Third quarter 1997 Workers'
Compensation premium benefited from the assumption of an existing book of
program business produced by an agency which will also provide loss management
services. Primary Casualty premium growth was attributable to new construction
and professional liability business. In December 1996, TIG acquired a majority
interest in a Lloyd's agency which manages three syndicates and established a
corporate name with an approximate 20% share of the managed syndicates' stamp
capacity. As the majority of syndicate business renews in the first quarter,
syndicate premium will not significantly impact the remainder of 1997. The
following table summarizes Commercial Specialty net premium written by business
unit:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ------------------ ------------------- ------------------
(In millions) NPW % NPW % NPW % NPW %
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Workers' Compensation $80 45% $46 37% $188 42% $142 42%
Sports and Leisure 56 31% 53 42% 142 31% 133 39%
Primary Casualty 29 16% 17 14% 69 15% 46 13%
Lloyd's Syndicates 3 2% - - % 27 6% - - %
Excess Casualty & Other 11 6% 9 7% 25 6% 19 6%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Net premium written $179 100% $125 100% $451 100% $340 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Gross premium written $245 $168 $594 $448
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Underwriting Results. Underwriting results for Commercial Specialty are
presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
---------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net premium earned $129 $112 $353 $305
Less:
Net loss and LAE incurred 87 79 241 214
Commission expense 27 22 67 57
Premium related expense 4 4 13 14
Other underwriting expense 9 8 33 23
Policyholder dividends incurred 2 1 5 4
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting loss $ - $(2) $(6) $(7)
---------------------------------------------- ------------- ------------- ------------- -------------
Statutory ratios
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 67.0 70.4 68.4 70.3
Commission 20.9 19.1 19.3 18.6
Premium related 2.6 3.3 3.3 4.2
Other underwriting 6.6 6.7 8.0 6.9
Policyholder dividends 1.9 2.6 2.6 3.6
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 99.0 102.1 101.6 103.6
---------------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
Commercial Specialty's underwriting loss declined by $2 million in third quarter
1997 as compared to third quarter 1996 and declined by $1 million for the first
nine months of 1997 as compared to the first nine months of 1996. The
improvement in underwriting results is primarily attributable to decreased
property losses and improvements in Workers' Compensation results as a
consequence of focusing on more profitable states. These trends were reflected
in an improved combined ratio for both third quarter 1997 and first nine months
of 1997 compared to prior year results.
- --------------------------------------------------------------------------------
2.4 RETAIL
- --------------------------------------------------------------------------------
The Retail division provides personal lines and small business insurance
products through four main business units: Independent Agents (see Item 2.1 and
Note F for information regarding the pending sale of the Independent Agents
unit), Non-standard Auto, Alternative Distribution and Small Business.
Independent Agents, based in Battle Creek, Michigan, markets principally
standard personal auto and homeowners coverages through approximately 400 active
independent agents focused in ten core states. Non-standard Auto provides auto
physical damage and liability coverages to higher risk insureds principally
through managing general agents. Alternative Distribution markets personal lines
insurance through non-traditional channels, such as direct marketing, group and
affiliation marketing, and electronic commerce. Small Business provides
commercial property, liability, and auto coverages to small business owners
through independent agents, primarily in Hawaii, Arizona and California.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Premium. Retail net premium written increased by approximately 19% and 18% for
the third quarter and first nine months of 1997, respectively, as compared to
the corresponding 1996 periods. Premium growth for third quarter 1997 was driven
by the Non-standard Auto unit and resulted primarily from increased production
in California and Texas. The Alternative Distribution unit recently commenced
operations, generating $9 million and $16 million of production in the third
quarter and first nine months of 1997, respectively. The increasing production
is attributable to additional sales staff and licensing in additional states.
The decrease in Independent Agents net premium written during the third quarter
of 1997 is primarily the of result the Company having re-evaluated its
relationship with certain agents and having identified under-performing business
which had net written premium of approximately $21 million and $73 million for
the third quarter and first nine months of 1997, respectively, as compared to
$28 million and $86 million for the corresponding 1996 periods. TIG does not
intend to renew this under-performing business over the next several years (see
Item 2.1 and Note F - for information regarding the pending sale of the
Independent Agents unit).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ------------------ ------------------- ------------------
(In millions) NPW % NPW % NPW % NPW %
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Independent Agents $59 55% $67 74% $200 63% $197 73%
Non-standard Auto 26 24% 9 10% 55 17% 27 10%
Alternative Distributions 9 8% - - % 16 5% - - %
Small Business 14 13% 15 16% 47 15% 46 17%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Net premium written $108 100% $91 100% $318 100% $270 100%
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Gross premium written $131 $102 $360 $304
---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
</TABLE>
Underwriting Results. Underwriting results for Retail are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
---------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net premium earned $101 $89 $307 $261
Less:
Net loss and LAE incurred 67 66 213 188
Commission expense 17 14 49 41
Premium related expense 4 3 13 12
Other underwriting expense 9 7 26 22
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting gain (loss) $4 $(1) $6 $(2)
---------------------------------------------- ------------- ------------- ------------- -------------
Statutory ratios
---------------------------------------------- ------------- ------------- ------------- -------------
Loss and LAE 66.9 73.6 69.4 71.9
Commission 16.9 15.4 15.8 15.9
Premium related 4.4 4.1 4.1 4.5
Other underwriting 9.3 8.6 9.3 8.8
---------------------------------------------- ------------- ------------- ------------- -------------
Combined ratio 97.5 101.7 98.6 101.1
---------------------------------------------- ------------- ------------- ------ ------------- -------------
</TABLE>
The improvement in Retail's underwriting results for the third quarter and the
first nine months of 1997 as compared to 1996 is primarily due to decreased
property and catastrophe losses incurred during 1997. Catastrophe losses
contributed a 1.3 and 1.6 percentage point improvement in Retail's loss and LAE
ratio for the third quarter and first nine months of 1997 as compared to the
respective 1996 periods. The improving trends in property losses were reflected
in an improved combined ratio.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.5 OTHER LINES
- --------------------------------------------------------------------------------
Other Lines principally includes commercial products which have been placed in
run-off due to the failure to meet profitability standards. Approximately 95% of
this business was placed in run-off in the first quarter of 1996. Most premium
written in run-off programs after the "exit date" represents contractually
required renewals. Net premium written in the third quarter of 1997 was negative
due to audits, write-offs and retro adjustments on certain policies. Non-renewal
of Other Lines business has generally progressed at a faster rate than
originally expected by management. Costs to administer required renewals were
accrued through a $100 million restructure charge and loss and LAE reserves for
Other Lines were increased by $31 million during first quarter 1996 (see Note C
to Condensed Consolidated Financial Statements). Underwriting results for Other
Lines are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
---------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross premium written $10 $75 $54 $274
---------------------------------------------- ------------- ------------- ------------- -------------
Net premium written $ (1) $41 $2 $152
---------------------------------------------- ------------- ------------- ------------- -------------
Net premium earned $ 4 $50 $38 $195
Less:
Net loss and LAE incurred 4 40 26 179
Commission expense (2) 7 6 28
Premium related expense 2 3 4 12
Other underwriting expense 1 2 3 17
---------------------------------------------- ------------- ------------- ------------- -------------
Underwriting loss $(1) $(2) $(1) $(41)
---------------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
2.6 INVESTMENTS
- --------------------------------------------------------------------------------
Investment Mix. TIG's ongoing investment strategies strive to provide the
Company with a balance of liquidity and return, within corporate credit
guidelines and regulatory restrictions. The following chart summarizes TIG's
investment portfolio by investment type:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
----------------------------- -----------------------------
Market % of Market Market % of Market
(In millions) Value Portfolio Value Portfolio
------------------------------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Corporate and other bonds $1,271 29% $1,242 29%
U.S. government bonds 1,179 27% 1,070 25%
Mortgage-backed securities 1,033 23% 1,210 29%
Municipal bonds 735 17% 535 13%
------------------------------------- -------------- -------------- --------------- ---------------
Total fixed maturity investments $4,218 96% $4,057 96%
Short-term investments 159 4% 139 3%
Other investments 28 -% 37 1%
------------------------------------- -------------- -------------- --------------- ---------------
Total invested assets $4,405 100% $4,233 100%
------------------------------------- -------------- -------------- --------------- ---------------
</TABLE>
The portfolio gross book yield at September 30, 1997 was 7.3%, as compared to
7.5% at December 31, 1996, primarily as a result of an increase in tax preferred
bonds.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Approximately one-fourth of TIG's portfolio consists of mortgage-backed
securities ("MBS"). AAA rated United States federal government agency mortgages
now represent approximately 91% of TIG's exposure to MBS. A risk inherent in MBS
is prepayment risk related to interest rate volatility. The underlying mortgages
may be repaid earlier or later than originally anticipated, depending on the
repayment and refinancing activity of the underlying homeowners. Should this
occur, TIG would receive paydowns on the principal amount which may have been
purchased at a premium or discount and TIG's investment income would be affected
by any adjustments to amortization resulting from the prepayments. TIG's
consolidated financial results have not been materially impacted by prepayments
of MBS. Additionally, interest rate volatility can affect the market value of
MBS. All MBS held in the portfolio can be traded in the public market.
Derivatives/Hedges. In the normal course of business, TIG may choose to hedge
some of its interest rate risk with futures contracts and/or interest rate
swaps. Alternatively, derivative financial instruments may also be utilized to
enhance prospective returns. TIG's interest rate swap arrangements generally
provide that one party pays interest at a floating rate in relation to movements
in an underlying index, and the other party pays interest at a fixed rate. While
TIG is exposed to credit risk in the event of nonperformance by the other party,
nonperformance is not anticipated due to the credit rating of the
counterparties.
No futures contracts positions were open at September 30, 1997, or December 31,
1996. There were $14 million notional face amount of interest rate swaps at
September 30, 1997, unchanged from December 31, 1996. Total fair value of
derivative positions were approximately $77 million, representing 1.76% of the
total investment asset holdings at September 30, 1997 as compared to $85 million
at December 31, 1996. All TIG derivative financial instruments were with
financial institutions rated "A" or better by one or more of the major credit
rating agencies.
Investment Life and Duration. TIG's objective is to maintain the weighted
average life of its investment portfolio between 8 and 11 years and the weighted
average duration between 4 and 7 years. At September 30, 1997, the weighted
average life of TIG's investment portfolio was 9.9 years compared to 10.3 years
at December 31, 1996. At September 30, 1997, the weighted average duration of
TIG's investment portfolio was 5.3 years compared to 5.6 years at December 31,
1996.
Investments in TBA's. TIG routinely enters into commitments to purchase
securities on a "To Be Announced" ("TBA") basis for which the interest rate risk
remains with TIG until the date of delivery and payment. Delivery and payment of
securities purchased on a TBA basis can take place a month or more after the
date of the transaction. These securities are subject to market fluctuations
during this period and it is the Company's policy to recognize any gains and
losses only when they are realized. TIG currently maintains cash and short-term
investments with a fair value exceeding the amount of its TBA purchase
commitments. At September 30, 1997, the net TBA purchase commitments amounted to
$96 million and had a fair value of $99 million compared to TBA commitments of
$46 million and a fair value of $46 million at December 31, 1996.
Unrealized gains. Net pre-tax unrealized gains increased by $54 million during
the first nine months of 1997 due to overall market value increases. As of
September 30, 1997, the aggregate net unrealized gain on TIG's investment
portfolio was $135 million. The following is a summary of net unrealized gains
(losses) by type of security:
<TABLE>
<CAPTION>
(In millions) September 30, 1997 December 31, 1996 Change
-------------------------------------------- --------------------- --------------------- --------------
<S> <C> <C> <C>
Municipal bonds $38 $33 $5
Mortgage-backed securities 8 (9) 17
US government bonds 51 32 19
Corporate and other bonds 35 25 10
Other investments 3 - 3
-------------------------------------------- --------------------- --------------------- --------------
Net unrealized gains $135 $81 $54
-------------------------------------------- --------------------- --------------------- --------------
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Investment Income. The following table displays the components of TIG's
investment income and mean after-tax investment yields. The yields include
interest earned and exclude realized investment gains and losses. These yields
are computed using the average of the end of the month asset balances during the
period.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
----------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity investments:
Taxable $66 $67 $203 $195
Tax-exempt 8 8 23 27
Short-term and other investments 1 1 4 5
----------------------------------------- ------------- ------------- ------------- -------------
Total gross investment income 75 76 230 227
Investment expenses, interest and other (4) (2) (11) (11)
----------------------------------------- ------------- ------------- ------------- -------------
Total net investment income $71 $74 $219 $216
----------------------------------------- ------------- ------------- ------------- -------------
After-tax net investment yield 4.43% 4.69% 4.62% 4.54%
----------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
Investment Quality. The table below shows the rating distribution of TIG's fixed
maturity portfolio:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------------- ---------------------------
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In millions)
AAA/Aaa $2,933 69.5% $2,787 68.7%
AA/Aa 263 6.3% 194 4.8%
A/A 248 5.9% 329 8.1%
BBB/Baa 270 6.4% 232 5.7%
Below BBB/Baa 504 11.9% 515 12.7%
------------------------------------------ ------------- ------------- ------------- -------------
Total fixed maturity investments $4,218 100.0% $4,057 100.0%
------------------------------------------ ------------- ------------- ------------- -------------
</TABLE>
TIG minimizes the credit risk of its fixed maturity portfolio by investing
primarily in investment grade securities; however, management has authorized the
purchase of up to $700 million in high yield, less than investment grade
securities. The Company's high yield portfolio is comprised of bonds whose
issuers are subjected to rigorous credit analysis, including tests of
prospective profitability, liquidity, leverage, and interest coverage. This
analysis is updated regularly as financial results are released, and bonds are
constantly evaluated for their value.
The information on credit quality in the preceding table is based upon the
higher of the rating assigned to each issue of fixed income securities by either
Standard & Poor's Rating Service or Moody's Investor Services, Inc. Where
neither Standard & Poor's nor Moody's has assigned a rating to a particular
fixed maturity issue, classification is based on 1) ratings available from other
recognized rating services, 2) ratings assigned by the National Association of
Insurance Commissioners Securities Valuation Office (the "SVO"), or 3) an
internal assessment of the characteristics of the individual security, if no
other rating is available.
The SVO assigns bond ratings for most publicly held bonds. The SVO ratings are
used by insurers when preparing their annual statutory financial statements.
State departments of insurance use the bond rating data when attempting to
determine whether an insurer's holdings are sound. Investments must fit within
certain regulatory guidelines of an insurer's domicilary state in order for an
insurer to be licensed to do business in that state. The SVO ratings range from
"1" to "6", with "1" and "2" being the higher quality, "3" being medium grade,
and "4" through "6" being lower grade obligations. As of September 30, 1997 and
December 31, 1996, approximately 90% and 87%, respectively, of TIG's portfolio,
measured on a statutory carrying value basis, was invested in securities rated
as "1" or "2".
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.7 RESERVES
- --------------------------------------------------------------------------------
TIG maintains reserves to cover its estimated ultimate liability for losses and
loss adjustment expenses ("LAE") with respect to reported and unreported claims.
TIG's reserves for losses and LAE totaled $3,691 million and $3,760 million at
September 30, 1997 and December 31, 1996, respectively. The process of
estimating loss and LAE reserves involves the active participation of an
experienced actuarial staff with input from underwriting, claims, reinsurance,
financial and legal departments. Management, using the advice of loss reserve
specialists, makes a judgment as to the appropriate amount to record in the
financial statements. Because reserves are estimates of ultimate losses and LAE,
management monitors reserve adequacy over time, evaluating new information as it
becomes known and adjusting reserves, as necessary. Such adjustments are
reflected in current operations.
The inherent uncertainty in estimating reserves is increased when significant
changes occur. Examples of such changes include: (1) changes in production
sources for existing lines of business; (2) writings of significant blocks of
new business; (3) changes in economic conditions; and (4) changes in state or
federal laws and regulations, particularly insurance reform measures. TIG has
experienced significant changes in each of these areas during the past several
years. The inherent uncertainties in estimating reserves are greater with
respect to reinsurance than for primary insurance due to the diversity of the
development patterns among different types of reinsurance contracts, the
necessary reliance on ceding companies for information regarding reported claims
and differing reserving practices among ceding companies.
TIG's reserves include an estimate of TIG's ultimate liability for
asbestos-related matters, environmental pollution, toxic tort and other
non-sudden and accidental claims for which ultimate values cannot be estimated
using traditional reserving techniques. TIG's "environmental" loss and LAE
reserves totaled $37 million and $39 million at September 30, 1997 and December
31, 1996, respectively. TIG's environmental claims activity is predominately
from hazardous waste and pollution-related claims rising from commercial
insurance policies written prior to 1985. In connection with TIG's IPO in April
1993, an affiliate of TIG's former parent, Transamerica Corporation, agreed to
pay 75% of up to $119 million of reserve development and newly reported claims,
up to a maximum reimbursement of $89 million, on policies written prior to
January 1, 1993, with respect to certain environmental claims involving paid
losses and certain LAE in excess of TIG's environmental loss and LAE reserves at
December 31, 1992. At September 30, 1997, the Transamerica affiliate had
incurred no liability under this agreement.
During second quarter 1997, TIG completed a study of Company-wide loss reserves
based on year-end 1996 data. The study indicated that the Company's reserve
position net of available reinsurance coverage continues to be adequate. TIG
will continue to monitor its reserve position and periodically conduct thorough
loss reserve reviews. Management considers many factors when setting reserves,
including: (i) current legal interpretations of coverage and liability; (ii)
economic conditions; and (iii) internal methodologies which analyze TIG's
experience with similar cases, information from ceding companies and historical
trends, such as reserving patterns, loss payments, pending levels of unpaid
claims and product mix. Based on these considerations, management believes that
adequate provision has been made for TIG's loss and LAE reserves. Actual losses
and LAE paid may deviate, perhaps substantially, from such reserves.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.8 LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. TIG requires cash primarily to pay
policyholders' claims, operating expenses, policyholder dividends and interest
expenses. Generally, premium is collected months or years before claims are paid
under the policies purchased by the premium. These funds are used first to pay
current claims and expenses. The balance is invested in securities to augment
the investment income generated by the existing portfolio. Historically, TIG has
had, and expects to continue to have, more than sufficient funds to pay claims,
operating expenses, policyholder dividends and interest expenses.
Cash Flow From Operating Activities. The following table summarizes the
significant components of cash flow from operations:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ---------------------------
(In millions) 1997 1996 1997 1996
------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Reinsurance operations $21 $52 $91 $140
Primary operations and corporate 28 45 63 29
------------------------------------- ------------- -------------- ------------- -------------
On-going operations 49 97 154 169
Run-off (Other Lines operations) (11) (58) (129) (130)
------------------------------------- ------------- -------------- ------------- -------------
Total $38 $39 $25 $39
------------------------------------- ------------- -------------- ------------- -------------
</TABLE>
The decrease in On-going operations cash flow for third quarter 1997 compared to
1996 is primarily attributable to a decline in overall premiums collected as a
result of a decline in net premium written in Reinsurance operations and due to
the timing of premiums collected in Primary operations. Run-off cash outflow has
declined significantly for the quarter due primarily to a decrease in losses
paid, net of reinsurance recoveries. Planned declines in Run-off premium
production partially offset the reduced paid loss trends.
The decline in on-going operations cash flow for the first nine months 1997 as
compared to 1996 is primarily attributable to an increase in paid losses in
Reinsurance due to a shift in business to shorter tail lines and an increase in
operating expenses paid in the company. Partially off-setting the increase in
paid items were increased premium receipts in the Primary operations as a result
of increasing production, and a decline in paid losses in Primary operations due
primarily to the timing of loss payments and reinsurance recoverables in 1996.
Run-off cash outflow was relatively flat for the nine months, however a
significant planned decline in run-off premium production off-set slowing paid
loss trends. Net premium written for run-off lines was $2 million for the first
nine months of 1997 as compared to $152 million for the 1996 period. As of
September 30, 1997, loss and LAE reserves for run-off business, net of
reinsurance, were approximately $387 million, 90% of which are expected to be
paid within the next 5 years.
Restrictions on Dividends from Insurance Subsidiaries. The maximum amount of
shareholders dividends which the insurance subsidiaries can pay to TIG Holdings
is limited to the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) the statutory net income for the preceding year except
that such amount may not exceed earned surplus. Accordingly, the maximum
dividend payout to TIG Holdings from its subsidiaries that can be made without
regulatory approval during 1997 is $155 million. TIG Holdings received $95
million in dividends from its insurance subsidiaries in the first nine months of
1997, as compared to $75 million for the first nine months of 1996. Aggregate
investments and cash at TIG Holdings were $59 million at September 30, 1997,
compared to $40 million at December 31, 1996.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Notes Payable. In December 1995, TIG Holdings established an unsecured revolving
line of credit with maximum borrowings of $250 million. At September 30, 1997,
TIG had no outstanding borrowings under this facility. In 1995, TIG Insurance
Company entered into a five-year $50 million credit facility of which
approximately $26 million was outstanding as of September 30, 1997 and $25
million was outstanding as of December 31, 1996. The facility is a direct
financing arrangement with a third-party related to the sale leaseback of
certain fixed assets. In addition, TIG Holdings had $98 million of 8.125% notes
payable maturing in 2005 outstanding at September 30, 1997 and December 31,
1996.
In January 1997, TIG Capital Trust I, a statutory business trust created under
Delaware law as a trust subsidiary of TIG Holdings, completed a private offering
of $125 million of 8.597% capital securities. TIG Holdings issued $128.75
million in 8.597% Junior Subordinated Debentures to TIG Capital Trust I
(including approximately $3.75 million with respect to the capital contributed
to the Trust by TIG Holdings). All of the net proceeds received by TIG Holdings
from the issuance of the debentures are being used for general corporate
purposes which includes repurchases of TIG Holding's common stock.
Shareholders' Equity. Shareholders' equity increased by $12 million during the
first nine months of 1997, primarily due to $115 million in net income, $36
million increase in unrealized gain on fixed maturities and $29 million in
common stock issues partially offset by $145 million of common stock repurchases
and $26 million of common and preferred stock dividends. Book value per share
increased to $23.91 at September 30, 1997 from $22.41 at December 31, 1996.
Excluding the impact of unrealized investment gains, the book value per share
would have been $22.20 at September 30, 1997 and $21.45 at December 31, 1996.
As of September 30, 1997, the Board of Directors has authorized common stock
repurchases of up to 18.75 million shares of TIG Holdings common stock. Under
the repurchase plan, repurchases may be made from time to time on the open
market at prevailing market prices or in privately negotiated transactions.
Through September 30, 1997, 14.9 million shares have been repurchased (22.5% of
total issued and outstanding including treasury shares at September 30, 1997) at
an average cost per share of $28.21, for an aggregate cost of $421 million.
In January, April and July 1997, TIG Holdings declared quarterly common stock
dividends of $.15 per share. The quarterly dividend rate for 1996 was $.05 per
share.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.9 FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
TIG Holdings would like to caution readers regarding certain forward-looking
statements in the Management's Discussion and Analysis and elsewhere in this
Form 10-Q. Statements which are based on management's projections, estimates and
assumptions are forward-looking statements. The words "believe", "expect",
"anticipate" and similar expressions generally identify forward-looking
statements. While TIG Holdings believes in the veracity of all statements made
herein, forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by TIG Holdings, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, including without limitation:
* changes in interest rates which could impact investment yields, the
market value of invested assets and ultimately product pricing
* changes in the frequency and severity of catastrophes which could
impact net income, reinsurance costs and cash flow
* increased competition (on the basis of price, services, or other
factors) which could generally reduce operating margins
* regulatory and legislative changes which could increase the Company's
overhead costs, increase federal and state tax assessments, restrict
access to profitable markets or force participation in unprofitable
markets
* changes in loss payment patterns which could impact cash flow and net
investment income
* changes in estimated overall adequacy of loss and LAE reserves which
could impact net income, statutory surplus adequacy and management's
decision to continue certain product lines
* changes in general market or economic conditions which could impact
the demand for the Company's products and loss frequency and severity
for certain lines of business
* loss of key management personnel which could impact the development
and execution of the Company's business strategy and impact key
customer and vendor relationships.
Many of these uncertainties and contingencies can affect TIG Holdings' actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, TIG
Holdings.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2.10 GLOSSARY
- --------------------------------------------------------------------------------
Catastrophe: An event that is designated to be a "catastrophe" by the Property
Claim Service Division of American Services Group, an industry body. It
generally defines events which are estimated to cause more that $5 million in
insured property damage and which affect a significant number of insureds and
insurers.
Combined ratio: A combination of the underwriting expense ratio, the loss and
LAE ratio, and the policyholder dividends ratio, determined in accordance with
statutory accounting practices. A combined ratio below 100% generally indicates
profitable underwriting results. A combined ratio over 100% generally indicates
unprofitable underwriting results.
Facultative reinsurance: The reinsurance of all or a portion of the insurance
coverage provided by a single policy. Each policy reinsured is separately
negotiated.
Finite reinsurance: Reinsurance that contains an ultimate negotiated limit of
risk to the reinsurer with respect to minimum and maximum exposure.
Gross premium written: Total premium for direct insurance written and
reinsurance assumed during a given period.
Incurred but not reported ("IBNR") reserves: Reserves for estimated losses and
LAE which have been incurred but not reported to the insurer (including future
developments on losses that are known to the insurer).
Incurred losses: The total losses sustained by an insurance company under a
policy or policies, whether paid or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet been reported to the insurer.
Loss adjustment expenses ("LAE"): The expenses of settling claims, including
legal and other fees, and the portion of general expenses allocated to claim
settlement costs.
Loss development: The emergence of actual loss data as compared to estimate for
specific accident years and for specific lines of business.
Loss and LAE ratio: The ratio of incurred losses and LAE to earned premium,
determined in accordance with statutory accounting practices.
Loss and LAE reserves: Liabilities established by insurers and reinsurers to
reflect the estimated cost of claims payments that the insurer will ultimately
be required to pay in respect to insurance or reinsurance it has written.
Reserves are established for losses and for LAE, and consist of case reserves
and IBNR reserves.
Net premium earned: The portion of net premium written in a particular period
that is recognized for accounting purposes as income during that period.
Net premium written: Direct premium written plus premium on assumed reinsurance
less premium on ceded business for a given period.
Policyholder dividend ratio: The ratio of dividends paid to policyholders to
earned premium determined in accordance with statutory accounting practices.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Program business: Tailored products developed for a particular industry segment
(i.e., sporting events, railroads) or distribution system (i.e., trade
associations, affinity groups). Programs are often developed and controlled by
managing general agents.
Reinsurance: The practice whereby one party, called the reinsurer, in
consideration of a premium paid to it agrees to indemnify another party, called
the reinsured, for part or all of the liability assumed by the reinsured under a
policy or policies of insurance which it has issued. The reinsured may be
referred to as the original or primary insurer, the direct writing company, or
the ceding company. Reinsurance does not legally discharge the primary insurer
from its liability to the insured.
Retention; Retention level: The amount or portion of risk which an insurer or
reinsurer retains for its own account. Losses in excess of the retention level
are paid by the reinsurer or retrocessionaire. In pro rata treaties, the
retention may be a percentage of the original policy's limit. In excess of loss
reinsurance, the retention is a dollar amount of loss, a loss ratio, or a
percentage of loss.
Reverse flow business: Alternative distribution mechanism whereby general agents
submit program business to a reinsurer. The reinsurer then works with a
reinsurance intermediary to provide a primary insurer to the transaction who
will issue the primary policy and then cede a significant portion of the risk to
the reinsurer.
Treaty reinsurance: The reinsurance of a specified type or category of risks
defined in a reinsurance agreement (a "treaty") between a primary insurer or
other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary
insurer or reinsured is obligated to offer and the reinsurer is obligated to
accept a specified portion of all such type or category of risks originally
underwritten by the primary insurer or reinsured.
Underwriting: The insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested and determining the applicable premium.
Underwriting expense ratio: The ratio of underwriting expenses to net premium
written, determined in accordance with statutory accounting practices.
Underwriting expenses: The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general, and other expenses
attributable to underwriting operations.
Underwriting results: The measure of profitability of the insurance operations
of an insurer, calculated as the result of earned premium, less losses, loss
expenses, and underwriting expenses. Underwriting results is an indicator of a
company's underwriting success.
Workers' compensation insurance: Insurance that covers medical care,
rehabilitation, and lost wages of employees who suffer work-related injuries,
and provides death benefits for dependents of employees killed in work-related
accidents.
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends
third-party claims brought against its insureds. As an insurer, the Company
defends against coverage claims.
On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive damages against TIG Insurance Company ("TIC") in
Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The
award arose out of TIC's handling of a surety bond claim on a construction
project. On March 28, 1997, the California Court of Appeal reduced the trial
court's punitive damage award to $15 million. On July 23, 1997, the California
Supreme Court granted TIC's petition to review the Court of Appeal's decision.
Management believes that the ultimate liability arising from the Talbot Case
will not materially impact consolidated operating results.
TIG's Federal income tax returns are routinely audited by the Internal Revenue
Service (IRS) and provisions are made in the financial statements in
anticipation of the results of these audits. Following a routine federal income
tax audit by the IRS, in September 1997 the IRS issued a Statutory Notice of
Deficiency for the tax year 1993 and a Revenue Agent's Report for 1994 asserting
a tax liability of approximately $170 million excluding interest. The IRS's
asserted tax adjustments principally relate to the acquisition made by TIG under
the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's IPO,
and primarily generate temporary differences by creating income in 1993 with
corresponding deductions in 1993 and future years. TIG strongly disagrees with
the IRS's position and intends to file a Tax Court Petition challenging it in
the fourth quarter of 1997. While the timing of cash tax payments may be
impacted, management believes that revisions to TIG's recorded tax liability, if
any, arising from the IRS's audit will not materially impact consolidated net
income or the financial condition of the Company.
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits:
Exhibit 3.1: Amended and Restated Certificates of Incorporation of TIG
Holdings as filed with the Delaware Secretary of State on April 16, 1993
(incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993, Commission File No.
1-11856).
Exhibit 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by TIG
Holdings' Board of Directors on May 18, 1993 (incorporated by reference to
Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File No.
33-63148).
Exhibit 4.1: Certificate of Designation of TIG Holdings relating to the
$7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware
Secretary of State on April 16, 1993 (incorporated by reference to Exhibit
4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993, Commission File No. 1-11856).
Exhibit 4.2: Indenture dated as of April 1, 1995 between TIG Holdings and
the First National Bank of Chicago, as Trustee (incorporated by reference
to Exhibit 4.2 to Registration Statement No. 33-90594, filed March 24,
1995).
Exhibit 4.3: Junior Subordinated Indenture, dated January 30, 1997, between
TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee (incorporated
by reference to Exhibit 4.3 to TIG Holdings' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
Exhibit 4.4: Certificate of Trust of TIG Capital Trust I, dated January 24,
1997 between TIG Holdings, Inc. and The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, as Trustees (incorporated by reference to Exhibit
4.4 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
Exhibit 4.5: Capital Securities Guarantee Agreement, dated January 30,
1997, between TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.5 to TIG Holdings' Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).
Exhibit 4.6: Trust Agreement, dated January 24, 1997, between TIG Holdings,
Inc. and The Chase Manhattan Bank, Chase Manhattan Bank Delaware, as
Trustees (incorporated by reference to Exhibit 4.6 to TIG Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
Exhibit 4.7: Amended and Restated Trust Agreement, dated January 30, 1997,
between TIG Holdings, Inc., the Administrators named therein and The Chase
Manhattan Bank, Chase Manhattan Bank Delaware, as Trustees (incorporated by
reference to Exhibit 4.7 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997).
Exhibit 4.8: Form of Capital Securities Certificate of TIG Capital Trust
I,(included as Exhibit E to Exhibit 4.7)
Exhibit 10.1: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Restricted
Share Award Agreement.
Exhibit 10.2: Tax Reimbursement Agreement dated November 11, 1996, between
TIG Holdings, Inc. and Mary R. Hennessy.
Exhibit 10.3: Purchase and Sale Agreement dated as of September 30, 1997,
by and between TIG Insurance Company and Nationwide Mutual Insurance
Company.
Exhibit 11: Computation of Earnings Per Share.
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997.
TIG HOLDINGS, INC.
65 EAST 55TH STREET
28TH FLOOR
NEW YORK, NEW YORK 10022
TIG HOLDINGS, INC. 1996 LONG-TERM INCENTIVE PLAN
Restricted Share Award Agreement ("Agreement")
With
FIRSTNAME MI LASTNAME
Residing at
ADDRESS
CSZ
Agreement dated as of January 16, 1997
1. Incorporation By Reference; Document Receipt. This Agreement is
subject in all respects to the terms and provisions of the TIG Holdings, Inc.
1996 Long-Term Incentive Plan (the "Plan"), including, without limitation, any
amendments thereto adopted at any time and from time to time and which are
intended to apply to the grant of Restricted Shares hereunder, all of which
terms and provisions are made a part of and incorporated in this Agreement as if
they were expressly set forth herein. Any capitalized term not defined in this
Agreement shall have the same meaning as is ascribed thereto under the Plan. You
hereby acknowledge receipt of a true copy of the Plan and that you have read the
Plan carefully and fully understand its contents. In the event of a conflict
between the terms of this Agreement and the terms of the Plan, the terms of the
Plan shall control.
2. Grant and Vesting of Restricted Shares. You have been selected to
receive a grant of the number of Restricted Shares set forth below as an Award
under Section 8 of the Plan.
Number of Restricted Shares ............................SHARES
The Restricted Shares shall be uncertificated and, except as provided in
paragraph 4 of this Agreement, shall vest as follows, provided you are employed
by the Company or one of its Related Companies on the applicable vesting date:
o T1shares................................on January 16, 1998
o T2shares................................on January 16, 1999
o T3shares................................on January 16, 2000
3. Delivery of Certificate. After the vesting of your Restricted
Shares, you shall be entitled, in accordance with the terms and provisions of
the Plan, to receive, upon your request, a stock certificate (registered in your
name) for and representing the number of shares of Common Stock underlying the
vested Restricted Shares. No fractional shares shall be issued under this
Agreement. Any fractional shares to which you would otherwise be entitled shall
be repurchased by the Company for cash.
4. Termination of Employment. If your employment with the Company and
the Related Companies is terminated due to death, Disability, or Retirement, all
then unvested Restricted Shares covered by this Agreement as of the date of any
such termination shall become 100% vested as of such date. Upon the occurrence
of both (a) a Change in Control and (b) an Adverse Employment Action before the
expiration of one year after the Change in Control, all then unvested Restricted
Shares shall become 100% vested in accordance with the provisions of Section 17
of the Plan. Except as otherwise provided herein, if your employment with the
Company and the Related Companies is terminated for any reason other than death,
Disability, or Retirement at any time, any Restricted Shares that have not yet
vested as of the date of any such termination shall be immediately forfeited by
you and canceled.
5. Rights of Stockholder. Subject to the provisions of the Plan and
this Agreement, you shall have all of the powers, preferences, and rights of a
holder of Common Stock with respect to the shares of Common Stock comprising
this Restricted Share grant. You agree and understand that nothing contained in
this Agreement provides, or is intended to provide, you any protection against
potential future dilution of your stockholder interest in the Company for any
reason, except as stated in Section 16.2 of the Plan. Any stock dividends paid
in respect of unvested Restricted Shares shall be treated as additional
Restricted Shares and shall be subject to the same restrictions and other terms
and conditions that apply to the unvested Restricted Shares with respect to
which such stock dividends are paid.
<PAGE>
6. Non-transferability. Unvested Restricted Shares (i) shall not be
sold, exchanged, assigned, transferred, or otherwise disposed of in any way at
any time by you (or your beneficiary(ies)), other than by testamentary
disposition by you or the laws of descent and distribution and (ii) shall not be
pledged, encumbered, or otherwise hypothecated in any way at any time by you (or
your beneficiary(ies)) and shall not be subject to execution, attachment, or
similar legal process. Any attempt to sell, transfer, pledge, encumber,
hypothecate, or otherwise dispose of any unvested Restricted Shares, contrary to
the terms and provisions of this Agreement and/or the Plan, shall be null and
void and without legal force or effect.
7. Withholding. The Company shall have the right to deduct from any
shares or amount due you under this Agreement or otherwise, any federal, state,
local, or other taxes of any kind that the Company, in its sole discretion,
deems necessary to be withheld to comply with the Internal Revenue Code of 1986,
as amended (the "Code"), and/or any other applicable law, rule, or regulation.
When the Restricted Shares become vested (or if you make an election under
Section 83(b) of the Code at the time of such election), you shall, if requested
by the Company, promptly pay to the Company in cash an amount equal to the
applicable withholding taxes determined by the Company as being required to be
withheld or collected under applicable federal, state, or local laws or
regulations. Furthermore, the Company shall have the right to deduct and
withhold any such applicable taxes from, or in respect of, any dividends or
other distributions paid on or in respect of the Common Stock comprising this
Restricted Share grant. All taxes, if any, in respect of the grant of the
Restricted Shares or any payments to you hereunder shall be solely your
responsibility and shall be paid by you. You will notify the Company of your
intention to make an election under Section 83(b) of the Code at least five (5)
business days before making such election.
8. Compliance with Laws. The resale of the shares of Common Stock
issued pursuant to this Agreement shall be subject to, and shall comply with,
any applicable requirements of federal and state securities laws, rules, and
regulations (including, without limitation, the provisions of the Securities Act
of 1933, the Exchange Act and the respective rules and regulations promulgated
thereunder) and any other law, rule, or regulation applicable thereto, as such
laws, rules, and regulations may be amended from time to time. The Company shall
not be obligated to permit the resale of any shares of Common Stock pursuant to
this Agreement if such resale would violate any such requirements.
<PAGE>
9. Cancellation and Rescission of Awards. Notwithstanding anything in
this Agreement to the contrary, the Committee may cancel any unexpired, unpaid,
unvested, or deferred Awards (and an Award that has already been paid, vested,
or delivered may be rescinded) in accordance with this paragraph 9 at any time
if you are not in compliance with all other applicable provisions of this
Agreement, the Plan and with the following conditions:
(a) Without the prior written consent of the Company which
expressly waives this provision, you shall not render services for any
organization or engage directly or indirectly in any business which, in the
judgment of the Chief Executive Officer of the Company or other senior officer
designated by the Chief Executive Officer for this purpose, or in the judgment
of the Committee, is or becomes competitive with the Company or a Related
Company, or which organization or business, or the rendering of services to such
organization or business, is or becomes otherwise prejudicial to or in conflict
with the interests of the Company or a Related Company. If your employment has
terminated, the judgment of the Chief Executive Officer, other designated senior
officer or the Committee shall be based on your position and responsibilities
while employed by the Company or a Related Company, your post-employment
responsibilities and position with the other organization or business, the
extent of past, current and potential competition or conflict between the
Company or a Related Company and the other organization or business, the effect
of your assumption of the post-employment position on the customers, suppliers,
producers, and competitors of the Company and the Related Companies, the
guidelines and policies established by the Company and the Related Companies
relating to business conduct ethics, and such other considerations as are deemed
relevant given the applicable facts and circumstances.
(b) You shall not, without prior written authorization from
the Company, disclose to anyone outside the Company and the Related Companies,
or use in other than the business of the Company and the Related Companies, any
confidential information or material, relating to the business of the Company
and the Related Companies, acquired by you either during or after employment
with the Company or a Related Company.
(c) Upon payment, vesting, or delivery pursuant to an Award,
you shall certify on a form acceptable to the Company that you are in compliance
with the terms and conditions of the Plan and this Agreement. Failure to comply
with any of the applicable provisions of the Plan and this Agreement, including
without limitation the non-compete and confidentiality provisions of
subparagraphs (a) and (b) above prior to, or during the six months after, any
payment, vesting, or delivery (including delivery of stock certificates by
book-entry) pursuant to an Award, shall cause such payment, vesting, or delivery
to be rescinded. The Company shall notify you in writing of any such rescission
within two years after such payment, vesting or delivery. Within ten days after
receiving such a notice from the Company, you shall pay to the Company the
amount of any gain realized or payment received as a result of the rescinded
payment, vesting, or delivery pursuant to an Award. Such payment shall be made
either in cash or by returning to the Company the number of shares of Common
Stock that you received in connection with the rescinded payment, vesting, or
delivery.
<PAGE>
10. Notices. Any notice hereunder shall be in writing and shall be
delivered in person, or via facsimile transmission, overnight courier service,
or certified mail, return receipt requested, postage prepaid, properly addressed
to you or the Company, as the case may be, at the applicable address specified
in the heading on the first page of this Agreement, or at such other address as
you or the Company, as the case may be, may designate to the other party from
time to time in a notice that satisfies the conditions of this paragraph.
11. Governing Law; Entire Agreement. This Agreement shall be governed
by and shall be construed in accordance with the laws of the State of Delaware,
without reference to the principles of conflict of laws thereof. This Agreement
contains the entire agreement between you and the Company with respect to the
subject matter contained herein, and supersedes all prior agreements or prior
understandings, whether oral or written, between such parties relating to such
subject matter.
12. Severability. The invalidity or unenforceability of any provision
of this Agreement in any jurisdiction shall not affect the validity, legality,
or enforceability of the remainder of this Agreement in such jurisdiction or the
validity, legality, or enforceability of any provision of this Agreement in any
other jurisdiction, it being intended that all rights and obligations of the
parties hereunder shall be enforceable to the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in one or more counterparts, each of which shall be deemed to be the
original, as of the date first set forth above.
TIG HOLDINGS, INC. Agreed to and accepted by:
By: /s/LON P. MCCLIMON
------------------- ------------------------ -------------
Lon P. McClimon Recipient Signature Date
November 11, 1996
Ms. Mary R. Hennessy
1 Nostrand Road
Cranbury, New Jersey 08512
Re: Tax Reimbursement
Dear Mary:
In connection with your becoming an employee of TIG Holdings, Inc.
("TIG"), we have discussed TIG's willingness to indemnify you against certain
potential tax liability that you may incur arising out of your termination of
employment with American Re Corporation ("American Re"). The purpose of this
letter is to confirm those arrangements. In agreeing to provide the indemnity
described herein, we have relied upon the information that you have furnished us
concerning the payments and benefits that have or will accrue to you in
connection with your termination of employment with American Re.
If you owe any excise tax pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended, as a result of any severance payments, or the
acceleration of any stock options, paid or provided to you in connection with
the acquisition of American Re by Munchener Ruckversicherung-Gesellschaft
Aktiengesellschaft (the "Excise Tax"), TIG will promptly pay you an amount (the
"Reimbursement Payment") such that, after the payment by you of any federal,
state and local income taxes, and any Medicare tax portion of the Federal
Insurance Contributions Act tax, attributable to the Reimbursement Payment, you
will retain an amount of the Reimbursement Payment equal to the Excise Tax.
You agree that (i) if you file any tax return reporting any Excise Tax,
and/or (ii) promptly after any determination, claim or assertion is made by the
Internal Revenue Service ("IRS") that the Excise Tax is due, you will notify TIG
of such filing, or of such determination, claim or assertion.
<PAGE>
You further agree that TIG will be allowed a reasonable period of time to review
with you whether the Excise Tax is owed or is required to be reported to the
IRS. If TIG obtains (at TIG's sole expense) an opinion of legal counsel that it
is more likely than not that (a) the Excise Tax is not owed by you or is not
required to be reported to the IRS, or (b) that you would succeed in disputing
such determination, claim or assertion of the IRS, you will (upon request and at
the sole expense of TIG) make a good faith effort to file a claim for a refund
and/or to contest such IRS determination, claim or assertion, or refund denial,
in all administrative proceedings with the IRS and in any related judicial
proceedings. In conducting any such contest, you will make a good faith effort
to keep TIG advised on all relevant matters and correspondence with the IRS and
will permit TIG to control any administrative or judicial proceedings. TIG will
bear all expenses of any such proceedings and will pay any penalties and
interest imposed on you (and not subsequently waived) by the IRS as a result of
any such proceeding.
If you are in agreement with the foregoing, please so indicate in the
space provided below.
Very truly yours,
TIG HOLDINGS, INC.
By: /s/ Peter M. Acton
-------------------
Name: Peter M. Acton
Title: Senior Vice President and
General Counsel
Acknowledged and agreed to:
/s/ Mary R. Hennessy
- --------------------
Mary R. Hennessy
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (the "Agreement"), is made and entered
into as of September 30, 1997, by and between TIG Insurance Company, a
corporation organized under the laws of the State of California (the "Seller"),
and Nationwide Mutual Insurance Company, a mutual insurance company organized
under the laws of the State of Ohio ("Purchaser" and, together with Seller, the
"Parties"). Certain capitalized terms used herein are defined in Section 1
hereof.
WITNESSETH
WHEREAS, Seller owns all of the issued and outstanding shares of capital
stock of TIG Countrywide Insurance Company, a corporation organized under the
laws of the State of California ("Target");
WHEREAS, Seller, among other things, conducts a business which markets
personal automobile and homeowners' insurance through Independent Agents (the
"Business"); and
WHEREAS, on the terms and subject to the conditions contained in this
Agreement, Purchaser desires to purchase, and Seller desires to sell, all of the
issued and outstanding shares of capital stock of Target and the Business and
certain assets of the Seller and its Subsidiaries relating to the Business, and
the Purchaser desires to assume, and the Seller desires to transfer, the Assumed
Liabilities.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, the parties, intending to
be legally bound, do hereby represent, warrant, covenant and agree as follows:
Section 1. Definitions.
-----------------------
"Acquired Assets" means all right, title, and interest in and to the assets
of Seller listed in Exhibit A hereto, provided, however, that the Acquired
Assets shall not include (i) any of the rights of Seller or any of its
Affiliates under this Agreement (or under any collateral agreement between
Seller or any of its Affiliates on the one hand and Purchaser on the other hand
entered into on or after the date of this Agreement) or (ii) any rights in and
with respect to the assets associated with its Employee Benefit Plans or other
assets not specifically listed in Exhibit A or described herein.
"Adverse Consequences" means all claims, 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 Securities Exchange Act of 1934, as amended.
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
Section 1504 (a) or any similar group defined under a similar provision of state
law.
"Assumed Liabilities" means all debts, obligations and other Liabilities of
Seller or its Affiliates under, or arising out of the agreements, contracts,
leases, licenses, and other arrangements referred to in the definitions of
Acquired Assets and Business through and including the time of Closing;
provided, however, that the Assumed Liabilities shall not include (i) any
Liability of Seller for the unpaid Taxes of any Person under Treas. Reg. Section
1.1502-6 (or any similar provision of state or local law), as a transferee or
successor, by contract, or otherwise, except to the extent required by law, (ii)
any liability of Seller for costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby, (iii) any liability or
obligation of Seller under this Agreement (or under any collateral agreement
between Seller or any of its Affiliates on the one hand and Purchaser on the
other hand entered into on or after the date of this Agreement) or (iv) any
liabilities of Seller for payment of any accrued but not taken vacation and any
accrued salaries, wages and bonuses with respect to the Personal Lines Employees
as of the close of business on the Closing Date.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business" has the meaning set forth in the recitals of this Agreement.
"California Insurance Department" has the meaning set forth in Section 6(d)
below.
"Closing" has the meaning set forth in Section 3 below.
"Closing Balance Sheet" has the meaning set forth in Section 4(i) below.
"Closing Date" has the meaning set forth in Section 3 below.
"Closing Date Total Surplus" means the pro forma total surplus of Target as
of the Closing Date, calculated on a basis consistent with the Latest Balance
Sheet and giving effect to the transactions contemplated by the Target Quota
Share Reinsurance Agreement, the Seller Quota Share Reinsurance Agreement and
the Loss Portfolio Transfer Agreement.
"Closing Financial Data" has the meaning set forth in Section 4(i) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Controlled Group of Corporations" has the meaning set forth in Section
1563 of the Code.
"Disclosure Schedule" has the meaning set forth in Section 6 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
<PAGE>
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).
"Environmental Damages" means all claims, judgments, losses, penalties,
fines, liabilities, encumbrances, liens, costs and reasonable expenses of
investigation, defense or good faith settlement resulting from violations of
Environmental Laws, and including, without limitation: (i) damages for personal
injury and injury to property or natural resources; (ii) reasonable fees and
disbursements of attorneys, consultants, contractors, experts and laboratories;
and (iii) costs of any cleanup, removal, response, abatement, containment,
closure, restoration or monitoring work required by any Environmental Law.
"Environmental, Health and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, together with all other laws (including rules, regulations and
codes of federal, state and local governments, and all agencies thereof)
concerning pollution or protection of the environment, public health and safety,
or employee health and safety, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes into ambient air, surface
water, ground water, or lands.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means an entity which, together with Target, would be
treated as a single employer under Section 414 of the Code.
"Extremely Hazardous Substance" has the meaning set forth in Section 302 of
the Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"Fiduciary" has the meaning set forth in ERISA Section 3 (21).
"Hazardous Materials" include substances (i) which are or become defined as
a "hazardous waste," "hazardous substance," or "pollutant or contaminant" under
any Environmental Laws; or (ii) which are toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic or mutagenic; or (iii) which
contain petroleum hydrocarbons, polychlorinated biphenyls, asbestos, asbestos
containing materials or urea formaldehyde.
"Indemnified Party" has the meaning set forth in Section 16(b) below.
"Indemnifying Party" has the meaning set forth in Section 16(b) below.
"Independent Agent" means those persons, firms or corporations listed on
Exhibit B.
"Knowledge of Seller" or words of similar import, means the actual
knowledge of William Huff, Michael Casey, Louis Paglia, Harry Cotter, Richard
Gibson, Mark Jorgensen, David Rowlands, Jr., Ranelle Smith or Wilson Wheeler.
"Latest Balance Sheet" has the meaning set forth in Section 7(b) below.
<PAGE>
"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due).
"Licenses" has the meaning set forth in Section 6(h) below.
"LossPortfolio Transfer Agreement" means the reinsurance agreement
described in Section 14(e) below.
"Material Adverse Effect" means any material adverse effect on the
business, financial condition, results of operations or properties of the Target
and the Business, considered as a whole.
"Material Agreement" has the meaning set forth in Section 7(k).
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Neutral Auditors" has the meaning set forth in Section 4(iv) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past practice and custom.
"Parties" has the meaning set forth in the preface of this Agreement.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Personal Lines Employees" means all of the employees of Seller who as of
the date of this Agreement performed services for the Business and who are named
in Exhibit C hereto (which Exhibit also sets forth the title, bonus paid (if
any), years of service and current rate of compensation for each such employee),
except any such employees who, prior to the Closing Date, become qualified for
long-term disability benefits under Seller's long-term disability plan, or any
such employees who are on short-term disability and who the Seller reasonably
determines, not later than December 1, 1997, are likely to become qualified for
long-term disability benefits.
"Prohibited Transaction" has the meaning set forth in ERISA Section 406 and
Section 4975 of the Code.
"Purchase Price" has the meaning set forth in Section 2 below.
"Purchaser" has the meaning set forth in the recitals of this Agreement.
"Purchaser Disclosure Schedule" has the meaning set forth in Section 8
below.
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Reserves" has the meaning set forth in Section 6(m) below.
"Resolution Period" has the meaning set forth in Section 4(iii) below.
<PAGE>
"Restricted Business" has the meaning set forth in Section 12(b) below.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (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 liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Seller" has the meaning set forth in the preface above.
"Seller Quota Share Reinsurance Agreement" means the reinsurance contract
between Target and Seller referred to in Section 13(e) below.
"Statements" has the meaning set forth in Section 6(d) below.
"Straddle Period" shall mean any taxable period that includes (but does not
end on) the Closing Date.
"Straddle Tax Return" shall mean any Tax Return required to be filed by
Target covering a taxable period commencing prior to the Closing Date and ending
after the Closing Date.
"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Target" has the meaning set forth in the preface above.
"Target Quota Share Reinsurance Agreement" means the reinsurance contract
between Target, Seller and certain Affiliates of Seller referred to in Section
12(d) below.
"Tax" means any federal, state, foreign or local income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Section 59A of the Code),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TIG Holdings" means TIG Holdings, Inc., a Delaware corporation.
"Third Party Claim" has the meaning set forth in Section 16(b) below.
"Unresolved Changes" has the meaning set forth in Section 4(iv) of this
Agreement.
<PAGE>
Section 2. Purchase and Sale. (a) Upon the terms and subject to the
conditions of this Agreement, at the Closing (as such term is defined below),
(i) Seller agrees to sell, transfer, assign, convey and deliver to Purchaser,
and Purchaser agrees to purchase, accept and acquire from Seller, 12,500 shares
of common stock, par value of $270 per share, of Target (the "Shares"), which
Shares shall constitute all of the issued and outstanding capital stock of
Target, and (ii) Purchaser shall pay to Seller $65 million plus Closing Date
Total Surplus (which may be negative) in cash by wire transfer in immediately
available funds (the "Purchase Price") in accordance with Section 5(b) below
(subject to adjustment as provided in Section 4 below), which price includes
consideration for certain transition and support services to be provided by
Seller to Purchaser as contemplated by Sections 11 and 14 hereof commencing
after the date hereof.
(b) No later than 10 days prior to the date that the Seller reasonably
believes will be the Closing Date, Seller shall deliver to Purchaser an
estimated pro forma balance sheet of Target as of the Closing (the "Estimated
Closing Balance Sheet") containing an estimate of Closing Date Total Surplus
("Estimated Closing Date Total Surplus"). The Estimated Closing Balance Sheet
shall be prepared on a basis consistent with the methods, principles, practices
and policies employed in the preparation and presentation of the Latest Balance
Sheet. The Purchase Price payable at Closing shall be adjusted by an amount
equal to Estimated Closing Date Surplus as set forth in such statement.
Section 3. The Closing. The closing of the sale and purchase of the
Shares and the Acquired Assets (the "Closing") shall take place at 10:00 a.m. on
the third business day following the satisfaction or waiver of all conditions to
the obligations of the Parties to consummate the actions contemplated hereby
(other than conditions with respect to actions the respective Parties will take
at the Closing itself) at the offices of Willkie Farr & Gallagher, One Citicorp
Center, 153 East 53rd Street, New York, NY 10022 or at the offices, or at such
other date, time or place as the parties may mutually agree (the "Closing
Date").
Section 4. Purchase Price Adjustment.
(i) As soon as practicable, but in no event later than 60 days
following the Closing Date, Seller shall prepare a pro forma balance sheet of
Target as of the Closing (the "Closing Balance Sheet") and a calculation of
Closing Date Total Surplus as of the Closing based on the Closing Balance Sheet
(collectively, the "Closing Financial Data"). The Closing Balance Sheet and the
calculation of Closing Date Total Surplus shall be prepared on a basis
consistent with the methods, principles, practices and policies employed in the
preparation and presentation of the Latest Balance Sheet.
(ii) During the preparation of the Closing Balance Sheet and the
calculation of Closing Date Total Surplus as of the Closing, and the period of
any review or dispute within the contemplation of this Section 4, Purchaser
shall (A) provide Seller and Seller's authorized representatives with full
access to all relevant books, records, workpapers and employees of Target and
the Business, and (B) cooperate fully with Seller and Seller's authorized
representatives, including the provision on a timely basis of all information
necessary or useful in the preparation of the Closing Balance Sheet.
<PAGE>
(iii) Seller shall deliver a copy of the Closing Financial Data to
Purchaser promptly after it has been prepared. After receipt of the Closing
Financial Data, Purchaser shall have forty-five (45) days to review the Closing
Financial Data, together with the workpapers used in the preparation thereof.
Unless Purchaser delivers written notice to Seller on or prior to the 45th day
after Purchaser's receipt of the Closing Financial Data stating that Purchaser
has objections to the Closing Financial Data, or methods, principles, practices
or policies employed in the preparation thereof, Purchaser shall be deemed to
have accepted and agreed to the Closing Financial Data. If Purchaser so notifies
Seller of its objections to the Closing Financial Data, the Parties shall,
within twenty (20) days (or such longer period as the Parties may agree)
following such notice (the "Resolution Period"), attempt to resolve their
differences arising from such objections and any resolution by them as to any
disputed amounts or methods, principles, practices or policies employed in the
preparation thereof shall be final, binding and conclusive. Purchaser
acknowledges and agrees that it shall not, under any circumstances, have the
ability to raise objections relating to the adequacy of the amounts recorded for
Loss Reserves, ALAE Reserves or ULAE (the "Reserve Accounts") on the Latest
Balance Sheet, Closing Date Balance Sheet, the methods, principles, practices or
policies employed in the preparation thereof, or the impact thereof on Closing
Date Total Surplus; provided, however, that with respect to any development in
the Reserve Accounts between the date of the Latest Balance Sheet and the
Closing Date, Purchaser may raise objections to the method used in preparing the
amounts recorded in the Reserve Accounts solely on the basis that such method
was inconsistent with the past practice of the Seller.
(iv) Any amounts or methods, principles, practices or policies employed
in the preparation thereof, remaining in dispute at the conclusion of the
Resolution Period ("Unresolved Changes") shall be submitted to such firm of
United States independent certified public accountants as Seller and Purchaser
may agree, such firm to be a "Big 6 Firm". If they cannot so agree within five
(5) days after the end of the Resolution Period, they shall each select one such
firm within ten (10) days after the end of the Resolution Period and the two (2)
firms so chosen shall select a third firm of United States independent certified
public accountants, such firm to be a "Big 6 Firm" to which such dispute shall
be submitted (the firm ultimately selected pursuant to this Section being the
"Neutral Auditors").
All Unresolved Changes shall be submitted to the Neutral Auditors no
later than ten (10) days after the same is designated. Each Party agrees to
execute, if requested by the Neutral Auditors, a reasonable engagement letter.
All fees and expenses relating to the work, if any, to be performed by the
Neutral Auditors shall be borne pro rata by Seller and Purchaser in proportion
to the allocation of the dollar amount of the Unresolved Changes between Seller
and Purchaser made by the Neutral Auditors such that the prevailing party pays a
lesser proportion of the fees and expenses. The Neutral Auditors shall act as an
arbitrator to determine, based on the provisions of this Section 4, only the
Unresolved Changes. The Neutral Auditors' determination of the Unresolved
Changes shall be made within forty-five (45) days of the submission of the
Unresolved Changes thereto, shall be set forth in a written statement delivered
to Seller and Purchaser and shall be final, binding and conclusive.
The term "Adjusted Closing Balance Sheet," as used in this Agreement,
shall mean the definitive Closing Balance Sheet agreed to by Seller and
Purchaser under Section 4(iii) or, if submitted to the Neutral Auditors, this
Section 4(iv) (in such case giving effect to those items theretofore agreed to
by Seller and Purchaser). It is understood by the Parties that to the extent
Purchaser's objections to the Closing Financial Data are correct, adjustments
will be made in such items of the Latest Balance Sheet so that such items are so
provided for or reflected therein in a manner consistent with the methods,
principles, practices or policies employed in the preparation of the Closing
Financial Data. Similar adjustments shall be made, if applicable, in Adjusted
Total Shareholders Equity.
<PAGE>
(v) The purchase price paid by Purchaser at the Closing shall be (A)
increased dollar for dollar by the amount and to the extent Closing Date Total
Surplus as of the Closing based upon the Closing Balance Sheet or the Adjusted
Closing Balance Sheet, as the case may be, exceeds Estimated Closing Date Total
Surplus, or (B) decreased dollar for dollar by the amount and to the extent
Closing Date Total Surplus as of the Closing based upon the Closing Balance
Sheet or the Adjusted Closing Balance Sheet, as the case may be, is less than
Estimated Closing Date Total Surplus. Any adjustments to the purchase price made
pursuant to this Section 4(a)(v) shall be paid by wire transfer of immediately
available funds to the account specified by the Party to which such payment is
owed. In the event that the amount of Closing Date Total Surplus as of the
Closing is agreed to by Purchaser and Seller during (or before) the Resolution
Period, such payment shall be made within five (5) business days after the date
such agreement is reached. In the event that there are Unresolved Changes at the
end of the Resolution Period, then (A) if the Purchaser and Seller agree that a
purchase price adjustment is owed to one Party regardless of the ultimate
resolution of any Unresolved Changes, then the minimum amount which the
Purchaser and the Seller agree is owed to such Party shall be paid within five
(5) business days after the end of the Resolution Period and any additional
amounts owing to such Party with respect to the Unresolved Changes shall be paid
within five (5) business days after resolution thereof by the Neutral Auditors
or (B) in all other cases, any and all payments shall be made within five (5)
business days after resolution of the Unresolved Changes by the Neutral
Auditors.
(vi) Purchaser and Seller shall make good faith efforts to comply with
the timing and response requirements set forth in this Section 4, but in the
absence of bad faith, neither Party shall be deemed to have waived its rights
under the purchase price adjustment provisions as contemplated herein on the
basis of technical violations of timing and response requirements.
Section 5. Actions at Closing; Further Assurances.
(a) Actions by Seller. At the Closing, Seller shall deliver to
Purchaser:
(i) stock certificates representing the Shares, duly
endorsed in blank;
(ii) the various certificates, instruments and documents
referred to in Section 14 hereof;
(iii) an opinion, dated the Closing Date, of Peter Acton,
General Counsel of TIG Holdings, in the form of Exhibit D
hereto; and
(iv) resignations, dated as of the Closing Date, of the
directors and officers of Target. (b) Actions by Purchaser.
At the Closing, Purchaser shall:
(i) wire transfer the Purchase Price in immediately
available funds to an account of Seller, as designated in
writing by Seller prior to the Closing Date;
(ii) deliver to Seller the various certificates, instruments
and documents referred to in Section 13 hereof; and
(iii) deliver to Seller an opinion, dated the Closing Date,
of W. Sidney Druen, Senior Vice President and General
Counsel and Assistant Secretary, in the form of Exhibit E
hereto.
<PAGE>
Section 6. Representations and Warranties of Seller With Respect to
Target. Except as set forth in the disclosure schedule of the Seller
accompanying this Agreement (the "Disclosure Schedule"), Seller hereby
represents and warrants to the Purchaser as follows:
(a) Organization and Standing. Target is an insurance
corporation duly organized, validly existing, and in good
standing under the laws of the State of California, is duly
authorized under California law to carry on its business as a
property and casualty insurance company, has all requisite
corporate power and authority to own, lease, and operate its
assets, properties and business and to carry on its business as
now being and heretofore conducted. Target is duly qualified to
do business in each other state or jurisdiction in which such
qualification is required, except where the failure to be so
qualified would not have a Material Adverse Effect.
(b) Capital Structure. The authorized capital stock of
Target consists of 30,000 shares of common stock, par value of
$270 per share. As of the date hereof, 12,500 Shares are
outstanding and issued to Seller, all of which are free and
clear of any Security Interest. All of such presently
outstanding Shares are duly authorized, validly issued, fully
paid, non-assessable and free of preemptive rights. Upon
delivery to Purchaser on the Closing Date of the stock
certificates provided for in Section 5(a)(i) hereof, Purchaser
will acquire good title to all of the Shares, free and clear of
any Security Interest, other than those created by or through
Purchaser, or as a result of Purchaser's application for
acquisition of control of Target.
(c) Subsidiaries. Target does not have any
Subsidiaries.
(d) Financial Statements. Seller has made available to
Purchaser for inspection complete copies of (i) the Annual
Statements of Target as filed with the Insurance Department of
the State of California (the "California Insurance Department")
for the years ended December 31, 1994, 1995 and 1996 and (ii)
the Quarterly Statement of Target as filed with the California
Insurance Department for the quarter ended June 30, 1997 (the
"Statements"). The Statements have been prepared in a manner
permitted under statutory authority of the California Insurance
Department, on a consistent basis, during the periods covered by
each such Statement, except as disclosed in the auditor's report
and notes to such Statements. All Statements fairly present the
financial position and results of operations of Target as of the
dates and for the periods covered by such statements.
(e) Options or Other Rights. There is no outstanding
right, subscription, warrant, call, unsatisfied preemptive
right, option or other agreement of any kind to purchase or
otherwise to receive from Target, any of the outstanding,
authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of Target and there is no
outstanding security of any kind convertible for or exchangeable
into any such capital stock. Except for powers of attorney with
respect to the consolidated federal income Tax Returns that
include the Target for periods ending on or before the Closing
Date,Target has no powers of attorney outstanding.
<PAGE>
(f) Certificate of Incorporation, By-laws, Etc. The
copies of the Certificate of Incorporation and Bylaws and the
stock books of Target made available to Purchaser for inspection
are true and complete as in effect on the date hereof. The
minute books of Target have been made available to the Purchaser
for its inspection and the originals thereof will be delivered
to Purchaser at Closing. The minute books of Target contain true
and complete recordings of all meetings and consents in lieu of
meetings of the board of directors or any committee thereof of
Target since April 23, 1993, except where the absence of any
such recordings of meetings or consents in lieu of meetings
would not have a Material Adverse Effect or the consummation of
the transactions contemplated by this Agreement.
(g) Compliance with Laws. To the Knowledge of Seller,
Target is not in violation of any federal, state or local law,
ordinance, statute, rule, regulation, order, judgment,
injunction, award, decree or requirement of any governmental or
regulatory body, court or arbitrator applicable to Target, which
violation individually or in the aggregate would have a Material
Adverse Effect and Target has not received any written notice
that any such violation is being or may be alleged.
(h) Licenses. Target has such licenses, permits, orders
or approvals of, and have made all required registrations with,
any federal or state governmental or regulatory body that are
necessary to the conduct of the business of Target as of the
date hereof (collectively, "Licenses") and all such Licenses are
in full force and effect, subject to such exceptions as would
not have a Material Adverse Effect. Seller has not received any
written notice of any violation in respect of any such License
and no proceeding is pending or, to the Knowledge of Seller,
threatened to suspend, revoke or limit any such License which
would have a Material Adverse Effect.
(i) No Breach. Assuming compliance with the
requirements referred to in Section 7(g) below, neither the
execution and the delivery of this Agreement by Seller, nor the
consummation of the transactions contemplated hereby, will (i)
violate any statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which Target is
subject or any provision of the charter or bylaws of Target or
(ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require
any notice under any Material Agreement or License to which
Target is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security
Interest upon any of its assets), except where the violation,
conflict, breach, default, acceleration, termination,
modification, cancellation, failure to give notice, or creation
of Security Interest would not have a Material Adverse Effect or
materially impair the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(j) Finders Fees. TIG Holdings has retained Goldman,
Sachs & Co. as its financial advisor in connection with this
Agreement. TIG Holdings (excluding Target) is solely liable for
the payment of any and all fees or commission in connection
therewith and Seller will indemnify Purchaser for any
misrepresentation contained in this Section 6(j).
<PAGE>
(k) Authority. Seller has all requisite corporate power
and authority to execute and deliver this Agreement and to carry
out its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Seller and this Agreement has
been duly executed and delivered by Seller and constitutes the
valid and legally binding obligation of Seller, enforceable
against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, rehabilitation, or
similar laws affecting the enforcement of creditors' rights
generally.
(l) No Improper Payments. To the Knowledge of Seller,
during the ownership of Target by TIG Holdings, neither Target
nor any of its officers and directors have at any time: (i) made
any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or allowed
by applicable law; or (ii) made any payment outside the Ordinary
Course of Business to any purchasing or selling agent, or person
charged with similar duties, of any entity to which Target sells
or has sold, or from which Target buys or has bought, products
or services, for the purpose of illegally influencing such agent
or person to buy products or services from, or sell products or
services to, Target, where either (i) or (ii) would have a
Material Adverse Effect.
(m) No Representation With Respect to Reserves.
Notwithstanding any other provision of this Agreement, Seller
makes no representation or warranty that the reserves of Target
or the Business for unpaid claims and claims expenses, whether
reported or incurred but not reported (the "Reserves"), or the
amounts recorded in the Reserve Accounts, are adequate or
sufficient. Purchaser agrees that it shall not affect a claim
against Seller under any provision of this Agreement, the Target
Quota Share Reinsurance Agreement, the Seller Quota Share
Reinsurance Agreement or the Loss Portfolio Transfer Agreement
or for Adverse Consequences suffered by it or any of its
Affiliates arising out of the inadequacy or insufficiency of the
Reserves or the amounts recorded in the Reserve Accounts.
Section 7. Representations and Warranties of the Seller With Respect to
the Business and the Acquired Assets. Except as set forth in the Disclosure
Schedule, Seller hereby represents and warrants to the Purchaser as follows:
(a) Acquired Assets. Upon consummation of the
transactions contemplated by this Agreement and the Purchaser
obtaining the consents referred to in the Disclosure Schedule,
the Seller will have assigned, transferred and conveyed to the
Target, directly or indirectly, all of the Acquired Assets free
and clear of all Security Interests except for such as would not
have a Material Adverse Effect. Each tangible asset has been
maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and
tear) and is suitable for the purposes for which it is presently
used in the Business except for such that would not have a
Material Adverse Effect.
<PAGE>
(b) Financial Information. Seller has furnished to
Purchaser the pro forma consolidated balance sheet of the
Business as of August 31, 1997 (the "Latest Balance Sheet"). The
Latest Balance Sheet presents fairly the financial condition of
the Business as of August 31, 1997 on the pro forma basis
described in the notes thereto.
(c) Events Subsequent to the Date of the Latest Balance
Sheet. Except as contemplated by this Agreement, since the date
of the Latest Balance Sheet, there has not been any material
adverse change in the business, financial condition, results of
operations, or properties of the Business and Target taken as a
whole. Without limiting the generality of the foregoing, since
that date:
(i) neither Seller nor Target has entered into
any Material Agreement outside the Ordinary Course of
Business that is an Assumed Liability and that relates
to any of the Acquired Assets;
(ii) no party (including Seller) has
accelerated, terminated, modified, or canceled any
Material Agreement relating to any of the Acquired
Assets outside the Ordinary Course of Business;
(iii) Seller has not imposed any Security
Interest upon any of the Acquired Assets, the
imposition of which, individually or in the aggregate,
would have a Material Adverse Effect;
(iv) Seller has not issued any note, bond, or
other debt security or created, incurred, assumed, or
guaranteed any indebtedness for borrowed money or
capitalized lease obligation that is an Assumed
Liability;
(v) Seller has not entered into any employment
or collective bargaining agreement or modified the
terms of any existing such agreement with respect to
the Personal Lines Employees;
(vi) Seller has not granted any increase in the
base compensation of any of the Personal Lines
Employees outside the Ordinary Course of Business;
(vii) Seller has not adopted, amended, modified
or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for
the benefit of any of the Personal Lines Employees (or
taken any such action with respect to any other
Employee Benefit Plan) that is an Assumed Liability
outside the Ordinary Course of Business; and
(viii) Seller has not entered into any
amendment, modification, termination, alteration,
sublease agreements or assignments regarding or
affecting any lease dealing with real estate which are
Assumed Liabilities and relate to Acquired Assets.
Nothing in this Section 7(c) or elsewhere in this
Agreement shall prohibit Seller from causing Target to assume
the Assumed Liabilities prior to the Closing.
<PAGE>
(d) Litigation. Section 7(d) of the Disclosure Schedule
sets forth each instance, with respect to the Personal Lines
Employees, the Acquired Assets and the Business, in which Seller
or Target (i) is subject to any outstanding injunction,
judgment, order, decree or ruling, or (ii) is a party to any
material action, suit, proceeding, hearing, or investigation of,
in, or before any court or quasi-judicial or administrative
agency of any federal, state or local jurisdiction or before any
arbitrator. Except as set forth in Section 7(d) of the
Disclosure Schedule: (i) to the Knowledge of the Seller, there
are no actions, suits, hearings, arbitrations, proceedings
(public or private) or governmental investigations that have
been brought by or against any governmental authority or any
other Person (collectively, "Proceedings") pending or threatened
in writing against or affecting the Seller, the Business or any
of the Acquired Assets as to which there is a substantial
likelihood of a determination or resolution adverse to the
Business and which, if so adversely determined or resolved,
would have a Material Adverse Effect; and (ii) there are no
existing or threatened in writing orders, judgments or decrees
(other than those of general application) of any governmental
authority affecting any of the Acquired Assets or the Business
which would have a Material Adverse Effect.
(e) Forms of Policy. Except for such forms which are
not material to the Business, each form of insurance policy,
policy endorsement or amendment, reinsurance treaties and
contracts, certificate of insurance, application form, and sales
material used by Seller in connection with the Business in any
jurisdiction has, where required, been approved by the
appropriate insurance or other regulatory authorities of such
jurisdiction, except where the failure to obtain such approval
would not have a Material Adverse Effect, and has been furnished
to Purchaser.
(f) No Breach. Assuming compliance with the
requirements referred to in Section 7(g) below, neither the
execution and the delivery of this Agreement nor the
consummation of the transactions contemplated thereby, will (i)
violate any statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which Seller is
subject or any provision of the charter or bylaws of Seller or
(ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require
any notice under any Material Agreement or License to which any
of the Acquired Assets or the Business are subject (or result in
the imposition of any Security Interest upon any of the Acquired
Assets or the Business), except where the violation, conflict,
breach, default, acceleration, termination, modification,
cancellation, failure to give notice, or creation of Security
Interest would not have a Material Adverse Effect or materially
impair the ability of the Parties to consummate the transactions
contemplated by this Agreement.
<PAGE>
(g) Consents and Approvals. The execution and delivery
by the Seller of this Agreement, the performance by the Seller
of its obligations hereunder, and the consummation by the Seller
of the transactions contemplated hereby do not require the
Seller or Target to obtain any consent, approval or action of,
or make any filing with or give any notice to, any governmental
or regulatory body, except for (i) any filings, notices and/or
approvals under the insurance laws of the states identified in
Section 7(g) of the Disclosure Schedule, (ii) the expiration or
early termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("the H-S-R
Act") or (iii) other notices, filings, authorizations, consents
and approvals which if not obtained or made would not have a
Material Adverse Effect or materially impair the ability of the
Parties to consummate the transactions contemplated by this
Agreement.
(h) Employees.
(i) To the Knowledge of Seller, as of the date
hereof, there is no Personal Lines Employee at the
level of Assistant Vice President or above who plans to
terminate employment with Seller, nor are there any
other Personal Lines Employees who plan to so terminate
which would result in a Material Adverse Effect. Seller
is not a party to or bound by any collective bargaining
agreement with respect to Personal Lines Employees, nor
has it experienced any strikes, grievances, claims of
unfair labor practices, or other collective bargaining
disputes with respect to Personal Lines Employees.
Neither Seller nor any of the directors and officers
(and employees with responsibility for employment
matters) of Seller has any Knowledge of any
organizational effort presently being made or
threatened by or on behalf of any labor union with
respect to the Personal Lines Employees.
(ii) Seller has not, except to the extent any
of the following would not have a Material Adverse
Effect:
(A) made any commitments, oral or in
writing or otherwise, to any Personal Lines
Employee regarding lifetime employment or
employment for any specified time period or
retention as a consultant;
(B) been advised by or have any
Knowledge that any Personal Lines Employee is,
will be, or is likely to be, asserting a claim
relating to such person's employment or
termination from employment with Seller for
breach of contract, breach of implied covenant
of good faith and fair dealing, wrongful
termination, violation of public policy,
negligent termination or other claim based in
tort or contract;
(C) been advised or have Knowledge
that, with respect to any Personal Lines
Employee, Seller has been charged with, or
deemed to be in violation of, or is likely to
be charged with or deemed to be in violation
of, any federal, state, or local law that
prohibits discrimination on the basis of sex,
race, color, religion, national origin, status
as a handicapped individual, disability,
marital status, status as a Vietnam era veteran
or a disabled veteran, or sexual preference; or
<PAGE>
(D) taken any action to create
enhanced rights or benefits for all or some of
the Personal Lines Employees based in whole or
in part on a change of control or change of
ownership of Target or the other transactions
contemplated by this Agreement, which action
would result in liability to Purchaser or
Target.
(i) Employee Benefit Plans.
(i) There are no Employee Benefit Plans which
are sponsored by Target or with respect to which Target
has any liability to contribute.
(ii) There are no Employee Benefit Plans in
which any ERISA Affiliate participates which are
subject to Title IV of ERISA. No ERISA Affiliate has
any material liability with respect to any
Multiemployer Plan.
(iii) Each Employee Pension Benefit Plan
maintained by Seller which is intended to satisfy the
requirements of Section 401(a) of the Code is qualified
in form and operation under that section and the trust
of each such plan is exempt from tax under Section
501(a) of the Code. Seller has provided to Purchaser a
copy of the most recent determination letter issued by
the Internal Revenue Service with respect to each such
plan. None of such plans has been amended since the
date of such determination letters in a manner which
would cause such plans to fail to so qualify.
(j) Real Property. Section 7(j) of the Disclosure
Schedule lists real property leased or subleased to Seller that
is an Acquired Asset. Seller has made available to Purchaser
correct and complete copies of the leases and subleases listed
in Section 7(j) of the Disclosure Schedule together with any
amendments thereto through the date of this Agreement. With
respect to each lease and sublease listed in Section 7(j) of the
Disclosure Schedule:
(i) the lease or sublease is legal, valid,
binding, and in full force and effect;
(ii) Neither Seller nor any Affiliate, and to
the Knowledge of Seller, no other party to the lease or
sublease is in material breach or material default, and
no event has occurred which, with notice or lapse of
time, would constitute a material breach or material
default or permit termination, modification, or
acceleration thereunder which would have a Material
Adverse Effect;
(iii) Seller has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any
interest in the leasehold or subleasehold;
<PAGE>
(iv) all facilities leased or subleased
thereunder have received all approvals of governmental
authorities required in connection with the operation
thereof and have been operated and maintained in
accordance with applicable laws, rules and regulations
and are supplied with utilities and other services
necessary for the operation of said facilities as
operated which if not received or operated and
maintained or supplied would have a Material Adverse
Effect or materially impair the ability of the Parties
to consummate the transactions contemplated by this
Agreement;
(v) Except as would not have a Material
Adverse Effect, Seller and its Affiliates have (A)
complied with all Environmental, Health, and Safety
Laws; (B) not caused or permitted any Hazardous
Materials to be treated, stored, disposed of,
generated, or used in any leased premises which are the
subject of this Agreement, except that Seller may have
stored, used or disposed of products customarily found
in office buildings and used in connection with
operation and maintenance of property but such use was
in compliance with all Environmental, Health, and
Safety Laws; and (C) have not received any notice
concerning any past or present, actual or potential
violation of Environmental Laws or liability for
Environmental Damages; and
(vi) Seller shall deliver to Purchaser as
promptly as practicable, with respect to the 12-month
period preceding the date hereof, true and complete
copies of all accounting information for transactions
valued at greater than $10,000 dollars in Seller's
possession regarding operating expenses, real estate
taxes, and common area charges for the leases and
subleases listed on Schedule 7(j).
(k) Material Agreements. Section 7(k) of the Disclosure
Schedule sets forth a true and complete list of each of the
following contracts that are currently in effect and to which
Target is a party, or by which any of the Acquired Assets is
bound:
(i) each agency or consultation contract that
is not terminable without penalty or other liability
(other than liabilities previously accrued thereunder)
upon 90 days or less notice, except for such as are not
material to the Business;
(ii) each contract which restricts or contains
limitations on the ability of Target to conduct the
Business that are Assumed Liabilities, which contract
would have a Material Adverse Effect;
(iii) each contract under which Target has
incurred, assumed or guaranteed indebtedness for
borrowed money in excess of $250,000;
(iv) each lease or sublease of real property
used in the Business, and each lease, sublease or
rental or use contract for which Target is liable, in
each case, that (i) is not terminable by Target without
penalty or other liability (other than liabilities
previously accrued thereunder or on the Latest Balance
Sheet) upon 90 days or less notice and (ii) requires
annual payments by Target of more than $250,000;
<PAGE>
(v) each assumption reinsurance (as the ceding
or assuming company), reinsurance, coinsurance or other
similar contract providing for the transfer or sharing
of liabilities with respect to the Business that are
material thereto, and each trust agreement or other
security agreement related thereto that are material to
the Business;
(vi) each contract or arrangement pursuant to
which any person guarantees an obligation of Target in
excess of $250,000, or, except for insurance policies
and similar contracts issued by Target and other
contracts entered into in the Ordinary Course of
Business, pursuant to which Target guarantees any
obligation of or agrees to indemnify another person
which could reasonably be expected to result in
aggregate future payments by Target of $250,000 or
more;
(vii) each contract not disclosed pursuant to
the foregoing clauses (i) through (vi) that are
expected to involve the payment, pursuant to the terms
of such contract, by or to Target of more than
$250,000, or that is otherwise material to the Business
and Target considered as a whole, other than insurance
policies, reinsurance arrangements, annuity and other
contracts entered into in the Ordinary Course of
Business;
(viii) any agreement (or group of related
agreements) under which Seller or Target has created,
incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation,
and under which Seller or Target has imposed a Security
Interest on any of the Acquired Assets;
(ix) any agreement involving Target and one or
more of its Affiliates concerning the Business or the
Acquired Assets, the Independent Agents or the Personal
Lines Employees; and
(x) any employment or collective bargaining
agreement with respect to the Personal Lines Employees.
Seller has delivered, or will deliver within two weeks
of the date hereof, to Purchaser a correct and complete copy of
each agreement listed in Section 7(k) of the Disclosure Schedule
and neither Target nor the Acquired Assets is bound by any oral
agreement which if written would be required to be disclosed
under this Section 7(k). Except (i) as to matters which on a
cumulative basis cannot reasonably be expected to have a
Material Adverse Effect or (ii) as contemplated by this
Agreement, with respect to each agreement referred to in clauses
(i) through (x) above (the "Material Agreements"): (A) the
Material Agreement is legal, valid, binding, enforceable against
the Affiliates of TIG Holdings party thereto, and, to the
Seller's Knowledge, each other party thereto; and (B) to the
Knowledge of Seller, no party is in material breach or material
default, and no event has occurred which with notice or lapse of
time would constitute a material breach or material default, or
permit termination, modification, or acceleration, under the
Agreement.
<PAGE>
Section 8. Representations and Warranties of Purchaser. Except as set
forth in the disclosure schedule of the Purchaser accompanying this Agreement
(the "Purchaser Disclosure Schedule"), Purchaser hereby represents and warrants
to the Seller as follows:
(a) Organization. Purchaser is duly organized and
validly existing as a mutual insurance company and in good
standing under the laws of Ohio.
(b) Authority. Purchaser has all requisite corporate
power and authority to execute and deliver this Agreement and to
carry out its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Purchaser and this Agreement has
been duly executed and delivered by Purchaser and constitutes
the valid and legally binding obligation of Purchaser,
enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, rehabilitation, or
similar laws affecting the enforcement of creditors' rights
generally.
(c) Finders Fees. Purchaser has no liability or
obligation to pay any fees or commissions to any broker, finder,
or agent with respect to the transactions contemplated by this
Agreement for which the Seller or any of its Affiliates could
become liable or obligated.
(d) No Breach. Assuming compliance with the
requirements referred to in Section 8(e) below, neither the
execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated thereby, will (i)
violate any statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which Purchaser is
subject or any provision of the charter or bylaws of Purchaser
or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or
require any notice under any material agreement, contract,
lease, License or instrument to which Purchaser or any of its
material properties or assets are subject (or result in the
imposition of any Security Interest upon any of its assets),
except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, failure
to give notice or creation of a Security Interest would not
materially impair the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(e) Consents and Approvals. The execution and delivery
by the Purchaser of this Agreement, the performance by the
Purchaser of its obligations hereunder, and the consummation by
the Purchaser of the transactions contemplated hereby do not
require the Purchaser to obtain any consent, approval or action
of, or make any filing with or give any notice to, any person or
any governmental or regulatory body, except for (i) any filings,
notices and/or approvals under the insurance laws of the states
identified in Section 8(e) of the Purchaser Disclosure Schedule,
(ii) the expiration or early termination of the applicable
waiting period under the H-S-R Act or (iii) other notices,
filings, authorizations, consents and approvals which if not
obtained or made would not materially impair the ability of the
Parties to consummate the transactions contemplated by this
Agreement.
<PAGE>
Section 9. Tax Matters.
(a) Prior Period Tax Returns. For the calendar years ended
December 31, 1996, 1995, and 1994, Seller shall deliver to Purchaser
prior to Closing complete copies of the separate company federal and
state income Tax Returns of Target included in the preparation of
consolidated or combined federal or state income Tax Returns that include
Target prepared by, or on behalf of, Target, and Seller shall deliver to
Purchaser, prior to Closing, complete copies of all other Tax Returns
filed in any jurisdiction by Target as reasonably requested by Purchaser.
Seller shall provide to Purchaser at Closing (i) a list of all Tax
Returns of Target required to be filed after the Closing Date for periods
ending on or prior to the Closing Date (including the due dates of such
returns) and (ii) a breakdown of the amounts accrued for federal and all
other Taxes on the Statements of Target on the Closing Date.
(b) Audits; Post-Closing Tax Returns. Except as disclosed in
Schedule 9(b), (i) Target (or Seller or its affiliates on behalf of
Target) has timely filed all Tax Returns that have become due and has
paid all Taxes shown as due thereon; (ii) Target has accrued all Taxes on
its financial statements, whether or not due and payable, imposed on or
with respect to the operations or assets of Target for all periods (or
portions thereof) ending on or before the date hereof in accordance with
GAAP; and (iii) there are no audits or investigations relating to, and no
claims, demands or assessments of, Taxes, pending or threatened against
Target. Purchaser shall cause Target to timely file all Tax Returns for
which Target bears primary filing responsibility that Target is required
to file after the Closing Date for periods ending on or prior to the
Closing Date and to pay Taxes relating to such Tax Returns to the extent
accrued on the Closing Balance Sheet. The preparation and filing of
federal income Tax Returns or any other Tax Return of Target for any
period beginning after the Closing Date and the payment of and liability
for Taxes relating thereto shall be the sole obligation of Purchaser.
(c) Seller's Consolidated Federal Income Tax Return. On the
Closing Date, Purchaser shall pay Seller an amount equal to the Seller's
estimate of the amount due but unpaid under that certain tax sharing
agreement dated January 28, 1993 (the "Tax Sharing Agreement") but in no
event more than the amount accrued for such purpose on the Closing
Balance Sheet. The obligations of Target under the Tax Sharing Agreement
shall be terminated on the Closing Date, and Target shall have no further
liability under such Tax Sharing Agreement after the payment provided for
in the preceding sentence. With respect to Seller's consolidated federal
income tax return for the calendar year ending during the taxable period
that includes the Closing Date, Seller shall include therein the income
and expense of Target for such period through the Closing Date
(determined consistent with prior practice). In connection with filing
its federal income and other Tax Returns, Seller and Purchaser agree to
report (and cause their respective affiliates to report) the acquisition
of Target in such returns in a manner consistent with the structure of
the transactions contemplated hereby.
<PAGE>
(d) Straddle Tax Returns. Purchaser shall prepare and file, or
cause to be prepared and filed, all Straddle Tax Returns required to be
filed by Target and shall cause Target to pay the Taxes shown to be due
thereon. Seller will furnish to Purchaser all information and records
reasonably requested by Purchaser for use in preparation of any Straddle
Tax Returns. Within a reasonable period of time prior to the due date
thereof, Purchaser shall allow Seller to review, comment upon and
reasonably approve any Straddle Tax Return prior to the filing of such
return with the relevant tax authority. Purchaser and Seller agree to
cause Target to file all Tax Returns for any Straddle Period in a manner
consistent with the filing of such Tax Returns for prior taxable periods
and on the basis that the relevant taxable period ended as of the close
of business on the Closing Date, unless the relevant Tax authority will
not accept a Tax Return filed on that basis.
(e) Responsibility for Taxes. Except to the extent accrued on
the Closing Balance Sheet or as otherwise provided under Section 9(i)
hereof, Seller shall pay and be responsible for any and all Taxes imposed
on or with respect to the operations or assets of Target for all periods
(or portions thereof) ending on or prior to the Closing Date (including
any and all Taxes attributable to or resulting from Target having been
affiliated with Seller and a portion of any Taxes reflected on Straddle
Tax Returns computed as if the taxable period with respect to such
Straddle Tax Return ended as of the close of business on the Closing
Date). Seller shall hold Purchaser harmless from loss in respect of any
liability for the aforementioned Taxes incurred by Target, Purchaser and
its affiliates in connection therewith (determined without regard to any
deduction, credit or exclusion of Purchaser and its affiliates other than
such items of Target which accrued prior to the Closing Date and as to
which Target has received a benefit). Notwithstanding anything else
contained in this Section 9(e), Seller shall be entitled to receive and
retain any refunds of Taxes attributable to operations of Target for
periods ending on or prior to the Closing Date, except for any such
refunds accrued on the Closing Balance Sheet or arising from the
carryback of any deduction or credit attributable to operations after the
Closing Date. Purchaser shall cause Target to pay any refunds to which
Seller is entitled to Seller within fifteen (15) days of its receipt of
any refund. Seller shall pay to Target any refunds it receives and to
which Target is entitled within fifteen (15) days of its receipt of any
such refund.
(f) Books and Records. Purchaser and Seller shall furnish or
cause to be furnished to the other Party upon request as promptly as
practicable such information (including access to personnel) and books
and records pertaining to the Target and assistance relating to the
Target as is reasonably necessary for the preparation, review, audit and
filing of any Tax Return required to be filed under this Agreement, the
preparation for any Tax audit or the defense of any assessment or other
similar claim. Each Party shall reimburse the other Party for the outside
nonemployee costs of providing such information. Neither Party shall
dispose of any books and records of Target until six months after the
expiration of the applicable statute of limitations (including any
extension thereof); provided, however, that in the event a proceeding has
been instituted for which the books and records may be required prior to
the expiration of the applicable statute of limitations, the information
shall be retained until six months after there is a final determination
with respect to such proceeding and each Party shall provide notice to
the other Party of its intention to dispose of such books and records at
least one month prior to disposing of such books and records.
<PAGE>
(g) Procedures Relating to Tax Claims. If a claim is made or
asserted, either orally or in writing, by any Tax authority which, if
successful, may result in an indemnity payment to Purchaser or any of its
affiliates pursuant to this Section 9, Purchaser shall notify Seller of
such claim (a "Tax Claim"), stating the nature and basis of such claim
and the amount thereof, to the extent known. Seller will have the right,
at its option, upon timely notice to Purchaser, to assume control of any
defense of any Tax Claim (other than a Tax Claim relating solely to Taxes
of Target for a Straddle Period) with its own counsel. Costs of such Tax
Claims are to be borne by Seller unless the Tax Claim relates to taxable
periods ending after the Closing Date, in which event such costs will be
fairly apportioned. Purchaser and Target shall cooperate with Seller in
contesting any Tax Claim, which cooperation shall include the retention
and, upon Seller's request, the provision of records and information
which are reasonably relevant to such Tax Claim and making employees
available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder. In the
case of any Tax Claim relating to Taxes of Target for a Straddle Period,
the Party which is responsible under this Agreement for the larger
portion of the total Tax Claim shall have the right to control any
proceedings related thereto. Purchaser shall take all actions necessary
to authorize Seller and its affiliates to act on behalf of Target with
respect to any Tax Claim for which Seller has the right of control under
this Section 9, including, without limitation, the execution of
appropriate powers of attorney or other required agreements.
(h) Tax Withholding. Seller has withheld and paid all material
Taxes required to have been withheld and paid in connection with amounts
paid or owing to the Personal Lines Employees and Independent Agents.
(i) Section 338(h)(10) Elections.
(i) Seller and Purchaser shall make a joint
election under Section 338(h)(10) of the Code and under any
comparable provision of applicable state or local law with
respect to Purchaser's acquisition of Shares pursuant to this
Agreement (collectively, the "Section 338(h)(10) Elections").
Notwithstanding any other provision of this Agreement, if either
Purchaser or Seller fails to properly effect the election under
this Section 9(i)(i), then Purchaser or Seller shall indemnify
Seller or Purchaser, as the case may be, for any Adverse
Consequences of such failure. Any claim based upon this Section
9(i)(i) shall survive until expiration of the applicable statute
of limitations for the taxable period that includes the Closing
Date.
<PAGE>
(ii) The following provisions shall apply:
(A) Subject to Section 9(i)(ii)(B) below, as soon
as practicable after the Closing, the Parties shall
mutually prepare a Form 8023-A (with all attachments)
and any corresponding forms under comparable
provisions of applicable state or local law (the
Section "338(h)(10) Forms"), the Parties shall execute
such Section 338(h)(10) Forms, and Purchaser shall
promptly and timely file such executed Section
338(h)(10) Forms and provide written evidence of such
filing to Seller. The Parties shall report the
purchase of the Shares pursuant to this Agreement
consistent with the Section 338(h)(10) Elections, and
no Party shall take any position to the contrary
thereto in any Tax Return, any proceeding before any
taxing authority or otherwise, unless required to do
so by applicable law pursuant to a determination as
defined in Section 1313(a) of the Code.
(B) Seller and Purchaser shall determine, as
promptly as reasonably practicable following the
Closing, the Modified Aggregate Deemed Sales Price (as
defined under applicable Treasury Regulations) and the
allocation of such Modified Aggregate Deemed Sales
Price among the assets of the Target. Such allocation
of the Modified Aggregate Deemed Sales Price shall be
made in accordance with Section 338(b) of the Code and
any applicable Treasury Regulations. The Parties (i)
shall be bound by such allocation for purposes of
determining any Taxes, (ii) shall prepare and file all
Tax Returns (including, but not limited to, the
Section 338(h)(10) Forms) to be filed with any taxing
authority in a manner consistent with such allocation,
and (iii) shall take no position inconsistent with
such allocation in any Tax Return, any proceeding
before any taxing authority or otherwise, unless
required to do so by applicable law pursuant to a
determination as defined in Section 1313(a) of the
Code. In the event that such allocation is disputed by
any taxing authority, the Party receiving notice of
such dispute shall promptly notify and consult with
the other Party concerning resolution of such dispute.
To the extent that the Purchase Price is adjusted by
reason of any payment under this Agreement, (i) the
Modified Aggregate Deemed Sales Price shall be
adjusted to reflect such change, (ii) the provisions
of this Section 9(i)(ii)(B) shall be followed in
redetermining the allocation of the Modified Aggregate
Deemed Sales Price, and (iii) the Parties will, to the
extent required by applicable law, file amended Tax
Returns consistent with such revised allocation.
(j) Limitation on Tax Indemnity. Notwithstanding the foregoing,
Seller shall have no obligation to indemnify Purchaser under this Section
9 for any loss to which Purchaser would not have been entitled to
indemnification had such obligation been treated as arising from a breach
described in Section 16(b) of this Agreement.
<PAGE>
Section 10. Representations and Covenants of Parties With Respect to
Personal Lines Employees. Each of the Parties hereby covenants as to itself, the
following:
(a) Hiring of Personal Lines Employees. Prior to the Closing
Date, Purchaser shall offer to employ all of the Personal Lines
Employees, such offer to be effective as of 12:01 a.m. on the day
immediately following the Closing Date, on terms fair to Purchaser and
the employees, including salaries equal to 100% of the salaries paid by
Seller as of the Closing Date, and with employee benefits (including
medical, disability, severance pay, and life insurance and retirement
benefits) that are substantially the same as those provided to
similarly situated employees of Purchaser and its subsidiaries who are
engaged in its insurance operations; provided that, with respect to any
person who is on short-term disability at such time, such employment
shall not commence until such short-term disability period terminates.
Seller shall remove from Seller's payroll system all Personal
Lines Employees effective as of the end of the business day on the
Closing Date. Seller makes no representations as to whether any
employee will accept employment with Purchaser. The Personal Lines
Employees who accept employment with Purchaser shall be referred to as
the "Transferred Employees." Nothing in this Agreement shall be
construed as limiting in any way the right of Purchaser after the
Closing Date to terminate the employment of any Transferred Employee at
any time, to change his or her salary or wages or to modify benefits or
other terms and conditions of employment of Transferred Employees as
long as any changes to salary or wages made are done in accordance with
Purchaser's normal compensation practices and as long as any
modification to benefits or other terms and conditions of employment of
any Transferred Employee apply generally to employees of Purchaser's
business, provided, however, that without limiting the right of the
Purchaser or Target to terminate the employment of any Transferred
Employee after the Closing Date, Purchaser shall not reduce the salary
or wages of any Transferred Employee for at least twenty four (24)
months following the Closing Date.
(b) Seller's and Purchaser's Obligations With Respect to
Personal Lines Employees. With respect to each Personal Lines Employee:
(i) Seller shall be responsible for, and shall
indemnify and hold harmless Purchaser against, any actions,
claims or proceedings brought by or on behalf of any Personal
Lines Employee at any time, including but not limited to,
wrongful termination, breach of fiduciary duty, discrimination,
sexual harassment, workers compensation or other
employment-related matter ("Employee Claims"), to the extent
such claims are based solely upon actions, events or
circumstances which occurred before the Closing Date. Purchaser
shall be responsible for, and shall indemnify and hold Seller
harmless against, any Employee Claims, to the extent such claims
are based solely upon actions, events or circumstances which
occur after the Closing Date.
(ii) Seller shall be responsible for all benefits
provided pursuant to all of Seller's Employee Benefit Plans,
including but not limited to deferred compensation,
non-qualified and incentive plans or policies with respect to
services rendered on or before the Closing Date.
<PAGE>
(iii) Seller's welfare benefit plans shall be
responsible for welfare benefit claims relating to the Personal
Lines Employees incurred on or prior to the Closing Date (in
accordance with the terms of such plans) or during any period
for which a Transferred Employee shall elect continuation
coverage of the type described in Section 10(b)(iv)(C) of this
Agreement with respect to a "qualifying event" occurring on or
before the Closing Date, and Purchaser's welfare plans shall
assume responsibility for all welfare benefit claims relating to
Personal Lines Employees incurred after the Closing Date to the
extent such claim is covered by such plans and the Transferred
Employee was enrolled for such coverage. For this purpose, a
claim is deemed incurred when the medical or other service
giving rise to the claim is performed, except that in the case
of death, a claim is incurred on the date of death.
(iv) Purchaser shall cause all Transferred Employees to
be covered by Purchaser's severance pay plan and each such
Transferred Employee shall be credited with such employee's
service with Seller for purposes of determining benefits under
such plan, based on the years of service shown for such employee
on Exhibit C hereto, provided that the crediting of such service
for Transferred Employees who have incurred breaks in service
shall, to the extent such crediting would not be permitted under
Purchaser's severance pay plan, be subject to the approval of an
amendment to such plan by Purchaser's board of directors
permitting such crediting, and Purchaser shall use its best
efforts to obtain such approval prior to the Closing Date.
(v) With respect to each Transferred Employee:
(A) Purchaser shall waive pre-existing condition
exclusions, evidence of insurability provisions,
waiting period requirements or any similar provisions
under any employee benefit plan or compensation
arrangements maintained or sponsored by or contributed
to by Purchaser for such Transferred Employee on or
after the Closing Date; provided such conditions,
waiting periods, exclusions or similar provisions did
not preclude coverage for such Transferred Employee as
of the Closing Date under the comparable plans of
Seller and, to the extent any such waiver is not
permitted under any of Purchaser's employee benefit
plans or compensation arrangements, such waiver will be
subject to approval of amendment under such plans or
arrangements by the Purchaser's board of directors
permitting such waiver and Purchaser will use its best
efforts to obtain such approval prior to the Closing
Date.
(B) Purchaser shall recognize the service of each
Transferred Employee with Seller prior to the Closing
Date for all purposes other than pension benefit
accrual under each of Purchaser's employee benefit
plans, programs and policies (including but not limited
to vacation and severance) other than the Nationwide
Insurance Enterprise Retirement Plan. Vesting service
for purposes of the Nationwide Insurance Enterprise
Savings Plan shall only be considered when applying
those vesting provisions which are based on service,
and not those based on participation in that plan.
<PAGE>
(C) Seller shall be responsible for satisfying
obligations under Section 601 et. seq. of ERISA and
Section 4980B of the Code ("COBRA"), to provide
continuation coverage to or with respect to any
Transferred Employee in accordance with law with
respect to any "qualifying event" occurring on or
before the Closing Date. Purchaser shall be responsible
for satisfying obligations under COBRA to provide
continuation coverage to or with respect to any
Transferred Employee in accordance with law with
respect to any "qualifying event" which occurs after
the Closing Date.
(D) Purchaser shall be responsible for, and shall
indemnify and hold Seller harmless against, all workers
compensation benefits paid or payable to the
Transferred Employees after the Closing Date with
respect to claims made by Transferred Employees after
the Closing Date.
(vi) Purchaser represents that it does not currently contemplate
a plant closing involving, or mass lay-off of, Transferred Employees,
or any terminations that in the aggregate would constitute a mass
lay-off of Transferred Employees, within twelve (12) months following
the Closing Date. Purchaser shall indemnify and hold Seller harmless
against any Liability which may be incurred or suffered by Seller under
the Worker Adjustment and Retraining Notification Act or any similar
state law arising out of, or relating to, any actions taken by
Purchaser with respect to the Transferred Employees on or after the
Closing Date.
Section 11. Covenants Pending the Closing. The Parties agree as follows
with respect to the period between the execution of this Agreement and the
Closing:
(a) General. Each of the Parties shall use all reasonable
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 this Agreement.
(b) Regulatory Approvals. Each of the Parties shall use all
reasonable 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 Purchaser or by any Affiliate of
Seller or Purchaser in order to consummate the transactions
contemplated by this Agreement. Seller and Purchaser shall make and
cause their respective Subsidiaries to make all necessary filings as
soon as practicable, including, without limitation, those required by
the H-S-R Act and applicable insurance laws in order to facilitate
prompt consummation of the transactions contemplated by the Agreement.
In addition, Seller and Purchaser shall each use all reasonable
efforts, and shall cooperate fully with each other, to comply as soon
as practicable with all governmental requirements applicable to, or
necessary for the consummation of, the transactions contemplated
hereby. Seller and Purchaser shall use all reasonable efforts to
provide such information and communications to governmental entities as
such governmental entities may reasonably request. Each of the Parties
shall provide to the other Party copies of all applications filed or
submitted with governmental 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 hereby.
<PAGE>
(c) Access to Information. Seller and Target shall give to
Purchaser and to Purchaser's accountants, actuaries, counsel, and other
representatives (hereinafter "Purchaser's Representatives") access at
all reasonable times in a manner so as not to interfere with the normal
business operations of Target or the Business, throughout the period
prior to the Closing, to all of Target's properties, books, contracts,
commitments and records. During such period, Seller shall furnish to
Purchaser all such information concerning the affairs of Target as
Purchaser may reasonably request. Pending the Closing hereunder,
Purchaser and Purchaser's Representatives will comply with the
provisions of the Confidentiality Agreement between Purchaser and TIG
Holdings, dated June 18, 1997.
(d) Conduct of Business; Appointment of Independent Agents.
Except as otherwise contemplated by this Agreement, Seller will not
engage in any practice, take any action, or enter into any transaction
outside the Ordinary Course of Business with respect to Target, the
Acquired Assets, the Personal Lines Employees or the Business. Seller
shall use commercially reasonable efforts to cause the appointment of
all Independent Agents with Target prior to the Closing Date.
Notwithstanding the immediately preceding sentence, Seller makes no
express or implied representation that any Independent Agent appointed
with Target prior to the Closing Date will continue to write the
Business with Target prior to, at or after the Closing.
(e) Insurance. Seller will use its reasonable efforts to
maintain in effect insurance coverage against loss of or damage to the
Acquired Assets and against the liabilities and risks of the Business
in amounts and kinds not less favorable in any material respect than
those currently in effect and use its reasonable efforts to maintain
the same through the Closing Date.
(f) Books of Account. Seller will, and Seller will cause Target
to, maintain and continue to keep its books, accounts and records with
respect to the Business in the Ordinary Course of Business.
(g) Exclusivity. So long as this Agreement is in effect, Seller
will not (i) solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to the acquisition of any
capital stock or other voting securities of Target, or any substantial
portion of the Acquired Assets, the Business or Target (including any
acquisition structured as a merger, consolidation, or share exchange)
or (ii) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any Person to
do or seek any of the foregoing. Seller will promptly notify Purchaser
if any Person makes any proposal, offer, inquiry, or contact with
respect to any of the foregoing.
(h) Notice of Developments. Each Party will give prompt written
notice to the other of any material matter causing a breach of any of
its own representations and warranties in Sections 6, 7 and 8 above, as
applicable .
(i) Inter-Company Balances. Seller shall cause all intercompany
balances between Seller and Target to be settled prior to the Closing
Date.
(j) Financial Statements. As promptly as practicable after an
Annual Statement or Quarterly Statement is filed by Target with the
California Insurance Department after the date hereof and prior to the
Closing Date, Seller shall deliver to Purchaser a copy of such Annual
Statement or Quarterly Statement.
<PAGE>
(k) Termination of Agreements. Except for the agreements
contemplated by this Agreement, Seller shall cause Target to terminate
or modify, on terms mutually agreeable and which do not have a Material
Adverse Effect on the Acquired Assets or the Business, as of or prior
to the Closing Date all agreements between Target and the TIG Holdings
as of the Closing Date.
(l) Certain Actions by Purchaser. Purchaser shall use all
reasonable efforts to obtain (i) its own IVANS account and (ii)
licenses to use any software loaded on any Acquired Assets, in each
case prior to Closing.
(m) Actions With Respect to Leases. The Seller shall use
reasonable efforts to obtain consents to the assignment of the real
property leases to Target set forth in Section 11(m) of the Disclosure
Schedule to the extent that Purchaser and Seller mutually agree that
such leases shall be assigned to Target. The assignment of one or all
of such leases shall not be a condition of the obligation of the
Purchaser or the Seller hereunder.
Section 12. Post-Closing Covenants. The Parties agree as follows with
respect to the period following the Closing.
(a) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
in connection with (i) any transaction contemplated under this
Agreement or (ii) any fact, situation, circumstance, status, condition,
activity, practice, plan, occurrence, event, incident, action, failure
to act, or transaction on or prior to the Closing Date involving Seller
or Purchaser, each of the other Parties will cooperate with the
contesting or defending Party and his or its counsel in the contest or
defense, make available his or its personnel, and provide such
testimony and access to his or its books and records as shall be
reasonably necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless
the contesting or defending Party is entitled to indemnification
therefor under Section 16(b) below) and all at reasonable times and in
a manner so as not to interfere with the other Party's business;
provided, however, that the Party being requested to provide
information and access shall not be required to provide such
information and access unless the Party requesting such information
agrees to abide by any reasonable requests on the part of the providing
party with respect to the confidentiality of such information.
<PAGE>
(b) Covenant Not to Compete. At a time agreeable to Purchaser,
Purchaser and Target shall take appropriate action to change the name
of Target as promptly as possible to a name not likely to be confused
with Seller. For a period of two (2) years after the Closing Date, no
Subsidiary of TIG Holdings will directly write Independent Agent
produced auto or homeowners business (the "Restricted Business"),
except as permitted in the Target Quota Share Reinsurance Agreement,
the Seller Quota Share Reinsurance Agreement or the Loss Portfolio
Transfer Agreement; provided, however, TIG Holdings and its
Subsidiaries shall be entitled to (i) continue to write non-standard
auto business, (ii) continue to conduct Restricted Business to the
extent required by law, (iii) write umbrella and excess business, and
(iv) acquire and continue to operate any business or company from a
third party, unless in the case this clause (iv), 25% or more of the
net premium written by the business or company to be acquired in its
most recently completed fiscal year was derived from Restricted
Business, and such percentage represents at least $50 million of net
premium written in which case after the consummation of such an
acquisition, Seller shall notify Purchaser of the transaction and
Purchaser shall have the right to offer to purchase that portion of the
business or company so acquired that is derived from Restricted
Business exercisable within thirty (30) days after receipt of such
notice, which shall be accompanied by such due diligence material as
would allow Purchaser to meaningfully evaluate the business or company
within such thirty (30) day period. To the extent Purchaser does not
make such an offer or the parties cannot agree on mutually acceptable
terms for such a transaction, Seller shall use commercially reasonable
efforts to sell the portion of the business or company derived from
Restricted Business to a third party within one year of the acquisition
thereof; provided that Seller shall not be deemed in breach of this
Section after the expiry of such 1-year period if, in good faith, it
has been unable to divest such business as of such expiration date and
it continues in good faith to attempt to divest such business. This
Section 12(b) shall terminate immediately following the acquisition of
TIG Holdings, whether by merger, sale of stock or substantially all of
the assets of TIG Holdings, by a third party or the merger of TIG
Holding with or into a third party, including a "merger of equals"
however accomplished. If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section 12(b)
is invalid or unenforceable, the Parties agree that the court making
the determination of invalidity or unenforceability shall have the
power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid
and enforceable and that comes closest to expressing the intention of
the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time
within which the judgment may be appealed.
(c) Non-Solicitation. The Parties hereby covenant and agree that
for a period of twenty four (24) months following the Closing Date
neither they nor any of their respective Affiliates shall, without the
prior written consent of the other Parties, directly or indirectly,
induce, encourage or solicit for employment or agency relationship any
Transferred Employee on the part of Seller or any employee of Seller on
the part of Purchaser or employ or enter into an agency relationship
with any Transferred Employee or any employee of Seller as of the
Closing Date; provided that the provisions of this Section 12(c) shall
not apply to any Transferred Employee if Purchaser terminates such
Transferred Employee, subjects such Transferred Employee to an
indefinite lay-off, or such Transferred Employee or employee of Seller
contacts the other Party on his or her own initiative without any
direct or indirect solicitation by or encouragement by such Party
(other than general solicitation in industry journals, national
newspapers or other such publications).
<PAGE>
(d) Target Quota Share Reinsurance Agreement; Surplus.
Immediately following the Closing, Purchaser shall cause Target to
enter into the Target Quota Share Reinsurance Agreement in
substantially the form of Exhibit G hereto and Seller shall cause the
Subsidiaries of Seller party to such Agreement to execute and deliver
such Agreement. Purchaser shall cause the statutory surplus of Target,
calculated in accordance with statutory accounting principles
prescribed or permitted by the California Insurance Department and
after giving effect to the transactions contemplated hereby to exceed
the minimum capital and surplus required by the California Insurance
Department.
Section 13. Conditions to Obligations 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:
(a) Accuracy of Representations and Warranties. The
representations and warranties of the Purchaser in Section 8 hereof
shall be true and correct in all material respects at and as of the
Closing Date, except for representations and warranties made as of a
specified date, which shall be true and correct in all material
respects as of such date.
(b) Performance by Purchaser. All of the obligations under this
Agreement to be complied with and performed by Purchaser on or before
the Closing Date shall have been complied with and performed in all
material respects, including, without limitation, the delivery of each
of the items to be delivered under Section 5(b) hereof provided that
the covenant contained in Section 5(b)(i) shall have been complied with
in all respects. At the Closing, Seller shall have received a
certificate, dated the Closing Date and duly executed by an executive
officer of the Purchaser (without personal liability to such officer)
to the effect that the conditions set forth in Section 13(a) and (b)
have been satisfied.
(c) Legal Challenge. No suit, action or other proceeding shall
be pending before any court or governmental agency, and no claim shall
have been asserted, in which it is or will be sought to restrain or
prohibit or to obtain damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated which,
in the opinion of Seller's counsel, if successful would materially
impair the ability of the Parties to consummate the transactions
contemplated by this Agreement.
(d) Approvals. The Parties shall have obtained all necessary
approvals or assurances thereof from the Insurance Commissioners of the
States of California and Michigan for the transfer of control of
Target, and the transactions contemplated hereby, and the applicable
waiting period under the H-S-R Act and rules and regulations
promulgated thereunder shall have expired or early termination of the
waiting period shall have been approved by the appropriate regulatory
authority. Purchaser shall have obtained an IVANS account with respect
to the Business and the software licenses referred to in Section 11(m).
(e) Seller Quota Share Reinsurance Agreement; Loss Portfolio
Transfer Agreement. The parties to the Seller Quota Share Reinsurance
Agreement shall have entered into such Agreement in substantially the
form of Exhibit H hereto and such Agreement shall be in full force and
effect. The Loss Portfolio Agreement substantially in the form of
Exhibit I hereto shall have been executed and delivered by the parties
thereto and such agreement shall be in full force and effect.
<PAGE>
(f) Certificates. Purchaser will have furnished Seller with such
certificates of its officers and others as Seller may reasonably
request to evidence satisfaction of the conditions set forth in this
Section 13, such certificates to be made without personal liability of
such officer or other person signing such certificate.
Seller may waive any condition specified in this Section 13 if
it executes a writing so stating at or prior to the Closing.
Section 14. Conditions to Obligations of Purchaser. The obligations of
Purchaser to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(a) Accuracy of Representations and Warranties. The
representations and warranties of the Seller in Sections 6 and 7 hereof
shall be true and correct in all material respects at and as of the
Closing Date, except for representations and warranties made as of a
specified date, which shall be true and correct in all material
respects as of such date.
(b) Performance by Seller. All of the obligations under this
Agreement to be complied with and performed by Seller on or before the
Closing Date shall have been complied with and performed in all
material respects, including, without limitation, the delivery of each
of the items to be delivered under Section 5(a) hereof provided that
the covenant contained in Section 5(a)(i) shall have been complied with
in all respects. At the Closing, Purchaser shall have received a
certificate, dated the Closing Date and duly executed by an executive
officer of the Seller (without personal liability to such officer) to
the effect that the conditions set forth in Section 14(a) and (b) have
been satisfied.
(c) Approvals. The Parties shall have obtained all necessary
approvals and assurances thereof from the Insurance Commissioners of
the States of California and Michigan for the transfer of control of
Target, and the transactions contemplated hereby, and the applicable
waiting period under the H-S-R Act and rules and regulations
promulgated thereunder shall have expired or early termination of the
waiting period shall have been approved by the appropriate regulatory
authority.
(d) Legal Challenge. No suit, action or other proceeding shall
be pending before any court or governmental agency, and no claim shall
have been asserted, in which it is or will be sought to restrain or
prohibit or to obtain damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby
which, in the opinion of Purchaser's counsel, if successful would have
a Material Adverse Effect on the Business, or would materially impair
the ability of the Parties to consummate the transactions contemplated
by this Agreement.
(e) Transition Service Agreement; Loss Portfolio Agreement. The
Transition Service Agreement in the form of Exhibit J hereto shall have
been executed and delivered by the Seller and Target. The Loss
Portfolio Agreement substantially in the form of Exhibit I hereto shall
have been executed and delivered by the parties thereto and such
agreement shall be in full force and effect.
(f) Seller Quota Share Reinsurance Agreement. The parties to the
Seller Quota Share Reinsurance Agreement shall have entered into such
Agreement in substantially the form of Exhibit H hereto and such
Agreement shall be in full force and effect.
<PAGE>
(g) Certificates. Seller will have furnished Purchaser with such
certificates of its officers and others as Purchaser may reasonably
request to evidence satisfaction of the conditions set forth in this
Section 14, such certificates to be made without personal liability of
such officer or other person signing such certificate.
(h) Transfer of Acquired Assets. Subject to the Purchaser
obtaining the consents referred to in Section 14(h) of the Disclosure
Schedule, Seller shall have transferred to Target the Acquired Assets
which are material to the Business.
Purchaser may waive any condition specified in this Section 14
if it executes a writing so stating at or prior to the Closing.
Section 15. Termination.
(a) Termination of Agreement. The Parties may terminate this
Agreement as provided below:
(i) Purchaser and Seller may terminate this Agreement
by mutual written consent at any time prior to the Closing.
(ii) Purchaser may terminate this Agreement by giving
written notice to Seller at any time prior to the Closing (A) in
the event Seller has breached any material representation,
warranty, or covenant contained in this Agreement in any
material respect, Purchaser has notified Seller of the breach,
and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (B) if the Closing shall
not have occurred on or before March 31, 1998, by reason of the
failure of any condition precedent under Section 14 hereof
(unless the failure results primarily from Purchaser itself
breaching any representation, warranty, or covenant contained in
this Agreement).
(iii) Seller may terminate this Agreement by giving
written notice to Purchaser at any time prior to the Closing (A)
in the event Purchaser has breached any material representation,
warranty, or covenant contained in this Agreement in any
material respect, Seller has notified Purchaser of the breach,
and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (B) if the Closing shall
not have occurred on or before March 31, 1998, by reason of the
failure of any condition precedent under Section 13 hereof
(unless the failure results primarily from Seller breaching any
representation, warranty, or covenant contained in this
Agreement).
(b) Effect of Termination. If any Party terminates this
Agreement pursuant to Section 15 above, all rights and obligations of
the Parties hereunder shall terminate without any liability of any
Party to any other Party (other than as a result of a willful breach of
any covenant or agreement contained in this Agreement); provided,
however that the confidentiality provisions contained in Section 11(c)
above shall survive termination.
<PAGE>
Section 16. Survival; Indemnification.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Seller contained in Sections 6, 7
and 10 of this Agreement, and all of the representations and warranties
of the Purchaser contained in Sections 8 and 10 of this Agreement,
shall survive the Closing hereunder (unless the damaged Party knew or
had reason to know of any misrepresentation or breach of warranty at
the time of Closing) and continue in full force and effect for two (2)
years thereafter. Notwithstanding any otherwise applicable statute of
limitations, no claim, lawsuit, or other proceeding arising out of or
related to the breach of any representation or warranty of the Parties
contained herein may be made more than two (2) years after the Closing
Date.
(b) Remedies for Breaches of This Agreement.
(i) Except in the case of any claim related to Taxes,
for which the obligation of Seller to indemnify shall be
governed solely by Section 9 hereof, in the event Seller
breaches (x) any of its representations and warranties
contained in Sections 6, 7 and 10 of this Agreement or (y) any
of its covenants contained in this Agreement, and, if there is
an applicable survival period pursuant to Section 16(a) above,
provided that Purchaser makes a written claim for
indemnification against Seller within such survival period,
then Seller agrees to indemnify Purchaser from and against any
Adverse Consequences Purchaser may suffer which are caused
proximately by the breach; provided, however, that Seller
shall not have any obligation to indemnify Purchaser from and
against any Adverse Consequences caused by the breach of any
representation or warranty of Seller contained in Sections 6 ,
7 or 10 above and any loss otherwise indemnifiable under
Section 9 of this Agreement (A) until Purchaser has suffered
Adverse Consequences by reason of all such breaches in excess
of a $1 million aggregate deductible (after which point Seller
will be obligated only to indemnify Purchaser from and against
further such Adverse Consequences) or thereafter (B) to the
extent the Adverse Consequences Purchaser has suffered by
reason of all such breaches exceeds the Purchase Price (after
which point Seller will have no obligation to indemnify
Purchaser from and against further such Adverse Consequences).
Notwithstanding anything to the contrary in this Agreement,
Seller will have no liability or obligation to Purchaser
pursuant to this Section 16(b) or otherwise for any Adverse
Consequences arising out of any breach of any representation
or warranty made in this Agreement if disclosed in writing at
or prior to the Closing.
<PAGE>
(ii) In the event Purchaser breaches (x) any of its
representations and warranties contained in Sections 8 or 10
of this Agreement or (y) any of its covenants contained in
this Agreement, and, if there is an applicable survival period
pursuant to Section 16(a) above, provided that Seller makes a
written claim for indemnification against Purchaser within
such survival period, then Purchaser agrees to indemnify
Seller from and against any Adverse Consequences Seller may
suffer which are caused proximately by the breach; provided,
however, that Purchaser shall not have any obligation to
indemnify Seller from and against any Adverse Consequences
caused by the breach of any representation or warranty of
Purchaser contained in Sections 8 or 10 above (A) until Seller
has suffered Adverse Consequences by reason of all such
breaches in excess of a $1 million aggregate deductible (after
which point Purchaser will be obligated only to indemnify
Seller from and against further such Adverse Consequences) or
thereafter (B) to the extent the Adverse Consequences Seller
has suffered by reason of all such breaches exceeds the
Purchase Price (after which point Purchaser will have no
obligation to indemnify Seller from and against further such
Adverse Consequences). Notwithstanding anything to the
contrary in this Agreement, Purchaser will have no liability
or obligation to Seller pursuant to Section 16(b) or otherwise
for any Adverse Consequences arising out of any breach by
Purchaser of any representation or warranty made in this
Agreement if disclosed in writing at or prior to the Closing.
(iii) Except in the case of any Tax Claim which shall
be governed by Section 9(g) of this Agreement, if any third
party shall notify any Party (the "Indemnified Party") with
respect to any matter (a "Third Party Claim") which may give
rise to a claim for indemnification against any other Party
(the "Indemnifying Party") under this Section 16(b), then the
Indemnified Party shall promptly (and in any event within five
(5) business days after receiving notice of the Third Party
Claim) notify each Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the
Indemnified Party in notifying any Indemnifying Party shall
relieve the Indemnifying Party from any obligation hereunder
unless (and then solely to the extent) the Indemnifying Party
thereby is materially prejudiced by such delay.
(iv) The Indemnifying Party shall have the right,
exercisable by giving notice to the Indemnified Party not
later than thirty (30) days after receipt of the notice
described in (iii) above, to assume the control of the
defense, compromise or settlement of the Third Party Claim.
(v) Upon the assumption of control by the
Indemnifying Party as aforesaid, the Indemnifying Party shall,
at its expense, diligently proceed with the defense,
compromise or settlement of the Third Party Claim at the
Indemnifying Party's sole expense, including employment of
counsel, and in connection therewith, the Indemnified Party
shall cooperate fully, but at the expense of the Indemnifying
Party, to make available to the Indemnifying Party all
pertinent information and witnesses under Indemnified Party's
control and to make such assignments and take such other steps
as in the opinion of counsel for the Indemnifying Party are
necessary to enable the Indemnifying Party to conduct such
defense, provided always that the Indemnified Party shall be
entitled to reasonable security from the Indemnifying Party
for any expense, costs or other liabilities to which it may be
or may become exposed by reason of such cooperation.
<PAGE>
(vi) The final determination of any such Third Party
Claim, including all related costs and expenses, will be
binding and conclusive upon the parties hereto as to the
validity or invalidity, as the case may be, of such Third
Party Claim against the Indemnifying Party hereunder.
(vii) Should the Indemnifying Party fail to give
notice to the Indemnified Party as provided in clause (iv)
hereof or in the event the Indemnifying Party declines to
undertake the defense of any Third Party Claim, action or
proceeding when first notified thereof, the Indemnified Party
shall keep the Indemnifying Party advised as to the current
status and progress thereof. The Indemnified Party agrees not
to make any offer of settlement without first having provided
five (5) days advance written notice thereof to the
Indemnifying Party. In no event will the 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
unreasonably withheld).
(viii) In the event the Indemnifying Party undertakes
the defense of any such claim, action or proceeding, the
Indemnified Party shall nevertheless be entitled to
participate in (but not direct) the defense thereof with
counsel of its own choice and at its own expense, and the
parties agree to cooperate fully with one another in
connection with the defense and/or settlement thereof;
provided, however, that any decision to settle any such claim,
action or proceeding shall be at the Indemnifying Party's sole
discretion. From and after delivery of the notice referred to
in clause (iii) above, the Indemnifying Party shall be
relieved of the obligation to reimburse the Indemnified Party
for any other legal, accounting or other out-of-pocket costs
and expenses thereafter incurred by the Indemnified Party with
respect to the defense of such claim, action or proceeding
notwithstanding any participation by the Indemnified Party
therein.
(ix) If the Indemnified Party subsequently recovers
all or part of the Third Party Claim from any other person
legally obligated to pay the claim, the Indemnified Party
shall forthwith repay to the Indemnifying Party the amounts
recovered up to an amount not exceeding the payment made by
the Indemnifying Party to the Indemnified Party by way of
indemnity.
(c) Mitigation. In the event that any Party suffers damage or
loss in respect of which it has or makes a valid claim against another
Party for indemnification, it must take reasonable steps to mitigate
its loss or damage.
(d) Determination of Adverse Consequences. The Parties shall
make appropriate adjustments for tax benefits and insurance coverage in
determining Adverse Consequences for purposes of this Section 16. All
indemnification payments under Section 9 hereof or under this Section
16 shall be deemed adjustments to the Purchase Price.
<PAGE>
(e) Exclusive Remedy. Each Party, on behalf of itself and its
Affiliates (and its partners, officers, directors and employees),
hereby acknowledges and agrees that the sole and exclusive remedy with
respect to any and all claims against the other Party and its
Affiliates relating to the acquisition of Target and the Business or
any other issue relating to the subject matter of this Agreement or the
transactions contemplated hereby shall be pursuant to the
indemnification provisions contained in Section 9 hereof and this
Section 16. Purchaser, on behalf of itself and its Affiliates (and its
partners, officers, directors and employees), hereby (i) waives and
releases the Seller and its Affiliates (and their shareholders,
officers, directors and employees) from any statutory or other rights
of contribution or indemnity (except as set forth in this Section 16)
with respect to the transactions contemplated hereby and the ownership
of the Business and Target and (ii) waives and releases all rights of
subrogation with respect to claims relating thereto. Notwithstanding
the foregoing, each party shall have the right to pursue remedies
against the other Party outside of this Section 16 to enforce covenants
of such other party contained in the Transition Services Agreement, the
Target Quota Share Reinsurance Agreement, the Seller Quota Share
Reinsurance Agreement and the Loss Portfolio Transfer Agreement.
Section 17. Press Releases. Each of the Parties to this Agreement
hereby agrees with each other Party that no press release or similar public
announcement or communication will be made or caused to be made prior to the
Closing concerning the execution or performance of this Agreement or the
transactions contemplated hereunder unless specifically approved in advance by
the other Party. It is understood and agreed that no Party hereto shall disclose
any facts or information with respect to this Agreement and the transactions
contemplated herein prior to the Closing, except disclosures to insurance
regulatory authorities, other governmental authorities, Seller's or Purchaser's
representatives (in which case the disclosing Party shall 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).
Section 18. Expenses. Each of the Parties shall pay its own expenses
incurred in connection with this Agreement and the consummation of the
transactions contemplated hereby. Purchaser shall be responsible for paying all
filing fees in connection with any H-S-R Act filing required to consummate this
transaction. Seller shall be required to pay and shall indemnify Purchaser and
Target against all transfer taxes payable in connection with the transfer of the
Acquired Assets and the Shares hereunder
Section 19. Cooperation Clause. Each Party agrees to execute and
deliver, or cause to be executed and delivered, at or after the Closing, such
additional or further transfers, assignments, resolutions, endorsements, power
of attorney, and other instruments or documents as may reasonably be requested
by the other for the purpose of carrying out the intentions of the Parties
hereto. Any reasonable out-of-pocket expense associated with preparing or
obtaining the requested material shall be borne by the requesting Party. Each
Party agrees to cooperate with the other in effecting the transactions
contemplated hereunder.
Section 20. Waiver of Covenants and Conditions. At any time prior to
the Closing Date or at the Closing, any Party hereto may waive compliance by a
written instrument in any particular instance with any covenant or condition by,
or breach of any representation or warranty by, any other Party hereto. No
waiver of any term, provision or condition of this Agreement, whether by conduct
or otherwise, in any one or more instances shall be deemed or construed as a
further or continuing waiver of any such term, provision or condition.
<PAGE>
Section 21. Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing and shall be deemed to have been
duly given at the time hand delivered, mailed, certified mail-return receipt
requested, or telefaxed, with hard copy mailed first class, postage prepaid, to
the parties at the following addresses:
(a) if to Seller, to:
TIG Holdings, Inc.
65 East 55th Street, 28th Floor
New York, New York 10022
Attention: Peter M. Acton
Telephone: (212) 446-2705
Facsimile: (212) 371-8574
In the case of any notices, requests, demands, claims and other
communications relating to any Tax matters covered described in Section
9 hereof,
an additional copy to:
Cynthia D. Crandall
Vice President and Director of Tax
TIG Insurance Company
5205 North O'Connor Blvd.
Irving, TX 75039
with a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Michael G. Marks
Telephone: (212) 821-8000
Facsimile: (212) 821-8111
(b) if to Purchaser, to:
Nationwide Mutual Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Attention: David A. Diamond
Vice President-Enterprise Controller
Telephone: 614-249-4462
Facsimile: 614-249-3003
<PAGE>
and:
Office of General Counsel
Mark B. Koogler
Vice President and
Associate General Counsel
Telephone: 614-249-4649
Facsimile: 614-249-2418
or to any such other address as designated in writing by the appropriate party.
Section 22. Assignment. None of the rights or obligations of any party hereto
may be assigned or delegated in whole or in part without the consent in writing
of the other party hereto.
Section 23. Entire Agreement; Construction. This Agreement and the Exhibits,
Disclosure Schedule and Purchaser Disclosure Schedule attached hereto embody the
entire agreement and understanding between Seller and Purchaser with respect to
the subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions hereof. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to federal, state or local
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
"including" shall mean including without limitation.
This Agreement may be amended only by a writing signed by all parties
hereto.
Section 24. Representations and Warranties; Disclosure Schedule.
Neither the specification of any dollar amount in the representations and
warranties set forth in Sections 6, 7, 8 and 10 nor the indemnification
provisions of Section 16 nor the inclusion of any items in the Disclosure
Schedule or the Purchaser Disclosure Schedule to this Agreement will be deemed
to constitute an admission by Seller or Purchaser, or otherwise imply, that any
such amounts or the items so included are material for the purposes of this
Agreement. All documents or information disclosed in any section of the
Disclosure Schedule or the Purchaser Disclosure Schedule to this Agreement are
intended to be disclosed for all purposes under this Agreement and will also be
deemed to be incorporated by reference in each of the other sections of the
Disclosure Schedule or the Purchaser Disclosure Schedule to this Agreement to
which they may be relevant. For purposes of this Agreement, the determination as
to whether any item, event, circumstance or amount is "material" shall be made
with reference to the Business and Target, taken as a whole. Purchaser
acknowledges and agrees that the failure of the Independent Agents to continue
to write Business prior to, at or after Closing shall not constitute a Material
Adverse Effect, material adverse change or a material event for any purpose
under this Agreement.
Section 25. No Agreement until signed by all Parties. Nothing in this
document will constitute an offer capable of acceptance or an agreement of any
kind until this document is executed and delivered by each of the Parties.
Section 26. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
conflict of law principles and shall be binding upon and shall inure to the
benefit of the parties hereto and their successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly entered into as of the date first above written.
PURCHASER:
NATIONWIDE MUTUAL INSURANCE COMPANY
By: /s/ Mark B. Koogler
Name: Mark B Koogler
Title: Vice President and
Associate General Counsel
SELLER:
TIG INSURANCE COMPANY
By: /s/ William H. Huff
Name: William H. Huff, III
Title: Senior Vice President and
General Counsel
TIG HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Exhibit 11
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions, except per share data) 1997 1996 1997 1996
- --------------------------------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 51.2 55.3 52.2 57.1
Net effect of dilutive stock options - based on
the treasury stock method using
average market price 2.6 2.5 2.6 2.8
- --------------------------------------------------- ----------- ------------ ------------ -----------
Total primary common shares 53.8 57.8 54.8 59.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income $39.8 $37.3 $115.0 $40.0
Less preferred stock dividend requirements (0.5) (0.5) (1.5) (1.5)
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income available to common stock $39.3 $36.8 $113.5 $38.5
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income per common share $0.73 $0.64 $2.07 $0.65
- --------------------------------------------------- ----------- ------------ ------------ -----------
Fully Diluted:
Weighted average shares outstanding 51.2 55.3 52.2 57.1
Net effect of dilutive stock options - based on
the treasury stock method using higher of
average or end of period market price 3.2 2.9 3.1 2.9
- --------------------------------------------------- ----------- ------------ ------------ -----------
Total fully diluted common shares 54.4 58.2 55.3 60.0
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income $39.8 $37.3 $115.0 $40.0
Less preferred stock dividend requirements (0.5) (0.5) (1.5) (1.5)
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income available to common stock $39.3 $36.8 $113.5 $38.5
- --------------------------------------------------- ----------- ------------ ------------ -----------
Net income per common share $0.72 $0.63 $2.05 $0.64
- --------------------------------------------------- ----------- ------------ ------------ -----------
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
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.
Dated: November 14, 1997 TIG HOLDINGS, INC.
By: /s/CYNTHIA B. KOENIG
Name: Cynthia B. Koenig
Title: Controller of TIG Insurance Company
(Chief Accounting Officer)
By: /s/EDWIN G. PICKETT
Name: Edwin G. Pickett
Title: Executive Vice President
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000897430
<NAME> TIG Holdings, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> Jun-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 4,218
<DEBT-MARKET-VALUE> 4,218
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,405
<CASH> 5
<RECOVER-REINSURE> 1,334
<DEFERRED-ACQUISITION> 171
<TOTAL-ASSETS> 6,832
<POLICY-LOSSES> 3,238
<UNEARNED-PREMIUMS> 759
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 124
25
0
<COMMON> 1,230
<OTHER-SE> (11)
<TOTAL-LIABILITY-AND-EQUITY> 6,832
380
<INVESTMENT-INCOME> 71
<INVESTMENT-GAINS> 1
<OTHER-INCOME> 0
<BENEFITS> 259
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 122
<INCOME-PRETAX> 55
<INCOME-TAX> (15)
<INCOME-CONTINUING> 40
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.72
<RESERVE-OPEN> 3,691
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,691
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
