<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996
REGISTRATION NO. 333-3956
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
EXECUTIVE RISK INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1388171
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
------------------------
82 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06070
(860) 408-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
LEROY A. VANDER PUTTEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
EXECUTIVE RISK INC.
82 HOPMEADOW STREET
SIMSBURY, CT 06070
(860) 408-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
JAMES A. FITZPATRICK, JR., ESQ. PETER R. O'FLINN, ESQ.
JONATHAN L. FREEDMAN, ESQ. STEPHEN G. ROONEY, ESQ.
DEWEY BALLANTINE LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
1301 AVENUE OF THE AMERICAS 125 WEST 55TH STREET
NEW YORK, NEW YORK 10019-6092 NEW YORK, NEW YORK 10019-5389
(212) 259-8000 (212) 424-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of
this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 9, 1996
PROSPECTUS
MAY , 1996
2,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,000,000 shares (the "Shares") of common stock, par value $.01
per share (the "Common Stock"), of Executive Risk Inc. ("ERI" or the "Company")
offered hereby (the "Offering") are being sold by Aetna Life and Casualty
Company ("AL&C" or the "Selling Stockholder"). See "Selling Stockholder." The
Company will not receive any proceeds from the sale of the Common Stock by the
Selling Stockholder.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "ER." The last reported sales price of the Common Stock on the NYSE
on May 7, 1996, was $29.50 per share. See "Price Range of Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO
TO THE DISCOUNTS AND THE SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
- ------------------------------------------------------------------------------------------------------
Per Share.................. $ $ $
Total(3)................... $ $ $
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Selling Stockholder estimated at
$ . The Company will pay certain other expenses incurred in
connection with the Offering, estimated to be $ , subject to
adjustment.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
300,000 shares of Common Stock, at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public and
Underwriting Discounts and Commissions will be $ and $ ,
respectively. If such option is exercised in full, the Proceeds to the
Selling Stockholder will be unchanged from the amount set forth above, and
the Company will receive proceeds of $ before deduction of expenses
referred to in note (2) above. See "Underwriting."
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the Shares will be made in New York,
New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE CONNING & COMPANY
SECURITIES CORPORATION
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF
THIS DOCUMENT.
ERI, A DELAWARE CORPORATION, OWNS ALL OF THE SHARES OF CAPITAL STOCK OF
CERTAIN INSURANCE COMPANIES DOMICILED IN THE STATES OF CONNECTICUT AND DELAWARE.
THE CONNECTICUT AND DELAWARE INSURANCE LAWS REQUIRE PRIOR APPROVAL BY THEIR
RESPECTIVE STATE INSURANCE COMMISSIONERS OF ANY ACQUISITION OF CONTROL OF A
DOMESTIC INSURANCE COMPANY OR OF ANY COMPANY WHICH CONTROLS A DOMESTIC INSURANCE
COMPANY. ONE INSURANCE COMPANY SUBSIDIARY OF ERI IS DEEMED TO BE COMMERCIALLY
DOMICILED IN CALIFORNIA. THE CALIFORNIA INSURANCE LAW REQUIRES PRIOR APPROVAL BY
THE CALIFORNIA INSURANCE COMMISSIONER OF ANY ACQUISITION OF CONTROL OF AN
INSURANCE COMPANY COMMERCIALLY DOMICILED IN CALIFORNIA OR OF ANY COMPANY WHICH
CONTROLS SUCH AN INSURANCE COMPANY. "CONTROL" IS GENERALLY PRESUMED TO EXIST
THROUGH THE OWNERSHIP OF, OR THE HOLDING OF PROXIES WITH RESPECT TO, 10% OR MORE
OF THE VOTING SECURITIES OF AN INSURANCE COMPANY OR OF ANY COMPANY WHICH
CONTROLS AN INSURANCE COMPANY. ANY PURCHASER OF COMMON STOCK HOLDING POWER TO
VOTE 10% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK WILL BE PRESUMED TO
HAVE ACQUIRED CONTROL OF ERI'S INSURANCE SUBSIDIARIES UNLESS THE RELEVANT
INSURANCE COMMISSIONER, FOLLOWING APPLICATION BY SUCH PURCHASER, DETERMINES
OTHERWISE. ACCORDINGLY, ANY PURCHASE RESULTING IN A PURCHASER'S HOLDING THE
POWER TO VOTE 10% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK WOULD
REQUIRE PRIOR APPROVAL BY THE INSURANCE COMMISSIONERS OF THE ABOVE-REFERENCED
STATES.
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY, BY
THE SELLING STOCKHOLDER, OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC
OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN
ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE
UNITED STATES AND CANADA. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES
ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND
TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE SHARES AND THE
DISTRIBUTION OF THIS PROSPECTUS.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, NY 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. Copies of the above
reports, proxy statements and other information also may be inspected at the
offices of the NYSE, 20 Broad Street, New York, NY 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the securities offered hereby, reference is hereby
made to the Registration Statement and the exhibits and schedules filed
therewith, which may be obtained from the principal office of the Commission in
Washington, DC, upon payment of the fees prescribed by the Commission.
2
<PAGE> 4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-12800) are incorporated by reference:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1995 (the "1995 Form 10-K");
(ii) Current Report on Form 8-K filed on March 26, 1996 (the "Form
8-K");
(iii) the sections entitled "Beneficial Ownership of Stock,"
"Executive Compensation" (except the "Compensation Committee Report" and
the "Performance Graph"), and "Compensation Committee Interlocks and
Insider Participation" of the Company's Proxy Statement, filed with the
Commission on April 2, 1996; and
(iv) description of the Company's capital stock contained in the
Company's Registration Statement on Form 8-A, filed with the Commission on
February 9, 1994, as amended by Form 8-A/A, filed with the Commission on
May 8, 1996, including any further amendment updating such description.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from their respective dates of filing. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person (including any
beneficial owner of Shares purchased in the Offering) to whom this Prospectus is
delivered, upon written or oral request, a copy of any or all of the foregoing
documents incorporated herein by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents). Written or telephone requests should be directed to the Company
at 82 Hopmeadow Street, Simsbury, CT 06070, Attention: Mr. Robert V. Deutsch,
Executive Vice President, 860-408-2000.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Except where otherwise indicated, (i) the "Company" or "ERI" refers
to Executive Risk Inc., with respect to any period subsequent to December 31,
1993 and to its wholly-owned subsidiary, Executive Re Inc. ("Executive Re"),
with respect to any period prior to January 1, 1994; (ii) "ERII" refers to
Executive Risk Indemnity Inc. and "ERSIC" refers to Executive Risk Specialty
Insurance Company (ERII and ERSIC are the Company's wholly-owned insurance
company subsidiaries and are sometimes collectively referred to as the
"Insurance Subsidiaries"); (iii) "ERMA" refers to Executive Risk Management
Associates, the Company's wholly-owned underwriting agency which offers
insurance policies issued by ERII and ERSIC, as well as by The Aetna Casualty
and Surety Company ("AC&S"); (iv) all financial information in this Prospectus
is presented in accordance with generally accepted accounting principles
("GAAP"), unless specified as being in accordance with statutory accounting
practices ("SAP"); and (v) the information contained in this Prospectus assumes
no exercise of the Underwriters' over-allotment option or the Aetna Stock
Option, as defined below.
THE COMPANY
ERI is a specialty insurance holding company that, through its
subsidiaries, develops, markets and underwrites directors and officers liability
insurance ("D&O") and other professional liability insurance products. Based on
the most recently available survey of the D&O industry by Watson Wyatt
Worldwide, the facility through which the Company and AC&S issue D&O is a
leading underwriter of primary D&O in the United States. From 1993 to 1995, the
Company's gross premiums written increased from $84.3 million to $210.6 million,
while its GAAP combined ratio declined from 107.2% to 95.5%. The Company
attributes this success primarily to the following factors: (i) an ability to
identify and capitalize on specialty insurance opportunities, including those in
underserved and new markets; (ii) increasing marketplace acceptance of the
Company as a direct insurer of D&O risks by both new insureds and previous AC&S
insureds; (iii) stable relationships with insureds and brokers, resulting from
an emphasis on client service in marketing, underwriting and claims handling;
(iv) pricing based on risk rather than market forces; and (v) a
performance-based culture, fostered by significant equity participation by the
Company's executive officers and directors (currently 21% of the Common Stock on
a fully diluted basis).
Historically, the Company has focused on writing D&O for domestic insureds,
which accounted for 76% of gross premiums written in 1995. The Company's
principal D&O insureds are commercial entities, financial institutions and
not-for-profit organizations, which represented 55%, 28% and 17% of gross
domestic D&O premiums written in 1995, respectively. In recent years, the
Company has expanded its product line to related specialty liability insurance
products, including errors and omissions liability insurance ("E&O") for lawyers
and other professionals (19% of gross premiums written in 1995), international
D&O through a joint venture with Union des Assurances de
Paris -- Incendie-Accidents ("UAP") (5% of gross premiums written in 1995) and
fiduciary and fidelity bond coverages.
The Company's E&O business is divided between Lawyers Professional
Liability ("LPL") and Miscellaneous Professional Liability ("MPL"). Gross
premiums written for LPL increased from $2.3 million in 1993 to $28.7 million in
1995. Gross premiums written for MPL grew from $1.6 million to $11.6 million
during the same period. The growth of the Company's E&O business demonstrates
the effectiveness of its overall strategy of identifying and serving insurance
markets which the Company believes are not being effectively served by other
insurers. For example, the Company identified large law firms (35 or more
lawyers) as one such underserved market. In this market, extensive risk
evaluation and underwriting are performed by the Company's LPL underwriters, all
of whom are attorneys formerly associated with large law firms. Additionally,
the Company's MPL department has expanded the classes of businesses it insures
and has formed alliances with wholesale brokers who control large blocks of E&O
business. Recent additions to the Company's MPL product offerings include E&O
insurance programs for automobile insurance agents, psychologists and temporary
help agencies.
4
<PAGE> 6
During the early 1990's, the Company perceived an opportunity to provide
professional liability insurance to foreign corporations whose directors and
officers are exposed to D&O risks, including, among others, risks arising in
connection with U.S. securities laws. In January 1993, ERI and UAP (the largest
insurance organization in France and the second largest in Europe) formed a
French insurance underwriting agency, known as UAP Executive Partners ("UPEX"),
in which each party has a 50% interest. UPEX is based in Paris and offers D&O
policies issued by UAP, a portion of each of which is reinsured by the Company.
The Company also reinsures international D&O business through its Dutch
subsidiary, Executive Risk N.V., founded in May 1995 to participate in
professional liability opportunities, principally in the Netherlands.
The following table sets forth ERI's gross premiums written by line of
business for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 GROSS 1994 GROSS 1993 GROSS
PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
WRITTEN OF TOTAL WRITTEN OF TOTAL WRITTEN OF TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
D&O............................. $159,491 76% $104,871 81% $ 79,541 94%
Lawyers E&O..................... 28,744 14 17,964 14 2,275 3
Misc. E&O....................... 11,649 5 5,153 4 1,646 2
International D&O............... 9,934 5 1,620 1 785 1
Other........................... 822 -- 591 -- 8 --
-------- ----- -------- ---- ---- ------- ---- -
Total................. $210,640 100% $130,199 100% $ 84,255 100%
======== ===== ======== ======== ======= =====
</TABLE>
While the Company seeks premium growth, management relies on a niche
strategy to maintain overall underwriting profitability levels. The Company
believes that certain niche markets have the advantage of reduced competitive
pressures and more attractive pricing formulas. The Company generally seeks to
compete in business lines where it can achieve an underwriting profit (i.e., a
combined ratio below 100%, which indicates profitability before taking net
investment income into account). The following table sets forth ERI's GAAP
ratios for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
GAAP DATA:
Loss Ratio................................... 67.4% 67.6% 67.6% 71.5% 70.6%
Expense Ratio................................ 28.1 29.1 39.6 34.7 33.1
---- ---- ----- ----- -----
Combined Ratio............................... 95.5% 96.7% 107.2% 106.2% 103.7%
==== ==== ===== ===== =====
</TABLE>
The Company prices insurance policies based primarily upon specific risk
exposure, including loss experience, rather than primarily upon market factors.
The table below sets forth statutory loss ratios for the periods indicated for
the Insurance Subsidiaries and the property/casualty industry as a whole. The
Insurance Subsidiaries' specialty products business is not directly comparable
to the business of the property/casualty industry as a whole.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
SAP DATA:
Insurance Subsidiaries Loss Ratio............... 67.4% 67.6% 67.6% 71.5% 73.0%
Industry Loss Ratio(1).......................... 78.9 81.1 79.5 88.1 81.1
</TABLE>
- ------------------------------
(1) Source: For 1991 through 1994, Best's Aggregates &
Averages-Property-Casualty; for 1995, BestWeek P/C Supplement.
The Insurance Subsidiaries conduct D&O business primarily through an
insurance facility (the "Facility") which consists of AC&S, ERII and ERSIC, each
of which can act as insurer or reinsurer, and ERMA, which acts as the product
developer, marketer and managing underwriter. In 1995, $99.0 million of gross
D&O premiums written were issued on ERII and ERSIC policies, as compared to $7.2
million in 1994.
5
<PAGE> 7
See "Business -- Markets." Approximately one-third of the growth in the
Company's gross premiums written from 1994 to 1995 was attributable to the
conversion of the Facility's insureds from AC&S policies to ERII or ERSIC
policies. It is unlikely that the rate of growth achieved in 1995 attributable
to such conversions can be sustained. Under the Facility, when the Company
issues an ERII or ERSIC D&O policy, the Company receives 100% of the gross
premiums written on that policy (and generally cedes 12.5% to AC&S), as compared
to the 50% it receives when an AC&S policy is issued. Also, ERI realizes an
incremental benefit from conversions to Insurance Subsidiaries' D&O policies
because of the elimination of the Company's payment to AC&S of an override
commission equal to 3% of gross premiums written on all AC&S D&O policies issued
through the Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
Both D&O and E&O are designed to protect insureds against lawsuits and
associated legal defense expenses. In connection with D&O coverage of
corporations, the most significant liabilities generally derive from lawsuits by
stockholders against directors and officers for alleged failures to discharge
duties to the corporation or violations of federal securities laws. In the case
of not-for-profit organizations, claims most often arise in connection with
employment practices litigation. E&O is offered to professionals, such as
attorneys, psychologists and insurance agents, among others, where the principal
source of potential claims is dissatisfied clients alleging breaches of
professional standards or ethical violations.
Approximately 94% of the Company's investment portfolio at March 31, 1996,
on a fair value basis, consisted of cash and investment grade fixed income
securities, primarily tax-exempt municipal securities. At that date, the
Company's investment portfolio had an amortized cost and fair value of $509.9
million and $531.7 million, respectively, and the tax equivalent yield on the
fixed maturity portfolio was 8.22%. The Company's investment philosophy is to
seek optimum yield, consistent with what management believes is a generally
conservative investment approach. At March 31, 1996, the Company's total assets
were $687.5 million and stockholders' equity was $105.0 million.
On March 26, 1996, the Company purchased 2,511,300 shares of its capital
stock from AC&S at a price of $29.875 per share, or approximately $75 million in
the aggregate (the "Repurchase Transaction"). Under the terms of the Amended and
Restated Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of
March 22, 1996 by and among ERI, AC&S and AL&C, the price is subject to upward
adjustment under certain circumstances. See "Recent Developments." Immediately
prior to the Repurchase Transaction, AC&S beneficially owned a total of
4,611,300 shares of ERI's then-outstanding capital stock, consisting of
3,286,300 shares of Common Stock, all 1,225,000 shares of the Class B Common
Stock and an option (the "Aetna Stock Option") to purchase 100,000 shares of
Common Stock at an exercise price of $12.00 per share. On March 29, 1996, AC&S
transferred the remaining 2,000,000 shares of Common Stock (which are the Shares
offered hereby), together with the Aetna Stock Option, to AL&C. Prior to the
repurchase of the Class B Common Stock, AC&S had the right to elect four
individuals to the Company's Board of Directors. Following the Repurchase
Transaction, AC&S has the right to nominate one director for election to the
Board of Directors. One individual designated by AC&S currently serves on the
Company's Board of Directors. See "Business Relationship with AC&S."
The Insurance Subsidiaries' current pooled rating from A.M. Best Company,
Inc. ("A.M. Best") is "A (Excellent)" and their current pooled claims-paying
ability rating from Standard & Poor's Corporation ("S&P") is "A+ (Good)." These
ratings are based upon factors of concern to policyholders, including financial
condition and solvency, and are not directed to the protection of investors. The
Company reviewed all material elements of the Repurchase Transaction, including,
but not limited to, the financing incurred to complete the Repurchase
Transaction (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"), with A.M. Best
and S&P prior to the consummation of the Repurchase Transaction. The Company's
ratings have been unaffected by the Repurchase Transaction. There can be no
assurance, however, that such ratings will not change in the future.
ERI employs approximately 250 people, most of whom are located at the
Company-owned headquarters building at 82 Hopmeadow Street, Simsbury,
Connecticut 06070.
6
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholder........................... 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)(2)........................ 8,996,041 shares
Use of proceeds......................... The Company will not receive any proceeds from the
sale of Shares by the Selling Stockholder. If the
Underwriters' over-allotment option is exercised
(see "Underwriting"), any net proceeds received by
the Company from the proceeds of shares sold
thereunder will be used for general corporate
purposes.
Dividend policy......................... The Company intends to continue to pay quarterly
cash dividends of $.02 per share of Common Stock
($.08 annually), subject to declaration by the
Board of Directors and certain regulatory and other
constraints.
NYSE symbol............................. ER
</TABLE>
- ------------------------------
(1) Excludes up to 300,000 shares of Common Stock which may be sold by the
Company upon exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of May 7, 1996.
Does not include 100,000 shares of Common Stock issuable upon exercise of
the Aetna Stock Option, or 1,656,576 options and shares issuable to current
and former directors and employees.
7
<PAGE> 9
PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents consolidated historical and pro forma income
statement data for the three months ended March 31, 1996 and the year ended
December 31, 1995, adjusted to give effect to the Repurchase Transaction and the
related disposition of assets and incurrence of debt, as if they had been
consummated at January 1, 1995. The unaudited pro forma consolidated financial
data do not purport to represent what the Company's consolidated results of
operations would have been, or to project the Company's results of operations
for any future period or date, had the Repurchase Transaction and the related
disposition of assets and incurrence of debt occurred on January 1, 1995. The
pro forma financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------------- -----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA INCOME STATEMENT
DATA:
Gross premiums written......... $57,682 $57,682 $210,640 $ 210,640
Net premiums written........... 38,851 38,851 145,121 145,121
Net premiums earned............ 33,913 33,913 116,434 116,434
Net investment income.......... 7,375 (416)(a) 6,959 26,706 $ (1,743)(a) 24,963
Net realized gains............. 954 954 1,588 1,588
Other income................... 92 92 83 83
------ -------- ------- -------- ------ --------
Total operating
revenues........... 42,334 (416) 41,918 144,811 (1,743) 143,068
Loss and loss adjustment
expenses..................... 22,894 22,894 78,530 78,530
Policy acquisition costs....... 6,744 6,744 21,931 21,931
General & administrative
costs........................ 3,168 3,168 10,730 10,730
Long-term incentive
compensation................. 187 187 1,458 1,458
Interest expense............... 578 752(b) 1,330 2,022 3,150(b) 5,172
------ -------- ------- -------- ------ --------
Total operating
expenses........... 33,571 752 34,323 114,671 3,150 117,821
------ -------- ------- -------- ------ --------
Income before income taxes..... 8,763 (1,168) 7,595 30,140 (4,893) 25,247
Income tax expense............. 1,538 (316)(c) 1,222 4,854 (1,323)(c) 3,531
------ -------- ------- -------- ------ --------
Net income..................... $ 7,225 $ (852) $ 6,373 $ 25,286 $ (3,570) $ 21,716
====== ======== ======= ======== ====== ========
Earnings per common share --
assuming full dilution....... $ 0.60 $ 0.06 $ 0.66 $ 2.11 $ 0.18 $ 2.29
Weighted average shares
outstanding -- assuming full
dilution..................... 12,061 (2,373)(d) 9,688 11,978 (2,511)(d) 9,467
Operating margin(1)............ 20.3% 19.5% 21.3% 20.4%
</TABLE>
- ------------------------------
(1) Consists of income before income taxes, excluding interest expense and
realized capital gains, divided by total revenues, excluding realized
capital gains.
8
<PAGE> 10
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
The following notes describe the adjustments made in computing pro forma
consolidated financial data:
(a) Reflects the loss of investment income that otherwise would have been earned
on the Company's invested assets used as partial funding of the Repurchase
Transaction, at 5.8%, which was the Company's nominal yield on its fixed
maturity portfolio for the year ended December 31, 1995.
(b) Reflects additional interest expense, at a 7% assumed rate, which represents
the Company's anticipated borrowing rate on the incremental long-term debt
incurred as partial funding of the Repurchase Transaction.
(c) Reflects the tax benefit of lost investment income and incremental interest
expense at the statutory tax rate of 35% adjusted for the effects of tax
exempt interest income.
(d) Reflects the reduction in the weighted average shares outstanding resulting
from the Repurchase Transaction.
9
<PAGE> 11
RISK FACTORS
Prospective investors in the Shares offered hereby should consider
carefully the matters set forth below, as well as the other information set
forth and incorporated by reference in this Prospectus.
RELATIONSHIP WITH AC&S
The Company derives a significant proportion of its revenue from insurance
written on AC&S policies, although, increasingly, the Company is writing
business on the policies of its own Insurance Subsidiaries (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations"). The agreements with AC&S relating to the
Facility place certain restrictions on the manner in which the Company may
conduct its business. These agreements distinguish between two types of
insurance business in which the Company may engage in the future. One type of
business consists of insurance business that complies with underwriting, claims
and reinsurance guidelines which are established by the Company with AC&S's
approval and which may not be altered without AC&S's consent. All other types of
insurance business are subject to volume restrictions (see "Business
Relationship with AC&S"). These restrictions may limit the Company's ability to
pursue business opportunities that it believes would be profitable.
On April 2, 1996, an affiliate of The Travelers Group Inc. ("Travelers")
purchased AC&S. Notwithstanding this transaction, AC&S remains a party to the
agreements relating to the Facility. The exclusive arrangement whereby
substantially all D&O written in the United States by AC&S and its former
parent, AL&C, is written through ERMA remains unchanged as a result of the
Travelers purchase; however, Travelers and its other affiliates are not bound by
this arrangement. A subsidiary of Travelers currently writes D&O in competition
with the Company and is likely to continue to compete with the Company in the
future.
An interruption or termination of the Company's contractual arrangements
with AC&S would, under certain circumstances, constitute an event of default
under the Company's existing senior loan agreements and could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's agreements with AC&S require a minimum two-year notice of
termination, and no such termination may become effective until year-end 1999,
subject to earlier termination upon the occurrence of specified events. These
events include the failure of the Company to meet certain specified financial
tests, the failure of the Company to comply with certain restrictions on its
ability to engage in non-Facility business and a change of control (as defined)
of the Company. In addition, ERMA's ability to underwrite Facility business on
behalf of AC&S may be suspended upon the failure of the Company to meet the same
specified financial tests which give rise to a right of termination.
Prior to the Repurchase Transaction, AC&S, as sole holder of the Class B
Common Stock, had the right under the Company's Certificate of Incorporation to
designate and elect four persons to the Company's Board of Directors. The Board
of Directors consisted during 1995 of twelve persons. It consists of ten persons
as of the date of this Prospectus. Following the Repurchase Transaction, AC&S
has the right to nominate one director for election to the Board of Directors.
AC&S's designee for such purpose is Joseph P. Kiernan, who has been a member of
the Company's Board of Directors since 1986. Mr. Kiernan also has been and will
continue to be a member of one of two underwriting committees of each Insurance
Subsidiary's Board of Directors. This committee, called Underwriting Committee
A, is responsible for, among other things, determining underwriting guidelines
and acting in respect of insurance written through the Facility on AC&S
policies. Since any action by Underwriting Committee A requires unanimous
consent of its members, the AC&S designee effectively has a veto right with
respect to changes in guidelines affecting underwriting, claims handling and
reinsurance with respect to AC&S policies.
CERTAIN BUSINESS CONSIDERATIONS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition and general economic
conditions, including interest rate levels, as well as legislative initiatives,
the frequency of litigation, and the size of judgments obtained against
directors and officers. The impact of these factors can dramatically
10
<PAGE> 12
affect demand for the Company's products, insurance capacity, pricing and claims
experience and, consequently, the Company's results of operations. The enactment
of the Private Securities Litigation Reform Act of 1995 (which is intended to
limit securities fraud lawsuits) is an example of an external factor that can
affect the market for the Company's products and services. Management does not
believe that the effects, if any, of this new statute on the D&O market will be
known for a number of years. Due to the Company's underwriting policy of pricing
its insurance products primarily according to perceived risk exposure rather
than according to pricing patterns in the market, it is possible that the
Company will seek to raise prices during times of excess insurance capacity (or,
will not seek to raise prices during times of limited insurance capacity) with
an accompanying adverse impact on the Company's results of operations, market
share or both.
The professional liability insurance sectors of the property/casualty
industry have experienced a prolonged "soft market," characterized by intense
competition and strong downward pricing pressures. The Company's business
strategy for continued growth relies on finding underserved D&O and E&O markets
where it can create and profitably underwrite attractive insurance products. The
Company's ability to pursue such strategy entails certain risks, due to the
highly competitive nature of the insurance industry. The Company competes with
domestic and foreign insurers and reinsurers, some of which have greater
financial, marketing and management resources and experience than the Company.
The Company may also be required to compete with new market entrants in the
future. Competition is based on many factors, including the perceived financial
strength of the insurer, pricing and other terms and conditions, levels of
customer service (including the speed with which claims are paid), ratings
assigned by independent rating organizations (including A.M. Best and S&P) and
reputation and experience in the business. This competition could have an
adverse effect on the Company's results of operations. In addition, with respect
to the Company's ratings, A.M. Best and S&P each reviews its ratings of
insurance companies from time to time. There can be no assurance that any
particular rating will continue for any given period of time or that it will not
be changed or withdrawn entirely if, in the judgment of the rating agency,
circumstances so warrant. If either the Company's A.M. Best rating or its
claims-paying ability rating from S&P were downgraded from its current level,
the Company's results of operations could be materially and adversely affected.
The Company has commenced offering E&O to members of various professions on
a program basis, that is, through wholesale brokers who control regional or
national books of business. These "program administrators" function similarly to
managing general agents. They are authorized to receive insurance applications
and issue Insurance Subsidiary policies, all in accordance with underwriting
criteria specified by the Company. Program administrators are not authorized to
handle or pay claims or to bind reinsurance. The use of third parties, such as
program administrators, is an accepted distribution methodology in the industry;
however, the Company has not previously authorized non-employees to bind
insurance coverage. Distribution through program administrators entails certain
fidelity, credit and underwriting risks not ordinarily encountered in connection
with the Company's other distribution methods.
REGULATION
The Insurance Subsidiaries are subject to a substantial degree of
regulatory oversight, which generally is designed to protect the interests of
policyholders as opposed to stockholders. Such regulation relates to authorized
lines of business, policy rates and forms, capital and surplus requirements,
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control and a variety of other financial and
nonfinancial components of an insurance company's business. The Company believes
that more, rather than less, regulation is likely in the future. The National
Association of Insurance Commissioners (the "NAIC") has adopted a system of
assessing the financial condition and stability of insurance companies, known as
"IRIS ratios," and a system to test the adequacy of statutory capital, known as
"risk-based capital," each of which applies to the Insurance Subsidiaries. IRIS
ratios consist of 11 ratios that are compiled annually from each insurance
company's statutory financial reports and then compared against the
NAIC-established "usual range" for each ratio. Companies like the Insurance
Subsidiaries, which are experiencing rapid premium growth, have fallen outside
the usual range for certain IRIS ratios from time to time. The risk-based
capital rules, required for the first time in regulatory filings for 1994,
establish statutory capital requirements based on levels of risk assumed by an
insurance company. The Insurance Subsidiaries' adjusted capital at
11
<PAGE> 13
December 31, 1994 and 1995 was in excess of the applicable risk-based standards
as established by the NAIC. Failure to maintain risk-based capital at the
required levels, or generation of IRIS ratios far outside the NAIC's usual
range, could adversely affect the Insurance Subsidiaries' ability to secure
regulatory approvals as necessary or appropriate in connection with their
insurance businesses.
EFFECTS OF BANK INDEBTEDNESS AND COVENANTS
In connection with the financing of the Repurchase Transaction, the Company
entered into a Term Loan Agreement (the "Term Loan Agreement"), dated as of
March 26, 1996, by and among the Company, the banks signatory thereto and The
Chase Manhattan Bank (National Association), as Agent. The Company borrowed, and
there is currently outstanding, $70 million of senior term debt under the Term
Loan Agreement, $25 million of which was used to refinance bank indebtedness.
The Company is required to make principal payments on the term loan beginning in
November 1997 and at 6-month intervals thereafter, in the respective amounts of
$5 million, $5 million, $6 million, $6 million, $7 million, $7 million, $8
million, $8 million, $9 million and $9 million, respectively. The Term Loan
Agreement contains certain negative covenants by the Company, including, among
other things, restrictions on the incurrence of additional debt, the sale of
assets, the making of acquisitions, the payment of dividends and the incurrence
of liens. The Term Loan Agreement also contains certain financial covenants
requiring, among other things, that the Company maintain a minimum net worth, a
minimum statutory surplus and certain financial ratios. In addition, the Term
Loan Agreement provides that the termination or disavowal by any party thereto
of either of the Agency Agreement or the Quota Share Agreement (as such terms
are hereinafter defined; see "Business Relationship with AC&S"), shall
constitute an event of default unless, in either case, AC&S business reinsured
by ERII pursuant to the Quota Share Agreement represents less than 15% of the
gross premiums written (on a combined basis) of the Insurance Subsidiaries for
the 12-month period preceding such date of termination or disavowal. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
ERI is an insurance holding company. Dividends and other payments from the
Insurance Subsidiaries and ERMA are ERI's primary source of funds to pay
expenses, service debt and pay dividends, if any. The payment of dividends by
ERII and ERSIC is subject to restrictions set forth in the Delaware and
California insurance laws and the Connecticut insurance laws, respectively. In
general, these restrictions limit the aggregate amount of dividends or other
distributions that the Insurance Subsidiaries may declare or pay to ERI within
any 12 month period without the permission of the applicable regulatory
authority (generally to the greater of statutory net income for the preceding
year or 10% of statutory surplus), and require that the statutory surplus of the
applicable Insurance Subsidiary following any such dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate to its
financial needs. The maximum amount of dividends payable by the Insurance
Subsidiaries in 1996, without prior approval of the applicable state insurance
regulators, is $16.7 million. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources."
In addition, under applicable state insurance laws and regulations, no
person may acquire control of ERII, ERSIC or any corporation controlling either
of them unless such person has filed a statement containing specified
information with appropriate regulatory authorities and approval for such
acquisition has been obtained. Under applicable laws and regulations, any person
acquiring, directly or indirectly, or holding proxies with respect to, 10% or
more of the voting stock of any other person is presumed to have acquired
"control of such person." Accordingly, any purchase resulting in the purchaser
owning 10% or more of the outstanding Common Stock of ERI, in the Offering or
otherwise, would require prior approval by applicable regulatory authorities.
Such prior approval requirement also would apply to an acquisition of proxies to
vote 10% or more of the outstanding Common Stock of ERI and, therefore, in a
proxy contest could delay or prevent a stockholder from acquiring such proxies.
No assurance can be given as to whether or not the Company would seek to invoke
these laws and regulations in the event of a contested solicitation of proxies.
12
<PAGE> 14
ADEQUACY OF LOSS RESERVES
The reserves for losses and loss adjustment expenses represent the
Company's estimates of liability on outstanding claims. These estimates involve
actuarial and statistical projections of the expected ultimate cost of
administering and settling these claims based on facts and circumstances then
known, predictions of future events, estimates of future trends in claims
severity and other variable factors such as inflation and new theories of
liability. As estimates, reserves may not accurately reflect amounts that are
ultimately incurred in administering and settling insured losses, particularly
in the instance of companies with relatively short operating histories or
companies that have a heavy reliance on relatively newer product lines, such as
the Company. If the reserve estimates prove to be inadequate, the Company would
be required to augment its reserves, resulting in a charge to earnings in the
period in which such action occurs. Although the Company believes that its
reserves are adequate, there can be no assurance that ultimate loss experience
will not exceed the Company's reserves, resulting in a material adverse effect
on the Company's financial condition and results of operations. Since 1988, the
Company has retained the services of an independent actuarial consulting firm to
provide opinions regarding reserves as required for state regulatory filings.
The Company intends to utilize such services in the future. In addition,
although the Company seeks to spread risk through the use of reinsurance
programs, like other insurance companies, it is subject to the risk of severe or
multiple losses, which could materially and adversely affect its financial
position and results of operations.
REINSURANCE
The Company has historically utilized reinsurance arrangements to limit the
amount of risk retained under policies written or reinsured by the Insurance
Subsidiaries. In addition to the D&O reinsurance obtained under the Facility
arrangements with AC&S, the Company currently has in place a number of
reinsurance programs pursuant to which it cedes risks. The ceding of risk to
reinsurers does not relieve the Company of liability to its insureds and
reinsureds, and consequently the Company is subject to credit risk with respect
to its reinsurers. While the Company endeavors to reinsure only with financially
sound reinsurers, there can be no assurance that the Company will not experience
difficulties in the future in recovering reinsurance recoverables under these
arrangements should one or more of its reinsurers suffer financial detriment.
The Company's reinsurance programs include some exposure to certain syndicates
of Underwriters at Lloyd's, London ("Lloyd's"). Lloyd's is currently undergoing
a restructuring, the success or failure of which could affect Lloyd's
syndicates' ability to meet their reinsurance obligations. In addition, the
availability and cost of reinsurance arrangements are subject to prevailing
market conditions, which are beyond the Company's control. The Company may in
the future choose to revise further its reinsurance practices to increase,
decrease or eliminate entirely the amount of risk it cedes to reinsurers.
DEPENDENCE ON MANAGEMENT AND KEY EMPLOYEES
The Company depends, and will continue to depend, to a great extent on the
services of its executive officers and key personnel who are identified under
"Management." The Company's Chairman and Chief Executive Officer, its Vice
Chairman and Chief Operating Officer, its President and Chief Underwriting
Officer and its Executive Vice President, Chief Financial Officer and Chief
Actuary have employment agreements, as do other key personnel. The respective
terms of these agreements expire in 1997, unless extended by mutual agreement.
The ability of the Company to underwrite and issue insurance policies profitably
is dependent on its ability to attract and maintain a staff of qualified
underwriters and service personnel. The Company does not carry any key person
life insurance policies on any of its executive officers or employees.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Company's Certificate of Incorporation and By-laws, its Stockholder
Rights Plan, the Agency Agreement and the Quota Share Agreement, as well as the
Delaware corporation law and the California, Delaware and Connecticut insurance
laws, all contain provisions that could have the effect of discouraging a
prospective acquirer from making a tender offer or otherwise attempting to
obtain control of the Company.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's initial public offering ("IPO") of Common Stock occurred on
March 15, 1994, at a price to the public of $12.00 per share. The following
table sets forth the high and low closing prices of the Common Stock on the NYSE
and the cash dividends paid per share since the IPO for the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
------------- DIVIDEND
FISCAL PERIOD HIGH LOW PAID
<S> <C> <C> <C>
1994:
First Quarter (from March 15)................................... $12 1/2 $10 7/8 --
Second Quarter.................................................. 14 7/8 10 7/8 $.02
Third Quarter................................................... 15 7/8 12 3/4 .02
Fourth Quarter.................................................. 14 1/4 12 1/4 .02
1995:
First Quarter................................................... $17 1/8 $13 5/8 $.02
Second Quarter.................................................. 19 16 5/8 .02
Third Quarter................................................... 23 7/8 18 3/8 .02
Fourth Quarter.................................................. 29 22 .02
1996:
First Quarter................................................... $33 $26 1/4 $.02
Second Quarter (through May 7).................................. 33 1/4 29 1/4 --
</TABLE>
The Company intends to continue to pay quarterly cash dividends of $.02 per
share of Common Stock (a rate of $.08 annually). The payment of dividends is
subject to the discretion of the Board of Directors and will depend upon general
business conditions, legal and contractual restrictions on the payment of
dividends and other factors that the Board of Directors deems relevant.
As an insurance holding company, ERI depends in large part on dividends and
other payments from its subsidiaries for the payment of cash dividends to
stockholders. In the case of the Insurance Subsidiaries, such payments are
restricted by insurance laws, and insurance regulators have authority in certain
circumstances to prohibit payments of dividends and other amounts by the
Insurance Subsidiaries that would otherwise be permitted without regulatory
approval. The Company's loan agreements also restrict the payment of dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996. The Offering will have no effect on the Company's
capitalization, unless the over-allotment option is exercised.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt................................................................. $ 70,000
Stockholders' equity:
Common Stock, $.01 par value;
authorized--50,000,000 shares
issued(1)--10,409,291 shares
outstanding(1)--8,994,041 shares.......................................... 104
Class B Common Stock, $.01 par value;
authorized--2,500,000 shares
issued--0 shares(2)
outstanding--0 shares(2).................................................. --
Additional paid-in capital..................................................... 87,064
Unrealized gains on investments, net of tax.................................... 14,388
Currency translation adjustments............................................... (55)
Retained earnings.............................................................. 45,063
--------------
Cost of shares in treasury, at cost:
--1,415,250 shares........................................................... (41,547)
--------------
Total stockholders' equity................................................... 105,017
--------------
Total capitalization................................................. $175,017
===========
</TABLE>
- ------------------------------
(1) Does not include (i) 1,477,056 shares of Common Stock issuable upon exercise
of employee stock options, (ii) 100,000 shares of Common Stock issuable upon
exercise of the Aetna Stock Option, (iii) 43,467 shares of Common Stock
issuable upon exercise of options granted to directors under the Company's
Nonemployee Directors Option Plan; (iv) 40,850 shares of Common Stock
issuable upon exercise of options granted to former directors of Executive
Re; and (v) any shares of Common Stock issuable pursuant to the Company's
Stock Incentive Plan and Performance Share Plan.
(2) The Company intends to retire the Class B Common Stock. The above data
reflect the retirement of the Class B Common Stock.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Shares by the
Selling Stockholder. If the Underwriters' over-allotment option is exercised
(see "Underwriting"), any net proceeds received by the Company with respect to
such exercise will be used for general corporate purposes.
15
<PAGE> 17
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data as of March 31, 1996 and
1995 and for each of the three-month periods ended March 31, 1996 and 1995 have
been derived from unaudited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of such financial information for
those periods. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected for any
other interim period or for the full year. The consolidated financial data as of
December 31, 1995, 1994, 1993, 1992 and 1991 and for each of the years in the
five-year period ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein and the
Consolidated Financial Statements of the Company and related notes incorporated
by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross premiums written............. $ 57,682 $ 35,633 $210,640 $130,199 $ 84,255 $ 82,667 $ 75,303
Net premiums written............... 38,851 25,470 145,121 108,285 70,519 74,605 72,903
Net premiums earned................ 33,913 25,287 116,434 94,961 69,014 71,926 68,994
Net investment income.............. 7,375 6,284 26,706 22,497 20,475 19,702 16,431
Net realized capital gains
(losses)......................... 954 (449) 1,588 (455) 1,964 869 536
Equity in earnings of ERMA......... -- -- -- -- 2,707 2,736 2,710
Other income (loss)................ 92 102 83 82 (364) -- --
------- ------- ------- ------- ------- -------- --------
Total revenues............ 42,334 31,224 144,811 117,085 93,796 95,233 88,671
Loss and loss adjustment
expenses......................... 22,894 17,058 78,530 64,171 46,640 51,427 48,736
Policy acquisition costs........... 6,744 4,880 21,931 18,723 18,613 18,535 17,871
General and administrative costs... 3,168 2,354 10,730 8,890 8,749 6,409 4,912
Long-term incentive compensation... 187 420 1,458 1,009 1,100 -- --
Interest expense................... 578 471 2,022 1,519 1,421 1,420 1,931
------- ------- ------- ------- ------- -------- --------
Total expenses............ 33,571 25,183 114,671 94,312 76,523 77,791 73,450
------- ------- ------- ------- ------- -------- --------
Income before income taxes......... 8,763 6,041 30,140 22,773 17,273 17,442 15,221
Income tax expense................. 1,538 743 4,854 3,533 2,360 2,870 2,442
------- ------- ------- ------- ------- -------- --------
Income before cumulative effect of
change in accounting for
income taxes..................... 7,225 5,298 25,286 19,240 14,913 14,572 12,779
Cumulative effect of change in
accounting for income taxes...... -- -- -- -- -- 1,387 --
------- ------- ------- ------- ------- -------- --------
Net income......................... $ 7,225 $ 5,298 $ 25,286 $ 19,240 $ 14,913 $ 15,959 $ 12,779
======= ======= ======= ======= ======= ======== ========
Earnings per common and common
equivalent share(1).............. $ 0.60 $ 0.45 $ 2.11 $ 1.80 $ 3.53 $ 3.44 $ 2.96
======= ======= ======= ======= ======= ======== ========
Weighted average shares
outstanding...................... 12,028 11,747 11,956 10,108 3,128 3,120 3,110
Earnings per common share--assuming
full dilution(1)................. $ 0.60 $ 0.45 $ 2.11 $ 1.69 $ 1.69 $ 1.66 $ 1.49
======= ======= ======= ======= ======= ======== ========
Weighted average shares
outstanding-- assuming full
dilution......................... 12,061 11,819 11,978 11,365 9,238 9,230 9,220
BALANCE SHEET DATA:
Cash and invested assets........... $531,668 $454,994 $549,852 $431,849 $371,596 $319,773 $264,648
Total assets(2).................... 687,469 550,912 687,837 516,747 420,382 361,149 308,124
Long-term debt..................... 70,000 25,000 25,000 25,000 25,000 25,000 25,000
Stockholders' equity (2)........... 105,017 146,029 177,725 130,854 114,837 92,473 80,778
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Loss ratio......................... 67.5% 67.5% 67.4% 67.6% 67.6% 71.5% 70.6%
Expense ratio...................... 29.2 28.6 28.1 29.1 39.6 34.7 33.1
------- ------- ------- ------- ------- -------- --------
Combined ratio..................... 96.7% 96.1% 95.5% 96.7% 107.2% 106.2% 103.7%
======= ======= ======= ======= ======= ======== ========
Ratio of net premiums written to
statutory surplus(3)(4).......... 1.4x 1.1x 1.2x 1.0x 0.7x 0.8x 0.8x
Statutory surplus(3) (at end of
period).......................... $112,727 $105,583 $121,465 $107,401 $ 94,445 $ 91,689 $ 89,866
Operating margin(5)................ 20.3% 22.0% 21.3% 21.1% 19.3% 19.3% 18.9%
Ratio of debt to total
capitalization................... 40.0 14.6 12.3 16.0 17.9 21.3 23.6
</TABLE>
- ---------------
(1) Per share information is based on income before cumulative effect of change
in accounting for income taxes. Earnings per common and common equivalent
share and earnings per common share--assuming full dilution based on net
income were $3.88 and $1.81, respectively, for the year ended December 31,
1992.
(2) For the three months ended March 31, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993, respectively, includes $9.9 million, $5.5
million, $15.4 million, ($3.3) million and $12.4 million, net of deferred
taxes, in total assets and stockholders' equity from unrealized gains
(losses) pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(3) Statutory data has been derived from the financial statements of the
Insurance Subsidiaries prepared in accordance with SAP.
(4) Ratios of net premiums written to statutory surplus are calculated on a
rolling twelve month basis.
(5) Consists of income before income taxes, excluding interest expense, realized
capital gains (losses) and certain non-recurring expenses, divided by total
revenues, excluding realized capital gains (losses).
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
incorporated by reference herein.
GENERAL
Management's discussion and analysis of financial condition and results of
operations compares certain financial results for the quarter ended March 31,
1996 with the corresponding period for 1995 and for the year ended December 31,
1995 with the corresponding periods for 1994 and 1993. The results of the
Company from and after January 1 1994 include the consolidated results of ERMA,
ERII and ERSIC. The Company's results also include its 50% interest in UPEX, a
French insurance underwriting agency which is a joint venture between the
Company and Union des Assurances de Paris--Incendie-Accidents. This investment
is reported using the equity method of accounting. In addition, the Company's
1995 and 1996 results include Executive Risk N.V. ("ERNV"), a Dutch insurance
company incorporated in May 1995 in the Netherlands under the ownership of
Executive Re. The Company's 1993 results include the consolidated results of
Executive Re and its subsidiaries.
Prior to January 1, 1994, Executive Re and AC&S had 30% and 70% ownership
interests, respectively, in ERMA, a general partnership which functions as the
underwriting manager for substantially all D&O written by AC&S in the United
States and for all insurance written by ERII and ERSIC. On January 1, 1994, the
Company, Executive Re and AC&S consummated a restructuring and exchange (the
"Transaction"), as discussed in Note 3 of Notes to Consolidated Financial
Statements of the Company, under which AC&S assigned its 70% interest in ERMA to
the Company in exchange for (a) 1,225,000 shares of Common Stock, (b) 1,225,000
shares of Class B Common Stock and (c) an option to purchase 100,000 shares of
Common Stock at a price of $12 per share. As part of the restructuring,
Executive Re became a subsidiary of ERI.
On March 22, 1996, the Company entered into the Stock Purchase Agreement
with AC&S and AL&C. Under the Stock Purchase Agreement, the Company purchased,
on March 26, 1996 (the "Closing Date"), a total of 2,511,300 shares of its
capital stock from AC&S (consisting of 1,286,300 shares of Common Stock and all
of the 1,225,000 outstanding shares of Class B Common Stock). The purchase price
paid by the Company for the stock purchase was $29.875 per share (the "Purchase
Price"), or approximately $75 million in the aggregate. The Purchase Price is
subject to upward adjustment under certain circumstances. In summary, if within
six months of the Closing Date, (i) the Company and any third party shall enter
into an agreement under which such third party will acquire 30% or more of the
Company's outstanding Common Stock, or (ii) any third party shall have publicly
announced a tender offer which results in such third party's acquisition of 30%
or more of the Company's outstanding Common Stock (in either case, a "30%
Transaction"), then the Company shall pay to AL&C an amount in cash which is
equal to 2,511,300 times the excess, if any, of the price per share paid by such
third party over the Purchase Price (the "Excess Per Share Price"). If the
Company and any third party shall enter into any such agreement, or any third
party shall have publicly announced such a tender offer, with respect to a 30%
Transaction during the second six months following the Closing Date, the Company
shall pay AL&C an amount in cash which is equal to 1,883,475 times the Excess
Per Share Price, or 75% of the amount which would have been payable with respect
to such an agreement entered into, or tender offer announced, during the first
six-month period.
In connection with the Stock Purchase Agreement, the Company obtained a $70
million senior credit facility arranged through The Chase Manhattan Bank
(National Association), the proceeds of which have been used as follows: $38
million to partially finance the Repurchase Transaction, $25 million to
refinance the Company's existing bank debt and $7 million for general corporate
purposes. In connection with the credit facility, the Company has pledged the
stock of its direct subsidiary, Executive Re, and Executive Re has pledged the
stock of its direct subsidiary, ERII.
On April 2, 1996, Travelers acquired AC&S from its parent, AL&C. The
Company's contractual relationship with AC&S is not terminable as a result of
the closing of the Travelers acquisition of AC&S. The Company's agreements with
AC&S (see Note 4 of Notes to Consolidated Financial Statements of the
18
<PAGE> 20
Company) provide that absent certain extraordinary events or mutual consent of
the parties, such relationship is terminable no earlier than December 31, 1999.
Moreover, increasingly, the Company is writing business on the policies of its
own Insurance Subsidiaries. Consequently, management does not believe that the
Travelers acquisition of AC&S will have a material adverse effect on the
Company, its business or prospects.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on the Company.
Also, reevaluations of the Company's loss reserves could result in an increase
or decrease in reserves and a corresponding adjustment to earnings.
Additionally, the insurance industry is highly competitive. The Company competes
with domestic and foreign insurers and reinsurers, some of which have greater
financial, marketing, management resources and experience than the Company, and
it may compete with new market entrants in the future. Competition is based on
many factors, including the perceived market strength of the insurer, pricing
and other terms and conditions, services provided, the speed of claims payment,
the reputation and experience of the insurer, and ratings assigned by
independent rating organizations (including A.M. Best and S&P). ERII and ERSIC's
current pooled rating from A.M. Best is "A (Excellent)." ERII and ERSIC's
current pooled claims-paying ability rating from S&P is "A+ (Good)." These
ratings are based upon factors of concern to policyholders, including financial
condition and solvency, and are not directed to the protection of investors.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
Gross premiums written increased by $22.1 million, or 62%, to $57.7 million
in the first quarter of 1996 from $35.6 million in the first quarter of 1995.
The increase was due in part to growth in domestic and international D&O and
miscellaneous professional liability E&O. Also contributing to the rise in gross
premiums written was the Company's ability to issue ERII and ERSIC D&O policies,
rather than AC&S policies, to both new and renewing insureds. Converting
insureds to ERII or ERSIC policies from AC&S policies results in the Company
receiving 100% of the gross premiums written (and ceding 12.5% to AC&S) as
compared to receiving 50% when reinsuring AC&S' risks. In the first quarter of
1996, $40.7 million of gross D&O premiums written were issued on ERII and ERSIC
policies as compared to $6.4 million in the first quarter of 1995. As
approximately one-third of the increase in gross premiums written was
attributable to conversions from AC&S policies to ERII and ERSIC policies, it is
unlikely that the rate of growth achieved in the first quarter of 1996 can be
sustained in future periods.
Ceded premiums increased $8.6 million, or 85%, to $18.8 million in the
first quarter of 1996 from $10.2 million in the first quarter of 1995. The rise
in ceded premiums was due principally to an increase in direct premium volume, a
portion of which is ceded to reinsurers under the Company's various D&O and E&O
treaties.
As a result of the foregoing, net premiums written increased $13.4 million,
or 53%, to $38.9 million for the quarter ended March 31, 1996 from $25.5 million
for the quarter ended March 31, 1995. Over the same periods, net premiums earned
increased to $33.9 million from $25.3 million.
Net investment income increased by $1.1 million, or 17%, to $7.4 million
for the quarter ended March 31, 1996 from $6.3 million for the quarter ended
March 31, 1995. This increase resulted principally from growth in invested
assets from $445.9 million at March 31, 1995 to $509.9 million at March 31,
1996. The nominal portfolio yield of the fixed maturity portfolio at March 31,
1996 was 6.04%, compared to 6.24% at March 31, 1995. The tax equivalent yields
on the fixed maturity portfolio were 8.22% and 8.53% for these periods,
respectively.
The Company's net realized capital gains were $1.0 million in the first
quarter of 1996, as compared to net realized capital losses of $0.4 million in
the first quarter of 1995. In the first quarter of 1996, capital gains were
realized from the sale of the fixed maturity portfolios of ERI and Executive Re
to provide available cash for the Repurchase Transaction.
19
<PAGE> 21
Loss and loss adjustment expenses ("LAE") increased by $5.8 million, or
34%, from $17.1 million in the first quarter of 1995 to $22.9 million in the
comparable period of 1996 due to higher premiums earned. The Company's loss
ratio was 67.5% in both the first quarter of 1996 and the first quarter of 1995.
In connection with the Company's normal reserving review, which includes a
reevaluation of the adequacy of reserve levels for prior years' claims, the
Company reduced its unpaid loss and LAE reserves for prior report years by $1.5
million, or $0.08 per share on a fully diluted basis, in the first quarter of
1996. In the first quarter of 1995, the Company reduced its unpaid loss and LAE
reserves for prior report years by $1.1 million, or $0.06 per share on a fully
diluted basis. There can be no assurance that reserve adequacy reevaluations in
the future will produce similar reserve reductions and net income increases in
future quarters.
Policy acquisition costs increased by $1.8 million, or 38%, to $6.7 million
for the quarter ended March 31, 1996 from $4.9 million for the quarter ended
March 31, 1995. The Company's ratio of policy acquisition costs to net premiums
earned increased from 19.3% in the first quarter of 1995 to 19.9% in the first
quarter of 1996. The increase in the acquisition cost ratio was attributable to
both higher commission amounts paid to brokers and increased compensation and
related expenses incurred in hiring additional underwriting staff to support the
growth in the Company's business, partially offset by the savings achieved by
paying less in override commissions to AC&S as a result of converting D&O
insureds from AC&S policies to ERII and ERSIC policies.
General and administrative ("G&A") expenses increased $0.8 million, or 35%,
to $3.2 million in the first quarter of 1996 from $2.4 million in the first
quarter of 1995 due largely to increased compensation and related costs
associated with the growth of the business. The ratio of G&A costs to net
premiums earned was 9.3%, unchanged from the year earlier period.
The GAAP combined ratio increased to 96.7% in the first quarter of 1996
from 96.1% in the first quarter of 1995. The increase of 0.6 percentage points
was attributable to the increase in the policy acquisition cost ratio as
discussed above. A combined ratio below 100% generally indicates profitable
underwriting prior to the consideration of investment income, capital gains and
interest expense. A company with a combined ratio exceeding 100% can still be
profitable due to such factors as investment income and capital gains realized.
Interest expense of $0.6 million for the first quarter of 1996 and $0.5
million for the first quarter of 1995 was attributable principally to the
outstanding balances under the Company's bank credit agreement. The outstanding
balances were $25 million for the quarter ended March 31, 1995, $25 million from
January 1, 1996 through March 26, 1996 and $70 million from March 26 through
March 31, 1996. Interest expense will increase in future quarters as a result of
the increase in the credit facility obtained in connection with the Repurchase
Transaction. See "-- Liquidity and Capital Resources."
Income tax expense increased $0.8 million, or 107%, from $0.7 million in
the first quarter of 1995 to $1.5 million in the first quarter of 1996. The
Company's effective tax rate increased from 12.3% to 17.5% for the same periods.
The increase in the effective tax rate was due to an increase in the Company's
state tax liability and growth in pre-tax income outpacing the increase in
tax-exempt investment income.
As a result of the factors described above, the Company's net income for
the first quarter of 1996 increased $1.9 million, or 36%, to $7.2 million, or
$0.60 per share on a fully diluted basis, from $5.3 million, or $0.45 per share
on a fully diluted basis, in the first quarter of 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Gross premiums written increased by $80.4 million, or 62%, to $210.6
million in 1995 from $130.2 million in 1994. The increase was partially due to
growth in sales in all of the Company's key lines of business, including
domestic and international D&O, and lawyers professional liability and
miscellaneous professional liability E&O. Also contributing to the rise in gross
premiums written was the Company's ability to issue ERII and ERSIC D&O policies,
rather than AC&S policies, to both new and renewing insureds. Converting an
insured to ERII or ERSIC from AC&S results in the Company receiving 100% of the
gross premiums written (and generally ceding 12.5% to AC&S) as compared to
receiving 50% when reinsuring AC&S's risks. In 1995, $99.0 million of gross D&O
premiums written were issued on ERII and ERSIC policies as compared to $7.2
20
<PAGE> 22
million in 1994. Since approximately one-third of the increase in gross premiums
written was attributable to conversions from AC&S policies to ERII and ERSIC
policies, it is unlikely that the rate of growth achieved in 1995 can be
sustained in 1996.
Ceded premiums increased $43.6 million, or 199%, to $65.5 million in 1995
from $21.9 million in 1994. The rise in ceded premiums was partly attributable
to increased coverage purchased in 1995 under the Company's D&O reinsurance
arrangement to 100% of losses incurred in excess of $2.5 million up to a limit
of $10 million, subject to aggregate limits and other restrictions. In 1994, the
D&O reinsurance coverage purchased provided for 20% reinsurance protection on
losses incurred in excess of $2.5 million up to a limit of $10 million, subject
to aggregate limits and other restrictions. Also contributing to the rise in
ceded premiums was the increase in quota share reinsurance under the Company's
various other D&O and E&O treaties, resulting from an increase in direct premium
volume. The D&O excess of loss reinsurance coverage purchased in 1995 has been
renewed for 1996 under similar terms and conditions.
As a result of the foregoing, net premiums written increased $36.8 million,
or 34%, to $145.1 million in 1995 from $108.3 million in 1994. Over the same
periods, net premiums earned increased to $116.4 million from $95.0 million.
Net investment income increased by $4.2 million, or 19%, to $26.7 million
in 1995 from $22.5 million in 1994. This increase resulted principally from
growth in the Company's investment portfolio, measured on an amortized cost
basis, from $436.5 million at December 31, 1994 to $520.9 million at December
31, 1995, partially offset by a slight decline in investment yields. The
Company's equity investment balances were $26.1 million and $24.3 million at
December 31, 1995 and 1994, respectively, and the cash and short-term investment
balances were $20.2 million and $24.6 million, respectively, for the same
periods. The Company manages its portfolio on a total return basis, and, as
such, its investments in equity securities are made for their perceived superior
return potential over the long term. Growth in invested assets resulted
primarily from strong cash flows from insurance operations. The nominal
portfolio yield of the fixed maturity portfolio at December 31, 1995 was 6.09%,
as compared to 6.13% at December 31, 1994. The tax-equivalent yields on the
fixed maturity portfolio were 8.25% and 8.56% for these periods, respectively.
See "--Liquidity and Capital Resources."
The Company's net realized capital gains were $1.6 million in 1995, as
compared to net realized capital losses of $0.5 million in 1994. During the
second quarter of 1995, the Company realized a $2.8 million gain resulting from
the acquisition by USF&G Corporation ("USF&G") of Discover Re Managers, Inc.
("Discover Re"), of which the Company was a stockholder. In connection with this
transaction, a stock-for-stock swap of Discover Re stock for USF&G stock
occurred as well as the receipt and simultaneous exercise by the Company of a
warrant to purchase USF&G stock. In December 1995, the Company sold its entire
position in USF&G stock. See "-- Liquidity and Capital Resources" and Note 6 of
Notes to Consolidated Financial Statements of the Company. Partially offsetting
the gain were net realized capital losses from fixed maturities sold in order to
increase the portfolio's tax-equivalent yield.
Loss and LAE increased $14.3 million, or 22%, to $78.5 million in 1995 from
$64.2 million in 1994 due to higher premiums earned. The Company's loss ratio
declined slightly to 67.4% in 1995 from 67.6% in 1994. In connection with the
Company's normal reserving review, which includes a reevaluation of the adequacy
of reserve levels for prior years' claims, the Company reduced its unpaid loss
and LAE reserves in 1995 for prior report years by approximately $5.2 million.
In 1994, the Company reduced its unpaid loss and LAE reserves for prior report
years by approximately $4.1 million. These reductions produced corresponding
increases in the Company's net income of approximately $3.4 million, or $0.28
per share, in 1995 and $2.7 million, or $0.24 per share, in 1994. There is no
assurance that reserve adequacy reevaluations will produce similar reserve
reductions and net income increases in the future.
Policy acquisition costs increased $3.2 million, or 17%, to $21.9 million
in 1995 from $18.7 million in 1994. The Company's ratio of policy acquisition
costs to net premiums earned declined to 18.8% in 1995 from 19.7% in 1994. The
decrease in the acquisition cost ratio was primarily due to savings achieved by
paying less in override commissions to AC&S as a result of successfully
converting D&O insureds from AC&S to ERII and ERSIC policies.
21
<PAGE> 23
G&A expenses increased $1.8 million, or 21%, to $10.7 million for the year
ended December 31, 1995, as compared to $8.9 million for the year ended December
31, 1994. The increase in G&A costs was due largely to increased compensation,
benefit and related overhead costs associated with new employees hired to
support the growth in premium volume. The ratio of G&A costs to net premiums
earned remained relatively stable at 9.3% in 1995 versus 9.4% in 1994.
As a result of the declines in the aforementioned ratios, the Company's
GAAP combined ratio decreased to 95.5% in 1995 from 96.7% in 1994. A combined
ratio below 100% generally indicates profitable underwriting prior to the
consideration of investment income, capital gains and interest expense. A
company with a combined ratio exceeding 100% can still be profitable due to such
factors as investment income and capital gains realized.
Long-term incentive compensation in 1995 and 1994 of $1.5 million and $1.0
million, respectively, consisted of non-cash charges to earnings for the value
of the stock option element of the IPO Stock Compensation Plan ("IPO Plan"). See
Note 7 of Notes to Consolidated Financial Statements of the Company for a
further discussion of the IPO Plan.
Interest expense was incurred principally on the outstanding balance of $25
million under the Company's bank credit agreement. Interest expense increased by
$0.5 million, or 33%, to $2.0 million in 1995 as compared to $1.5 million in
1994, due primarily to higher interest rates and a higher average outstanding
balance on the debt during 1995. See "-- Liquidity and Capital Resources" and
Note 5 of Notes to Consolidated Financial Statements of the Company.
Income tax expense increased $1.4 million, or 37%, to $4.9 million for the
year ended December 31, 1995, as compared to $3.5 million for the year ended
December 31, 1994. The Company's effective tax rate increased slightly to 16.1%
in 1995 from 15.5% in 1994. The increase in the effective tax rate was due
principally to growth in pre-tax income outpacing the increase in tax-exempt
investment income. See Note 10 of Notes to Consolidated Financial Statements of
the Company.
As a result of the factors described above, net income increased $6.1
million, or 31%, to $25.3 million, or $2.11 per fully diluted share, in 1995
from $19.2 million, or $1.69 per fully diluted share, in 1994.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Gross premiums written increased by $45.9 million, or 55%, from $84.3
million in 1993 to $130.2 million in 1994. This growth was due primarily to a
$19.2 million increase in E&O premiums and an $18.0 million increase in D&O
premiums assumed from AC&S, principally in the commercial and not-for-profit
markets. Additionally, in 1994, the Company began issuing its own D&O policies.
Total D&O gross premiums written directly by ERII and ERSIC were $7.2 million.
Ceded premiums rose $8.2 million, or 60%, from $13.7 million in 1993 to
$21.9 million in 1994. This increase was due to increased cessions primarily on
E&O as a result of higher writings, partially offset by a reduction in
reinsurance coverage purchased on the D&O business. In 1994, the D&O reinsurance
coverage purchased provided for 20% reinsurance protection on losses incurred in
excess of $2.5 million up to a limit of $10 million, subject to aggregate limits
and other restrictions.
As a result of the foregoing, net premiums written increased $37.8 million,
or 54%, from $70.5 million in 1993 to $108.3 million in 1994. Over the same
period, net premiums earned increased from $69.0 million to $95.0 million.
Net investment income increased by $2.0 million, or 10%, from $20.5 million
in 1993 to $22.5 million in 1994. This increase resulted from growth in the
Company's investment portfolio, measured on an amortized cost basis, from $352.8
million at December 31, 1993 to $436.5 million at December 31, 1994, partially
offset by a higher concentration of the portfolio in equities and short-term
investments, both of which provide for lower yields. The Company's equity
balances were $24.3 million and $1.1 million, at December 31, 1994 and 1993,
respectively, and the cash and short-term investment balances were $24.6 million
and $6.9 million, respectively, for the same periods. Growth in invested assets
resulted primarily from increased cash flow from
22
<PAGE> 24
the ownership of ERMA and insurance operations, as well as proceeds received
from the IPO. The nominal portfolio yield of the fixed maturity portfolio at
December 31, 1994 was 6.13% as compared to 6.21% at December 31, 1993. The
tax-equivalent yields on the fixed maturity portfolio were 8.56% and 8.28% for
these periods, respectively. See "-- Liquidity and Capital Resources."
The Company's net realized capital losses were $0.5 million in 1994 versus
net realized capital gains of $2.0 million in 1993. The 1994 losses resulted
primarily from the sale of fixed maturity investments sold to increase the
portfolio's tax-equivalent yield while also utilizing capital loss carrybacks.
As a result of the Transaction described above and in Note 3 of Notes to
Consolidated Financial Statements of the Company, ERMA's 1994 financial position
and results of operations were consolidated with those of the Company. Equity in
earnings of ERMA in 1993 of $2.7 million represented the Company's proportionate
interest in the results of operations of ERMA using the equity method of
accounting.
Loss and LAE increased $17.6 million, or 38%, from $46.6 million in 1993 to
$64.2 million in 1994 due to higher premiums earned. The Company's loss ratio
remained unchanged at 67.6% from 1993. In 1994, the Company reduced its unpaid
loss and LAE reserves for prior report years by approximately $4.1 million. In
1993, the Company reduced its unpaid loss and LAE reserves for prior report
years by approximately $3.0 million. These reductions produced corresponding
increases in the Company's net income of approximately $2.7 million, or $0.24
per share, and $2.0 million, or $0.21 per share, in 1994 and 1993, respectively.
Policy acquisition costs increased $0.1 million, or 1%, from $18.6 million
in 1993 to $18.7 million in 1994. The Company's acquisition expense ratio
declined from 26.9% in 1993 to 19.7% in 1994. The decline was attributable to
the benefits of ERMA's net revenues realized from the agency agreements between
AC&S and ERMA entered into on January 1, 1994 in connection with the
Transaction, which were substantially accounted for as a reduction in the
Company's policy acquisition costs.
G&A expenses increased $0.2 million, or 2%, from $8.7 million in 1993 to
$8.9 million in 1994. The increase in expenses was due to increased regulatory
and pension costs, and certain G&A costs incurred by ERMA, offset partially by a
portion of ERMA's G&A revenues not related to policy acquisition. Additionally,
1993 G&A expenses included one-time legal and consulting services of $1.0
million related to the Transaction. The G&A expense ratio declined from 12.7% in
1993 to 9.4% in 1994.
As a result of the decline in policy acquisition expense and G&A expense
ratios, the Company's GAAP combined ratio decreased to 96.7% in 1994 from 107.2%
in 1993.
Long-term incentive compensation in 1994 of $1.0 million consisted of a
non-cash charge to earnings for the value of the stock option element of the IPO
Plan. In 1993, the $1.1 million of long-term incentive compensation consisted of
a one-time cash amount paid to participants in the IPO Plan in recognition of
their efforts in connection with the closing of the Transaction and in
consideration of their waiver of rights to receive the cash portion of
compensation payable under the IPO Plan. See Note 7 of Notes to Consolidated
Financial Statements of the Company.
Interest expense increased $0.1 million, or 7%, from $1.4 million in 1993
to $1.5 million in 1994 and was primarily attributable to the outstanding
balance on the Company's bank credit agreement. See "-- Liquidity and Capital
Resources" and Note 5 of Notes to Consolidated Financial Statements of the
Company.
Income tax expense increased by $1.1 million, or 50%, from $2.4 million in
1993 to $3.5 million in 1994. The Company's effective tax rate increased to
15.5% in 1994 from 13.7% in 1993. The increase in the effective tax rate was due
in part to growth in pre-tax income exceeding growth in tax-exempt investment
income and an increase in the Company's state tax liability. See Note 10 of
Notes to Consolidated Financial Statements of the Company.
As a result of the factors described above, net income increased $4.3
million, or 29%, from $14.9 million in 1993 to $19.2 million in 1994. Fully
diluted earnings per share were unchanged at $1.69 for both 1994 and 1993, as
net income gains were offset by the dilutive effects of the Transaction and the
IPO.
23
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
ERI is a holding company, the principal asset of which is equity in its
subsidiaries. ERI's cash flows depend primarily on dividends and other payments
from its subsidiaries. ERI's sources of funds consist primarily of premiums
received by the insurance subsidiaries, revenues received by ERMA under
insurance agency arrangements, investment income, and proceeds from the sales
and redemptions of investments. Funds are utilized principally to pay claims and
operating expenses, to purchase investments, and to pay interest and principal
under the Company's bank indebtedness.
Cash flows from operating activities were $24.8 million for the quarter
ended March 31, 1996 and $4.3 million for the quarter ended March 31, 1995. The
increase in operating cash flows resulted from the increase in net premiums
received resulting from higher net premiums written. In addition, the Company
settled fewer losses in the first quarter of 1996 than anticipated. These losses
could be settled in future quarters, depressing net cash flows in future
periods.
Cash flows from operating activities were $86.0 million, $78.7 million and
$37.0 million for 1995, 1994 and 1993, respectively. The increase in operating
cash flows in 1995 resulted principally from the increase in net premiums
received resulting from the increase in net premiums written. The Company
settled fewer losses than anticipated in 1995. Those losses that were not
settled in 1995 could be settled in 1996, depressing net cash flows in 1996.
Rising loss payments are expected of a maturing professional liability
underwriter. The primary components of the cash flow increase in 1994 over 1993
were increased net premiums received coupled with lower than anticipated loss
payments.
The Company believes that it has sufficient liquidity to meet its
anticipated insurance obligations as well as its operating and capital
expenditure needs. Consistent with the Company's emphasis on total return, the
Company's investment strategy emphasizes quality, liquidity and diversification.
With respect to liquidity, the Company considers liability durations,
specifically loss reserves, when determining investment maturities. In addition,
maturities have been staggered to produce a pre-planned pattern of cash flows
for purposes of loss payments and reinvestment opportunities. Average investment
duration of the fixed maturity portfolio at March 31, 1996 and December 31,
1995, 1994 and 1993 was approximately 4.5, 4.6, 4.1 and 3.4 years, respectively,
as compared to an expected loss reserve duration of 4.5 to 5.5 years. The
Company's short-term investment pool was $30.1 million (5.7% of the total
investment portfolio) at March 31, 1996, $20.2 million (3.7%) at December 31,
1995 and $24.6 million (5.7%) at December 31, 1994. The short-term investment
pool was increased in the first quarter to generate a funding source for the
initiation of an allocation to mortgage and asset backed securities, which began
early in the second quarter of 1996. The 1995 decrease in the short-term
investment pool was due to the purchase of fixed maturity investments acquired
for the purpose of enhancing investment yields. Cash and publicly traded fixed
income securities constituted 94.3% of the Company's total investment portfolio
at December 31, 1995.
The Company's entire investment portfolio is classified as available for
sale under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and is reported at fair value, with the resulting unrealized gains
or losses included as a separate component of stockholders' equity until
realized. Due to a rise in interest rates, the market value of the portfolio at
March 31, 1996 was 103% of amortized cost versus 105% of amortized cost at
December 31, 1995. At March 31, 1996 and December 31, 1995, stockholders' equity
was increased by $9.9 million and $15.4 million, respectively, to record the
Company's fixed maturity investment portfolio at fair value. Due to a decline in
interest rates, the market value of the portfolio at December 31, 1995 was 105%
of amortized cost versus 99% of amortized cost at December 31, 1994. The overall
increase in the market value of the portfolio resulted in an increase to
stockholders' equity at December 31, 1995 of $19.2 million, net of deferred
taxes. At December 31, 1994, stockholders' equity was decreased by $4.0 million,
net of deferred taxes, to record the Company's investment portfolio at fair
value. At March 31, 1996 and December 31, 1995, the Company owned no derivative
instruments, except for certain mortgage and other asset backed securities and
an interest rate swap agreement which was used to effectively convert a portion
of its floating rate debt to a fixed rate basis, thus reducing the impact of
interest rate changes on future income. The Company owned no derivative
instruments at December 31, 1994.
24
<PAGE> 26
Until November 9, 1994, the Company had a credit agreement to borrow up to
$25 million, of which $25 million was outstanding during 1993 and through April
1994. An amortization payment of $5 million was made during May 1994. On
November 9, 1994, the Company entered into an agreement to replace the loan with
a $50 million credit facility. That facility consisted of a term loan of $25
million, as well as an additional $25 million of borrowing capacity which was
available to the Company during 1995, but not drawn on, under a revolving credit
facility. At December 31, 1995, there was $25 million of senior indebtedness
outstanding under this facility.
On March 26, 1996, the Company repaid the previous bank indebtedness with a
portion of the proceeds of the $70 million senior credit facility, which was
arranged through The Chase Manhattan Bank (National Association) ("Chase"). In
addition, the Company has secured through Chase a $25 million revolving credit
facility. The Company has no current plans to draw funds under the revolving
credit facility. Interest accrues on principal balances outstanding under the
term loan and revolving credit facility at a rate per annum equal to (a) the
higher of (i) the federal funds rate plus a stipulated percentage and (ii)
Chase's prime rate or, (b) for London Interbank Offered Rate ("LIBOR") based
loans, LIBOR plus a stipulated percentage over LIBOR (the "Margin") based on the
Company's debt-to-capital ratio and its then effective S&P claims-paying ability
rating. With respect to $25 million of indebtedness, the Company currently has
in place an interest rate swap agreement that effectively converts a floating
interest rate to a semi-fixed interest rate. In addition, the Company has
agreed, under the Term Loan Agreement, that within 120 days from the closing of
the term loan, it will enter into an interest rate protection agreement
providing interest rate protection for an aggregate notional amount equal to at
least 50% of the principal outstanding under the term loan. The Company is
required to make principal payments on the term loan beginning in November 1997
and at 6-month intervals thereafter, in the respective amounts of $5 million, $5
million, $6 million, $6 million, $7 million, $7 million, $8 million, $8 million,
$9 million and $9 million, respectively. The terms of the credit agreements for
the term loan and the revolving credit facility require, among other things,
that the Company maintain certain defined minimum consolidated net worth and
combined statutory surplus levels, and certain debt leverage, premiums-
to-surplus and fixed charge ratios, and place restrictions on the payment of
dividends, the incurrence of additional debt, the sale of assets, the making of
acquisitions and the incurrence of liens. At March 31, 1996, there was $70
million outstanding under this facility.
On May 1, 1995, the Company and Chase entered into an equity swap
transaction for the Company's equity holdings in USF&G. The terms of the swap
provided that the Company was entitled to receive an interest rate of 4.84%,
based upon a notional amount of $3.9 million, in return for providing Chase with
the total return accruing to an owner of the Company's interest in USF&G stock
over the life of the swap. The swap expired in December 1995, concurrent with
the sale of the Company's USF&G equity position.
In March of 1996 and in each of March, June, September and December of
1995, the Company paid dividends to common stockholders of record of $0.02 per
share. Such common stock dividends totaled $0.2 million in the quarter ended
March 31, 1996 and $0.9 million in the year ended December 31, 1995.
ERII and ERSIC are subject to state regulatory restrictions which limit the
amount of dividends payable by these companies. Subject to certain net income
carryforward provisions, ERII must obtain approval of the Insurance Commissioner
of the State of Delaware (and, for so long as ERII is deemed to be commercially
domiciled in California, the California Insurance Commissioner) in order to pay,
in any 12-month period, dividends which exceed the greater of 10% of surplus as
regards policyholders as of the preceding December 31 and statutory net income
less realized capital gains for the preceding calendar year. In addition,
dividends may be paid by ERII only out of earned surplus. ERSIC must obtain
approval of the Insurance Commissioner of the State of Connecticut in order to
pay, in any 12-month period, dividends which exceed the greater of 10% of
surplus with respect to policyholders as of the preceding December 31 and
statutory net income for the preceding calendar year. In addition, ERSIC may not
pay any dividend or distribution in excess of the amount of its earned surplus,
as reflected in its most recent statutory annual statement on file with the
Connecticut Insurance Commissioner, without such Commissioner's approval. Both
ERII and ERSIC are required to provide notice to the Insurance Commissioners of
the States of Delaware and Connecticut, respectively, of all dividends to
shareholders within five business days after declaration and at least ten days
prior to payment. Additionally, Delaware and Connecticut law require that the
statutory surplus of ERII or ERSIC, as applicable, following any dividend or
distribution be reasonable in relation to its outstanding
25
<PAGE> 27
liabilities and adequate for its financial needs. As a company which is
commercially domiciled in California, ERII is subject to these same restrictions
under the laws of that state. The maximum amount payable as dividends by ERII
and ERSIC in 1996, without prior approval of the applicable state insurance
regulators, is $16.7 million.
OTHER
Delaware and Connecticut, the respective states of domicile of ERII and
ERSIC, impose minimum risk-based capital requirements on all insurance companies
which were developed by the National Association of Insurance Commissioners
("NAIC"). The formulas for determining the amount of risk-based capital specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the insurance company's regulatory total adjusted
capital to its authorized control level risk-based capital, both as defined by
the NAIC. At December 31, 1995 and 1994, the total adjusted capital (as defined
by the NAIC) of ERII and ERSIC was in excess of the risk-based capital
standards.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of " ("SFAS 121"), which establishes standards for
recognizing and measuring the impairment of long-lived assets and related
goodwill. SFAS 121 encompasses both assets to be held and used in the course of
business and those assets which are held for disposal. The provisions of SFAS
121 require that such assets should be reviewed for possible impairment whenever
events or changes in circumstances require that the carrying value of the asset
may not be fully recoverable. An impairment loss is to be recorded when the net
undiscounted estimated future cash flows to be generated by the asset are less
than the asset's carrying value. This impairment loss is to be included in
income from continuing operations. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. The Company is currently reviewing the
provisions of SFAS 121 and anticipates no material financial statement impact to
the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 defines a fair value based method of accounting for
employee stock compensation plans and encourages the use of this method.
However, the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," may still be utilized with
supplemental pro forma disclosures of net income and earnings per share being
made in the footnotes as if the provisions of SFAS 123 had been applied. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The Company
is currently reviewing the provisions of SFAS 123 and its anticipated financial
statement impact to the Company.
26
<PAGE> 28
BUSINESS
GENERAL
ERI is a specialty insurance holding company that, through its
subsidiaries, develops, markets and underwrites directors and officers liability
insurance ("D&O") and other professional liability insurance products. Based on
the most recently available survey of the D&O industry by Watson Wyatt
Worldwide, the facility through which the Company and AC&S issue D&O is a
leading underwriter of primary D&O in the United States. From 1993 to 1995, the
Company's gross premiums written increased from $84.3 million to $210.6 million,
while its GAAP combined ratio declined from 107.2% to 95.5%. The Company
attributes this success primarily to the following factors: (i) an ability to
identify and capitalize on specialty insurance opportunities, including those in
underserved and new markets; (ii) increasing marketplace acceptance of the
Company as a direct insurer of D&O risks by both new insureds and previous AC&S
insureds; (iii) stable relationships with insureds and brokers, resulting from
an emphasis on client service in marketing, underwriting and claims handling;
(iv) pricing based on risk rather than market forces; and (v) a
performance-based culture, fostered by significant equity participation by the
Company's executive officers and directors (currently 21% of Common Stock on a
fully diluted basis).
Historically, the Company has focused on writing D&O for domestic insureds,
which accounted for 76% of gross premiums written in 1995. The Company's
principal D&O insureds are commercial entities, financial institutions and
not-for-profit organizations, which represented 55%, 28% and 17% of gross
domestic D&O premiums written in 1995, respectively. In recent years, the
Company has expanded its product line to related specialty liability insurance
products, including errors and omissions liability insurance ("E&O") for lawyers
and other professionals (19% of gross premiums written in 1995), international
D&O through a joint venture with Union des Assurances de
Paris -- Incendie-Accidents ("UAP") (5% of gross premiums written in 1995) and
fiduciary and fidelity bond coverages.
The Company's E&O business is divided between Lawyers Professional
Liability ("LPL") and Miscellaneous Professional Liability ("MPL"). Gross
premiums written for LPL increased from $2.3 million in 1993 to $28.7 million in
1995. Gross premiums written for MPL grew from $1.6 million to $11.6 million
during the same period. The growth of the Company's E&O business demonstrates
the effectiveness of its overall strategy of identifying and serving insurance
markets which the Company believes are not being effectively served by other
insurers. For example, the Company identified large law firms (35 or more
lawyers) as one such underserved market. In this market, extensive risk
evaluation and underwriting are performed by the Company's underwriters, all of
whom are attorneys formerly associated with large law firms. Additionally, the
Company's MPL department has expanded the classes of businesses it insures and
has formed alliances with wholesale brokers who control large blocks of E&O
business. Recent additions to the Company's MPL product offerings include E&O
programs for automobile insurance agents, psychologists and temporary help
agencies.
During the early 1990's, the Company perceived an opportunity to provide
professional liability insurance to foreign corporations whose directors and
officers are exposed to D&O risks, including, among others, risks arising in
connection with U.S. securities laws. In January 1993, ERI and UAP (the largest
insurance organization in France and the second largest in Europe) formed a
French insurance underwriting agency, known as UAP Executive Partners ("UPEX"),
in which each party has a 50% interest. UPEX is based in Paris and offers D&O
policies issued by UAP, a portion of each of which is reinsured by the Company.
The Company also reinsures international D&O business through its Dutch
subsidiary, Executive Risk N.V., founded in May 1995 to participate in
professional liability opportunities, principally in the Netherlands.
ERI's strategy has been to position itself as a niche provider, developing
specialized expertise in specific industry groups, such as financial
institutions (in D&O) and large law firms (in E&O). Both D&O and E&O are
typically claims-made coverages, i.e., they are designed to protect insureds
against lawsuits and associated legal defense expenses with respect to liability
claims first made against insureds during the policy term. In connection with
D&O coverage of for-profit corporations, the most severe liabilities generally
derive from lawsuits by stockholders against directors and officers for alleged
failures to discharge duties to the corporation
27
<PAGE> 29
or violations of federal securities laws. In the case of not-for-profit
organizations, the Company's coverage is most often implicated in employment
practices litigation. E&O is offered to professionals, such as attorneys,
psychologists and insurance agents, among others, where the principal source of
potential claims is dissatisfied clients alleging breaches of professional
standards or ethical violations. Fiduciary coverages are intended primarily to
protect those who invest and administer benefit plan trusts, and fidelity bond
coverages (or crime coverages) insure against losses associated with employee
defalcations and dishonesty. Employment practices liability insurance, which is
available to cover both the employing organization and its employees, insures
against losses associated with employment claims such as sexual harassment,
wrongful termination and discriminatory treatment.
MARKETS
Directors & Officers Liability Insurance. The Company markets its D&O
products in three principal sectors: Commercial Entities, Financial Institutions
and Not-for-Profit Organizations. The following table shows the gross domestic
D&O premiums written for each of these sectors for the periods indicated:
<TABLE>
<CAPTION>
GROSS DOMESTIC D&O PREMIUMS
WRITTEN
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
SECTOR 1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial Entities................................. $ 88,318 $ 47,993 $30,564
Financial Institutions.............................. 45,169 36,922 32,251
Not-for-Profit Organizations........................ 26,826 20,547 16,734
-------- -------- -------
Total..................................... $160,313 $105,462 $79,549
======== ======== =======
</TABLE>
Within each of the D&O sectors, ERI has targeted and developed particular
areas of expertise, a strategy that management believes has allowed ERMA and the
Insurance Subsidiaries to develop and adapt their insurance products more
knowledgeably and to underwrite submissions and process claims more
professionally than competing companies. Management believes that such
expertise, together with a strong reputation for prompt service and responsive
claims handling, reduces the pressure to compete on the basis of price during a
"soft market," such as that which has prevailed within the industry in recent
years.
The Commercial Entities sector focuses principally on coverages for
publicly owned, mid-sized companies. With respect to larger public companies,
which carry primary D&O coverage from other insurers, the Company principally
writes secondary layers of insurance (called "excess insurance"). In 1993, the
Company also began to focus on coverages for small commercial entities (assets
under $100 million), and during 1995, a product specifically designed for the
small non-public commercial entity was introduced by the Company. As with
respect to other sectors, ERI's Commercial Entities D&O strategy is to develop
particularized knowledge of selected sub-sectors and then utilize its
underwriting expertise in adapting coverage and assessing risks. During 1995,
the Commercial Entities sector underwrote approximately 1,400 policies and had
an underwriting staff of 29.
Within the Financial Institutions sector, the Company's subsidiaries
maintain specializations in several sub-sectors, such as community banks
(including small depository institutions under $250 million in assets), large
depository institutions, mortgage bankers and broker-dealers. During 1995, the
Company insured approximately 800 financial institutions, and 12 underwriters
were dedicated to this sector.
The third sector, Not-for-Profit Organizations, underwrites for a variety
of not-for-profit healthcare facilities (principally hospitals) and social
service/charitable organizations (such as foundations and chambers of commerce).
In 1995, policies were written covering approximately 1,200 hospitals and 4,500
service/charitable organizations, with 21 underwriters assigned to the sector.
Errors & Omissions Liability Insurance. ERMA underwrites and markets E&O,
both MPL and LPL, primarily on ERII and ERSIC policy forms directly, but does
offer some E&O through the Facility on AC&S forms. The MPL group was formed in
1992 and oversees the Company's basic line of non-lawyer related E&O products.
The MPL group currently operates with a staff of eight underwriters and is
dedicated
28
<PAGE> 30
to E&O products providing up to $5 million in coverage to a variety of
professionals, including smaller to medium-sized, independent professional firms
in the financial services and real estate sectors. During 1995, the Company's
Insurance Subsidiaries wrote approximately 1,900 MPL policies, generating
approximately $10 million in gross premiums written.
The Company wrote its first lawyers E&O in 1990, and following a research
and development program, formed the LPL underwriting group in 1993. With a staff
of seven attorney-underwriters, this group underwrites E&O for larger law firms
(those with 35 or more lawyers) on a primary or excess coverage basis. The
Company believes that its use of experienced lawyers in the marketing and
underwriting process has proven to be attractive to firms within the target
market. The Company currently covers approximately 80 firms, and gross premiums
written in the LPL product have grown from less than $2.5 million in 1993 to
approximately $29 million for the year ended December 31, 1995. Effective
January 1, 1996, the Company instituted a reinsurance program, involving a
number of domestic and international reinsurance markets, and the Company
markets lawyers E&O policies up to policy limits of $50 million each claim and
$100 million in the aggregate per policy. See "-- Reinsurance."
International. In January 1993, the Company entered into a joint venture
agreement with UAP to write D&O for European companies. Under the UPEX joint
venture agreement, the Company has agreed that it will not market D&O outside
North America, except that it may offer D&O through UPEX and in countries where
UPEX elects not to do business. At March 31, 1996, UPEX employed 18 persons at
its offices in Paris, which included seven underwriters. UPEX offers D&O
policies issued by UAP, up to a maximum $25 million policy limit, subject to
certain foreign currency adjustments, and the Company has a net 15%
participation in these policies. Commencing operations in November 1993, UPEX
underwrote $20.7 million in gross premiums in 1995.
The Company's Dutch subsidiary, ERNV, was founded in May 1995 to
participate in professional liability opportunities, principally in the
Netherlands. ERNV was formed initially to participate in a Netherlands-based D&O
pool, from which it assumed approximately $385,000 in gross premiums in 1995.
The Facility. The Insurance Subsidiaries conduct D&O business primarily
through the Facility, which consists of AC&S, ERII and ERSIC, each of which can
act as insurer or reinsurer, and ERMA, as the product developer, marketer and
managing underwriter. Generally, where an AC&S policy is issued, 50% of gross
D&O liability is ceded to ERII on a quota share basis, with other specified
percentages applicable to non-D&O policies. Where an Insurance Subsidiary's
policy is issued, 12.5% (as compared to 50% in 1994) of the gross D&O liability
is ceded to AC&S on a quota share basis, also with other specified percentages
applicable to non-D&O policies. For each reinsured policy, the reinsuring entity
receives premium from the reinsured entity and is obligated to pay a ceding
commission to the reinsured entity.
The Facility arrangements permit ERMA to underwrite D&O, E&O and other
specialty lines of insurance, whether issued by AC&S or the Insurance
Subsidiaries. Policies that do not conform to specific underwriting guidelines
are subject to volume limitations. ERMA is authorized to bind D&O coverage for
AC&S and the Insurance Subsidiaries, generally up to policy limits of $20
million (up to $30 million on a case-by-case basis). Certain E&O policies may be
bound through the Facility, generally up to a maximum policy limit of $25
million. In all cases, the Company's binding authority with respect to AC&S
policies is subject to agreed-upon underwriting guidelines. The Agency Agreement
and the Quota Share Agreement each requires a minimum two-year notice of
termination. No such termination may be effective before December 31, 1999,
subject to the occurrence of certain extraordinary events or mutual consent of
the parties.
Based on the most recently available survey of the D&O industry conducted
by Watson Wyatt Worldwide, the Facility is a leading underwriter of primary D&O
in the United States.
MARKETING
The Company's products are distributed principally through licensed
independent property and casualty brokers, excess and surplus lines brokers and
licensed wholesalers. During 1995, the Company received submissions from over
4,000 brokers, and no single office of any broker organization accounted for a
material
29
<PAGE> 31
portion of the 1995 gross premiums written through ERMA. The Company does not
believe that it is dependent on any one broker. Improvements to the Company's
product distribution system are regularly under review, and the Company has
instituted a program utilizing Connecticut-based account executives who spend a
significant portion of each month in assigned regions meeting with local
brokerage firms. Such programs are currently effective for a number of regions,
including Atlanta, Boston, Chicago, Dallas, Los Angeles and San Francisco.
The Company's eight-person marketing staff produces a widely distributed
quarterly newsletter, containing articles of interest to the D&O and E&O
industry. Advertisements, articles in trade publications, seminar participations
and convention sponsorships are among the other methods used to market the
Company's products. Particularly in the health care D&O line, arrangements with
national hospital and health care associations have been useful in presenting
the Company's products to target markets. During 1995, the Company instituted
certain "program administration" relationships with insurance agencies having
national or regional books of E&O program business. Under such a program
administration relationship, a third party entity becomes the Company's agent to
underwrite and issue E&O policies within guidelines specified by the Company.
Program administrators are not authorized to handle or pay claims or to bind
reinsurance. As of December 31, 1995, two program administration relationships
were in effect, one for automobile insurance agents E&O and one for
psychologists E&O. A program administration agreement for temporary help
agencies E&O was entered into in early 1996. Although the amount of business
conducted through program administrators was not significant in 1995, the
Company expects this business to grow in the future.
UNDERWRITING
The Company's general underwriting philosophy stresses two essential
factors: expert consideration of complex insurance submissions, including those
from harder-to-insure applicants, and profitability over premium growth.
Accordingly, the Company prices premiums based primarily upon specific risk
exposure, including loss experience, rather than primarily upon market factors.
The table below sets forth statutory loss ratios and combined ratios for the
periods indicated for the Insurance Subsidiaries and the property/casualty
industry.
The Insurance Subsidiaries' specialty products business is not directly
comparable to the business of the property/casualty industry as a whole.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
SAP DATA: 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Insurance Subsidiaries
Loss Ratio............................ 67.4% 67.6% 67.6% 71.5% 73.0%
Combined Ratio........................ 90.7 97.6 102.1 102.8 102.4
Industry(1)
Loss Ratio............................ 78.9% 81.1% 79.5% 88.1% 81.1%
Combined Ratio(2)..................... 105.0 107.1 105.7 114.6 107.6
</TABLE>
- ------------------------------
(1) Source: For 1991 through 1994, Best's Aggregates &
Averages--Property-Casualty; for 1995, BestWeek P/C Supplement.
(2) Excludes policyholder dividends.
The Company emphasizes industry specialization within its underwriting
staff, which includes a number of professionals with operational experience from
the industries being underwritten. At December 31, 1995, ERMA had a staff of 75
underwriters, under the overall supervision of Stephen J. Sills, President,
Chief Underwriting Officer and a director of the Company. In evaluating
submissions, underwriters may consult with members of the Company's actuarial,
claims and legal departments, as they analyze various aspects of a prospective
insured's risk profile. Except with respect to the Company's higher volume,
lower risk not-for-profit business (not including hospitals, where a
Company-developed ratings system is utilized), submissions for D&O and E&O are
underwritten on a risk-by-risk basis. All policy pricing quotes must be approved
by an underwriter who has written delegated authority for the industry sub-group
involved. Underwriting authorities
30
<PAGE> 32
cover various significant aspects of coverage, including maximum limits, minimum
deductibles, permissible deviation from established premium rates and risk
exposure. As an example, a coverage quote for a bank that failed to meet
established underwriting criteria would have to be approved by the senior
underwriter or, in some cases, the Chief Underwriting Officer. Producing brokers
are not authorized to bind D&O coverage either for the Insurance Subsidiaries or
for AC&S under the Facility. As noted above, the Company initiated during 1995
certain program administration arrangements with respect to defined E&O
programs, under which producing agents may bind coverage within underwriting
parameters specified by the Company.
A large portion of policies issued through the Facility have a one-year
term, although multi-year policies are becoming increasingly common. Exceptions
include principally "run-off" D&O coverage, which is most often purchased to
protect the directors and officers of an acquired corporation during the three
to six year period following a merger or acquisition. Most submissions for
renewal of an expiring policy are re-underwritten and re-priced in accordance
with the standard underwriting practices and procedures, which generally do not
distinguish between new and renewal policies. The underwriting guidelines are
set by the respective underwriting committees of the Insurance Subsidiaries,
each of which has two distinct committees. For each Insurance Subsidiary,
Underwriting Committee A acts with respect to D&O and other business issued
through ERMA on AC&S and Insurance Subsidiary policies. Underwriting Committee
A, on which AC&S has one designee (two prior to April 1996), acts only by
unanimous vote. Underwriting Committee B of each Insurance Subsidiary is
comprised of Company employees and one outside director (not an AC&S designee),
and it acts with respect to policies written on the Insurance Subsidiaries' own
policies. The Company's Chief Underwriting Officer, Stephen J. Sills, chairs
each of the Underwriting Committees. See "Business Relationship with AC&S."
CLAIMS
Claims arising under insurance policies underwritten by the Company are
managed by the Company's claims department. Because of the nature of the
Company's policies and the persons covered by D&O, claims tend to be reported
soon after the occurrence of a loss or an event representing a potential loss.
Claims personnel are assigned to handle claims based, in part, on industry
specialization. At December 31, 1995, the Claims department consisted of 23
employees, including 16 claims handlers. To assist its staff in claims
management, the Company has developed a comprehensive automated electronic claim
file system for administering and investigating claims, and calculating and
updating case reserves.
REINSURANCE
The Company has historically utilized reinsurance arrangements to limit the
amount of risk retained under policies written or reinsured by the Insurance
Subsidiaries. With respect to D&O risks, the Company has in place an
excess-of-loss reinsurance treaty providing for 100% reinsurance protection (20%
in 1994), subject to aggregate limits and other restrictions, on losses incurred
in excess of $2.5 million up to a limit of $10 million. ERII and ERSIC also have
entered into quota share reinsurance treaties with various reinsurers, covering
D&O and E&O related losses, subject to certain restrictions and aggregate
limits. In addition, for the Company's D&O risks assumed from UAP, ERII has
entered into a quota share reinsurance treaty, with various reinsurers, which
generally provides for 70% reinsurance protection on losses incurred, subject to
certain restrictions and aggregate limits. Effective January 1, 1996, the LPL
product is reinsured through a number of domestic and international reinsurance
markets, in a program that generally limits the Company's per claim exposure to
slightly under $5 million and its per policy exposure to slightly under $10
million. With respect to MPL policies, the Company has secured quota share
reinsurance which generally limits its maximum loss to $1 million per claim and
per policy. The Company's reinsurance programs include some exposure to
syndicates at Lloyd's, which is currently undergoing a restructuring, the
success or failure of which could affect syndicates' ability to meet their
reinsurance obligations. In addition, the availability and cost of reinsurance
arrangements are subject to prevailing market conditions, which are beyond the
Company's control. As a result of these or other factors, the Company may in the
future choose to revise further its reinsurance practices to increase, decrease
or eliminate entirely the amount of risk it cedes to reinsurers.
31
<PAGE> 33
RESERVES
Both D&O and E&O policies are generally written on a claims-made policy. In
many cases, several years may elapse between the reporting of the claim or
covered act to the Company and the Company's payment on a related loss. The
Company reflects its liability for the ultimate payment of incurred losses and
LAE by establishing loss and LAE reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred. Reserves are
estimates involving actuarial and statistical projections of the cost of the
ultimate settlement and administration of claims, based on known facts and
circumstances, predictions of future events, estimates of future trends in
claims severity and other variable factors such as inflation and new concepts of
liability. As the Company becomes aware of new information, it may refine and
adjust its estimates of its ultimate liability. Actual losses and LAE paid may
deviate, perhaps substantially, from estimates reflected in the Company's
reserves in its financial statements.
Since 1988, the Company has retained the services of an independent
actuarial consulting firm to provide opinions regarding reserves as required for
state regulatory filings. The Company intends to retain such services in the
future. Although the Company believes that its reserves are adequate, there can
be no assurance that ultimate loss experience will not exceed the Company's
reserves, which may result in a material adverse effect on the Company's
financial condition and results of operations. The following table sets forth a
reconciliation of beginning and ending reserves for unpaid losses and LAE, net
of reserves for reinsured losses and LAE, for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of period,
gross............................................ $254,758 $215,151 $188,438
Reinsurance recoverable at beginning of period..... (8,958) (6,053) --
-------- -------- --------
Reserves for losses and LAE at beginning of period,
net.............................................. 245,800 209,098 188,438
Provision for losses and LAE for current year
claims........................................... 83,775 68,304 49,687
Decrease in estimated ultimate losses and LAE for
prior year claims................................ (5,245) (4,133) (3,047)
-------- -------- --------
Total incurred losses and LAE...................... 78,530 64,171 46,640
Adjustment for foreign exchange loss on unpaid loss
and LAE.......................................... 58 27 --
Loss and LAE payments for claims attributable to:
Current year..................................... 792 587 142
Prior years...................................... 32,711 26,909 25,838
-------- -------- --------
Total payments..................................... 33,503 27,496 25,980
-------- -------- --------
Reserves for losses and LAE at end of period,
net.............................................. 290,885 245,800 209,098
Reinsurance recoverable at end of period........... 33,531 8,958 6,053
-------- -------- --------
Reserves for losses and LAE at end of period,
gross............................................ $324,416 $254,758 $215,151
======== ======== ========
</TABLE>
As shown above, a result of the Company's normal reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior-years'
claims, was that in 1995 the Company reduced its unpaid loss and LAE reserves
for prior-years' claims by approximately $5.2 million. The Company does not
consider reserve reductions to represent a trend, and there can be no assurance
concerning future adjustments of reserves, positive or negative, for
prior-years' claims. The procedures used in determining appropriate reserves at
December 31, 1995 were consistent with prior-year reserving methodologies.
Except for the last six lines, the "Development of Reserves" table below
presents the development of unpaid loss and LAE reserves, net of reinsurance,
from 1987 through 1995. The last six lines of the table present that type of
development on a "gross-of-reinsurance" basis for the periods following the
Company's adoption of SFAS No. 113, "Accounting and Reporting For Reinsurance of
Short-Duration and Long-
32
<PAGE> 34
Duration Contracts," as of January 1, 1993. The top line of the table shows the
reserves for unpaid losses and LAE, net of reinsurance recoverables on unpaid
claims, at the end of each of the indicated years. That net reserve represents
the amount of unpaid losses and LAE for claims arising in the current year and
all prior years that were unpaid at the balance sheet date, including reserves
for losses incurred but not reported. The upper portion of the table also shows
the re-estimated amount of the previously recorded reserve based on experience
as of the end of each succeeding year. The estimate changes as more information
becomes known about the frequency and severity of claims for individual years.
DEVELOPMENT OF RESERVES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses and LAE,
net........................... $11,459 $43,273 $76,277 $111,987 $157,131 $188,438 $209,098 $245,800 $290,885
Reserves re-estimated as of end
of year:
1 year later.................. 10,990 42,140 74,787 112,710 156,773 185,391 204,965 240,555
2 years later................. 10,345 38,653 70,708 112,333 153,726 181,258 199,720
3 years later................. 6,886 23,846 56,919 111,178 149,593 176,013
4 years later................. 2,801 10,057 55,764 110,597 144,348
5 years later................. 1,619 8,899 55,183 105,352
6 years later................. 1,635 8,916 49,938
7 years later................. 1,635 8,916
8 years later................. 1,635
Cumulative redundancy
(deficiency).................. 9,824 34,357 26,339 6,635 12,783 12,425 9,378 5,245
Cumulative paid as of:
1 year later.................. $ 5 $ 50 $ 1,088 $ 9,491 $ 20,075 $ 25,838 $ 26,909 $ 32,711
2 years later................. 33 449 4,815 26,321 44,814 47,270 56,823
3 years later................. 33 1,936 17,977 44,759 61,562 73,100
4 years later................. 1,283 2,072 26,483 56,572 78,916
5 years later................. 1,265 2,134 31,157 68,277
6 years later................. 1,265 4,421 38,435
7 years later................. 1,265 4,426
8 years later................. 1,265
Net reserve--December 31........ $209,098 $245,800 $290,885
Reinsurance recoverables........ 6,053 8,958 33,531
-------- -------- --------
Gross reserve--December 31...... $215,151 $254,758 $324,416
======== ======== ========
Net re-estimated reserve........ 199,720 240,555
Re-estimated reinsurance
recoverables.................. 2,290 8,974
-------- --------
Gross re-estimated reserve...... $202,010 $249,529
======== ========
Gross cumulative redundancy..... $ 13,141 $ 5,229
======== ========
</TABLE>
In the Company's early years of operation, it had little or no actual loss
experience upon which to calculate reserves. As a result, its reserving
methodologies were based largely on industry data. In recent years, the Company
has developed data based upon its own loss experience. With this information
available, the Company believes it is capable of estimating future losses, and
consequently reserves, with a greater degree of accuracy than in the Company's
early years of operations. As shown above, the cumulative reserve redundancies
have fallen in recent years. There can be no assurance that the Company's
reserves will be sufficient to cover ultimate losses.
INVESTMENTS
The Company seeks optimum yield, consistent with what management believes
is a generally conservative investment approach, as evidenced by the portfolio's
quality characteristics, liquidity and diversification.
33
<PAGE> 35
The Company has established investment guidelines and policies and oversees
management of the investment portfolio through the Finance Committee of the
Company's Board of Directors. All investments are reviewed periodically by the
Finance Committee, and exceptional investment decisions are submitted for
advance approval. In addition to the specifications in the investment policy
statements, all investments of the Insurance Subsidiaries must meet the
applicable state statutory requirements.
Investments currently consist principally of U.S. Government securities,
and corporate and municipal obligations, but also include asset backed
securities, partnership interests and common equities (including mutual fund
shares). At March 31, 1996, the Company also owned agency-issued collateralized
mortgage obligations, known as planned amortization class ("PAC") bonds, with an
approximate market value of $8.5 million. The PAC bonds are rated AAA and are
structured such that their market values tend to be more stable than traditional
mortgage backed securities in volatile interest rate environments. Investments
in securities backed by the full faith and credit of the U.S. Government and
U.S. Government agencies may be made without limitation. Using two new money
managers, the Company intends to increase its allocation of investments to
mortgage and other asset backed securities from $17.9 million at March 31, 1996
to $50 million. Mortgage backed securities may be subject to prepayment risk in
periods of declining interest rates and extension risk in periods of rising
interest rates. Aside from interest rate risk similar to that experienced by any
fixed income investment, the Company does not believe a material risk is
inherent in its allocation to mortgage backed securities relative to its
earnings and liquidity. The Company's investment policies specify limitations
both according to type of investment and with respect to exposure to single
issuers.
Investments in publicly-traded fixed income securities, both short- and
long-term, are restricted to issues that maintain a quality rating equal or
equivalent to "A" or better from S&P or Moody's Investors Service, Inc.
("Moody's"). Should an investment in the portfolio be downgraded below this
rating, the investment is not necessarily sold immediately but is closely
monitored for further deterioration of credit quality and the need to write down
the book value of the investment. Private placements or other investments not
rated by those agencies are permitted, if approved by the Finance Committee and
reported to the Board of Directors.
The following table summarizes the investment portfolio of the Company, by
asset class, as of March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
FAIR VALUE COST(1) PERCENT(2)
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury or agency securities............. $ 18,905 $ 18,931 3.6%
Municipal securities........................... 389,420 376,342 73.2
Corporate fixed income securities.............. 44,940 43,879 8.4
Mortgage and other asset backed securities..... 17,874 17,077 3.4
Foreign government securities.................. 1,644 1,594 0.3
-------- -------- ------
Total fixed maturities............... 472,783 457,823 88.9
-------- -------- ------
Equity securities.............................. 28,788 21,938 5.4
Short-term investments and cash................ 30,097 30,097 5.7
-------- -------- ------
Total investments and cash........... $ 531,668 $509,858 100.0%
======== ======== ======
</TABLE>
- ------------------------------
(1) Amortized cost for fixed maturities and short-term investments.
(2) Percent of total portfolio, based on fair value.
34
<PAGE> 36
At March 31, 1996, the Company's publicly-traded bond portfolio did not
contain any securities that were rated below investment grade. The following
table sets forth the composition of the Company's publicly-traded fixed income
securities, by quality rating, as of March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31,
RATINGS 1996(1)
<S> <C>
(S&P/Moody's):
AAA/Aaa.......................................... 60.2%
AA/Aa............................................ 20.3
A/A.............................................. 18.4
BBB/Baa.......................................... 1.1
------
Total.................................... 100.0%
======
</TABLE>
- ------------------------------
(1) Based on fair value.
REGULATION
As insurance companies, ERII and ERSIC are subject to supervision and
regulation in the states in which they transact business. Such supervision and
regulation, which is designed primarily for the protection of policyholders and
not stockholders, relates to most aspects of an insurance company's business and
includes such matters as authorized lines of business; underwriting standards;
financial condition standards; licensing of insurers; investment standards;
premium levels; policy provisions; the filing of annual and other financial
reports prepared on the basis of SAP; the filing and form of actuarial reports;
the establishment and maintenance of reserves for unearned premiums, losses and
LAE; transactions with affiliates; dividends; changes in control; and a variety
of other financial and nonfinancial matters. Additionally, ERMA is subject to
supervision and regulation under state insurance agency laws in the states in
which it does business as an insurance agent. Insurance regulatory authorities
have broad administrative powers to regulate trade practices and in that
connection to restrict or rescind licenses to transact business and to levy
fines and monetary penalties against insurers and insurance agents found to be
in violation of applicable laws and regulations.
COMPETITION
The insurance industry is highly competitive. ERI competes with domestic
and foreign insurers and reinsurers, some of which have greater financial,
marketing and management resources than ERI, and it may compete with new market
entrants in the future. The Company's major competitors are American
International Group, Inc. and The Chubb Corporation, which the Company believes
are the dominant competitors in the industry. Other competitors include ACE
Limited, Associated Electric & Gas Insurance Services Limited, CNA Financial
Corp., EXEL Limited, Gulf Insurance Company (a subsidiary of Travelers), Great
American Insurance Company, Lloyd's syndicates, PHICO Insurance Company,
Reliance Group Holdings, Inc. and Zurich-American Insurance Company. Competition
is based on many factors, including the perceived financial strength of the
insurer, pricing and other terms and conditions, services provided, ratings
assigned by independent rating organizations (including A.M. Best and S&P), the
speed of claims payment and the reputation and experience of the insurer.
Ultimately, this competition could affect the Company's ability to attract
business on terms having the potential to yield appropriate returns.
EMPLOYEES
At March 31, 1996, the Company employed approximately 250 employees. None
of the employees is subject to collective bargaining agreements and the Company
knows of no current efforts to implement such agreements. The Company believes
it has a good relationship with its employees.
35
<PAGE> 37
MANAGEMENT
Set forth below are the names, ages and titles of the persons who are
members of the Company's Board of Directors or executive officers of the Company
as of the date of this Prospectus. All directors of the Company are also
directors of each of the Insurance Subsidiaries.
<TABLE>
<CAPTION>
NAME AGE CAPACITY
<S> <C> <C>
LeRoy A. Vander Putten..................... 61 Chairman, Chief Executive Officer and
Director
Robert H. Kullas........................... 51 Vice Chairman, Chief Operating Officer and
Director
Stephen J. Sills........................... 47 President, Chief Underwriting Officer and
Director
Robert V. Deutsch.......................... 36 Executive Vice President, Chief Financial
Officer and Chief Actuary
James A. FitzPatrick, Jr. ................. 46 Secretary
Gary G. Benanav............................ 50 Director
John G. Crosby............................. 53 Director
Patrick A. Gerschel........................ 50 Director
Peter Goldberg............................. 60 Director
Joseph P. Kiernan.......................... 55 Director
Michael D. Rice............................ 53 Director
Joseph D. Sargent.......................... 66 Director
</TABLE>
Barbara G. Cohen has been nominated to serve as a director of the Company.
Stockholders will vote on her election to the Board at the Company's 1996 Annual
Meeting of Stockholders. Purchasers of the Shares of Common Stock in this
Offering will not be entitled to vote at such Annual Meeting.
Certain officers of the Insurance Subsidiaries and ERMA are as follows:
<TABLE>
<CAPTION>
NAME AGE CAPACITY(1)
<S> <C> <C>
Anthony J. Falkowski....................... 50 Senior Vice President--Claims
James A. Roberts........................... 45 Senior Vice President--Information Services
Mark I. Rosen.............................. 44 Senior Vice President--Claims and Chief
Legal Officer
Raymond Wahl............................... 47 Senior Vice President--Underwriting
David Condren.............................. 37 Vice President--Underwriting(2)
John F. Kearney............................ 38 Vice President--Underwriting
Jeffrey H. Koenig.......................... 33 Vice President--Finance and Controller(3)
David B. Lapin............................. 36 Vice President--Underwriting
Joseph A. Sterling, Jr. ................... 51 Vice President--Administration(2)
Douglas J. Dalrymple....................... 48 Treasurer(3)
</TABLE>
- ------------------------------
(1) Each officer listed is an officer of ERII, ERSIC and ERMA, unless otherwise
specified.
(2) ERMA only.
(3) Insurance Subsidiaries only.
LeRoy A. Vander Putten. Mr. Vander Putten has been a director of the
Company since December 1986 and its Chief Executive Officer since January 1988.
He also served as the Company's Chairman from January 1988 through December
1993, and he resumed the office of Chairman in August 1994. He was the Company's
President from January 1988 until August 1994. Mr. Vander Putten served as
Chairman, President and Chief Executive Officer of ERII beginning in January
1988 and of ERSIC beginning in November 1991.
Robert H. Kullas. Mr. Kullas became Vice Chairman in April 1996, after
serving as President since August 1994. He has served as a director of the
Company, ERII and ERSIC, and as Chairman of the
36
<PAGE> 38
Partnership Committee of ERMA, since January 1994. From January 1994 until
August 1994, his title was Chairman of the Board of each of the Company, ERII
and ERSIC. In August 1994 his title became President and Chief Operating Officer
for each of the Company, ERII and ERSIC. Prior to joining the Company, Mr.
Kullas held various financial and planning positions in the Life, Financial and
Commercial Insurance Divisions at AL&C.
Stephen J. Sills. Mr. Sills became President in April 1996 and has served
as a director of the Company since December 1986. He served as Executive Vice
President of the Company from November 1990 until April 1996. Mr. Sills has
served as Executive Vice President of ERII and ERSIC since November 1990 and
November 1991, respectively. Prior to serving as Executive Vice President, Mr.
Sills served as Senior Vice President of the Company and ERII from December 1986
and April 1987, respectively. Mr. Sills has served as a director of ERII and
ERSIC since February 1987 and December 1991, respectively. Mr. Sills also has
served as President, and a member of the Partnership Committee, of ERMA since
January 1988.
Robert V. Deutsch. Mr. Deutsch became Executive Vice President in April
1996. From November 1990 until April 1996, he served as Senior Vice President of
the Company. He has also served as Chief Financial Officer and Chief Actuary of
the Company since November 1990. Mr. Deutsch has also served as Senior Vice
President, Chief Financial Officer and Chief Actuary of ERII and ERSIC since
November 1990 and November 1991, respectively. From June 1987 until November
1990, he served as Senior Vice President and Chief Actuary of the Company and
ERII.
James A. FitzPatrick, Jr. Mr. FitzPatrick has served as Secretary of the
Company, ERII and ERSIC since August 1986, February 1987 and November 1991,
respectively. He has been a partner at Dewey Ballantine since February 1989, and
from January 1983 to February 1989 was a partner at LeBoeuf, Lamb, Leiby &
MacRae.
Gary G. Benanav. Mr. Benanav has served as a director of the Company and
of ERII since April 1988 and as a director of ERSIC since December 1991, and has
been a member of the Partnership Committee of ERMA since January 1994. He is
currently an independent consultant, having served as Executive Vice President
of AL&C and head of AL&C's property/casualty lines from December 1993 until
April 1996. From April 1992 through December 1993, he served as Group Executive
responsible for Aetna Life Insurance and Annuity Company and Aetna
International. He also serves as a director of Barnes Group, Inc., Bristol, CT.
Barbara G. Cohen. Ms. Cohen has been nominated for election as a director
of the Company at the 1996 Annual Meeting, scheduled to be held on May 10, 1996.
Since 1993 Ms. Cohen has served as President of Kannon Consulting, a
Chicago-based marketing consulting firm. From 1991 to 1993 she was a senior
partner at Cambridge Group, Inc. and, prior to that, a partner in the Marketing
and Strategy practice of Booz, Allen & Hamilton, Inc.
John G. Crosby. Mr. Crosby has served as a director of the Company since
1987 and as a director of ERII and ERSIC, and a member of the Partnership
Committee of ERMA, since January 1994. Mr. Crosby is currently President and
Managing Director of the investment banking firm, Madison Partners, Inc., a
position he has held since September 1995. He served as Managing Director of LSG
Advisors ("LSG"), an investment banking firm and a division of Societe Generale
Securities Corp., from May 1993 through August 1995. From 1990 through May 1993,
Mr. Crosby served as Managing Director of The Lodestar Group ("Lodestar"),
predecessor to LSG. From 1980 to 1990, Mr. Crosby served as a Managing Director
and in various positions with Merrill Lynch & Co.
Patrick A. Gerschel. Mr. Gerschel has served as a director of the Company
and of ERII since July 1990, as a director of ERSIC since December 1991 and as a
member of the Partnership Committee of ERMA since January 1994. Mr. Gerschel has
served as Chairman of Gerschel & Co., a merchant banking firm, since 1980. Mr.
Gerschel has also served as Chairman of Rivondale/Santa Rita Resources since
1983. From 1978 to 1982, Mr. Gerschel was a Limited Partner of Lazard Freres &
Co. and, from 1978 to 1980, was Vice Chairman of Lazard Realty.
Peter Goldberg. Mr. Goldberg has served as a director of the Company, ERII
and ERSIC, and a member of the Partnership Committee of ERMA, since May 1994.
Mr. Goldberg has served as Chairman and
37
<PAGE> 39
a director of Calco Insurance Brokers & Agents, Inc. since 1993. Since 1993, Mr.
Goldberg also has served as President and a director of California Casualty
Management Company ("CCMC") and from 1980 to 1993 was Executive Vice President
and a director of CCMC.
Joseph P. Kiernan. Mr. Kiernan has served as a director of the Company,
ERII and ERSIC since December 1986, February 1987 and December 1991,
respectively. He has also served as a member of the ERMA Partnership Committee
since 1988. Mr. Kiernan serves as Chairman and Chief Executive Officer--Fidelity
and Surety, Travelers/Aetna Property Casualty Corp., a position assumed in April
1996. Prior to the Travelers acquisition of AC&S, Mr. Kiernan served as head of
AL&C's Bond and Standard Commercial Accounts strategic business units.
Michael D. Rice. Mr. Rice has served as a director of the Company since
1986. He has also served as a director of ERII and ERSIC, and a member of the
Partnership Committee of ERMA since January 1994. Mr. Rice has served as
President of Aon Specialty Group, an insurance brokerage firm, since 1989. From
1988 to 1989, Mr. Rice served as a Senior Vice President of Rollins, Burdick &
Hunter.
Joseph D. Sargent. Mr. Sargent has served as a director of the Company,
ERII and ERSIC since December 1986, February 1987 and December 1991,
respectively. He has also served as a member of the Partnership Committee of
ERMA since January 1994. Mr. Sargent currently serves as Chairman of Connecticut
Surety Corporation, a position he has held since December 1992. Mr. Sargent
served as Chairman, and later as Vice Chairman, of Conning & Company, an
investment banking firm, from 1991 to 1995 and as its Chairman and Chief
Executive Officer from 1988 to 1991. Mr. Sargent is a director of E.W. Blanch
Holdings, Policy Management Systems Corporation, Mutual Risk Management Ltd.,
MMI Companies, Inc. and Trenwick Group Inc.
Anthony J. Falkowski. Mr. Falkowski has served as Senior Vice President
and Claims Manager of ERII and ERSIC since June 1987 and November 1991,
respectively. Prior to joining the Insurance Subsidiaries, he served in various
positions with Chubb Insurance Group, including his last position as a Vice
President in the Claims Department.
James D. Roberts. Mr. Roberts has served as Senior Vice President of ERII
and ERSIC since November 1990 and November 1991, respectively. From April 1988
through November 1990, Mr. Roberts was Vice President and Chief Information
Officer of ERII. Prior to that date, Mr. Roberts held various positions within
Peat Marwick Main & Co. (now, KPMG Peat Marwick), serving as manager from 1986
to 1988.
Mark I. Rosen. Mr. Rosen became the Company's chief legal officer in 1991,
and he has served as Senior Vice President of ERII and ERSIC since April 1993.
From 1976 until 1991, Mr. Rosen was an attorney with the Federal Deposit
Insurance Corporation and was its Deputy General Counsel from 1988 until 1991.
He headed the branch responsible for litigating D&O claims.
Raymond Wahl. Mr. Wahl has served as Senior Vice President of ERII and
ERSIC since June 1991 and April 1992, respectively. From 1977 until 1991, Mr.
Wahl served in various underwriting related positions within National Union Fire
Insurance Company, a subsidiary of American International Group.
David Condren. Mr. Condren joined ERII in 1988, and has served as Vice
President in the Company's underwriting department since 1994. Prior to joining
the Company, Mr. Condren was associated with Peat Marwick Main & Co. (now, KPMG
Peat Marwick).
John F. Kearney. Mr. Kearney has served as Vice President of ERII and
ERSIC since July 1993. From 1987 until 1993, Mr. Kearney underwrote D&O
insurance with ERMA where, from November 1991 he was a Vice President. Prior to
joining ERMA, Mr. Kearney was an account executive with Merrill Lynch & Co.
Jeffrey H. Koenig. Mr. Koenig joined the Company as Assistant Controller
in 1987. He has served as Vice President of ERII and ERSIC since January 1996
and as Controller since April 1990 and November 1991, respectively. Prior to
joining the Company, Mr. Koenig held various positions at Coopers & Lybrand. He
is a certified public accountant.
38
<PAGE> 40
David B. Lapin. Mr. Lapin has served as Vice President of ERII and ERSIC
since July 1993. From 1987 to 1993, Mr. Lapin underwrote D&O insurance with
ERMA, where, from November 1991, he was a Vice President. Prior to joining ERMA,
Mr. Lapin was Underwriting Manager at Home Insurance Company.
Joseph A. Sterling, Jr. Mr. Sterling joined ERMA as Vice President,
Administration, in 1987. Prior to 1987, Mr. Sterling had served in various
capacities with AC&S.
Douglas J. Dalrymple. Mr. Dalrymple has served as Treasurer of ERII and
ERSIC since October 1992. From 1990 to 1992, Mr. Dalrymple was an Assistant Vice
President of CIGNA Corporation, and prior to that, he served in various
capacities with Equicor Equitable HCA Corp. and Equitable Life Assurance Society
of the United States.
BUSINESS RELATIONSHIP WITH AC&S
The Facility operates under an Amended and Restated Agency and Insurance
Services Agreement among AC&S, the Company and ERMA (the "Agency Agreement") and
an Amended and Restated Quota Share Reinsurance Agreement between AC&S and ERII
(the "Quota Share Agreement"). These agreements contain various provisions
governing the manner in which the Facility's business is conducted and the
nature and scope of the insurance business conducted by ERI and its
subsidiaries. Certain provisions of these agreements are summarized below:
Agency Agreement. Under the Agency Agreement, AC&S has authorized ERMA to
issue AC&S D&O policies with liability limits of up to $20 million (with up to
$30 million available on a case-by-case basis with AC&S's approval). The Agency
Agreement also authorizes ERMA to issue AC&S financial institution trust
department errors and omissions policies, fidelity bonds, kidnap and ransom
policies, commercial crime policies, mail policies, combination safe depository
policies and pension and welfare fund fiduciary responsibility policies which
meet the underwriting guidelines of Underwriting Committee A. The Agency
Agreement provides that, with minor exceptions, all of AC&S's D&O insurance in
the United States will be written through ERMA. This exclusive arrangement
applies to AC&S and its former parent, AL&C, as well as any other subsidiaries
of AL&C currently in existence or to be formed. It does not, however, apply to
Travelers, to its D&O subsidiary, Gulf Insurance Company, or to any other
Travelers subsidiary.
The Agency Agreement generally requires a minimum two year notice of
termination, and no such termination may be effective until December 31, 1999.
The Agency Agreement also may be terminated immediately if the Company
materially breaches any of its obligations thereunder or any of the business
restrictions applicable to it as described under "--Reinsurance Agreements." The
Agency Agreement may also be terminated in the event that any person other than
AC&S acquires 20% or more of ERI's voting securities or if ERI ceases to own all
of the voting stock or partnership interests of ERMA, or upon any suspension of
ERMA's underwriting authority under the Agency Agreement as described below.
Under the Agency Agreement, ERMA's underwriting authority may be suspended
upon the occurrence of any of the following events: (a) in the event that as of
the last date of any calendar year, the consolidated policyholders' surplus of
the Insurance Subsidiaries decreases by more than 20% compared to the last date
of the calendar year immediately preceding such calendar year; (b) if the
consolidated net premiums written to policyholders' surplus ratio of the
Insurance Subsidiaries for policies underwritten on behalf of AC&S under the
Agency Agreement is in excess of 3.5 to 1 for any rolling period of four
consecutive calendar quarters and such ratio for such subsidiaries is not
reduced below 3.5 to 1 for the rolling period of four consecutive calendar
quarters ended six months thereafter; (c) if the consolidated policyholders'
surplus of the Insurance Subsidiaries is less than $60 million; or (d) upon the
effective date of the termination of the Quota Share Agreement.
Under the Agency Agreement, ERMA currently pays AC&S an override commission
equal to 3% of gross written premiums with respect to AC&S D&O policies issued
through ERMA. It will continue to pay at the 3% level until on average, over a
rolling period of four consecutive quarters, more than 70% of ERI's Insurance
Revenues (defined below) during a period of four consecutive calendar quarters
are derived from sources other than the issuance, and reinsurance, of AC&S
policies, at which point the rate of the override
39
<PAGE> 41
commission would be 2%. The override commission will remain at the 2% level
until on average, over a rolling period of four consecutive calendar quarters,
more than 70% of the aggregate gross written premiums for all D&O written in the
United States through ERMA is directly written on policies of the Insurance
Subsidiaries. Thereafter ERI will not be required to pay AC&S any override with
respect to AC&S D&O policies issued through ERMA. For purposes of the foregoing,
"Insurance Revenues" means (a) AC&S's gross written premiums from all AC&S
policies underwritten by ERMA pursuant to the Agency Agreement, plus (b) the
consolidated gross premiums written of the Insurance Subsidiaries (excluding (i)
any such premiums attributable to any insurance assumed from AC&S pursuant to
the Quota Share Agreement and (ii) any such premiums which, pursuant to the
policies to which they relate, are required to be segregated for possible return
to the insured under such policies depending on any profit sharing,
experience-rating or other similar criteria set forth in such policy, except to
the extent such premiums are recorded as earned premiums by any of the Insurance
Subsidiaries during any of the four calendar quarters in question), plus (c) the
consolidated fee income of ERI, determined in accordance with GAAP, after
deducting any fees paid by AC&S or any affiliate of AC&S, plus (d) an amount
equal to (i) the fee income of any equity in which ERI owns 20% or more of the
outstanding equity interests, multiplied by (ii) the percentage of the
outstanding equity interest of such entity owned by ERI as of the date such fee
income is determined.
As to each AC&S policy issued by ERMA, ERMA deducts as its commission 24%
of that portion of the gross premiums written which is not ceded by AC&S to ERII
under the Quota Share Agreement. In addition, as to each such policy, on behalf
of AC&S ERMA withholds, from the portion of the premiums ceded by AC&S to ERII,
ERII's share of producers' commissions and general and administrative expenses
incurred.
The Agency Agreement states that ERI and AC&S anticipate that, over time,
an increasing portion of ERMA's revenue will be attributable to policies
underwritten on behalf of the Insurance Subsidiaries. The Agency Agreement
provides that ERMA is permitted to underwrite business on behalf of the
Insurance Subsidiaries on such terms as it may negotiate with them subject to
the limitations imposed on the business activities of the Insurance Subsidiaries
under their reinsurance agreements with AC&S described below under
"--Reinsurance Agreements." In addition, ERMA may enter into agreements to
underwrite insurance on behalf of third party insurers, subject to certain
conditions and limitations described below. See "--Limit on Additional Lines and
Third Party Paper."
ERI has guaranteed the obligations of ERMA to AC&S under the Agency
Agreement.
Reinsurance Agreements. The Quota Share Agreement requires AC&S to cede to
ERII 50% of its gross liability, up to $20 million per policy, on all of AC&S's
D&O policies issued through ERMA, 6.25% of its gross liability on financial
institution trust department E&O policies issued through ERMA, up to $5 million
per policy, and generally 50% of its gross liability on other specified policies
issued through ERMA, up to $5 million per policy. Under the Quota Share
Agreement, ERII pays AC&S a ceding commission, in addition to the amounts
withheld by ERMA on behalf of AC&S under the Agency Agreement, as follows: (a)
with respect to each D&O and financial institution trust department E&O policy
issued through ERMA, an amount equal to 3% of the portion of gross premiums
written on such policy payable to ERII under the Quota Share Agreement, and (b)
with respect to each fidelity bond and fiduciary policy issued through ERMA, an
amount equal to 5% of the portion of gross premiums written on such bond or
policy payable to ERII under the Quota Share Agreement. Such ceding commission
is intended to reimburse AC&S for premium taxes incurred. The Quota Share
Agreement also requires AC&S to retain, and not reinsure, at least 12.5% of its
gross liability on its D&O policies written through ERMA. AC&S has also entered
into reinsurance agreements with each of ERII and ERSIC under which ERII and
ERSIC currently cede to AC&S 12.5% (50% for 1994) of their gross liability on
D&O policies issued by ERII and ERSIC to U.S. insureds. These reinsurance
agreements contain terms substantially similar to those contained in the Quota
Share Agreement.
In the event the Quota Share Agreement is terminated for any reason other
than pursuant to the voluntary termination provisions thereof or certain other
limited reasons, or is terminated for any reason at a time when ERII's rating
from A.M. Best is B++ ("Very Good") or lower, then ERII is required to deposit
with AC&S security in an amount equal to its then pro rata share (the
"Reinsurer's Pro Rata Share") of AC&S's loss reserves, loss adjustment expenses
and unearned premiums with respect to the business reinsured
40
<PAGE> 42
under the Quota Share Agreement. In the event the Quota Share Agreement is
terminated by AC&S pursuant to such agreement's voluntary termination provisions
or for certain other limited reasons at a time when ERII's rating from A.M. Best
is higher than B++, the amount of the security required to be deposited by ERII
with AC&S pursuant to the agreement varies depending on the amount of ERII's
statutory surplus as of the effective date of such termination, with the amount
of such security ranging from 100% of such Pro Rata Share in the event that
ERII's statutory surplus as of the effective date of termination is less than
$100,000,000 to 0% of such Pro Rata Share if ERII's statutory surplus as of the
effective date of termination is greater than or equal to $750,000,000. Any
security deposited by ERII with AC&S pursuant to the Quota Share Agreement is
required to be adjusted quarterly to adjust the amount of such security in
relation to the then applicable Reinsurer's Pro Rata Share and certain other
variables, with ERII entitled to receive any excess security then on deposit and
required to supplement any such security in the amount of any deficiency in such
security, as the case may be. Generally, ERII is permitted to satisfy its
obligation to post security by establishing a trust account for the benefit of
AC&S but, under certain circumstances, ERII is required to post a letter of
credit in lieu of a trust account. These circumstances include any termination
of the agreement by AC&S as a result of any payment default by ERII or as a
result of the suspension of ERMA's underwriting authority under the Agency
Agreement.
Underwriting Committees. ERII and ERSIC each has two underwriting
committees of their respective Boards of Directors. One such committee
("Underwriting Committee A") acts with respect to D&O and other business issued
through ERMA on AC&S, ERII and ERSIC policies ("Underwriting Committee A
Business"). Underwriting Committee A, on which AC&S has one designee (two prior
to April 1996), acts only by unanimous vote. Approval of Underwriting Committee
A is required for any changes in or deviations from the underwriting,
reinsurance and claim guidelines applicable to Underwriting Committee A Business
and any changes to ERII's and ERSIC's affiliate arrangements. A second
underwriting committee of the Board of Directors of each of ERII and ERSIC
("Underwriting Committee B") acts with respect to (i) D&O and other business
written on ERII and ERSIC policies which does not conform with the
aforementioned guidelines of Underwriting Committee A, (ii) business, other than
D&O and specialty lines, written on ERII and ERSIC policies and (iii) business
written on policies of unrelated third party insurers which may be reinsured by
ERII or ERSIC ("Underwriting Committee B Business"). Underwriting Committee B is
responsible for the underwriting, claims and reinsurance guidelines for
Underwriting Committee B Business and acts by majority vote. AC&S does not have
the right to designate any members of Underwriting Committee B.
Limit on Additional Lines and Third Party Paper. Under the Quota Share
Agreement, ERII is precluded from insuring any business, or reinsuring any
insurer other than AC&S, and from engaging in any other business, except as
expressly provided in the Quota Share Agreement and the Exchange Agreement,
dated as of November 5, 1993 (the "Exchange Agreement"), by and among AC&S,
Executive Re and ERI. The Quota Share Agreement permits ERII to directly write
without limitation any of the lines of insurance business which ERMA has the
authority to underwrite on behalf of AC&S pursuant to the Agency Agreement and
which meets the applicable underwriting guidelines of Underwriting Committee A.
In addition, the Quota Share Agreement permits ERII to directly write errors and
omissions and other insurance lines (including D&O) which do not meet the
underwriting guidelines of Underwriting Committee A, provided such writing is
approved by Underwriting Committee B and a majority of ERII's Board of Directors
(any such line, a "Specialty Line") and provided further that after giving
effect to the writing of any such Specialty Lines the aggregate net written
premiums of ERII and the other insurance company subsidiaries of ERII
attributable to all Specialty Lines during any period of four consecutive
calendar quarters does not exceed 40% of the consolidated policyholders' surplus
of ERII and such other insurance company subsidiaries as determined based on the
most recent quarterly statements filed by each such insurer with its state of
domicile.
In addition, if ERII in good faith determines that it is unable to fully
develop its business by writing the lines of insurance which it is permitted to
write directly under the Quota Share Agreement (the "Permitted Lines") because
it does not have the proper authority, licensing or rating to do so, or it is
for some other reason impractical to do so, ERII may reinsure business within
any Permitted Line written by insurers other than
41
<PAGE> 43
AC&S, AC&S's affiliates or the Insurance Subsidiaries (a "Third-Party Insurer")
by entering into reinsurance arrangements and agreements with Third-Party
Insurers, provided (a) it affords AC&S a right of first offer prior to the
entering into most of such arrangements or agreements, (b) Underwriting
Committee B and a majority of the entire Board of Directors of ERII shall have
approved ERII's issuance of such reinsurance and (c) to the extent the
reinsurance in question relates to a Specialty Line, ERII, after giving effect
to such reinsurance, would be in compliance with the 40% of policyholders'
surplus limit referred to above.
ERMA has agreed that except as expressly permitted under the Agency
Agreement, it will not engage in any business or act as agent, broker,
representative or manager without the prior written consent of AC&S. Under the
Agency Agreement, ERMA is permitted to underwrite insurance on behalf of the
Insurance Subsidiaries on such terms as it may negotiate with them, provided the
issuance of such insurance by ERII is permitted under the applicable provisions
of the Quota Share Agreement or the issuance of such insurance by any of ERI's
other insurance company subsidiaries is permitted under the applicable
provisions of the Exchange Agreement, as the case may be. In addition, ERMA is
permitted to underwrite insurance and reinsurance on behalf of Third-Party
Insurers, provided that in most cases it affords AC&S a right of first offer
with respect to any such proposed underwriting agreement or arrangement.
Under the Exchange Agreement, ERI has agreed to cause ERSIC and any future
insurance company subsidiary of ERI to comply with the business limitations
applicable to ERII in the Quota Share Agreement as though such subsidiary were
itself subject to such restrictions, and to cause any future managing
underwriter to comply with the business limitations applicable to ERMA under the
Agency Agreement as though such managing underwriter were itself subject to such
restrictions.
RECENT DEVELOPMENTS
On March 26, 1996, the Company completed the Repurchase Transaction,
pursuant to which it purchased 2,511,300 shares of its capital stock from AC&S
at a price of $29.875 per share, or approximately $75 million in the aggregate.
Under the terms of the Stock Purchase Agreement, the price is subject to upward
adjustment under certain circumstances described below. Immediately prior to the
Repurchase Transaction, AC&S beneficially owned a total of 4,611,300 shares of
ERI's then-outstanding capital stock, consisting of 3,286,300 shares of Common
Stock, all 1,225,000 shares of the Class B Common Stock and the Aetna Stock
Option. The repurchased Common Stock was comprised of 1,286,300 shares of Common
Stock and all 1,225,000 shares of Class B Common Stock. On March 29, 1996, AC&S
transferred to AL&C the remaining 2,000,000 shares of Common Stock (which are
the Shares offered hereby) and the Aetna Stock Option. Prior to the repurchase
of the Class B Common Stock, AC&S had the right to elect four individuals to the
Company's Board of Directors. Following the Repurchase Transaction, AC&S has the
right, so long as the Agency Agreement remains in effect, to nominate one
director for election to the Board of Directors. One individual designated by
AC&S currently serves on the Company's Board of Directors.
Under the Stock Purchase Agreement, the purchase price was the average of
the closing prices of the Common Stock on the NYSE during the ten consecutive
trading days that ended on March 19, 1996, the third trading day prior to the
date on which the Agreement was signed. The Purchase Price is subject to upward
adjustment under certain circumstances. In summary, if within six months of the
March 26, 1996 closing date, (i) the Company and any third party shall enter
into an agreement under which such third party will acquire 30% or more of the
Company's outstanding Common Stock, or (ii) any third party shall have publicly
announced a tender offer which results in such third party's acquisition of 30%
or more of the Company's outstanding Common Stock (in either case, a "30%
Transaction"), then the Company shall pay to AL&C an amount in cash which is
equal to 2,511,300 times the excess, if any, of the price per share paid by such
third party over the Purchase Price (the "Excess Per Share Price"). If the
Company and any third party shall enter into any such agreement, or any third
party shall have publicly announced such a tender offer, with respect to a 30%
Transaction during the second six months following March 26, 1996, the Company
shall pay AL&C an amount in cash which is equal to 1,883,475 times the Excess
Per Share Price, or 75% of the amount which would have been payable with respect
to such an agreement entered into, or tender offer announced, during the first
six-month period.
42
<PAGE> 44
In connection with the Stock Purchase Agreement, the Company obtained a $70
million senior credit facility arranged through The Chase Manhattan Bank
(National Association), the proceeds of which have been used as follows: $38
million to partially finance the Repurchase Transaction, $25 million to
refinance the Company's existing bank debt and $7 million for general corporate
purposes. In connection with the credit facility, the Company has pledged the
stock of its direct subsidiary, Executive Re Inc., and Executive Re Inc. has
pledged the stock of its direct subsidiary, ERII. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
SELLING STOCKHOLDER
AL&C is the only Selling Stockholder. Prior to March 26, 1996, AL&C through
AC&S owned a total of 4,511,300 shares of the Company's capital stock, comprised
of 3,286,300 shares of Common Stock and all 1,225,000 shares of Class B Common
Stock. AC&S also owned the Aetna Stock Option. Since 1986, AC&S has had a number
of business relationships with the Company. See "Business Relationships with
AC&S." On March 26, 1996, the Company repurchased 1,286,300 shares of Common
Stock and all 1,225,000 shares of Class B Common Stock from AC&S pursuant to the
Stock Purchase Agreement, which also contained provisions related to the
Offering made hereby. See "Recent Developments." On March 29, 1996, AC&S
transferred the remaining 2,000,000 shares of Common Stock (which are the Shares
offered hereby), together with the Aetna Stock Option, to AL&C.
The Stock Purchase Agreement provides that the Company shall file with the
Commission a registration statement with respect to the resale by AL&C of all
2,000,000 shares of Common Stock (the "Remaining Common Stock") on or before May
31, 1996. The Company was obligated to use its reasonable efforts to cause such
registration statement to become effective and to remain effective for the
period specified by AL&C, so as to permit AL&C to complete the offering and sale
of the Remaining Common Stock. Under the Stock Purchase Agreement, the Company
has agreed to indemnify and hold harmless AL&C, its directors, officers,
affiliates and controlling persons, with respect to certain liabilities arising
out of the Offering made herein.
The following table sets forth certain information with respect to AL&C, as
Selling Stockholder (assuming no exercise of the over-allotment option):
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
------------------------- -------------------------
NUMBER PERCENT NUMBER PERCENT
OF COMMON OF TOTAL OF COMMON OF TOTAL
NAME OF SELLING STOCKHOLDER STOCK SHARES SHARES STOCK SHARES SHARES
<S> <C> <C> <C> <C>
Aetna Life and Casualty Company................. 2,100,000(1) 23% 100,000(1) 1%
</TABLE>
- ------------------------------
(1) Includes 100,000 shares subject to the Aetna Stock Option.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, ERI will have outstanding 8,996,041 shares
of Common Stock, of which approximately 1.3 million shares will be "restricted
securities" (the "Restricted Shares") as that term is defined in Rule 144 under
the Securities Act ("Rule 144"). Other than shares owned by Company affiliates,
all of the Restricted Shares may be publicly sold in accordance with Rule
144(k), without regard to the volume, manner of sale or other limitations of
Rule 144. Approximately 700,000 shares of the Common Stock are held by
securityholders subject to the Lock-up period described below.
In connection with the underwriting agreement entered into with the
Underwriters, ERI, as well as each of its directors and executive officers and
AL&C, have agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangeable or
exercisable for
43
<PAGE> 45
Common Stock without the prior written consent of the Representatives of the
Underwriters (the "Lock-up") for a period of 180 days after the date of this
Prospectus other than, in the case of ER1, pursuant to any employee or director
stock-based plan. After giving effect to the Offering, such directors and
executive officers and AL&C held as of the date of this Prospectus, in the
aggregate, approximately 22% of the Common Stock (on a fully diluted basis).
Upon completion of the Offering, there will be outstanding options to
purchase approximately 1.7 million shares of Common Stock, of which options to
purchase approximately 1.3 million shares are subject to the Lock-up period.
44
<PAGE> 46
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated the date hereof (the "Underwriting Agreement"), among the Company, AL&C
and Donaldson, Lufkin & Jenrette Securities Corporation and Conning & Company,
which are acting as representatives (the "Representatives") for the underwriters
named below (the "Underwriters"), the Selling Stockholder has agreed to sell to
the Underwriters and each of the Underwriters has severally agreed to purchase
the number of Shares set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..................
Conning & Company....................................................
---------
2,000,000
=========
</TABLE>
Under the terms of the Underwriting Agreement, the Underwriters are
obligated to take and pay for all such Shares, if any are taken. Under certain
circumstances, the commitments of nondefaulting Underwriters may be increased as
set forth in the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Shares directly to the public at the price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the Offering, the offering price and
such concession may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price, less the underwriting
discount. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the Offering of the
Shares made hereby. To the extent such option is exercised, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage of option shares as the number of Shares to be
purchased by said Underwriter shown in the foregoing table bears to the total
number of Shares initially offered by the Underwriters hereby.
Each of the Company and the Selling Stockholder has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act. The Company
has agreed to indemnify AL&C and its directors, officers, affiliates and
controlling persons with respect to certain liabilities arising out of the
Offering. In all cases, the indemnity includes indemnification for matters
arising under the federal securities laws.
Conning & Company provides the Company and Insurance Subsidiaries with
investment advisory, record-keeping and related services pursuant to an
agreement that is annually renewable in June. For services rendered during 1995,
the Company paid Conning & Company approximately $547,000.
The Company has agreed, for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives not to (i)
offer, sell, contract to sell, or grant any option to purchase or otherwise
dispose of any shares of Common Stock other than pursuant to any employee or
director stock-based plans, or (ii) file any registration statement under the
Securities Act with respect to shares of Common Stock other than pursuant to any
employee or director stock-based plans.
45
<PAGE> 47
CERTAIN LEGAL MATTERS
Certain legal matters in connection with the offering of the Shares made
hereby will be passed upon for the Company by Dewey Ballantine, 1301 Avenue of
the Americas, New York, New York. James A. FitzPatrick, Jr., Secretary of the
Company, is a member of Dewey Ballantine. From time to time, Dewey Ballantine
represents Donaldson, Lufkin & Jenrette Securities Corporation. Certain legal
matters in connection with the offering of the Shares made hereby will be passed
upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited
liability partnership including professional corporations, 125 West 55th Street,
New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company
incorporated by reference or appearing in the Company's Annual Report (Form
10-K) for the year ended December 31, 1995, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon incorporated by
reference or appearing therein and incorporated herein by reference. Such
consolidated financial statements and schedule are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
46
<PAGE> 48
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 10
Price Range of Common Stock
and Dividends...................... 14
Capitalization....................... 15
Use of Proceeds...................... 15
Selected Consolidated Historical
Financial Data..................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 27
Management........................... 36
Business Relationship with AC&S...... 39
Recent Developments.................. 42
Selling Stockholder.................. 43
Shares Eligible for Future Sale...... 43
Underwriting......................... 45
Certain Legal Matters................ 46
Experts.............................. 46
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
May , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 49
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the Common
Stock, other than underwriting discounts and commissions, a portion of which
will be paid by each of the Company and the Selling Stockholder, are estimated
(other than with respect to the SEC Registration Fee and the NASD Filing Fee) to
be as follows:
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 26,073.28
NASD Filing Fee......................................................... 8,061.25
Blue Sky fees and expenses (including fees of counsel).................. 15,000.00
Accountants fees and expenses........................................... 30,000.00
Legal fees and expenses................................................. 90,000.00
Printing expenses....................................................... 150,000.00
-----------
Total......................................................... $319,134.53
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. The Registrant's Certificate of Incorporation
limits the liability of the Registrant's directors to the Registrant or its
stockholders to the fullest extent permitted by the Delaware statute as in
effect from time to time. Specifically, directors of the Registrant will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in the Delaware law, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Certificate of Incorporation of the Registrant provides that the
Registrant shall indemnify its officers and directors and former officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, the Registrant has the power to
indemnify any person who was or is a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding (other
than an action by or in the right of the Registrant) by reason of the fact that
he or she is or was a director, officer, employee, or agent of the Registrant,
against any and all expenses, judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if such person acted in good
faith and in a manner he or she reasonably believed to be in the best interest,
or not opposed to the best interest, of the Registrant and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
Registrant as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
The Company's officers and directors are also covered by a directors and
officers liability insurance policy issued by a third party. Additionally,
Joseph P. Kiernan serves on the Board of Directors at the request of The Aetna
Casualty and Surety Company ("AC&S") and is entitled to indemnification by AC&S
under certain circumstances in accordance with Connecticut law.
II-1
<PAGE> 50
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of Executive Risk Inc.,
incorporated herein by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 (No. 33-70820) of the Company (herein the "S-1 Registration
Statement").
3.2 -- Restated Bylaws of Executive Risk Inc., incorporated herein by reference to
Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994.
4.1 -- Rights Agreement between Executive Risk Inc. and Mellon Bank, N.A., as Rights
Agent, incorporated by reference to Exhibit 4.2 to the S-1 Registration
Statement.
4.2 -- Amendment, dated as of April 8, 1996, to Rights Agreement between Executive
Risk Inc. and Mellon Bank, N.A., as Rights Agent.
5.1* -- Opinion of Dewey Ballantine.
10.1 -- Exchange Agreement, dated as of January 1, 1994, by and among Executive Re
Inc., Executive Risk Inc. and The Aetna Casualty and Surety Company,
incorporated herein by reference to Exhibit 10.1 to the S-1 Registration
Statement.
10.2 -- Agreement and Plan of Merger by and among Executive Re Inc., Executive Risk
Inc. and Executive Re Holdings Inc., incorporated herein by reference to
Exhibit 10.2 to the S-1 Registration Statement.
10.3 -- Stock Purchase Option between Executive Risk Inc. and The Aetna Casualty and
Surety Company, incorporated herein by reference to Exhibit 10.3 to the S-1
Registration Statement.
10.4 -- Amended and Restated Agency and Insurance Services Agreement by and among The
Aetna Casualty and Surety Company, Executive Risk Inc. and Executive Risk
Management Associates, incorporated herein by reference to Exhibit 10.4 to the
S-1 Registration Statement.
10.5 -- Amended and Restated Quota Share Reinsurance Agreement between The Aetna
Casualty and Surety Company and Executive Re Indemnity Inc., incorporated
herein by reference to Exhibit 10.5 to the S-1 Registration Statement.
10.6 -- Securityholders' Agreement among Executive Risk Inc., The Aetna Casualty and
Surety Company and the persons listed on Annex B thereto, incorporated herein
by reference to Exhibit 10.6 to the S-1 Registration Statement.
10.7 -- Credit Agreement, dated as of November 9, 1994, among Executive Risk Inc., the
Banks signatory thereto and The Chase Manhattan Bank, N.A. as Agent,
incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q for the period ended September 30, 1994.
10.8 -- Revolving Credit Agreement, dated as of November 9, 1994, among Executive Risk
Inc., the Banks signatory thereto and The Chase Manhattan Bank, N.A. as Agent,
incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form
10-Q for the period ended September 30, 1994.
</TABLE>
II-2
<PAGE> 51
<TABLE>
<C> <C> <S>
10.9 -- Agreement, dated as of June 18, 1993, by and among Executive Re Indemnity
Inc., Executive Re Inc., Executive Re Specialty Insurance Company and Conning
& Company, incorporated herein by reference to Exhibit 10.13 to the S-1
Registration Statement.
10.10 -- Joint Venture Agreement, dated January 21, 1993, between Executive Re Inc. and
Union des Assurance de Paris-IARD, incorporated herein by reference to Exhibit
10.17 to the S-1 Registration Statement.
10.11 -- Agreement for Purchase and Sale of Real Estate, dated as of July 22, 1994, by
and between Stephen L. Owens and Executive Re Indemnity Inc., incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ended September 30, 1994.
10.12 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Robert H. Kullas, incorporated herein by reference to Exhibit
10.13 to Annual Report on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K").
10.13 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Stephen J. Sills, incorporated herein by reference to Exhibit
10.14 of the 1994 10-K.
10.14 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Robert V. Deutsch, incorporated herein by reference to Exhibit
10.15 to the 1994 10-K.
10.15 -- Executive Risk Inc. Nonqualified Stock Option Plan, incorporated herein by
reference to Exhibit 10.23 to the S-1 Registration Statement.
10.16 -- Executive Risk Inc. Employee Incentive Nonqualified Stock Option Plan,
incorporated herein by reference to Exhibit 10.24 to the S-1 Registration
Statement.
10.17 -- Executive Risk Inc. IPO Stock Compensation Plan, incorporated herein by
reference to Exhibit 10.25 to the S-1 Registration Statement.
10.18 -- Executive Risk Inc. Incentive Compensation Plan, incorporated herein by
reference to Exhibit 10.19 to the 1994 10-K.
10.19 -- Executive Risk Inc. Retirement Plan, incorporated herein by reference to
Exhibit 10.27 to the S-1 Registration Statement.
10.20 -- Executive Risk Inc. Nonemployee Directors Stock Option Plan, incorporated by
reference to Exhibit 10.21 to the 1994 10-K.
10.21 -- Purchase and Sale Agreement, dated as of April 13, 1995, by and between Tower
Business Park Associates and Executive Risk Indemnity Inc., incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ended March 31, 1995.
10.22 -- Employment Agreement, dated as of March 31, 1995, by and between the Company
and LeRoy A. Vander Putten, incorporated herein by reference to Exhibit 10.2
to Quarterly Report on Form 10-Q for the period ended March 31, 1995.
10.23 -- Supplemental Pension Agreement by and among the Company, Aetna Life and
Casualty Company and LeRoy A. Vander Putten, dated as of March 31, 1995,
incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form
10-Q for the period ended March 31, 1995.
10.24 -- Executive Risk Inc. Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 10-K").
10.25 -- Executive Risk Inc. Performance Share Plan, incorporated herein by reference
to Exhibit 10.26 to the 1995 10-K.
10.26 -- Stock Purchase Agreement, dated as March 22, 1996 by and among the Executive
Risk Inc., The Aetna Casualty and Surety Company and Aetna Life and Casualty
Company, incorporated by reference to Exhibit 2 to Current Report on Form 8-K
dated March 25, 1996 (the "March 1996 8-K").
10.27 -- Term Loan Agreement, dated as of March 26, 1996, among Executive Risk Inc.,
the Banks signatory thereto and The Chase Manhattan Bank (National
Association), as Agent, incorporated by reference to Exhibit 3(a) to the March
1996 8-K.
</TABLE>
II-3
<PAGE> 52
<TABLE>
<C> <C> <S>
10.28 -- Stock Pledge Agreement, dated as of March 26, 1996, between Executive Risk
Inc. and The Chase Manhattan Bank (National Association), as Agent,
incorporated by reference to Exhibit 3(b) to the March 1996 8-K.
10.29 -- Stock Pledge Agreement, dated as of March 26, 1996, between Executive Re Inc.
and The Chase Manhattan Bank (National Association), as Agent.
10.30 -- Revolving Credit Agreement, dated as of March 26, 1996, among Executive Risk
Inc., the Bank's signatory thereto and The Chase Manhattan Bank (National
Association), as Agent.
10.31 -- Amended and Restated Stock Purchase Agreement, dated as of March 22, 1996 by
and among Executive Risk Inc., The Aetna Casualty and Surety Company and Aetna
Life and Casualty Company.
11.1 -- Statement regarding computation of per share earnings, incorporated by
reference to Exhibit 11 to the 1995 10-K.
21.1 -- Subsidiaries of Executive Risk Inc., incorporated by reference to Exhibit 21.1
to 1995 10-K.
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Dewey Ballantine (included in Exhibit 5.1).
24.1 -- Power of Attorney (included in the signature page to the registration
statement).
28.1 -- Information from reports furnished to State insurance regulatory authorities.
</TABLE>
- ---------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes the following:
(a)(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) See Item 15.
II-4
<PAGE> 53
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hartford,
State of Connecticut, on May 9, 1996.
EXECUTIVE RISK INC.
By /s/ LEROY A. VANDER PUTTEN
---------------------------------
LeRoy A. Vander Putten, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on May 9, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
/s/ LEROY A. VANDER PUTTEN Chairman, Director and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
LeRoy A. Vander Putten
* Vice Chairman, Director and Chief Operating Officer
- ------------------------------------
Robert H. Kullas
* President, Director and Chief Underwriting Officer
- ------------------------------------
Stephen J. Sills
* Director
- ------------------------------------
Gary G. Benanav
* Director
- ------------------------------------
John G. Crosby
* Director
- ------------------------------------
Patrick A. Gerschel
* Director
- ------------------------------------
Peter Goldberg
* Director
- ------------------------------------
Joseph P. Kiernan
</TABLE>
II-5
<PAGE> 54
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
* Director
- ------------------------------------
Michael D. Rice
* Director
- ------------------------------------
Joseph D. Sargent
* Executive Vice President, Chief Financial Officer and
- ------------------------------------ Chief Actuary (Principal Financial and Accounting
Robert V. Deutsch Officer)
*By: LeRoy A. Vander Putten
- ------------------------------------
LeRoy A. Vander Putten
as Attorney-in-Fact
</TABLE>
II-6
<PAGE> 1
DRAFT
5/7/96
2,000,000 Shares
EXECUTIVE RISK INC.
Common Stock
UNDERWRITING AGREEMENT
May __, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Aetna Life and Casualty Company ("Aetna"), a Connecticut
insurance corporation and a stockholder of Executive Risk Inc., a Delaware
corporation (the "Company") proposes to sell an aggregate of 2,000,000 shares of
common stock, par value $.01 per share (the "Common Stock"), of the Company (the
"Firm Shares"), to the several underwriters named in Schedule I hereto (the
"Underwriters"). The Company proposes to issue and sell to the several
Underwriters not more than 300,000 additional shares of Common Stock of the
Company (the "Additional Shares"), if requested by the Underwriters as provided
in Section 2 hereof. The Firm Shares and the Additional Shares are herein
collectively called the "Shares". The Company and Aetna are sometimes
hereinafter collectively referred to as the "Sellers."
<PAGE> 2
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Conning
& Company shall act as representatives (the "Representatives") of the several
Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 (Registration No. 333-3956)
including a prospectus relating to the Shares, which registration statement may
be amended. The registration statement, as amended at the time when it becomes
effective, including any amendment to the registration statement filed pursuant
to Rule 462(b) under the Act increasing the size of the offering registered
under the Act and information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A (or Rule 434) under
the Act (and including, in each case, all documents incorporated by reference),
is hereinafter referred to as the "Registration Statement;" and the prospectus
in the form first used to confirm sales of Shares is hereinafter referred as the
"Prospectus."
2. Agreements to Sell and Purchase. Upon the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, Aetna hereby agrees to sell to the Underwriters the Firm
Shares, at a price per share of $______ per share (the "Purchase Price"), and
each Underwriter hereby agrees, severally and not jointly, to purchase from
Aetna, at the Purchase Price, the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may determine)
set forth opposite the name of such Underwriter in Schedule I.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
issue and sell to the Underwriters, and the Underwriters shall have the right to
purchase, severally and not jointly, from the Company, up to an aggregate of
300,000 Additional Shares at the Purchase Price. Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. The Underwriters may exercise their right
to purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company within 30 days after the date of this
Agreement. The Representatives shall give any such notice on behalf of the
Underwriters and such notice shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof. The date specified in any such notice shall be
-2-
<PAGE> 3
a business day (i) no earlier than the Closing Date (as hereinafter defined),
(ii) no later than ten business days after such notice has been given and (iii)
no earlier than two business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Additional Shares to be purchased from the Company as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I bears
to the total number of Firm Shares purchased by such Underwriter from Aetna.
Aetna hereby agrees, and the Company shall, concurrently with the
execution of this Agreement, deliver an agreement executed by each of the
directors and executive officers of the Company pursuant to which each such
person agrees, not to directly or indirectly offer, sell, contract to sell,
grant any option to purchase, or otherwise dispose of any capital stock of the
Company or any securities convertible into or exercisable or exchangeable for
such capital stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any such capital stock,
except to the Underwriters pursuant to this Agreement, for a period of 180 days
after the date of the Prospectus, without the prior written consent of the
Representatives (the "Lock-up"), and except any transfers of such capital stock
pursuant to bona fide gifts whereby the transferee agrees in writing to be bound
by the Lock-up.
3. Terms of Public Offering. The Sellers are advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment
for the Firm Shares shall be made at 10:00 A.M., New York City time, on the
third or fourth business day, unless otherwise permitted by the Commission
pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (the "Closing Date") following the date of the public offering,
at the offices of LeBoeuf, Lamb Greene & MacRae, L.L.P., 125 West 55th Street,
New York, New York 10019 against payment therefor by wire transfer or by
certified or official bank check or checks in Federal (same day) funds drawn to
the order of Aetna. The Closing Date and the location of
-3-
<PAGE> 4
delivery of and the form of payment for the Firm Shares may be
varied by agreement between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at 10:00 A.M., New York City
time, at such place in New York, New York as the Representatives shall designate
on the date specified in the applicable exercise notice given by the
Representatives pursuant to Section 2 (the "Option Closing Date"), against
payment of the purchase price therefor by wire transfer or by certified or
official bank check or checks in Federal (same day) funds drawn to the order of
the Company. Any such Option Closing Date and the location of delivery of and
the form of payment for such Additional Shares may be varied by agreement
between the Representatives and the Company.
Aetna has prior to the date hereof surrendered its certificates
representing the Firm Shares, along with fully executed stock powers, to the
Company. Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or the Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or the Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or the Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by wire
transfer or certified or official bank checks payable in Federal (same day)
funds to the order of the applicable Sellers.
5. Agreements of the Company. The Company agrees with you as follows:
(a) As soon as practicable after the execution and delivery of this
Agreement, the Company will file (i) if the Registration Statement is not
yet effective, an amendment to the Registration Statement or (ii) if the
Registration Statement is already effective, a post-effective amendment to
the Registration Statement, if necessary, pursuant to Rule 430A under the
Act. The Company will use its best efforts to cause the Registration
Statement or such post-effective amendment to become effective at the
earliest possible time. The Company will comply fully and in a timely manner
with the applicable provisions of Rules 424 and 430A under the Act.
-4-
<PAGE> 5
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing, (i) when the Registration Statement has
become effective (if such Registration Statement has not become effective
prior to the execution of this Agreement), if and when any Prospectus is
filed with the Commission pursuant to Rule 424 under the Act and when any
post-effective amendment to the Registration Statement becomes effective,
(ii) of any request by the Commission for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for additional
information, (iii) if and when it becomes aware of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the issuance by any state securities commission or
other regulatory authority of any order suspending the qualification or
exemption from qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, and
(iv) during the period referred to in paragraph (f) below, if and when it
becomes aware of any material change in the business, prospects, operations,
properties, net worth, results of operations or financial condition of the
Company and its subsidiaries (including, for the purposes of this Agreement,
any Subsidiary (as hereinafter defined)), taken as a whole, or of the
happening of any event which makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading in any
material respect. If at any time the Commission shall issue any stop order
of which the Company becomes aware suspending the effectiveness of the
Registration Statement or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Shares, the Company will make every
reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
(c) The Company will furnish to you, without charge, five signed copies
of the Registration Statement as first filed with the Commission and of each
amendment to it, including all exhibits filed therewith or incorporated by
reference therein, and will furnish to you and each Underwriter designated
by you such number of conformed copies of the Registration Statement as so
filed and of each amendment to it, without exhibits, as you may reasonably
request.
-5-
<PAGE> 6
(d) The Company will not (i) file any amendment or supplement to the
Registration Statement, whether before or after the time when the
Registration Statement becomes effective, or make any amendment or
supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably and timely object or (ii) during
such period as, in the judgment of counsel for the Underwriters, a
Prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
without delivering a copy of such information, documents or reports to you,
as the Representatives, prior to, concurrently with or immediately after
such filing. The Company will prepare and file with the Commission, promptly
upon your reasonable request, any amendment to the Registration Statement or
any amendment or supplement to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares as determined by
the Company and the Representatives. The Company will use its best efforts
to cause any such amendment or supplement to become effective as promptly as
possible. In the event that the Company and you, as the Representatives,
agree that the Prospectus should be amended or supplemented, the Company, if
requested by you, will promptly issue a press release announcing or
disclosing the matters to be covered by the proposed amendment or
supplement.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have
reasonably requested, copies of each form of preliminary prospectus. The
Company consents to the use, in accordance with the provisions of the Act
and with the securities, insurance securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Underwriters
and by all dealers to whom the Shares may be sold, prior to the date of the
Prospectus, of each preliminary prospectus.
(f) Promptly after the Registration Statement becomes effective, and
from time to time thereafter during such period as in the judgment of
counsel for the Underwriters a prospectus is required by law to be delivered
in connection with sales by an Underwriter or a dealer, the Company will
furnish without charge to each Underwriter and such dealers as you shall
specify as many copies of the Prospectus (and of each amendment or
supplement thereto) as such Underwriter or dealer may reasonably request.
The Company consents to the use of the Prospectus and any amendment or
supplement
-6-
<PAGE> 7
thereto by the Underwriters and by all dealers to whom the Shares may be
sold, both at the time of the offering or sale of the Shares and for such
period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith.
(g) If during the period specified in paragraph (f) any event shall
occur as a result of which, in the judgment of counsel for the Underwriters,
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if it is
necessary to amend or supplement the Prospectus to comply with any law, the
Company will forthwith prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in the
Prospectus, as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with law, and to furnish without charge to each
Underwriter and to such dealers as you shall specify, such number of copies
thereof as such Underwriter or dealers may reasonably request.
(h) Prior to any public offering of the Shares, the Company will
cooperate with you and with counsel for the Underwriters in connection with
the registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the securities, Blue Sky or
insurance laws governing the offer and sale of securities of such
jurisdictions as you may request, to continue such qualification in effect
so long as required for distribution of the Shares and to file such consents
to service of process or other documents as may be necessary in order to
effect such registration or qualification.
(i) The Company will make generally available to its stockholders as
soon as reasonably practicable, but not later than 60 days after the close
of the period covered thereby, an earnings statement covering a period of at
least twelve months beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration
Statement which shall satisfy the provisions of Section 11(a) of the Act and
Rule 158 promulgated thereunder.
(j) During the period of five years after the date of this Agreement,
the Company will (i) mail as soon as reasonably practicable after the end of
each fiscal year to the record holders of the Common Stock a financial
report of
-7-
<PAGE> 8
the Company and the Subsidiaries on a consolidated basis, all such financial
reports to include a consolidated balance sheet, a consolidated statement of
operations, a consolidated statement of cash flows and a consolidated
statement of shareholders' equity as of the end of and for such fiscal year,
together with comparable information as of the end of and for the preceding
year, certified by independent certified public accountants, and (ii) mail
and make generally available as soon as practicable after the end of each
quarterly period (except for the last quarterly period of each fiscal year)
to such holders, an unaudited consolidated balance sheet, an unaudited
consolidated statement of operations and an unaudited consolidated statement
of cash flows as of the end of and for such period, and for the period from
the beginning of such year to the close of such quarterly period, together
with comparable information for the corresponding periods of the preceding
year.
(k) During the five years after the date of this Agreement, the Company
will furnish without charge to you, and, upon request, to each of the other
Underwriters, as soon as available, a copy of each report or other publicly
available information of the Company mailed to the holders of Common Stock
or filed with the Commission and such other non-confidential information
concerning the Company and the Subsidiaries as you may reasonably request.
(l) Aetna and the Company will pay pro rata, in proportion to the
number of shares of Common Stock sold by each of them, all costs, expenses,
fees and taxes incident to (i) the preparation, printing, filing and
distribution under the Act of the Registration Statement (including
financial statements and exhibits), each preliminary prospectus and all
amendments and supplements to any of them, (ii) the preparation, printing,
filing and delivery of the Prospectus and all amendments or supplements
thereto, (iii) the printing and delivery of this Agreement, the Preliminary
and Supplemental Blue Sky Memoranda and all other agreements printed and
delivered in connection with the offering of the Shares (including in each
case any reasonable disbursements of counsel for the Underwriters relating
to such printing and delivery), (iv) the registration with the Commission,
and the issuance and delivery by the Company, and the delivery by Aetna, of
the Shares, (v) the registration or qualification of the Shares for offer
and sale under the securities, Blue Sky or insurance laws governing the
offer and sale of securities of the several states (including in each case
the reasonable fees and disbursements of counsel for the Underwriters
-8-
<PAGE> 9
relating to such registration or qualification and memoranda relating
thereto), (vi) furnishing such copies of the Registration Statement, the
Prospectus and any preliminary prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the
offering or sale of the Shares by the several Underwriters or by dealers to
whom the Shares may be sold, (vii) filings and clearance with the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
offering, and (viii) the performance by the Sellers of their other
obligations under this Agreement (including, without limitation, the fees of
the Company's transfer agent and registrar, the cost of its personnel and
other internal costs, the cost of printing and engraving the certificates
representing the Shares and all expenses and taxes incident to the sale and
delivery of the Shares to be sold to the Underwriters other than any
transfer taxes on resales by the Underwriters); but excluding except as
expressly provided in clauses (iii) and (v) above, the fees and expenses of
counsel to the Underwriters.
(m) From the date hereof and for a period of 180 days after the date of
the Prospectus, the Company will not directly or indirectly offer, sell,
contract to sell, grant any option for the sale of, otherwise dispose of,
file with the Commission a registration statement under the Act to register,
or announce the sale or offering of, any additional shares of its capital
stock or any security convertible into or exchangeable or exercisable for
its capital stock without your prior written consent; provided, however,
that the foregoing shall not apply to (i) the grant of options to purchase
shares of Common Stock to employees, officers or directors of the Company
pursuant to any stock option plan of the Company existing on the date hereof
(the "Stock Option Plans"), (ii) the issuance of shares of Common Stock
pursuant to the exercise of options granted under any of the Stock Option
Plans, (iii) the issuance of shares of Common Stock pursuant to the exercise
of options granted to former directors of ERI prior to the date hereof, (iv)
the grant of performance share units under the Company's Performance Share
Plan ("PSP"), (v) the grant of stock units under the Company's Stock
Incentive Plan ("SIP"), (vi) the issuance of shares of Common Stock pursuant
to the PSP or the SIP or (vii) any registration statement filed under the
Act in respect of securities to be issued pursuant to any of the Company's
Stock Option Plans, the PSP or the SIP.
(n) The Company will use its best efforts to maintain the inclusion of
the Common Stock on the NYSE for a period of three years after the effective
date of the Registration
-9-
<PAGE> 10
Statement; provided that any acquisition of an ownership interest in
the Company resulting in the removal of the Common Stock from the NYSE
shall not constitute a breach of the agreement contained in this
Section 5(n).
(o) The Company will apply the net proceeds from the sale of
the Additional Shares in accordance with the description set forth in
the Prospectus under the caption "Use of Proceeds."
(p) The Company will use its best efforts to satisfy all
conditions precedent to the delivery of the Shares.
6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Act; and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and
warranties set forth in this paragraph (b) do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to (i) any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein or
(ii) Aetna under the caption "Selling Stockholder" furnished to the
Company (with a copy to the Representative) in writing by Aetna
expressly for use therein.
(c) The documents incorporated by reference in the
Registration Statement or the Prospectus pursuant to Item 12 of Form
S-3 under the Act, at the time they were filed or last amended or
hereafter are filed or amended, as the case may be, with the
Commission, complied and will comply in all
-10-
<PAGE> 11
material respects with the requirements of the Exchange Act and, when
read together and with the other information in the Prospectus, at the
time the Registration Statement became or becomes effective and at the
Closing Date and the Option Closing Date, as the case may be, did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were or are made, not misleading; and any documents deemed
to be incorporated by reference in the Registration Statement or the
Prospectus, if and when they were or are filed with the Commission,
complied with or will comply in all material respects with the
requirements of the Exchange Act and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the representations and
warranties in this paragraph shall not apply to statements in or
omissions from the Registration Statement or the Prospectus (or any
supplement or amendment to them) made based upon and conforming with
information relating to any Underwriter furnished to the Company in
writing by or on behalf of any Underwriter through the Representatives
expressly for use therein.
(d) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, and each
Registration Statement filed pursuant to Rule 462(b) under the Act, if
any, complied when so filed in all material respects with the Act and
did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The Commission has not issued any order
preventing or suspending the use of any preliminary prospectus.
(e) Each corporation, partnership or other entity in which the
Company owns beneficially at least 50% of the outstanding ownership
interests is listed on Exhibit 21.1 to the Registration Statement. With
the exception of UAP Executive Partners, each of such entities is
referred to herein as a "Subsidiary" and all of such entities,
collectively, are referred to as the "Subsidiaries". The Company owns
100% of the outstanding capital stock of Executive Re Inc., a Delaware
corporation ("ERI"), and 70% of the general partnership interests in
Executive Risk Management Associates, a Connecticut general partnership
-11-
<PAGE> 12
("ERMA"), free and clear of all liens, claims, charges, options,
restrictions or other encumbrances of any type or nature, except, with
respect to the stock of ERI, for the lien of The Chase Manhattan Bank
(National Association), as Agent (the "Agent"), pursuant to the Stock
Pledge Agreement dated as of March 26, 1996 between the Company and the
Agent entered into in connection with that certain Term Loan Agreement
dated as of March 26, 1996 among the Company, the Banks signatory
thereto and the Agent. ERI owns 100% of the outstanding capital stock
of Executive Re Indemnity, Inc., a Delaware corporation ("ERII"), 100%
of the outstanding capital stock of Talcott Services Corporation, a
Delaware corporation ("Talcott"), 100% of the issued share capital of
Executive Risk Limited, a company incorporated under the laws of the
United Kingdom, 100% of the outstanding capital stock of Executive Risk
N.V., a company incorporated under the laws of the Netherlands, 50% of
the outstanding capital stock of UAP Executive Partners, a French
corporation ("UPEX"), and 30% of the general partnership interests in
ERMA, free and clear of all liens, claims, charges, options,
restrictions or other encumbrances of any type or nature except, in the
case of the stock of ERII, for the lien of The Chase Manhattan Bank
(National Association), as Agent (the "Agent"), pursuant to the Stock
Pledge Agreement dated as of March 26, 1996 between ERI and the Agent
entered into in connection with that certain Term Loan Agreement dated
as of March 26, 1996 among the Company, the Banks signatory thereto and
the Agent. ERII owns 100% of the outstanding capital stock of Executive
Re Specialty Insurance Company, a Connecticut corporation ("ERSIC"),
free and clear of all liens, claims, charges, options, restrictions or
other encumbrances of any type or nature. Except as set forth above,
neither the Company nor any Subsidiary (i) owns equity securities of
any other corporation representing in excess of 5% of the outstanding
capital stock of such corporation or (ii) is a partner in any
partnership other than ERMA.
(f) The Company and each Subsidiary (other than ERMA) (i) is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it was organized and has all
requisite power and authority to conduct its business as it is
currently being conducted and to own, lease and operate its properties;
(ii) is duly qualified as a foreign corporation authorized to transact
business in, and is in good standing in, each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects,
-12-
<PAGE> 13
operations, properties, net worth, results of operations or condition
(financial or otherwise) of the Company and the Subsidiaries taken as a
whole; ERMA is a duly organized and validly existing general
partnership and has all requisite power and authority to conduct its
business as it is currently being conducted and to own, lease and
operate its properties. The only partners in ERMA are the Company and
ERI.
(g) The Company and each of the Subsidiaries (i) holds such
licenses, certificates, permits, franchises and authorizations from
insurance departments and other governmental or regulatory authorities
("permits") (including, without limitation, insurance licenses from the
insurance regulatory agencies of the various states where it conducts
business (the "Insurance Licenses")) which are necessary to own, lease
and operate its respective properties and to the conduct of its
businesses as described in the Prospectus, except to the extent the
failure to hold any such permits or Insurance Licenses (either
singularly or in the aggregate) would not have a material adverse
effect on the business, prospects, operations, properties, net worth,
results of operations or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole and (ii) to the
Company's knowledge has fulfilled and performed all material
obligations necessary to maintain such permits and the Insurance
Licenses. There has been, and there is, no pending or, to the knowledge
of the Company, threatened action, suit, proceeding, investigation or
event that may reasonably be expected to lead to the revocation,
termination, suspension or any other material impairment of the rights
of the holder of any such permit (including, without limitation, the
Insurance Licenses); and except as disclosed in the Prospectus, the
Company is not aware of any order or decree of an insurance regulatory
agency or body impairing, restricting or prohibiting the payment of
dividends by any of the Subsidiaries of the Company to its parent.
(h) All of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of the Company have been,
as applicable, duly authorized and validly issued and, in the case of
shares of capital stock, are fully paid and non-assessable, and all
such shares and other ownership interests owned of record by the
Company or by a Subsidiary of the Company are owned free and clear of
any security interest, lien, claim, encumbrance or adverse interest of
any nature, except as set forth in paragraph (e) above.
-13-
<PAGE> 14
(i) The partnership agreement of ERMA has been duly executed
and delivered by each of the parties thereto and is a valid and binding
agreement enforceable in accordance with its terms except as (i) rights
to indemnity and contribution hereunder may be limited by applicable
law or principles of public policy, (ii) the enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors'
rights generally and (iii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. Other than as described in the
Prospectus, there are no outstanding warrants, rights or options to
acquire, or instruments convertible into or exchangeable for, any
shares of capital stock or other equity interest in the Company or any
of the Subsidiaries.
(j) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by Aetna) have been duly authorized,
validly issued, and are fully paid and non-assessable; the Additional
Shares to be issued and sold by the Company hereunder, if any, have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable; no holder of the Shares will be
subject to personal liability by reason of being such a holder; and
such Shares are not subject to any preemptive rights.
(k) The authorized and outstanding capital stock of the
Company, including the Common Stock, conforms in all material respects
to the description thereof incorporated by reference in the Prospectus.
(l) Except as described in the Prospectus and except to the
extent that any of the following would not have a material adverse
effect on the business, prospects, operations, properties, net worth,
results of operations or financial condition of the Company and the
Subsidiaries, taken as a whole, neither the Company nor any of the
Subsidiaries is (i) in violation of its respective charter or by-laws,
or other organizational documents, (ii) in violation of any law,
ordinance, administrative or governmental rule or regulation applicable
to the Company or any of the Subsidiaries or any of their respective
properties, (iii) in violation of any judgment, injunction, order or
decree of any court, governmental agency or body (including, without
limitation, any insurance regulatory agency or body) or arbitrator
having jurisdiction over the
-14-
<PAGE> 15
Company or any of the Subsidiaries, or (iv) in default in the
performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any
other agreement, indenture, lease or instrument to which the Company or
any of the Subsidiaries is a party or by which it or any of the
Subsidiaries or their respective property is bound.
(m) No consent, approval, waiver, license, authorization,
order, filing, registration, qualification or other action of or with
any court, regulatory body, arbitrator, administrative agency or other
governmental agency or body (including, without limitation, any
insurance regulatory agency or body) is required for the issuance and
sale of the Additional Shares, if any, being sold by the Company or the
execution, delivery and performance of this Agreement, compliance by
the Company with all the provisions hereof or the consummation of the
other transactions contemplated hereby or by the Registration Statement
or for the use of the proceeds received by the Company, if any, from
such sale in the manner described under the caption "Use of Proceeds"
contained in the Prospectus, except such as have been obtained and made
under the Act and the Exchange Act, all of which have been or will be
obtained in accordance with this Agreement and as may be required under
the insurance securities laws or securities or Blue Sky laws of various
jurisdictions, and except to the extent that the failure to obtain such
would not have a material adverse effect on the business, prospects,
operations, properties, net worth, results of operations or financial
condition of the Company and the Subsidiaries, taken as a whole.
(n) The issuance and sale of the Additional Shares, if any, to
be sold by the Company under this Agreement and the application of the
net proceeds therefrom as described under the caption "Use of Proceeds"
contained in the Prospectus and the execution, delivery and performance
of this Agreement, compliance by the Company with all the provisions
hereof and the consummation of the transactions herein contemplated,
will not result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject, and will
not conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default (with notice or the
passage of time or both) under, (i) any statute, rule, regulation or
order of any governmental agency or body (including, without
-15-
<PAGE> 16
limitation, any insurance regulatory agency or body) or any court or
arbitrator, which is applicable to the Company or any Subsidiary or any
of their respective properties, (ii) any bond, debenture, note, other
evidence of indebtedness, agreement, indenture, lease or other
instrument to which the Company or any such Subsidiary is a party or by
which the Company or any such Subsidiary is bound or to which any of
the properties of the Company or any such Subsidiary is subject, or
(iii) the organizational documents of the Company or any such
Subsidiary except, in the case of clauses (i) and (ii), to the extent
that any such creation or imposition or any such breach, violation or
default would not have a material adverse effect on the business,
prospects, operations, properties, net worth, results of operations or
financial condition of the Company and the Subsidiaries, taken as a
whole.
(o) The Company is not (a) an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended (the "Investment Company
Act"), or (b) a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended (the "1935
Act").
(p) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act, except as provided in (i)
the Securityholders Agreement dated as of January 1, 1994 (the
"Securityholders Agreement") among the Company, The Aetna Casualty and
Surety Company ("AC&S") and the other persons named as parties therein
and (ii) the Stock Purchase Agreement (as defined in paragraph (oo) of
this Section 6).
(q) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company or any of the Subsidiaries, any brokerage or finder's fee or
other similar fee or commission as a result of any of the transactions
contemplated by this Agreement.
-16-
<PAGE> 17
(r) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company enforceable in accordance with its terms except as (i) rights
to indemnity and contribution hereunder may be limited by applicable
law or principles of public policy, (ii) the enforceability hereof may
be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors'
rights generally and (iii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(s) Except as described in the Prospectus (or in the documents
incorporated therein by reference), there are no outstanding: (i)
securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (ii) warrants,
rights or options to subscribe for or purchase from the Company any
such capital stock or any such convertible or exchangeable securities
or obligations, or (iii) obligations for the Company to issue such
shares, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or obligations.
(t) To the Company's knowledge, neither A.M. Best Company,
Inc. nor Standard & Poor's Corporation has pending, or has overtly
threatened, as applicable: (i) any downgrading in the ratings of the
Subsidiaries or (ii) any public announcement that its ratings of any of
the Subsidiaries are under surveillance or review.
(u) Subsequent to the dates as of which information is given
in the Registration Statement and the Prospectus, except as disclosed
therein: (i) neither the Company nor any of the Subsidiaries has
incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is
material to the Company and the Subsidiaries taken as a whole, (ii)
there has not been any change in the capital stock of the Company or
any payment of or declaration to pay any dividends other than regular
quarterly dividends on the Common Stock or any other distribution with
respect to the Company's capital stock, and (iii) there has not been
any material adverse change in the financial condition, business,
properties, prospects, net worth or results of operations or material
increase in the loss and loss adjustment expense reserves or any
material decrease in statutory surplus of the Company and the
Subsidiaries, taken as a whole.
-17-
<PAGE> 18
(v) The Shares have been duly authorized for listing on the
NYSE, subject in the case of the Additional Shares to official notice
of issuance.
(w) Except as otherwise set forth in the Prospectus (or in the
documents incorporated therein by reference), there are no material
pending legal or governmental actions, suits or proceedings to which
the Company or any of the Subsidiaries is a party or of which any of
their respective property is the subject, and, to the best of the
Company's knowledge, no such actions, suits or proceedings are
threatened or contemplated. No contract or document of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
is not so described or filed as required. The descriptions of the terms
of any such contracts or documents contained in the Registration
Statement or the Prospectus are correct in all material respects.
(x) Neither the Company nor any of the Subsidiaries has
violated any foreign, federal, state or local law or regulation
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), or any federal or state law relating to
discrimination in the hiring, promotion or pay of employees, or any
applicable federal or state wages and hours laws, or any provisions of
the United States Employee Retirement Income Security Act of 1974 and
the regulations and published interpretations thereunder ("ERISA"),
which in each case might result in any material adverse change in the
business, prospects, financial condition or results of operations of
the Company and the Subsidiaries, taken as a whole.
(y) Except as otherwise set forth in the Prospectus (or in
the documents incorporated therein by reference) or such as are not
material to the business, prospects, operations, properties, net worth,
results of operations or financial condition of the Company and the
Subsidiaries, taken as a whole, the Company and each of the
Subsidiaries has good and marketable title, free and clear of all
liens, claims, security interests, encumbrances and restrictions except
liens for taxes not yet due and payable, to all property and assets
described in the Registration Statement as being owned by it. All
material leases to which the Company or any of the Subsidiaries is a
party are binding on and enforceable against the Company or any such
Subsidiary, as the case may be, in all material respects and no default
on the part of the Company or any such Subsidiary, as the case
-18-
<PAGE> 19
may be, or, to the Company's knowledge, the other party thereto, has
occurred or is continuing thereunder, which might result in any
material adverse change in the business, prospects, financial condition
or results of operations of the Company and the Subsidiaries taken as a
whole, and the Company and the Subsidiaries enjoy peaceful and
undisturbed possession under all such leases to which any of them is a
party as lessee with such exceptions as do not materially interfere
with the use made by the Company or such Subsidiary.
(z) Ernst & Young has informed the Company that they are
independent public accountants with respect to the Company, as required
by the Act.
(aa) The financial statements, together with related schedules
and notes, forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto) or incorporated
therein by reference, present fairly the consolidated financial
position, results of operations, cash flows and changes in financial
position of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein and except that quarterly
financial statements contained in the Registration Statement are
subject to year-end adjustments; and the other financial and
statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto)
is, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and
records of the Company. The pro forma financial statements of the
Company and the Subsidiaries and the related notes thereto included in
the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
applicable requirements of Rule 11-02 of Regulation S-X promulgated
under the Act, have been properly compiled on the pro forma bases
described therein and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions or
circumstances referred to therein. The statutory financial statements
of ERII and ERSIC required or permitted to be prepared in accordance
with the insurance laws of the States of Delaware and Connecticut,
respectively (the "Insurance Laws") and the rules and regulations
promulgated
-19-
<PAGE> 20
thereunder, from which certain ratios and other statistical data
contained in the Registration Statement and the Prospectus have been
derived, have for each relevant period been prepared in conformity in
all material respects with the requirements of the Insurance Laws and
such rules and regulations and present fairly the information purported
to be shown.
(bb) The Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Additional
Shares, if any, to be sold by it to the Underwriters as provided
herein. The execution and delivery by the Company of this Agreement,
and the performance by the Company of its obligations hereunder
(including without limitation the issuance and sale by the Company of
the Shares), have been duly authorized by all necessary corporate
action on the part of the Company.
(cc) The form of certificate for the Shares conforms in all
material respects to the requirements of the Delaware General
Corporation Law and the NYSE.
(dd) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which might reasonably be
expected to, cause or result in the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or
resale of the Shares pursuant to the distribution contemplated by this
Agreement, and other than as permitted by the Act, the Company has not
distributed and will not distribute, prior to the later to occur of (i)
the Closing Date or the Option Closing Date and (ii) completion of the
distribution of the Shares, any prospectus or other offering material
in connection with the offering and sale of the Shares.
(ee) Each of the Company and the Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in all material respects
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles or statutory accounting principles, as the case may be, and
to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
-20-
<PAGE> 21
(ff) Each of the Company and the Subsidiaries owns or has
valid and adequate rights to use all patents, trademarks, trademark
registration, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in
the Prospectus as being owned by it or necessary for the conduct of its
respective business, free and clear of all liens, claims, security
interests encumbrances and restrictions that may materially interfere
with the conduct of its business, and neither the Company nor any of
the Subsidiaries is aware of any claim to the contrary or any challenge
by any other person to the rights of the Company and any of the
Subsidiaries with respect to the foregoing which would have a material
adverse effect on the business, prospects, operations, properties, net
worth, results of operations or financial condition of the Company and
the Subsidiaries taken as a whole.
(gg) Except as disclosed in the Registration Statement all
reinsurance treaties, contracts and agreements to which the Company or
any of the Subsidiaries is a party (including without limitation the
Amended and Restated Agency and Insurance Services Agreement dated as
of January 1, 1994, as amended (the "Agency Agreement"), among the
Company, AC&S and ERMA, and the Amended and Restated Quota Share
Reinsurance Agreement dated as of January 1, 1994, as amended (the
"Reinsurance Agreement"), between AC&S and ERII) are in full force and
effect and neither the Company nor any of the Subsidiaries is in
violation of, or in default in the performance, observance or
fulfillment of, any obligation, agreement, covenant or condition
contained therein, except where the failure to be in full force and
effect and except where any such violation or default would not have a
material adverse effect on the business, prospects, operations,
properties, net worth, results of operations or financial condition of
the Company and the Subsidiaries taken as a whole; neither the Company
nor any of the Subsidiaries has received any notice from any of the
other parties to such treaties, contracts or agreements which are
material to its business that such other party intends not to perform
in any material respect such treaty, contract or agreement, and the
Company and the Subsidiaries have no reason to believe that any of the
other parties to such treaties, contracts or agreements will be unable
to perform such treaty, contract, agreement or arrangement, except
where any such non-performance would not have a material adverse effect
on the business, prospects, operations, properties, net worth, results
of operations or financial condition of the Company and the
Subsidiaries taken as a whole.
-21-
<PAGE> 22
(hh) No relationship, direct or indirect, or agreement,
arrangement or understanding (including, without limitation, any voting
agreement), exists between or among the Company or any of the
Subsidiaries and any other party, which is required by the Act to be
described or incorporated by reference in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required.
(ii) Except to the extent that the failure with respect to the
following would not result in a material adverse effect on the
business, prospects, operations, properties, net worth, results of
operations, or financial condition of the Company and the Subsidiaries
taken as a whole, each of the Company and the Subsidiaries has
fulfilled its obligations, if any, under the minimum funding standards
of Section 302 of ERISA with respect to each "plan" (as defined in
ERISA and its regulations and published interpretations) in which
employees of the Company or the Subsidiaries are eligible to
participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such
regulations and published interpretations, and has not incurred any
unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such
plan under Title IV of ERISA.
(jj) All United States federal income tax returns of, and
assessments to, the Company and the Subsidiaries required by law to be
filed have been filed and have not been audited and all taxes shown by
such returns or otherwise assessed, which are due and payable, have
been paid, except assessments against which appeals have been or will
be promptly taken or which are being contested in good faith and as to
which adequate reserves have been provided. Each of the Company and the
Subsidiaries has filed all other tax returns that are required to have
been filed by it pursuant to applicable foreign, state, local or other
laws, except insofar as the failure to file such returns would not have
a material adverse effect on the business, prospects, operations,
properties, net worth, results of operations, or financial condition of
the Company and the Subsidiaries taken as a whole, and has paid all
taxes due pursuant to such returns or pursuant to any assessment
received by the Company or any Subsidiary, except for such taxes, if
any, as are being contested in good faith and as to which adequate
reserves have been provided. The charges, accruals and reserves on the
books of the Company and the Subsidiaries in respect of any income and
corporation tax liability for any years not finally determined are
adequate in the Company's
-22-
<PAGE> 23
reasonable judgment to meet any assessments or reassessments for
additional income tax for any years not finally determined, except to
the extent of any inadequacy that would not have a material adverse
effect on the business, prospects, operations, properties, net worth,
results of operations, or financial condition of the Company and the
Subsidiaries taken as a whole.
(kk) To the best knowledge of the Company, no labor problem
exists with its employees or with employees of the Subsidiaries or is
imminent that could reasonably be expected to have a material adverse
affect on the Company and the Subsidiaries taken as a whole.
(ll) No part of the proceeds of the sale of the Additional
Shares, if any, will be used for any purpose that violates the
provisions of any of Regulation G, T or X of the Board of Governors of
the Federal Reserve System or any other regulation of such Board of
Governors.
(mm) Except as disclosed in the Prospectus or the documents
incorporated by reference therein, the Subsidiaries have made no
material changes in their insurance reserving practices during the last
two years.
(nn) Any certificate signed by any officer of the Company or
any Subsidiary and delivered at any closing contemplated by Section 4
hereof to the Underwriters or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(oo) The representations and warranties of the Company
contained in the Amended and Restated Stock Purchase Agreement, dated
as of March 22, 1996 (the "Stock Purchase Agreement"), among the
Company, Aetna and AC&S are true and correct in all material respects
on the date hereof, except to the extent any such representation or
warranty was expressly made as of any other date, in which case such
representation and warranty was true and correct at such date, and
except to the extent that the failure to be true and correct would not
have a material adverse effect on the business, prospects, operations,
properties, net worth, results of the operations or financial condition
of the Company and the Subsidiaries, taken as a whole. The Stock
Purchase Agreement is a valid and binding agreement enforceable against
the Company and ERI in accordance with its terms except as (i) rights
to indemnity and contribution thereunder may be limited by applicable
law or principles of public policy, (ii) the enforceability thereof may
be
-23-
<PAGE> 24
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (iii) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
(pp) There are no pending or, to the Company's knowledge,
threatened claims, actions, suits or proceedings arising out of or in
connection with the consummation of the transactions contemplated by
the Stock Purchase Agreement.
(qq) The purchase by the Company of 1,225,000 shares of its
Class B Common Stock, par value $.01 per share, and 1,286,300 shares of
the Company's Common Stock from Aetna (the "Stock Repurchase") referred
to in the Prospectus under the caption "Recent Developments", and all
other transactions contemplated by the Stock Purchase Agreement that
are required to have been consummated prior to the date hereof have
been duly consummated as described in the Prospectus in compliance in
all material respects with applicable law, including without limitation
applicable federal and state securities laws.
7. Representations and Warranties of Aetna. Aetna represents
and warrants to each Underwriter that:
(a) Aetna is a corporation duly organized, validly existing in
a good standing under the laws of the jurisdiction in which it was
organized and has all requisite corporate power and authority to
conduct its business as it is currently being conducted and to own,
lease and operate its properties.
(b) Aetna has, and on the Closing Date will have, full legal
right, power and authority and any approval required by law (other than
any approval imposed by the applicable Federal and state securities and
Blue Sky laws) to enter into this Agreement and to sell, assign,
transfer and deliver the Firm Shares to be sold by Aetna in the manner
provided herein, and this Agreement has been duly authorized, executed
and delivered by Aetna and is a valid and binding agreement of Aetna
enforceable against Aetna in accordance with its terms except (i) as
rights to indemnity and contribution hereunder may be limited by
applicable law or principles of public policy, (ii) the enforceability
hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally
-24-
<PAGE> 25
and (iii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought.
(c) No consent, approval, waiver, license, authorization,
order, filing, registration, qualification or other action of or with
any court, regulatory body, administrative agency or other governmental
agency or body (including, without limitation, any insurance regulatory
agency or body) is required for the sale of the Shares to be sold by
Aetna or the execution, delivery and performance of this Agreement,
compliance by Aetna with all the provisions hereof or the consummation
of the other transactions contemplated hereby or by the Registration
Statement, except such as have been obtained and made under the Act and
the Exchange Act, all of which have been or will be obtained in
accordance with this Agreement, and as may be required under the
insurance securities laws or securities or Blue Sky laws of various
jurisdictions, and except to the extent that the failure to obtain the
same would not have a material adverse effect on the ability of Aetna
to perform its obligations under this Agreement, or that are otherwise
material in the context of the sale of the Firm Shares.
(d) The execution, delivery and performance by Aetna of this
Agreement, compliance by Aetna with all the provisions hereof and the
consummation by Aetna of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default (with notice or the passage
of time) under, (i) any statute, rule, regulation or order of any
governmental agency or body (including, without limitation, any
insurance regulatory agency or body) or any court or arbitrator which
is applicable to Aetna or any subsidiary thereof or any of their
respective properties, or (ii) any bond, debenture, note, other
evidence of indebtedness, agreement, indenture, lease or other
instrument to which Aetna or any such subsidiary is a party or by which
Aetna or any such subsidiary is bound or to which any of the properties
of Aetna or any such subsidiary is subject, or (iii) the
organizational documents of Aetna or any such subsidiary, except, in
the case of clauses (i) and (ii), for any conflicts, breaches,
violations or defaults that would not have a material adverse effect on
the ability of Aetna to perform its obligations under this Agreement,
or that are not otherwise material in the context of the sale of the
Firm Shares,
-25-
<PAGE> 26
(e) Aetna is not (a) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act or (b) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company" within the
meaning of the 1935 Act.
(f) There are no pending legal or governmental actions, suits
or proceedings to which Aetna or any of its subsidiaries is a party or
of which any of their respective property is the subject relating to
the sale of Shares by Aetna under this Agreement, and, to the best of
Aetna's knowledge, no such actions, suits or proceedings are threatened
or contemplated. No contract or document pertaining to Aetna of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
is not so described or filed as required. The descriptions of the terms
of any such contracts or documents contained in the Registration
Statement or the Prospectus are correct in all material respects.
(g) Aetna is the lawful owner of the Firm Shares to be sold by
it pursuant to this Agreement and has, and on the Closing Date will
have, valid and unencumbered title to such Shares, and Aetna has the
corporate power and authority to enter into this Agreement and to sell,
assign, transfer and deliver such Firm Shares to you hereunder, and the
execution and delivery of this Agreement, and the performance by it of
its obligations hereunder (including without limitation the sale of the
Firm Shares to be sold thereby), have been duly authorized by all
necessary corporate action on the part of Aetna; and upon the delivery
of and payment for the Firm Shares hereunder, the several Underwriters
will acquire valid and unencumbered title to the Firm Shares purchased
by them from Aetna, free and clear of any and all restrictions on
transfer, liens, charges, encumbrances, security interests and claims
whatsoever, assuming such Underwriters acquire such shares without
notice of any adverse claims; and Aetna has not entered into any
agreement with any third party or taken any other action the effect of
which would be to subject the Firm Shares to any restrictions on
transfer, lien, charge, encumbrance, security interest or any other
claim whatsoever which has not been legally and validly waived.
(h) The information pertaining to Aetna contained in the
Registration Statement under the captions "Selling Stockholder,"
"Business Relationship with AC&S," "Recent
-26-
<PAGE> 27
Developments" and as otherwise specifically identified in Exhibit A
hereto, does not, and will not on the Closing Date, contain
any untrue statement of material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(i) Aetna has not taken and will not take, directly or
indirectly, any action designed to, or which might reasonably be
expected to, cause or result in the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or
resale of the Shares pursuant to the distribution contemplated by this
Agreement, and other than as permitted by the Act, Aetna has not
distributed and will not distribute, prior to the later to occur of (i)
the Closing Date or the Option Closing Date and (ii) completion of the
distribution of the Shares, any prospectus or other offering material
in connection with the offering and sale of the Shares.
(j) At any time during the period described in paragraph 5(f)
hereof, if there is any change in the information referred to in
paragraph 7(h) above, Aetna shall immediately notify you of such
change.
8. Indemnification and Contribution. (a) The Company will
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims, damages,
judgments, or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, only insofar as such losses, claims,
damages, judgments or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, the Prospectus or any
amendment or supplement thereto, or any preliminary prospectus, or arise out of
or are based upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, judgment, liability or
action as such expenses are incurred; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage,
judgment or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in
-27-
<PAGE> 28
conformity with written information furnished to the Company by any Underwriter
relating to the Underwriter through you, or by Aetna under the caption "Selling
Stockholder," in either case expressly for use therein; provided, however, that
the foregoing indemnity with respect to any preliminary prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), other than the documents incorporated by reference therein, was timely
made available by the Company to such Underwriter and was not delivered by or on
behalf of such Underwriter to such person, if required by the Act so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect contained in such preliminary prospectus giving rise
to such losses, claims, damages or liabilities.
(b) Aetna will indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages, judgments or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise, only
insofar as such losses, claims, damages, judgments or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
the Prospectus or any amendment or supplement thereto, or any preliminary
prospectus, or arise out of or are based upon any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent that such untrue statement or alleged untrue statement or omission
or alleged omission was contained in those specific sections of the prospectus
describing Aetna and/or AC&S and/or the business relationships of Aetna and/or
AC&S with the Company and its Subsidiaries as identified in Exhibit A hereto,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, judgment, liability or action as such expenses are
incurred; provided, however, that the foregoing indemnity with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages or liabilities
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if Aetna shall have furnished any
-28-
<PAGE> 29
amendments or supplements thereto), other than the documents incorporated by
reference therein, was timely made available by Aetna to such Underwriter and
was not delivered by or on behalf of such Underwriter to such person, if
required by the Act so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect contained in such
preliminary prospectus giving rise to such losses, claims, damages or
liabilities. Notwithstanding any other provision of this Agreement, the
aggregate liability of Aetna for indemnification or contribution under this
Agreement shall not exceed an amount equal to the proceeds of the sale of the
Shares being sold by Aetna after deduction of underwriting discounts and
commissions and all costs and expenses required to be paid by it under this
Agreement.
(c) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each officer of the Company who signs
the Registration Statement, each director of the Company, Aetna and each person,
if any, who controls the Company or Aetna within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, judgments or liabilities to which the Company, such officers
and directors or Aetna may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained or incorporated by reference in the Registration
Statement, the Prospectus or any amendment or supplement thereto, or any
preliminary prospectus, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or incorporated by reference therein or necessary to make the statements
therein or incorporated by reference therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter, or by such Underwriter through you, expressly for use in the
preparation thereof, and will reimburse the Company, such officers and
directors, Aetna or any such control person for any legal or other expenses
reasonably incurred by the Company, such officers and directors, Aetna or any
such control person in connection with investigating or defending any such loss,
claim, damage, judgment, liability or action as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to
-29-
<PAGE> 30
be made against an indemnifying party under subsection (a), (b) or (c) above,
notify the indemnifying party of the commencement thereof and the indemnifying
party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party and payment of all fees and
expenses; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a), (b) or (c) above. An indemnified party shall have the
right to employ separate counsel in any such action or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the employment of
such counsel has been specifically authorized in writing by the indemnifying
parties, (ii) the indemnifying parties have failed promptly to assume the
defense and employ counsel reasonably satisfactory to the indemnified party
(which payment of fees and expenses of separate counsel by the indemnifying
parties shall cease upon such assumption of defense by the indemnifying parties)
or (iii) the named parties to any such action or proceeding (including any
impleaded parties) include both the indemnified party and the indemnifying
parties and representation of both parties by the same counsel would be
inappropriate due to actual or potential differences between them (in which case
the indemnifying parties shall not have the right to assume the defense of such
action on behalf of such indemnified party), it being understood, however, that
the Company and Aetna shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons, which firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation and that all such fees and expenses shall be reimbursed as they are
incurred). The indemnifying party shall not be liable for any settlement of any
such action affected without the written consent of the indemnifying parties,
but if settled with a written consent of the indemnifying parties, or if there
is a final judgment with respect thereto or with respect to the indemnifying
parties' liability therefore, the indemnifying parties agree to indemnify and
hold harmless each indemnified party from and against any loss or liability by
reason of such settlement or judgment (if and to the extent required hereby).
The indemnifying party shall not, without the prior written consent of each
indemnified party affected thereby, effect any settlement of any pending or
threatened proceeding in which such indemnified party could have sought
indemnity hereunder, unless such settlement includes an unconditional release of
such indemnified party from all liability for which there is an indemnification
obligation hereunder.
-30-
<PAGE> 31
(e) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages, judgments or
liabilities referred to in subsection (a), (b), (c) or (d) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, judgments or liabilities as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Sellers and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, Aetna or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Sellers and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, judgments or liabilities referred to in
the first sentence of this subsection (e) shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
action or claim which is the subject of this subsection (e). Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay
-31-
<PAGE> 32
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(e) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
the respective number of shares purchased by each of the Underwriters hereunder
and not joint.
(f) The obligations of the Company and Aetna under this
Section shall be in addition to any liability which the Company and Aetna
otherwise may have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section shall be in addition to
any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the Company, to
each person who has consented to become a director of the Company, to each
officer of the Company who has signed the Registration Statement and to each
person, if any, who controls the Company or Aetna within the meaning of the Act.
9. Conditions of Underwriters' Obligations. The several
obligations of (i) the Underwriters to purchase the Firm Shares and (ii) the
Underwriters pursuant to their option to purchase the Additional Shares under
this Agreement are subject to the satisfaction of each of the following
conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing
Date (with respect to the Firm Shares) and the Option Closing Date
(with respect to the Additional Shares) with the same force and effect
as if made on and as of the Closing Date or Option Closing Date, as the
case may be. The Company shall have performed or complied with all
agreements and satisfied all conditions on its part to be performed or
complied with by the Company at or prior to the Closing Date or the
Option Closing Date, as the case may be.
(b) (i) The Registration Statement shall have become effective
not later than 5:00 P.M. (and in the case of a Registration Statement
filed under Rule 462(b) of the Act, not later than 10:00 P.M.), New
York City time, on the date of this Agreement or at such later date and
time as you may approve in writing, (ii) all filings, if any, required
by Rules 424 and 430A under the Act shall have been timely made, (iii)
at the Closing Date and the Option Closing Date no stop order
suspending the effectiveness of the
-32-
<PAGE> 33
Registration Statement or any post-effective amendment to the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been commenced or shall be pending before or
contemplated by the Commission and (iv) any request of the Commission
for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with
to your reasonable satisfaction. No stop order suspending the sale of
the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been commenced or shall be
pending or contemplated.
(c) (i) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there shall not have
been any material adverse change in, or affecting the affairs,
business, prospects, operations, properties, net worth, results of
operations or financial condition, whether or not arising in the
ordinary course of business, of the Company or any of the Subsidiaries,
(ii) since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, (iii) since the date of the
latest balance sheet included in the Registration Statement and
Prospectus, and except as disclosed therein, none of the Company or any
of the Subsidiaries shall have incurred any liabilities or obligations,
direct or contingent (whether or not in the ordinary course of
business), or entered into any transactions, not in the ordinary course
of business, that are material, individually or in the aggregate, to
the business of the Company and the Subsidiaries taken as a whole and
(iv) on the Closing Date and the Option Closing Date, you shall have
received a certificate dated the Closing Date or the Option Closing
Date, as the case may be, signed by two of: LeRoy A. Vander Putten,
Robert H. Kullas and Robert V. Deutsch, solely in their respective
capacities as the Chairman and Chief Executive Officer, Vice Chairman
and Chief Operating Officer and Executive Vice President and Chief
Financial Officer of the Company, confirming the matters set forth in
paragraphs (a), (b), and (c) of this Section 9.
(d) All the representations and warranties of Aetna contained
in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date.
Aetna shall have performed or complied with all agreements and
satisfied all conditions on its part to be performed or complied with
by it at or prior to the Closing Date and you shall have received a
certificate to such effect, dated the Closing Date, from
-33-
<PAGE> 34
Aetna with respect to the matters set forth in this paragraph.
(e) You shall have received an opinion (reasonably
satisfactory to you and counsel for the Underwriters), dated the
Closing Date or the Option Closing Date, as the case may be, of Dewey
Ballantine, counsel for the Company, to the effect that:
(i) The Company and each of ERI, ERII and Talcott
(collectively, the "Delaware Subsidiaries") is a corporation
duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it was organized and has
all requisite power and authority to conduct its business as
it is currently being conducted and to own, lease and operate
its properties. The Company and each of the Delaware
Subsidiaries (other than ERMA) is duly qualified as a foreign
corporation authorized to transact business in and is in good
standing in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified
would not have a material adverse effect on the business,
prospects, operations, properties, net worth, results of
operations or financial condition of the Company and the
Subsidiaries considered as a whole. The partnership agreement
of ERMA has been duly executed and delivered by the Company
and ERI. To the best of such counsel's knowledge, the only
partners of ERMA are the Company and ERI.
(ii) All of the outstanding shares of capital stock
of, or other ownership interests in, each Delaware Subsidiary
of the Company have been, as applicable, duly authorized and
validly issued and, in the case of shares of capital stock,
are fully paid and non-assessable, and all such shares and
other ownership interests owned of record by the Company or by
a Delaware Subsidiary are owned free and clear of any
perfected security interest and, to the best of such counsel's
knowledge, any lien, claim, encumbrance or adverse interest of
any nature, except (A) with respect to the stock of ERI, for
the lien of The Chase Manhattan Bank (National Association),
as Agent (the "Agent"), pursuant to the Stock Pledge Agreement
dated as of March 26, 1996 between the Company and the Agent
entered into in connection with that certain Term Loan
Agreement dated as of March 26, 1996 among the Company, the
Banks signatory thereto and the Agent, and (B) with
-34-
<PAGE> 35
respect to the stock of ERII, for the lien of The Chase
Manhattan Bank (National Association), as Agent (the "Agent"),
pursuant to the Stock Pledge Agreement dated as of March 26,
1996 between ERI and the Agent entered into in connection with
that certain Term Loan Agreement dated as of March 26, 1996
among the Company, the Banks signatory thereto and the Agent.
(iii) Other than as described in the Prospectus, to
the best of such counsel's knowledge, there are no outstanding
warrants, rights or options to acquire, or instruments
convertible into or exchangeable for, or any obligation of the
Company to issue any shares of capital stock or other equity
interests in the Company or any of the Subsidiaries.
(iv) All the outstanding shares of capital stock of
the Company (including the Shares to be sold by Aetna) have
been duly authorized, validly issued, and are fully paid and
non-assessable; and the Additional Shares to be issued and
sold by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable; no holder of the Shares
will be subject to personal liability by reason of being such
a holder; and such Shares are not subject to any preemptive
rights of any stockholder of the Company under Delaware
General Corporation Law except as described in the Prospectus.
(v) To the best of such counsel's knowledge, there
are no contracts or agreements between the Company and any
person granting such person the right to require the Company
to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under
the Act, except as provided in the Securityholders Agreement.
(vi) No consent, approval, waiver, license,
authorization, order, filing, registration, qualification or
other action of or with any court, regulatory body,
arbitrator, administrative agency or other governmental agency
or body (including, without limitation, any insurance
regulatory agency or body) is
-35-
<PAGE> 36
required for the issuance and sale of the Additional Shares or
the execution, delivery and performance of this Agreement by
the Company, compliance by the Company with all the provisions
hereof or the consummation of the other transactions
contemplated hereby or by the Registration Statement, except
such as have been obtained and made under the Act and the
Exchange Act, all of which have been or will be obtained in
accordance with this Agreement, and as may be required under
the insurance securities laws or securities or Blue Sky laws
of various jurisdictions.
(vii) To the best of such counsel's knowledge, the
issuance and sale of the Shares to be sold by the Company
under this Agreement and the execution, delivery and
performance of this Agreement by the Company, compliance by
the Company with all the provisions hereof and the
consummation by the Company of the transactions herein
contemplated, will not result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of
the Company or any of the Subsidiaries pursuant to the terms
of any agreement or instrument to which any of the Company and
its Subsidiaries is a party or by which any of them may be
bound or to which any of the property or assets of any of them
is subject except, in all instances to the extent that any
such creation or imposition would not have a material adverse
effect on the business, prospects, operations, properties, net
worth, results of operations or financial condition of the
Company and its Subsidiaries, taken as a whole, and will not
conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default (with notice
or the passage of time) under, (i) any statute, rule,
regulation or order, of any governmental agency or body
(including, without limitation, any insurance regulatory
agency or body) or any court or arbitrator, which is
applicable to the Company or any Subsidiary or any of their
respective properties, (ii) any bond, debenture, note, other
evidence of indebtedness, agreement, indenture, lease or other
instrument to which the Company or any Subsidiary is a party
or by which the Company or any Subsidiary is bound or to which
any of the properties of the Company or any Subsidiary is
subject or (iii) the organizational documents of the Company
or any such Subsidiary except, in the case of clauses (i) and
(ii), to the extent that any such breach, violation or default
would not have a material adverse effect on the business,
prospects, operations, properties, net
-36-
<PAGE> 37
worth, results of operations or financial condition of
the Company and the Subsidiaries, taken as a whole.
(viii) Such counsel has been informed by the staff of
the Commission that the Registration Statement and all
post-effective amendments, if any, have become effective under
the Act, the Prospectus either was filed with the Commission
pursuant to the subparagraph of Rule 424(b) specified in such
opinion on the date specified therein or was included in the
Registration Statement (as the case may be), and to such
counsel's knowledge no stop order suspending the effectiveness
of the Registration Statement or any part thereof has been
issued and to such counsel's knowledge no proceedings for that
purpose have been instituted or are pending or are
contemplated under the Act.
(ix) Each document filed pursuant to the 1934 Act and
incorporated by reference in the Prospectus, at the time it
was filed or last amended (other than financial statements or
other financial information or statistical data included
therein, as to which no opinion need be rendered), complied as
to form in all material respects to the requirements of the
Exchange Act and the regulations adopted in connection
therewith.
(x) To the best of such counsel's knowledge, except
as otherwise set forth in the Prospectus, there are no pending
legal or governmental actions, suits or proceedings to which
the Company or any of the Subsidiaries is a party or of which
any of their respective property is the subject and which are
required to be described or incorporated by reference in the
Registration Statement or the Prospectus, and, to the best of
such counsel's knowledge, no such actions, suits or
proceedings are threatened or contemplated, and no contract or
document of a character required to be described or
incorporated by reference in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration
Statement is not so described or filed or incorporated by
reference as required, and the descriptions of the terms of
any such contracts or documents contained or incorporated by
reference in the Registration Statement or the Prospectus are
correct in all material respects.
(xi) This Agreement has been duly authorized,
executed and delivered by the Company and is a valid
-37-
<PAGE> 38
and binding agreement of the Company, enforceable in
accordance with its terms except as (i) rights to indemnity
and contribution hereunder may be limited by applicable law or
principles of public policy, (ii) the enforceability hereof
may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (iii) the remedy
of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding
therefor may be brought.
(xii) The authorized capital stock of the Company,
including the Common Stock, conforms in all material respects
to the description thereof contained or incorporated by
reference in the Prospectus.
(xiii) The statements under the captions "Risk
Factors", "Capitalization", "Management's Discussion and
Analysis of Financial Condition and Results of Operations",
"Shares Eligible for Future Sale", "Business", "Relationship
with Aetna", "Recent Developments", "Selling Stockholder" and
"Underwriting" in the Prospectus and Items 14 and 15 of Part
II of the Registration Statement insofar as such statements
constitute a description of legal matters, documents or
proceedings or refer to statements of regulation, law or legal
conclusions, are accurate in all material respects.
(xiv) Neither the Company nor any of the Subsidiaries
is (A) in violation of its respective charter or by-laws, or
other organizational documents, or, to the best of such
counsel's knowledge, except as described in the Prospectus and
except to the extent that any of the following would not have
a material adverse effect on the business, prospects,
operations, properties, net worth, results of operations or
financial condition of the Company and the Subsidiaries, taken
as a whole, (B) in violation of any judgment, injunction,
order or decree of any court, governmental agency or body
(including, without limitation, any insurance regulatory
agency or body) or arbitrator having jurisdiction over the
Company or any of the Subsidiaries, or (C) in default in the
performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence
of indebtedness or in any other agreement,
-38-
<PAGE> 39
indenture, lease or instrument that is an exhibit to
the Registration Statement.
(xv) To the best of such counsel's knowledge after
due inquiry, all material leases to which the Company or any
of the Subsidiaries is a party are valid and binding on the
Company or such Subsidiary, as the case may be, and no default
has occurred or is continuing thereunder, which might result
in any material adverse change in the business, prospects,
financial condition or results of operation of the Company and
the Subsidiaries taken as a whole.
(xvi) To such counsel's knowledge, each of the
Company and its Subsidiaries holds such licenses,
certificates, permits, franchises and authorizations from
insurance departments and other governmental or regulatory
authorities ("permits") (including, without limitation,
Insurance Licenses) which are necessary to own, lease and
operate its properties and to conduct its business as
described in the Prospectus, except to the extent the failure
to hold any such permits or Insurance Licenses (either
singularly or in the aggregate) would not have a material
adverse effect on the business, prospects, operations,
properties, net worth, results of operations or financial
condition of the Company and the Subsidiaries taken as a
whole; to the best of such counsel's knowledge, all such
permits and the Insurance Licenses are in full force and
effect. Except as disclosed in the Prospectus, to the best of
such counsel's knowledge, there has been, and there is no,
pending or threatened action, suit, proceeding, investigation
or event that may reasonably be expected to lead to the
revocation, termination, suspension or any other material
impairment of the rights of the holder of any such permit
(including, without limitation, the Insurance Licenses); to
the best of such counsel's knowledge, such permits and
Insurance Licenses do not materially restrict the conduct of
business of the Company or any of the Subsidiaries except as
described in the Prospectus and except for any restrictions
customarily found in insurance licenses generally; and except
as disclosed or incorporated by reference in the Prospectus,
to the best of such counsel's knowledge, no insurance
regulatory agency or body has issued any order or decree
impairing, restricting or prohibiting the payment of dividends
by any of the Subsidiaries of the Company to its parent.
-39-
<PAGE> 40
(xvii) The Company is not (a) an "investment company"
or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act or (b) a "holding
company" or a "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company" within the meaning of the 1935
Act.
(xviii) (i) The Registration Statement and any
post-effective amendment thereto, at the time such
Registration Statement or such post-effective amendment became
or becomes effective, complies or will comply in all material
respects with the provisions of the Act; and (ii) the
Prospectus, and any supplement or amendment thereto, on the
date of filing thereof with the Commission and on the Closing
Date and the Option Closing Date, complies and will comply in
all material respects with the provisions of the Act; provided
that such counsel need express no view on the financial
statements and the notes thereto and the schedules and other
financial, statistical and accounting data included therein.
(xix) The Company has corporate power and authority
to enter into this Agreement and to issue, sell and deliver
the Additional Shares to be sold by it to the Underwriters as
provided herein. The performance by the Company of its
obligations hereunder (including without limitation the
issuance and sale of the Additional Shares), has been duly
authorized by all necessary corporate action on the part of
the Company.
(xx) The form of certificate for the Shares conforms
in all material respects to the requirements of the Delaware
General Corporation Law and the NYSE.
(xxi) To the best of such counsel's knowledge, after
due inquiry, no relationship, direct or indirect, or
agreement, (including, without limitation, any voting
agreement), exists between or among the Company or any of the
Subsidiaries and any other party or any of their respective
affiliates, which is required by the Act to be described or
incorporated by reference in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or incorporated by reference
or filed as required.
(xxii) The Stock Purchase Agreement has been duly
executed and delivered by the Company. The Stock
-40-
<PAGE> 41
Repurchase and all other transactions contemplated by the
Stock Purchase Agreement that are required to have been
consummated prior to the date hereof have been duly
consummated as described in the Prospectus in compliance in
all material respects with applicable law, including without
limitation applicable federal and state securities laws,
except to the extent that the failure to comply would not have
a material adverse effect on the business, prospects,
operations, properties, net worth, results of operations or
financial condition of the Company and the Subsidiaries, taken
as a whole.
(xxiii) To the best of such counsel's knowledge,
after due inquiry, there are no pending or threatened claims,
actions, suits or proceedings arising out of or in connection
with the consummation of the transactions contemplated by the
Stock Purchase Agreement.
Such counsel shall also state that although such counsel has
not undertaken to determine independently, and therefore does not assume any
responsibility explicitly or implicitly for, the accuracy, completeness or
fairness of the statements contained in the Registration Statement and in the
Prospectus, such counsel has participated in the preparation of the Registration
Statement and the Prospectus, including review and discussion of the contents
thereof, and that based upon and subject to the foregoing, nothing came to such
counsel's attention that caused them to believe that the Registration Statement,
at the time it became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus,
as of its date and as of the date of such opinion, contained or contains an
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (except in
each case as to the financial statements and the notes thereto and the schedules
and other financial and statistical data included therein, as to which such
counsel need express no belief).
As to factual matters, such counsel may rely on certificates
obtained from officers of the Company and the Subsidiaries and from public
officials and on such other authority as such counsel deems reasonable. In
rendering such opinion counsel may rely upon an opinion or opinions, each dated
the Closing Date, of other counsel retained by them or the Company as to laws of
any jurisdiction other than the United States or the States of New York and
Delaware, provided that
-41-
<PAGE> 42
(1) each such local counsel is reasonably acceptable to the Representatives and
their counsel, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Representatives
and is in form and substance reasonably satisfactory to the Representatives and
their counsel.
(f) You shall have received opinions (reasonably satisfactory
to you and to counsel for the Underwriters), dated the Closing Date, of
counsel to Aetna, which counsel are reasonably satisfactory to you and
to counsel for the Underwriters, to the effect that:
(i) Aetna is a corporation duly organized and validly
existing under the laws of the jurisdiction in which it was
organized and has all requisite power and authority and any
approval required by law (other than any approval imposed by
the applicable state securities and Blue Sky laws) to enter
into this Agreement and to sell, assign, transfer and deliver
the Shares to be sold by Aetna in the manner provided herein
and therein, and this Agreement has been duly authorized,
executed and delivered by Aetna and is a valid and binding
agreement of Aetna enforceable in accordance with its terms
except as (i) rights to indemnity and contribution hereunder
may be limited by applicable law or principles of public
policy, (ii) the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors'
rights generally and (iii) the remedy of specific performance
and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(ii) To such counsel's knowledge, no consent,
approval, waiver, license, authorization, order, filing,
registration, qualification or other action of or with any
court, regulatory body, administrative agency or other
governmental agency or body (including, without limitation,
any insurance regulatory agency or body) is required for the
sale of the Firm Shares to be sold by Aetna or the execution,
delivery and performance of this Agreement by Aetna,
compliance by Aetna with all the provisions hereof or the
consummation by Aetna of the other transactions contemplated
hereby or by the Registration Statement, except such as have
been obtained and made under the Act and the Exchange Act, all
of which have been or
-42-
<PAGE> 43
will be obtained in accordance with this Agreement, and as may
be required under the insurance securities laws or securities
or Blue Sky laws of various jurisdictions.
(iii) The execution, delivery and performance by
Aetna of this Agreement, compliance by Aetna with all the
provisions hereof and the consummation of the transactions
herein contemplated will not conflict with or result in a
breach or violation of any of the terms and provisions of (A)
the organizational documents of Aetna, or, to such counsel's
knowledge, (B) any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence
of indebtedness or in any other agreement, indenture, lease or
instrument or (C) any law, regulation or rule or any judgment,
injunction, order or decree of any court, governmental agency
or body (including, without limitation, any insurance
regulatory agency or body) or arbitrator having jurisdiction
over Aetna that, in the case of either (B) or (C), is material
to the business of Aetna.
(iv) The Amended and Restated Stock Purchase
Agreement has been duly authorized, executed and delivered by
Aetna and is a valid and binding agreement of Aetna
enforceable in accordance with its terms except as (i) rights
to indemnity and contribution hereunder may be limited by
applicable law or principles of public policy, (ii) the
enforceability hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights
generally and (iii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
(v) Upon due delivery and payment for the Shares to
be sold by the Selling Stockholder as provided for in this
Underwriting Agreement, the Underwriters will have good and
valid title to the Shares so transferred, free and clear of
any liens, encumbrances, equities or claims (assuming that the
Underwriters are without notice of any adverse claim, as
defined in the Uniform Commercial Code as adopted in the State
of New York). Aetna has good and clear title to the
certificates for the Firm Shares to be sold by it and upon
delivery thereof, pursuant hereto and
-43-
<PAGE> 44
payment therefor, good and clear title will pass to the
Underwriters, severally, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
(vi) Aetna is not (a) an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act or (b) a "holding
company" or a "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company" within the meaning of the 1935
Act.
As to factual matters, such counsel may rely on certificates
obtained from officers of the Company or Aetna and from public officials and
such other authority as such counsel deems reasonable.
(g) You shall have received an opinion (reasonably
satisfactory to you and counsel for the Underwriters), dated the
Closing Date or the Option Closing Date, as the case may be, of
Timothy Curry, counsel to the Company, to the effect that:
(i) ERSIC is a corporation duly organized, validly
existing and in good standing under the laws of the
jurisdiction in which it was organized and has all requisite
power and authority to conduct its business as it is currently
being conducted and to own, lease and operate its properties.
ERMA is a partnership duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it
was organized and has all requisite power and authority to
conduct its business as it is currently being conducted and to
own, lease and operate its properties. ERSIC is duly qualified
as a foreign corporation authorized to transact business in
and is in good standing in each jurisdiction in which the
nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the
business, prospects, operations, properties, net worth,
results of operations or financial condition of the Company
and the Subsidiaries considered as a whole.
(ii) All of the outstanding shares of capital stock
of, or other ownership interests in, each of ERSIC and ERMA
have been duly authorized and validly issued and, in the case
of shares of capital stock, are fully paid and non-assessable,
and all such shares and
-44-
<PAGE> 45
other ownership interests owned of record by the Company or by
a Subsidiary of the Company are owned free and clear of any
perfected security interest and any lien, claim, encumbrance
or adverse interest of any nature.
(iii) Except as otherwise set forth in the
Prospectus, there are no pending legal or governmental
actions, suits or proceedings to which ERSIC or ERMA is a
party or of which any of their respective property is the
subject and which are required to be described in the
Registration Statement or the Prospectus, and, to the best of
such counsel's knowledge after due inquiry, no such actions,
suits or proceedings are threatened or contemplated, and no
contract or document of a character required to be described
in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement is not so
described or filed as required, and the descriptions of the
terms of any such contracts or documents contained in the
Registration Statement or the Prospectus are correct in all
material respects.
(iv) Neither ERSIC nor ERMA is (A) in violation of
its respective charter or by-laws, or other organizational
documents, or (B) in violation of any judgment, injunction,
order or decree of any court, governmental agency or body
(including, without limitation, any insurance regulatory
agency or body) or arbitrator having jurisdiction over ERSIC
or ERMA, or (C) in default in the performance of any
obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in
any other agreement, indenture, lease or instrument that, in
the case of either (B) or (C), is material to the business of
and the Other Subsidiaries.
(v) All material leases to which any of ERSIC or ERMA
is a party are valid and binding on each such subsidiary, as
the case may be, and no default has occurred or is continuing
thereunder, which might result in any material adverse change
in the business, prospects, financial condition or results of
operation of the Company and the Subsidiaries taken as a
whole.
(vi) Each of ERSIC and ERMA holds such licenses,
certificates, permits, franchises and authorizations from
insurance departments and other governmental or regulatory
authorities ("permits") (including, without limitation,
Insurance Licenses)
-45-
<PAGE> 46
which are necessary to own, lease and operate its properties
and to conduct its business as described in the Prospectus,
except to the extent the failure to hold any such permits or
Insurance Licenses (either singularly or in the aggregate)
would not have a material adverse effect on the business,
prospects, operations, properties, net worth, results of
operations or financial condition of the Company and the
Subsidiaries taken as a whole; all such permits and the
Insurance Licenses are in full force and effect. Except as
disclosed in the Prospectus there has been, and there is no,
pending or threatened action, suit, proceeding, investigation
or event that could reasonably be expected to lead to the
revocation, termination, suspension or any other material
impairment of the rights of the holder of any such permit
(including, without limitation, the Insurance Licenses); such
permits and Insurance Licenses do not materially restrict the
conduct of business of the Other Subsidiaries except as
described in the Prospectus and except for any restrictions
customarily found in insurance licenses generally; and except
as disclosed in the Prospectus no insurance regulatory agency
or body has issued any order or decree impairing, restricting
or prohibiting the payment of dividends by any of the
Subsidiaries of the Company to its parent.
(vii) No relationship, direct or indirect, or
agreement, (including, without limitation, any voting
agreement), exists between or among any of ERSIC or ERMA and
any other party or any of their respective affiliates, which
is required by the Act to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed as
required.
(h) You shall have received on the Closing Date and the Option
Closing Date, as the case may be, an opinion, dated as of such date, of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a partnership including
professional corporations, as counsel for the Underwriters, with
respect to the incorporation of the Company, the validity of the
Shares, the Registration Statement, the Prospectus and other related
matters as you may require, and the Company and Aetna shall have
furnished to such counsel such documents as they reasonably request for
the purpose of enabling them to pass upon such matters.
-46-
<PAGE> 47
The opinions of Dewey Ballantine, counsel to the Company, of
Timothy Curry, counsel to ERI and ERSIC, of the counsel to Aetna and of LeBoeuf,
Lamb, Greene & MacRae, L.L.P., counsel to the Underwriters, described in
paragraphs (e), (f), (g) and (h), respectively, above shall be rendered to you
at the request and direction and instruction of the Company or Aetna, as the
case may be, and shall so state therein.
(i) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency as of such Closing Date or Option Closing Date, as
the case may be, that would prevent the issuance of the Shares. No
injunction, restraining order or order of any nature by a federal or
state court of competent jurisdiction shall have been issued as of such
Closing Date or Option Closing Date, as the case may be, that would
prevent the issuance of the Shares.
(j) You shall have received a letter, dated the date of this
Agreement, of Ernst & Young confirming that they are independent public
accountants with respect to the Company within the meaning of the Act
and the applicable published rules and regulations promulgated
thereunder and stating in effect the information contained in Annex I.
(k) You shall have received a letter on and as of the Closing
Date and the Option Closing Date from Ernst & Young substantially in
the form and substance of, or confirming the statements contained in,
the letter delivered to you by Ernst & Young on the date of this
Agreement.
(l) The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the
Representatives on the Option Closing Date of such documents as you may
reasonably request with respect to the good standing of the Company,
the due authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
(m) All of the transactions contemplated by this Agreement and
by the Registration Statement shall have been consummated at or prior
to the time that the Shares are delivered and paid for pursuant to
Section 4 of this Agreement.
(n) The Shares shall have been listed or approved for listing
upon official notice of issuance on the New York Stock Exchange.
-47-
<PAGE> 48
(o) The Company and Aetna shall have furnished or caused to be
furnished to you such further certificates and documents as you shall
have reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the
Company or Aetna, as the case may be, and delivered to you, as the
Representatives, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company or Aetna to each Underwriter as to
the statements made therein.
10. Effective Date of Agreement and Termination.
(a) This Agreement shall become effective upon the later of
(i) execution of this Agreement and (ii) when notification of the
effectiveness of the Registration Statement has been released by the
Commission.
(b) This Agreement may be terminated at any time prior to the
Closing Date or the Option Closing Date, as the case may be, by you by
written notice to the Sellers if any of the following has occurred: (i)
since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change
or development involving a prospective material adverse change in or
affecting particularly the business, prospects, operations, properties,
net worth, results of operations or financial condition of the Company
or any Subsidiary other than Talcott Services Corporation, Executive
Risk N.V. or Executive Risk Limited, whether or not arising in the
ordinary course of business, which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or
change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and
would, in your judgment, make it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus, (iii) the
suspension or material limitation of trading in securities on the NYSE,
the American Stock Exchange or the NASDAQ National Market System or
limitation on prices for securities on any such exchange or National
Market System, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental
-48-
<PAGE> 49
authority which in your opinion materially and adversely affects, or
will materially and adversely affect, the business or operations of the
Company or any Subsidiary other than Talcott Services Corporation,
Executive Risk N.V. or Executive Risk Limited, (v) the declaration of a
banking moratorium by either federal or New York State authorities or
(vi) the taking of any action by any federal, state or local government
or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the
United States.
(c) If on the Closing Date or on the Option Closing Date, as
the case may be, any one or more of the Underwriters shall fail or
refuse to purchase the Firm Shares or Additional Shares, as the case
may be, which it or they have agreed to purchase hereunder on such date
and the aggregate number of Firm Shares or Additional Shares, as the
case may be, which such defaulting Underwriter or Underwriters, as the
case may be, agreed but failed or refused to purchase is not more than
one-tenth of the total number of Shares to be purchased on such date by
all Underwriters, each non-defaulting Underwriter shall be obligated
severally, in the proportion which the number of Firm Shares set forth
opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case
may be, which such defaulting Underwriter or Underwriters, as the case
may be, agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Firm Shares or Additional Shares,
as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of
such Underwriter. If on the Closing Date or on an Option Closing Date,
as the case may be, any Underwriter or Underwriters shall fail or
refuse to purchase Firm Shares, or Additional Shares, as the case may
be, and the aggregate number of Firm Shares or Additional Shares, as
the case may be, with respect to which such default occurs is more than
one-tenth of the aggregate number of Shares to be purchased on such
date by all Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48
hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter and the
applicable Sellers. In any such case which does not result in
termination of this Agreement, either you or the Sellers
-49-
<PAGE> 50
shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer
than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect
of any default of any such Underwriter under this Agreement.
11. Agreements of Aetna. Aetna agrees with you and the Company
as follows:
(a) Aetna will deliver to you on or prior to the Closing Date
a properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof);
(b) Aetna will pay or cause to be paid all transfer taxes with
respect to the Shares to be sold by Aetna; and
(c) Aetna will take all reasonable actions in cooperation with
the Company and the Underwriters to cause the Registration Statement to
become effective at the earliest possible time, to do and perform all
things to be done and performed under this Agreement prior to the
Closing Date and to satisfy all conditions precedent to the delivery of
the Shares pursuant to this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (a) if to the Company, to
Executive Risk Inc., 82 Hopmeadow Street, Simsbury, CT 06070, Attention:
President, (b) if to Aetna, 185 Asylum Street, Hartford, CT 06103, Attention:
______________________ and (c) if to any Underwriter or to the Representatives,
to the Representatives c/o Donaldson, Lufkin & Jenrette Securities Corporation,
277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or
in any case to such other address as the person to be notified may have
requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of Aetna, the Company, its
officers and directors and of the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive delivery of and payment for the Shares, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter or by or on behalf of the Sellers, the officers or directors of
the Company or any
-50-
<PAGE> 51
controlling person of the Sellers, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement and shall be binding upon
and inure to the benefit of the successors, assigns, heirs, and personal
representatives of each Underwriter and each Seller.
If this Agreement is terminated pursuant to Section 10(c) or
if for any reason the purchase of the Shares by the Underwriters is not
consummated, the Company shall remain responsible for the expenses to be paid or
reimbursed by it pursuant to Section 5(l) and the respective obligations of the
Company, Aetna and the Underwriters pursuant to Section 8 shall remain in
effect. If the purchase of the Shares by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 10(b) or 10(c), the Company will reimburse the Underwriters
for all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Shares.
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, each officer of the Company who signs the Registration Statement,
each director of the Company, any controlling persons referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICTS OF LAWS
PROVISIONS THEREOF.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
-51-
<PAGE> 52
Please confirm that the foregoing correctly sets forth the
agreement among the Company, Aetna and the several Underwriters.
Very truly yours,
EXECUTIVE RISK INC.
By:
---------------------------
Title:
AETNA LIFE AND
CASUALTY COMPANY
By:
---------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Title:
-52-
<PAGE> 53
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Conning & Company
---------
2,000,000
Total
-53-
<PAGE> 1
Exhibit 5.1
May 9, 1996
Executive Risk Inc.
82 Hopmeadow Street
Simsbury, CT 06070
Dear Sirs:
We refer to the Registration Statement on Form S-3 (Registration No.
333-3956) (the "Registration Statement") filed by Executive Risk Inc. (the
"Company") with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Act"), relating to (i) 2,000,000
shares of the Company's common stock, $.01 par value per share (the "Common
Stock"), to be offered for sale on behalf of Aetna Life and Casualty Company
(the "Aetna Shares") and (ii) 300,000 shares of Common Stock to be offered for
sale by the Company (the "Company Shares"), upon exercise of an over-allotment
option (the "Over-allotment Option") granted to the underwriters pursuant to an
underwriting agreement to be entered into among the Company, Aetna Life and
Casualty Company, Donaldson, Lufkin & Jenrette Securities Corporation and
Conning & Company as representatives of the several underwriters (the
"Underwriting Agreement").
We have examined and are familiar with originals, or copies certified
or otherwise identified to our satisfaction, of such corporate records of the
Company, certificates of officers of the Company and of public officials and
such other documents as we have deemed appropriate as a basis for the opinions
expressed below.
Based upon the foregoing, we are of the opinion that:
1. the Company is duly incorporated and existing under the laws
of the State of Delaware;
2. the Aetna Shares are duly authorized, validly issued, fully
paid and non-assessable; and
3. the Company Shares are duly authorized and, if issued as
contemplated in the Underwriting Agreement upon exercise of
the Over-allotment Option, and if paid for as contemplated in
the Underwriting Agreement, will be validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit in the
Registration Statement and to the reference to this firm under the caption
"Certain Legal Matters" in the Prospectus constituting a part of such
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Dewey Ballantine
