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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-12800
EXECUTIVE RISK INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1388171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
82 Hopmeadow Street
Simsbury, Connecticut 06070
(Address of principal executive offices) (Zip Code)
(860) 408-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
As of May 10, 1999, there were 11,548,271 shares of Executive Risk Inc.
Common Stock, $0.01 par value, outstanding, net of treasury shares.
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EXECUTIVE RISK INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
<S> <C>
Independent Accountants' Review Report............................................... 2
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998................................................. 3
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 .......................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 .......................................... 5
Notes to Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 7-10
PART II - OTHER INFORMATION
Item 5. Other Information.............................................................. 10
Item 6. Exhibits and Reports on Form 8-K............................................... 10
SIGNATURES.............................................................................. 11
Exhibit 10.1 - Retirement Agreement, dated May 7, 1999, between Executive Risk
Inc. and Robert H. Kullas............................................................... --
Exhibit 10.2 - Other Agreement, dated May 7, 1999, between Executive Risk Inc.
and Robert V. Deutsch................................................................... --
Exhibit 15.1 - Independent Accountants' Acknowledgment Letter........................... --
Exhibit 27 - Financial Data Schedule ................................................... --
</TABLE>
NOTE ON FORWARD-LOOKING STATEMENTS: The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for forward-looking statements. This Report may
include forward-looking statements, as do other publicly available Company
documents, including reports on Forms 10-K, 10-Q and 8-K filed with the
Securities and Exchange Commission and other written or oral statements made by
or on behalf of the Company, its officers and employees. When made, such
forward-looking statements reflect the then-current views of the Company or its
management with respect to future events and financial performance. There are
known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those contemplated or indicated by such
forward-looking statements. These include, but are not limited to, risks and
uncertainties inherent in or relating to (i) general economic conditions,
including interest rate movements, inflation and cyclical industry conditions,
(ii) governmental and regulatory policies affecting professional liability, as
well as the judicial environment, (iii) the loss reserving process, (iv)
increasing competition in the market segments in which the Company operates, (v)
the conduct of international operations, including exchange rate fluctuations
and foreign regulatory changes, and (vi) the effects of Year 2000 on Company
insureds and the degree to which liability exposure is affected thereby. The
words "believe," "expect," "anticipate," "project," and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. Neither the Company or its management undertakes any obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors
Executive Risk Inc.
We have reviewed the accompanying consolidated balance sheet of Executive Risk
Inc. and its subsidiaries as of March 31, 1999, and the related consolidated
statements of income and cash flows for the three month periods ended March 31,
1999 and 1998. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which is performed for
the full year with the objective of expressing an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Executive Risk Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended (not
presented herein) and in our report dated February 6, 1999, we expressed an
unqualified opinion on those consolidated financial statements.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
April 30, 1999
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EXECUTIVE RISK INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
(In thousands, except share data) 1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Fixed maturities available for sale, at fair value
(amortized cost: 1999 - $1,075,330 and 1998 - $1,102,744) $ 1,101,175 $ 1,136,375
Equity securities available for sale, at fair value
(cost: 1999 - $52,435 and 1998 - $50,103) 82,375 79,187
Cash and short-term investments, at cost which approximates market 65,631 34,312
----------- -----------
TOTAL CASH AND INVESTED ASSETS 1,249,181 1,249,874
Premiums receivable 41,401 44,256
Reinsurance recoverables 337,224 302,062
Accrued investment income 16,302 16,479
Deferred acquisition costs 46,536 38,252
Prepaid reinsurance premiums 135,907 150,266
Deferred income taxes 22,733 22,336
Other assets 48,047 42,514
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TOTAL ASSETS $ 1,897,331 $ 1,866,039
=========== ===========
LIABILITIES
Loss and loss adjustment expenses $ 901,312 $ 866,285
Unearned premiums 379,874 369,532
Senior notes payable 75,000 75,000
Ceded balances payable 35,895 54,969
Accrued expenses and other liabilities 40,480 44,330
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TOTAL LIABILITIES 1,432,561 1,410,116
PREFERRED SECURITIES OF EXECUTIVE RISK CAPITAL TRUST
Company obligated mandatorily redeemable preferred securities of subsidiary,
Executive Risk Capital Trust, holding solely $125,000,000 aggregate
principal amount of 8.675% Series B Junior Subordinated Deferrable Interest
Debentures of the Company due February 1, 2027 and $3,866,000 aggregate principal
amount of 8.675% Series A Junior Subordinated Deferrable Interest Debentures of
the Company due February 1, 2027 125,000 125,000
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STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized 4,000,000 shares;
issued - 1999 and 1998 - 0 shares -- --
Common Stock, $.01 par value; authorized 52,500,000 shares;
issued - 1999 - 12,597,891 shares and 1998 - 12,229,622 shares 126 122
Additional paid-in capital 182,268 178,740
Accumulated other comprehensive income 35,318 40,959
Retained earnings 154,614 143,658
Cost of shares in treasury, at cost: 1999 and 1998 - 1,114,294 shares (32,556) (32,556)
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TOTAL STOCKHOLDERS' EQUITY 339,770 330,923
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TOTAL LIABILITIES, PREFERRED SECURITIES OF EXECUTIVE RISK
CAPITAL TRUST AND STOCKHOLDERS' EQUITY $ 1,897,331 $ 1,866,039
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In thousands, except per share data) 1999 1998
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REVENUES
<S> <C> <C>
Gross premiums written $ 135,545 $ 100,084
Premiums ceded (47,837) (39,742)
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Net premiums written 87,708 60,342
Change in unearned premiums (24,793) (557)
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Net premiums earned 62,915 59,785
Net investment income 16,234 15,139
Net realized capital gains 2,182 1,775
Other income 260 83
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TOTAL REVENUES 81,591 76,782
EXPENSES
Loss and loss adjustment expenses 40,895 40,116
Policy acquisition costs 11,225 10,617
General and administrative expenses 9,247 7,371
Non-recurring merger expenses 2,644 --
Interest expense 1,388 1,376
Minority Interest in Executive Risk Capital 2,711 2,682
Trust --------- ---------
TOTAL EXPENSES 68,110 62,162
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INCOME BEFORE INCOME TAXES 13,481 14,620
Income tax expense
Current 269 1,964
Deferred 2,029 1,177
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2,298 3,141
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NET INCOME $ 11,183 $ 11,479
========= =========
Comprehensive Income $ 5,542 $ 14,327
Earnings per common share $ 1.00 $ 1.06
Weighted average shares outstanding 11,217 10,862
Earnings per common share -
assuming dilution $ 0.95 $ 0.98
Weighted average shares outstanding -
assuming dilution 11,719 11,726
Dividends declared per common share $ 0.02 $ 0.02
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In thousands) 1999 1998
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OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 11,183 $ 11,479
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation 1,299 990
Deferred income taxes 2,029 1,177
Amortization of bond premium 907 613
Net realized gains on investments (2,182) (1,775)
Stock based compensation plans 963 593
Other (4,914) 1,264
Change in:
Premiums receivable, net of ceded balances payable (16,219) (4,648)
Accrued investment income 177 (1,017)
Deferred acquisition costs (8,284) (2,371)
Loss and loss adjustment expenses, net of reinsurance recoverables (135) 25,659
Unearned premiums, net of prepaid reinsurance premiums 24,701 554
Accrued expenses and other liabilities 2,059 (15,579)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 11,584 16,939
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available for sale 88,041 151,274
Proceeds from sales of equity securities available for sale 2,344 2,482
Proceeds from maturities of investment securities 6,967 17,134
Purchase of fixed maturities available for sale (73,555) (201,204)
Purchase of equity securities available for sale (2,148) (5,717)
Net capital expenditures (3,439) (3,610)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,210 (39,641)
FINANCING ACTIVITIES
Proceeds from exercise of options 1,752 589
Placement fees and other -- (183)
Dividends paid on common stock (227) (218)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,525 188
--------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 31,319 (22,514)
--------- ---------
Cash and short-term investments at beginning of period 34,312 88,505
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 65,631 $ 65,991
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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EXECUTIVE RISK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited interim consolidated financial
statements of Executive Risk Inc. (the "Company" or "ERI") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring accruals except as described in Note 2) considered necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods have been included. Operating results for any
interim period are not necessarily indicative of results that may be expected
for the full year. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
NOTE 2 - ACQUISITION AND NON-RECURRING CHARGES
On February 8, 1999, the Company announced that it had entered into an Agreement
and Plan of Merger, dated as of February 6, 1999 (the "Merger Agreement"), among
the Company, The Chubb Corporation ("Chubb") and Excalibur Acquisition, Inc. The
Merger Agreement calls for the merger of the Company with Excalibur Acquisition,
Inc., a Chubb subsidiary, with the effect that following the proposed merger the
Company would be a wholly-owned subsidiary of Chubb. The completion of the
merger is subject to customary closing conditions, including a vote of the
Company's stockholders and to approval by insurance regulators in the States of
Connecticut and Delaware, and may be subject to additional state regulatory
approvals. Approval of the Connecticut Insurance Department has been received
and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 has expired. The Company filed a Current Report with the SEC on Form 8-K,
dated February 9, 1999, in which further information concerning the proposed
merger with Chubb is contained. Approval of the proposed merger by the Company's
stockholders will be solicited only by means of a proxy statement to be mailed
to all stockholders.
In the first quarter of 1999, the Company incurred non-recurring charges of $2.6
million related to the Company's pending acquisition by Chubb. These
non-recurring charges consist of $1.8 million related to investment banker fees
and $0.8 million for legal and other costs. These charges were recorded on the
consolidated income statement as non-recurring merger expenses.
The Company is contingently liable for approximately an additional $6.0 million
of investment banker and legal fees payable upon the successful completion of
the acquisition by Chubb.
NOTE 3 - REINSURANCE
In the first quarter of 1999, the Company restructured certain of its
reinsurance treaties. The restructured reinsurance program generally makes
greater use of excess of loss reinsurance, rather than quota share reinsurance,
to reduce exposures to severity losses. The reinsurance restructuring resulted
in the non-renewal of several in-force reinsurance treaties commensurate with
the effective date of the new reinsurance treaties. The restructuring of the
reinsurance treaties did not have a material effect on the Company's financial
position or results of operations.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those derivatives at fair value. The accounting
for the changes in the fair value of the derivatives depends on the intended use
of the derivative and the resulting designation as prescribed by the provisions
of SFAS 133. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, with earlier application permitted.
Implementation of SFAS 133 is not expected to have a material impact on the
Company's financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations compares certain financial results for the quarter ended March 31,
1999 with the corresponding period for 1998. The results of Executive Risk Inc.
(the "Company" or "ERI") include the consolidated results of Executive Risk
Management Associates ("ERMA"), Executive Re Inc. ("Executive Re"), and
Executive Re's direct and indirect insurance companies, Executive Risk Indemnity
Inc., Executive Risk Specialty Insurance Company, Executive Risk N.V., Quadrant
Indemnity Company and Executive Risk (Bermuda) Ltd. In addition, the Company's
results include Executive Risk Capital Trust (the "Trust"), a Delaware statutory
business trust, and Sullivan Kelly Inc. ("Sullivan Kelly"), an underwriting
management subsidiary of Executive Re. In the third quarter of 1998, the Company
initiated a plan to close the Sullivan Kelly brokerage operation, transfer the
remaining underwriting functions to ERMA and dissolve Sullivan Kelly. Results
for the quarter ended March 31, 1999 include $0.1 million of net after-tax
income related to the run-off of Sullivan Kelly.
RESULTS OF OPERATIONS
The Company's net income for the first quarter of 1999 was $11.2 million, or
$0.95 per diluted share, as compared to $11.5 million, or $0.98 per diluted
share, earned in the first quarter of 1998. The Company's operating earnings,
calculated as net income before realized capital gains and non-recurring
expenses related to the Company's proposed merger transaction with The Chubb
Corporation ("Chubb"), both net of tax, were $11.4 million, or $0.98 per diluted
share, for the quarter ended March 31, 1999 and $10.3 million, or $0.88 per
diluted share, for the quarter ended March 31, 1998.
Gross premiums written increased by $35.4 million, or 35%, to $135.5 million in
the first quarter of 1999 from $100.1 million in the first quarter of 1998. The
increase was principally due to growth in sales in miscellaneous errors and
omissions insurance ("E&O"), employment practices liability insurance, and
private commercial directors and officers liability insurance ("D&O"), partially
offset by a decrease in public company D&O. The level of D&O gross premiums
written for public companies has been adversely affected both by continued
strong competition in the D&O market and by declinations of D&O applicants that
appear to the Company to present greater than acceptable exposure to the Year
2000 issue (See "The Year 2000 (Y2K)"). These factors are likely to continue to
affect the level of D&O writings for the foreseeable future.
Ceded premiums increased $8.1 million, or 20%, to $47.8 million in the first
quarter of 1999 from $39.7 million in the first quarter of 1998. The rise in
ceded premiums was due principally to increased cessions on E&O and certain D&O
products as a result of higher writings, partially offset by the lower cession
rates of certain reinsurance treaties restructured in the first quarter of 1999,
which included the benefits of a reinsurance portfolio transfer (see Note 3).
As a result of the foregoing, net premiums written increased $27.4 million, or
45%, to $87.7 million for the quarter ended March 31, 1999 from $60.3 million
for the quarter ended March 31, 1998. For the same periods, net premiums earned
increased $3.1 million, or 5%, to $62.9 million from $59.8 million. The increase
in net premiums earned lagged that of net premiums written due to the
incremental cost related to additional reinsurance protection purchased for D&O,
partially offset by lower cession rates for certain E&O treaties, both related
to the reinsurance restructuring in the first quarter of 1999.
Net investment income increased by $1.1 million, or 7%, to $16.2 million for the
quarter ended March 31, 1999 from $15.1 million for the quarter ended March 31,
1998. This increase resulted principally from growth in invested assets,
measured on an amortized cost basis, from $1,064.9 million at March 31, 1998 to
$1,193.4 million at March 31, 1999, partially offset by a decrease in nominal
yields. The nominal portfolio yield of the fixed maturity portfolio at March 31,
1999 was 5.79%, compared to 6.04% at March 31, 1998. The tax equivalent yields
on the fixed maturity portfolio were 7.41% and 7.52% for these periods,
respectively.
The Company's net realized capital gains were $2.2 million in the first quarter
of 1999 as compared to $1.8 million in the first quarter of 1998. In the first
quarter of 1999, net capital gains were realized principally from certain equity
limited partnership investments, equity mutual fund distributions and the sale
of fixed maturity investments.
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Loss and loss adjustment expenses ("LAE") increased by $0.8 million, or 2%, from
$40.1 million in the first quarter of 1998 to $40.9 million in the comparable
period of 1999. The Company's loss ratio was 65.0% in the first quarter of 1999
as compared to 67.1% in the first quarter of 1998. 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 primarily for the 1992 and 1993 report years by an aggregate of
$4.9 million, or $0.27 per diluted share, in the first quarter of 1999. In the
first quarter of 1998, the Company reduced its unpaid loss and LAE reserves for
prior report years by an aggregate of $3.0 million, or $0.16 per diluted share.
There can be no assurance that reserve adequacy reevaluations will produce
similar reserve reductions and net income increases in future quarters.
Policy acquisition costs increased by $0.6 million, or 6%, to $11.2 million for
the quarter ended March 31, 1999 from $10.6 million for the quarter ended March
31, 1998. The Company's ratio of policy acquisition costs to net premiums earned
was 17.8% in both quarters.
General and administrative ("G&A") expenses increased $1.8 million, or 25%, to
$9.2 million in the first quarter of 1999 from $7.4 million in the first quarter
of 1998, due largely to increased compensation, benefit and related overhead
costs associated with staffing increases to support future growth in premium
volume. The ratio of G&A costs to premiums earned increased from 12.3% in the
first quarter of 1998 to 14.7% in the first quarter of 1999.
First quarter 1999 expenses also include $2.6 million in non-recurring
investment banker, legal and other expenses related to the Company's pending
merger transaction with Chubb.
The GAAP combined ratio, excluding the non-recurring charges, increased slightly
to 97.5% in the first quarter of 1999 from 97.2% in the first quarter of 1998.
The increase of 0.3 percentage points was attributable to the increase in the
G&A ratio, partially offset by a decrease in the loss ratio as discussed above.
A combined ratio below 100% 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 in that
period due to such factors as investment income and capital gains realized
during that period.
Interest expense of $1.4 million for the first quarter of 1999 and 1998 was
attributable principally to the Company's outstanding senior notes payable.
Minority interest in the Trust of $2.7 million for the first quarter of 1999 and
1998 is attributable to distributions payable on the securities of the Trust.
Income tax expense decreased $0.8 million, or 27%, from $3.1 million in the
first quarter of 1998 to $2.3 million in the first quarter of 1999. The
Company's effective tax rate decreased from 21.5% to 17.0% for the same periods,
principally due to an increase in tax-exempt investment income. Tax exempt
securities comprised 58% of the Company's fixed income portfolio as of March 31,
1999 as compared to 51% as of March 31, 1998.
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, investment income and proceeds from
sales and redemptions of investments. Funds are used primarily to pay claims and
operating expenses, to purchase investments, to pay interest and principal under
the terms of the Company's indebtedness for borrowed money and to pay dividends
to common stockholders.
Cash flows from operating activities were $11.6 million for the quarter ended
March 31, 1999 and $16.9 million for the quarter ended March 31, 1998. The
decrease in operating cash flows resulted from higher direct paid losses and the
outflow of ceded premiums during the quarter associated with the restructuring
of certain reinsurance treaties. Rising loss payments are expected of a maturing
professional liability underwriter. In addition, the Company is writing more
high frequency, low severity lines of business in which losses are generally
paid in shorter durations than in the Company's traditional lines of business.
The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations as well as its operating and capital expenditure needs.
The Company's investment strategy emphasizes quality,
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liquidity and diversification. With respect to liquidity, the Company considers
liability durations, specifically loss reserves, when determining investment
maturities. Average investment duration of the fixed maturity portfolio at March
31, 1999 and December 31, 1998 was 5.2 years, as compared to an expected loss
reserve duration of 5.0 to 5.5 years. The Company's short-term investment pool
was $65.6 million (5.3% of the total investment portfolio) at March 31, 1999 and
$34.3 million (2.7%) at December 31, 1998. The short-term investment pool
increased in order to fund reinsurance premiums and expected near-term operating
cash outflow needs.
The Company's entire investment portfolio is classified as available for sale
under the provisions of Statement of Financial Accounting Standards 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. The market value
of the portfolio at March 31, 1999 and December 31, 1998 was 105% of amortized
cost. At March 31, 1999 and December 31, 1998, stockholders' equity was
increased by $16.8 million and $21.9 million, respectively, to record the
Company's fixed maturity investment portfolio at fair value. At March 31, 1999,
the Company owned no derivative instruments, except for $136.3 million (fair
value) invested in mortgage and asset backed securities.
On February 12, 1999, the Company declared its first quarter dividend on the
Company's Common Stock of $.02 per share, which was paid on March 31, 1999 to
stockholders of record as of March 15, 1999. Such dividends totaled $0.2
million.
THE YEAR 2000 ("Y2K")
The Y2K problem is a worldwide issue facing virtually every organization that
employs technology to achieve its goals, including the Company. The Y2K problem
stems from the use of a two-digit code representing the year in computer-based
systems, which could cause some computers to fail or malfunction after December
31, 1999. The Company's insurance policies contain date sensitive data, such as
expiration dates, and internal systems rely on such date fields. Further, the
Company's philosophy has long emphasized the use of technology, so it may be
more heavily reliant upon computer systems than some other similarly situated
insurance companies. If the Company's principal computer systems were not made
Y2K compliant, its business operations, including policy issuance, premium
billing and collections, claims handling, investment and accounting functions,
could be materially adversely affected, with negative financial consequences and
damage to the Company's reputation.
Internal: Management has taken steps to address Y2K as it affects the
Company's own business systems. In addition to assigning senior Information
Services staff resources exclusively to this project, the Company has formed a
Y2K Project Office, which includes the Chairman of the Board of Directors as
well as representatives from all principal operations areas. Early in 1998, the
Project Office began monitoring the Company's Y2K compliance project, a
five-phase program incorporating assessment, remediation, testing, business
partner compliance and corporate acceptance. Later in 1998, the Company retained
an independent consultant, which advised and made recommendations as to the
adequacy of planned testing protocols and test schedules. The Company has
completed the assessment, remediation and testing phases of all mission-critical
applications. It is on-schedule to complete the remaining testing, and currently
plans to conduct a so-called "end to end" test of all information systems by
late second quarter or early third quarter 1999. Additionally, third-party
business partners that have material vendor or customer relationships with the
Company have been identified, and each is being contacted to determine its Y2K
readiness. In particular, there are several insurance brokerage firms that
produce a significant share of the Company's insurance business. An inability on
the part of any such firm to process insurance applications due to a failure of
their computer systems could materially affect the Company's financial results
for the period in which such failure occurred. The Company's Y2K readiness
project calls for contingency planning to identify actions to be taken should
the Company's or its business partners' readiness efforts fail. Such plans will
be formalized during the third quarter of 1999.
Operating results in the first quarter of 1999 included some expense (less than
$0.2 million) directly or indirectly related to Y2K readiness. Based on the
progress of the Company's Y2K project to date, it is not currently anticipated
that there will be a material impact on operating expense related to Y2K during
1999, nor will the completion of Y2K efforts result in a meaningful reduction in
expense levels in 1999 or future years.
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External: Because a significant portion of the Company's business is insuring
executives of business organizations that rely on computer technology, business
interruptions and other problems related to mismanagement of the Y2K issue could
also affect the Company's claims experience in future years. In July 1998, a
national rating agency revised its outlook on the rating of the Company's senior
debt from "stable" to "negative," premised upon the agency's analysis of the D&O
insurance industry's exposure to the Y2K issue. Such negative ratings outlook
has since been removed in light of the announced acquisition by Chubb. The
Company acknowledges that Y2K entails a significant risk to the entities it
insures. Y2K litigation is likely to cause some negative development in the
Company's loss experience. Due to the general uncertainty inherent in the Y2K
problem, however, the Company is unable to determine at this time whether such
losses will have a material impact on the Company's results of operations or
financial condition. The Company believes that its Y2K specific underwriting
techniques, together with conservative reinsurance practices and loss reserving,
should mitigate the impact of the Y2K problem.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
a) RETIREMENT AGREEMENT
On May 7, 1999, Executive Risk entered into an agreement with its Chairman,
Robert H. Kullas, which provides that Mr. Kullas will resign as an officer and
director of Executive Risk and its subsidiaries as of the day after the closing
date of the merger. Under this agreement, Mr. Kullas will be entitled to
continuation of his base salary from the time of his resignation through
December 31, 1999, subject to a minimum aggregate amount of $122,000 for this
period. Mr. Kullas will not, however, be eligible to participate in the
Executive Risk Severance Pay Plan. The agreement provides that Mr. Kullas'
resignation shall be treated as a retirement for purposes of Executive Risk's
stock based and incentive compensation plans, the principal effects of which are
that Mr. Kullas will have three years, rather than three months, following
resignation in which to exercise his stock options and Mr. Kullas will be
entitled to receive incentive compensation with respect to Executive Risk's
performance during 1999 and prior years in the event that other participants in
the Executive Risk Incentive Compensation Plan receive incentive compensation
for such periods. The agreement also contains a restriction on Mr. Kullas'
ability to compete with Executive Risk, Chubb and their affiliates through
December 31, 2000 and other customary provisions.
b) OTHER AGREEMENT
On May 7, 1999, Executive Risk entered into an agreement with Robert V. Deutsch,
its Executive Vice President, Treasurer, Chief Financial Officer and Chief
Actuary, which provides that in the event Mr. Deutsch's employment with
Executive Risk should terminate following the merger, other than as a result of
his death or disability, Mr. Deutsch's termination would be treated as a
retirement for purposes of Executive Risk's stock based and incentive
compensation plans. The principal effect of this agreement is that Mr. Deutsch
would have three years, rather than three months, following termination of
employment in which to exercise his stock options (or if, as a matter of policy,
Chubb determines that other persons who are employees of Executive Risk on the
closing date of the merger shall be allowed a period of time longer than three
years after termination of employment in which to exercise stock options, Mr.
Deutsch would have the same longer period of time, measured from his termination
date, in which to exercise his stock options). In addition, under the agreement,
Mr. Deutsch would be entitled to receive incentive compensation with respect to
Executive Risk's performance during 1999 and prior years in the event that other
participants in the Executive Risk Incentive Compensation Plan receive incentive
compensation for such periods.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Retirement Agreement, dated May 7, 1999, between
Executive Risk Inc. and Robert H. Kullas.
10.2 Other Agreement, dated May 7, 1999, between
Executive Risk Inc. and Robert V. Deutsch.
15.1 Independent Accountant's Acknowledgment Letter
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
On February 9, 1999, the Registrant filed a current report on Form 8-K,
disclosing its Agreement and Plan of Merger, dated as of February 6, 1999, with
The Chubb Corporation and its wholly-owned subsidiary, Excalibur Acquisition,
Inc.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Kulias Chairman and Director May 12, 1999
- --------------------
Robert H. Kullas
/s/ Robert V. Deutsch Executive Vice President, Chief Financial Officer, May 12, 1999
- --------------------- Chief Actuary, Treasurer, Assistant Secretary and
Robert V. Deutsch Director
(Principal Financial and Accounting Officer)
</TABLE>
11
<PAGE> 1
EXHIBIT 10.1
RETIREMENT AGREEMENT
RETIREMENT AGREEMENT (the "Retirement Agreement"), dated as of
May 7, 1999, between Executive Risk Inc., a Delaware corporation (the
"Company"), and Robert H. Kullas, an individual residing at 14 Fawn Run, Avon,
Connecticut 06001 (the "Executive").
WHEREAS, the Executive is employed as Chairman of the Company;
WHEREAS, effective on the day after the date of the effective
time of the merger (the "Merger") of the Company with Excalibur Acquisition,
Inc. ("MergerSub"), a Delaware corporation which is a wholly-owned subsidiary of
The Chubb Corporation, a New Jersey corporation ("Chubb"), (the "Retirement
Date"), the Executive will retire and his employment with the Company will
terminate;
WHEREAS, the parties wish to provide for their mutual rights
and obligations arising from such retirement;
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein and other good and valuable consideration, the
receipt of which are hereby acknowledged, the Company and the Executive hereby
agree as follows:
Section 1. Resignation. By affixing his signature to this
Agreement, Executive confirms his voluntary and irrevocable resignation from his
various positions as executive officer and director of all organizations
identified in Exhibit A attached hereto and incorporated by reference, such
resignation to be effective as of the Retirement Date. Executive acknowledges
that any employment relationship he has had with the Company will cease as of
the Retirement Date and that he shall have no further employment relationship
with the Company.
Section 2. Salary Continuation. Through December 31, 1999, the
Executive shall continue to be entitled to payments in amounts equal to the base
salary payments he would have received at his current rate of base salary had he
remained employed through December 31, 1999, payable in arrears not less
frequently than monthly, in accordance with the normal payroll practices of the
Company. In addition, to the extent that the aggregate gross payments made under
this Section 2 through December 31, 1999 do not equal $122,000, the Executive
shall receive a lump sum cash payment on or about such date equal to such
shortfall.
Section 3. Deemed Retirement. As further described in Sections
4, 5 and 6 below, for purposes of the Executive Risk Inc. Nonqualified Stock
Option Plan (the "Option Plan"), the Executive Risk Inc. Incentive Compensation
Plan (Pool A) (the "ICP") and the Executive Risk Inc. Performance Share Plan
(the "PSP"), the Executive's termination of employment hereunder shall be
treated (a) as a "Retirement" for purposes of the Option Plan and PSP, and (b)
as a "retirement" with age plus full years of employment by the Company
equaling, or exceeding, sixty for purposes of the ICP.
<PAGE> 2
Section 4. Stock Options. Each of the Executive's outstanding
options to purchase shares of the Company's common stock will be fully vested,
and fully exercisable, immediately upon the effective time of the Merger and
will be deemed to constitute an option to purchase shares of Chubb common stock
pursuant to the terms of the Agreement and Plan of Merger dated as of February
6, 1999 among the Company, MergerSub and Chubb (the "Merger Agreement"). Each of
the Executive's stock options outstanding as of the Retirement Date shall remain
exercisable until the earlier of the third anniversary of the Retirement Date or
the expiration of the term of such option. Except as provided herein, the stock
options held by the Executive shall be governed by the terms of the respective
stock option agreements and stock option plans pursuant to which such options
were granted.
Section 5. Incentive Compensation Plan. The Executive shall be
eligible to receive a pro rata Award for Plan Year 1999, as provided in
Paragraph III(g) of the ICP, at such time as other Participants in the ICP
receive Awards, if any, for that Plan Year, subject to reduction in the
discretion of the Committee as provided in the fourth paragraph of Section
III(e) of the ICP; provided, however, that (i) such discretion shall not be
exercised to reduce any such Award by more than 50% from the amount calculated
pursuant to the terms of the ICP and (ii) the recommendation of the Chairman
shall not be required for the exercise of such discretion. At such times as
other Participants in the Plan receive Awards, if any, with respect to the
Report Year Loss Ratio for Plan Years 1996, 1997, 1998 and 1999, the Executive
shall receive payment with respect to his participation in the ICP for such Plan
Years. All capitalized terms used in this Section 5 shall have the respective
meanings provided for such terms in the ICP. In the event that (i) no Awards are
made under the ICP with respect to Plan Year 1999 and (ii) bonus or incentive
compensation with respect to performance in 1999 is otherwise paid to all the
other individuals who (a) are Participants in the ICP on the date hereof and (b)
are employed by the Company on the first date as of which any portion of such
bonus or incentive compensation becomes payable (the "Covered Persons"), the
Company shall in its discretion determine the amount of a bonus payment to the
Executive with respect to performance during 1999; provided that the minimum
amount of any such bonus shall be $50,000 and the payment of such amount shall
be made in a lump sum on the first date as of which any portion of a bonus or
incentive compensation with respect to performance during 1999 becomes payable
to all the Covered Persons.
Section 6. Performance Share Plan. The number of Performance
Share Units earned by the Executive under the PSP with respect to the 1997-1999
Performance Period shall be determined pursuant to Section 10.1 of the PSP and
the Merger shall constitute a Change in Control for such purposes. The Executive
shall receive distributions on such Performance Share Units at the same time or
times as the other Participants in the PSP receive their distributions, all in
accordance with the terms of the PSP. For purposes of clarity, it is agreed that
the Number of Performance Units earned by the Executive shall not be prorated
based upon the number of months of the Executive's participation during the
1997-1999 Performance Period. All capitalized terms used in this Section 6 shall
have the respective meanings provided for such terms in the PSP.
2
<PAGE> 3
Section 7. Medical Benefits. Through December 31, 1999, the
Executive and all of his dependents covered under the Company's medical plan
immediately preceding the Retirement Date, if any, shall be entitled to
continued coverage under the Company's medical plan. The Executive shall
reimburse the Company for part of the cost of providing such benefits through
December 31, 1999, with such reimbursement being equal to the amount the
Executive was contributing immediately prior to the Retirement Date. Such
continuation coverage shall be applied towards satisfaction of the Company's
obligations to the Executive pursuant to Section 4980B of the Internal Revenue
Code ("COBRA").
Section 8. Other Rights and Benefits. Except as specifically
provided herein, this Retirement Agreement shall have no effect on the rights of
the Executive to payments or other benefits due to the Executive pursuant to the
terms of any employee benefit plan, fringe benefit policy, payroll practice or
arrangement of the Company, including, without limitation, rights in respect of
coverage under welfare benefit plans for periods through the Retirement Date,
rights under the Company's Retirement Plan and Benefit Equalization Plan, rights
under the Merger Agreement, rights under deferred compensation arrangements of
the Company, and reimbursement for any reasonable business expenses incurred
through the Retirement Date in accordance with Company policy. Notwithstanding
the foregoing, the Executive shall not be entitled to any payments under any
severance plans, programs or arrangements of the Company (including, without
limitation, any such plans, programs or arrangements established pursuant to the
Merger Agreement). Upon the termination of his employment with the Company, the
Executive shall be under no obligation to seek other employment or to otherwise
mitigate the obligations of the Company hereunder, and there shall be no offset
against amounts or benefits due the Executive hereunder on account of any
remuneration or benefit he may receive in connection with subsequent employment.
Section 9. Conditions of Benefits and Restrictions. The
Company shall provide to the Executive the rights, payments and benefits set
forth herein and shall execute and honor a release of claims and covenant not to
sue in favor of the Executive (in the form attached hereto as Exhibit B) as
consideration for and contingent upon (i) the Executive's execution,
non-revocation and honoring of a release of claims and covenant not to sue in
favor of the Company (in the form attached hereto as Exhibit C) and (ii) the
Executive's continued compliance with the restrictive covenants set forth in
Section 10 hereof.
Section 10. Noncompetition; Nondisclosure; Nonsolicitation.
The Executive hereby acknowledges and agrees that from January 1, 1999 he did
not (except for such activities he performed on behalf of the Company) and
through December 31, 2000 he shall not:
(i) engage or participate, directly or indirectly, as
an officer, director, employee, partner or consultant with primary
responsibility for activities in the fields of directors and officers
or errors and omissions liability insurance or reinsurance in the
United States of America (a "Competing Activity");
3
<PAGE> 4
(ii) divulge, furnish, or make accessible to anyone
any confidential or secret knowledge or information (x) with respect
to business plans, new products, policy forms, insurance-related
technology or other proprietary information of the Company or any of
its Subsidiaries, or (y) with respect to any development or research
work of the Company or any of its Subsidiaries;
(iii) recruit or solicit any person who has served as
an officer or employee of the Company or any of its Subsidiaries at
any time from February 1999 through December 31, 2000 to join any
other company to engage in a Competing Activity, or solicit or
recruit a substantial number of such employees or officers to work
with any company with whom the Executive is associated;
(iv) engage in or participate in, directly or
indirectly, any business conducted under a name that shall be the
same as or similar to the name of, or any trade name used by, the
Company or any of its Subsidiaries.
The Executive acknowledges that irreparable damage may result
to the Company if the provisions of this Section 10 are not specifically
enforced, and agrees that the Company shall be entitled to any appropriate
legal, equitable or other remedy, including injunctive relief, in respect of any
failure to comply with the provisions of this Section 10.
For purposes of this Section 10, the term "Subsidiary" shall
mean (i) a corporation of which shares of stock having ordinary voting power
(other than stock having such power only by reason of the happening of a
contingency) to elect 50% or more of the board of directors or other managers of
such corporation are at the time owned, directly or indirectly, through one or
more intermediaries, by the Company, or (ii) in the case of unincorporated
entities, any such entity with respect to which the Company has the power,
directly or indirectly, to designate 50% or more of the individuals exercising
functions similar to a board of directors.
For the purposes of this Section 10, "Company" shall also be
deemed to include The Chubb Corporation and its subsidiaries and affiliates (the
"Chubb Companies") with respect to the employees, officers and/or operations of
Executive Risk Inc. or its Subsidiaries that become employed by, are merged
into, or are otherwise assumed by a Chubb Company.
Section 11. Termination. This Retirement Agreement may be
terminated (i) by mutual written agreement of the Executive and the Company or
(ii) by either party if the effective date of the Merger shall not have occurred
by December 31, 1999. If this Retirement Agreement is terminated pursuant to
this Section 11, there shall be no liability or obligation on the part of the
Company or the Executive pursuant hereto.
4
<PAGE> 5
Section 12. Miscellaneous.
A. Complete Agreement. This Retirement Agreement,
together with the rights and benefits provided to the Executive as
described in Section 8 hereof, constitutes the entire agreement
between the parties and cancels and supersedes all other agreements
and understandings, whether written or oral, between the parties
which may have related to the subject matter contained in this
Retirement Agreement.
B. Modification; Amendment; Waiver. No modification,
amendment or waiver of any provisions of this Retirement Agreement
shall be effective unless approved in writing by both parties. The
failure at any time to enforce any of the provisions of this
Retirement Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter
to enforce each and every provision hereof in accordance with its
terms.
C. Governing Law; Jurisdiction. This Retirement
Agreement and performance under it, and all proceedings that may
ensue from its breach, shall be construed in accordance with and
under the laws of the State of Connecticut, and the parties submit to
the jurisdiction of the courts of the State of Connecticut for
purposes of any actions or proceedings that may be required to
enforce this Retirement Agreement.
D. Severability. Whenever possible, each provision of
this Retirement Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of
this Retirement Agreement shall be held to be prohibited by or
invalid under applicable law, such provision shall be ineffective
only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining
provisions of this Retirement Agreement.
E. Assignment. The rights and obligations of the
parties under this Retirement Agreement shall be binding upon and
inure to the benefit of their respective successors, assigns,
executors, administrators and heirs; provided, however, that the
Company may assign any duties under this Retirement Agreement without
the prior written consent of the Executive.
F. Notices. All notices and other communications under
this Retirement Agreement shall be in writing and shall be given in
person or by telefax or first class mail, certified or registered
with return receipt requested, and shall be deemed to have been duly
given when delivered personally or three days after mailing or one
day after transmission of a confirmed telefax, as the case may be, to
the respective persons named below:
5
<PAGE> 6
If to the Company: Executive Risk Inc.
82 Hopmeadow Street
Simsbury, Connecticut 06070
Attn.: Stephen J. Sills
Chief Executive Officer
Telefax: 860-408-2202
If to the Executive: Robert H. Kullas
14 Fawn Run
Avon, Connecticut 06001
Telefax: 860-677-5107
IN WITNESS WHEREOF, the parties have executed this Retirement
Agreement as of the day and year first above written.
COMPANY: Executive Risk Inc.
By /s/ Stephen J. Sills
-------------------------------------
Stephen J. Sills
President and Chief Executive Officer
EXECUTIVE: /s/ Robert H. Kullas
-------------------------------------
Robert H. Kullas
6
<PAGE> 7
EXHIBIT A
ROBERT H. KULLAS
POSITIONS WITH SUBSIDIARIES OF EXECUTIVE RISK INC.
<TABLE>
NAME OF SUBSIDIARY DOMICILE MR. KULLAS' POSITION(S)
- ------------------ -------- -----------------------
<S> <C> <C>
Executive Risk Inc. Subsidiaries
Executive Risk Management Associates Connecticut Chairman
(underwriting and claims agency)
Executive Risk Capital Trust Delaware Administrative Trustee
Executive Re Inc. Delaware Chairman, Director
(middle-level holding company)
Executive Re Inc. Subsidiaries
- Executive Risk Netherlands none
International Holdings BV
(mid-level holding co.)
Executive Risk I.H. BV subsidiary
-Executive Risk N.V. Netherlands Supervisory Director
(Netherlands insurer)
- Executive Risk (Bermuda) Ltd. Bermuda Director
(Bermuda insurer)
- Sullivan Kelly Inc. California Director
(underwriting manager)
Sullivan Kelly Inc. subsidiary
- Sullivan Kelly of Arizona, Inc. Arizona none
- - Executive Risk Indemnity Inc. Delaware Co-chairman, Director
(admitted insurance company)
Executive Risk Indemnity Inc. subsidiaries
- Executive Risk Specialty
Insurance Company Connecticut Co-chairman, Director
(surplus lines company)
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
- Quadrant Indemnity Company Connecticut Co-chairman, Director
(admitted insurance company)
- Talcott Services Corporation Connecticut none
- Executive Risk Limited United Kingdom none
</TABLE>
ALL SUBSIDIARIES HAVE A PRINCIPAL U.S. MAILING ADDRESS OF:
82 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06070
<PAGE> 9
EXHIBIT B
RELEASE OF CLAIMS AND COVENANT NOT TO SUE
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE is executed and
delivered by EXECUTIVE RISK INC. (the "Company") to ROBERT H. KULLAS (the
"Executive").
In consideration of the agreement by the Executive to enter
into the Retirement Agreement between the Executive and the Company, dated May
7, 1999 (the "Retirement Agreement"), the Company hereby agrees as follows:
The Company and its Subsidiaries release and forever discharge
the Executive from, and covenants not to sue or proceed against the Executive on
the basis of, any and all past or present causes of action, suits, agreements or
other claims which the Company or any of its Subsidiaries has against the
Executive upon or by reason of any matter, cause or thing whatsoever, including,
but not limited to, any matters arising out of his employment by the Company and
the cessation of said employment. This release shall not, however, constitute a
waiver of any of the Company's rights under the Retirement Agreement. The
Company hereby covenants that neither it nor any of its Subsidiaries has
transferred or assigned to any person or entity any of the claims that are
subject to this release and covenant.
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE is executed by
the Company and delivered to the Executive on May 7, 1999.
EXECUTIVE RISK INC.
By: /s/ Stephen J. Sills
-------------------------------------
Stephen J. Sills
President and Chief Executive Officer
<PAGE> 10
EXHIBIT C
RELEASE OF CLAIMS AND COVENANT NOT TO SUE
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE (the "Release")
is executed and delivered by ROBERT H. KULLAS (the "Executive") to EXECUTIVE
RISK INC. (the "Company").
In consideration of the agreement by the Company to provide
the Executive with the rights, payments and benefits under the Retirement
Agreement between the Executive and the Company dated May 7, 1999 (the
"Retirement Agreement") to which the Executive would not otherwise be entitled,
the Executive hereby agrees as follows:
Section I. Release and Covenant. The Executive, of his own
free will, voluntarily releases and forever discharges the Company, The Chubb
Corporation, their subsidiaries, affiliates, their directors, officers,
employees, agents, stockholders, successors and assigns (both individually and
in their official capacities) from, and covenants not to sue or proceed against
any of the foregoing on the basis of, any and all past or present causes of
action, suits, agreements or other claims which the Executive, his dependents,
relatives, heirs, executors, administrators, successors and assigns has or have
against any of them upon or by reason of any matter, cause or thing whatsoever,
including, but not limited to, any matters arising out of his employment by the
Company and the cessation of said employment, and including, but not limited to,
any alleged violation of the Civil Rights Acts of 1964 and 1991, the Equal Pay
Act of 1963, the Age Discrimination in Employment Act of 1967, the
Rehabilitation Act of 1973, the Older Workers Benefit Protection Act of 1990,
the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of
1993, and any other federal or state law, regulation or ordinance, or public
policy, contract or tort law having any bearing whatsoever on the terms and
conditions of employment or termination of employment. This Release shall not,
however, constitute a waiver of any of the Executive's rights under the
Retirement Agreement.
Section 2. Due Care. The Executive acknowledges that he has
received a copy of this Release prior to its execution and has been advised
hereby of his opportunity to review and consider this Release for 21 days prior
to its execution. The Executive further acknowledges that he has been advised
hereby to consult with an attorney prior to executing this Release. The
Executive enters into this Release having freely and knowingly elected, after
due consideration, to execute this Release and to fulfill the promises set forth
herein. This Release shall be revocable by the Executive during the 7-day period
following its execution, and shall not become effective or enforceable until the
expiration of such 7-day period. In the event of such a revocation, the
Executive shall not be entitled to the consideration for this Release set forth
above.
<PAGE> 11
Section 3. Reliance by Executive. The Executive acknowledges
that, in his decision to enter into this Release, he has not relied on any
representations, promises or agreements of any kind, including oral statements
by representatives of the Company, except as set forth in this Release.
This RELEASE OF CLAIMS AND COVENANT NOT TO SUE is executed by
the Executive and delivered to the Company on May 7, 1999.
EXECUTIVE:
/s/ Robert H. Kullas
------------------------------
Robert H. Kullas
<PAGE> 1
EXHIBIT 10.2
OTHER AGREEMENT
AGREEMENT (the "Agreement"), dated as of May 7, 1999, between
Executive Risk Inc., a Delaware corporation (the "Company"), and Robert V.
Deutsch, an individual residing at 7 Pheasant Hill Road, Farmington, Connecticut
06032 (the "Executive").
WHEREAS, the Executive is employed as Executive Vice
President, Treasurer, Chief Financial Officer and Chief Actuary of the Company;
WHEREAS, the Executive and the Company have held certain
discussions concerning the Executive's employment by the Company after the
closing of the merger (the "Merger") of the Company with Excalibur Acquisition,
Inc. ("MergerSub"), a Delaware corporation which is a wholly-owned subsidiary of
The Chubb Corporation, a New Jersey corporation ("Chubb");
WHEREAS, the Company and the Executive have reached agreement
with respect to certain terms related to the Executive's employment by the
Company;
WHEREAS, the Company and the Executive wish to record such
agreement in writing;
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein and other good and valuable consideration, the
receipt of which are hereby acknowledged, the Company and the Executive hereby
agree as follows:
Section 1. Deemed Retirement. As further described in Sections
2, 3 and 4 below, for purposes of the Executive Risk Inc. Nonqualified Stock
Option Plan and the Executive Risk Inc. IPO Stock Compensation Plan
(collectively, the "Option Plans"), the Executive Risk Inc. Incentive
Compensation Plan (Pool A) (the "ICP") and the Executive Risk Inc. Performance
Share Plan (the "PSP"), in the event that the Executive's employment with the
Company terminates at any time after the closing of the Merger other than as a
result of his death or Permanent and Total Disability (as defined in the Option
Plans), such termination of employment shall be treated (a) as a "Retirement"
for purposes of the Option Plans and PSP, and (b) as a "retirement" with age
plus full years of employment by the Company equaling, or exceeding, sixty for
purposes of the ICP. The date of any such termination is hereinafter referred to
as the "Retirement Date."
Section 2. Stock Options. Each of the Executive's outstanding
options to purchase shares of the Company's common stock will be fully vested,
and fully exercisable, immediately upon the effective time of the Merger and
will be deemed to constitute an option to purchase shares of Chubb common stock
pursuant to the terms of the Agreement and Plan of Merger dated as of February
6, 1999 among the Company, MergerSub and Chubb (the "Merger Agreement"). Subject
to the sentence immediately following, each of the Executive's stock options
outstanding as of the Retirement Date shall remain exercisable until the earlier
of the third anniversary of the Retirement Date or the expiration of the term of
such option. In the event that Chubb should determine, as
<PAGE> 2
a matter of policy, that persons who are employees of the Company or one or more
of its subsidiaries on the day of the closing of the Merger shall be allowed a
period of longer than three years after termination of employment in which to
exercise options, outstanding upon the closing of the Merger, to purchase Chubb
common stock, the Executive also shall have such longer period, measured from
the Retirement Date, to exercise such stock options unless and to the extent
they have expired earlier. Except as provided herein, the stock options held by
the Executive shall be governed by the terms of the respective stock option
agreements and stock option plans pursuant to which such options were granted.
Section 3. Incentive Compensation Plan. The Executive shall be
eligible to receive an Award for Plan Year 1999 (which Award shall be a pro rata
Award if the Retirement Date should occur prior to December 31, 1999, as
provided in Paragraph III(g) of the ICP), at such time as other Participants in
the ICP receive Awards, if any, for that Plan Year. At such times as other
Participants in the Plan receive Awards, if any, with respect to the Report Year
Loss Ratio for Plan Years 1996, 1997, 1998 and 1999, the Executive shall receive
payment with respect to his participation in the ICP for such Plan Years. All
capitalized terms used in this Section 3 shall have the respective meanings
provided for such terms in the ICP.
Section 4. Performance Share Plan. The number of Performance
Share Units earned by the Executive under the PSP with respect to the 1997-1999
Performance Period shall be determined pursuant to Section 10.1 of the PSP and
the Merger shall constitute a Change in Control for such purposes. The Executive
shall receive distributions on such Performance Share Units at the same time or
times as the other Participants in the PSP receive their distributions, all in
accordance with the terms of the PSP. For purposes of clarity, it is agreed that
the Number of Performance Units earned by the Executive shall not be prorated
based upon the number of months of the Executive's participation during the
1997-1999 Performance Period. All capitalized terms used in this Section 4 shall
have the respective meanings provided for such terms in the PSP.
Section 5. Other Rights and Benefits. Except as specifically
provided herein, this Agreement shall have no effect on the rights of the
Executive to payments or other benefits due to the Executive pursuant to the
terms of any employee benefit plan, fringe benefit policy, payroll practice or
arrangement of the Company, including, without limitation, rights in respect of
coverage under welfare benefit plans for periods through the Retirement Date,
rights under the Company's Retirement Plan and Benefit Equalization Plan, rights
under the Merger Agreement, rights under any severance plan of the Company,
rights under deferred compensation arrangements of the Company, and
reimbursement for any reasonable business expenses incurred through the
Retirement Date in accordance with Company policy. Upon the termination of his
employment with the Company, the Executive shall be under no obligation to seek
other employment or to otherwise mitigate the obligations of the Company
hereunder, and there shall be no offset against amounts or benefits due the
Executive hereunder on account of any remuneration or benefit he may receive in
connection with subsequent employment.
2
<PAGE> 3
Section 6. Termination. This Agreement may be terminated (i)
by mutual written agreement of the Executive and the Company or (ii) by either
party if the effective date of the Merger shall not have occurred by December
31, 1999. If this Agreement is terminated pursuant to this Section 6, there
shall be no liability or obligation on the part of the Company or the Executive
pursuant hereto.
Section 7. Miscellaneous.
A. Modification; Amendment; Waiver. No modification,
amendment or waiver of any provisions of this Agreement shall be
effective unless approved in writing by both parties. The failure at
any time to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not
affect the right of either party thereafter to enforce each and every
provision hereof in accordance with its terms.
B. Governing Law; Jurisdiction. This Agreement and
performance under it, and all proceedings that may ensue from its
breach, shall be construed in accordance with and under the laws of
the State of Connecticut, and the parties submit to the jurisdiction
of the courts of the State of Connecticut for purposes of any actions
or proceedings that may be required to enforce this Agreement.
C. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this
Agreement shall be held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this
Agreement.
D. Assignment. The rights and obligations of the
parties under this Agreement shall be binding upon and inure to the
benefit of their respective successors, assigns, executors,
administrators and heirs; provided, however, that neither the Company
nor the Executive may assign any duties under this Agreement without
the prior written consent of the other.
E. Notices. All notices and other communications under
this Agreement shall be in writing and shall be given in person or by
telefax or first class mail, certified or registered with return
receipt requested, and shall be deemed to have been duly given when
delivered personally or three days after mailing or one day after
transmission of a confirmed telefax, as the case may be, to the
respective persons named below:
3
<PAGE> 4
If to the Company: Executive Risk Inc.
82 Hopmeadow Street
Simsbury, Connecticut 06070
Attn.: Stephen J. Sills
Chief Executive Officer
Telefax: 860-408-2202
If to the Executive: Robert V. Deutsch
7 Pheasant Hill Road
Farmington, Connecticut 06032
Telefax: 860-676-1398
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
COMPANY: Executive Risk Inc.
By /s/ Stephen J. Sills
-------------------------------------
Stephen J. Sills
President and Chief Executive Officer
EXECUTIVE: /s/ Robert V. Deutsch
-------------------------------------
Robert V. Deutsch
4
<PAGE> 1
EXHIBIT 15.1
ACKNOWLEDGMENT LETTER
To the Stockholders and Board of Directors
Executive Risk Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-78414) pertaining to the Executive Risk Inc. Nonqualified Stock
Option Plan, Executive Risk Inc. Employee Incentive Nonqualified Stock Option
Plan, Executive Risk Inc. IPO Stock Compensation Plan, Executive Risk Inc.
Nonemployee Directors Stock Option Plan, and Option Agreements for Outside
Directors of Executive Re Inc. and in the Registration Statement (Form S-8 No.
333-52307) pertaining to the Executive Risk Inc. Performance Share Plan and the
Executive Risk Inc. Stock Incentive Plan, of our report dated April 30, 1999
relating to the unaudited consolidated interim financial statements of Executive
Risk Inc. which are included in its Form 10-Q for the quarter ended March 31,
1999.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
May 12, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,101,175
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 82,375
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,183,550
<CASH> 65,631
<RECOVER-REINSURE> 25,738
<DEFERRED-ACQUISITION> 46,536
<TOTAL-ASSETS> 1,897,331
<POLICY-LOSSES> 901,312
<UNEARNED-PREMIUMS> 379,874
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,000
125,000
0
<COMMON> 126
<OTHER-SE> 339,644
<TOTAL-LIABILITY-AND-EQUITY> 1,897,331
62,915
<INVESTMENT-INCOME> 16,234
<INVESTMENT-GAINS> 2,182
<OTHER-INCOME> 260
<BENEFITS> 40,895
<UNDERWRITING-AMORTIZATION> 11,225
<UNDERWRITING-OTHER> 15,990
<INCOME-PRETAX> 13,481
<INCOME-TAX> 2,298
<INCOME-CONTINUING> 11,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,183
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .95
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
