UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy
Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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SPECIALTY UNDERWRITERS ALLIANCE, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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N/A
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(2)
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Aggregate number of securities to which transaction applies:
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N/A
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(3)
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined):
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N/A
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(4)
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Proposed maximum aggregate value of transaction:
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N/A
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(5)
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Total fee paid:
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N/A
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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$5,819.73
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(2)
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Form, Schedule or Registration Statement No.:
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Registration Statement on Form S-4
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(3)
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Filing Party:
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Tower Group, Inc.
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(4)
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Date Filed:
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July 31, 2009
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120 Broadway
31st Floor
New York, NY 10271
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222 S. Riverside Plaza
Suite 1600
Chicago, IL 60606-6001
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PROPOSED
MERGER YOUR VOTE IS VERY IMPORTANT
To the stockholders of Specialty Underwriters Alliance,
Inc., which we refer to as SUA:
On June 21, 2009, Tower Group, Inc., which we will refer to
as Tower, Tower S.F. Merger Sub Corporation, which
we refer to as Merger Sub, a wholly-owned subsidiary
of Tower, and SUA entered into an Agreement and Plan of Merger
and on July 22, 2009, Tower, Merger Sub and SUA executed an
Amended and Restated Agreement and Plan of Merger effective as
of June 21, 2009, which we refer to as the merger
agreement.
Subject to stockholder approval as described herein and
satisfaction or waiver of the other conditions specified in the
merger agreement, on the closing date of the merger, which we
refer to as the closing date, Merger Sub will be
merged with and into SUA upon the terms and subject to the
conditions set forth in the merger agreement, which we refer to
as the merger, and SUA will continue as the
surviving corporation and will succeed to and assume all the
rights and obligations of Merger Sub.
Under the terms of the merger agreement, each share of SUA
common stock, par value $0.01, which we refer to as SUA
common stock, and each share of SUA Class B common
stock, par value $0.01, which we refer to as SUA
Class B common stock and, collectively with the SUA
common stock, as SUA stock, excluding any shares
held in treasury by SUA, owned by Tower or any wholly-owned
subsidiary of Tower, owned by any direct or indirect subsidiary
of SUA (other than SUA stock held in an investment portfolio),
and any shares of SUA Class B common stock as to which
appraisal rights have been exercised pursuant to
Section 262 of the General Corporation Law of the State of
Delaware, will be converted into the right to receive, subject
to adjustment as set forth in the merger agreement, a fraction
of a share of Tower common stock equal to the product of one
share of SUA stock and the exchange ratio. The exchange ratio is
determined by reference to the average Tower stock price, which
is the volume-weighted average price per share of Tower common
stock on the NASDAQ Global Select Market for the 15 trading day
window immediately preceding the fifth business day prior to the
closing date, and will be fixed at 0.28 if the average Tower
stock price is greater than or equal to $23.25 and less than or
equal to $27.75. If the average Tower stock price is greater
than $27.75, the exchange ratio will be adjusted downward to
provide SUA stockholders with a fixed value per share of $7.77.
If the average Tower stock price is less than $23.25 but greater
than or equal to $20.00, the exchange ratio will be adjusted
upward to provide SUA stockholders with a fixed value per share
of $6.51. However, if the average Tower stock price is less than
$20.00, the exchange ratio will be fixed at 0.3255, and SUA will
have the right, for a limited period, to terminate the merger
agreement, unless Tower elects to add additional shares of Tower
common stock to provide SUA stockholders with a value per share
of $6.51, as described in The Merger Agreement
Terms of the Merger SUA Walk-Away Right; Tower
Top-Up
Right below. Tower will not issue any fractional shares;
instead, SUA stockholders will receive an amount in cash in lieu
of the fractional share interest to which such stockholders
would otherwise be entitled pursuant to the merger agreement.
SUA will hold a special meeting of stockholders, which we refer
to as the SUA special meeting, on November 10,
2009 at 9:00 a.m. central standard time, at 222 South
Riverside Plaza, 19th Floor, in the Cook County Room,
Chicago, IL 60606. At the SUA special meeting, SUA will ask you
(i) to adopt the merger agreement; and (ii) approve
the adjournment or postponement of the SUA special meeting for
the solicitation of additional proxies in the event there are
not sufficient votes present, in person or represented by proxy,
at the time of the special meeting to adopt the merger agreement.
Before the merger can be completed, holders of the outstanding
shares of SUA common stock must adopt the merger agreement by
the requisite stockholder vote at the SUA special meeting.
As of October 7, 2009, directors and executive officers of
SUA held and were entitled to vote 290,632 shares of SUA
common stock or approximately 2.0% of the voting power of the
issued and outstanding shares of SUA common stock. Please see
the sections of this proxy statement/prospectus entitled
SUA Special Meeting Voting by SUA Directors
and Executive Officers for additional information. It is
currently expected that SUAs directors and executive
officers will vote their shares in favor of adopting the merger
agreement and other proposals described in this proxy
statement/prospectus, although none of them have entered into
any agreements obligating them to do so.
Immediately following the merger, based upon Towers
present capitalization, and assuming an average Tower stock
price between $23.25 and $27.75, SUA stockholders will own
approximately 10% of the issued and outstanding shares of Tower
common stock. Based upon the closing price of a share of Tower
common stock on the NASDAQ Global Select
Market on October 7, 2009, the most recent practicable
date before the printing of this proxy statement/prospectus, we
estimate that Tower will issue approximately
4,460,099 shares of Tower common stock, in the aggregate,
in the merger.
Tower common stock is traded on the NASDAQ Global Select Market
under the symbol TWGP, and the closing price of a
share of Tower common stock on October 7, 2009 was
$23.90 per share. Shares of SUA common stock, which are
currently traded on the NASDAQ Global Market under the symbol
SUAI, will be delisted upon completion of the
merger. The closing price of a share of SUA common stock on
October 7, 2009 was $6.40 per share.
SUAs board of directors has approved the merger, the
merger agreement and the other transactions contemplated by the
merger agreement, determined that the merger, the merger
agreement and the other transactions contemplated by the merger
agreement are advisable, fair to and in the best interests of
SUA and its stockholders and resolved to recommend that
SUAs stockholders vote in favor of the adoption of the
merger agreement. SUAs board of directors recommends that
you vote FOR the proposal to adopt the merger
agreement and FOR the proposal to approve the
adjournment or postponement of the SUA special meeting for the
solicitation of additional proxies in the event there are not
sufficient votes present, in person or represented by proxy, at
the time of the special meeting to adopt the merger agreement.
This proxy statement/prospectus provides SUA stockholders with
detailed information about the special meeting and the proposed
merger. You can also obtain information from publicly available
documents filed by Tower and SUA with the Securities and
Exchange Commission, which we refer to as the SEC.
Tower and SUA encourage you to read this entire document
carefully, including the section entitled Risk
Factors below.
Your vote is very important. Whether or not you plan to
attend the SUA special meeting, please take time to vote on the
proposal by completing and mailing the enclosed proxy card.
Sincerely,
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Michael H. Lee
Chairman of the Board of Directors, President and Chief
Executive Officer of Tower Group, Inc
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Courtney C. Smith
President, Chief Executive Officer and Chairman of the Board of
Directors of Specialty Underwriters Alliance, Inc.
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Neither the SEC nor any state securities commission has
approved or disapproved of the securities to be issued in
connection with the merger, approved or disapproved of the
transaction, passed upon the merits or fairness of the
transaction or determined if this proxy statement/prospectus is
adequate, accurate or complete. Any representation to the
contrary is a criminal offense.
This
proxy statement/prospectus is dated October 9, 2009 and
is
first being mailed to stockholders of SUA on or about
October 13, 2009.
SOURCES
OF ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates by reference
information set forth in documents filed by Tower and SUA with
the SEC, and those documents include important business and
financial information about each company that is not included in
or delivered with this document. This information is available
to you without charge upon your written or oral request. You can
obtain the documents incorporated by reference into this
document through the SEC website at www.sec.gov or by requesting
them in writing or by telephone at the appropriate address or
telephone number below:
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Tower Group, Inc.
120 Broadway
31st Floor
New York, NY 10271
Attention: Elliot S. Orol
Telephone Number:
(212) 655-2000
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Specialty Underwriters Alliance, Inc.
222 S. Riverside Plaza
Suite 1600
Chicago, IL 60606-6001
Attention: Scott W. Goodreau
Telephone Number: (312) 277-1600
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If you would like to request documents, in order to ensure
timely delivery, you must do so at least five business days
before the date of the SUA special meeting. This means SUA
stockholders must request this information no later than
November 3, 2009. Tower or SUA, as the case may be, will
mail properly requested documents to requesting stockholders by
first class mail, or another equally prompt means, within one
business day after receipt of such request.
For further information, see Where You Can Find More
Information below.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD ON NOVEMBER 10, 2009
To the Stockholders of Specialty Underwriters Alliance,
Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Specialty Underwriters Alliance, Inc. (SUA)
will be held on November 10, 2009 at 9:00 a.m. central
standard time, at 222 South Riverside Plaza, 19th Floor, in
the Cook County Room, Chicago, IL 60606 for the following
purposes:
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to adopt the Amended and Restated Agreement and Plan of Merger
(the merger agreement), executed on July 22,
2009 and effective as of June 21, 2009, among SUA, Tower
Group, Inc. (Tower) and Tower S.F. Merger
Corporation, a wholly-owned subsidiary of Tower (Merger
Sub); and
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to approve the adjournment or postponement of the special
meeting for the solicitation of additional proxies in the event
there are not sufficient votes present, in person or represented
by proxy, at the time of the special meeting to adopt the merger
agreement.
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Only those persons who were holders of record of SUAs
common stock, par value $0.01 (SUA common stock), at
the close of business on September 25, 2009 will be
entitled to notice of, to attend and to vote at, the special
meeting and any adjournment or postponement thereof. Holders of
Class B common stock, par value $0.01 (SUA
Class B common stock), are not entitled to vote at
the special meeting or any adjournment or postponement thereof.
As of September 25, 2009, the SUA record date, there were
14,574,596 shares of SUA common stock outstanding. Each
holder of SUA common stock is entitled to one vote for each
share of SUA common stock owned on the SUA record date. If you
own shares through a broker or other nominee and you want to
have your vote counted, you must instruct your broker or nominee
to vote. Approval of the proposal to adopt the merger agreement
requires the affirmative vote of a majority of the outstanding
shares of SUA common stock entitled to vote thereon at the SUA
special meeting. Approval of the adjournment or postponement of
the special meeting for solicitation of additional proxies in
the event there are not sufficient votes present, in person or
represented by proxy, at the time of the special meeting to
adopt the merger agreement requires the affirmative vote of a
majority of the of the shares of SUA common stock entitled to
vote thereon at the SUA special meeting and present, in person
or represented by proxy, at the special meeting.
For more information about the merger of Merger Sub with and
into SUA upon the terms and subject to the conditions set forth
in the merger agreement, the merger, and the other
transactions contemplated by the merger agreement, please review
the accompanying proxy statement/prospectus and the merger
agreement attached to it as Annex A.
SUAs board of directors has approved the merger, the
merger agreement and the other transactions contemplated by the
merger agreement, determined that the merger, the merger
agreement and the other transactions contemplated by the merger
agreement are advisable, fair to, and in the best interests of
SUA and its stockholders and resolved to recommend that
SUAs stockholders vote in favor of the adoption of the
merger agreement.
SUAs board of directors recommends that you vote
FOR the proposal to adopt the merger agreement and
FOR the proposal to approve the adjournment or
postponement of the SUA special meeting for the solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
special meeting to adopt the merger agreement.
By Order of the Board of Directors,
Chairman of the Board of Directors
Dated: October 9, 2009
Chicago, Illinois
IMPORTANT:
REGARDLESS OF HOW MANY SHARES OF SUA COMMON STOCK YOU OWN AS
OF THE SUA RECORD DATE, PLEASE COMPLETE, DATE, SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE
PROVIDED TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE
MEETING.
Table of
Contents
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Page
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List of Annexes
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A-1
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B-1
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C-1
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D-1
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E-1
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Annex F Hermitage Insurance Company and Subsidiary
Audited Historical Consolidated Financial Statements for the
years ended December 31, 2007 and 2006 and for the periods
January 1, 2005 through June 2, 2005 (predecessor) and
June 3, 2005 through December 31, 2005 (successor)
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F-1
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iii
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
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Q:
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When and where is the SUA special meeting?
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A:
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The SUA special meeting will take place on November 10,
2009 at 9:00 a.m. central standard time, at 222 South
Riverside Plaza, 19th Floor, in the Cook County Room, Chicago,
IL 60606.
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Q:
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On what am I being asked to vote?
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A:
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At the SUA special meeting, holders of shares of SUA common
stock will be asked (1) to adopt the merger agreement,
which is also referred to as the merger proposal;
and (2) to approve the adjournment or postponement of the
SUA special meeting for the solicitation of additional proxies
in the event there are not sufficient votes present, in person
or represented by proxy, at the time of the special meeting to
adopt the merger agreement.
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Q:
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What will happen in the merger?
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A:
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If SUA stockholder approval as described herein is obtained and
all other conditions to the merger have been satisfied or
waived, Merger Sub will merge with and into SUA, upon the terms
and subject to the conditions set forth in the merger agreement.
Upon the completion of the merger, the separate corporate
existence of Merger Sub will cease and SUA will continue as the
surviving corporation in the merger, succeed to and assume all
the rights and obligations of Merger Sub and be a wholly-owned
subsidiary of Tower.
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Q:
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Why are the parties proposing to merge?
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A:
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SUA and Tower believe that the merger will (a) provide the
opportunity to share profit center resources in the specialty
property and casualty insurance market and consolidate certain
functions, resulting in cost savings to the combined company,
(b) provide the opportunity to create long-term stockholder
value by increasing the growth of SUAs business by
cross-selling products with Tower and accessing Towers
higher A− A.M. Best Company rating (the
4th highest of 15 rating levels) instead of SUAs lower
B+ A.M. Best Company rating (the 6th highest of 15
rating levels) and Towers higher capital base,
(c) allow Tower and SUA to manage market cycles through
diversity of lines of business and geography while maintaining a
culture of disciplined underwriting and pricing and
(d) provide the opportunity to achieve enhanced growth
opportunities and leverage SUAs scalable infrastructure.
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In addition, Tower believes that the merger will, among other
benefits, (a) allow for the expansion of Towers
underwriting capacity in the specialty property and casualty
insurance market, which will further broaden Towers
product offerings and (b) provide the opportunity for Tower
to utilize SUAs office headquarters to develop
Towers brokerage business written through retail and
wholesale agents in the midwestern United States.
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SUA further believes that the merger consideration payable to
SUA stockholders represents a significant premium to the price
of SUAs common stock prior to the announcement of the
transaction and that the market for Tower common stock
represents a significantly more liquid market than the market
for SUA common stock prior to the announcement of the
transaction.
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Please see The Merger SUAs Reasons for
the Merger and The Merger Towers
Reasons for the Merger below for additional information.
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Q:
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What will SUA stockholders receive in the merger?
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A:
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Under the terms of the merger agreement, each outstanding share
of SUA common stock and each outstanding share of SUA
Class B common stock, excluding any shares held in treasury
by SUA, owned by Tower or any wholly-owned subsidiary of Tower,
owned by any direct or indirect subsidiary of SUA (other than
SUA stock held in an investment portfolio), and any shares of
SUA Class B common stock as to which appraisal rights have
been exercised pursuant to Section 262 of the General
Corporation Law of the State of Delaware, which we refer to as
the DGCL, will be converted into the right to
receive, subject to adjustment as set forth in the merger
agreement, a fraction of a share of Tower common stock equal to
the
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product of one share of SUA stock and the exchange ratio, which
we refer to as the merger consideration. The
exchange ratio is determined by reference to the average
Tower stock price, which is the volume-weighted average
price per share of Tower common stock on the NASDAQ Global
Select Market for the 15 trading day window immediately
preceding the fifth business day prior to the closing date, and
will be fixed at 0.28 if the average Tower stock price is
greater than or equal to $23.25 and less than or equal to
$27.75. If the average stock price is greater than $27.75, the
exchange ratio will be adjusted downward to provide SUA
stockholders with a fixed value per share of $7.77. If the
average Tower stock price is less than $23.25 but greater than
or equal to $20.00, the exchange ratio will be adjusted upward
to provide SUA stockholders with a fixed value per share of
$6.51. However, if the average Tower stock price falls below
$20.00, the exchange ratio will be fixed at 0.3255, and SUA will
have the right, for a limited period, to terminate the merger
agreement, unless Tower elects to add additional shares of Tower
common stock to provide SUA stockholders with a value per share
of $6.51. SUA stockholders will not receive any fractional
shares of Tower common stock in the merger. Instead, SUA
stockholders will be paid cash in lieu of the fractional share
interest to which such stockholders would otherwise be entitled
as described under the section entitled The Merger
Agreement Terms of the Merger below.
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|
Q:
|
|
Are SUA stockholders able to exercise appraisal rights?
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A:
|
|
With respect to SUA Class B common stock, yes. Under the
DGCL, which governs the merger, holders of shares of SUA
Class B common stock have the right to seek appraisal of
their issued and outstanding SUA Class B common stock. In
order to exercise appraisal rights, holders of SUA Class B
common stock must, within twenty days after the date of mailing
this proxy statement/prospectus, demand in writing the appraisal
of their shares of SUA Class B common stock from SUA. The
right to seek appraisal requires strict compliance with the
procedures contained in Section 262 of the DGCL. Failure to
follow any of these procedures may result in the termination or
waiver of appraisal rights.
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With respect to SUA common stock, no. Under the DGCL,
holders of SUA common stock will not be entitled to exercise any
appraisal rights in connection with the merger. For more
information, see the section entitled The
Merger Appraisal Rights below.
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Q:
|
|
When do the parties expect to complete the merger?
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A:
|
|
The parties expect to complete the merger in December of 2009,
although there can be no assurance that the parties will be able
to do so.
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Q:
|
|
How will the combined company be managed?
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A:
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|
It is expected that the current senior management team of Tower,
including Michael H. Lee, who is currently serving as the
chairman of the board of directors, president and chief
executive officer of Tower, will continue in their respective
positions and manage the combined company.
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Q:
|
|
What will be the composition of the board of directors of
Tower following the merger?
|
|
A:
|
|
The composition of the board of directors of Tower is not
expected to change as a result of the merger.
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|
Q:
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|
Why is my vote important?
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|
A:
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|
If you do not submit a proxy or vote in person at the special
meeting, it will be more difficult for SUA to obtain the
necessary quorum to hold the meeting. Your failure to submit a
proxy or to vote in person will have the same effect as a vote
against the merger proposal. If you hold your shares through a
broker, your broker will not be able to cast a vote on the
adoption of the merger agreement without instructions from you.
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|
Q:
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|
What constitutes a quorum for the meeting?
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A:
|
|
A majority of the outstanding shares having voting power being
present, in person or represented by proxy constitutes a quorum
for the meeting.
|
v
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Q:
|
|
What stockholder vote is required to approve the items to be
voted on at the SUA special meeting?
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A:
|
|
Merger proposal
: The affirmative vote of a
majority of the outstanding shares of SUA common stock entitled
to vote at the SUA special meeting is required to adopt the
merger agreement.
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|
|
Adjournment of meeting
: The affirmative vote
of a majority of the shares of SUA common stock entitled to vote
and present, in person or represented by proxy, at the special
meeting is required to adjourn or postpone the special meeting
for solicitation of additional proxies in the event there are
not sufficient votes present, in person or represented by proxy,
at the time of the special meeting to adopt the merger agreement.
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|
|
|
Holders of shares of SUA Class B common stock are not
entitled to vote at the SUA special meeting, including with
respect to the merger proposal.
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|
Q:
|
|
Does the board of directors recommend adoption of the merger
agreement?
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|
A:
|
|
Yes. The SUA board of directors approved the merger, the merger
agreement and the other transactions contemplated by the merger
agreement, and recommends that you vote FOR the
adoption of the merger agreement and FOR the
approval of a proposal to adjourn or postpone the special
meeting for solicitation of additional proxies in the event
there are not sufficient votes present, in person or represented
by proxy, at the time of the special meeting to adopt the merger
agreement.
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|
Q:
|
|
What is the record date for the special meeting?
|
|
|
|
A:
|
|
The record date for the SUA special meeting is
September 25, 2009, which we refer to as the SUA
record date. Holders of SUA common stock and holders of
SUA Class B common stock on the record date are entitled to
notice of the SUA special meeting, but only holders of shares of
SUA common stock at the close of business on the SUA record date
are entitled to vote at the SUA special meeting or any
adjournment or postponement thereof.
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|
|
Q:
|
|
What do I need to do now?
|
|
A:
|
|
The parties urge you to read carefully this proxy
statement/prospectus, including its annexes hereto and the
documents incorporated by reference herein. You also may want to
review the documents referenced under the section Where
You Can Find More Information below and consult with your
accounting, legal and tax advisors.
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|
Q:
|
|
How do I vote my shares?
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|
A:
|
|
Holders of shares of SUA common stock may indicate how they want
to vote on their proxy card and then sign, date and mail their
proxy card in the enclosed return envelope or as otherwise set
forth in the proxy card as soon as possible so that their SUA
common stock may be represented at the SUA special meeting.
Holders of shares of SUA common stock may also attend the SUA
special meeting in person instead of submitting a proxy.
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|
|
|
Holders of shares of SUA Class B common stock may attend
the SUA special meeting but are not entitled to vote at the SUA
special meeting and need not complete a proxy card.
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|
Q:
|
|
Who may attend the meeting?
|
|
|
|
A:
|
|
SUA stockholders (or their authorized representatives) and
SUAs invited guests may attend the meeting. Verification
of stock ownership will be required at the meeting. If you own
your shares in your own name or hold them through a broker (and
can provide documentation showing ownership such as a letter
from your broker or a recent account statement) at the close of
business on the record date (September 25, 2009), you will
be permitted to attend the meeting.
|
|
|
|
Q:
|
|
How do I obtain directions to attend the special meeting in
person?
|
|
A:
|
|
You may contact SUA Investor Relations at
(312) 277-1600
or contact InvestorRelations@SUAInsurance.com to obtain
directions to the special meeting.
|
vi
|
|
|
Q:
|
|
What if I abstain from voting or do not vote?
|
|
A:
|
|
Abstentions of shares of SUA common stock will be counted as
shares that are present and entitled to vote for purposes of
determining whether a quorum exists for a vote on any particular
proposal, but will not be counted as votes cast in favor of such
proposal. Accordingly, an abstention from voting a share of SUA
common stock will have the same legal effect as a vote
AGAINST the proposal. If a holder of shares of SUA
common stock fails to return its proxy card, such shares will
not be counted for purposes of such vote.
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|
Q:
|
|
If my SUA common stock is held in a brokerage account or in
street name, will my broker vote my shares for
me?
|
|
A:
|
|
If you are an SUA stockholder, and if you do not provide your
bank or broker with instructions on how to vote your street name
shares, your bank or broker will not be permitted to vote them
unless your bank or broker already has discretionary authority
to vote such street name shares. Also, if your bank or broker
has indicated on the proxy that it does not have discretionary
authority to vote such street name shares, your bank or broker
will not be permitted to vote them. Either of these situations
results in a broker non-vote.
|
|
Q:
|
|
How are broker non-votes for the merger proposal treated?
|
|
A:
|
|
Broker non-votes for the adoption of the merger agreement will
have the same legal effect as a vote AGAINST the
adoption of the merger agreement and will have no effect on the
proposal to approve the adjournment or postponement of the SUA
special meeting. Holders of shares of SUA common stock,
therefore, should provide their bank or broker with instructions
on how to vote their shares, or arrange to attend the SUA
special meeting and vote their shares in person to avoid a
broker non-vote. If the bank or broker holds the shares and the
holder of shares of SUA common stock attends the special meeting
in person, the holder of shares of SUA common stock should bring
a letter from his bank or broker identifying him as the
beneficial owner of the shares and authorizing him to vote his
shares at the meeting.
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|
Q:
|
|
What do I do if I want to change my vote or revoke my
proxy?
|
|
A:
|
|
Unless your proxy is irrevocable, you may change your vote at
any time before the vote takes place at the SUA special meeting.
To do so, you may either complete and submit a new proxy card
with a later date or send a written notice to the corporate
secretary of SUA stating that you would like to revoke your
proxy. In addition, you may elect to attend the SUA special
meeting and vote in person, as described above. However, if you
hold your shares of SUA common stock through a bank, broker or
other nominee, you may revoke your instructions only by
informing the bank, broker or nominee in accordance with any
procedures established by such nominee.
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|
Q:
|
|
How will my shares be represented at the meeting?
|
|
A:
|
|
At the meeting, the officers named in your proxy card will vote
your shares in the manner you requested if you correctly
submitted your proxy. If you sign your proxy card and return it
without indicating how you would like to vote your shares, your
proxy will be voted as the SUA board of directors recommends,
which is:
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|
|
FOR the adoption of the merger agreement; and
|
|
|
|
FOR the approval of a proposal to adjourn or
postpone the special meeting for solicitation of additional
proxies in the event there are not sufficient votes present, in
person or represented by proxy, at the time of the special
meeting to adopt the merger agreement.
|
|
Q:
|
|
Should I send in my SUA stock certificates now?
|
|
A:
|
|
No. If the merger is completed, written instructions will
be sent to stockholders of SUA with respect to the exchange of
their share certificates for the merger consideration described
in the merger agreement.
|
vii
|
|
|
Q:
|
|
Do I have to take any action now to exchange my shares held
in book-entry form?
|
|
A:
|
|
No. SUA stockholders who hold their shares in book-entry
form will receive instructions for the exchange of their shares
for the merger consideration following the completion of the
merger.
|
|
Q.
|
|
Are there risks associated with the merger that I should
consider in deciding how to vote?
|
|
A.
|
|
Yes. There are a number of risks related to the merger and the
other transactions contemplated by the merger agreement that are
discussed in this proxy statement/prospectus and in other
documents incorporated by reference or referred to in this proxy
statement/prospectus. Please read with particular care the
detailed description of the risks described in Risk
Factors and in the Tower SEC filings and the SUA SEC
filings referred to in Where You Can Find More
Information below.
|
|
Q:
|
|
Will a proxy solicitor be used?
|
|
A:
|
|
Yes. SUA has engaged the Altman Group, Inc. to assist in the
solicitation of proxies for the special meeting and SUA
estimates it will pay the Altman Group, Inc. a fee of
approximately $10,000. SUA has also agreed to reimburse the
Altman Group, Inc. for reasonable
out-of-pocket
expenses and disbursements incurred in connection with the proxy
solicitation and to indemnify the Altman Group, Inc. against
certain losses, costs and expenses. In addition, our officers
and employees may request the return of proxies by telephone or
in person, but no additional compensation will be paid to them.
|
|
Q:
|
|
Who can I contact with any additional questions?
|
|
A:
|
|
If you have additional questions about the merger, you should
contact SUA at:
|
|
|
|
Specialty Underwriters Alliance, Inc.
222 S. Riverside Plaza
Suite 1600
Chicago, IL
60606-6001
Attention: Scott W. Goodreau, Senior Vice President, General
Counsel, Administration & Corporate Relations and
Secretary
Telephone Number:
(312) 277-1600
|
|
|
|
If you would like additional copies of this proxy
statement/prospectus, or if you need assistance voting your
shares, you should contact:
|
|
|
|
THE ALTMAN GROUP, INC.
1200 Wall Street West, 3rd Fl.
Lyndhurst, NJ 07071
Call Toll-Free
(866) 620-5668
Banks or Brokers Call Collect
(201) 806-7300
Email: proxyinfo@altmangroup.com
|
|
Q:
|
|
Where can I find more information about the companies?
|
|
A:
|
|
You can find more information about Tower and SUA in the
documents described under the section entitled Where You
Can Find More Information below.
|
viii
SUMMARY
This summary highlights selected information from this
statement and may not contain all the information that is
important to you. To fully understand the merger proposal and
for a more complete description of the legal terms of the
merger, you should read carefully this entire document,
including the annexes hereto and documents incorporated by
reference herein, and the other documents to which the parties
have referred you. For information on how to obtain the
documents that the parties have filed with the SEC, see the
section entitled Where You Can Find More Information
below.
Information
About the Companies
SUA
SUA, through its wholly-owned subsidiary, SUA Insurance Company,
offers specialty commercial property and casualty insurance
products through independent general agents, or partner agents,
that serve niche groups of insureds. These targeted customer
groups require specialized knowledge due to their unique risk
characteristics. Examples include tow trucks, professional
employer organizations, public entities, and contractors.
SUAs innovative approach provides products and claims
handling, allowing its partner agents to focus on distribution
and customer relationships.
SUA is a Delaware corporation. SUAs common stock trades on
the NASDAQ Global Market under the symbol SUAI. SUA
has an A.M. Best Company rating of B+ (Good),
which is the 6th highest of 15 rating levels. SUAs
principal executive offices are located at 222 South Riverside
Plaza, Suite 1600, Chicago, Illinois 60606 and its
telephone number is
(888) 782-4672.
Tower
Tower, a Delaware corporation, through its subsidiaries, offers
a broad range of specialized property and casualty insurance
products and services to small to mid-sized businesses and to
individuals primarily in the Northeast, Florida, Texas and
California. Tower provides coverage for many different market
segments, including nonstandard risks that do not fit the
underwriting criteria of standard risk carriers due to factors
such as type of business, location and premium per policy. Tower
provides, on both an admitted and excess and surplus lines
basis, commercial lines products comprised of commercial
package, general liability, workers compensation,
commercial auto and commercial umbrella policies to businesses
such as residential and commercial buildings, retail and
wholesale stores, food services and restaurants, artisan
contractors and garage automotive services. Tower also provides
personal lines products that insure modestly valued homes and
dwellings as well as personal automobiles. These products are
distributed through approximately 1,147 active retail agents
that are serviced through twelve branch offices. Tower also
distributes products through approximately 210 wholesale agents.
Tower common stock trades on the NASDAQ Global Select Market
under the symbol TWGP. Tower has an A.M. Best
Company rating of A- (Excellent), which is the 4th
highest of 15 rating levels. Towers principal executive
offices are located at 120 Broadway, 31st Floor, New York,
New York 10271 and its telephone number is
(212) 655-2000.
Merger
Sub
Merger Sub, a Delaware corporation, is a wholly-owned subsidiary
of Tower that was formed solely for the purpose of effecting the
merger. Merger Sub has not conducted and will not conduct any
business prior to the merger. Merger Subs principal
executive offices are located at 120 Broadway,
31st Floor, New York, New York 10271 and its telephone
number is
(212) 655-2000.
Further details relating to Tower, Merger Sub and SUA are
described in Information About the Companies below.
1
The
Merger
Pursuant to the merger agreement, Merger Sub will merge with and
into SUA, with SUA continuing as the surviving corporation and
succeeding to and assuming all of the rights and obligations of
Merger Sub. Immediately following the merger, based on
Towers present capitalization and assuming an average
Tower stock price between $23.25 and $27.75, SUA stockholders
will own approximately 10% of the issued and outstanding shares
of Tower common stock. The merger agreement is attached as
Annex A
to this proxy statement/prospectus. You
should read the merger agreement in its entirety because it, and
not this proxy statement/prospectus, is the legal document that
governs the merger.
Under the terms of the merger agreement, each share of SUA
stock, excluding any shares held in treasury by SUA, owned by
Tower or any wholly-owned subsidiary of Tower, owned by any
direct or indirect subsidiary of SUA (other than SUA stock held
in an investment portfolio), and any shares of SUA Class B
common stock as to which appraisal rights have been exercised
pursuant to Section 262 of the DGCL, will be converted into
the right to receive, subject to adjustment as set forth in the
merger agreement, a fraction of a share of Tower common stock
equal to the product of one share of SUA stock and the exchange
ratio. The exchange ratio is determined by reference to the
average Tower stock price, and will be fixed at 0.28 if the
average Tower stock price is greater than or equal to $23.25 and
less than or equal to $27.75. If the average Tower stock price
is greater than $27.75, the exchange ratio will be adjusted
downward to provide SUA stockholders with a fixed value per
share of $7.77. If the average Tower stock price is less than
$23.25 but greater than or equal to $20.00, the exchange ratio
will be adjusted upward to provide SUA stockholders with a fixed
value per share of $6.51. However, if the average Tower stock
price is less than $20.00, the exchange ratio will be fixed at
0.3255, and SUA will have the right, for a limited period, to
terminate the merger agreement, unless Tower elects to add
additional shares of Tower common stock to provide SUA
stockholders with a value per share of $6.51, as described in
The Merger Agreement Terms of the
Merger SUA Walk-Away Right; Tower
Top-Up
Right below. Please refer to the table set forth below in
The Merger Agreement Terms of the Merger
for examples of the exchange ratio and the amount of
consideration to be received by SUA stockholders for each share
of SUA stock, based in each case on various examples of the
average Tower stock price. Tower will not issue any fractional
shares; instead, SUA stockholders will receive an amount in cash
in lieu of the fractional share interest to which such
stockholders would otherwise be entitled pursuant to the merger
agreement.
It is currently expected that the merger will be completed after
the adoption of the merger agreement by the SUA stockholders, if
all other conditions, including requisite regulatory approvals,
have been satisfied (or are capable of being satisfied) or
waived by that time. Tower and SUA expect to complete the merger
in late 2009, although there can be no assurance that the
parties will be able to do so.
Further details relating to the structure of the merger, the
exchange ratio and the merger consideration are described in
The Merger Agreement Terms of the Merger
below.
Treatment
of SUA Stock Options and Other Equity Awards
SUA periodically has granted stock options and deferred stock
awards to employees and non-employee directors pursuant to
SUAs 2004 Stock Option Plan and SUAs 2007 Stock
Incentive Plan. As of the record date for the SUA special
meeting, there were approximately 718,066 shares of SUA
common stock subject to outstanding stock options under the 2004
Stock Option Plan and 329,960 SUA deferred stock awards
granted under the 2007 Stock Incentive Plan to the current
employees and non-employee directors of SUA.
At the effective time of the merger, each outstanding SUA stock
option that remains unexercised as of the completion of the
merger, whether or not the option is vested or unvested, and
each deferred stock award, will be assumed by Tower and will
automatically be converted into an equivalent option to acquire,
or a deferred stock award with respect to, a number of shares of
Tower common stock at the award exchange ratio. SUA stock
options and SUA deferred stock awards will be converted into
Tower options and Tower deferred stock awards at a different
ratio than the ratio used to convert outstanding shares of SUA
common stock into the merger consideration, as described in
The Merger Agreement Treatment of SUA Stock
Options and Other Equity Awards. The terms and conditions
of any converted stock option and deferred stock award generally
2
will continue to be governed by the applicable SUA plans and
will be the same as the terms and conditions of the original
award, including with respect to vesting, duration and the
effect of termination of service.
For a more detailed discussion of the terms of the merger
agreement with respect to the treatment of outstanding SUA
equity awards in connection with the merger, please see the
section captioned The Merger Agreement
Treatment of SUA Stock Options and Other Equity Awards
below.
SUAs
Reasons for the Merger
In the course of reaching its decision, SUAs board of
directors consulted with its legal and financial advisors and
considered a range of factors, including the fact that the
merger consideration payable to SUA stockholders represents a
significant premium to the price of SUAs common stock
prior to the announcement of the transaction and that the market
for Tower common stock represents a significantly more liquid
market than the market for SUA common stock prior to the
announcement of the transaction. SUA also believes that the
merger will provide SUA stockholders with greater value in the
near term than if SUA were to remain independent because the
merger will allow SUA (a) to increase the growth of its
business by cross-selling products with Tower and accessing
Towers higher A− A.M. Best Company
rating (the 4th highest of 15 rating levels) instead of
SUAs lower B+ A.M. Best Company rating (the
6th highest of 15 rating levels) and Towers higher capital
base; (b) to achieve enhanced growth opportunities and
leverage its scalable infrastructure; (c) the opportunity
to share profit center resources with Tower in the specialty
property and casualty insurance market and consolidate certain
functions, resulting in cost savings to the combined company and
(d) to manage market cycles through diversity of lines of
business and geography while maintaining a culture of
disciplined underwriting and pricing.
Further details relating SUAs reasons for approving and
recommending the merger are described in The
Merger SUAs Reasons for the Merger
below, which is not intended to be exhaustive.
Recommendations
of the SUA Board of Directors with Respect to the
Merger
SUAs board of directors recommends that holders of SUA
common stock vote FOR the adoption of the merger
agreement and FOR the approval of the adjournment or
postponement of the special meeting for the solicitation of
additional proxies if there are not sufficient votes present, in
person or represented by proxy, at the time of the special
meeting to adopt the merger agreement.
For further discussion of SUAs reasons for the merger and
the recommendation of the SUA board of directors, see The
Merger Background of the Merger, The
Merger SUAs Reasons for the Merger and
The Merger Recommendations of the SUA Board of
Directors with Respect to the Merger below.
Opinion
of SUAs Financial Advisor
FBR Capital Markets & Co., which we refer to as
FBR, delivered its opinion, dated June 21,
2009, to the SUA board of directors that, as of such date,
subject to certain assumptions and qualifications set forth in
the opinion, the exchange ratio was fair, from a financial point
of view, to the holders of the shares of SUA stock.
The full text of the FBR opinion is attached to this proxy
statement/prospectus as Appendix B. Stockholders are urged
to read the FBR opinion in its entirety. FBR provided its
opinion for the information and assistance of the SUA board of
directors in connection with its consideration of the proposed
merger. The FBR opinion addresses only the fairness, from a
financial point of view, as of the date of the opinion, of the
exchange ratio pursuant to the merger agreement to holders of
the SUA stock in the proposed merger, and does not address any
other aspect of the merger nor any other matter. The FBR opinion
is not intended to be and does not constitute a recommendation
to any stockholders as to how to vote on the merger or any other
matter and should not be relied upon by any stockholder as a
recommendation.
Under the terms of FBRs engagement, SUA agreed to pay to
FBR certain fees for its services, some of which were payable in
connection with rendering its opinion and a significant portion
of which is contingent upon completion of the merger.
3
Further details relating FBRs opinion and a description of
the fees payable in connection with the merger are included in
The Merger Opinion of SUAs Financial
Advisor below.
Towers
Reasons for the Merger
In determining that the merger was advisable and in the best
interest of Tower, the Tower board of directors considered a
number of factors, including that (a) the merger allows for
the expansion of Towers underwriting capacity in the
specialty property and casualty insurance market, which will
further broaden Towers product offerings, (b) the
merger provides the opportunity to share profit center resources
with SUA in the specialty property and casualty insurance market
and consolidate certain functions, resulting in cost savings to
the combined company, (c) the merger provides the
opportunity for Tower to utilize SUAs office headquarters
to develop Towers brokerage business written through
retail and wholesale agents in the midwestern United States
and (d) the merger provides the opportunity to create
long-term stockholder value by increasing the growth of
SUAs business by cross-selling products with Tower and
accessing Towers higher A- A.M. Best
Company rating (the 4th highest of 15 rating levels) instead of
SUAs lower B+ A.M. Best Company rating
(the 6th highest of 15 rating levels) and Towers higher
capital base. Further details relating to Towers reasons
for approving the merger are described in The
Merger Towers Reasons for the Merger
below, which are not intended to be exhaustive.
Interests
of SUA Executive Officers and Directors in the Merger
You should be aware that certain executive officers and
directors of SUA have interests in the merger that are different
from, or in addition to, the interests of stockholders
generally. These interests relate to existing employment and
change in control agreements between SUA and certain executive
officers, one of whom is currently also a director of SUA and
another of whom was also a director of SUA as of the date of the
merger agreement, but is not currently a director of SUA, that
provide for certain benefits upon the completion of the merger
and after a qualifying event, such as certain types of
terminations that could occur after the merger, including
accelerated vesting of deferred stock awards
and/or
certain severance benefits. Further details relating to SUA
directors, officers and employees interests in
the merger are described in The Merger
Interests of SUA Executive Officers and Directors in the
Merger below.
Material
U.S. Federal Income Tax Consequences
The merger is intended to qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended, which is referred to as the Code, and it is a
condition to the completion of the merger that Tower and SUA
receive written opinions from their respective counsel to the
effect that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and that
Tower and SUA will each be a party to the reorganization.
Assuming the merger qualifies as such a reorganization and that
Tower and SUA are parties to such reorganization, holders of SUA
common stock generally will not recognize gain or loss for
U.S. federal income tax purposes upon the exchange of their
SUA common stock for Tower common stock pursuant to the merger,
except with respect to cash received in lieu of fractional
shares of Tower stock.
For a further discussion of the material U.S. federal
income tax consequences of the merger, see Material
U.S. Federal Income Tax Consequences below.
SUA stockholders are strongly urged to consult their own tax
advisors as to the specific tax consequences to them of the
merger in light of their particular circumstances, including the
applicability and effect of U.S. federal, state, local,
non-U.S. income
and other tax laws. Holders of shares of SUA Class B common
stock and persons holding options on SUA common stock are also
strongly urged to consult their own tax advisors about the
consequences of the merger and related transactions.
4
Accounting
Treatment
Tower will account for the merger under the purchase method of
accounting for business combinations. Tower will be considered
the acquirer of SUA for accounting purposes. Further details
relating to the accounting treatment of the merger are described
in The Merger Accounting Treatment below.
Regulatory
Approvals Required for the Merger
The merger is subject to the expiration or termination of the
applicable waiting periods under certain state law insurance
regulatory approvals and non-disapprovals. Subject to the terms
and conditions of the merger agreement, each party agreed to use
its reasonable best efforts to prepare and file as promptly as
practicable all documentation to effect all necessary
applications, notices, petitions, filings and other documents
and to obtain, as promptly as practicable, all consents,
clearances, waivers, licenses, orders, registrations,
authorizations, approvals and permits required in order to
complete the merger or any of the other transactions
contemplated by the merger agreement. On July 17, 2009, the
Federal Trade Commission granted early termination under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder
(the HSR Act). Tower received approvals from the
California and Illinois departments of insurance for its
Form As on October 2, 2009 and October 5, 2009,
respectively. The required regulatory approvals may not be
obtained before holders of shares of SUA common stock vote on
the merger proposal. For further discussion of regulatory
matters relating to the merger, see the section entitled
The Merger Regulatory Approvals Required for
the Merger below.
Because the SUA Class B common stock is not listed on a
national securities exchange, under Section 262 of the
DGCL, such holders will have appraisal rights in connection with
the merger. Holders of SUA common stock are not entitled to
exercise any appraisal rights in connection with the merger. For
further discussion of appraisal rights, see the section entitled
The Merger Appraisal Rights below.
Conditions
to Completion of the Merger
The parties expect to complete the merger after all of the
conditions to the merger in the merger agreement are satisfied
or waived, including after SUA receives stockholder approval of
the adoption of the merger agreement at its special meeting and
the parties receive all required regulatory approvals. The
parties currently expect to complete the merger in December of
2009. It is possible, however, that factors outside of each
partys control could require them to complete the merger
at a later time or not to complete it at all.
The merger is subject to the satisfaction or waiver of a number
of conditions, including the following:
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adoption by holders of SUA common stock of the merger agreement;
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receipt of required regulatory approvals, including approvals by
the California and Illinois departments of insurance;
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absence of any injunctions or other legal restraints, having the
effect of making the merger illegal or preventing the completion
of the merger;
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the absence of any event or development that has had or would
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on SUA;
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receipt of a legal opinion by each of Tower and SUA from their
respective counsel to the effect that the merger will be treated
as a reorganization within the meaning of Section
368(a) of the Code and that Tower and SUA will each be a party
to the reorganization;
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effectiveness of this proxy statement/prospectus and the absence
of a stop order or proceedings threatened or initiated by the
SEC for that purpose; and
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other customary closing conditions.
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The merger agreement provides that the respective conditions of
Tower and Merger Sub or SUA may be waived, in whole or in part,
by Tower and Merger Sub or SUA, as applicable, to the extent
legally allowed.
5
In the event that either Tower or SUA were to waive a condition
to the completion of the merger set forth above that would
require material changes to the disclosure set forth in this
proxy statement/prospectus, Tower and SUA will recirculate this
proxy statement/prospectus and resolicit adoption of the merger
agreement by the holders of SUA common stock. Accordingly, if
either or both of Tower and SUA waives the condition to
completion of the merger that opinions are received from
Towers and SUAs respective counsel to the effect
that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and that Tower
and SUA will each be a party to the reorganization, Tower and
SUA intend to recirculate this proxy statement/prospectus and
resolicit the adoption of the merger agreement by the holders of
SUA common stock. Neither Tower nor SUA currently intends to
waive any material condition to the completion of the merger,
including the condition that the above referenced opinions are
received. For further discussion of the conditions to the
merger, see The Merger Agreement Conditions to
Completion of the Merger below.
No
Solicitation of Other Offers by SUA
The merger agreement contains provisions prohibiting SUA and its
subsidiaries from taking actions to solicit, respond to or
negotiate for competing transaction proposals, with certain
exceptions, including with respect to an unsolicited bona fide
written superior proposal, as described in The
Merger Agreement No Solicitation of Other Offers by
SUA below.
Termination
of the Merger Agreement
Tower and SUA may jointly agree to terminate the merger
agreement at any time without completing the merger, even after
adoption by the SUA stockholders of the merger agreement. In
addition, either Tower or SUA may terminate the merger
agreement, if, among other things:
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the merger shall not have been consummated on or before
December 31, 2009, as such date may be extended pursuant to
the merger agreement;
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a required regulatory approval has been denied, a law is in
effect which has the effect of prohibiting consummation of the
merger or any governmental entity in the United States has taken
action permanently restraining, enjoining or otherwise
prohibiting the merger; or
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the SUA stockholders have not adopted the merger agreement at
the SUA special meeting.
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In addition, SUA may terminate the merger agreement if, among
other things:
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the average Tower stock price is less than $20.00, unless Tower
elects to increase the merger consideration pursuant to the
terms of the merger agreement, as described in The Merger
Agreement Terms of the Merger SUA
Walk-Away Right; Tower
Top-Up
Right below; or
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subject to Towers option to cause SUA to promptly give
notice of, convene and hold the SUA special meeting for the
purpose of obtaining SUA stockholder adoption of the merger
agreement, if SUA has received an unsolicited bona fide written
superior proposal prior to the approval by its
stockholders of the merger proposal and has complied with the
provisions of the merger agreement applicable to superior
proposals, as described in The Merger
Agreement No Solicitation of Other Offers by
SUA and The Merger Agreement
Recommendation of the SUA Board of Directors below; or
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if Tower has breached the merger agreement in certain respects.
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In addition, Tower may terminate the merger agreement if, among
other things:
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the board of directors of SUA has withdrawn its recommendation
or SUA has breached its covenants relating to providing notice
of or holding of the SUA special meeting or non-solicitation of
competing transactions; or
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if SUA has breached the merger agreement in certain respects.
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Termination
Fees and Expenses
Each of Tower and SUA has agreed that, if the merger agreement
is terminated in certain circumstances described in the merger
agreement, one party will be obligated to pay the other
partys reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000. In addition, if
the merger agreement is
6
terminated in certain circumstances described in the merger
agreement, SUA must pay Tower a termination fee of $3,000,000.
SUA may be required to pay certain of Towers transaction
expenses up to a cap of $1,000,000 if:
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subject to certain exceptions, the merger agreement is
terminated because SUA stockholders have not adopted the merger
agreement at the SUA special meeting; or
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Tower terminates the merger agreement because SUA has breached
or failed to perform any of its representations, warranties,
covenants or agreements contained in the merger agreement.
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In addition to the payment of certain of Towers
transaction expenses up to a cap of $1,000,000, in the
circumstances described above, SUA may be required to pay Tower
a termination fee of $3,000,000 if SUA enters into an agreement
with certain third parties or consummates an alternative
acquisition proposal involving 75% or more of its stock or all
or substantially all of its assets within one year after
termination of the merger agreement.
Under the following circumstances, SUA may be required to pay
Tower both a termination fee of $3,000,000 and certain of
Towers transaction expenses up to a cap of $1,000,000:
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subject to certain conditions, the merger agreement is
terminated because of a failure of the merger to be consummated
by December 31, 2009 or February 28, 2010, as
applicable, and SUA enters into an agreement with certain third
parties or consummates an alternative acquisition proposal
involving 75% or more of its stock or all or substantially all
of its assets within one year after termination of the merger
agreement;
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SUA terminates the merger agreement to accept a superior
proposal, as described in The Merger Agreement
No Solicitation of Other Offers by SUA and The
Merger Agreement Recommendation of the SUA Board of
Directors; or
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Tower terminates the merger agreement because SUA (i) has
changed, or failed to include in this proxy
statement/prospectus, its recommendation to its stockholders or
(ii) has materially breached certain of the no solicitation
obligations applicable to it under the merger agreement, as
described in The Merger Agreement No
Solicitation of Other Offers by SUA and The Merger
Agreement Recommendation of the SUA Board of
Directors.
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Tower may be required to pay certain of SUAs transaction
expenses up to a cap of $1,000,000 if SUA terminates the merger
agreement because Tower has breached or failed to perform any of
its representations, warranties, covenants or agreements
contained in the merger agreement.
For a more detailed description of the circumstances under which
SUA and Tower may be required to pay the termination fees and
certain transaction expenses of the other, see The Merger
Agreement Termination Fees and Expenses below.
Purpose
of the SUA Special Meeting
Holders of SUA common stock will be asked to vote on the
following proposals:
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to adopt the merger agreement; and
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to approve the adjournment or postponement of the SUA special
meeting for the solicitation of additional proxies in the event
there are not sufficient votes present, in person or represented
by proxy, at the time of the special meeting to adopt the merger
agreement.
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SUAs board of directors recommends that SUAs
stockholders vote
FOR
the proposals set forth
in the two bullets above.
7
Voting by
SUA Directors and Executive Officers
As of October 7, 2009, directors and executive officers of
SUA held and were entitled to vote 290,632 shares of SUA
common stock, or approximately 2.0% of the voting power of the
issued and outstanding shares of SUA common stock. Please see
the sections of this proxy statement/prospectus entitled
SUA Special Meeting Voting by SUA Directors
and Executive Officers for additional information. It is
currently expected that SUAs directors and executive
officers will vote their shares in favor of adopting the merger
agreement and other proposals described in this proxy
statement/prospectus, although none of them have entered into
any agreements obligating them to do so.
Rights of
SUA Stockholders
SUA stockholders receiving merger consideration will have
different rights once they become Tower stockholders, due to
differences between the governing documents of Tower and SUA.
These differences are described in detail under Comparison
of Rights of Tower Stockholders and SUA Stockholders below.
8
RISK
FACTORS
In addition to the other information included and
incorporated by reference into this proxy statement/prospectus,
including the matters addressed in Cautionary Statement
Regarding Forward-Looking Statements above, you should
carefully consider the following risk factors before deciding
whether to vote to adopt the merger agreement. In addition to
the risk factors set forth below, you should read and consider
other risk factors specific to each of the Tower and SUA
businesses that will also affect the combined company after the
merger. These risk factors are described in Item IA of each
companys Annual Report on
Form 10-K
for the year ended December 31, 2008, each of which has
been filed by Tower or SUA, as applicable, with the SEC, as such
risks may be updated or supplemented in each companys
subsequently filed Quarterly Reports on
Form 10-Q,
all of which are incorporated by reference into this proxy
statement/prospectus. If any of the risks described below or in
the periodic reports incorporated by reference into this proxy
statement/prospectus actually materialize, the businesses,
financial conditions, results of operations, prospects or stock
prices of SUA, Tower or the combined company could be materially
adversely affected. See Where You Can Find More
Information below.
Risks
Relating to the Pending Merger
Failure
to complete the merger may negatively impact Towers and
SUAs respective businesses, financial conditions, results
of operations, prospects and stock prices.
The merger is subject to the satisfaction or waiver of a number
of conditions and there can be no assurance that the conditions
to the completion of the merger will be satisfied or waived.
These conditions include:
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adoption by holders of SUA common stock of the merger agreement;
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the absence of any injunctions or other legal restraints, having
the effect of making the merger illegal or preventing the
completion of the merger;
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the absence of any event or development that has had or would
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on SUA;
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receipt of a legal opinion by each of Tower and SUA from their
respective counsel to the effect that the merger will be treated
as a reorganization within the meaning of Section
368(a) of the Code and that Tower and SUA will each be a party
to the reorganization;
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effectiveness of this proxy statement/prospectus and the absence
of a stop order or proceedings threatened or initiated by the
SEC for that purpose; and
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other customary closing conditions.
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If the merger is not completed, Tower and SUA will be subject to
several risks, including:
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the current market price of the companies common stock may
reflect a market assumption that the merger will occur and a
failure to complete the merger could result in a negative
perception of either or both companies by equity investors and a
resulting decline in the respective market prices of the common
stock of that company;
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Tower or SUA may be required to reimburse the other for certain
reasonable,
out-of-pocket
transaction expenses, up to $1,000,000 and, in addition, SUA may
be required to pay a termination fee of $3,000,000, if the
merger agreement is terminated under certain circumstances;
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Tower and SUA are expected to incur substantial transaction
costs in connection with the merger; and
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neither SUA nor Tower would realize any of the anticipated
benefits of having completed the merger.
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If the merger is not completed, these risks may materialize and
materially adversely affect either or both companies
respective businesses, financial conditions, results of
operations, prospects and stock prices. Due to
9
the difference in size of Tower and SUA, these risks could have
a greater negative impact on SUAs business, financial
condition, results of operation, prospects and stock price.
In addition, if the merger agreement is not completed because of
the termination of the merger agreement in certain circumstances
described in the merger agreement, one party will be obligated
to pay the other partys reasonable out-of-pocket
transaction expenses up to a cap of $1,000,000. In addition, if
the merger agreement is terminated in certain circumstances
described in the merger agreement, SUA must pay Tower a
termination fee of $3,000,000.
SUA may be required to pay certain of Towers transaction
expenses up to a cap of $1,000,000 if:
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subject to certain exceptions, the merger agreement is
terminated because SUA stockholders have not adopted the merger
agreement at the SUA special meeting; or
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Tower terminates the merger agreement because SUA has breached
or failed to perform any of its representations, warranties,
covenants or agreements contained in the merger agreement.
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In addition to the payment of certain of Towers
transaction expenses up to a cap of $1,000,000, in the
circumstances described above, SUA may be required to pay Tower
a termination fee of $3,000,000 if SUA enters into an agreement
with certain third parties or consummates an alternative
acquisition proposal involving 75% or more of its stock or all
or substantially all of its assets within one year after
termination of the merger agreement.
Under the following circumstances, SUA may be required to pay
Tower both a termination fee of $3,000,000 and certain of
Towers transaction expenses up to a cap of $1,000,000:
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subject to certain conditions, the merger agreement is
terminated because of a failure of the merger to be consummated
by December 31, 2009 or February 28, 2010, as
applicable, and SUA enters into an agreement with certain third
parties or consummates an alternative acquisition proposal
involving 75% or more of its stock or all or substantially all
of its assets within one year after termination of the merger
agreement;
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SUA terminates the merger agreement to accept a superior
proposal, as described in The Merger Agreement
No Solicitation of Other Offers by SUA and The
Merger Agreement Recommendation of the SUA Board of
Directors; or
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Tower terminates the merger agreement because SUA (i) has
changed, or failed to include in this proxy
statement/prospectus, its recommendation to its stockholders or
(ii) has materially breached certain of the no solicitation
obligations applicable to it under the merger agreement, as
described in The Merger Agreement No
Solicitation of Other Offers by SUA and The Merger
Agreement Recommendation of the SUA Board of
Directors.
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Tower may be required to pay certain of SUAs transaction
expenses up to a cap of $1,000,000 if SUA terminates the merger
agreement because Tower has breached or failed to perform any of
its representations, warranties, covenants or agreements
contained in the merger agreement.
For a more detailed description of the circumstances under which
SUA and Tower may be required to pay the termination fees and
certain transaction expenses of the other, see The Merger
Agreement Termination Fees and Expenses below.
The
announcement and pendency of the merger could have an adverse
effect on Towers or SUAs stock price, businesses,
financial conditions, results of operations or business
prospects.
The announcement and pendency of the merger could disrupt
SUAs
and/or
Towers businesses in the following ways, among others:
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employees may experience uncertainty regarding their future
roles with the combined company, which might adversely affect
SUAs
and/or
Towers ability to retain, recruit and motivate key
personnel;
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the attention of SUA
and/or
Tower
management may be directed toward the completion of the merger
and transaction-related considerations and may be diverted from
the
day-to-day
business operations of their respective companies, and matters
related to the merger may require commitments of time and
resources that could otherwise have been devoted to other
opportunities that might have been beneficial to Tower or
SUA; and
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third parties with business relationships with Tower or SUA may
seek to terminate
and/or
renegotiate their relationships with Tower or SUA as a result of
the merger, whether pursuant to the terms of their existing
agreements with SUA
and/or
Tower
or otherwise.
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The merger agreement also restricts SUA from engaging in certain
actions and taking certain actions without Towers
approval, which could prevent SUA from pursuing opportunities
that may arise prior to the closing of the merger or termination
of the merger agreement.
Any of these matters could adversely affect either or both
companies respective businesses, financial conditions,
results of operations, prospects and stock prices.
Because
the market price of Tower common stock will fluctuate, SUA
stockholders cannot be sure of the precise value of the merger
consideration.
Under the terms of the merger agreement, each share of SUA
stock, excluding any shares held in treasury by SUA, owned by
Tower or any wholly-owned subsidiary of Tower, owned by any
direct or indirect subsidiary of SUA (other than shares of SUA
stock held in an investment portfolio), and any shares of SUA
Class B common stock as to which appraisal rights have been
exercised pursuant to Section 262 of the DGCL, will be
converted into the right to receive, subject to adjustment as
set forth in the merger agreement, a fraction of a share of
Tower common stock equal to the product of one share of SUA
stock and the exchange ratio. The exchange ratio is determined
by reference to the average Tower stock price subject to certain
adjustments for fluctuation in the Tower stock price as
described in The Merger Agreement Terms of the
Merger SUA Walk-Away Right; Tower
Top-Up
Right below. The average Tower stock price may differ from
the closing price per share of Tower common stock on the date
that the parties entered into the merger agreement, on the date
that the parties announced the merger, on the date that this
document was mailed, on the date of the SUA special meeting, on
the date that is the deadline for any SUA stockholder to
exercise its rights to seek an appraisal of the fair value of
its SUA Class B common stock, at the effective time of the
merger, and on the date that you receive the merger
consideration.
Accordingly, at the time of the SUA special meeting, SUA
stockholders will not be able to calculate the precise value of
the merger consideration that they would receive upon completion
of the merger. Changes in the average Tower stock price and
stock prices of Tower and SUA generally may result from a
variety of factors, including general market, economic and
political conditions, changes in the parties respective
businesses, operations and prospects, regulatory considerations,
legal proceedings and developments, market assessments of the
benefits of the merger and the likelihood that the merger will
be consummated and the timing of such consummation, the
prospects of post-merger operations and other factors. Many of
these factors are beyond the parties control. Tower and
SUA generally are not permitted to terminate the merger
agreement solely because of changes in the market prices of
either companys stock, though SUA will have the right, for
a limited period, to terminate the merger agreement if the
average Tower stock price is less than $20.00, unless Tower
elects to increase the merger consideration pursuant to the
terms of the merger agreement, as described in The Merger
Agreement Terms of the Merger SUA
Walk-Away Right; Tower
Top-Up
Right below.
In the event that Towers stock price is less than $20.00,
SUAs board of directors likely would consider the
following factors in determining whether SUA should exercise its
walk-away right: (i) the then-current and recent price of
SUA common stock relative to the then-current and recent price
of Tower common stock, (ii) SUAs business prospects,
(iii) Towers business prospects, (iv) the
economy in general, (v) the insurance industry as a whole,
and the commercial property and casualty industry in particular,
and (vi) subject to the no solicitation and similar
obligations in the merger agreement, potential alternative
strategic opportunities, if any.
You should obtain current market quotations for shares of Tower
common stock and SUA common stock.
11
Some
of the executive officers and directors of SUA have interests in
seeing the merger completed that are different from, or in
addition to, those of the other SUA stockholders. Therefore,
some of the directors and executive officers of SUA may have a
conflict of interest in recommending that SUA stockholders vote
to adopt the merger agreement.
Some of the executive officers and directors of SUA have
arrangements that provide them with interests in the merger that
are different from, or in addition to, those of the other
stockholders of SUA. These interests relate to existing
employment and change in control agreements between SUA and
certain executive officers, one of whom is also a director of
SUA and another of whom was also a director of SUA as of the
date of the merger agreement, but is not currently a director of
SUA, that provide for certain benefits upon the completion of
the merger and after a qualifying event, such as certain types
of terminations that could occur after the merger, including
accelerating vesting of deferred stock awards
and/or
certain severance benefits, as described in The
Merger Interests of SUA Executive Officers and
Directors in the Merger. These interests, among others,
may influence the executive officers and directors of SUA to
support or approve the merger proposal.
The
merger agreement contains provisions that could discourage a
potential acquirer that might be willing to acquire or merge
with SUA.
The merger agreement contains no shop provisions and
other restrictions, subject to certain exceptions, that restrict
SUAs ability to, among other things:
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solicit, initiate or knowingly encourage, or knowingly
facilitate an alternative acquisition proposal (as described
under the section entitled The Merger
Agreement No Solicitation of Other Offers by
SUA) with respect to it;
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enter into, continue or otherwise participate in any discussions
or negotiations regarding, or furnish to any person any
non-public material information with respect to an alternative
acquisition proposal;
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withdraw (or modify or qualify in a manner adverse to Tower),
the SUA board of directors recommendation regarding the merger
proposal;
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approve, adopt or recommend, or publicly propose to approve,
adopt or recommend an alternative acquisition proposal; or
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enter into any letter of intent, memorandum of understanding,
agreement in principle, merger agreement, acquisition agreement,
option agreement, joint venture, partnership agreement or
similar contract providing for, with respect to or in connection
with, an alternative acquisition proposal.
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The merger agreement also contains a force the vote
provision that requires SUA to submit the merger proposal to its
stockholders regardless of its receipt of a superior alternative
proposal. There are only limited exceptions to SUAs
agreement that its board of directors will not withdraw or
adversely modify its recommendation regarding the merger, and
any such change must be in response to a superior alternative
proposal or based on the SUA board of directors good faith
determination that a failure to do so would be inconsistent with
its fiduciary duties.
In addition, in the event that the merger agreement is
terminated at any time prior to the SUA special meeting, due to
the board of directors of SUA adversely withdrawing or modifying
its recommendation regarding the merger proposal or the merger
agreement is terminated in connection with SUA entering into
definitive agreements with respect to an alternative acquisition
proposal, Tower will be entitled to collect a termination fee of
$3,000,000 from SUA, as well as the reimbursement of certain
reasonable,
out-of-pocket
transaction expenses, up to a cap of $1,000,000. Further, if a
third party makes an alternative acquisition proposal for SUA,
under certain circumstances, if the merger agreement is
terminated for certain reasons specified in the merger
agreement, Tower will be entitled to reimbursement of certain
reasonable,
out-of-pocket
transaction expenses, up to a cap of $1,000,000 and, if SUA
enters into an agreement with certain third parties or
consummates an alternative acquisition proposal involving 75% or
more of its stock or all or substantially all of its assets
within a year after termination, SUA will be required to pay
Tower a
12
termination fee of $3,000,000 and, to the extent not previously
paid, to reimburse Tower for certain reasonable,
out-of-pocket
transaction expenses, up to a cap of $1,000,000.
These provisions could discourage other potential acquirers of
SUA even if those parties might be willing to offer a greater
amount of consideration than that proposed to be paid in the
merger, or may result in a potential competing acquirer
proposing to pay a lower per share price than it may otherwise
have proposed to pay because of the added expense of the
termination fee and expense reimbursement.
Risk
Factors Relating to the Combined Company Following the
Merger
If the merger is completed, Tower and SUA will operate as a
combined company in a market environment that is difficult to
predict and involves significant risks, many of which will be
beyond the control of the combined company. In determining
whether you should vote to adopt the merger agreement, you
should carefully read and consider the following risk factors.
If any of the events, contingencies, circumstances or conditions
described in the following risks actually occur, the combined
companys business, financial condition, results of
operations, prospects or stock price could be adversely
affected.
The
parties must obtain governmental and other consents to complete
the merger. If these consents are delayed, not granted or
granted with unacceptable conditions, it may jeopardize or
postpone the completion of the merger, result in additional
expenditures of money and resources and/or reduce the
anticipated benefits of the merger.
The parties must obtain approvals and consents in a timely
manner from federal and some state authorities prior to the
completion of the merger. These approvals or consents include:
(i) the termination or expiration of any waiting period (and any
extension thereof) applicable to the merger under the HSR Act,
which occurred on July 17, 2009, (ii) approvals by the
California and Illinois departments of insurance, which occurred
on October 2, 2009 and October 5, 2009, respectively.
(iii) the effectiveness of this proxy statement/prospectus
and the absence of a stop order or proceedings threatened or
initiated by the SEC for that purpose. If the parties do not
receive these approvals, or do not receive them on terms that
satisfy the conditions set forth in the merger agreement, then
the parties will not be obligated to complete the merger. The
governmental agencies from which the parties will seek these
approvals have broad discretion in administering the governing
regulations. As a condition to approval of the merger, these
agencies may impose terms, conditions, obligations or
restrictions that could negatively affect Towers ability
to integrate SUAs operations into Towers operation
and the way the combined company conducts business following the
merger. If Tower or SUA agrees to any material term, condition,
obligation or restriction in order to obtain any approval
required to complete the merger, these terms, conditions,
obligations or restrictions could adversely affect the ability
to integrate SUAs operations into Towers operations
or could reduce the anticipated benefits of the merger. This
could result in a material adverse effect on the business,
financial condition, operating results, prospects and stock
price of the combined company following the merger. If any such
term, condition, obligation or restriction would, individually
or in the aggregate, reasonably be expected to have a
regulatory material adverse effect, either Tower or
SUA may refuse to complete the merger.
There
may be unexpected delays in the consummation of the merger,
which would delay SUA stockholders receipt of the merger
consideration and could impact Towers ability to timely
achieve cost savings associated with the merger.
The merger is expected to close in late 2009. However, certain
events may delay the consummation of the merger, including,
without limitation, the inability to obtain regulatory approvals
of the merger on the proposed terms or the failure of SUA to
obtain the stockholder approval required to complete the merger.
If these events were to occur, the receipt of shares of Tower
common stock by SUA stockholders would be delayed. In addition,
a delay in the consummation of the merger could impact
Towers ability to timely realize cost savings associated
with the merger.
13
Combining
Tower and SUA may be more difficult than expected.
Tower and SUA agreed to merge their businesses with the
expectation that the merger would result in various benefits,
including, among other things, that the merger will
(a) provide the opportunity to share profit center
resources in the specialty property and casualty insurance
market and consolidate certain functions, resulting in cost
savings to the combined company, (b) provide the
opportunity to create long-term stockholder value by increasing
the growth of SUAs business by cross-selling products with
Tower and accessing Towers higher A−
A.M. Best Company rating (the 4th highest of 15 rating
levels) instead of SUAs lower B+ A.M. Best
Company rating (the 6th highest of 15 rating levels) and
Towers higher capital base, (c) allow Tower and SUA
to manage market cycles through diversity of lines of business
and geography while maintaining a culture of disciplined
underwriting and pricing, (d) provide the opportunity to
achieve enhanced growth opportunities and leverage SUAs
scalable infrastructure, (e) allow for the expansion of
Towers underwriting capacity in the specialty property and
casualty insurance market, which will further broaden
Towers product offerings and (f) provide the
opportunity for Tower to utilize SUAs office headquarters
to develop Towers brokerage business written through
retail and wholesale agents in the midwestern United States.
Please see The Merger SUAs Reasons for
the Merger and The Merger Towers
Reasons for the Merger below for additional information.
Achieving the anticipated benefits of the merger is subject to a
number of uncertainties, including whether Tower and SUA are
integrated in an efficient and effective manner, and general
competitive factors in the marketplace. Failure to achieve these
anticipated benefits could result in increased costs, decreases
in the amount of expected revenues and diversion of
managements time and energy and could negatively impact
the combined companys business, financial condition,
results of operations, prospects and stock price.
Adverse
economic factors including recession, inflation, periods of high
unemployment or lower economic activity could result in the
combined company selling fewer policies than expected and/or an
increase in premium defaults which, in turn, could affect the
combined companys growth and profitability.
Negative economic factors may also affect the combined
companys ability to receive the appropriate rate for the
risk it insures with its policyholders and may impact its policy
flow. In an economic downturn, the degree to which prospective
policyholders apply for insurance and fail to pay all balances
owed may increase. Existing policyholders may exaggerate or even
falsify claims to obtain higher claims payments. These outcomes
would reduce the combined companys underwriting profit to
the extent these effects are not reflected in the rates charged
by the combined company.
The
loss of key personnel could have a material adverse effect on
the combined companys business, financial condition,
results of operations or business prospects.
The success of the merger will depend in part on the combined
companys ability to retain key Tower and SUA employees who
continue employment with the combined company after the merger.
It is possible that these employees might decide not to remain
with the combined company after the merger is completed. If
these key employees terminate their employment, the combined
companys sales, marketing or development activities might
be adversely affected, managements attention might be
diverted from successfully integrating SUAs operations to
recruiting suitable replacements and the combined companys
business, financial condition, results of operations or business
prospects could be adversely affected. In addition, the combined
company might not be able to locate suitable replacements for
any such key employees who leave the combined company or offer
employment to potential replacements on reasonable terms.
Each of Tower and SUA maintain employment agreements with
certain of their key personnel. With respect to SUA employees
with employment agreements or change in control agreements, the
merger would constitute a change in control under each of those
agreements. These agreements provide for certain benefits upon
completion of the merger and after a qualifying event, such as
certain terminations that could occur after the merger,
including accelerated vesting of deferred stock awards and/or
certain severance benefits. The merger does not constitute a
change of control or otherwise entitle the relevant employees of
Tower to enhanced severance benefits under the employment
agreements maintained by Tower. For a description of the
14
term and termination provisions of the SUA and Tower employment
agreements, see The Merger Interests of SUA
Executive Officers and Directors in the Merger and
Information About the Companies Tower,
respectively.
Future
results of the combined company may differ materially from the
unaudited pro forma financial statements presented in this proxy
statement/prospectus.
The future results of the combined company may be materially
different from those shown in the unaudited
pro forma
financial statements presented in this proxy
statement/prospectus which show only a combination
of the historical results of Tower and SUA.
The
market price of Tower common stock after the merger may be
affected by factors different from those affecting SUA common
stock currently.
If the merger is completed, holders of SUA stock will become
holders of Tower common stock. The results of operations and
market price of Tower common stock may be affected by factors
different from those currently affecting the results of
operations and market prices of SUA common stock. These factors
include:
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a greater number of shares outstanding;
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different stockholders;
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different businesses, including with respect to the types of
business written, geographical areas of operation and
underwriting guidelines; and
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different assets, including investment portfolios, and
capitalizations.
|
Accordingly, the historical market prices and financial results
of SUA, which SUA stockholders considered when investing in SUA,
may not be indicative of the market prices and financial results
for the combined company after the merger.
For a discussion of the businesses of Tower and SUA and of
certain factors to consider in connection with those businesses,
see the documents incorporated by reference in this proxy
statement/prospectus and referred to under Where You Can
Find More Information below.
The
market price of Tower common stock and Towers earnings per
share may decline as a result of the merger.
The market price of Tower common stock may decline as a result
of, among other things, the merger if Tower does not achieve the
perceived benefits of the merger as rapidly or to the extent
anticipated by financial or industry analysts or if the effect
of the merger on Towers financial results is not
consistent with the expectations of financial or industry
analysts. In addition, the failure to achieve expected benefits
and unanticipated costs relating to the merger could reduce
Towers future earnings per share.
Ownership
will be diluted and voting power will decline.
As a result of the merger, the voting power of SUA stockholders
will substantially decline. Assuming the average Tower stock
price is greater than or equal to $23.25 and less than or equal
to $27.75, following the merger, SUA stockholders will own
approximately 10% of the issued and outstanding shares of Tower
common stock, as opposed to 100% of the issued and outstanding
shares of SUA common stock that they currently own.
The
shares of Tower common stock to be received by SUA stockholders
as a result of the merger will have different rights from the
shares of SUA common stock.
Upon completion of the merger, SUA stockholders will become
Tower stockholders, and their rights as stockholders will be
governed by Towers certificate of incorporation and
by-laws. The rights associated with Tower common stock are
different from the rights associated with SUA common stock and
SUA Class B
15
common stock and the rights associated with Tower common stock
may be less advantageous than the rights associated with SUA
common stock and SUA Class B common stock in certain
respects, including:
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Towers board of directors is divided into three classes
and members of only one of three classes of Towers
directors are elected each year, whereas SUAs board of
directors is not classified. This means that the SUA
stockholders are able to vote on the election of every director
of SUA each year, whereas Tower stockholders are only able to
vote on the election of certain directors of Tower each year.
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Any action required or permitted to be taken at any annual or
special meeting of stockholders of Tower may be taken only upon
the vote of the stockholders at an annual or special meeting
duly noticed and called, and may not be taken by written consent
of the stockholders, whereas an action by the stockholders of
SUA may be taken without a meeting if a consent or consents in
writing setting forth the action so taken, is signed by the
holders of the outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Thus, SUA stockholders have
access to a broader range of methods to take stockholder actions
than do Tower stockholders.
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The affirmative vote of at least 75% of the voting power of all
of the then outstanding shares of capital stock of Tower is
required to adopt any amendment pertaining to certain sections
of Towers amended and restated certificate of
incorporation, whereas the approval of only the holders of a
majority of the outstanding stock of each class entitled to vote
thereon is required to amend SUAs amended and restated
certificate of incorporation.
|
For a discussion of these different rights, see Comparison
of Rights of Tower Stockholders and SUA Stockholders below.
Currently
pending or future litigation or governmental proceedings could
result in material adverse consequences, including injunctions,
judgments or settlements.
Tower and SUA are and from time to time become involved in
lawsuits, regulatory inquiries and governmental and other legal
proceedings arising out of the ordinary course of their
businesses. Many of these matters raise difficult and
complicated factual and legal issues and are subject to
uncertainties and complexities. The timing of the final
resolutions to these types of matters is often uncertain.
Additionally, the possible outcomes or resolutions to these
matters could include adverse judgments or settlements, either
of which could require substantial payments, adversely affecting
the combined companys business, financial condition,
results of operations, prospects and stock price.
16
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA OF SUA
Set forth below is certain selected historical consolidated
financial data relating to SUA. The financial data has been
derived from the unaudited financial statements filed as part of
SUAs Quarterly Report on
Form 10-Q
for the quarter and six months ended June 30, 2009 and the
audited financial statements filed as part of SUAs Annual
Report on
Form 10-K
for the year ended December 31, 2008. This financial data
should be read in conjunction with the financial statements and
the related notes and other financial information contained in
that
Form 10-Q
and
Form 10-K,
each of which is incorporated by reference into this proxy
statement/prospectus. More comprehensive financial information,
including managements discussion and analysis of
SUAs financial condition and results of operations, is
contained in other documents filed by SUA with the SEC, and the
following summary is qualified in its entirety by reference to
such other documents and all of the financial information and
notes contained in those documents. See Where You Can Find
More Information below.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Predecessor
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov 23
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|
Jan 1
|
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|
Six Months
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|
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|
|
|
|
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|
to
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to
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Ended June 30,
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Year ended December 31,
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Dec. 31
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|
Nov. 22
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2009
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|
2008
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|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
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|
|
2004
|
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2004
|
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(In thousands, except per share amounts)
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|
(unaudited)
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|
|
|
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|
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|
|
|
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|
Results of Operations
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|
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|
|
|
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Earned insurance premiums
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$
|
70,140
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|
|
$
|
69,945
|
|
|
$
|
143,465
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|
|
$
|
152,469
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|
|
$
|
110,891
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|
|
$
|
26,611
|
|
|
$
|
|
|
|
$
|
|
|
Net investment income
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|
|
5,549
|
|
|
|
5,323
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|
|
|
10,837
|
|
|
|
9,553
|
|
|
|
6,087
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|
|
|
3,558
|
|
|
|
278
|
|
|
|
1,329
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|
Net realized gains (losses) on investments
|
|
|
168
|
|
|
|
38
|
|
|
|
(811
|
)
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|
(27
|
)
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|
275
|
|
|
|
(4
|
)
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|
|
2
|
|
|
|
390
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|
Other than temporary impairment losses
|
|
|
(1,835
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
Portion of loss recognized in other comprehensive income
|
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|
1,259
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|
|
|
|
|
|
|
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|
|
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|
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|
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|
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Net impairment recognized in earnings
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(576
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)
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|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
75,281
|
|
|
|
75,306
|
|
|
|
153,491
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|
|
|
161,995
|
|
|
|
117,253
|
|
|
|
30,165
|
|
|
|
280
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
Net income (loss)
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|
$
|
517
|
|
|
$
|
5,715
|
|
|
$
|
7,425
|
|
|
$
|
12,589
|
|
|
$
|
8,408
|
|
|
$
|
(17,996
|
)
|
|
$
|
(8,155
|
)
|
|
$
|
650
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
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|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.37
|
|
|
$
|
0.48
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
(1.22
|
)
|
|
$
|
(4.59
|
)
|
|
$
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
(1.22
|
)
|
|
$
|
(4.59
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
As of December 31,
|
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|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
265,044
|
|
|
$
|
263,405
|
|
|
$
|
229,387
|
|
|
$
|
164,058
|
|
|
$
|
102,991
|
|
|
$
|
97,835
|
|
Total assets
|
|
|
462,532
|
|
|
|
454,737
|
|
|
|
422,534
|
|
|
|
363,297
|
|
|
|
277,163
|
|
|
|
217,231
|
|
Total liabilities
|
|
|
321,819
|
|
|
|
318,448
|
|
|
|
291,397
|
|
|
|
249,315
|
|
|
|
176,348
|
|
|
|
98,301
|
|
Total stockholders equity
|
|
|
140,713
|
|
|
|
136,289
|
|
|
|
131,137
|
|
|
|
113,982
|
|
|
|
100,815
|
|
|
|
118,930
|
|
Book value data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
8.85
|
|
|
$
|
8.62
|
|
|
$
|
8.42
|
|
|
$
|
7.42
|
|
|
$
|
6.76
|
|
|
$
|
8.09
|
|
Tangible book value per share
|
|
$
|
8.17
|
|
|
$
|
7.94
|
|
|
$
|
7.73
|
|
|
$
|
6.72
|
|
|
$
|
6.04
|
|
|
$
|
7.36
|
|
17
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA OF TOWER
Set forth below is certain selected historical consolidated
financial data relating to Tower. The financial data has been
derived from the unaudited financial statements filed as part of
Towers Quarterly Report on
Form 10-Q
for the quarter and six months ended June 30, 2009 and the
audited financial statements filed as part of Towers
Annual Report on
Form 10-K
for the year ended December 31, 2008. This financial data
should be read in conjunction with the financial statements and
the related notes and other financial information contained in
that
Form 10-Q
and the Annual Report on
Form 10-K
for the year ended December 31, 2008, each of which is
incorporated by reference into this proxy statement/prospectus.
More comprehensive financial information, including
managements discussion and analysis of Towers
financial condition and results of operations, is contained in
other documents filed by Tower with the SEC, and the following
summary is qualified in its entirety by reference to such other
documents and all of the financial information and notes
contained in those documents. See Where You Can Find More
Information below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
460,685
|
|
|
$
|
301,076
|
|
|
$
|
634,820
|
|
|
$
|
524,015
|
|
|
$
|
432,663
|
|
|
$
|
300,107
|
|
|
$
|
177,766
|
|
Ceded premiums written
|
|
|
38,603
|
|
|
|
150,095
|
|
|
|
290,777
|
|
|
|
264,832
|
|
|
|
187,593
|
|
|
|
88,325
|
|
|
|
79,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
422,082
|
|
|
|
150,981
|
|
|
|
344,043
|
|
|
|
259,183
|
|
|
|
245,070
|
|
|
|
211,782
|
|
|
|
98,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
397,541
|
|
|
|
138,544
|
|
|
|
314,551
|
|
|
|
286,106
|
|
|
|
223,988
|
|
|
|
164,436
|
|
|
|
45,564
|
|
Ceding commission revenue
|
|
|
20,741
|
|
|
|
42,145
|
|
|
|
79,162
|
|
|
|
71,010
|
|
|
|
43,130
|
|
|
|
25,218
|
|
|
|
39,983
|
|
Insurance services revenue
|
|
|
3,983
|
|
|
|
23,902
|
|
|
|
68,156
|
|
|
|
33,300
|
|
|
|
7,973
|
|
|
|
14,103
|
|
|
|
16,381
|
|
Policy billing fees
|
|
|
1,320
|
|
|
|
1,133
|
|
|
|
2,347
|
|
|
|
2,038
|
|
|
|
1,134
|
|
|
|
892
|
|
|
|
679
|
|
Net investment income
|
|
|
31,950
|
|
|
|
18,162
|
|
|
|
34,568
|
|
|
|
36,699
|
|
|
|
23,026
|
|
|
|
14,983
|
|
|
|
5,070
|
|
Net realized gains (losses) on investments
|
|
|
7,124
|
|
|
|
4,133
|
|
|
|
8,297
|
|
|
|
(7,417
|
)
|
|
|
12
|
|
|
|
122
|
|
|
|
13
|
|
Other-than-temporary impairment losses
|
|
|
(14,871
|
)
|
|
|
(10,729
|
)
|
|
|
(22,651
|
)
|
|
|
(10,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in other accumulated comprehensive
net loss
|
|
|
7,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(7,354
|
)
|
|
|
(10,729
|
)
|
|
|
(22,651
|
)
|
|
|
(10,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
455,305
|
|
|
|
217,290
|
|
|
|
484,430
|
|
|
|
411,642
|
|
|
|
299,263
|
|
|
|
219,754
|
|
|
|
107,690
|
|
Losses and loss adjustment expenses
|
|
|
210,083
|
|
|
|
74,219
|
|
|
|
162,739
|
|
|
|
157,906
|
|
|
|
135,125
|
|
|
|
96,614
|
|
|
|
27,060
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and ceding commission expenses
|
|
|
99,949
|
|
|
|
56,634
|
|
|
|
132,445
|
|
|
|
101,030
|
|
|
|
60,558
|
|
|
|
43,839
|
|
|
|
32,825
|
|
Other operating expenses
|
|
|
58,163
|
|
|
|
43,858
|
|
|
|
91,491
|
|
|
|
77,319
|
|
|
|
53,675
|
|
|
|
42,632
|
|
|
|
29,954
|
|
Interest expense
|
|
|
8,442
|
|
|
|
4,484
|
|
|
|
8,449
|
|
|
|
9,290
|
|
|
|
6,870
|
|
|
|
4,853
|
|
|
|
3,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
376,637
|
|
|
|
179,195
|
|
|
|
395,124
|
|
|
|
345,545
|
|
|
|
256,228
|
|
|
|
187,938
|
|
|
|
92,967
|
|
Equity income (loss) in unconsolidated affiliate
|
|
|
(777
|
)
|
|
|
1,522
|
|
|
|
269
|
|
|
|
2,438
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
Acquisition-related transactions costs
|
|
|
(11,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on investment in acquired unconsolidated affiliate
|
|
|
7,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from issuance of common stock by unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,705
|
|
|
|
7,883
|
|
|
|
|
|
|
|
|
|
Warrant received from unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
73,931
|
|
|
|
39,617
|
|
|
|
89,575
|
|
|
|
71,240
|
|
|
|
56,437
|
|
|
|
31,816
|
|
|
|
14,723
|
|
Income tax expense
|
|
|
25,327
|
|
|
|
14,595
|
|
|
|
32,102
|
|
|
|
26,158
|
|
|
|
19,673
|
|
|
|
11,062
|
|
|
|
5,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
48,604
|
|
|
$
|
25,022
|
|
|
$
|
57,473
|
|
|
$
|
45,082
|
|
|
$
|
36,764
|
|
|
$
|
20,754
|
|
|
$
|
9,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.31
|
|
|
$
|
1.08
|
|
|
$
|
2.49
|
|
|
$
|
1.95
|
|
|
$
|
1.85
|
|
|
$
|
1.06
|
|
|
$
|
1.23
|
|
Diluted
|
|
$
|
1.30
|
|
|
$
|
1.07
|
|
|
$
|
2.47
|
|
|
$
|
1.93
|
|
|
$
|
1.82
|
|
|
$
|
1.03
|
|
|
$
|
1.06
|
|
Weighted average outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,110
|
|
|
|
23,268
|
|
|
|
23,040
|
|
|
|
22,715
|
|
|
|
19,750
|
|
|
|
19,571
|
|
|
|
7,335
|
|
Diluted
|
|
|
37,256
|
|
|
|
23,461
|
|
|
|
23,251
|
|
|
|
22,968
|
|
|
|
20,147
|
|
|
|
20,147
|
|
|
|
8,566
|
|
Selected Insurance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss ratio
|
|
|
54.7
|
%
|
|
|
50.1
|
%
|
|
|
49.9
|
%
|
|
|
50.7
|
%
|
|
|
55.0
|
%
|
|
|
56.8
|
%
|
|
|
55.2
|
%
|
Gross underwriting expense ratio
|
|
|
31.2
|
%
|
|
|
30.4
|
%
|
|
|
30.4
|
%
|
|
|
29.2
|
%
|
|
|
28.7
|
%
|
|
|
30.8
|
%
|
|
|
31.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross combined ratio
|
|
|
85.9
|
%
|
|
|
80.5
|
%
|
|
|
80.3
|
%
|
|
|
80.0
|
%
|
|
|
83.7
|
%
|
|
|
87.6
|
%
|
|
|
86.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
52.8
|
%
|
|
|
53.6
|
%
|
|
|
51.7
|
%
|
|
|
55.2
|
%
|
|
|
60.3
|
%
|
|
|
58.8
|
%
|
|
|
59.4
|
%
|
Net underwriting expense ratio
|
|
|
32.7
|
%
|
|
|
29.7
|
%
|
|
|
30.7
|
%
|
|
|
28.5
|
%
|
|
|
27.3
|
%
|
|
|
29.3
|
%
|
|
|
16.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net combined ratio
|
|
|
85.5
|
%
|
|
|
83.3
|
%
|
|
|
82.4
|
%
|
|
|
83.7
|
%
|
|
|
87.6
|
%
|
|
|
88.1
|
%
|
|
|
75.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of December 31,
|
|
|
|
June 30,2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments at fair value
|
|
$
|
1,581,576
|
|
|
$
|
677,226
|
|
|
$
|
696,747
|
|
|
$
|
564,618
|
|
|
$
|
395,933
|
|
|
$
|
283,635
|
|
Reinsurance recoverable
|
|
|
136,760
|
|
|
|
272,606
|
|
|
|
207,828
|
|
|
|
118,003
|
|
|
|
104,811
|
|
|
|
101,173
|
|
Intangible assets
|
|
|
38,963
|
|
|
|
20,464
|
|
|
|
21,670
|
|
|
|
5,423
|
|
|
|
5,835
|
|
|
|
4,978
|
|
Goodwill
|
|
|
236,407
|
|
|
|
18,962
|
|
|
|
13,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs, net
|
|
|
146,008
|
|
|
|
53,080
|
|
|
|
39,271
|
|
|
|
35,811
|
|
|
|
29,192
|
|
|
|
18,740
|
|
Total assets
|
|
|
2,576,254
|
|
|
|
1,538,381
|
|
|
|
1,355,649
|
|
|
|
954,082
|
|
|
|
657,457
|
|
|
|
494,147
|
|
Loss and loss adjustment expenses
|
|
|
833,175
|
|
|
|
534,991
|
|
|
|
501,183
|
|
|
|
302,541
|
|
|
|
198,724
|
|
|
|
128,722
|
|
Unearned premium
|
|
|
523,113
|
|
|
|
328,847
|
|
|
|
272,774
|
|
|
|
227,017
|
|
|
|
157,779
|
|
|
|
95,505
|
|
Long-term debt and redeemable preferred stock
|
|
|
235,058
|
|
|
|
101,036
|
|
|
|
101,036
|
|
|
|
68,045
|
|
|
|
47,426
|
|
|
|
47,426
|
|
Total stockholders equity
|
|
|
847,299
|
|
|
|
335,204
|
|
|
|
309,387
|
|
|
|
223,920
|
|
|
|
144,822
|
|
|
|
129,447
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$
|
20.93
|
|
|
$
|
14.36
|
|
|
$
|
13.34
|
|
|
$
|
9.23
|
|
|
$
|
7.29
|
|
|
$
|
6.56
|
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
0.12
|
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.03
|
|
Class A Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
|
|
Class B Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
|
|
19
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF TOWER
The following unaudited pro forma condensed consolidated
financial statements are based on the historical financial
statements of Tower, CastlePoint Holdings, Ltd.
(CastlePoint), HIG, Inc. (Hermitage) and
SUA, after giving effect to the merger and the acquisitions of
CastlePoint and Hermitage by Tower, which were consummated on
February 5, 2009 and February 27, 2009,
respectively.
The unaudited pro forma condensed consolidated financial
information gives effect to the merger as if it had occurred
(i) on June 30, 2009 for the purposes of the unaudited
pro forma condensed consolidated balance sheet as of
June 30, 2009 and (ii) on January 1, 2008 for the
purposes of the unaudited pro forma condensed consolidated
statements of income for the year ended December 31, 2008
and January 1, 2009 for the six months ended June 30,
2009. The unaudited pro forma condensed consolidated statements
of income for the year ended December 31, 2008 and the six
months ended June 30, 2009 give effect to the acquisitions
of CastlePoint and Hermitage as if they had occurred on
January 1, 2008 and January 1, 2009, respectively. The
unaudited pro forma condensed consolidated financial information
has been prepared by and is the responsibility of Towers
management. Certain amounts from SUAs historical
consolidated financial statements have been reclassified to
conform to Towers presentation.
The unaudited pro forma condensed consolidated financial
statements have been prepared for illustrative purposes only and
are not necessarily indicative of the financial condition or
results of operations of future periods or the financial
condition or results of operations that actually would have been
realized had the entities been a single entity as of or for the
periods presented. The unaudited pro forma condensed
consolidated financial information should be read together with
the historical financial statements and related notes of Tower
and SUA that each has filed with the SEC.
20
Tower
Group, Inc.
Unaudited
Condensed Consolidated Pro forma Balance Sheet
June 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tower
|
|
|
SUA
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Combined
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments & cash
|
|
$
|
1,581,576
|
|
|
$
|
266,427
|
|
|
|
|
|
|
|
|
|
|
$
|
1,848,003
|
|
Investment income receivable
|
|
|
14,982
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
17,536
|
|
Premiums receivable
|
|
|
213,901
|
|
|
|
68,484
|
|
|
|
|
|
|
|
|
|
|
|
282,385
|
|
Reinsurance recoverable
|
|
|
136,760
|
|
|
|
79,725
|
|
|
|
|
|
|
|
|
|
|
|
216,485
|
|
Prepaid reinsurance premiums
|
|
|
64,438
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
64,683
|
|
Deferred acquisition costs, net of ceding commission revenue
|
|
|
146,008
|
|
|
|
16,982
|
|
|
|
(16,982
|
)
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,419
|
|
|
|
4
|
(c)
|
|
|
158,427
|
|
Deferred income taxes
|
|
|
58,550
|
|
|
|
1,602
|
|
|
|
(184
|
)
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,131
|
|
|
|
4
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,597
|
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,367
|
)
|
|
|
4
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,329
|
|
Intangible assets
|
|
|
38,963
|
|
|
|
10,745
|
|
|
|
525
|
|
|
|
4
|
(a)
|
|
|
50,233
|
|
Goodwill
|
|
|
236,407
|
|
|
|
|
|
|
|
(341
|
)
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,814
|
|
|
|
4
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966
|
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,539
|
)
|
|
|
4
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,168
|
)
|
|
|
4
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,268
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,407
|
|
Fixed assets, net
|
|
|
46,590
|
|
|
|
12,901
|
|
|
|
(8,945
|
)
|
|
|
4
|
(b)
|
|
|
50,546
|
|
Investment in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
107,545
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,545
|
)
|
|
|
4
|
(e)
|
|
|
|
|
Other assets
|
|
|
38,079
|
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
40,946
|
|
Total assets
|
|
$
|
2,576,254
|
|
|
$
|
462,532
|
|
|
$
|
(9,806
|
)
|
|
|
|
|
|
$
|
3,028,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
$
|
833,175
|
|
|
$
|
218,400
|
|
|
$
|
(3,906
|
)
|
|
|
4
|
(d)
|
|
$
|
1,047,669
|
|
Unearned premium
|
|
|
523,113
|
|
|
|
79,247
|
|
|
|
|
|
|
|
|
|
|
|
602,360
|
|
Reinsurance balances payable
|
|
|
51,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,419
|
|
Payable to issuing carriers
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Insured deposit funds
|
|
|
|
|
|
|
13,737
|
|
|
|
|
|
|
|
|
|
|
|
13,737
|
|
Funds held under reinsurance agreements
|
|
|
15,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,558
|
|
Accounts payable, accrued liabilities and other liabilities
|
|
|
70,585
|
|
|
|
10,435
|
|
|
|
|
|
|
|
|
|
|
|
81,020
|
|
Subordinated debentures
|
|
|
235,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,728,955
|
|
|
|
321,819
|
|
|
|
(3,906
|
)
|
|
|
|
|
|
|
2,046,868
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value)
|
|
|
405
|
|
|
|
161
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
4
|
(e)
|
|
|
405
|
|
Treasury stock
|
|
|
(1,330
|
)
|
|
|
(1,003
|
)
|
|
|
1,003
|
|
|
|
4
|
(e)
|
|
|
(1,330
|
)
|
Paid-in capital
|
|
|
642,047
|
|
|
|
138,088
|
|
|
|
107,545
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(138,088
|
)
|
|
|
4
|
(e)
|
|
|
749,592
|
|
Accumulated other comprehensive loss
|
|
|
(4,655
|
)
|
|
|
894
|
|
|
|
(894
|
)
|
|
|
4
|
(e)
|
|
|
(4,655
|
)
|
Retained earnings
|
|
|
210,832
|
|
|
|
2,573
|
|
|
|
(2,573
|
)
|
|
|
4
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,268
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
847,299
|
|
|
|
140,713
|
|
|
|
(5,900
|
)
|
|
|
|
|
|
|
982,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,576,254
|
|
|
$
|
462,532
|
|
|
$
|
(9,806
|
)
|
|
|
|
|
|
$
|
3,028,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro forma Condensed Consolidated
Financial Statements below.
21
Tower
Group, Inc.
Unaudited
Condensed Consolidated Pro forma Statement of Income
Six
months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tower/SUA
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
Tower Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tower
|
|
|
CastlePoint Hermitage(a)
|
|
|
Combined
|
|
|
SUA
|
|
|
Adjustments SUA
|
|
|
Notes
|
|
|
Combined
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
397,541
|
|
|
$
|
52,650
|
|
|
$
|
450,191
|
|
|
$
|
70,140
|
|
|
|
|
|
|
|
|
|
|
$
|
520,331
|
|
Ceding commission revenue
|
|
|
20,741
|
|
|
|
(5,842
|
)
|
|
|
14,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,899
|
|
Insurance services revenue
|
|
|
3,983
|
|
|
|
(4,276
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
Policy billing fees
|
|
|
1,320
|
|
|
|
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
Net investment income
|
|
|
31,950
|
|
|
|
2,991
|
|
|
|
34,941
|
|
|
|
5,549
|
|
|
|
|
|
|
|
|
|
|
|
40,490
|
|
Net realized gains (losses) on investments
|
|
|
7,124
|
|
|
|
57
|
|
|
|
7,181
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
7,349
|
|
Other-than-temporary impairment losses
|
|
|
(14,871
|
)
|
|
|
|
|
|
|
(14,871
|
)
|
|
|
(1,835
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,706
|
)
|
Portion of loss recognized in other accumulated comprehensive
net loss
|
|
|
7,517
|
|
|
|
|
|
|
|
7,517
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
8,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(7,354
|
)
|
|
|
|
|
|
|
(7,354
|
)
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
455,305
|
|
|
|
45,580
|
|
|
|
500,885
|
|
|
|
75,281
|
|
|
|
|
|
|
|
|
|
|
|
576,166
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
210,083
|
|
|
|
27,300
|
|
|
|
237,383
|
|
|
|
43,979
|
|
|
|
643
|
|
|
|
4
|
(d)
|
|
|
282,005
|
|
Underwriting expenses
|
|
|
158,112
|
|
|
|
23,717
|
|
|
|
181,829
|
|
|
|
30,610
|
|
|
|
247
|
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,190
|
)
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
|
|
4
|
(b)
|
|
|
209,818
|
|
Interest expense
|
|
|
8,442
|
|
|
|
|
|
|
|
8,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
376,637
|
|
|
|
51,017
|
|
|
|
427,654
|
|
|
|
74,589
|
|
|
|
(1,979
|
)
|
|
|
|
|
|
|
500,264
|
|
Other Income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated affiliate
|
|
|
(777
|
)
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related transaction costs
|
|
|
(11,348
|
)
|
|
|
11,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on investment in acquired unconsolidated affiliate
|
|
|
7,388
|
|
|
|
(7,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
73,931
|
|
|
|
(700
|
)
|
|
|
73,231
|
|
|
|
692
|
|
|
|
1,979
|
|
|
|
|
|
|
|
75,902
|
|
Income tax expense (benefit)
|
|
|
25,327
|
|
|
|
(75
|
)
|
|
|
25,252
|
|
|
|
175
|
|
|
|
(86
|
)
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237
|
|
|
|
4
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767
|
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
4
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
4
|
(f)
|
|
|
26,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
48,604
|
|
|
($
|
625
|
)
|
|
$
|
47,979
|
|
|
$
|
517
|
|
|
$
|
1,219
|
|
|
|
|
|
|
$
|
49,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.31
|
|
|
|
|
|
|
$
|
1.19
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
$
|
1.11
|
|
Diluted
|
|
$
|
1.30
|
|
|
|
|
|
|
$
|
1.19
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,110
|
|
|
|
3,283
|
|
|
|
40,292
|
|
|
|
15,843
|
|
|
|
|
|
|
|
|
|
|
|
44,750
|
|
Diluted
|
|
|
37,256
|
|
|
|
3,283
|
|
|
|
40,438
|
|
|
|
15,941
|
|
|
|
|
|
|
|
|
|
|
|
44,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The
Pro forma
adjustments are made to reflect the results
of operations of CastlePoint and Hermitage assuming their
acquisition by Tower had occurred on January 1, 2009.
Certain one-time charges were excluded from the
pro forma
results including, (i) transaction costs of
$11.4 million and $3.6 million, respectively, related
to the acquisition of CastlePoint and Hermitage,
(ii) CastlePoints severance expenses of
$2.0 million and (iii) Towers gain of
$7.4 million related to the acquisition of CastlePoint.
|
See Notes to Unaudited Pro forma Condensed Consolidated
Financial Statements below.
22
Tower
Group, Inc.
Unaudited
Condensed Consolidated Pro forma Statement of Income
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations of
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tower CastlePoint
|
|
|
Adjustments
|
|
|
|
|
|
Tower
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
Tower/SUA
|
|
|
|
Historical
|
|
|
Intercompany
|
|
|
Tower/
|
|
|
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
Adjustments
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tower
|
|
|
CastlePoint
|
|
|
Hermitage
|
|
|
Amounts
|
|
|
CastlePoint
|
|
|
Notes
|
|
|
Combined
|
|
|
SUA
|
|
|
SUA
|
|
|
Notes
|
|
|
Combined
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
314,551
|
|
|
$
|
444,719
|
|
|
$
|
84,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
843,418
|
|
|
$
|
143,465
|
|
|
|
|
|
|
|
|
|
|
$
|
986,883
|
|
Ceding commission revenue
|
|
|
79,162
|
|
|
|
|
|
|
|
|
|
|
|
(71,191
|
)
|
|
|
|
|
|
|
3
|
(c)
|
|
|
7,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,971
|
|
Insurance services revenue
|
|
|
68,156
|
|
|
|
37,827
|
|
|
|
|
|
|
|
(63,293
|
)
|
|
|
|
|
|
|
3
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,827
|
)
|
|
|
|
|
|
|
3
|
(b)
|
|
|
4,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,863
|
|
Policy billing fees
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,347
|
|
Net investment income
|
|
|
34,568
|
|
|
|
31,457
|
|
|
|
7,045
|
|
|
|
|
|
|
|
(1,148
|
)
|
|
|
3
|
(d)
|
|
|
|
|
|
|
10,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,733
|
|
|
|
3
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,285
|
)
|
|
|
3
|
(j)
|
|
|
75,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,207
|
|
Net realized gains (losses) on investments
|
|
|
8,297
|
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
Other-than-temporary impairment losses
|
|
|
(22,651
|
)
|
|
|
(16,690
|
)
|
|
|
(3,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,406
|
)
|
|
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
484,430
|
|
|
|
496,572
|
|
|
|
88,128
|
|
|
|
(172,311
|
)
|
|
|
2,300
|
|
|
|
|
|
|
|
899,119
|
|
|
|
153,491
|
|
|
|
|
|
|
|
|
|
|
|
1,052,610
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
162,739
|
|
|
|
261,807
|
|
|
|
48,736
|
|
|
|
|
|
|
|
(3,125
|
)
|
|
|
3
|
(l)
|
|
|
470,157
|
|
|
|
89,385
|
|
|
|
1,285
|
|
|
|
4
|
(d)
|
|
|
560,827
|
|
Underwriting expenses
|
|
|
223,936
|
|
|
|
222,462
|
|
|
|
38,528
|
|
|
|
|
|
|
|
2,391
|
|
|
|
3
|
(a)
|
|
|
|
|
|
|
56,122
|
|
|
|
494
|
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,293
|
)
|
|
|
|
|
|
|
3
|
(b)
|
|
|
|
|
|
|
|
|
|
|
(3,301
|
)
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,827
|
)
|
|
|
|
|
|
|
3
|
(b)
|
|
|
|
|
|
|
|
|
|
|
(3,640
|
)
|
|
|
4
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,191
|
)
|
|
|
|
|
|
|
3
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
3
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,849
|
)
|
|
|
3
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,238
|
)
|
|
|
3
|
(m)
|
|
|
302,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352,093
|
|
Interest expense
|
|
|
8,449
|
|
|
|
11,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
395,124
|
|
|
|
495,687
|
|
|
|
87,264
|
|
|
|
(172,311
|
)
|
|
|
(13,321
|
)
|
|
|
|
|
|
|
792,443
|
|
|
|
145,507
|
|
|
|
(5,163
|
)
|
|
|
|
|
|
|
932,787
|
|
Other Income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated affiliate
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
3
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
89,575
|
|
|
|
885
|
|
|
|
864
|
|
|
|
|
|
|
|
15,352
|
|
|
|
|
|
|
|
106,676
|
|
|
|
7,984
|
|
|
|
5,163
|
|
|
|
|
|
|
|
119,823
|
|
Income tax expense (benefit)
|
|
|
32,102
|
|
|
|
554
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(837
|
)
|
|
|
3
|
(a)
|
|
|
|
|
|
|
559
|
|
|
|
(173
|
)
|
|
|
4
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(402
|
)
|
|
|
3
|
(d)
|
|
|
|
|
|
|
|
|
|
|
1,274
|
|
|
|
4
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,925
|
)
|
|
|
3
|
(e)
|
|
|
|
|
|
|
|
|
|
|
1,156
|
|
|
|
4
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
3
|
(f)
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
4
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,007
|
|
|
|
3
|
(g)
|
|
|
|
|
|
|
|
|
|
|
2,235
|
|
|
|
4
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
3
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
|
|
3
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
|
|
3
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,397
|
|
|
|
3
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094
|
|
|
|
3
|
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,933
|
|
|
|
3
|
(m)
|
|
|
38,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,473
|
|
|
$
|
331
|
|
|
$
|
992
|
|
|
$
|
|
|
|
$
|
9,793
|
|
|
|
|
|
|
$
|
68,589
|
|
|
$
|
7,425
|
|
|
$
|
1,120
|
|
|
|
|
|
|
$
|
77,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.72
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
$
|
1.74
|
|
Diluted
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.71
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,878
|
|
|
|
|
|
|
|
39,919
|
|
|
|
15,608
|
|
|
|
|
|
|
|
|
|
|
|
44,377
|
|
Diluted
|
|
|
23,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,878
|
|
|
|
|
|
|
|
40,129
|
|
|
|
15,776
|
|
|
|
|
|
|
|
|
|
|
|
44,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro forma Condensed Consolidated
Financial Statements below.
23
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements
The unaudited
pro forma
condensed consolidated financial
information gives effect to the merger as if it had occurred
(i) on June 30, 2009 for the purposes of the unaudited
pro forma
condensed consolidated balance sheet and
(ii) on January 1, 2008 for the purposes of the
unaudited
pro forma
condensed consolidated statements of
income for the year ended December 31, 2008 and
January 1, 2009 for the six months ended June 30,
2009. The unaudited
pro forma
condensed consolidated
statements of income for the year ended December 31, 2008
and the six months ended June 30, 2009 give effect to the
acquisitions of CastlePoint and Hermitage, which were
consummated on February 5, 2009 and February 27, 2009,
respectively, as if they had occurred on January 1, 2008
and January 1, 2009, respectively. The unaudited
pro
forma
condensed consolidated financial information has been
prepared by Towers management. Certain amounts from
SUAs historical consolidated financial statements have
been reclassified to conform to Towers presentation.
General
This unaudited
pro forma
condensed consolidated financial
information has been prepared in conformity with generally
accepted accounting principles in the United States
(GAAP). The unaudited
pro forma
condensed
consolidated balance sheet as of June 30, 2009 and the
unaudited
pro forma
condensed consolidated statements of
income for the year ended December 31, 2008 and the six
months ended June 30, 2009 have been prepared using the
following information:
|
|
|
|
|
Unaudited historical consolidated financial statements of Tower
as of June 30, 2009 and for the six months ended
June 30, 2009;
|
|
|
|
|
|
Unaudited historical consolidated financial statements of SUA as
of June 30, 2009 and for the six months ended June 30,
2009;
|
|
|
|
|
|
Audited historical consolidated financial statements of Tower
for the year ended December 31, 2008;
|
|
|
|
|
|
Audited historical consolidated financial statements of
CastlePoint for the year ended December 31, 2008;
|
|
|
|
|
|
Audited historical consolidated financial statements of
Hermitage for the year ended December 31, 2008;
|
|
|
|
|
|
Audited historical consolidated financial statements of SUA for
the year ended December 31, 2008;
|
|
|
|
|
|
Such other supplementary information as considered necessary to
reflect the proposed merger in the unaudited
pro forma
condensed consolidated financial information.
|
The
pro forma
adjustments reflecting the merger and the
acquisitions of CastlePoint and Hermitage by Tower under the
purchase method of accounting are based on certain estimates and
assumptions. The unaudited
pro forma
condensed
consolidated adjustments may be revised as additional
information becomes available. The actual adjustments upon
consummation of the merger and the allocation of the final
purchase price of SUA, CastlePoint and Hermitage will depend on
a number of factors, including additional financial information
available at such time, changes in values and changes in
SUAs operating results between the date of preparation of
this unaudited
pro forma
condensed consolidated financial
information and the closing date. Therefore, the actual
adjustments will differ from the
pro forma
adjustments
and it is possible that the differences may be material.
Towers management believes that its assumptions provide a
reasonable basis for presenting all of the significant effects
of the transactions contemplated and that the
pro forma
adjustments give appropriate effect to those assumptions and
are properly applied in the unaudited
pro forma
condensed
consolidated financial information.
The unaudited
pro forma
condensed consolidated financial
information does not include financial benefits or expenses from
operating expense efficiencies or revenue enhancements arising
from the merger and the
24
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements (Continued)
acquisitions of CastlePoint and Hermitage by Tower nor does the
unaudited
pro forma
condensed consolidated financial
information include the portion of restructuring and integration
costs to be incurred by Tower, CastlePoint, Hermitage and SUA,
except for certain fair value adjustments.
The unaudited
pro forma
condensed consolidated financial
information is not intended to reflect the results of operations
or the financial position that would have resulted had the
merger and the acquisitions of CastlePoint and Hermitage by
Tower been effected on the dates indicated and if the companies
had been managed as one entity. The unaudited
pro forma
condensed consolidated financial information should be read
in conjunction with the historical consolidated financial
statements of Tower included in Towers Annual Report on
Form 10-K
for the year ended December 31, 2008 and Quarterly Report
on
Form 10-Q
for the quarter and six months ended June 30, 2009 and the
historical consolidated financial statements of SUA included in
SUAs Annual Report on
Form 10-K
for the year ended December 31, 2008 and Quarterly Report
on
Form 10-Q
for the quarter and six months ended June 30, 2009 and the
historical consolidated financial statements of CastlePoint and
Hermitage for the year ended December 31, 2008, attached
hereto as Annexes D and E.
|
|
2.
|
PURCHASE
PRICE AND RELATED CONSIDERATIONS
|
Pursuant to the merger agreement and subject to the terms and
conditions set forth therein, Merger Sub will merge into SUA,
with SUA continuing as the surviving corporation and a
wholly-owned subsidiary of Tower.
At the effective time of the merger, SUA stockholders will
receive for each share of SUA stock a fraction of a share of
Tower common stock equal to the product of one share of SUA
stock and the exchange ratio. The exchange ratio is determined
by reference to the average Tower stock price, which
is the volume-weighted average price per share of Tower common
stock on the NASDAQ Global Select Market for the 15 trading day
window immediately preceding the fifth business day prior to the
closing date. The exchange ratio will be fixed at 0.28 if the
average Tower stock price is greater than or equal to $23.25 and
less than or equal to $27.75. If the average Tower stock price
is greater than $27.75, the exchange ratio will be adjusted
downward to provide SUA stockholders with a fixed value per
share of $7.77. If the average Tower stock price is less than
$23.25 but greater than or equal to $20.00, the exchange ratio
will be adjusted upward to provide SUA stockholders with a fixed
value per share of $6.51. However, if the average Tower stock
price falls below $20.00, the exchange ratio will be fixed at
0.3255, and SUA will have the right, for a limited period, to
terminate the merger agreement, unless Tower elects to add
additional shares of Tower common stock to provide SUA
stockholders with a value per share of $6.51.
The boards of directors of Tower and SUA have approved the
merger agreement, the merger and the other transactions
contemplated thereby and the board of directors of SUA has
recommended the adoption of the merger agreement to the SUA
stockholders.
The merger is expected to close in late 2009 subject to
regulatory approvals of the merger, stockholder approval
required to complete the merger and other customary conditions.
Under the merger agreement, SUA is required to pay Tower a
termination fee of $3,000,000 plus Towers expenses up to a
cap of $1,000,000 in certain customary circumstances, including
if SUA terminates the merger agreement to accept a superior
alternative proposal. Similarly, under the merger agreement,
Tower is required to reimburse SUAs expenses up to a cap
of $1,000,000 in the event that SUA terminates the merger
agreement for Towers breach, subject to certain exceptions.
25
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements (Continued)
For purposes of presentation in the unaudited
pro forma
condensed consolidated financial information, the financing
of the merger and allocation of purchase consideration is
assumed to be as follows:
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Purchase Consideration(a)
|
|
|
|
|
Purchase price paid
|
|
$
|
106,596
|
|
Estimated fair value of outstanding SUA stock options and
deferred stock awards(b)
|
|
|
949
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
107,545
|
|
|
|
|
|
|
Allocation of Purchase Consideration at June 30,
2009(c)
|
|
|
|
|
Total assets
|
|
|
446,768
|
|
Total liabilities
|
|
|
(319,280
|
)
|
Estimated fair value adjustments, net of taxes of $3,945
|
|
|
7,326
|
|
|
|
|
|
|
Estimated fair value of net assets acquired
|
|
|
134,813
|
|
|
|
|
|
|
Negative goodwill
|
|
|
(27,268
|
)
|
Recognized in earnings as gain on acquisition of SUA
|
|
|
27,268
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Based on the exchange rate of 0.28 shares of Tower common
stock for each share of SUA stock, using a price of 23.90 per
share of Tower common stock, the closing price per share on
October 7, 2009. Based on an exchange ratio of 0.28, the
purchase price consideration will consist of approximately
4,460,099 shares of Tower common stock with an aggregate
value of approximately $106.6 million.
|
|
|
|
(b)
|
|
The purchase price includes the estimated fair value of Tower
stock options to be issued as of the closing date in exchange
for vested stock options of SUA. SUA stock options will be
converted to Tower stock options at the award exchange ratio and
the exercise price will be the exercise price of the SUA stock
options divided by the award exchange ratio. Vested stock
options issued by Tower in respect of vested SUA stock options
held by employees of SUA are considered part of the purchase
price. Accordingly, the purchase price includes an estimated
fair value of Tower stock options of $0.5 million. The fair
value of vested Tower stock options that will be issued in
respect of vested SUA stock options was estimated by using the
Black-Scholes option pricing model with market assumptions.
Option pricing models require the use of highly subjective
market assumptions, including expected stock price volatility,
which if changed can materially affect fair value estimates. The
more significant assumptions used in estimating the fair value
of Tower options include volatility of 44%, an expected life of
two years based on the age of the original award, a dividend
yield of 1%, and a risk-free interest rate of 1.6%. The fair
value of the Tower unvested stock options to be issued to
holders of SUA stock options as of June 30, 2009 is de
minimis. Also included in the purchase price is the estimated
fair value of the vested portion of the deferred stock awards
held by SUA employees of $0.5 million.
|
|
|
|
(c)
|
|
The purchase price is allocated to balance sheet assets acquired
(including identifiable intangible assets arising from the
merger) and liabilities assumed based on their estimated fair
value. The fair value adjustments to the SUA historical
consolidated balance sheet in connection with the merger are
described below in Note 4.
|
|
|
|
(d)
|
|
The fair value adjustments to balance sheet assets acquired and
liabilities assumed are preliminary in nature. Among other
items, the fair value of SUAs loss reserves as estimated
by Towers management could result in an adjustment within
the range of reasonable loss reserve estimates previously
disclosed by SUA in its
Form 10-K
for the year ended December 31, 2008. The high end estimate
of such range was approximately $15 million greater than
the net reserves carried by SUA at December 31, 2008. Such
an adjustment to loss reserves would result in a reduction in
the amount of negative goodwill.
|
26
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements (Continued)
|
|
3.
|
PRO FORMA
ADJUSTMENTS RELATED TO TOWER, CASTLEPOINT AND
HERMITAGE
|
As discussed above, these
pro forma
adjustments are based
on certain estimates and assumptions made as of the date of the
unaudited
pro forma
condensed consolidated financial
information. As the values of certain assets and liabilities are
preliminary in nature, they are subject to adjustment as
additional information is obtained, including, but not limited
to, the valuation of separately identifiable intangible assets,
the valuation of the business acquired, fixed assets, loss
reserves and deferred taxes. The valuations will be finalized
within the measurement period, generally defined as
12 months from the close of the acquisition. When the
valuations are finalized, any changes to the preliminary
valuation of assets acquired or liabilities assumed may result
in adjustments to separately identifiable intangible assets and
goodwill.
(a) In connection with the CastlePoint and Hermitage
acquisitions, intangible assets were recorded by Tower in the
amount of $20.0 million in the first quarter of 2009. The
pro forma
statement of income has been adjusted to
reflect amortization expense for intangibles of
$2.4 million for the year ended December 31, 2008.
(b) Insurance services revenues earned (primarily
consisting of direct commission revenue) as a result of placing
business through Tower Risk Management Corp. or CastlePoint
Management Corp. on behalf of CastlePoints or Towers
respective insurance subsidiaries has been eliminated with a
corresponding elimination of CastlePoints underwriting
expenses for the year ended December 31, 2008.
(c) Ceding commission revenue recognized by Tower on
business ceded to CastlePoint has been eliminated with a
corresponding elimination of underwriting expenses for the year
ended December 31, 2008.
(d) This amount represents the loss of investment income on
$65.4 million of cash consideration which was paid to
CastlePoint shareholders on February 5, 2009 for the
acquisition of CastlePoint, at an assumed investment rate of
1.76%.
(e) Deferred acquisition costs, including related tax
effect, were reduced for
pro forma
purposes as the
acquisition of CastlePoint would eliminate certain costs charged
by Tower Risk Management Corp. to CastlePoint Insurance Company,
which had previously been deferred by CastlePoint Insurance
Company.
(f) This amount represents the elimination of Towers
equity income from CastlePoint as an unconsolidated affiliate
for the year ended December 31, 2008 and the related income
tax effect.
(g) Net investment income has been increased, net of income
tax effect, representing the accretion of an additional
estimated purchase discount arising from the fair value of
certain of CastlePoints fixed maturity investments that is
approximately $50.0 million less than amortized cost as of
February 5, 2009. The fair value of these investments
became Towers cost when the acquisition of CastlePoint
closed. The additional estimated discount will be amortized over
the estimated remaining years to maturity of the identified
investments. The additional estimated discount assumes Tower
will continue to hold the identified investments and there will
be no loss of principal.
(h) For
pro forma
purposes, CastlePoints
marginal tax rate was increased to Towers statutory income
tax rate of 35%.
(i) For
pro forma
purposes, Hermitages
marginal tax rate was increased to Towers statutory income
tax rate of 35%.
(j) This amount represents the loss of investment income on
$130.1 million of funds which were used on
February 27, 2009 to purchase Hermitage, at an assumed
investment rate of 1.76%.
27
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements (Continued)
(k) Underwriting expenses were reduced by $6.8 million
for the year ended December 31, 2008. This adjustment
reflects lower acquisition costs for the value of business
acquired (VOBA) as compared to CastlePoints
and Hermitages deferred acquisition costs.
(l) The
pro forma
statement of income for the year
ended December 31, 2008 has been adjusted to reflect
$3.1 million of amortization of the fair value adjustment
for loss and loss adjustment expenses (LAE) which is
being amortized over the loss and LAE payout pattern and
reflected as a component of loss and LAE.
(m) This amount reflects acquisition-related transaction
expenses and one-time severance costs totaling
$11.2 million recorded by CastlePoint.
|
|
4.
|
PRO FORMA
ADJUSTMENTS RELATED TO TOWER AND SUA
|
As discussed above, these
pro forma
adjustments are based
on certain estimates and assumptions made as of the date of the
unaudited
pro forma
condensed consolidated financial
information. The actual adjustments will depend on a number of
factors, including changes in the estimated fair value of
balance sheet assets, liabilities and operating results of SUA
between June 30, 2009 and the closing date. Tower expects
to make such actual adjustments at the closing date. These
actual adjustments may be different from the adjustments to the
unaudited
pro forma
condensed consolidated financial
information and such differences may be material. The fair value
adjustments to balance sheet assets acquired and liabilities
assumed are preliminary in nature. Among other items, the fair
value of SUAs loss reserves as estimated by Towers
management could result in an adjustment within the range of
reasonable loss reserve estimates previously disclosed by SUA in
its
Form 10-K
for the year ended December 31, 2008. The high end estimate
of such range was approximately $15 million greater than
the net reserves carried by SUA at December 31, 2008. Such
an adjustment to loss reserves would result in a reduction in
the amount of negative goodwill.
(a) Identifiable intangible assets increased by
$0.5 million to $11.3 million and are comprised
principally of $3.8 million relating to SUAs
distribution network, $0.4 million related to SUAs
trademark and name and $7.1 million relating to insurance
licenses. The intangible asset related to the distribution
network acquired and trade name will be amortized over
approximately 25 years and 1 year, respectively. The
intangible asset related to the insurance licenses is
indefinite. All intangible assets and goodwill will be tested
for impairment whenever events or change in circumstances
indicate that a carrying amount may be impaired. Indefinite
lived intangible assets and goodwill will be subject to annual
impairment testing. The
pro forma
statements of income
reflect amortization expense for intangibles of
$0.2 million for the six months ended June 30, 2009
and $0.5 million for the year ended December 31, 2008.
(b) Fixed assets were reduced by $8.9 million to
$4.0 million. Of this amount SUAs policy and claims
administration system was decreased by $9.1 million and the
adjustment represents what a market participant would be willing
to pay for such system. The fair value for personal property,
which includes computer hardware and off-the-shelf software, was
increased by $0.2 million to $1.6 million. The
pro
forma
statements of income reflect net depreciation expense
(reduction) of $0.7 million for the six months ended
June 30, 2009 and a reduction of $3.6 million for the
year ended December 31, 2008, giving effect to the reversal
of depreciation expense on the reduction of fixed assets
described above.
(c) Deferred acquisition costs (DAC), which
includes VOBA decreased by $4.6 million. The valuation for
the policies that were in force on the acquisition date has been
determined by using a cash flow model rather than an observable
market price, as a liquid market for valuing the in force
business could not be determined. The valuation model uses an
estimate of the expected underwriting profit and the net nominal
future cash flows associated with the in force policies that a
market participant would expect as of the date of the merger.
The fair value of the VOBA recorded on June 30, 2009 was
$12.4 million and replaced SUAs carried DAC of
$17.0 million as part of the business combination
adjustments. The fair value adjustment will be amortized in
proportion to the timing of the expected underwriting profit
associated with the in force
28
Tower
Group, Inc.
Notes to
Unaudited Pro forma Condensed Consolidated Financial
Statements (Continued)
policies acquired. The cash flow or interest component of the
VOBA asset will be amortized in proportion to the expected
underwriting profit associated with the in force policies
acquired. The amortization will be reflected as a component of
underwriting expenses. As a result of this business combination
adjustment, the Companys underwriting expenses were
reduced by $2.2 million for the six months ended
June 30, 2009 and $3.3 million for the year ended
December 31, 2008.
(d) The fair value of the loss and LAE reserves decreased
by $3.9 million to $214.5 million. The required
valuation of loss and LAE reserves acquired has been determined
by using a cash flow model rather than an observable market
price as a liquid market for such underwriting liabilities could
not be determined. The valuation model uses an estimate of net
nominal future cash flows related to liabilities for losses and
LAE that a market participant would expect as of the closing
date. These future cash flows are adjusted for the time value of
money at a risk free rate and a risk margin to compensate an
acquirer for bearing the risk associated with the liabilities.
The fair value adjustment for loss and LAE reserves of
$3.9 million will be amortized over the loss and LAE payout
pattern and reflected as a component of loss and LAE incurred.
The
pro forma
statements of income reflect the
amortization of the fair value adjustments of $0.6 million
for the six months ended June 30, 2009 and
$1.3 million for the year ended December 31, 2008.
(e) This amount reflects elimination of SUAs
historical equity balances.
(f) For
pro forma
purposes, SUAs marginal tax
rate was increased to Towers statutory income tax rate of
35%.
|
|
5.
|
EARNINGS
PER COMMON SHARE
|
(a)
Pro forma
earnings per share of common stock for
the six months ended June 30, 2009 and the year ended
December 31, 2008 have been calculated based on the
estimated weighted average number of shares of Towers
common stock outstanding on a
pro forma
basis, as
described below. The historical weighted average number of
shares of Towers common stock outstanding, after giving
effect to the shares of Tower common stock issued in connection
with the CastlePoint acquisition, was 40,391,878 and 40,537,703,
basic and diluted, respectively, for the six months ended
June 30, 2009 and 39,918,906 and 40,129,052, basic and
diluted, respectively, for the year ended December 31, 2008.
(b) The
pro forma
weighted average number of shares
of Towers common stock outstanding for the six months
ended June 30, 2009, after giving effect to
4,458,462 shares of Towers common stock issued to SUA
stockholders is 44,850,340 and 44,996,165, basic and diluted,
respectively. The
pro forma
weighted average number of
shares of Towers common stock outstanding for the year
ended December 31, 2008, after giving effect to 16,878,410
and 4,458,462 shares of Tower common stock issued to
CastlePoints and SUAs stockholders, respectively is
44,377,368, and 44,587,514, basic and diluted, respectively.
29
CERTAIN
FINANCIAL PROJECTIONS
In connection with Towers review of SUA and SUAs
review of Tower and in the course of the negotiations between
Tower and SUA described in The Merger
Background of the Merger, both Tower and SUA provided to
each other certain nonpublic business and financial information.
The nonpublic information included projections of Towers
and SUAs future earnings and SUAs assets,
liabilities and shareholders equity. Such projections of
Tower also were provided to FBR in its capacity as financial
advisor to SUA. The information set forth below has been
summarized from the materials provided to Tower, SUA or FBR in
order to provide SUA stockholders certain previously nonpublic
information that was provided to Tower, SUA or FBR for the
purpose of considering and evaluating the merger.
Except as set forth in this proxy statement/prospectus, Tower
has not publicly provided guidance for future earnings beyond
2010. SUA has never publicly provided guidance for future
earnings, assets, liabilities or shareholders equity.
However, in connection with Tower and SUAs respective
evaluation of the potential transaction, Tower prepared and is
responsible for the Tower projections included in this proxy
statement/prospectus and SUA prepared and is responsible for the
SUA projections included in this proxy statement/prospectus. The
projections were not prepared with a view to public disclosure
and are included in this proxy statement/prospectus only because
such information was made available in connection with
Towers and SUAs mutual due diligence investigations
and the proposed merger. The projections were not prepared with
a view to compliance with the published guidelines of the SEC
regarding projections, nor were they prepared in accordance with
generally accepted accounting principles or the guidelines
established by the American Institute of Certified Public
Accountants for preparation and presentation of financial
projections.
Neither Johnson Lambert & Co., LLP, Towers
independent registered public accounting firm nor
PricewaterhouseCoopers LLP, SUAs independent registered
public accounting firm have examined, compiled or performed any
procedures with respect to the accompanying projections and,
accordingly, neither of Johnson Lambert & Co. LLP nor
PricewaterhouseCoopers LLP express an opinion or any other form
of assurance with respect to the projections. The audit reports
included or incorporated by reference into this proxy
statement/prospectus related to Tower, SUA, CastlePoint and
Hermitage historical financial information do not extend to the
projections and should not be read to do so.
In compiling the projections, Tower and SUA took into account
historical performance, combined with projections regarding
development activities. The projections were developed in a
manner consistent with Tower, and SUAs view on the
historical development of budgets and long-range operating
projections. Although the projections were presented with
numerical specificity, the projections reflect numerous
assumptions and estimates as to future events made by Tower and
SUA that each, respectively, believed were reasonable at the
time the projections were prepared. No assurances can be given
that these assumptions and estimates will reflect future
conditions. Failure to realize any such assumptions would impact
the accuracy of the projections. In addition, factors such as
industry performance and general business, economic, regulatory,
market and financial conditions and other factors described
under Cautionary Statement Regarding Forward-Looking
Statements below, all of which are difficult to predict
and are beyond the control of Tower and SUA, may cause the
projections or the underlying assumptions to be materially
inaccurate. Accordingly, there can be no assurance that the
projections will be realized, and actual results may differ
materially from those contained in the projections. You should
read Towers and SUAs most recent filings on
Form 10-K
and
Form 10-Q,
each of which is incorporated by reference into this proxy
statement/prospectus, for a description of risk factors with
respect to their respective businesses. Since the projections
cover multiple years, such information by its nature becomes
less predictive with each successive year. None of Tower, SUA,
or any of their respective affiliates, advisors or
representatives have made or make any representation to any SUA
stockholder regarding the ultimate performance of Tower or SUA
compared to the information contained in these projections. See
Cautionary Statement Regarding Forward-Looking
Statements, below.
Neither Tower nor SUA intends to update or otherwise revise the
projections to reflect circumstances existing after the date
when made or to reflect the occurrence of future events, even if
any or all of the assumptions underlying the projections are
shown to be in error.
30
Tower
Financial Projections
In connection with SUAs review of Tower and in the course
of the negotiations between Tower and SUA, Towers
management team prepared the Tower financial projections that
were provided to FBR in its capacity as financial advisor to
SUA. The information set forth below has been summarized from
the financial projections provided by Tower to SUA in order to
provide SUA stockholders certain non-public information that was
provided to FBR.
|
|
|
|
|
|
|
|
|
|
|
Projections(1)
|
|
|
|
Year Ended December 31,
|
|
|
|
2010E
|
|
|
2011E
|
|
|
|
($ in millions except
|
|
|
|
per share amounts)
|
|
|
Gross Premiums Written
|
|
$
|
1,322.6
|
|
|
$
|
1,454.9
|
|
Net Premiums Written
|
|
$
|
1,217.5
|
|
|
$
|
1,361.7
|
|
Loss Ratio
|
|
|
56.9
|
%
|
|
|
57.6
|
%
|
Expense Ratio
|
|
|
32.9
|
%
|
|
|
31.7
|
%
|
Investment Yield
|
|
|
5.3
|
%
|
|
|
5.0
|
%
|
Net Income(2)
|
|
$
|
143.6
|
|
|
$
|
170.5
|
|
Earnings per Share(2)(3)
|
|
$
|
3.56
|
|
|
$
|
4.23
|
|
|
|
|
(1)
|
|
Projections were prepared by Tower Management on June 12,
2009 in response to a due diligence request from SUAs
advisors. The information set forth above does not include
projections of Towers future earnings for 2009 since the
2009 year will have substantially concluded prior to the
required stockholder vote of SUA.
|
|
|
|
(2)
|
|
The projections do not assume the realization of any investment
gains or losses. Earnings per share (EPS) figures are provided
on a diluted basis.
|
|
|
|
(3)
|
|
Projected 2009 operating EPS of $3.28 was provided to SUA. This
figure was within the range of $3.10 to $3.30 per diluted share
guidance provided on May 7, 2009 in Towers first
quarter earnings release. For Towers second quarter
earnings release on August 5, 2009, projected 2009
operating EPS guidance was provided in a range between $3.15 and
$3.25 per diluted share.
|
SUA
Financial Projections
In connection with the market test that SUA conducted in early
2009, SUAs management team prepared the SUA financial
projections as part of its confidential offering memorandum
provided to certain prospective purchasers of SUA for the
purpose of considering and evaluating a potential transaction.
The projections were prepared on both a stand-alone basis,
reflecting SUA managements view of the future operations
of SUA should it remain independent and continue to execute its
then-current business plan, and on a basis assuming that SUA
would receive an upgrade of its A.M. Best rating to
A− should it become an operating unit of a
larger entity. The information set forth below has been
summarized from the confidential offering memorandum in order to
provide SUA stockholders certain non-public information that was
provided to potential purchasers. It does not include financial
projections for 2009 since the 2009 year will have
substantially concluded prior to the required stockholder vote
of SUA and those projections would vary substantially from
actual results because of the significant costs and expenses
associated with the proposed merger.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands except ratios and per share data)
|
|
|
Gross premiums written
|
|
|
|
|
|
|
|
|
SUA stand-alone(1)(3)
|
|
$
|
190,000
|
|
|
$
|
208,300
|
|
A.M. Best upgrade(2)(3)
|
|
|
335,917
|
|
|
|
388,864
|
|
Net premiums written
|
|
|
|
|
|
|
|
|
SUA stand-alone(3)
|
|
$
|
180,800
|
|
|
$
|
198,700
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands except ratios and per share data)
|
|
|
A.M. Best upgrade(2)(3)
|
|
|
325,516
|
|
|
|
377,265
|
|
Loss ratio
|
|
|
|
|
|
|
|
|
SUA stand-alone(4)
|
|
|
61.6
|
%
|
|
|
58.9
|
%
|
A.M. Best upgrade(4)
|
|
|
62.7
|
%
|
|
|
60.0
|
%
|
Expense ratio
|
|
|
|
|
|
|
|
|
SUA stand-alone(5)
|
|
|
36.9
|
%
|
|
|
36.9
|
%
|
A.M. Best upgrade(5)(6)(7)
|
|
|
32.6
|
%
|
|
|
32.6
|
%
|
Net income
|
|
|
|
|
|
|
|
|
SUA stand-alone
|
|
$
|
12,876
|
|
|
$
|
17,934
|
|
A.M. Best upgrade
|
|
|
22,012
|
|
|
|
35,088
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
SUA stand-alone
|
|
$
|
0.82
|
|
|
$
|
1.14
|
|
A.M. Best upgrade
|
|
|
|
*
|
|
|
|
*
|
Total assets
|
|
|
|
|
|
|
|
|
SUA stand-alone
|
|
$
|
541,445
|
|
|
$
|
618,545
|
|
A.M. Best upgrade
|
|
|
713,145
|
|
|
|
917,945
|
|
Total shareholders equity
|
|
|
|
|
|
|
|
|
SUA stand-alone
|
|
$
|
159,345
|
|
|
$
|
177,545
|
|
A.M. Best upgrade
|
|
|
171,045
|
|
|
|
207,445
|
|
|
|
|
*
|
|
These figures were not included in the confidential offering
memorandum because it was assumed SUA would be a wholly-owned
subsidiary of another entity and would not have separately
reportable earnings per share.
|
|
|
|
(1)
|
|
SUA stand-alone projections were developed to reflect SUA
managements view of the future operations of SUA should it
remain independent and continue to execute its then-current
business plan.
|
|
|
|
(2)
|
|
The premium growth in the projected periods takes into account
an upgrade to an A- A.M. Best rating from SUA
Insurance Companys current, B+ rating and
assumes SUA would have access to a larger capital base. On a
stand-alone basis, however SUA would not be able to support the
projected premium growth without additional capital.
|
|
|
|
(3)
|
|
SUA management projected gross written premiums assuming an 80%
persistency rate, consistent with experience for 2008 and
anticipated experience for 2009. No further rate increases or
decreases were assumed, other than those needed to cover payroll
or benefit inflation. Assuming an upgrade to A- from
A.M. Best, an increase in new business was assumed to
result in an increase of over 100% in new business written in
2010. Reinsurance costs were assumed to be in line with
historical rates for the projection period and were based on
April 1, 2009 renewal terms.
|
|
|
|
(4)
|
|
SUA management projected a net loss ratio of approximately 62%
for 2010, equal to the net loss ratio booked in 2008 and
anticipated for 2009. Going forward, the net loss ratio was
projected to improve by approximately 3% year-over-year in 2011.
This decline was assumed from a general market hardening.
|
|
|
|
(5)
|
|
SUA management expected general and administrative expenses to
grow annually at the rate of inflation, assumed to be
approximately 4%.
|
|
|
|
(6)
|
|
SUA management expected to incur incremental general and
administrative expenses of approximately 3% of new premiums
produced.
|
|
|
|
(7)
|
|
SUA management believed that with an upgrade to A-
from A.M. Best, SUA would eliminate approximately
$2.7 million of annual costs. These would include the
elimination of a current fronting fee of 6% on approximately
$20 million of premium that requires an A-
rated carrier, which would equal approximately
$1.2 million, and the elimination of approximately
$1.5 million of expenses related to operating as a
stand-alone public company.
|
32
COMPARATIVE
PER SHARE DATA
The historical per share earnings, dividends, and book value of
Tower and SUA shown in the table below are derived from their
respective audited consolidated financial statements as of and
for the year ended December 31, 2008 and their respective
unaudited financial statements for the six months ended
June 30, 2009. The
pro forma
comparative basic and
diluted earnings per share and dividends per share data give
effect to the merger using the purchase method of accounting as
if the merger had been completed on January 1, 2008 for the
year ended December 31, 2008 and January 1, 2009 for
the six months ended June 30, 2009. The
pro forma
book value per share information was computed as if the
merger had been completed on June 30, 2009. You should read
this information in conjunction with the historical financial
information of Tower and of SUA included or incorporated
elsewhere in this proxy statement/prospectus, including
Towers and SUAs financial statements and related
notes. The per share
pro forma
information assumes that
all shares of SUA common stock are converted into shares of
Tower common stock at the exchange ratio. The
pro forma
data is not necessarily indicative of actual results had the
merger occurred during the periods indicated. The
pro
forma
data is not necessarily indicative of future
operations of the combined entity.
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
TGI historical
|
|
$
|
1.31
|
|
|
$
|
2.49
|
|
TGI
pro forma
(including CastlePoint and Hermitage)
|
|
|
1.19
|
|
|
|
1.72
|
|
SUA historical
|
|
|
0.03
|
|
|
|
0.48
|
|
Pro forma
combined
|
|
|
1.11
|
|
|
|
1.74
|
|
Equivalent
pro forma
for one share of SUA common stock(1)
|
|
|
0.31
|
|
|
|
0.49
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
TGI historical
|
|
$
|
1.30
|
|
|
$
|
2.47
|
|
TGI
pro forma
(including CastlePoint and Hermitage)
|
|
|
1.19
|
|
|
|
1.71
|
|
SUA historical
|
|
|
0.03
|
|
|
|
0.47
|
|
Pro forma
combined
|
|
|
1.11
|
|
|
|
1.73
|
|
Equivalent
pro forma
for one share of SUA common stock(1)
|
|
|
0.31
|
|
|
|
0.48
|
|
Cash dividends declared per share(2)
|
|
|
|
|
|
|
|
|
TGI historical
|
|
$
|
0.12
|
|
|
$
|
0.20
|
|
SUA historical
|
|
|
|
|
|
|
|
|
Pro forma
combined
|
|
|
0.12
|
|
|
|
0.20
|
|
Equivalent
pro forma
for one share of SUA common stock(1)
|
|
|
0.03
|
|
|
|
0.06
|
|
Book value per share (at period end)
|
|
|
|
|
|
|
|
|
TGI historical
|
|
$
|
19.46
|
|
|
$
|
14.36
|
|
SUA historical
|
|
|
8.85
|
|
|
|
8.62
|
|
Pro forma
combined
|
|
|
21.85
|
|
|
|
N/A
|
|
Equivalent
pro forma
for one share of SUA common stock(1)
|
|
|
6.12
|
|
|
|
N/A
|
|
|
|
|
(1)
|
|
The
pro forma
equivalent was calculated by multiplying
the
pro forma
combined EPS by the exchange ratio of
0.28 shares of Tower common stock for each share of SUA
common stock.
|
|
|
|
(2)
|
|
TGIs cash dividends per share of common stock were $0.05
in the first quarter and were increased in the second quarter of
2009 to $0.07 per share.
|
33
MARKET
PRICE AND DIVIDEND INFORMATION
Tower common stock is listed on the NASDAQ Global Select Market
and SUA common stock is listed on the NASDAQ Global Market. The
following table sets forth for the periods indicated the high
and low transaction prices per share of Tower and SUA common
stock, and the cash dividends declared during each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tower
|
|
|
SUA
|
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
24.46
|
|
|
$
|
16.80
|
|
|
$
|
0.025
|
|
|
$
|
6.80
|
|
|
$
|
5.77
|
|
|
$
|
|
|
Second Quarter
|
|
|
32.00
|
|
|
|
22.50
|
|
|
|
0.025
|
|
|
|
7.03
|
|
|
|
6.18
|
|
|
|
|
|
Third Quarter
|
|
|
34.47
|
|
|
|
25.87
|
|
|
|
0.025
|
|
|
|
9.00
|
|
|
|
6.28
|
|
|
|
|
|
Fourth Quarter
|
|
|
36.49
|
|
|
|
29.18
|
|
|
|
0.025
|
|
|
|
10.56
|
|
|
|
8.25
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter(1)
|
|
|
35.93
|
|
|
|
28.10
|
|
|
|
0.025
|
|
|
|
8.64
|
|
|
|
7.11
|
|
|
|
|
|
Second Quarter
|
|
|
33.32
|
|
|
|
29.44
|
|
|
|
0.025
|
|
|
|
8.52
|
|
|
|
7.52
|
|
|
|
|
|
Third Quarter
|
|
|
32.57
|
|
|
|
24.11
|
|
|
|
0.050
|
|
|
|
8.07
|
|
|
|
6.67
|
|
|
|
|
|
Fourth Quarter
|
|
|
35.50
|
|
|
|
27.02
|
|
|
|
0.050
|
|
|
|
7.41
|
|
|
|
5.06
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
33.73
|
|
|
|
23.17
|
|
|
|
0.050
|
|
|
|
5.86
|
|
|
|
4.11
|
|
|
|
|
|
Second quarter
|
|
|
28.26
|
|
|
|
21.03
|
|
|
|
0.050
|
|
|
|
6.14
|
|
|
|
4.25
|
|
|
|
|
|
Third quarter
|
|
|
27.53
|
|
|
|
17.83
|
|
|
|
0.050
|
|
|
|
5.72
|
|
|
|
4.61
|
|
|
|
|
|
Fourth Quarter
|
|
|
28.69
|
|
|
|
15.76
|
|
|
|
0.050
|
|
|
|
4.81
|
|
|
|
2.00
|
|
|
|
|
|
Year Ending December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
31.05
|
|
|
|
24.34
|
|
|
|
0.050
|
|
|
|
3.90
|
|
|
|
2.40
|
|
|
|
|
|
Second Quarter
|
|
|
28.32
|
|
|
|
22.70
|
|
|
|
0.070
|
|
|
|
6.35
|
|
|
|
2.71
|
|
|
|
|
|
Third Quarter (through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 7, 2009
)
|
|
|
26.10
|
|
|
|
22.88
|
|
|
|
0.070
|
|
|
|
7.04
|
|
|
|
6.09
|
|
|
|
|
|
The following table presents trading information for Tower and
SUA common stock for June 19, 2009 and October 7,
2009. June 19, 2009 was the last full trading day prior to
the public announcement of the proposed merger. October 7,
2009 was the last practicable trading day for which information
was available prior to the date of the first mailing of this
proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
Common Stock Close
|
|
|
|
Tower
|
|
|
SUA
|
|
|
June 19, 2009
|
|
$
|
24.00
|
|
|
$
|
3.96
|
|
October 7, 2009
|
|
$
|
23.90
|
|
|
$
|
6.40
|
|
SUA stockholders are encouraged to obtain current market
quotations for Tower common stock prior to making any decision
with respect to the merger. No assurance can be given concerning
the market price for Tower common stock before or after the date
on which the merger is consummated. The market price for Tower
common stock will fluctuate between the date of this proxy
statement/prospectus and the date on which the merger is
consummated and thereafter. The average Tower common stock
price, on which the exchange ratio is based, may differ from the
closing price per share of Tower common stock on the date that
the parties entered into the merger agreement, on the date that
the parties announced the merger, on the date that this document
was mailed, on the date of the SUA special meeting, on the date
that is the deadline for any SUA stockholder to apply to the
court to appraise the fair value of its shares of SUA
Class B common stock, at the effective time of the merger,
and on the date that SUA stockholders receive the merger
consideration.
34
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking information about
Tower and SUA and the combined company that is intended to be
covered by the safe harbor for forward-looking
statements provided by the Private Securities Litigation
Reform Act of 1995. These statements may be made directly in
this proxy statement/prospectus or may be incorporated into this
proxy statement/prospectus by reference to other documents and
may include statements for the period after the completion of
the merger. Representatives of Tower and SUA may also make
forward-looking statements. Forward-looking statements are
statements that are not historical facts. Words such as
expect, believe, will,
may, anticipate, plan,
estimate, intend, should,
can, likely, could and
similar expressions are intended to identify forward-looking
statements. These statements include statements about the
expected benefits of the merger, information about the combined
companys objectives, plans and expectations, the
likelihood of satisfaction of certain conditions to the
completion of the merger and whether and when the merger will be
completed. Forward-looking statements are not guarantees of
performance. These statements are based upon the current beliefs
and expectations of the management of each of Tower and SUA and
are subject to risks and uncertainties, including the risks
described in this proxy statement/prospectus under the section
Risk Factors and those that are incorporated by
reference into this proxy statement/prospectus, that could cause
actual results to differ materially from those expressed in, or
implied or projected by, the forward-looking information and
statements.
In light of these risks, uncertainties, assumptions and factors,
the results anticipated by the forward-looking statements
discussed in this proxy statement/prospectus or made by
representatives of Tower or SUA may not occur. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof or, in the
case of statements incorporated by reference, on the date of the
document incorporated by reference, or, in the case of
statements made by representatives of Tower or SUA, on the date
those statements are made. All subsequent written and oral
forward-looking statements concerning the merger or the combined
company or other matters addressed in this proxy
statement/prospectus and attributable to Tower or SUA or any
person acting on their behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to
in this section. Except to the extent required by applicable law
or regulation, neither Tower nor SUA undertakes any obligation
to update or publish revised forward-looking statements to
reflect events or circumstances after the date hereof or the
date of the forward-looking statements or to reflect the
occurrence of unanticipated events.
35
THE
MERGER
The following is a description of the material aspects of the
background and history behind the merger. This description may
not contain all of the information that is important to you. You
are encouraged to carefully read this entire proxy
statement/prospectus, including the merger agreement attached
hereto as Appendix A, for a more complete understanding of
the merger.
Background
of the Merger
Since SUAs initial public offering in 2004, as part of an
ongoing evaluation of SUAs business, SUAs board of
directors and SUAs chief executive officer, Courtney
Smith, SUAs chief financial officer, Peter Jokiel,
SUAs chief underwriting officer, Daniel Cacchione,
SUAs chief information officer, Barry Cordeiro, SUAs
chief claims officer, Gary Ferguson, SUAs general counsel,
Scott Goodreau, SUAs chief actuary, Scott Charbonneau, and
SUAs controller, Daniel Rohan have regularly reviewed and
assessed opportunities to further SUAs long-term goals and
to maximize stockholder value, including strategic opportunities
and opportunities for organic growth. From time to time,
SUAs board of directors and Messrs. Smith, Jokiel,
Cacchione, Cordeiro, Ferguson, Goodreau, Charbonneau and Rohan
have evaluated a variety of strategic alternatives in light of
the business trends and regulatory conditions impacting SUA and
the insurance industry as a whole. Attributes that SUA
considered attractive when assessing potential strategic
transactions included the potential party having (i) an
A- or higher A.M. Best rating, (ii) existing
premiums that could be processed through SUA in order to better
leverage SUAs infrastructure to reduce its operating
expense ratio, (iii) higher stock trading volume and an
(iv) existing book of business that would further diversify
SUAs book of business. SUA considered various types of
transactions, including
going-private
transactions, cash and stock mergers and various types of
alternative transaction structures such as reverse mergers and
tender offers.
During mid-2008 and again in the first quarter of 2009, as
described below, Messrs. Smith, Jokiel, and Goodreau, were
approached by representatives of certain third parties
interested in the possibility of entering into strategic
transactions with SUA, including potential business combinations
or other transactions that could result in a sale of SUA.
By a letter to SUAs board of directors dated June 16,
2008, Hallmark Financial Services, Inc., which we refer to as
Hallmark, made an unsolicited, non-binding and
conditional proposal to acquire SUA pursuant to a merger in
which SUA stockholders would receive shares of Hallmark common
stock. The letter proposed that SUA stockholders would receive
per share merger consideration of $6.50 per share, payable in
Hallmark stock, for each share of SUA common stock and SUA
Class B common stock. After receipt of such proposal
letter, SUAs board of directors retained FBR as its
financial advisor to assist SUAs board of directors in
evaluating the Hallmark proposal. Also, on June 23, 2008,
Hallmark and certain related parties filed a Schedule 13D
with the SEC in which such parties disclosed the Hallmark
proposal and that Hallmark and such related parties had acquired
approximately 9.6% of the outstanding SUA common stock. SUA
issued a press release on June 23, 2008 acknowledging the
receipt of Hallmarks unsolicited proposal. Between June 17
and June 25, 2008, SUAs board of directors, in
consultation with FBR and Stroock &
Stroock & Lavan LLP, SUAs legal advisors, held
several meetings to evaluate the Hallmark proposal. On
June 26, 2008, SUA issued a press release stating that
SUAs board of directors had reviewed Hallmarks
proposal to acquire SUA and, after a thorough deliberation, the
SUA board of directors had unanimously concluded that the
Hallmark proposal should be rejected and that SUA should remain
independent and continue with the execution of its then-current
business strategy, which the board of directors believed
represented a better long-term value for SUAs stockholders.
On November 25, 2008, at an FBR-sponsored investment
conference, representatives from FBR introduced Messrs. Smith,
Jokiel and Goodreau, to representatives from a private
investment fund seeking to invest in the insurance industry,
which we refer to as Company 1, interested in
investing in companies similar to SUA. During that brief
meeting, representatives of Company 1 and the officers of SUA
had a general discussion about SUAs operations. There was
no discussion of any potential transaction between SUA and
Company 1.
Also on November 25, 2008, Mr. Smith, Mr. Jokiel
and Mr. Goodreau had lunch with a representative of an
investment bank other than FBR, who told the SUA officers that
he represented an investment fund
36
interested in the insurance industry. Mr. Smith,
Mr. Jokiel and Mr. Goodreau stated that SUA was not
for sale but did generally discuss SUAs current operations.
From December 2008 through March 2009, Messrs. Smith, Jokiel and
Goodreau received other informal inquiries about potential
business combinations from representatives of other companies
and funds, including one such inquiry in writing from a private
equity fund, which we refer to as Private Equity
Fund 1, with experience investing in the insurance
industry, which indicated that it might be interested in
sponsoring a going-private transaction. Private
Equity Fund 1 stated that it managed over $1.8 billion
in private equity capital and concentrated in management buy-out
transactions. Private Equity Fund 1 represented that
certain persons affiliated with the fund had experience in
transactions involving wholesale and retail brokers and
insurance carriers. Private Equity Fund 1 indicated an
interest in discussing an all cash transaction that would be
subject to certain contingencies including a financing
contingency. The preliminary indication of interest included a
per share valuation range, the upper end of which did not exceed
the $6.50 per share proposed by Hallmark. Based on prior
instructions from SUAs board, Mr. Smith responded to
these various informal inquiries, including the inquiry from
Private Equity Fund 1, by stating that SUA was not for sale
and that SUAs board of directors had instructed
Mr. Smith to reject any proposed transaction that the
members of SUA management deemed inadequate and to continue
SUAs focus on execution of SUAs current business
plan.
By letter dated February 4, 2009, SUA received from Company
1 a letter setting forth an unsolicited, non-binding,
conditional proposal to enter into a business combination
transaction wherein Company 1 would launch a partial tender for
SUA stock, following which Company 1 would merge into SUA, with
Company 1s equity holders becoming the majority holders of
SUA common stock and receiving SUA common stock. SUAs
board of directors again retained FBR to act as SUAs
financial advisor to assist the SUA board of directors in
evaluating this new proposal. In consultation with FBR and
Stroock & Stroock & Lavan LLP, SUAs
legal advisor, SUAs board of directors considered this
proposal at a special meeting of the board of directors held on
February 12, 2009. SUAs board of directors considered
the material terms of the transaction and determined that, even
though the proposed transaction purported to add capital to the
company, it would be dilutive to the existing stockholders of
the company and did not provide significant liquidity for
existing SUA stockholders. Company 1 is a private investment
fund with approximately $150 million in capital and is
externally managed by an institutional asset manager with over
$5 billion under management. After thorough deliberations,
the SUA board of directors determined not to agree to the an
exclusivity period that was being insisted upon by Company 1 to
continue discussions of its proposal, and Company 1 was so
advised. Company 1 did not take further action at that time.
Due in part to the general downturn in the economy in the second
half of 2008 and early 2009, the general negative economic
outlook for the remainder of 2009, SUAs prospects for
internal growth and the worsening conditions of the insurance
market generally, in March 2009 SUAs board of directors
considered creating a committee to examine SUAs strategic
opportunities as part of its ongoing evaluation of SUAs
business, especially in light of interest expressed by third
parties during the previous nine months regarding potential
business combinations. On March 19, 2009, SUAs board
of directors established the Strategic Review Committee,
appointing Raymond Groth, Robert Dean and Paul Philp as members,
with Mr. Groth serving as its chairman, and adopted a
charter for the Strategic Review Committee. The purpose of the
Strategic Review Committee was to assist SUAs full board
of directors with respect to strategic planning, including
reviewing opportunities that could arise for strategic
transactions or other transactions outside the ordinary course
of SUAs business.
The Strategic Review Committees responsibilities, included
reviewing and evaluating long-range objectives and strategic
businesses for SUA, meeting with, and providing guidance and
oversight to, management with respect to SUAs strategic
planning process and initiatives to achieve SUAs long-term
financial and strategic objectives and to review and approve (or
recommend to the full board of directors, as the case may be),
any major corporate transactions outside the ordinary course of
business, including potential debt and equity financings,
proposed mergers, acquisitions or divestitures or investments
that might arise from time to time. The Strategic Review
Committee also was granted the authority to select and retain
outside legal counsel, investment bankers, financial advisors,
business consultants or other experts or consultants, as it
deemed appropriate, including sole authority to approve fees and
other retention terms.
37
The Strategic Review Committee held its first meeting on
March 19, 2009, and during that meeting, decided to have
weekly telephonic meetings with Messrs. Smith, Jokiel and
Goodreau. In addition, at that meeting the committee decided to
engage FBR to assist in its review of strategic opportunities
for SUA. FBR had served as the lead managing underwriter in
SUAs initial public offering in 2004, provided advice in
connection with the recent unsolicited proposals and was
familiar with SUAs operating history and management. The
Strategic Review Committee subsequently engaged FBR to assist
the committee, executing an engagement letter on March 20,
2009. Pursuant to the engagement letter, FBR received an initial
fee of $50,000 and, if a transaction were to be consummated,
would be paid a transaction success fee equal to the greater of
$750,000 and 1.25% of the aggregate consideration paid to SUA or
its stockholders. The initial fee, plus $50,000 which had been
paid to FBR in connection with its prior engagements in
connection with the unsolicited proposals described above, would
be credited against the transaction success fee. In addition, if
FBR were to issue a fairness opinion at the request of the SUA
board of directors in connection with a transaction, FBR would
receive a fee of $500,000 for such fairness opinion.
In addition, FBR previously acted as the sole bookrunner and
lead manager of SUAs initial public offering in 2004 and
served as its financial advisor in connection with evaluating
unsolicited merger proposals in 2008 and 2009, and FBR acted as
a bookrunner and sole lead manager in connection with the
initial public offering and follow-on offering of common stock
of Tower in 2004 and 2007, acted as the sole initial purchaser
and placement agent in the initial equity offering of
CastlePoint, an affiliate of Tower, in 2006 and advised
CastlePoint in 2008 regarding its acquisition by Tower, which
closed earlier this year. In the last two completed fiscal
years, FBR shared, as bookrunner and sole lead manager, in the
aggregate underwriting discounts and commissions of $4,757,188
in the follow-on common stock offering of Tower and received, as
sole initial purchaser and placement agent, an aggregate
$8,538,330 in discounts and placement fees in connection with
the initial equity offering of CastlePoint. FBR also received a
fee of $500,070 from CastlePoint in April of 2009 for advice to
CastlePoint in connection with its acquisition by Tower. SUA has
not paid any fees to FBR other than in connection with the
merger and evaluating merger proposals during the last two
completed fiscal years. However, in 2004 FBR did share, as
bookrunner and sole lead manager, in the aggregate underwriting
discounts and commissions of $8,445,500 in SUAs initial
public offering.
On March 23, 2009, representatives of FBR met with the
Strategic Review Committee to discuss SUAs current
situation and market conditions. FBR also discussed SUAs
peer group stock performance and selected recent merger and
acquisition transactions in the property and casualty insurance
industry. FBR also reviewed with the committee a number of
potential partners for strategic transactions, including
transactions that might result in a sale of SUA, and possible
rationales for such transactions. FBR presented additional
industry and financial information to the Strategic Review
Committee at a
follow-up
meeting on March 27, 2009, including presenting an initial
valuation of SUA, reviewing current market conditions and again
discussing potential partners for strategic transactions.
On March 26, 2009, Michael Lee, chairman of the board of
directors, president and chief executive officer of Tower,
contacted Mr. Smith to discuss Towers possible
interest in acquiring SUA. He mentioned that Tower was currently
reviewing its acquisition opportunities. Mr. Lee and
Mr. Smith discussed certain of Towers reasons for
considering a potential transaction and the possible benefits of
such a transaction, including, (a) allowing for the
expansion of Towers underwriting capacity in the specialty
property and casualty insurance market and further broadening
Towers product offerings, (b) providing the
opportunity to share profit center resources with SUA in the
specialty property and casualty insurance market and to
consolidate certain functions, resulting in cost savings,
(c) providing the opportunity for Tower to utilize
SUAs office headquarters to develop Towers brokerage
business written through retail and wholesale agents in the
midwestern United States and (d) providing the
opportunity to create long-term stockholder value by increasing
the growth of SUAs business by cross-selling products with
Tower and accessing Towers higher A-
A.M. Best Company rating (the 4th highest of 15 rating
levels) instead of SUAs lower B+
A.M. Best Company rating (the 6th highest of 15 rating
levels) and Towers higher capital base. Mr. Lee
emphasized that Tower was experienced in acquiring and
integrating companies and that he would be interested in
continuing the conversation after SUA had an opportunity to
discuss the matter internally.
38
On April 1, 2009, Mr. Lee again contacted
Mr. Smith to reiterate Towers interest in discussing
a potential transaction, and Mr. Lee and Mr. Smith
agreed that they would schedule a time in the future to discuss
the matter.
On April 3, 2009, at a regular meeting of the Strategic
Review Committee, representatives of FBR again discussed
potential third parties that might be interested in exploring a
potential transaction with SUA and described the process FBR
would propose to employ to initiate discussions with such
parties. FBR suggested that a representative of FBR would
contact by phone (on a no-names basis) certain third parties
approved by the Strategic Review Committee in order to ascertain
whether such party may be interested in considering a potential
transaction with a client of FBR. If a third party expressed
interest in a potential transaction and would agree to maintain
the appropriate confidentiality, FBR would disclose that SUA was
the client in question. Upon receipt of an executed
confidentiality agreement from the third party, a detailed
confidential information memorandum about SUA would be sent to
interested third parties. Those receiving the confidential
information memorandum would be requested to review the
memorandum and submit a written initial indication of interest,
and the Strategic Review Committee, in consultation with
SUAs full board of directors, would then select a subset
of those submitting written initial indications of interest to
conduct due diligence on SUA and meet with Messrs. Smith,
Jokiel, Cacchione, Cordeiro, Goodreau, Charbonneau and Rohan and
Peter Slavin, SUAs director of claims. The Strategic
Review Committee directed FBR to begin the process as outlined
by FBR and approved an initial list of third parties that FBR
should contact on SUAs behalf, including Tower, Private
Equity Fund 1 and Company 1. The list of potential parties
included both strategic and financial purchasers. The Strategic
Review Committee directed FBR to contact certain parties that
had an A− or higher rating by A.M. Best,
were capable of financing a transaction without any financing
contingencies and had either previously expressed interest in
acquiring SUA or had an established record of acquiring property
and casualty insurance companies. FBR contacted some additional
parties that had previously contacted the company but lacked
certain of above-mentioned criteria, as well as a limited number
of additional companies that FBR believed might be interested in
pursuing a strategic transaction with SUA.
Over approximately the next two weeks, FBR worked with Messrs,
Smith, Jokiel and Goodreau and members of the Strategic Review
Committee to prepare and finalize the confidential information
memorandum.
On April 9, 2009, Mr. Lee and Elliot Orol, senior vice
president, general counsel and secretary of Tower, visited SUA
and met with Mr. Smith, Mr. Jokiel and
Mr. Goodreau. Frank Colalucci, a senior vice president, the
chief financial officer, treasurer and a director of Tower, and
Thomas Song, Towers managing vice president, also
participated by telephone. The officers of Tower and SUA
discussed various matters relating to a potential transaction,
including the possibility of structuring the merger as an
all-stock transaction, the relative attractiveness of a Tower
offer as compared to offers from third parties and the benefits
of a possible transaction between Tower and SUA, including those
discussed during the March 26, 2009 telephone call, which
are described above.
During April and May 2009, FBR contacted 34 prospective parties
previously approved by the Strategic Review Committee, including
Tower, Hallmark, Private Equity Fund 1 and Company 1,
to discuss potential strategic opportunities with SUA. Of those
prospective parties, nine entered into confidentiality
agreements and were given a confidential information memorandum,
which included projections prepared by SUA management. The
projections were prepared on both a stand-alone basis,
reflecting SUA managements view of the future operations
of SUA should it remain independent and continue to execute its
then-current business plan, and on a basis assuming that SUA
would receive an upgrade of its A.M. Best rating to
A− should it become an operating unit of a
larger entity. For more information regarding these projections,
please see Certain Financial Projections SUA
Financial Projections.
On April 21, 2009, Tower entered into a confidentiality
agreement and received a copy of the confidential information
memorandum. On June 12, 2009, in connection with SUAs
due diligence review, Tower and SUA entered into a substantially
similar confidentiality agreement to cover certain non-public
materials and information that Tower would provide to SUA.
39
On April 30, 2009, FBR sent letters to each of the parties
that had received a confidential information memorandum
informing them that written initial indications of interest were
due by May 7, 2009.
As of the deadline on May 7, 2009, Tower, one of the nine
interested parties that had received the confidential
information memorandum, submitted a written initial indication
of interest. SUA received two additional indications of interest
on May 8, 2009, from Company 1 and from a foreign insurance
company seeking to expand into the United States, which we refer
to as Company 2. Company 2 was initially capitalized by a
private equity firm with over $700 million in capital and has
operations in Bermuda, the United Kingdom and the United States.
Company 2s indication of interest contemplated a purchase
of SUA stock for a fixed sum of cash. After reviewing these
initial indications of interest at a meeting on May 8,
2009, the Strategic Review Committee decided to allow two of
those parties, Tower and Company 2, to conduct due diligence by
accessing an online data room made available by SUA and by
meeting with Messrs. Smith, Jokiel, Cacchione, Cordeiro,
Goodreau, Charbonneau, Rohan and Slavin. Company 1 was not
invited to conduct due diligence as its initial indication of
interest was substantially the same proposal that SUAs
board of directors had considered and determined not to be
adequate earlier in 2009 for the reasons described above and was
significantly less favorable to SUA and its stockholders than
the indications of interest submitted by Tower and Company 2.
On May 9, 2009, SUA received an additional indication of
interest from another insurance company with operations in the
United States and Bermuda, which we refer to as Company 3.
Company 3 is a private company partially owned by a private
investment fund currently managing over $150 million, and
provides a range of specialized property and casualty insurance
products and related services to businesses and individuals in
the United States and Bermuda. Company 3s indication of
interest, which was dated as of May 7, 2009, contemplated a
purchase of SUA stock for all cash. The Strategic Review
Committee discussed Company 3s indication of interest and
at its next meeting on May 19, 2009 judged this indication
of interest to be inadequate in comparison to the other
indications of interest that had been received to date, taking
into account that Company 3s indication of interest was
contingent on financing and was at a per share valuation that
was significantly less than proposed by Tower and Company 2. On
May 19, 2009, the Strategic Review Committee decided not to
continue further discussions with Company 3.
On May 13, 2009, Tower began conducting due diligence by
accessing the data room provided by SUA.
On May 18, 2009, Company 2 began conducting due diligence
by accessing the data room provided by SUA.
On May 18, 2009, Messrs. Smith, Jokiel, Cacchione,
Cordeiro, Goodreau, Charbonneau, Rohan and Slavin met with the
chief executive and two financial advisor representatives from
Company 2 at SUAs offices to conduct initial
on-site
due
diligence. Nine employees from Company 2, including junior
executives and consultants, returned to SUAs offices on
May 28, 2009 to conduct more extensive due diligence.
On May 27, 2009, nine employees from Tower, including
Mr. Lee and Mr. Colalucci, met with
Messrs. Smith, Jokiel, Cacchione, Cordeiro, Goodreau,
Charbonneau, Rohan and Slavin at SUAs offices to conduct
on-site
due
diligence.
On June 1, 2009, at a regularly scheduled weekly meeting,
the Strategic Review Committee determined that FBR should send
Tower and Company 2 a letter requesting final non-binding
proposals by Wednesday, June 10, 2009 at the close of
business and that the Strategic Review Committee and SUAs
board of directors would convene on Friday, June 12, 2009
to discuss any such proposals received.
On June 5, 2009, another party, which we refer to as
Company 4, submitted an indication of interest for a business
combination transaction with its privately held United States
insurance subsidiary that, if consummated, would have resulted
in then-current stockholders of SUA receiving an amount of cash
and continuing to hold a minority of the common stock of the
combined entity. Company 4s proposal was subject to
financing and other contingencies. Company 4 is a private
company that is the parent of several U.S. insurance companies
which has stockholders equity of approximately
$300 million. The Strategic Review Committee determined
that the proposal was inadequate in light of Towers
proposal primarily due to the total value of the proposed
transaction being substantially lower than the Tower proposal
and the fact that a portion of the
40
consideration to be paid to SUA stockholders was subject to a
financing contingency, unlike the Tower proposal which contained
no such contingency.
On June 10, 2009, SUA received a non-binding proposal from
Tower for a
stock-for-stock
merger under which each share of SUA stock would be converted
into the right to receive, subject to adjustment as set forth in
the merger agreement, a fraction of a share of Tower common
stock equal to the product of one SUA share and the exchange
ratio, which was: (i) 0.27, if the average price of
Towers common stock during a
15-day
reference period prior to consummation of the merger was greater
than or equal to $23.00 and less than or equal to $28.00;
(ii) if the average price of Towers common stock
during the reference period was greater than $28.00, that
fraction equal to the quotient obtained by dividing $7.56 by the
average price of Towers common stock; (iii) if the
average price of Towers common stock during the reference
period was greater than or equal to $20.50 and less than $23.00,
that fraction equal to the quotient obtained by dividing $6.21
by the price of Towers common stock during the reference
period; or (iv) 0.3029, if the average price of
Towers common stock during the reference period was less
than $20.50. With its non-binding indication of interest, Tower
provided a draft agreement and plan of merger marked against a
form of agreement previously provided by SUA. After review by
SUAs board of directors of the terms of the non-binding
indication of interest, and after consulting with its financial
and legal advisors, SUAs board of directors directed FBR
to negotiate with Tower a more favorable exchange ratio,
including a floor so as to protect the valuation to
SUA stockholders if the average Tower stock price for the
relevant reference period prior to closing was below $20.50.
Tower delivered a revised non-binding indication of interest the
following day, June 11, 2009. The proposal adjusted the
exchange ratio and the upper and lower collars to increase the
potential value of the merger consideration to be paid to SUA
stockholders based on Towers recent average trading price
and imposed a floor below the $20.00 average Tower stock price
whereby if the reference price of Towers common stock used
in determining the exchange ratio were to fall below the
specified threshold, SUA would have the right, for a limited
period of time, to terminate the merger agreement unless Tower
agreed to
top-up
the merger consideration so that SUA stockholders would receive
a minimum dollar value of Tower common stock. In particular,
Towers revised non-binding indication of interest adjusted
the exchange ratio as follows: (i) 0.28, if the average
price of Towers common stock during the
15-day
reference period prior to consummation of the merger was greater
than or equal to $23.25 and less than or equal to $27.75,
(ii) if the average price of Towers common stock
during the reference period was greater than $27.75, that
fraction equal to the quotient obtained by dividing $7.77 by the
average price of Towers common stock during the reference
period, (iii) if the average price of Towers common
stock during the reference period was less than $23.25 but
greater than or equal to $20.00, that fraction equal to the
quotient obtained by dividing $6.51 by the average price of
Towers common stock during the reference period; provided,
however, that, if Towers average stock price during the
reference period was below $20.00, the exchange ratio would be
fixed at 0.3255, and SUA would have the right, for a limited
period, to terminate the agreement, unless Tower elected to add
Tower shares to provide SUA stockholders with a value per share
of $6.51. Shortly after providing the revised non-binding
proposal, Towers counsel, Debevoise & Plimpton
LLP, provided a revised markup of the agreement and plan of
merger reflecting those changes to the proposal. In connection
with its revised proposal, Tower requested that SUA grant Tower
an exclusivity period in which to negotiate a definitive merger
agreement.
On June 12, 2009, Francis M. Colalucci and Thomas Song, on
behalf of Tower, provided Towers income statement
projections for 2009 through 2011 to FBR, in connection with
FBRs and SUAs due diligence with respect to Tower.
The projections included Towers projected gross and net
premiums written, loss ratio, expense ratio, investment yield,
net income and earnings per share for the years 2009, 2010 and
2011. For a summary of the financial projections provided by
Tower, see Certain Financial Projections above.
On June 12, 2009, representatives of FBR informed the
Strategic Review Committee that Company 2 had advised FBR of its
decision not to continue with the process and therefore Company
2 would not be submitting a final non-binding proposal. Also on
June 12, 2009, the Strategic Review Committee considered
the indication of interest submitted by Company 4 and determined
that it was inadequate in light of the superior proposal
submitted by Tower.
41
On June 12, 2009, SUAs board of directors held a
telephonic special meeting to discuss the proposal received from
Tower. At that meeting the board of directors discussed in
detail, and consulted with its financial and legal advisors, the
substantive terms of the Tower proposal and reviewed the terms
of the draft merger agreement submitted by Tower, copies of
which had been provided to the board of directors in advance of
the meeting. The meeting was adjourned to allow the Strategic
Review Committee to convene a meeting to discuss the proposed
transaction and determine whether it would recommend to the full
board of directors that SUA agree to an exclusivity period with
Tower to negotiate a definitive agreement.
After completion of the meeting of the Strategic Review
Committee, the full SUA board of directors reconvened. The
Strategic Review Committee then recommended to the full board of
directors that it pursue negotiating a merger agreement based on
the proposal received from Tower and recommended that Tower and
SUA enter into an exclusivity agreement until 5:00 p.m.
Eastern time on June 19, 2009 to negotiate and finalize a
definitive agreement. SUAs board of directors determined
that Towers offer presented the best value available to
SUA stockholders from other indications of interest received,
based primarily on four factors. First, the value of the Tower
merger consideration was comparatively attractive, particularly
in light of the fact that SUA stockholders could potentially
receive up to $7.77 in value and could benefit from the
soft-floor that the top-up provision
could provide, as described in greater detail in The
Merger Agreement Terms of the Merger
Exchange Ratio below. Second, Towers offer included
fewer contingencies than the other indications of interest and
did not contain a financing contingency. In addition, SUAs
board of directors believed that Towers business model and
operations provided SUA with a better platform for continued
expansion and growth. Finally, SUAs board of directors
believed that the Tower offer provided more liquidity for
existing SUA stockholders than certain of the other indications
of interest. Upon a unanimous vote of the board of directors
following the Strategic Review Committees recommendation,
SUAs board of directors gave its outside legal counsel and
financial advisors direction with respect to negotiating the
merger agreement and entering into an exclusivity agreement.
During the evening of June 12, 2009, Tower and SUA executed
an exclusivity agreement wherein SUA agreed not to negotiate,
solicit, initiate, engage, encourage, discuss or enter into a
potential transaction with any party other than Tower until
after 5:00 p.m. Eastern time on June 19, 2009.
Based on the direction received from SUAs board of
directors in response to Towers
mark-up
of
the proposed definitive merger agreement, on June 13, 2009,
SUAs counsel provided Towers counsel with a revised
draft of the definitive merger agreement. The parties continued
to negotiate the draft merger agreement during the week of
June 14, 2009.
On June 18, 2009, Mr. Goodreau, representatives from
SUAs outside legal counsel and representatives of FBR met
at the offices of Stroock & Stroock & Lavan
LLP with Thomas Song, Susan Eylward, corporate counsel at Tower,
and representatives of Towers outside legal counsel to
negotiate remaining open issues with respect to the draft merger
agreement. Mr. Lee also participated in a portion of those
discussions by teleconference.
During the evening of June 18, 2009, SUAs board of
directors held another telephonic meeting to discuss the
progress of the negotiations with Tower and the remaining open
business issues, to receive a detailed presentation of the terms
and conditions of the draft merger agreement (copies of which
had been provided to the board of directors prior to the
meeting) by SUAs outside legal counsel and to receive a
financial presentation from representatives of FBR, which
included a financial overview of SUA, a financial overview of
Tower and a discussion of the financial terms of the proposed
transaction, including the proposed exchange ratio. After giving
its outside legal counsel further instructions with respect to
the remaining open business issues in the draft merger
agreement, SUAs board of directors adjourned the meeting
until 5:00 p.m. Eastern time on June 19, 2009. When
SUAs board of directors reconvened on the evening of
June 19, 2009, SUAs outside legal counsel provided an
update on the negotiations with Towers advisors, and
representatives of FBR made a detailed presentation to the board
of directors regarding the financial terms of the proposed
transaction and discussed the draft fairness opinion that had
been previously circulated to the board of directors.
Representatives of Stroock & Stroock & Lavan
LLP advised SUAs board of directors that it anticipated
the final draft of the merger agreement would be ready for
execution by the evening of June 21, 2009. Based on this
report, SUAs board of directors gave its legal counsel
further guidance with respect to the
42
unresolved issues and authorized an extension of the exclusivity
period until 9:00 a.m. Eastern time on June 22,
2009.
During the weekend of June
20-21,
2009,
the parties and their advisors completed their negotiations
regarding the definitive merger agreement and related exhibits
and schedules.
On the evening of June 21, 2009, SUAs board of
directors held another telephonic special meeting to discuss the
definitive merger agreement between Tower, Merger Sub and SUA.
SUAs outside legal counsel reviewed the final changes to
the terms of the merger agreement, a revised version of which
had been provided to the directors in advance of the meeting.
Representatives of FBR provided the board of directors with its
fairness opinion, which was confirmed in a written opinion, that
as of June 21, 2009, the exchange ratio offered by Tower
was fair from a financial point of view to holders of SUAs
common stock and Class B common stock. After discussion,
the board of directors then unanimously determined that the
merger agreement was advisable, fair to, and in the best
interests of SUAs stockholders and unanimously approved it
and recommended that it be submitted to the stockholders to vote
on adoption of the merger agreement.
Following the board of directors meeting on June 21, 2009,
the merger agreement was executed on behalf of SUA, Tower and
Merger Sub. On the following day, June 22, 2009, the
parties issued a joint press release announcing the execution of
the merger agreement and filed
Forms 8-K
with the SEC describing the merger agreement and the
transactions contemplated thereunder.
On July 21, 2009, the board of directors of SUA unanimously
approved the Amended and Restated Agreement and Plan of Merger
and on July 22, 2009 Tower, Merger Sub and SUA executed the
Amended and Restated Agreement and Plan of Merger to
(i) correct the number of shares of SUA common stock
outstanding, the amount of deferred stock awards of SUA issued
and outstanding and the number of shares of SUA common stock
held by SUA in treasury, each as set forth in section 3.5
of the merger agreement, (ii) correct certain typographical
errors and (iii) make certain conforming changes as to the
date of the merger agreement.
SUAs
Reasons for the Merger
SUAs board of directors believes that the merger is
advisable, fair to, and in the best interests of SUA and its
stockholders. Accordingly, SUAs board of directors has
unanimously approved the merger, the merger agreement and the
other transactions contemplated by the merger agreement and
unanimously recommends that SUA stockholders vote
FOR
the adoption of the merger agreement.
In deciding to approve the merger, the merger agreement and the
other transactions contemplated by the merger agreement,
SUAs board consulted with management, as well as its
outside legal counsel and financial advisors, and considered
numerous factors, including the following:
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Form and Value of Per Share Merger Consideration and Business
Condition and Prospects of SUA
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The all stock merger consideration represented a per share value
for SUA stockholders of $6.72 (based on the closing price of
Tower common stock on June 19, 2009, the trading day before
public announcement of the transaction), a premium of
approximately 87% to the closing price of SUAs volume
weighted average closing price of its common stock for the
thirty-day
trading period ending on June 19, 2009.
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After an extensive market test conducted by SUA and FBR, which
was overseen by SUAs Strategic Review Committee,
Towers offer was viewed by SUAs board of directors
as presenting the best value available to SUA stockholders.
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The performance of Towers and SUAs stock price
relative to each other and general market indices, which showed
that Towers stock price has generally outperformed SUA and
Towers peers while SUAs stock price had tended to
under-perform Tower and SUAs peers.
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Because of Towers substantially larger market
capitalization, Towers common stock is more liquid than
SUAs common stock.
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Through their receipt of Tower common stock as the merger
consideration, SUA stockholders would have the option to sell
shares into the market to realize cash or to participate in any
appreciation in Towers common stock price.
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The board of directors belief, based upon discussions with
SUAs management and after a thorough review of SUAs
strategic alternatives, including the market-check overseen by
SUAs Strategic Review Committee, that the merger would
provide greater value to the stockholders of SUA within a
shorter timeframe than other potential strategic alternatives
available to SUA, including the continued operation of SUA as a
stand-alone company, particularly during the current economic
recession and the current soft insurance market which has led to
greater competition and slowed premium growth.
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As a standalone public company, SUA has been generating a low
return on equity and SUAs common stock had been trading at
a low
price-to-earnings
ratio and a low
price-to-book
multiple.
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The merger was expected to be treated as a
reorganization within the meaning of
Section 368(a) of the Code, so that the receipt of the
merger consideration (other than cash in lieu of fractional
shares) generally would be tax-free to holders of SUA common
stock.
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The perceived risks and uncertainties attendant to SUAs
execution of its strategic growth plans as a stand-alone
company, including its ability to develop and implement internal
growth opportunities through new product offerings and its
ability to seek external growth at a time of increased market
competition.
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The financial presentations of FBR and its oral opinion, which
was subsequently confirmed in writing, that as of June 21,
2009 and based upon and subject to the factors and assumptions
set forth in the opinion, the exchange ratio was fair from a
financial point of view to the holders of SUA stock.
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Strategic and Other Business Advantages
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The opportunity to create long-term stockholder value by
increasing the growth of SUAs business by cross-selling
products with Tower and accessing Towers higher
A− A.M. Best Company rating (the 4th
highest of 15 rating levels) instead of SUAs lower
B+ A.M. Best Company ratings (the 6th highest of 15
rating levels) and Towers higher capital base and
reallocating capital to higher margin businesses, which would
lead to more and better premium opportunities and the
elimination of fronting fees that SUA currently pays.
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The opportunity to achieve enhanced growth opportunities for
SUAs business arising from improved financial flexibility
and strong cash flow.
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The opportunity to leverage SUAs highly scalable
infrastructure across an increased premium base.
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The opportunity to reduce costs and improve efficiency by
combining businesses, including costs associated with
maintaining SUA as a public company, which costs SUA estimates
are approximately $1,500,000 per year currently, consisting of
SUAs NASDAQ listing fees, transfer agent fees, legal and
accounting fees related to SEC filings and stockholder mailings,
printing and mailing expenses for periodic reports and proxy
statements, annual meeting expenses and other investor relations
related expenses, and the fact that such cost savings will inure
to the benefit of the combined company.
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The opportunity to manage market cycles based on the diversity
of the lines of business and geography while maintaining a
culture of disciplined underwriting and pricing.
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The opportunity to share profit center resources in the
specialty property and casualty insurance market and consolidate
certain functions, resulting in additional cost savings to the
combined company.
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Terms of the Merger Agreement
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The terms and conditions of the merger agreement, including the
representations and warranties and conditions to closing, were
within the range of reasonableness.
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The view of SUAs board of directors, after consultation
with SUAs outside legal advisors and financial advisors,
that as a percentage of the merger consideration to be paid in
the merger, the termination fee and reimbursable expenses were
within the range of reasonableness for termination fees and
reimbursable expenses provided in recent acquisition
transactions.
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The fact that SUA has the right, for a two-business-day period
following the fifth business day prior to the date initially
established as the closing date, to exercise its
walk-away right and terminate the merger agreement
if the average Tower stock price is less than $20.00, subject to
Towers
top-up
right; as described in The Merger Agreement
Terms of the Merger SUA Walk-Away Right; Tower
Top-Up
Right below.
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The fact that, subject to compliance with certain obligations
under the merger agreement, the SUA board of directors is
permitted to change its recommendation to the SUA stockholders;
in addition, in certain circumstances, the SUA board of
directors may explore and respond to an alternative transaction
proposed by a third party and terminate the merger agreement in
order to accept a superior proposal, subject to Towers
option to force the merger proposal to be put to a vote at the
SUA special meeting and to payment to Tower of a termination fee
of $3,000,000, plus Towers expenses not to exceed
$1,000,000.
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The fact that the conditions to effecting the merger as
described in The Merger Agreement Conditions
to Completion of the Merger below, appeared limited and
capable of being satisfied, thus increasing the likelihood that
the merger will be consummated.
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The fact that no external financing is required for the
transaction, thus increasing the likelihood that the merger will
be consummated.
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The strong commitment on the part of both Tower and SUA to
complete the merger pursuant to their respective obligations
under the terms of the merger agreement, including both
parties reciprocal commitments to use reasonable best
efforts to obtain regulatory and any other governmental
approvals required to complete the merger.
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Towers strong track record for completing acquisitions and
integrating acquired companies.
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SUAs board of directors has also considered a variety of
risks and other potentially negative factors concerning the
merger. These factors included the following:
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The ceiling on the merger consideration, which limits the merger
consideration to a value of $7.77 per share of SUA stock even if
the average Tower stock price were to be greater than $27.75.
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The effect of the public announcement of the merger on
SUAs stock price if stockholders of Tower or SUA do not
view the merger positively.
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That the merger is subject to a number of closing conditions of
Tower and there can be no assurance that these conditions to the
completion of the merger will be satisfied or waived.
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The possibility that the merger might not be completed due to
difficulties in obtaining sufficient SUA stockholder approval,
obtaining requisite regulatory approvals or the occurrence of a
material adverse effect on SUAs business, or that
completion might be unduly delayed by regulatory
authorities withholding consent or seeking to block the
merger, or that governmental authorities could attempt to
condition their approvals or clearances of the merger on one or
more parties compliance with certain conditions, which may
be burdensome.
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The restrictions on the conduct of SUAs business prior to
completion of the merger, which could delay or prevent SUA from
undertaking business opportunities that may arise pending
completion of the merger.
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The possibility that combining Tower and SUA may be more
difficult than expected.
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The potential disruption to SUAs business that could
result from the announcement of the merger and the completion of
the transactions required to effect the merger, including the
diversion of management and employee attention, employee
attrition, the potential inability of SUA to retain, recruit and
motivate its key personnel and the potential negative effect on
business and customer relationships, particularly relationships
with SUAs partner agents.
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The risks and costs to SUA if the merger does not close, and the
potential effect of the resulting public announcement of
termination of the merger agreement on, among other things, the
market price for SUA common stock, which may reflect a market
assumption that the merger will occur, and the perception of SUA
by equity investors, its operating results, its ability to
attract and retain key personnel and producers and its ability
to complete an alternative transaction.
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If the merger is not completed, SUA may be required to pay its
fees and expenses associated with the transaction as well as
reimburse Tower for its
out-of-pocket
fees and expenses associated with the transaction up to
$1,000,000 in certain limited circumstances, as described in
The Merger Agreement Termination of the Merger
Agreement Effects of Termination; Termination Fees
and Expenses below.
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The possibility that provisions of the merger agreement
restricting delivery of information to, and discussions with,
third parties regarding an alternative transaction, and
provisions requiring payment of a termination fee and
reimbursement of expenses in certain circumstances, including in
the event SUAs board of directors decides to terminate the
merger agreement to accept a superior proposal, may have the
effect of discouraging other persons potentially interested in a
combination with SUA from pursuing any such opportunity.
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The merger consideration, even at the maximum valuation of $7.77
per share, would constitute a discount to the book value per
share of SUA stock.
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The possibility of significant costs and delays resulting from
seeking regulatory approvals necessary for completion of the
transaction, and the possibility of not completing the
transaction if these approvals are not obtained, including any
approval by an insurance regulatory authority.
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The possibility that the SUA stockholders may not react
favorably to the merger, and the execution risk and additional
costs that would be required to complete the merger as a result
of any derivative suits brought by the SUA stockholders.
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The foregoing discussion of the information and factors
considered by the SUA board of directors is not intended to be
exhaustive, but includes the material factors considered by the
SUA board of directors. In view of the variety of factors
considered in connection with its evaluation of the merger
agreement and the transactions contemplated by the merger
agreement, the SUA board of directors did not find it
practicable to, and did not, quantify or otherwise assign
specific weights to the factors considered in reaching its
determination. In addition, each of the members of the SUA board
of directors may have given differing weights to different
factors. On balance, the SUA board of directors believed that
the positive factors discussed above outweighed the negative
factors discussed above.
SUAs board of directors determined that Towers offer
presented the best value available to SUA stockholders from
other indications of interest received based primarily on four
factors. First, the value of the Tower merger consideration was
comparatively attractive, particularly in light of the fact that
SUA stockholders could potentially receive up to $7.77 in value
and could benefit from the soft-floor that the
top-up provision could provide as described in
The Merger Agreement Terms of the
Merger Exchange Ratio below. Second,
Towers offer included fewer contingencies than the other
indications of interest and did not contain a financing
contingency. In addition, SUAs board of directors believed
that Towers business model and operations provided SUA
with a better platform for continued expansion and growth.
Finally, SUAs board of directors believed that the Tower
offer provided more liquidity for existing SUA stockholders than
certain
46
of the other indications of interest. Therefore, SUAs
board of directors unanimously recommends that SUA stockholders
vote to adopt the merger agreement.
Recommendations
of the SUA Board of Directors with Respect to the
Merger
On June 21, 2009, SUAs board of directors, by a
unanimous vote, determined that the merger, the merger agreement
and the other transactions contemplated by the merger agreement
are advisable, fair to, and in the best interests of, SUA and
its stockholders and approved the merger, the merger agreement
and the other transactions contemplated by the merger agreement.
Accordingly, SUAs board of directors recommends that you
vote
FOR
the adoption of the merger agreement
at the special meeting. SUAs board of directors also
recommends that you vote
FOR
the approval of
the adjournment or postponement of the special meeting for the
solicitation of additional proxies if there are not sufficient
votes present, in person or represented by proxy, at the time of
the special meeting to adopt the merger agreement.
Opinion
of SUAs Financial Advisor
Pursuant to its charter, the Strategic Review Committee of the
board of directors of SUA was delegated the authority to select
and retain financial advisors as it deemed appropriate for the
purposes of assisting the committee in its review of strategic
opportunities for SUA. The Strategic Review Committee selected
FBR as its financial advisor in connection with the merger due
to FBRs qualifications, expertise, reputation and its
knowledge of the business of SUA and the property and casualty
insurance industry. Pursuant to FBRs engagement letter
with SUA, dated March 20, 2009, SUA requested that FBR
evaluate the fairness, from a financial point of view, of the
exchange ratio to be received by the holders of SUA stock. On
June 21, 2009, FBR delivered its oral opinion and
subsequently confirmed in writing on the same date to the SUA
board of directors that, based on and subject to the factors,
limitations and assumptions set forth in the opinion, the
exchange ratio pursuant to the merger agreement was fair, from a
financial point of view, to the holders of shares of SUA stock
(other than SUA, Tower or their respective subsidiaries).
The full text of FBRs written opinion dated June 21,
2009, which sets forth the assumptions made, procedures
followed, matters considered and limitations on the review
undertaken in connection with the opinion, is included as
Appendix B to this proxy statement/prospectus. FBRs
opinion was directed to SUAs board of directors and was
limited solely to the fairness to SUA stockholders of the
exchange ratio from a financial point of view as of the date of
the opinion. FBR expressed no opinion as to the underlying
business decision of SUA to effect the merger, the structure or
accounting treatment or taxation consequences of the merger or
the availability of any alternatives to the merger. FBR
expressed no opinion as to any other reasons, legal, business or
otherwise, that may support the decision of the SUA board of
directors to approve or cause SUA to consummate the merger.
FBRs opinion addressed only the fairness, from a financial
point of view, of the exchange ratio. The opinion did not
address the fairness of the merger or any specific aspect of the
merger (including, without limitation, as to the fairness of the
amount or nature of any compensation paid or payable to the
officers, directors or employees of SUA or its subsidiaries)
other than the exchange ratio to be received by holders of
shares of SUA stock (other than shares of SUA stock held by SUA,
Tower or their respective subsidiaries). Neither FBRs
opinion nor the related analyses constituted a recommendation of
the proposed merger to the SUA board of directors. FBR makes no
recommendation to any SUA stockholder as to how to vote or act
on any matters relating to the proposed merger. FBR was not
requested to consider, and its opinion does not address, the
relative merits of the merger compared to any alternative
business strategies that might exist for SUA or the effect of
any other transaction in which SUA might engage. You are urged
to read FBRs opinion carefully and in its entirety.
In arriving at its opinion, FBR, among other things:
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reviewed a draft of the merger agreement, dated June 21,
2009;
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reviewed publicly available financial and business information
relating to Tower and SUA;
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reviewed the reported stock prices and trading histories of SUA
common stock and Tower common stock and a comparison of these
trading histories with each other and those of other companies
FBR deemed relevant;
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met with certain members of SUAs management (i.e.,
Courtney Smith, SUAs chief executive officer, Peter
Jokiel, its chief financial officer, Scott Goodreau, its general
counsel and Scott Charbonneau, its chief actuary) to discuss the
business and prospects of SUA;
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met with certain members of Towers management to discuss
the business and prospects of Tower;
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held discussions with certain members of SUAs management
concerning the amounts and timing of cost savings and related
expenses expected to result from the merger as furnished to FBR
by SUAs management (the expected synergies);
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|
reviewed certain
pro forma
financial effects of the
merger on Tower, including the expected synergies;
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|
reviewed certain historical and forward-looking business,
financial and other information relating to Tower and SUA,
provided to or discussed with FBR by the respective managements
of Tower and SUA;
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|
reviewed certain financial and stock market data and other
information of Tower and SUA and compared that data and
information with corresponding data and information for
companies with publicly traded securities that FBR deemed
relevant;
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|
reviewed the financial terms of the proposed merger and compared
those terms with the financial terms of certain other business
combinations and other transactions which have recently been
effected or announced; and
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|
considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria
that FBR deemed, in its sole judgment, to be necessary,
appropriate or relevant to render its opinion.
|
In preparing its opinion, FBR, with the consent of SUAs
board of directors, relied upon and assumed the accuracy and
completeness of all of the financial, accounting, legal, tax and
other information it reviewed, and did not assume any
responsibility for the independent verification of any of such
information. With respect to the financial forecasts provided to
or discussed with FBR by the management of SUA, including the
expected synergies, the financial forecasts provided to or
discussed with FBR by the management of Tower, and the unaudited
interim financial statements and other financial information
provided to FBR by the management of SUA or the management of
Tower, as applicable, FBR assumed that they were reasonably
prepared on a basis reflecting the best currently available
estimates and judgments of Tower or SUA, as applicable. FBR
assumed no responsibility for the assumptions, estimates and
judgments on which such forecasts, expected synergies and
interim financial statements and other financial information
were based and did not make any independent verification
thereof. In addition, FBR was not requested to make, and did not
make, an independent evaluation or appraisal of the assets or
liabilities (contingent, derivative, off-balance sheet or
otherwise) of SUA or any of its subsidiaries or of Tower or any
of its subsidiaries, independently or combined, nor was FBR
furnished with any such evaluations or appraisals. FBR expressed
no opinion as to the future prospects, plans or viability of
Tower or SUA, independently or combined. With regard to the
information provided to FBR by Tower or SUA, FBR assumed that
all such information was complete and accurate in all material
respects and relied upon the assurances of the management of
Tower or SUA, as applicable, that they were unaware of any facts
or circumstances that would make such information incomplete or
misleading. FBR made no independent evaluation of any legal
matters involving Tower or SUA and assumed the correctness of
all statements with respect to legal matters made or otherwise
provided to SUA and FBR by SUAs counsel, and, with respect
to legal matters relating to Tower, Towers counsel. FBR
also assumed that there has been no change in the assets,
liabilities, business, condition (financial or otherwise),
results of operations or business prospects of SUA or of Tower
since the date of the most recent financial statements made
available to FBR that would be material to its analysis. FBR
assumed, with the consent of SUAs board of directors, that
the merger will qualify for federal income tax purposes as a
reorganization under Section 368(a) of the Code. With the
consent
48
of SUAs board of directors, FBR also assumed that the
merger agreement, when executed, would conform to the draft
reviewed by FBR in all respects material to its analyses, that
in the course of obtaining any necessary regulatory and
third-party consents, approvals and agreements for the merger,
no modification, delay, limitation, restriction or condition
will be imposed that will have an adverse effect on SUA, Tower
or the proposed merger and that the merger will be consummated
in accordance with the terms of the merger agreement, without
waiver, modification or amendment of any term, condition or
agreement therein that is material to FBRs analysis.
FBRs opinion was necessarily based on financial, economic,
market and other circumstances and conditions as they existed on
and the information made available to FBR as of the date of its
opinion. FBRs opinion can be evaluated only as of
June 21, 2009 and any change in such circumstances and
conditions, including a change in stock price of Tower, would
require a reevaluation of the opinion, which FBR is under no
obligation to undertake. FBR assumes no responsibility to
update, revise or reaffirm its opinion based upon events or
circumstances occurring after the date of the opinion.
FBRs opinion was provided for the information and use of
SUAs board of directors in evaluating the merger and does
not confer rights or remedies upon Tower. FBR did not express
any opinion as to the value of the Tower common stock upon the
announcement or consummation of the merger or the price at which
shares of Tower common stock will trade at any time.
Description
of Valuation Analysis of SUA
FBR assessed the fairness of the exchange ratio to the holders
of shares of SUA stock in connection with the merger by
assessing the value of SUA using several methodologies,
including a comparable companies analysis using valuation
multiples from selected publicly traded companies, a comparable
acquisitions analysis and an implied premium analysis, each of
which is described in more detail below. Each of these
methodologies was used to generate imputed valuation ranges that
were then compared to the 0.28 Tower share of common stock per
share of SUA stock exchange ratio (which exchange ratio was used
based on the volume-weighted average price of Tower common stock
for the 15 trading days ending on the fifth trading day prior to
the date of the opinion).
The following table shows the ranges of imputed valuation per
share of the SUA stock derived using each of these
methodologies. No company or transaction reviewed was directly
comparable to SUA or the proposed merger. Accordingly, this
analysis involved complex considerations and judgments
concerning differences in financial and operating
characteristics of SUA relative to the selected companies and to
the targets in the selected transactions and other factors that
would affect their values. The table should be read together
with the more detailed summary of each of the valuation analyses
discussed below.
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Implied Valuation of Shares of SUA Stock
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Valuation Methodology (as Applied to the Indicated Metric)
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Minimum
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Median
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Maximum
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Comparable Companies Analysis (2009 EPS estimate(1))
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$
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2.75
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$
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4.54
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$
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5.73
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Comparable Companies Analysis (book value)
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$
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2.02
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$
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7.24
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$
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12.86
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Comparable Companies Analysis (tangible book value)
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$
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1.92
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$
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9.16
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$
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16.02
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Comparable Acquisitions Analysis (LTM Net Income)
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$
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1.35
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$
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4.35
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$
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9.11
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Comparable Acquisitions Analysis (book value)
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$
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4.17
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$
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14.49
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$
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24.07
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Comparable Acquisitions Analysis (tangible book value)
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$
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3.84
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$
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14.32
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$
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22.20
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Implied Premium Analysis (one month prior)
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$
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3.61
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$
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4.78
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$
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6.55
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(1)
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As provided by SUA management
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Comparable
Companies Analysis
FBR compared the financial and operating performance of SUA with
publicly available information of selected property and casualty
insurance companies. Each of these companies was selected
because (1) it provides property and casualty insurance,
(2) it focuses on niche groups of insureds,
(3) workers compensation insurance accounts for a
significant percentage, and in some cases a majority, of its
business and (4) it
49
has a market capitalization of between approximately
$25 million and $1 billion. The companies selected
were:
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Tower Group, Inc.
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AmTrust Financial Services, Inc.
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Safety Insurance Group, Inc.
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Meadowbrook Insurance Group, Inc.
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AMERISAFE, Inc.
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National Interstate Corporation
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SeaBright Insurance Holdings, Inc.
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Hallmark Financial Services, Inc.
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|
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Eastern Insurance Holdings, Inc.
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CRM Holdings, Ltd.
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These companies were selected, among other reasons, for their
size, target market, focus and performance. None of the
companies utilized in the analysis, however, is identical to SUA.
For each selected company, using publicly available information,
FBR calculated the ratio of (a) its estimated earnings per
share for 2009, (b) its estimated earnings per share for
2010, (c) its book value per share as of the most recent
reported quarter and (d) its tangible book value per share
as of the most recent reported quarter, in each case, to its
stock price as of June 17, 2009. For 2009, FBR calculated
earnings per share multiples of the selected companies as
ranging from a low of 4.6x to a high of 9.5x with a median of
7.5x and an average of 7.4x. For 2010, FBR calculated earnings
per share multiples of the selected companies as ranging from a
low of 4.4x to a high of 9.1x with a median of 7.0x and an
average of 7.1x. For the most recent reported quarter, FBR
calculated book value per share multiples of the selected
companies as ranging from a low of 0.23x to a high of 1.47x with
a median of 0.83x and an average of 0.90x. For the most recent
reported quarter, FBR calculated tangible book value per share
multiples of the selected companies as ranging from a low of
0.24x to a high of 1.99x with a median of 1.14x and an average
of 1.12x.
By applying the range of multiples for 2009 for the selected
companies to SUAs 2009 estimated earnings per share as
provided by SUAs management, FBR derived a range of equity
values for the share of SUA stock of between $2.75 and $5.73 per
share with a median of $4.54 per share. By applying the range of
multiples for the selected companies for the most recent
reported quarter to SUAs estimated book value per share as
of March 31, 2009, FBR derived a range of equity values for
SUA of between $2.02 and $12.86 per share with a median of $7.24
per share. By applying the range of multiples for the selected
companies for the most recent reported quarter to SUAs
estimated tangible book value per share as of March 31,
2009, FBR derived a range of equity values for SUA of between
$1.92 and $16.02 per share with a median of $9.16 per share.
Comparable
Acquisitions Analysis
Using publicly available information, FBR examined the following
selected transactions within the insurance industry announced
since June 30, 2006, each of which had a transaction value
of greater than $20 million. Each of these transactions
involved the acquisition of a property and casualty insurance
company during the previous three years where the relevant
accounting information under generally accepted accounting
50
principles and purchase price information were announced
publicly. These transactions were considered relevant
transactions for purposes of FBRs analysis:
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Target
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|
Acquiror
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|
HSB Group, Inc.
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|
Munich Re
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HIG, Inc.
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|
CastlePoint Reinsurance Company, Ltd.
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CastlePoint Holdings, Ltd.
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|
Tower Group, Inc.
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Philadelphia Consolidated Holding Corp.
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|
Tokio Marine Holdings, Inc.
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Darwin Professional Underwriters, Inc.
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|
Allied World Assurance Company Holdings, Ltd.
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Quanta Capital Holdings Ltd.
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|
Catalina Holdings (Bermuda) Ltd.
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Safeco Corporation
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|
Liberty Mutual Holding Company, Inc.
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National Atlantic Holdings Corporations
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|
Palisades Safety and Insurance Association
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ProCentury Corporation
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|
Meadowbrook Insurance Group, Inc.
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AmCOMP Incorporated
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|
Employers Holdings, Inc.
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North Pointe Holdings Corp.
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|
QBE Insurance Group Limited
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Commerce Group, Inc.
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|
Fundacion Mapfre
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Midland Company
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|
Munich Re
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SCPIE Holdings Inc.
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|
Doctors Company, An Interinsurance Exchange
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RTW, Inc.
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|
Rockhill Holding Company
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Alfa Corporation
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|
Alfa Mutual Group
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Professionals Direct, Inc.
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|
Hanover Insurance Group, Inc.
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James River Group, Inc.
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|
D. E. Shaw & Company, LP
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Ohio Casualty Corporation
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|
Liberty Mutual Holding Company, Inc.
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Bristol West Holdings, Inc.
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|
Zurich Financial Services, AG
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21st Century Insurance Group
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|
American International Group, Inc.
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Direct General Corporation
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|
Elara Holdings, Inc.
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Merchants Group, Inc.
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|
American European Group
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Republic Companies Group, Inc.
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|
Delek Group Ltd.
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FBR then calculated the equity values with respect to the
transactions (a) as a multiple of the earnings of the
target company for the last twelve months, which we refer to as
LTM, prior to the transaction, (b) as a
multiple of the estimated earnings of the target company for the
year in which the transaction was announced, (c) as a
multiple of the book value of the target company as of the most
recent reported quarter prior to announcement of the transaction
and (d) as a multiple of the tangible book value of the
target company as of the most recent reported quarter prior to
announcement of the transaction. No transaction reviewed was
directly comparable to the proposed merger. Accordingly, this
analysis involved complex considerations and judgments
concerning differences in financial and operating
characteristics of SUA relative to the targets in the selected
transactions and other factors that would affect the acquisition
values in the precedent transactions.
FBR calculated the multiples of transaction purchase price to
LTM earnings for the target companies as ranging from a low of
4.5x to a high of 30.4x, with a median of 14.5x and an average
of 14.4x. FBR calculated the multiples of purchase price to the
estimated current year earnings for the target companies as
ranging from a low of 6.9x to a high of 22.9x, with a median of
14.2x and an average of 13.9x. FBR calculated the multiples of
transaction equity value to the book value for the target
companies as ranging from a low of 0.48x to a high of 2.76x,
with a median of 1.66x and an average of 1.60x. FBR calculated
the multiples of transaction equity value to the tangible book
value for the target companies as ranging from a low of 0.48x to
a high of 2.76x, with a median of 1.78x and an average of 1.70x.
Based on the multiples set forth above, and taking into account
differences between SUAs business and the businesses of
the target companies in the precedent transactions and such
other factors as FBR deemed
51
appropriate, FBR derived an appropriate range of multiples for
LTM earnings to be applied to SUAs earnings per share for
the twelve months ended March 31, 2009, an appropriate
range of multiples for current earnings to be applied to
SUAs estimated earnings per share for 2009 as provided by
SUAs management and an appropriate range of price to book
and price to tangible book multiples to be applied to SUAs
estimated book and tangible book values as of as of
March 31, 2009.
Based upon the multiples derived from this analysis, FBR derived
a range of implied equity values for the shares of SUA stock of
between $1.35 and $9.11 per share with a median of $4.35 per
share when the multiples derived from the analysis of the LTM
earnings of the target companies in the precedent transactions
were applied to SUAs earnings per share for the last
twelve months ended March 31, 2009, between $4.17 and
$24.07 per share with a median of $14.49 per share when the
multiples derived from the analysis of the book value of the
target companies in the precedent transactions were applied to
SUAs estimated book value as of March 31, 2009, and
between $3.84 and $22.20 per share with a median of $14.32 per
share when the multiples derived from the transaction equity
value to tangible book value of the target companies in the
precedent transactions were applied to SUAs estimated
tangible book value as of March 31, 2009.
Implied
Premium Analysis
FBR reviewed publicly available information for transactions in
the insurance industry during the three years leading up to the
date of FBRs opinion. For each of these transactions, FBR
derived and compared with similar information for the merger the
per share premium or discount paid or proposed to be paid to the
target companys stockholders based on the closing price
per share of the target companys common stock one day, one
week and one month prior to the announcement of the transaction.
The results of this analysis were:
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|
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|
|
|
|
|
|
Premium
|
|
|
|
One Day
|
|
|
One Week
|
|
|
One Month
|
|
|
Low
|
|
|
(1.9
|
)%
|
|
|
2.1
|
%
|
|
|
0.4
|
%
|
Median
|
|
|
34.3
|
%
|
|
|
34.1
|
%
|
|
|
32.8
|
%
|
Average
|
|
|
34.0
|
%
|
|
|
35.8
|
%
|
|
|
36.1
|
%
|
High
|
|
|
80.1
|
%
|
|
|
89.8
|
%
|
|
|
82.0
|
%
|
SUA Merger (Implied Premium)
|
|
|
95.0
|
%
|
|
|
89.1
|
%
|
|
|
91.7
|
%
|
Based on premiums paid as compared to market prices one month
before the relevant announcement date, FBR derived a range of
equity values for the shares of SUA stock of between $3.61 and
$6.55 per share with a median of $4.78. FBR noted that the
merger consideration payable to SUA stockholders pursuant to the
merger agreement was within or above this range.
Miscellaneous
In connection with the review of the merger by SUAs board
of directors, FBR performed a variety of financial and
comparative analyses for the purpose of rendering its opinion.
The above summary of these analyses, while describing the
material analyses performed by FBR, does not purport to be a
complete description of the analyses performed by FBR in
arriving at its opinion. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to a
partial analysis or summary description. In arriving at its
opinion, FBR considered the results of all of its analyses as a
whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, FBR
believes that selecting any portion of its analyses, without
considering all of its analyses, would create an incomplete view
of the process underlying its analyses and the opinion. In
addition, FBR may have given various analyses or factors more or
less weight than other analyses and may have deemed various
assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular
analysis described above should not be taken to be FBRs
view of the actual value of SUA.
In performing its analyses, FBR made numerous assumptions with
respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the
control of Tower or SUA. Any estimates contained in the analyses
performed by FBR are not necessarily indicative of future
results or
52
actual values, which may be significantly more or less favorable
than those suggested by such estimates. Such analyses were
prepared solely as a part of FBRs analysis of the fairness
from a financial point of view of the consideration to be
offered to the holders of shares of SUA stock pursuant to the
merger agreement and were provided to SUAs board of
directors in connection with the delivery of the FBR opinion.
The analyses do not purport to be appraisals of value or to
reflect the prices at which the stock of Tower or SUA might
actually trade. In addition, as described above, the FBR opinion
was one of the many factors taken into consideration by
SUAs board of directors in making its determination to
approve the merger, the merger agreement and the other
transactions contemplated by the merger agreement. The
consideration pursuant to the merger agreement was determined
through arms-length negotiations between Tower and SUA and
was approved by SUAs board of directors. FBR did not
recommend any specific consideration to SUA or advise that any
given consideration constituted the only appropriate
consideration for the merger. Consequently, the FBR analyses as
described above should not be viewed as determinative of the
opinion of SUAs board of directors with respect to the
value of SUA or of whether SUAs board of directors would
have been willing to agree to a different consideration.
FBR, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in
connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. FBR
has acted as financial advisor to SUA in connection with the
proposed merger and proposals received by SUA in 2008 and 2009
and received an aggregate of $100,000 in retainers for its
services. FBR received a fee of $500,000 in connection with the
delivery of its opinion and will receive a fee equal to 1.25% of
the aggregate consideration of the merger as of the consummation
thereof, less any retainer and fairness opinion fees. Assuming
an average Tower stock price of $25.00, the total fee to FBR
(including the retainer fees and opinion fee previously paid)
would be approximately $1,392,000. In addition, SUA has agreed
to indemnify FBR and certain related parties against certain
liabilities and to reimburse FBR for certain expenses arising in
connection with or as a result of its engagement. FBR and its
affiliates provide a wide range of investment banking and
financial services, including financial advisory, securities
trading, brokerage and financing services. In that regard, FBR
and its affiliates have in the past provided and may in the
future provide investment banking and other financial services
to SUA, Tower and their respective affiliates for which FBR and
its affiliates would expect to receive compensation. In
particular, FBR acted as the sole bookrunner and lead manager of
SUAs initial public offering in 2004 and served as its
financial advisor in connection with evaluating unsolicited
merger proposals in 2008 and 2009, and FBR acted as a bookrunner
and sole lead manager in connection with the initial public
offering and follow-on offering of common stock of Tower in 2004
and 2007, acted as the sole initial purchaser and placement
agent in the initial equity offering of CastlePoint, an
affiliate of Tower, in 2006 and advised CastlePoint in 2008
regarding its acquisition by Tower, which closed earlier this
year. In the last two completed fiscal years, FBR shared, as
bookrunner and sole lead manager, in the aggregate underwriting
discounts and commissions of $4,757,188 in the follow-on common
stock offering of Tower and received, as sole initial purchaser
and placement agent, an aggregate $8,538,330 in discounts and
placement fees in connection with the initial equity offering of
CastlePoint. FBR also received a fee of $500,070 from
CastlePoint in April of 2009 for advice to CastlePoint in
connection with its acquisition by Tower. SUA has not paid any
fees to FBR other than in connection with the merger and
evaluating merger proposals during the last two completed fiscal
years. However, in 2004 FBR did share, as bookrunner and sole
lead manager, in the aggregate underwriting discounts and
commissions of $8,445,500 in SUAs initial public offering.
In the ordinary course of business, FBR and its affiliates may
trade in the securities and financial instruments of the SUA,
Tower and their affiliates for its and its affiliates own
accounts and the accounts of customers. Accordingly, FBR may at
any time hold a long or short position in such securities and
financial instruments.
Towers
Reasons for the Merger
In deciding to approve the merger, the merger agreement and the
other transactions contemplated by the merger agreement,
Towers board consulted with management and considered
numerous factors, including the following:
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|
Financial, Strategic and Other Business Advantages
|
|
|
|
|
|
The possible inability of Tower to access equity and debt
capital markets on attractive terms, which would restrict
Towers ability to access capital in order to grow
organically and through acquisitions.
|
53
|
|
|
|
|
The merger provides Tower with an opportunity to enhance its
profile in the specialty business segment.
|
|
|
|
The opportunity to strengthen Towers brokerage division by
(1) shifting certain resources of Tower currently
supporting its specialty insurance business to its brokerage
division and (2) utilizing SUAs office headquarters
to develop Towers brokerage business written through
retail and wholesale agents in the midwestern United States.
|
|
|
|
The opportunity to utilize SUA for the expansion of Towers
underwriting capacity in the specialty property and casualty
insurance market and to further broaden Towers product
offerings.
|
|
|
|
The potential expansion and diversification of revenues and
distribution channels of Tower by expanding (1) product
lines and industry classes of business; (2) geographically
and leveraging existing products; (3) access to market
segments based upon premium size, pricing and coverage tier; and
(4) access to distributions systems.
|
|
|
|
The increased market capitalization resulting from the merger
will provide Tower with strategic flexibility in a consolidating
environment.
|
|
|
|
|
|
The opportunity to create long-term stockholder value by
increasing the growth of SUAs business by cross-selling
products with Tower and accessing Towers higher
A− A.M. Best Company rating (the 4th
highest of 15 rating levels instead of SUAs lower
B+ A.M. Best Company rating (the 6th highest of 15
rating levels) and Towers higher capital base and
reallocating capital to higher margin businesses, which would
lead to more and better premium opportunities and the
elimination of fronting fees that SUA currently pays.
|
|
|
|
|
|
The opportunity to achieve enhanced growth opportunities for
SUAs business arising from improved financial flexibility
and strong cash flow.
|
|
|
|
The opportunity to leverage SUAs highly scalable
infrastructure across an increased premium base.
|
|
|
|
The opportunity to reduce costs and improve efficiency by
combining businesses, including costs associated with
maintaining SUA as a public company, which costs SUA estimates
are approximately $1,500,000 per year currently, consisting of
SUAs NASDAQ listing fees, transfer agent fees, legal and
accounting fees related to SEC filings and stockholder mailings,
printing and mailing expenses for periodic reports and proxy
statements, annual meeting expenses and other investor relations
related expenses, and the fact that such cost savings will inure
to the benefit of the combined company.
|
|
|
|
The opportunity to manage market cycles based on the diversity
of the lines of business and geography while maintaining a
culture of disciplined underwriting and pricing.
|
|
|
|
The opportunity to share profit center resources in the
specialty property and casualty insurance market and consolidate
certain functions, resulting in additional cost savings to the
combined company.
|
|
|
|
|
|
Terms of the Merger Agreement
|
|
|
|
|
|
The Tower board of directors belief that the exchange
ratio represented the lowest per share merger consideration that
could be negotiated.
|
|
|
|
The merger consideration, even at the maximum valuation of $7.77
per share, would constitute a discount to the book value per
share of SUA stock.
|
|
|
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That, if the average Tower stock price is greater than $27.75,
Tower is required to deliver a fixed value of $7.77 in merger
consideration rather than a fixed number of shares of Tower
common stock, as described in The Merger
Agreement Terms of the Merger Exchange
Ratio below.
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That the merger agreement allows Tower the option, to be
exercised at its sole discretion, to increase the merger
consideration with Tower common stock in the event that the
average Tower stock price
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is less than $20.00 and SUA delivers a walk-away
termination notice, as described in The Merger
Agreement Terms of the Merger SUA
Walk-Away Right; Tower
Top-Up
Right below.
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The terms and conditions of the merger agreement, including the
representations and warranties and conditions to closing, were
within the range of reasonableness.
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The fact that the conditions to effecting the merger as
described in The Merger Agreement Conditions
to Completion of the Merger below, appeared limited and
capable of being satisfied, thus increasing the likelihood that
the merger will be consummated.
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The fact that no external financing is required for the
transaction, thus increasing the likelihood that the merger will
be consummated.
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The strong commitment on the part of both Tower and SUA to
complete the merger pursuant to their respective obligations
under the terms of the merger agreement, including both
parties reciprocal commitments to use reasonable best
efforts to obtain regulatory and any other governmental
approvals required to complete the merger.
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Towers strong track record for completing acquisitions and
integrating acquired companies.
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Towers board of directors has also considered a variety of
risks and other potentially negative factors concerning the
merger. These factors included the following:
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The fact that, in the future, conditions in the debt or equity
capital markets might permit Tower to access capital on more
favorable terms than at present.
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The effect of the public announcement of the merger on
Towers stock price if stockholders of Tower or SUA do not
view the merger positively.
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That the merger is subject to a number of closing conditions of
SUA and there can be no assurance that these conditions to the
completion of the merger will be satisfied or waived.
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The possibility that the merger might not be completed due to
difficulties in obtaining sufficient SUA stockholder approval,
obtaining requisite regulatory approvals or the occurrence of a
material adverse effect on SUAs business, or that
completion might be unduly delayed by regulatory
authorities withholding consent, seeking to block the
merger or that governmental authorities could attempt to
condition their approvals or clearances of the merger on one or
more parties compliance with certain conditions, which may
be burdensome.
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The possibility that combining Tower and SUA may be more
difficult than expected.
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The fact that SUA has the right, for a two-business-day period
following the fifth business day prior to the date initially
established as the closing date, to exercise its
walk-away right and terminate the merger agreement
if the average Tower stock price is less than $20.00, subject to
Towers
top-up
right; as described in The Merger Agreement
Terms of the Merger SUA Walk-Away Right; Tower
Top-Up
Right below.
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The potential disruption to Towers business that could
result from the announcement of the merger and the completion of
the transactions required to effect the merger, including the
diversion of management and employee attention, employee
attrition, the potential inability of Tower to retain, recruit
and motivate its key personnel, and the potential negative
effect on business and customer relationships.
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The risks and costs to Tower if the merger does not close, and
the potential effect of the resulting public announcement of
termination of the merger agreement on, among other things, the
market price for Tower common stock, which may reflect a market
assumption that the merger will occur, and the perception of
Tower by equity investors, its operating results, its ability to
attract and retain key personnel and producers and its ability
to complete an alternative transaction.
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If the merger is not completed, Tower may be required to pay its
fees and expenses associated with the transaction, as well as
reimburse SUA for its
out-of-pocket
fees and expenses associated with the transaction up to
$1,000,000 in certain limited circumstances, as described in
The Merger Agreement Termination of the Merger
Agreement Effects of Termination; Termination Fees
and Expenses below.
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The possibility of significant costs and delays resulting from
seeking regulatory approvals necessary for completion of the
transaction, and the possibility of not completing the
transaction if these approvals are not obtained, including any
approval by an insurance regulatory authority.
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The fact that, subject to compliance with certain obligations
under the merger agreement, the SUA board of directors is
permitted to change its recommendation to the SUA stockholders
and the SUA stockholders may fail to adopt the merger agreement;
in addition, in certain circumstances, the SUA board of
directors may explore and respond to an alternative transaction
proposed by a third party and terminate the merger agreement in
order to accept a superior proposal, subject to Towers
option to force the merger proposal to be put to a vote at the
SUA special meeting and to payment to Tower of a termination fee
of $3,000,000, plus Towers expenses not to exceed
$1,000,000.
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The possibility that the SUA stockholders may not react
favorably to the merger, and the execution risk and additional
costs that would be required to complete the merger as a result
of any derivative suits brought by the SUA stockholders.
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The foregoing discussion of the information and factors
considered by the Tower board of directors is not intended to be
exhaustive, but includes the material factors considered by the
Tower board of directors. In view of the variety of factors
considered in connection with its evaluation of the merger
agreement and the transactions contemplated by the merger
agreement, the Tower board of directors did not find it
practicable to, and did not, quantify or otherwise assign
specific weights to the factors considered in reaching its
determination. In addition, each of the members of the Tower
board of directors may have given differing weights to different
factors. On balance, the Tower board of directors believed that
the positive factors discussed above outweighed the negative
factors discussed above.
Interests
of SUA Executive Officers and Directors in the Merger
In considering the recommendation of SUAs board of
directors with respect to the adoption of the merger agreement
and the approval of the merger, SUAs stockholders should
be aware that SUAs executive officers and directors have
interests in the merger that are different from, or in addition
to, those of SUA stockholders generally.
Employment
Agreements
Each of Courtney Smith, SUAs chairman of the board and
chief executive officer, Peter Jokiel, SUAs chief
financial officer, and Gary Ferguson, SUAs chief claims
officer, has an employment agreement that provides for certain
benefits upon and after the completion of the merger, including
accelerated vesting of deferred stock awards
and/or
certain severance benefits upon qualifying terminations that
could occur in connection with the merger. The term of
Mr. Smiths and Mr. Jokiels employment
agreements commenced on April 7, 2008 and will
automatically extend each January 1st for an additional
calendar year unless, at least 15 months prior to the end
of the
then-current
term, SUA delivers to Mr. Smith or Mr. Jokiel, as
applicable, a written notice that the agreement will not be so
extended, provided that employment under the agreement may be
terminated on an earlier date in accordance with the provisions
of the agreement. The term of Mr. Fergusons
employment agreement commenced on April 7, 2008 and will
automatically terminate on December 31, 2009, provided that
employment under the terms of the agreement may be terminated on
an earlier date in accordance with the provisions of that
agreement.
Each employment agreement (other than Mr. Fergusons
employment agreement) provides that if the person is terminated
by SUA without cause, or by the executive with good reason,
within 24 months of a change in control, then the officer
will be entitled to receive, in addition to accrued salary and
benefits, 300%
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of the officers base salary if the change in control
occurs on or before December 31, 2009, or 200% of the
officers base salary if the change in control occurs after
December 31, 2009. Upon a termination within 24 months
of a change in control, Mr. Ferguson will be entitled to
receive, in addition to accrued salary and benefits, 200% of his
base salary if the change in control occurs on or before
December 31, 2009. Moreover, upon such a termination after
a change in control, all stock options, deferred stock awards or
other types of equity-based compensation then held by the
executive that were not previously vested or exercisable shall
become fully vested
and/or
exercisable.
The merger, if consummated, would constitute a change in control
under Mr. Smiths, Mr. Jokiels and
Mr. Fergusons employment agreements. As such, after
consummation of the merger, if Mr. Smiths employment
is terminated without cause or by Mr. Smith for good reason
within the 24 months after the merger, he would be entitled
to receive a lump sum severance payment of $1,389,000, if the
change in control occurred on or before December 31, 2009
or $926,000, if the change in control occurred after
December 31, 2009 and the termination occurred prior to the
end of the term of his employment agreement, in addition to
accrued salary and benefits. If Mr. Jokiels
employment is terminated by SUA without cause or by
Mr. Jokiel for good reason, he would be entitled to receive
a lump sum severance payment of $1,215,000, if the change in
control occurred before December 31, 2009 or $810,000, if
the change in control occurred after December 31, 2009 and
the termination occurred prior to the end of the term of his
employment agreement, in addition to accrued salary and
benefits. Finally, if Mr. Fergusons employment is
terminated without cause by SUA or by Mr. Ferguson for good
reason, he would be entitled to receive a lump sum severance
payment of $250,000, if the change in control occurred before
December 31, 2009 in addition to accrued salary and
benefits. Further, unvested deferred stock awards in the amounts
of 78,000 shares of SUA common stock for Mr. Smith,
54,600 shares of SUA common stock for Mr. Jokiel and
31,200 shares of SUA common stock for Mr. Ferguson
would become fully vested
and/or
exercisable.
Change
in Control Agreements
Each of Daniel Cacchione, SUAs chief underwriting officer,
Scott Charbonneau, SUAs chief actuary, Barry Cordeiro,
SUAs chief information officer, Scott Goodreau, SUAs
general counsel, and Daniel Rohan, SUAs controller, has a
change in control agreement that provides for certain benefits
upon and after the completion of the merger, including
accelerated vesting of deferred stock awards
and/or
certain severance benefits upon qualifying terminations that
could occur in connection with the merger. The agreements do not
include term and termination provisions and will remain in force
so long as such individual is employed by SUA. Upon a
termination of employment by SUA without cause, or by the
executive with good reason, within 24 months of a change in
control, Messrs. Cordeiro, Goodreau and Cacchione would be
entitled to receive 200% of his respective base salary and
Messrs. Charbonneau and Rohan would be entitled to 100% of
his base salary. Upon such a termination of employment due to a
change in control, all stock options, deferred stock awards or
other types of equity-based compensation then held by the
executive which were not previously vested or exercisable would
become fully vested
and/or
exercisable. The change in control agreements also provide that
if employment is terminated as a result of a change in control,
each will not compete with SUA for a period of one year.
The merger, if consummated, would constitute a change in control
under Messrs. Cacchione, Charbonneau, Cordeiro, Goodreau
and Rohans change in control agreements. As such, after
consummation of the merger, if Mr. Cordeiro and
Mr. Goodreaus employment is terminated by SUA without
cause or by such executive officer for good reason, each would
be entitled to receive a lump sum severance payment of $580,000,
in addition to accrued salary and benefits. If
Mr. Cacchiones, Mr. Charbonneaus or
Mr. Rohans employment is terminated without cause or
by such executive officer for good reason, each would be
entitled to receive a lump sum severance payment of $520,000,
$260,000 and $205,000, respectively, in addition to accrued
salary and benefits. Further, unvested deferred stock awards in
the amounts of 31,200 shares of SUA common stock for
Mr. Cordeiro, 31,200 shares of SUA common stock for
Mr. Goodreau, 19,500 shares for Mr. Cacchione,
25,360 shares for Mr. Charbonneau and
20,800 shares for Mr. Rohan would become fully vested
and/or
exercisable.
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Section 280G
of the Internal Revenue Code
Notwithstanding the preceding, if the benefits and payments
under the employment and change in control agreements, either
alone or together with other benefits and payments that the
executive has the right to receive either directly or indirectly
from SUA or any of its affiliates, would constitute an excess
parachute payment under Section 280G of the Code, the
executive has agreed that his or her benefits and payments will
be reduced (but not below zero) by the amount necessary to
prevent any such benefits and payments to the executive from
constituting an excess payment, but only if such reduction would
result in a higher net after-tax benefit to the executive.
Certain
Definitions in the Employment Agreements and Change in Control
Agreements
The following definitions apply to the employment and change in
control agreements:
Cause
means that the executive: (1) has
committed an act constituting a misdemeanor involving moral
turpitude or a felony under the laws of the United States or any
state or political subdivision thereof; (2) has committed
an act constituting a breach of fiduciary duty, gross negligence
or willful misconduct; (3) has engaged in conduct that
violated SUAs then-existing material internal policies or
procedures and which is detrimental to the business, reputation,
character or standing of SUA or any of its affiliates;
(4) has committed an act of fraud, self dealing, conflict
of interest, dishonesty or misrepresentation; or (5) in the
case of the employment agreements, has materially breached his
obligations as set forth in his employment agreement or in the
case of the change in control agreement, has materially breached
the duties of his employment; provided, however, that SUA must
provide the executive with notice specifying the nature of the
breach or behavior, and, if the breach or behavior is pursuant
to (2), (3) or (5) above, the executive will have ten
days after receipt of the notice to correct the breach or
behavior.
Good Reason
will apply if the executive sends
SUA (in the case of the employment agreements, within
90 days of the initial existence of the event or
circumstances that constitute good reason), written notice
setting forth the alleged good reason and after a
60-day
cure
period there continues to be: (1) a material adverse change
in the executives title, position or responsibilities;
and/or
(2) in the case of the employment agreement, a material
breach by SUA of any material provision of the employment
agreement or in the case of the change in control agreements, a
material reduction of the employees base salary.
Change in Control
is defined as:
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any person or group of persons acquiring direct or indirect
beneficial ownership of securities of SUA representing 50% or
more of the combined voting power of the then-outstanding
securities of SUA;
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a merger or consolidation with any other corporation, other than
a merger or consolidation that would result in all or
substantially all of the holders of SUAs voting securities
immediately prior thereto continuing to hold at least 50% of the
combined voting power of SUAs or the surviving
entitys outstanding voting securities immediately after
such merger or consolidation;
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SUAs board of directors approving a plan of complete
liquidation or an agreement for the sale or disposition of all
or substantially all of SUAs assets, other than any such
sale or disposition where all or substantially all of the
holders of SUAs voting securities immediately prior
thereto continue to hold at least 50% of the combined voting
power of the outstanding voting securities of the acquiror or
transferee entity immediately after such sale or
disposition; or
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individuals who are currently directors ceasing for any reason
to constitute a majority of directors of SUA; provided, however,
that if the appointment or election (or nomination for election)
of any new director was approved or recommended by a majority
vote of the current board of directors, the new director(s) will
be considered a member of the current board of directors, unless
the new directors initial assumption of office occurs as a
result of or in connection with either an actual or threatened
election contest or other actual or threatened solicitation of
proxies or consents by or on behalf of an entity other than the
current board of directors.
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Accounting
Treatment
SFAS 141(R) requires the use of the purchase method of
accounting for business combinations. In applying the
acquisition method, it is necessary to identify the acquiree and
the acquirer for accounting purposes. Tower will be considered
the acquirer of SUA for accounting purposes. The purchase price
will be allocated to the identifiable assets acquired and
liabilities assumed from SUA based on their fair values as of
the date of the completion of the transaction, with any excess
being allocated to goodwill. Reported financial condition and
results of operations of Tower issued after completion of the
merger will reflect SUAs balances and results after
completion of the merger, but will not be restated retroactively
to reflect the historical financial position or results of
operations of SUA. Following the completion of the merger, the
earnings of the combined company will reflect purchase
accounting adjustments; for example, additional depreciation of
property, plant and equipment, amortization of identified
intangible assets or other impacts from the purchase price
allocation.
Regulatory
Approvals Required for the Merger
Subject to the terms and conditions of the merger agreement,
Tower and SUA have agreed to use reasonable best efforts to
take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable under the
merger agreement and applicable laws, rules and regulations to
consummate the merger and the other transactions contemplated by
the merger agreement as soon as reasonably possible after the
date of the merger agreement, as discussed in The Merger
Agreement Reasonable Best Efforts to Obtain Required
Approvals below.
Notwithstanding the foregoing, under the merger agreement, Tower
shall not be required to and none of SUA or its subsidiaries
may, without the prior written consent of Tower, take any action
if doing so would, individually or in the aggregate, reasonably
be expected to result in a regulatory material adverse
effect.
Antitrust
Under the HSR Act, Tower and SUA cannot consummate the merger
until Tower and SUA have notified the Department of Justice and
the Federal Trade Commission, which we refer to as the
DOJ and the FTC, respectively, of the
merger, furnished them with certain information and materials
relating to the merger and the applicable waiting periods have
terminated or expired. The termination of the waiting period
means the parties have satisfied the regulatory requirements
under the HSR Act. Tower and SUA filed notification and report
forms under the HSR Act with the DOJ and the FTC on July 8,
2009. On July 17, 2009, the FTC granted early termination
of the waiting period under the HSR Act with respect to the
merger.
At any time before or after consummation of the merger,
notwithstanding the early termination of the waiting period
under the HSR Act, the Antitrust Division of the DOJ or the FTC
could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking
to enjoin the consummation of the merger or seeking divestiture
of substantial assets of Tower and SUA. At any time before or
after the consummation of the merger, and notwithstanding the
early termination of the waiting period under the HSR Act, any
state could take such action under the antitrust laws as it
deems necessary or desirable in the public interest. Such action
could include seeking to enjoin the consummation of the merger
or seeking divestiture of substantial assets of Tower and SUA.
Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
Insurance
Regulations
The insurance laws and regulations of all 50 U.S. states,
the District of Columbia, Puerto Rico and the U.S. Virgin
Islands generally require that, prior to the acquisition of
control of an insurance company, either through the acquisition
of or merger with the insurance company or a holding company of
that insurance company, the acquiring party must obtain approval
from the insurance commissioner of the insurance companys
state of domicile and any state in which the insurance company
is commercially domiciled.
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SUA currently has one insurance company subsidiary, SUA
Insurance Company, which is domiciled in Illinois and
commercially domiciled in California. Accordingly, Tower has
made the necessary applications with the insurance commissioners
of Illinois and California. Tower has received approvals from
the Illinois and California departments of insurance for its
Form As on October 2, 2009 and October 5, 2009,
respectively.
Although Tower and SUA do not expect these regulatory
authorities to raise any significant concerns in connection with
their review of the merger, there is no assurance that Tower and
SUA will obtain all required regulatory approvals, or that those
approvals will not include terms, conditions or restrictions
that would reasonably be expected to have a regulatory material
adverse effect.
Other than the filings described above, neither Tower nor SUA is
aware of any regulatory approvals required to be obtained, or
waiting periods required to expire, to complete the merger. If
the parties discover that other approvals or waiting periods are
necessary, they will seek to obtain or comply with them. If any
additional approval or action is needed, however, Tower or SUA
may not be able to obtain it, as is the case with respect to the
other necessary approvals. Even if Tower and SUA obtain all
necessary approvals, and the merger agreement is adopted and the
merger is approved by SUA stockholders, conditions may be placed
on any such approval that could cause either Tower or SUA to
abandon the merger.
Because SUAs Class B common stock is not listed on a
national securities exchange, under Delaware law, such holders
have the right to dissent from the merger and to receive payment
in cash for the fair value of their shares of SUA Class B
common stock as determined by the Delaware Court of Chancery,
together with interest, if any, as determined by the court, in
lieu of the merger consideration. These rights are known as
appraisal rights. Holders of SUA common stock do not have
appraisal rights. Holders of SUA Class B common stock
electing to exercise appraisal rights must comply with the
provisions of Section 262 of the DGCL in order to perfect
their rights. SUA will require strict compliance with the
statutory procedures. The following is intended as a brief
summary of the material provisions of the DGCL statutory
procedures required to be followed by a holder of Class B
common stock in order to perfect appraisal rights. This summary,
however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to
Section 262 of the DGCL, the full text of which appears in
Annex C
to this proxy statement/prospectus. Failure
of any holder of SUA Class B common stock to precisely
follow any of the statutory procedures set forth in
Section 262 of the DGCL may result in a termination or
waiver of their appraisal rights.
Section 262 of the DGCL requires that stockholders for whom
appraisal rights are available be notified not less than twenty
(20) days before the special meeting to vote on the merger
with respect to which appraisal rights will be available. A copy
of Section 262 of the DGCL must be included with such
notice. This proxy statement/prospectus constitutes SUAs
notice to holders of SUA Class B common stock of the
availability of appraisal rights in connection with the merger
in compliance with the requirements of Section 262 of the
DGCL. If a holder of SUA Class B common stock wishes to consider
exercising their appraisal rights, the holder should carefully
review the text of Section 262 of the DGCL contained in
Annex C
to this proxy statement/prospectus since
failure to timely and properly comply with the requirements of
Section 262 of the DGCL will result in the loss of the
holders appraisal rights under Delaware law.
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If a holder of SUA Class B common stock elects to demand
appraisal of their shares, the holder must satisfy each of the
conditions listed below.
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Holders of SUA Class B common stock must deliver to SUA a
written demand for appraisal of their shares before the vote
with respect to the merger is taken.
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Holders of shares of SUA Class B common stock must also
continue to hold the shares of SUA Class B common stock
through the effective time of the merger. Therefore, a
stockholder who is the book-entry record holder of shares of SUA
Class B common stock on the date the written demand for
appraisal is made but who thereafter transfers the shares prior
to the effective time of the merger will lose any right to
appraisal with respect to such shares.
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If a holder of SUA Class B common stock fails to comply
with any of these conditions and the merger is completed, the
holder will be entitled to receive the merger consideration, but
will have no appraisal rights with respect to their shares of
SUA Class B common stock.
All demands for appraisal should be addressed to Specialty
Underwriters Alliance, Inc., 222 South Riverside Plaza,
Suite 1600, Chicago, Illinois 60606, Attn: Corporate
Secretary, and must be delivered before the vote on the merger
agreement is taken at the special meeting and should be executed
by, or on behalf of, the book-entry record holder of the shares
of SUA Class B common stock. The demand must reasonably
inform SUA of the identity of the stockholder and the intention
of the stockholder to demand appraisal of his shares.
To be effective, a demand for appraisal by a holder of SUA
Class B common stock must be made by, or in the name of,
such registered stockholder, fully and correctly, as the
stockholders name appears in book-entry.
Within ten (10) days after the effective time of the
merger, the surviving corporation must give written notice that
the merger has become effective to each holder of SUA
Class B common stock who has properly filed a written
demand for appraisal and who did not vote in favor of the
adoption of the merger agreement. At any time within sixty
(60) days after the effective time, any holder of SUA
Class B common stock who has demanded an appraisal, and who
has not commenced an appraisal proceeding or joined that
proceeding as a named party, has the right to withdraw the
demand and to accept the merger consideration specified by the
merger agreement for his shares of SUA Class B common
stock; after this period, the holder of SUA Class B common
stock may withdraw such demand for appraisal only with the
consent of the surviving corporation. Within one-hundred twenty
(120) days after the effective time of the merger, any
holder of SUA Class B common stock who has complied with
Section 262 of the DGCL will, upon written request to the
surviving corporation, be entitled to receive a written
statement setting forth the aggregate number of shares of SUA
Class B common stock with respect to which demands for
appraisal rights have been received and the aggregate number of
holders of such shares. Such written statement will be mailed to
the requesting holder of SUA Class B common stock within
ten (10) days after such written request is received by the
surviving corporation or within ten (10) days after
expiration of the period for delivery of demands for appraisal,
whichever is later. Within one-hundred twenty (120) days
after the effective time, either the surviving corporation or
any holder of SUA Class B common stock who has complied
with the requirements of Section 262 of the DGCL and who is
otherwise entitled to appraisal rights may file a petition in
the Delaware Court of Chancery demanding a determination of the
fair value of the shares held by all holders of SUA Class B
common stock entitled to appraisal. Upon the filing of the
petition by a holder of SUA Class B common stock, service
of a copy of such petition shall be made upon SUA, as the
surviving corporation. The surviving corporation has no
obligation to file such a petition in the event there are
dissenting holders of SUA Class B common stock.
Accordingly, the failure of a holder of SUA Class B common
stock to file such a petition within the period specified could
nullify the holders previously written demand for
appraisal. There is no present intent on the part of SUA to file
an appraisal petition, and holders of SUA Class B common
stock seeking to exercise appraisal rights should not assume
that SUA will file such a petition or that SUA will initiate any
negotiations with respect to the fair value of such shares.
Accordingly, holders of SUA Class B common stock who desire
to have their shares appraised should initiate any petitions
necessary for the perfection of their appraisal rights within
the time periods and in the manner prescribed in
Section 262 of the DGCL.
If a petition for appraisal is duly filed by a holder of SUA
Class B common stock and a copy of the petition is
delivered to the surviving corporation, the surviving
corporation will then be obligated, within twenty (20) days
after receiving service of a copy of the petition, to provide
the Delaware Court of Chancery with a duly verified list
containing the names and addresses of all holders of SUA
Class B common stock who have demanded an appraisal of
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving corporation. After
notice to dissenting holders of SUA Class B common stock
who demanded appraisal of their shares, the Delaware Court of
Chancery is empowered to conduct a hearing upon the petition,
and to determine those holders of SUA Class B common stock
who have complied with Section 262 of the DGCL and who have
become entitled to the appraisal rights provided thereby.
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After determination of the holders of SUA Class B common
stock entitled to appraisal of their shares of SUA Class B
common stock, the Delaware Court of Chancery will appraise the
shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the
merger, together with interest, if any. Unless the Delaware
Court of Chancery in its discretion determines otherwise for
good cause shown, interest from the closing date through the
date of payment of the judgment shall be compounded quarterly
and shall accrue at five percent (5%) over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective time of the
merger and the date of payment of the judgment.
When the value is determined, the Delaware Court of Chancery
will direct the payment of such value, with interest thereon
accrued during the pendency of the proceeding, if the Delaware
Court of Chancery so determines, to the holders of SUA
Class B common stock entitled to receive the same, upon
cancellation of the book entry shares.
In determining fair value, and, if applicable, interest, the
Delaware Court of Chancery is required to take into account all
relevant factors. In
Weinberger v. UOP, Inc.
, the
Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding,
stating that proof of value by any techniques or methods
which are generally considered acceptable in the financial
community and otherwise admissible in court should be
considered, and that fair price obviously requires
consideration of all relevant factors involving the value of a
company.
Section 262 of the DGCL provides that fair value is to be
exclusive of any element of value arising from the
accomplishment or expectation of the merger. In
Cede & Co. v. Technicolor
,
Inc.
,
the Delaware Supreme Court stated that such exclusion is a
narrow exclusion [that] does not encompass known elements
of value, but which rather applies only to the speculative
elements of value arising from such accomplishment or
expectation. In
Weinberger
, the Delaware Supreme Court
construed Section 262 of the DGCL to mean that
elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be
considered.
Holders of SUA Class B common stock should be aware that
the fair value of their shares of SUA Class B common stock
as determined under Section 262 of the DGCL could be more
than, the same as, or less than the value that such holder is
entitled to receive under the terms of the merger agreement.
Costs of the appraisal proceeding may be imposed upon the
surviving corporation and the holders of SUA Class B common
stock participating in the appraisal proceeding by the Delaware
Court of Chancery as the Court deems equitable under the
circumstances. Upon the application of a holder of SUA
Class B common stock, the Delaware Court of Chancery may
order all or a portion of the expenses incurred by any holder of
SUA Class B common stock in connection with the appraisal
proceeding, including, without limitation, reasonable
attorneys fees and the fees and expenses of experts, to be
charged pro rata against the value of all shares entitled to
appraisal. Any holder of SUA Class B common stock who had
demanded appraisal rights will not, after the effective time of
the merger, be entitled to vote shares subject to that demand
for any purpose or to receive payments of dividends or any other
distribution with respect to those shares, other than with
respect to payment as of a record date prior to the effective
time; however, if no petition for appraisal is filed within
one-hundred twenty (120) days after the effective time of
the merger, or if the holder of SUA Class B common stock
delivers a written withdrawal of his demand for appraisal and an
acceptance of the terms of the merger within sixty
(60) days after the effective time of the merger, then the
right of that holder of SUA Class B common stock to
appraisal will cease and that holder of SUA Class B common
stock will be entitled to receive the merger consideration for
shares of his shares of SUA Class B common stock pursuant
to the merger agreement. No appraisal proceeding in the Delaware
Court of Chancery will be dismissed as to any holder of SUA
Class B common stock without the prior approval of such
court, and such approval may be conditioned upon such terms as
the Delaware Court of Chancery deems just; provided, however,
that any stockholder who has not commenced an appraisal
proceeding or joined that proceeding as a named party will
maintain the right to withdraw its demand for appraisal and to
accept the merger consideration that such holder would have
received pursuant to the merger agreement within sixty
(60) days after the effective time of the merger.
62
In view of the complexity of Section 262 of the DGCL,
holders of SUA Class B common stock who may wish to dissent
from the merger and pursue appraisal rights should consult their
legal advisors.
NASDAQ
Listing of Tower Common Stock; Delisting and Deregistration of
SUA Common Stock
Tower has agreed to use its reasonable best efforts to cause the
shares of Tower common stock to be issued in the merger and the
shares of Tower common stock to be reserved for issuance upon
exercise of stock options, to be approved for listing on the
NASDAQ Global Select Market, subject to official notice of
issuance. If the merger is completed, SUA common stock will
cease to be listed on the NASDAQ Global Market or registered
under the Securities Exchange Act of 1934.
63
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
Material
U.S. Federal Income Tax Consequences of the Merger
The following discussion sets forth the material
U.S. federal income tax consequences of the merger to
U.S. Holders (as defined below) of SUA common stock. This
discussion addresses only those U.S. Holders that hold SUA
common stock as a capital asset. It does not address all of the
U.S. federal income tax consequences that may be relevant
to a particular holder of SUA common stock in light of that
stockholders particular circumstances or to a holder of
SUA common stock that is subject to special rules, including,
without limitation:
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a financial institution or insurance company;
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a tax-exempt organization;
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certain U.S. expatriates;
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a person that is not a U.S. Holder;
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a regulated investment company;
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a pass-through entity or an investor in such an entity;
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a trader in securities that elects
mark-to-market
accounting;
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a dealer or broker in securities or currencies;
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a person that holds SUA common stock as part of a hedge,
straddle, constructive sale or conversion transaction;
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a person that acquired its shares of SUA common stock pursuant
to the exercise of employee stock options or otherwise in
connection with the performance of services;
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a person that has a functional currency other than the
U.S. dollar;
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a person liable for the alternative minimum tax; and
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a person that exercises dissenters rights.
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For purposes of this discussion U.S. Holder
refers to a beneficial holder of SUA common stock that, for
U.S. federal income tax purposes, is (i) an individual
citizen or resident of the United States, (ii) a
corporation, or other entity taxable as a corporation created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia, (iii) an estate the
income of which is subject to U.S. federal income taxation
regardless of its source or (iv) a trust (x) that is
subject to the supervision of a court within the United States
and the control of one or more U.S. persons as described in
section 7701(a)(30) of the Code or (y) that has a
valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds SUA common stock,
the tax treatment of a partner in such entity will generally
depend upon the status and activities of both the partner and
the partnership. A partner in a partnership holding SUA common
stock is urged to consult its tax advisor regarding the tax
consequences of the merger.
This discussion and the opinions of Debevoise &
Plimpton LLP and Stroock & Stroock & Lavan
LLP described below are based upon the Code, the Treasury
regulations issued thereunder, relevant legislative history and
administrative and judicial interpretations thereof, all as in
effect on the date of the Registration Statement of which this
proxy statement/prospectus forms a part. The discussion and such
opinions assume that there will be no change through the
effective time of the merger in any of these authorities or
interpretations. No assurance can be given that any of the
foregoing authorities or interpretations will not be modified,
revoked, supplemented or overruled, possibly with retroactive
effect, in a manner that could adversely affect the current and
continuing validity of this discussion or such opinions, or that
the IRS will agree with the discussion or the opinions or that,
if the IRS were to take a contrary position, such positions
64
will not be ultimately sustained by the courts. In addition,
neither this discussion nor any of the opinions described below
addresses any state, local or non-US tax consequences of the
merger.
SUA stockholders are strongly urged to consult their own tax
advisors as to the specific tax consequences to them of the
merger in light of their particular circumstances, including the
applicability and effect of U.S. federal, state, local,
non-U.S. income
and other tax laws. Holders of shares of SUA Class B common
stock and persons holding options on SUA common stock are also
strongly urged to consult their own tax advisors about the
consequences of the merger and related transactions.
General
Subject to the limitations, assumptions and qualifications set
forth in this section entitled Material U.S. Federal
Income Tax Consequences, it is the opinion of each of
Debevoise & Plimpton LLP, counsel to Tower, and
Stroock & Stroock & Lavan LLP, counsel to
SUA, that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code and that Tower and
SUA will each be a party to the reorganization. In rendering the
foregoing opinions, each of Debevoise & Plimpton LLP
and Stroock & Stroock & Lavan LLP has
assumed (i) that all parties to the merger agreement and to
any other documents examined by them have acted, and will act,
in accordance with the terms of such merger agreement and
documents and that the merger will be consummated at the
effective time of the merger pursuant to the terms and
conditions set forth in the merger agreement without the waiver
or modification of any such terms and conditions and will be
effective under applicable state law, (ii) that all
representations contained in the merger agreement and exhibits
thereto (which exhibits include tax representation certificates
from each of Tower and SUA) are, and through the effective time
of the merger will be, true and complete in all material
respects, and that any representation made in any of the
relevant transaction documents to the best of the
knowledge (or similar qualification) of any person or
party is, and through the effective time of the merger will be,
correct without such qualification, (iii) that as to all
matters for which a person or entity has represented that such
person or entity is not a party to, does not have, or is not
aware of, any plan, intention, understanding, or agreement,
there is and will be no such plan, intention, understanding, or
agreement, (iv) the authenticity and completeness of all
documents submitted to them as originals, (v) the
genuineness of all signatures on all documents that they
examined, (vi) the conformity to authentic originals and
completeness of documents submitted to them as certified,
conformed or reproduction copies, and (vii) the legal
capacity of all natural persons executing documents.
Material
U.S. Federal Income Tax Consequences to U.S. Holders of SUA
Common Stock Who Participate in the Merger
As a result of the merger qualifying as a reorganization within
the meaning of Section 368(a) of the Code and Tower and SUA
being parties to such reorganization, the material
U.S. federal income tax consequences of the merger to U.S.
Holders will be as follows:
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a U.S. Holder whose shares of SUA common stock are
exchanged in the merger for shares of Tower common stock will
not recognize gain or loss with respect to such SUA common
stock, except as to cash, if any, received in lieu of a
fractional share of Tower common stock (as discussed below);
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a U.S. Holders aggregate tax basis in shares of Tower
common stock received in the merger in exchange for SUA common
stock (including any fractional shares deemed received and
exchanged for cash as described below) will equal the aggregate
tax basis of the SUA common stock surrendered in the merger;
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a U.S. Holders holding period for shares of Tower
common stock received in the merger (including any fractional
shares deemed received and exchanged for cash, as described
below) will include the holding period for the shares of SUA
common stock surrendered in exchange therefor in the merger;
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if a U.S. Holder acquired different blocks of SUA common
stock at different times or at different prices, such
stockholders tax basis and holding periods in its Tower
common stock will be determined with reference to each block of
SUA common stock; and
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to the extent that a U.S. Holder receives cash in lieu of a
fractional share of Tower common stock, the U.S. Holder
will be deemed to have received that fractional share in the
merger and then to have
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65
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received such cash in redemption of that fractional share. The
stockholder will generally recognize capital gain or loss equal
to the difference between the cash received and the tax basis
allocable to that fractional share of Tower common stock. This
capital gain or loss will generally be long-term capital gain or
loss if the U.S. Holders holding period for its
shares of SUA common stock exchanged exceeds one year at the
closing date.
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Certain
Conditions to Completing the Merger
It is a condition to Towers obligation to complete the
merger that Tower receive, on the closing date of the merger, a
written opinion of its counsel, Debevoise & Plimpton
LLP, to the effect that the merger will be treated as a
reorganization within the meaning of Section 368
(a) of the Code and that Tower and SUA will each be a party
to the reorganization. Similarly, it is a condition to
SUAs obligation to complete the merger that, on the
closing date of the merger, SUA receive an opinion of its
counsel, Stroock & Stroock & Lavan LLP, to
the effect that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and that
Tower and SUA will each be a party to the reorganization.
The opinions will be subject to assumptions, qualifications and
limitations substantially similar to those set forth at
Material U.S. Federal Income Tax Consequences of the
Merger General above (including an assumption
as to the accuracy of tax representation certificates to be
provided by Tower and SUA). If events occur between the date of
this document and the closing of the merger that render Tower
and/or
SUA
unable to make the representations required by
Debevoise & Plimpton LLP and Stroock &
Stroock & Lavan LLP or there is a change in applicable
law, either or both of Debevoise & Plimpton LLP and
Stroock & Stroock & Lavan LLP may be unable
to deliver an opinion on the closing date that the merger will
be treated as a reorganization within the meaning of
Section 368(a) of the Code. If either or both of Tower and
SUA waives this condition to the completion of the merger, Tower
and SUA intend to recirculate this proxy statement/prospectus
and to resolicit the adoption of the merger agreement by the
holders of SUA common stock. Neither Tower nor SUA currently
intends to waive this condition.
None of the tax opinions given in connection with the merger
will be binding on the IRS. Neither Tower nor SUA intends to
request any ruling from the IRS as to the U.S. federal
income tax consequences of the merger. In addition, if any of
the representations or assumptions upon which those opinions are
based is inconsistent with the actual facts, or there is a
change in applicable law, the U.S. federal income tax
consequences of the merger could be materially different. If the
merger does not qualify as a reorganization within the meaning
of Section 368(a) of the Code, then a U.S. Holder
generally would recognize gain or loss on the exchange of SUA
common stock for Tower common stock measured by the difference
between the fair market value of the Tower common stock
(together with any cash received in lieu of a fractional share
of Tower common stock) received by such U.S. Holder and
such U.S. Holders adjusted tax basis in the SUA
common stock surrendered.
Backup
Withholding and Information Reporting
Non-corporate U.S. Holders may be subject to information
reporting and backup withholding on any cash payments received
in lieu of a fractional share interest in Tower. These
U.S. Holders will not be subject to backup withholding,
however, if they furnish a correct taxpayer identification
number and certify that they are not subject to backup
withholding on the
Form W-9
or successor form included in the letter of transmittal to be
delivered to the holders following the completion of the merger
or are otherwise exempt from backup withholding. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or credit against that holders U.S. federal
income tax liability, provided the required information or
appropriate claim for refund is furnished to the IRS.
U.S. Holders receiving Tower common stock as a result of
the merger generally will be required to retain records
pertaining to the merger and certain U.S. Holders will be
required to file with their U.S. federal income tax return
for the year in which the merger takes place a statement setting
forth certain facts relating to the merger.
66
THE
MERGER AGREEMENT
Terms of
the Merger
The merger agreement provides that, subject to the terms and
conditions of the merger agreement, and in accordance with the
DGCL, upon the completion of the merger, Merger Sub will merge
with and into SUA, with SUA continuing as the surviving
corporation and succeeding to and assuming all of the rights and
obligations of Merger Sub. Upon the completion of the merger,
outstanding shares of SUA stock, excluding any shares held in
treasury by SUA, owned by Tower or any wholly-owned subsidiary
of Tower, owned by any direct or indirect subsidiary of SUA
(other than SUA stock held in an investment portfolio), and any
shares of SUA Class B common stock as to which appraisal
rights have been exercised pursuant to Section 262 of the
DGCL, will be converted into the right to receive, subject to
adjustment as set forth in the merger agreement, a fraction of a
share of Tower common stock equal to the exchange ratio. The
following table sets forth the exchange ratio and the amount of
consideration to be received by SUA stockholders for each share
of SUA stock, in each case based on various examples of the
average Tower stock price.
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Average
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Merger
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Tower
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Consideration
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Stock
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Exchange
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per Share of SUA
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Price(1)
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Ratio(2)
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Stock(3)
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$30.00
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0.2590
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$
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7.77
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$29.00
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0.2679
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$
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7.77
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$28.00
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0.2775
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$
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7.77
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$27.00
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0.2800
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$
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7.56
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$26.00
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0.2800
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$
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7.28
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$25.00
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0.2800
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$
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7.00
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$24.00
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0.2800
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$
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6.72
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$23.00
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0.2830
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$
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6.51
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$22.00
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0.2959
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$
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6.51
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$21.00
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0.3100
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$
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6.51
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$20.00
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0.3255
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$
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6.51
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$19.00
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0.3255
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$
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6.18
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(4)
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$18.00
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0.3255
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$
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5.86
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(4)
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(1)
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The average Tower stock price is the volume-weighted average
price per share of Tower common stock on the NASDAQ Global
Select Market for the 15-business-day window immediately
preceding the fifth business day prior to the closing date.
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(2)
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The exchange ratio is subject to adjustment based on the average
Tower stock price. See The Merger Agreement
Terms of the Merger Exchange Ratio below.
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(3)
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SUA stockholders (subject to certain exceptions) will receive a
fraction of a share of Tower common stock equal to the exchange
ratio (the value of which is determined by multiplying the
average Tower stock price by the exchange ratio).
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(4)
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If the average Tower stock price is less than $20.00 and SUA
exercises its walk-away right, but Tower elects to
top-up
by adding additional shares of Tower common stock, SUA
stockholders would receive a value per share of $6.51, but there
can be no assurance that Tower will
top-up.
In
such circumstances, if Tower elects not to
top-up,
the
merger agreement would terminate. See The Merger
Agreement Terms of the Merger SUA
Walk-Away Right; Tower
Top-Up
Right below.
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Exchange
Ratio
The exchange ratio is determined by reference to the average
Tower stock price and will be fixed at 0.28 if the average Tower
stock price is greater than or equal to $23.25 and less than or
equal to $27.75. If the average Tower stock price is greater
than $27.75, the exchange ratio will be adjusted downward to
provide
67
SUA stockholders with a fixed value per share of $7.77. If the
average Tower stock price is less than $23.25 but greater than
or equal to $20.00, the exchange ratio will be adjusted upward
to provide SUA stockholders with a fixed value per share of
$6.51. However, if the average Tower stock price is less than
$20.00, the exchange ratio will be fixed at 0.3255, and SUA will
have the right, for a limited period, to terminate the merger
agreement, unless Tower elects to add additional shares of Tower
common stock to provide SUA stockholders with a value per share
of $6.51.
SUA
Walk-Away Right; Tower
Top-Up
Right
If the average Tower stock price is less than $20.00, the
exchange ratio will be fixed at 0.3255, and SUA will have the
right, for a two-business-day period following the fifth
business day prior to the date initially established as the
closing date, to terminate the merger agreement, which we refer
to as the walk-away right. In such event, SUA must
give Tower written notice of its election to terminate the
merger agreement prior to 5:00 p.m. on the second business
day after the average Tower stock price is determined, which
election will be irrevocable (unless Tower otherwise consents in
writing) and effective at 5:00 p.m. on the second business
day following Towers receipt of that termination notice,
unless during such two-business-day period Tower elects by
written notice to SUA to add additional shares of Tower common
stock (which we refer to as the
top-up
right) to provide SUA stockholders with a value per share
of $6.51.
It is not possible to know until shortly prior to the closing
whether the average Tower stock price will be less than $20.00.
Neither SUA nor Tower can predict whether or not SUA would
exercise its walk-away right, or whether Tower would exercise
its
top-up
right, if the average Tower stock price were less than $20.00 at
that time. In determining whether or not to exercise its
walk-away right, SUA would consult with its financial and legal
advisors and carefully consider the interests of SUA and its
stockholders, the factors discussed in The
Merger SUAs Reasons for the Merger, and
such other information as it is legally permitted to consider
including: (i) the then-current and recent price of SUA
common stock relative to the then-current and recent price of
Tower common stock, (ii) SUAs business prospects,
(iii) Towers business prospects, (iv) the
economy in general, (v) the insurance industry as a whole, and
the commercial property and casualty industry in particular, and
(vi) subject to the no solicitation and similar obligations
in the merger agreement, potential alternative strategic
opportunities, if any. Similarly, in determining whether or not
to exercise its
top-up
right, Tower would consult with its financial and legal advisors
and carefully consider the interests of Tower and its
stockholders, the factors discussed in The
Merger Towers Reasons for the Merger and
such other information as it is legally permitted to consider.
To the extent that the average Tower stock price were below
$20.00 and SUA elected not to exercise its walk-away right, the
implied value of the merger consideration for a share of SUA
stock will be less than $6.51.
The merger agreement does not require, and SUA would not expect
to seek, further approval from SUAs stockholders in the
event that the average Tower stock price is less than $20.00 and
SUA nonetheless determines to complete the transaction.
Therefore, adoption of the merger agreement by SUA stockholders
will give Tower and SUA the ability to complete the transaction
even if the average Tower stock price is less than $20.00
without any further action by, or further solicitation of the
SUA stockholders, and FRB will not be obligated to update its
June 21, 2009 opinion.
Fractional
Shares
Tower will not issue any fractional shares of Tower common stock
in connection with the merger. Instead, any SUA stockholder who
would otherwise have been entitled to a fraction of a share of
Tower common stock in connection with the merger will be paid an
amount in cash determined by multiplying such fraction by the
average Tower common stock price.
Example
of Merger Consideration
For example, if the average Tower stock price was 23.90, which
was the closing price of Tower common stock on October 7,
2009, the exchange ratio would be 0.28 and an SUA stockholder
owning 100 shares of
68
SUA common stock would receive total consideration with an
implied value at October 7, 2009 of 28 shares of Tower
common stock and $0.00 in cash instead of fractional shares.
Exchange
of SUA Stock Certificates; Book-Entry Shares
Not less than five business days prior to the mailing of this
proxy statement/prospectus to SUA stockholders, Tower will
designate an exchange agent for the purpose of paying the merger
consideration to SUA stockholders. At or prior to the effective
time, Tower will deposit cash and shares of Tower common stock
in an amount sufficient to pay the merger consideration to
holders of SUA stock.
Within three business days of the completion of the merger,
Towers exchange agent will mail you a letter of
transmittal and instructions for use in surrendering your SUA
stock (including any stock certificates if you hold shares in
certificated form) for common stock of Tower and a fractional
share payment in lieu of any fractional shares of Tower common
stock. When you deliver your SUA stock certificates to the
exchange agent along with a properly executed letter of
transmittal and any other required documents, your SUA stock
certificates will be cancelled.
PLEASE DO NOT SUBMIT YOUR SUA STOCK CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
If you own SUA stock in book-entry form or through a broker,
bank or other holder of record, you will not need to obtain
stock certificates to submit for exchange to the exchange agent.
However, you or your broker or other nominee will need to follow
the instructions provided by the exchange agent in order to
properly surrender your shares of SUA stock.
Holders of SUA stock will not be entitled to receive any
dividends or other distributions on Tower common stock until the
merger is completed and you have surrendered your SUA stock in
exchange for Tower common stock. If Tower effects any dividend
or other distribution on the Tower common stock with a record
date occurring after the time the merger is completed and a
payment date before the date you surrender your SUA stock, you
will receive the dividend or distribution, without interest,
with respect to the whole shares of Tower common stock issued to
you after you surrender your SUA stock and the shares of Tower
common stock are issued in exchange. If Tower effects any
dividend or other distribution on the Tower common stock with a
record date after the date on which the merger is completed and
a payment date after the date you surrender your SUA stock, you
will receive the dividend or distribution, without interest, on
that payment date with respect to the whole shares of Tower
common stock issued to you. After the effective time of the
merger, subject to applicable appraisal rights under the DGCL,
each certificate and book-entry formerly representing shares of
SUA stock that has not been surrendered will represent only the
right to receive the merger consideration.
If your SUA stock certificate has been lost, stolen or
destroyed, you may receive shares of Tower common stock upon the
making of an affidavit to that fact. The surviving corporation
may, in its discretion, require you to deliver an
indemnification agreement in a form reasonably acceptable to the
surviving corporation as indemnity against any claim that may be
made against the surviving corporation, Tower, or the exchange
agent with respect to the lost, stolen or destroyed SUA stock
certificate. Tower will issue stock (or make a fractional share
payment) in a name other than the name in which a surrendered
SUA stock certificate is registered only if you present the
exchange agent with all documents required to show and effect
the unrecorded transfer of ownership and show that you paid any
applicable stock transfer taxes.
At any time more than six months after the effective time, Tower
will have the right to have the exchange agent return to it any
portion of the merger consideration that remains unclaimed by
holders of SUA stock. Thereafter, a holder of SUA stock must
look only to Tower for payment of the merger consideration to
which the holder is entitled under the terms of the merger
agreement. Any portion of the merger consideration remaining
unclaimed by holders of SUA stock as of the date that is five
years after the effective time (or the date that is immediately
prior to such time as such amount would otherwise escheat to or
become property of any governmental entity) will, to the extent
permitted by law, become the property of Tower, free and clear
of any claims or interest of any person previously entitled to
such merger consideration. Tower, the surviving
69
corporation and the exchange agent will not be liable to any
holder of shares of SUA stock for any amount paid to a public
official or governmental entity under any applicable abandoned
property, escheat or similar law.
Treatment
of SUA Stock Options and Other Equity Awards
At the effective time of the merger, each outstanding SUA stock
option that remains unexercised as of the completion of the
merger, whether or not the option is vested or unvested, and
each deferred stock award, will be assumed by Tower and will
automatically be converted into an equivalent option to acquire,
or a deferred stock award with respect to, a number of shares of
Tower common stock at the award exchange ratio. The award
exchange ratio is equal to the per share cash value of the
merger consideration (valuing Tower common stock for such
purposes based on the closing price per share of Tower common
stock on the NASDAQ Global Select Market on last business day
prior to the closing date) divided by the closing price per
share of Tower common stock on the NASDAQ Global Select Market
on last business day prior to the closing date. The per share
exercise price for each converted option to acquire shares of
Tower common stock will be equal to the exercise price per share
of the SUA stock option immediately prior to the effective time
divided by the award exchange ratio (rounded up to the nearest
whole cent). The converted options will otherwise have the same
terms and conditions (including vesting dates, expiration date
and exercise periods) as were in effect before the merger was
effective.
At the effective time of the merger, outstanding deferred stock
awards will be assumed by Tower and will automatically be
converted into deferred stock awards with respect to Tower
common stock at the award exchange ratio (rounded down to the
nearest number of whole shares). The Tower deferred stock awards
received for such SUA deferred stock awards will remain subject
to the same restrictions that applied before the merger was
effective and will otherwise have the same terms and conditions
(including vesting dates) as were in effect before the merger
was effective.
Governance
Matters upon Completion of the Merger
Articles
of Incorporation and By-laws of the Surviving
Corporation
At the effective time, the Articles of Incorporation of SUA
shall by virtue of the merger be amended and restated to be
identical to the articles of incorporation set forth as
Exhibit A to the merger agreement. Such articles, as
amended and restated, will be the articles of incorporation of
the surviving corporation until thereafter amended as provided
therein and by applicable law. The by-laws of Merger Sub in
effect immediately prior to the effective time shall be the
by-laws of the surviving corporation (other than references to
Merger Subs name, which will be replaced by references to
SUAs name) until thereafter amended as provided in
accordance with the organizational documents of the surviving
corporation and by applicable law.
Directors
and Officers
The directors of Merger Sub at the effective time will be the
directors of the surviving corporation until their successors
have been elected or until their earlier death, resignation or
removal in accordance with the organizational documents of the
surviving corporation. SUAs officers at the effective time
will be the officers of the surviving corporation until their
successors have been appointed or until their earlier death,
resignation or removal in accordance with the organizational
documents of the surviving corporation.
The composition of the board of directors of Tower is not
expected to change as a result of the merger.
Completion
of the Merger
Unless Tower and SUA agree otherwise, the parties are required
to complete the merger on the fifth business day after
satisfaction or, to the extent permitted by law, waiver of all
the conditions described under The Merger
Agreement Conditions to Completion of the
Merger below. The merger will be effective at the time the
certificate of merger is filed with the Secretary of State of
the State of Delaware or such later time as is agreed upon by
the parties and specified in the certificate of merger.
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Conditions
to Completion of the Merger
The respective obligations of SUA, Tower and Merger Sub to
complete the merger are subject to the satisfaction of certain
conditions.
Conditions to each partys obligation to effect the
merger.
The obligations of Tower, Merger Sub and
SUA to complete the merger are each subject to the satisfaction
or waiver of the following conditions:
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approval by holders of SUA common stock of the merger proposal;
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receipt of required regulatory approvals, including approvals by
the California and Illinois departments of insurance;
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the termination or expiration of any waiting period (and any
extension thereof) applicable to the merger under the HSR Act,
which occurred on July 17, 2009;
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absence of any injunctions or other legal restraints, having the
effect of making the merger illegal or preventing the completion
of the merger; and
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effectiveness of this proxy statement/prospectus and the absence
of a stop order or proceedings threatened or initiated by the
SEC for that purpose.
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Conditions to the obligations of Tower and Merger Sub to
effect the merger.
The obligations of Tower and
Merger Sub to complete the merger are subject to the
satisfaction or waiver of the following conditions:
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the truth and correctness of certain other of SUAs
representations and warranties in the merger agreement (in
certain circumstances, subject to materiality or material
adverse effect qualifications) as of the date of the merger
agreement and as of the closing date as though made on and as of
the closing date;
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the prior performance by SUA, in all material respects, of all
of its obligations under the merger agreement;
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receipt of a certificate executed by an executive officer of SUA
as to the satisfaction of the conditions described in the
preceding two bullets;
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the absence of any event or development that has had or would
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on SUA;
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receipt of a legal opinion from Towers counsel to the
effect that the merger will be treated as a
reorganization within the meaning of
Section 368(a) of the Code and that Tower and SUA will each
be a party to the reorganization; and
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the absence of any material litigation brought by any
U.S. governmental entity of competent jurisdiction
challenging the acquisition by Tower or Merger Sub of the shares
of SUA common stock, seeking to restrain or prohibit the
completion of the merger or seeking to prohibit or limit the
ownership or operation by SUA or any of its subsidiaries or by
Tower or any of its subsidiaries of any material portion of any
business or assets of SUA and its subsidiaries, taken as a
whole, or Tower and its subsidiaries, taken as a whole, where
such prohibition or limitation would, individually or in the
aggregate, reasonably be likely to have a regulatory material
adverse effect.
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Conditions to the obligations of SUA to effect the
merger.
The obligations of SUA to complete the
merger are subject to the satisfaction or waiver of the
following conditions:
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the truth and correctness of certain of Towers
representations and warranties in the merger agreement (in
certain circumstances, subject to materiality or material
adverse effect qualifications) as of the date of the merger
agreement and as of the closing date as though made on and as of
the closing date;
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the prior performance by Tower, in all material respects, of all
of its obligations under the merger agreement;
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receipt of a certificate executed by an executive officer of
Tower as to the satisfaction of the conditions described in the
preceding two bullets; and
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receipt of a legal opinion from SUAs counsel to the effect
that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and the
Tower and SUA will each be a party to the reorganization.
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The merger agreement provides that any or all of the respective
conditions of Tower and Merger Sub or SUA may be waived, in
whole or in part, by Tower and Merger Sub or SUA, as applicable,
to the extent legally allowed. In the event that either Tower or
SUA were to waive a condition to the completion of the merger
set forth above that would require material changes to the
disclosure set forth in this proxy statement/prospectus, Tower
and SUA will recirculate this proxy statement/prospectus and
resolicit the adoption of the merger agreement by the holders of
SUA common stock. Accordingly, if either or both of Tower and
SUA waives the condition to completion of the merger that
opinions are received from Towers and SUAs
respective counsel to the effect that the merger will be treated
as a reorganization within the meaning of Section
368(a) of the Code and that Tower and SUA will each be a party
to the reorganization, Tower and SUA intend to recirculate this
proxy statement/prospectus and resolicit the adoption of the
merger agreement by the holders of SUA common stock. Neither
Tower nor SUA currently intends to waive any material condition
to the completion of the merger, including the condition that
the above referenced opinions are received.
Representations
and Warranties
The merger agreement contains representations and warranties
made by SUA relating to, among other things, the following:
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(a)
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due incorporation, good standing, qualification and corporate
power, organizational documents and governmental licenses,
authorizations, permits and approvals to conduct its business;
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(b)
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corporate power and authority to enter into, and perform its
obligations under, the merger agreement, enforceability of the
merger agreement, approval of the merger agreement by the SUA
board of directors, the recommendation of the SUA board of
directors that SUA stockholders vote to adopt the merger
agreement;
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(c)
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required governmental filings and approvals;
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(d)
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the absence of conflicts between the execution, delivery or
performance of the merger agreement and SUAs or its
subsidiaries organizational documents, any applicable law
or order, certain of SUAs contracts, or any governmental
licenses, authorizations, permits or approvals, and the absence
of any liens resulting from the execution, delivery or
performance of the merger agreement;
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(e)
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capitalization and outstanding stock options and deferred stock
awards;
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(f)
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SUAs subsidiaries;
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(g)
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filings with the SEC and internal controls and procedures;
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(h)
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financial statements;
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(i)
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statutory statements of SUAs insurance subsidiaries filed
with state insurance departments;
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(j)
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the accuracy of information contained in this proxy
statement/prospectus and compliance with SEC rules and
regulations;
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(k)
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the absence of a material adverse effect on SUA since
December 31, 2008;
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(l)
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the absence of undisclosed liabilities;
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(m)
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compliance with applicable laws, including insurance laws;
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(n)
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the absence of material litigation;
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(o)
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conduct of, and matters related to, SUAs partner agents
and its insurance subsidiaries, reinsurance matters, actuarial
analyses, policy forms and marketing materials and the
acquisition of Potomac Insurance Company of Illinois by SUA;
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(p)
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the absence of material claims and assessments by any state
insurance guaranty association;
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(q)
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the determination of reserves;
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(r)
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SUAs leases for real property;
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(s)
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receipt of the fairness opinion from FBR;
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(t)
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tax matters;
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(u)
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employee benefit plan matters, post-employment compensation and
deferred compensation matters;
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(v)
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employee and labor matters;
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(w)
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environmental matters;
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(x)
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intellectual property rights;
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(y)
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material contracts of SUA and its subsidiaries;
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(z)
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finders fees due in connection with the merger;
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(aa)
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the absence of any threatened ratings downgrades by
A.M. Best Company; and
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(bb)
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the absence of certain affiliate transactions between SUA and
its directors, officers or stockholders.
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The merger agreement also contains representations and
warranties made by each of Tower and Merger Sub relating to,
among other things, the following:
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(i)
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due incorporation, good standing, qualification and corporate
power, and governmental licenses, authorizations, permits and
approvals to conduct its business;
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(ii)
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corporate power and authority to enter into, and perform its
obligations under, the merger agreement, enforceability of the
merger agreement and approval of the merger agreement by the
board of directors of Tower and Merger Sub;
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(iii)
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required governmental filings and approvals;
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(iv)
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the absence of conflicts between the execution, delivery or
performance of the merger agreement and Towers or Merger
Subs organizational documents, any applicable law or
order, or certain agreements of Tower or Merger Sub and the
absence of any liens resulting from the execution, delivery or
performance of the merger agreement;
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(v)
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capitalization, ownership and operations of Merger Sub;
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(vi)
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filings with the SEC by Tower and internal controls and
procedures of Tower;
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(vii)
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financial statements of Tower;
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(viii)
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accuracy of information supplied by Tower or Merger Sub for
inclusion in this proxy statement/prospectus;
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(vix)
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the absence of a material adverse effect on Tower since
December 31, 2008;
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(x)
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the absence of undisclosed liabilities;
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(xi)
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compliance with applicable laws, including insurance laws;
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(xii)
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the absence of certain material litigations or governmental
orders;
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(xiii)
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tax matters; and
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(xiv)
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the absence of finders fees due in connection with the
merger.
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All of the representations and warranties of SUA are qualified
in whole or in part as to materiality or
material adverse effect; except for the
representations and warranties of SUA identified in items (b),
(e), (s),
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(z), (aa) and (bb) above. All of the representations and
warranties of Tower and Merger Sub are qualified as to
materially or material adverse effect
except for the representatives and warranties of Tower and
Merger Sub identified in items (v) and (iv) above.
For purposes of the merger agreement, material adverse
effect means, with respect to Tower or SUA, as the case
may be, any event, change, circumstance or effect that is
materially adverse to the business, assets, liabilities,
financial condition or results of operations of the party and
its subsidiaries, taken as a whole.
In determining whether a material adverse effect on SUA and its
subsidiaries, on the one hand, or Tower and Merger Sub and their
subsidiaries, on the other hand, has occurred, none of the
following shall be considered:
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changes or fluctuations in the economy or the securities, credit
or financial markets generally in the U.S.;
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national or international political conditions or changes
therein (including the commencement, continuation or escalation
of acts of war, armed hostilities, sabotage or other acts of
terrorism);
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changes generally affecting the property and casualty insurance
industry or the geographic areas in which SUA and its
subsidiaries operate;
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any loss of, or adverse change in, the relationship of such
party or any of its subsidiaries with its customers, employees,
agents or other producers, suppliers, financing sources,
business partners or regulators caused by the identity of the
other party or the announcement, negotiation or performance of
the transactions contemplated by the merger agreement;
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changes in generally accepted accounting practices, which we
refer to as GAAP, or statutory accounting practices,
which we refer to as SAP, the rules or policies of
the Public Company Accounting Oversight Board, or any
interpretation or application of any of the foregoing after the
date of the merger agreement;
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any failure by the party to meet any internal or external
projections, forecasts or estimates of revenues or earnings for
any period (except that this exception does not preclude a
determination that any event, change, circumstance or effect
underlying such decline has resulted in, or contributed to, a
material adverse effect);
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the suspension of trading in securities on the NYSE or NASDAQ or
a decline in the price, or a change in the trading volume, of
the partys common stock on NASDAQ (except that this
exception does not preclude a determination that any event,
change, circumstance or effect underlying such decline has
resulted in, or contributed to, a material adverse
effect); or
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any adverse effect resulting from compliance by the party with
the terms of the merger agreement, or any actions taken, or
failure to take any action, which Tower has requested in writing.
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However, the exceptions in the first, second, third and fifth
bullet points in the preceding list apply only to the extent
that any such event, change, circumstance or effect does not
(1) relate only to the party and its subsidiaries, taken as
a whole, or (2) disproportionately adversely affect the
party and its subsidiaries, taken as a whole, compared to other
companies of similar size operating in the property and casualty
insurance industry in similar geographic areas in which the
party and its subsidiaries operate.
The representations and warranties of each of SUA, on the one
hand, and Tower and Merger Sub, on the other hand, are subject
to information disclosed in the confidential disclosure
schedules delivered by SUA to Tower and Merger Sub, on the one
hand, and by Tower and Merger Sub to SUA, on the other hand, and
to the information in SUAs SEC filings or Towers SEC
filings, as the case may be, filed or furnished with the SEC
prior to the date of the merger agreement, excluding information
contained in the Risk Factors sections or any
forward-looking disclaimers included in such SEC
filings.
The representations and warranties in the merger agreement do
not survive the completion of the merger.
74
Conduct
of Business Prior to Closing
SUA has agreed to covenants in the merger agreement that affect
the conduct of its business between the date the merger
agreement was signed and the closing date. Prior to the closing
date, subject to specified exceptions, SUA and each of its
subsidiaries are required to conduct business in the ordinary
course consistent with past practices and, to the extent
consistent therewith, use commercially reasonable efforts to
preserve their business organization and goodwill and
relationships with customers, third party payors, including
governmental entities, and others with which it has material
business dealings (including partner agents). In addition,
without the prior written consent of Tower (which consent shall
not be unreasonably withheld, conditioned or delayed) and
subject to specified exceptions which are set forth in detail in
the merger agreement, SUA will not, and will not permit any of
its subsidiaries to take numerous actions, including the
following:
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amend or propose or agree to amend, in any material respect, any
of its certificate of incorporation, by-laws or similar charter
or governing documents;
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declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property) in respect of
any of its capital stock, except for dividends or distributions
by any wholly-owned subsidiary of SUA to SUA or to any other
wholly-owned subsidiary of SUA;
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adjust, split, combine or reclassify any of its capital stock or
issue or propose or authorize the issuance of any other
securities (including options, warrants or any similar security
exercisable for, or convertible into, such other security) in
respect of, in lieu of, or in substitution for, shares of its
capital stock;
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repurchase, redeem or otherwise acquire any SUA securities or
securities of an SUA subsidiary;
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issue, sell, grant, pledge, amend, grant any rights in respect
of or otherwise encumber, any SUA securities or securities of an
SUA subsidiary or make any changes (by combination, merger,
consolidation, reorganization, liquidation or otherwise) in the
capital structure of SUA or any of its subsidiaries;
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merge or consolidate with any other person or acquire any
material assets or make a material investment in (whether
through the acquisition of stock, assets or otherwise) any other
person;
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sell, lease, license, subject to a material lien or otherwise
dispose of any material assets, product lines or businesses of
SUA or any of its subsidiaries (including capital stock or other
equity interests of any subsidiary);
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make any loans, advances or capital contributions to any other
person;
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create, incur, guarantee or assume any indebtedness;
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make or commit to make any capital expenditure other than
capital expenditures set forth in SUAs capital budget for
fiscal 2009;
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cancel any debts of any person to SUA or any subsidiary of SUA
or waive any claims or rights of material value, except for
cancellations or waivers in the ordinary course of business;
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increase the compensation or other benefits payable or provided
to SUAs directors or to employees at or above the vice
president level, except pursuant to existing contracts;
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increase the compensation or other benefits payable or provided
to SUAs employees below the vice president level;
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enter into any employment, change of control, severance or
retention agreement with any employee of SUA;
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establish, adopt, enter into or amend any company benefit plan
for the benefit of any current or former directors, officers or
employees or any of their beneficiaries;
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settle or compromise any material claim, audit, arbitration,
suit, investigation, complaint or other proceeding in excess of
the amount of the corresponding reserve established on the
consolidated
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balance sheet of SUA as most recently filed with the SEC prior
to the date of the merger agreement plus any applicable third
party insurance proceeds;
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enter into any consent decree, injunction or similar restraint
or form of equitable relief in settlement of any material claim
or audit that would materially restrict the operations of the
business after the consummation of the merger;
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modify or amend in any materially adverse respect or terminate
certain contracts material to SUA;
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effect or permit any plant closing or mass layoff;
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enter into any successor agreement to such contract that is
expiring and that changes the terms of the expiring contract in
a way that is materially adverse to SUA or any subsidiary of SUA;
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enter into certain new agreements that would be material to SUA;
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materially change any of its accounting policies (whether for
financial accounting or tax purposes), except as required by
applicable law or changes in GAAP or SAP;
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make or rescind any tax election, settle or compromise any
claims related to taxes, enter into any binding agreement with a
taxing authority relating to taxes or amend any tax return;
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request a written ruling of a taxing authority relating to taxes
or change any of its methods of reporting income or deductions
for federal income tax purposes;
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take any action that would reasonably be expected to prevent the
merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code;
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enter into, renew or extend any agreements or arrangements that
materially limit or otherwise restrict SUA or any subsidiary of
SUA or any of their respective affiliates or any successor
thereto, or that would, after the effective time, limit or
restrict Tower or any of its affiliates (including the surviving
corporation) or any successor thereto, from engaging or
competing in any line of business or in any geographic area;
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terminate, cancel, amend or modify any insurance policies
maintained by it which are not replaced by a comparable amount
of insurance coverage;
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adopt a plan of complete or partial liquidation, dissolution,
restructuring, recapitalization or other reorganization of SUA
or any of its subsidiaries;
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alter or amend in any material respect any existing reinsurance,
underwriting, claim handling, loss control, investment,
actuarial, financial reporting or accounting practices,
guidelines or policies (including compliance policies) or any
material assumption underlying an actuarial practice or policy,
in each case except as may be required by applicable law, GAAP
or SAP; or
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take any action that would reasonably be expected to
(i) result in any condition to the merger not being
satisfied or (ii) prevent, materially delay or materially
impede the consummation of the merger or any other transactions
contemplated by the merger agreement.
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Tower also has agreed to covenants in the merger agreement that
affect the conduct of its business between the date the merger
agreement was signed and the closing date. Prior to the closing
date, subject to specified exceptions which are set forth in
detail in the merger agreement, without the prior written
consent of SUA, Tower will not, and will not permit any of its
subsidiaries to take the following actions:
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amend, propose or agree to amend any of its certificate of
incorporation, by-laws or similar charter or governing documents
in such a manner that would cause holders of SUA stock that
receive Tower common stock pursuant to the merger to be treated
differently than holders of Tower common stock;
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declare, set aside or pay any dividend payable in cash, stock or
property or make any other distribution with respect to such
shares of capital stock or other ownership interests, except a
wholly-owned
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subsidiary may pay a dividend to Tower and Tower may declare and
pay regular quarterly dividends in the ordinary course of
business;
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take any action that would reasonably be expected to prevent the
merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code;
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adopt a plan of complete or partial liquidation or dissolution
with respect to Tower or resolutions providing for or
authorizing such a liquidation or dissolution; or
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take any action that would reasonably be expected to
(i) result in any condition to the merger not being
satisfied or (ii) prevent, materially delay or materially
impede the consummation of the merger or any other transactions
contemplated by the merger agreement.
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No
Solicitation of Other Offers by SUA
The merger agreement provides that SUA will, and will cause its
subsidiaries, directors, officers and employees to, and use its
reasonable best efforts to cause its other representatives to,
immediately cease and terminate all existing discussions or
negotiations with any third party conducted prior to the date of
the merger agreement with respect to any takeover proposal.
Under the terms of the merger agreement, subject to certain
exceptions described below, SUA has also agreed that it will
not, and will cause its subsidiaries, directors, officers and
employees not to, and will use its reasonable best efforts to
cause its other representatives not to, directly or indirectly:
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solicit, initiate or knowingly encourage, or knowingly
facilitate, any takeover proposal or the making or consummation
of a takeover proposal; or
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enter into, continue or otherwise participate in any discussions
or negotiations regarding, or furnish any non-public material
information in connection with, any takeover proposal.
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Under the merger agreement, a takeover proposal is
any proposal or offer from any third party (other than Tower or
its subsidiaries) relating to:
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any direct or indirect acquisition or purchase, in one
transaction or a series of related transactions, by any third
party or the stockholders of any third party (other than Tower
and its subsidiaries) of shares of voting securities or equity
securities of SUA representing more than 20% of the voting
securities or such class of equity securities of SUA, including
pursuant to a tender offer or exchange offer;
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any direct or indirect acquisition or purchase, in one
transaction or a series of related transactions, of assets
(including equity securities of any subsidiary of SUA) or
businesses that constitute more than 20% of the assets or
account for more than 20% of the net income of SUA and its
subsidiaries, taken as a whole, or;
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any merger, consolidation, business combination,
recapitalization, reorganization, liquidation, dissolution or
other similar transaction involving SUA or any of its
subsidiaries, pursuant to which any third party or the
stockholders of any third party other than Tower and its
subsidiaries would own 20% or more of the voting securities or
any class of equity securities of SUA or of any resulting parent
company of SUA.
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SUA has agreed that as promptly as practicable (and in any event
within 24 hours) after the receipt of any takeover
proposal, SUA will provide oral and written notice to Tower of
such proposal setting forth the material terms and conditions of
such proposal. Similarly, SUA has agreed that as promptly as
practicable (and in any event within 24 hours) after the
receipt of any request for non-public information relating to
SUA or any of its subsidiaries (other than requests not
reasonably expected to be related to a takeover proposal), SUA
will provide oral and written notice to Tower of such request.
Additionally, SUA is required to keep Tower reasonably informed
on a reasonably current basis of the status of any such takeover
proposal, including any material changes to the terms of the
takeover proposal or request.
If, following the execution of the merger agreement and prior to
the adoption of the merger agreement by SUA stockholders, SUA
receives an unsolicited, bona fide written takeover proposal
which did not arise as a
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result of a breach of SUAs no solicitation obligations
under the merger agreement, then SUA and its representatives may:
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contact the third party making the takeover proposal (and its
representatives) solely to clarify the terms and conditions of
the takeover proposal; and
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if the SUA board of directors determines in good faith (after
consultation with outside legal counsel) that the failure to
take such action would, or would reasonably be expected to, be
inconsistent with its fiduciary duties:
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furnish information regarding SUA and its subsidiaries to the
third party making the takeover proposal (and its
representatives) pursuant to a confidentiality agreement
containing standstill terms and conditions no less restrictive
to the third party than the standstill provisions contained in
SUAs confidentiality agreement with Tower are to Tower, so
long as any information provided to the third party has already
been provided or made available to Tower or is provided or made
available to Tower substantially concurrent with the third
party, and
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participate in discussions or negotiations with the third party
making the takeover proposal.
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SUA
Special Meeting
Except as provided in the merger agreement, SUA agreed to duly
call, give notice of, convene and hold a special meeting of the
stockholders of SUA within forty-five (45) days of the SEC
advising that SUA may mail this proxy statement/prospectus for
the purpose of obtaining stockholder adoption of the merger
agreement and will, subject to certain exceptions, include in
this proxy statement/prospectus SUAs board of directors
recommendation set forth in The Merger
Recommendations of the SUA Board of Directors with Respect to
the Merger above. SUA also will use its reasonable best
efforts to solicit and secure stockholder adoption of the merger
agreement in accordance with applicable legal requirements.
Recommendation
of the SUA Board of Directors
Under the merger agreement, SUAs board of directors has
agreed to recommend that the holders of SUA common stock vote to
adopt the merger agreement, which is set forth in The
Merger Recommendations of the SUA Board of Directors
with Respect to the Merger above. Subject to the
provisions described below, the merger agreement provides that
none of the SUA board of directors or any committee thereof will:
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withdraw (or modify or qualify in a manner adverse to Tower),
the SUA board of directors recommendation regarding the merger
proposal;
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fail to include the SUA board of directors recommendation in
this proxy statement/prospectus;
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approve, adopt or recommend, or publicly propose to approve,
adopt or recommend, any takeover proposal (each of the actions
set forth in this bullet point or in the two preceding bullet
points is referred to in this proxy statement/prospectus as a
SUA recommendation withdrawal) (provided that Tower
and SUA have agreed that the provision of factual information by
SUA to SUA stockholders will not constitute an SUA
recommendation withdrawal so long as the disclosure through
which such factual information is conveyed, taken as a whole, is
not contrary to or materially inconsistent with the SUA board of
directors recommendation); or
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allow SUA or any of its subsidiaries to execute or enter into
any letter of intent, memorandum of understanding, agreement in
principle, merger agreement, acquisition agreement, option
agreement, joint venture agreement, partnership agreement or
other similar contract (other than a confidentiality agreement
in accordance with the terms of SUAs no solicitation
obligations) providing for, with respect to, or in connection
with, any takeover proposal.
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However, at any time prior to the adoption of the merger
agreement by the SUA stockholders:
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the SUA board of directors may effect an SUA recommendation
withdrawal if the SUA board of directors determines in good
faith, after consultation with its outside legal counsel, that
the failure to do
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so would be reasonably likely to be inconsistent with the SUA
board of directors fiduciary duties under applicable law;
provided, however, that the SUA board of directors may not make
an SUA recommendation withdrawal, unless SUA provides Tower with
four business days prior written notice advising Tower of the
SUA board of directors intention to effect such SUA
recommendation withdrawal and specifying the reasons for the SUA
recommendation withdrawal; and
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in response to an unsolicited, bona fide, written takeover
proposal which did not arise as a result of a breach of
SUAs no solicitation obligations under the merger
agreement, if the SUA board of directors determines in good
faith, after consultation with its financial advisor and outside
legal counsel, that the takeover proposal constitutes a superior
proposal, SUA may terminate the merger agreement and
concurrently with such termination enter into a definitive
agreement with respect to such superior proposal; provided,
however, that SUA may not effect an SUA recommendation
withdrawal in connection with a superior proposal or terminate
the merger agreement and enter into a definitive agreement with
respect to a superior proposal, unless SUA provides Tower with
four business days prior written notice advising Tower of the
SUA board of directors intention to take such action and
specifying the reasons therefor and the material terms and
conditions of any superior proposal (including the identity of
the third party making the superior proposal and copies of all
documents and correspondence evidencing the superior proposal),
and, if requested by Tower, negotiates in good faith with Tower
regarding any amendment to the merger agreement proposed in
writing by Tower during such four-business-day period, and at
the end of such four-business-day period, taking into account
any changes to the terms and conditions of the merger agreement
proposed by Tower during the four-business-day period, the
takeover proposal in question continues to constitute (in the
good faith judgment of the SUA board of directors) a superior
proposal; provided, further, that Tower has the option
exercisable within such
four-day
period to cause SUA to promptly give notice of, convene and hold
the SUA stockholder meeting for the purpose of adopting the
merger agreement and, in such circumstances, SUA will not be
entitled to terminate the merger agreement and concurrently with
such termination enter into a definitive agreement with respect
to such superior proposal.
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A superior proposal is any written takeover proposal
(with all references to more than 20% when referring
to voting securities or equity securities of SUA (or any
resulting parent company of the SUA) in the definition of
takeover proposal being deemed to be references to more
than 75% and all references to more than 20%
when referring to assets or net income of SUA and its
subsidiaries in the definition of takeover proposal being deemed
to be references to all or substantially all) that
the board of directors of SUA determines in good faith (after
consultation with its financial advisor and outside legal
counsel) taking into account, among other things, all legal,
financial, regulatory, timing and other aspects of the takeover
proposal and the third party making the takeover proposal
(including
break-up
fees, expense reimbursement provisions and conditions to
consummation is more favorable to SUA stockholders than the
transactions contemplated by the merger agreement (including any
written offer by Tower to amend the merger agreement that is
made in accordance with the merger agreement) and is fully
financed or reasonably capable of being financed, reasonably
likely to receive all required governmental approvals on a
timely basis and otherwise reasonably capable of being completed
on the terms proposed.
Reasonable
Best Efforts to Obtain Required Approvals
Subject to the terms and conditions of the merger agreement,
SUA, Tower and Merger Sub have agreed to use their reasonable
best efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper and
advisable under applicable laws and regulations to consummate
the transactions contemplated by the merger agreement as soon as
reasonably possible, including (i) preparing and filing all
documents to effect all necessary applications, notices,
petitions, filings and other documents and registrations,
authorizations, approvals and permits contemplated by the merger
agreement and (ii) taking all reasonable steps as may be
reasonably necessary or advisable to make all necessary filings
and obtain all consents, clearances, waivers, licenses, orders,
registrations, authorizations, approvals and permits, including
filings required to obtain regulatory approvals and all other
necessary filings with any other governmental entities.
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To the extent permitted by applicable law, rules and
regulations, SUA, Tower and Merger Sub will also use their
reasonable best efforts to (i) cooperate with each other
party in connection with any filing or submission in connection
with any investigation or inquiry, (ii) keep the other
parties apprised of the status of matters relating to the
completion of the transactions contemplated in the merger
agreement and promptly inform the other parties of any
communication received from any governmental entity,
(iii) permit the other parties to review any filings or
communications given to it any governmental entity,
(iv) consult with the other parties in advance of any
meetings with any governmental entity and (v) give the
other parties the opportunity to attend and participate in any
such meetings.
Each of SUA, Tower and Merger Sub also shall use its reasonable
best efforts to resolve any objections or challenges to the
merger brought by a governmental entity or a private party so as
to permit consummation of merger on the terms set forth in the
merger agreement as soon as reasonably possible.
Notwithstanding the foregoing, under the merger agreement, Tower
shall not be required to and none of SUA or its subsidiaries
may, without the prior written consent of Tower, take any action
if doing so would, individually or in the aggregate, reasonably
be expected to result in a regulatory material adverse effect.
Employee
Benefits Matters
Tower and SUA have agreed that until the second anniversary of
the closing of the merger, the surviving corporation will
provide, or cause to be provided, continuing employees either
(i) employee benefits substantially similar in the
aggregate to the employee benefits in effect immediately prior
to the merger, (ii) Towers employee benefit plans on
the same terms as similarly situated employees of Tower and its
subsidiaries or (iii) a combination of (i) and (ii),
in the discretion of Tower. Until December 31, 2010, the
surviving corporation will provide, or cause to be provided, to
continuing employees compensation opportunities (including
salary, wages and bonus opportunities but excluding equity
incentive opportunities) substantially similar in the aggregate
to the compensation opportunities in effect immediately prior to
the merger.
To the extent applicable, Tower has agreed to (i) waive any
applicable pre-existing condition exclusions and waiting periods
with respect to participation and coverage requirements in any
Tower or surviving corporation replacement or successor welfare
benefit plan that a continuing employee is eligible to
participate in following the merger, (ii) provide each
continuing employee with credit for any co-payments and
deductibles paid prior to the merger in satisfying any
applicable deductible or
out-of-pocket
requirements, and (iii) recognize service prior to the
merger with SUA and any of its subsidiaries for purposes of
eligibility to participate and vesting and level of benefits to
the same extent such service was recognized by SUA or any of its
subsidiaries under their analogous benefit plans.
After the merger, except as otherwise agreed in writing between
Tower and an SUA employee, Tower will cause the surviving
corporation and its subsidiaries to honor, in accordance with
its terms, (i) each existing employment, change in control,
severance and termination protection plan or agreement,
(ii) all obligations in effect as of the closing under any
bonus, bonus deferral and vacation plans, programs or agreements
of SUA or any of its subsidiaries and (iii) all obligations
in effect as of the closing pursuant to any outstanding
retention or equity based plans, programs or agreements, and all
vested and accrued benefits under any employee benefit,
employment compensation or similar plans, programs, agreements
or arrangements of SUA or any of its subsidiaries.
Other
Covenants and Agreements
The merger agreement contains other covenants and agreements,
including covenants and agreements relating to:
Expenses
Except as provided in the merger agreement, each of Tower and
SUA will pay their own expenses incurred in connection with the
merger.
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Transfer
Taxes
Tower and SUA will reasonably cooperate in the preparation,
execution and filing of all returns, questionnaires,
applications or other documents regarding any real property
transfer, sales, use, transfer, value added, stock transfer and
stamp taxes, and transfer, recording, registration and other
fees and any similar taxes that become payable in connection
with the transactions contemplated by the merger agreement.
Tax
Treatment of the Merger
Each of SUA, Tower and Merger Sub will use commercially
reasonable efforts to cause the merger to qualify as a
reorganization within the meaning of
Section 368(a) of the United States Internal Revenue Code
and the regulations promulgated thereunder.
Directors
and Officers Indemnification and Insurance
After the closing, the surviving corporation will, and Tower
will cause the surviving corporation to, to the fullest extent
permitted by law, indemnify and hold harmless (and advance
expenses to) the present and former directors and officers of
SUA and its subsidiaries against any and all costs or expenses
(including reasonable attorneys fees and expenses),
judgments, fines, losses, claims, damages, penalties,
liabilities and amounts paid in settlement in connection with
any actual or threatened claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative,
regulatory or investigative, arising out of, relating to or in
connection with any circumstances, developments or matters in
existence, or acts or omissions occurring or alleged to occur
prior to or at the time of the consummation of the merger, to
the same extent such persons are indemnified or have the right
to advancement of expenses as of the date of the merger
agreement by SUA pursuant to its certificate of incorporation
and by-laws and the existing indemnification agreements.
In addition, subject to certain limitations set forth in the
merger agreement, the surviving corporation will, and Tower will
cause the surviving corporation to, at no expense to the
beneficiaries, either (i) continue to maintain in effect
for six (6) years from the consummation of the merger
directors and officers liability insurance and
fiduciary liability insurance having terms and conditions at
least as favorable to the officers and directors as SUAs
currently existing directors and officers liability
insurance and fiduciary liability insurance with respect to
matters existing or occurring at or prior to the consummation of
the merger (including the transactions contemplated by the
merger agreement), or (ii) purchase a six (6) year
extended reporting period endorsement with respect to the
current SUA directors and officers insurance.
The certificate of incorporation and by-laws of the surviving
corporation will include provisions for indemnification,
advancement of expenses and exculpation of directors and
officers on the same basis as set forth in such constituent
documents of SUA in effect on the date of the merger agreement.
Public
Announcements Regarding the Merger
Subject to certain limited exceptions set forth in the merger
agreement, Tower and SUA will consult with each other before
issuing, and give each other the opportunity to review and
comment upon, any press release or other public statements with
respect to the transactions contemplated the merger agreement.
Notification
of Certain Events
SUA will promptly notify Tower, and Tower will promptly notify
SUA, of (i) any notice or other communication received by
such party from any governmental entity in connection with the
transactions contemplated by the merger agreement or from any
person alleging that the consent of such person is or may be
required in connection with the transactions contemplated by the
merger agreement, if the subject matter of such communication or
the failure of such party to obtain such consent would
reasonably be expected to have a material adverse effect on
Tower or SUA, as the case may be, (ii) any matter
(including a breach of any representation, warranty, covenant or
agreement contained in the merger agreement) that would
reasonably be expected to lead to the failure to satisfy any of
the conditions to consummation of the merger and (iii) any
action, suits, claims, investigations or proceedings commenced
or, to such partys knowledge, threatened in
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writing against, relating to or involving or otherwise affecting
such party or any of its subsidiaries which relate to the
transactions contemplated the merger agreement.
Section 16(b)
Issues
Tower and SUA will take all steps reasonably necessary to cause
the transactions contemplated by the merger agreement and any
other dispositions of equity securities of SUA or acquisitions
of equity securities of Tower in connection with the
transactions contemplated by the merger agreement by each
individual who is a director or executive officer of Tower or
SUA to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
Listing
of Towers Common Stock
Tower will use its reasonable best efforts to cause the shares
of Tower common stock to be issued in the merger and the shares
of Tower common stock to be reserved for issuance upon exercise
of stock options to be approved for listing on the NASDAQ Global
Select Market, subject to official notice of issuance.
Delisting
of SUAs Common Stock
Each of SUA, Tower and Merger Sub will cooperate with each other
in taking, or causing to be taken, all actions necessary to
delist the SUA common stock from the NASDAQ Global Market and
terminate its registration under the Exchange Act.
Certain
Partner Agent Program Agreement Amendments and Other Partner
Agent Matters
SUA agreed to use its reasonable best efforts to negotiate and
enter into certain amendments with certain SUA partner agents to
each of the applicable partner agent program agreements and to
negotiate and enter into certain other agreements with certain
SUA partner agents.
Termination
of the Merger Agreement
The merger agreement may be terminated, at any time prior to the
consummation of the merger:
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by mutual consent of Tower and SUA;
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subject to certain limitations described in the merger
agreement, by either Tower or SUA, if:
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the merger shall not have been consummated on or before
December 31, 2009, as such date may be extended pursuant to
the merger agreement;
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a required regulatory approval has been denied or a law is in
effect which has the effect of prohibiting consummation of the
merger or any governmental entity in the United States has taken
action permanently restraining, enjoining or otherwise
prohibiting the merger; or
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the SUA stockholders have not adopted the merger agreement at
the SUA special meeting.
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In addition, SUA may terminate the merger agreement if, among
other things:
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Tower or Merger Sub has breached a representation, warranty,
covenant or agreement that would preclude the satisfaction of
certain conditions to the consummation of the merger and such
breach is not remedied within the applicable cure period;
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subject to Towers option to cause SUA to promptly give
notice of, convene and hold the SUA special meeting for the
purpose of the adoption of the merger agreement by SUA
stockholders, if SUA has received an unsolicited bona fide
written superior proposal prior to the approval by
its stockholders of the merger proposal, has complied with the
notice and matching provisions under the merger agreement, has
paid the termination fee to Tower and reimbursed Tower for
certain of its reasonable
out-of-pocket
transactions expenses, all as described in The Merger
Agreement No Solicitation of
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Other Offers by SUA and The Merger
Agreement Recommendation of the SUA Board of
Directors above; or
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the average Tower stock price is less than $20.00 and SUA elects
to exercise its walk-away right, unless Tower elects by written
notice to SUA to add additional shares of Tower common stock to
provide SUA stockholders with a value per share of at least
$6.51, as described in The Merger Agreement
Terms of the Merger SUA Walk-Away Right; Tower
Top-Up
Right.
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In addition, Tower may terminate the merger agreement if, among
other things:
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SUA has breached a representation, warranty, covenant or
agreement that would preclude the satisfaction of certain
conditions to the consummation of the merger and such breach is
not remedied within the applicable cure period; or
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the board of directors of SUA has made an SUA recommendation
withdrawal or SUA has breached its covenants relating to
providing notice of or holding of the SUA special meeting or
non-solicitation of competing transactions.
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Termination
Fees and Expenses
If the merger agreement is terminated as described in The
Merger Agreement Termination of the Merger
Agreement above, the merger agreement will become void,
and there will be no liability or obligation of any party or its
officers and directors under the merger agreement except as to
certain limited provisions set forth in the merger agreement,
including the payment of termination fees and the reimbursement
of reasonable
out-of-pocket
transaction expenses, up to a cap of $1,000,000 (including
reasonable fees and expenses of counsel, accountants, investment
bankers, experts and consultants) in connection with a
termination of the merger agreement, as described below, which
will survive the termination, and except that no party will be
relieved or released from any liabilities or damages arising out
of its material and intentional breach of the merger agreement.
If either party terminates the merger agreement as a result of
the failure of the merger to be consummated by December 31,
2009 or February 28, 2010, as applicable, and (i) an
acquisition proposal for all or substantially all of SUAs
consolidated assets or net income (including, without
limitation, stock of its subsidiaries) or 75% or more of
SUAs total voting power or the voting power of its
subsidiaries was publicly proposed or announced by any person
after the date of the merger agreement but before such
termination and not withdrawn or abandoned as of the time of
such termination, and within twelve (12) months after such
termination of the merger agreement, SUA enters into a
definitive agreement with any person pursuant to which there is
eventually consummated such a transaction, or there is
consummated such a transaction, or (ii) an acquisition
proposal for all or substantially all of SUAs consolidated
assets (including, without limitation, stock of its
subsidiaries) or net income or 75% or more of SUAs total
voting power or the voting power of its subsidiaries was
publicly proposed or announced by any person after the date of
the merger agreement but before such termination and such
proposal was withdrawn or abandoned prior to the time of such
termination, and within twelve (12) months after such
termination of the merger agreement, SUA enters into a
definitive agreement with the person that publicly proposed or
announced such acquisition proposal pursuant to which there is
eventually consummated such a transaction, or there is
consummated a transaction constituting such an acquisition with
such person, then, in each case SUA will be required to pay
Tower a termination fee of $3,000,000 plus Towers
reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 on the date of
the consummation of a competing proposal.
If either party terminates the merger agreement because the SUA
stockholders have not adopted the merger agreement at the SUA
special meeting, then SUA will be required to pay Towers
reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 within two
business days of such termination, unless at the time of the SUA
stockholders meeting volume weighted average price per share of
Tower common stock on the NASDAQ Global Select Market for the 15
trading day window immediately preceding the SUA special meeting
is less than $20.00 and Tower has not delivered a
top-up
notice. In addition, if (i) an acquisition proposal for all
or substantially all of SUAs consolidated assets
(including, without limitation,
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stock of its subsidiaries) or net income or 75% or more of
SUAs total voting power or the voting power of its
subsidiaries was publicly proposed or announced by any person
after the date of the merger agreement but before such
termination and not withdrawn or abandoned as of the time of the
SUA meeting, and (ii) SUA enters into a definitive
agreement with any person pursuant to which there is eventually
consummated such a transaction, or there is consummated such a
transaction, within 12 months of the date of such
termination of the merger agreement, SUA will be required to pay
Tower a termination fee of $3,000,000 on the date of the
consummation of a competing proposal.
If Tower terminates the merger agreement because SUA has
breached or failed to perform any of its representations,
warranties, covenants or agreements contained in the merger
agreement, then SUA will be required to pay Towers
reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 within two
business days of such termination and, if SUA consummates an
acquisition of all or substantially all of SUAs
consolidated assets (including, without limitation, stock of its
subsidiaries) or net income or 75% or more of SUAs total
voting power or the voting power of its subsidiaries within
12 months of the date of such termination of the merger
agreement, SUA will be required to pay Tower a termination fee
of $3,000,000 on the date of the consummation of such
transaction.
If SUA terminates the merger agreement because Tower or Merger
Sub has breached or failed to perform any of its
representations, warranties, covenants or agreements contained
in the merger agreement, then Tower will be required to pay
SUAs reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 within two
business days of such termination.
If SUA terminates the merger agreement to accept a superior
proposal, as described in The Merger Agreement
No Solicitation of Other Offers by SUA and The
Merger Agreement Recommendation of the SUA Board of
Directors above, SUA will be required to pay Tower a
termination fee of $3,000,000 plus Towers reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 as a condition to
such termination of the merger agreement becoming effective.
If Tower terminates the merger agreement because SUA has
changed, or failed to include in this proxy
statement/prospectus, its recommendation to its stockholders or
has materially breached certain of the no solicitation
obligations applicable to it under the merger agreement, as
described in The Merger Agreement No
Solicitation of Other Offers by SUA and The Merger
Agreement Recommendation of the SUA Board of
Directors above, SUA will be required to pay Tower a
termination fee of $3,000,000 plus Towers reasonable
out-of-pocket
transaction expenses up to a cap of $1,000,000 within two
business days of such termination of the merger agreement.
Amendment,
Extension and Waiver
Tower and SUA have agreed that the merger agreement may be
amended by the parties, as authorized by their respective boards
of directors, in writing, at any time before the adoption of the
merger agreement by the SUA stockholders. After such approval,
no amendment may be made to the merger agreement without the
approval of SUA stockholders, if such approval is required by
law or under rules of any relevant stock exchange.
The parties have also agreed that, prior to the consummation of
the merger, with the authorization of their respective boards of
directors, the parties will be allowed, in writing, to the
extent permitted by law, to extend the time for the performance
of any of the obligations or other acts of the other parties,
waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered
pursuant to the merger agreement and to the extent permitted by
applicable law, waive compliance with any of the agreements or
conditions contained in the merger agreement.
Governing
Law
The merger agreement is governed by and will be construed in
accordance with the laws of the State of Delaware.
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INFORMATION
ABOUT THE COMPANIES
SUA
SUA, a Delaware corporation headquartered in Chicago, Illinois,
was incorporated in April 2003, and through its wholly-owned
subsidiary, SUA Insurance Company, offers specialty commercial
property and casualty insurance products through independent
general agents, or partner agents, that serve niche groups of
insureds. These targeted customer groups require specialized
knowledge due to their unique risk characteristics. Examples
include tow trucks, professional employer organizations, public
entities, and contractors. SUAs innovative approach
provides products and claims handling, allowing its partner
agents to focus on distribution and customer relationships.
SUAs business model emphasizes its relationship with a
select number of partner agents, who have specialized business
knowledge in the types of business classes SUA underwrites.
SUA relies on these partner agents for industry insights and
their understanding of the specific risks in the niche markets
SUA serves. SUAs business model is designed to realign the
interests of carriers, agents and insureds. SUAs partner
agents are required to enter into agreements that provide that
in exchange for marketing and pre-qualifying business for SUA,
they receive an up-front commission and an underwriting
profit-based commission paid over several years. The agreements
further provide SUAs partner agents with a five year
exclusive arrangement (generally allowing partner agents to
offer other companies products if SUA declines to offer
coverage to a prospective insured) covering a specific class of
business and territory. These agreements do not contain change
in control or termination provisions that will be triggered by
the merger. In addition, each partner agent is required to
purchase Class B common stock pursuant to a separate
securities purchase agreement. Pursuant to the terms of these
agreements, each partner agents Class B common stock
will be converted into Tower common stock at the effective time
of the merger, and therefore, after the merger, none of
SUAs partner agents will be obligated to continue to hold
equity in Tower. SUA does consider certain of these agreements
to be material and has filed such agreements as exhibits to its
Annual Report on
Form 10-K
for the year ended December 31, 2008 as material contracts
pursuant to Item 601(b)(10) of
Regulation S-K.
See Where You Can Find More Information below.
For the year ended December 31, 2008, SUA had revenues of
$153.5 million and net income of $7.43 million.
SUAs common stock trades on the NASDAQ Global Market under
the symbol SUAI. SUA has an A.M. Best Company
Rating of B+ (Good), which is the 6th highest of
15 rating levels. SUAs principal executive offices
are located at 222 South Riverside Plaza, Suite 1600,
Chicago, Illinois 60606 and its telephone number is
(888) 782-4672.
Tower
Tower, a Delaware corporation with its headquarters in New York
City, was incorporated in 1989. Through its subsidiaries, Tower
Insurance Company of New York, Tower National Insurance Company,
Tower Risk Management Corp., Preserver Insurance Company,
Mountain Valley Indemnity Company, North East Insurance Company,
CastlePoint Insurance Company, CastlePoint Florida Insurance
Company, Hermitage Insurance Company and Kodiak Insurance
Company, Tower offers a broad range of specialized property and
casualty insurance products and services to small to mid-sized
businesses and to individuals primarily in the Northeast,
Florida, Texas and California. Tower provides coverage for many
different market segments, including nonstandard risks that do
not fit the underwriting criteria of standard risk carriers due
to factors such as type of business, location and premium per
policy. Tower provides, on both an admitted and excess and
surplus lines basis, commercial lines products comprised of
commercial package, general liability, workers
compensation, commercial auto and commercial umbrella policies
to businesses such as residential and commercial buildings,
retail and wholesale stores, food services and restaurants,
artisan contractors and garage automotive services. Tower also
provides personal lines products that insure modestly valued
homes and dwellings as well as personal automobiles. These
products are distributed through approximately 1147 active
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retail agents that are serviced through twelve branch offices.
Tower also distributes products through approximately 210
wholesale agents.
Tower has completed two acquisitions in 2009, which have
expanded its business offerings. On February 5, 2009, Tower
announced that it had completed the acquisition of CastlePoint,
a Bermuda holding company that provides property and casualty
insurance and reinsurance business solutions, products and
services primarily to small insurance companies and program
underwriting agents in the United States through its operating
subsidiaries, CastlePoint Reinsurance Company, Ltd. and
CastlePoint Insurance Company. The acquisition of CastlePoint
provides Tower with additional capital to support organic growth
as well as external growth from acquisitions. The CastlePoint
acquisition also provides Tower with access to program
underwriting agents focused on specialty classes of business and
to small insurance companies that need reinsurance solutions.
Historical financial statements and related notes of CastlePoint
as at December 31, 2008 and 2007 and for the years ended
December 31, 2008, 2007 and 2006 are attached to this proxy
statement/prospectus as
Annex D.
On February 27, 2009, Tower announced that it had completed
the acquisition of HIG, Inc., a specialty property and casualty
insurance holding company. Hermitage offers both admitted and
excess and surplus lines products to small commercial customers
throughout the eastern United States through its two operating
subsidiaries Hermitage Insurance Company and Kodiak Insurance
Company. This transaction further expands Towers wholesale
distribution system nationally and establishes a network of
retail agents in the Southeast. Historical financial statements
and related notes of Hermitage for the years ended
December 31, 2008 and 2007 and historical financial
statements and related notes of Hermitage Insurance Company and
subsidiary for the period from January 1, 2005 to
June 3, 2005, the period from June 3, 2005 to
December 31, 2005 and the years ended December 31,
2006 and 2007 are attached to this proxy statement/prospectus as
Annexes E
and
F
.
Tower common stock trades on the NASDAQ Global Select Market
under the symbol TWGP. Tower has an A.M. Best
Company rating of A- (Excellent), which is the 4th
highest of 15 rating levels. Towers principal executive
offices are located at 120 Broadway, 31st Floor, New
York, New York 10271 and its telephone number is
(212) 655-2000.
Employment
Agreements
Tower maintains employment agreements with certain of its key
employees.
Under Michael Lees employment agreement, dated as of
August 1, 2004, Mr. Lee has agreed to serve as
chairman of the board of directors, president and chief
executive officer of Tower. Mr. Lees term of service
under this agreement continues for five years followed by
automatic additional one-year terms unless notice not to extend
the term is provided by Tower or Mr. Lee at least one year
prior to the end of the term.
If Mr. Lees employment terminates as a result of
disability or death, Mr. Lees employment agreement
automatically terminates, and he or his designated beneficiary
or administrator, as applicable, is entitled to accrued salary
through the termination date and a prorated target bonus.
Additionally, all of Mr. Lees stock-based awards will
vest and his stock options will remain exercisable for one year
after the date his employment terminates (or until the last day
of the stock option term, whichever occurs first).
If Tower terminates Mr. Lees employment agreement for
cause, which includes conviction of, or Mr. Lees
pleading nolo contendere to, a crime involving moral turpitude
or a felony, gross negligence or gross misconduct, all of
Towers obligations under the agreement cease. Mr. Lee
will only be entitled to receive his accrued base salary and all
outstanding incentive awards are forfeited. If Mr. Lee
voluntarily terminates his employment agreement with Tower
without good reason and not due to death, disability or
retirement, all of Towers obligations under the agreement
cease, and Mr. Lee will be entitled to receive his accrued
base salary plus a prorated target bonus. In the case of
voluntary termination by Mr. Lee, he will have three months
(or until the last day of the stock option term, whichever
occurs first) to exercise any vested stock options, and all
unvested incentive awards will be forfeited.
If Tower terminates Mr. Lees employment without cause
or if Mr. Lee terminates his employment with good reason,
as defined in the employment agreement, then Mr. Lee is
entitled to (i) his accrued base salary
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and a prorated target bonus, (ii) a cash severance payment
equal to 300% of the sum of his annual base salary and the
highest annual bonus paid to him within the preceding three
years, (iii) the continuation of life, accident and health
insurance coverage for three years, and (iv) at least three
months (or until the last day of the stock option term,
whichever occurs first) to exercise any vested stock options. If
Tower terminates Mr. Lees employment agreement
without cause, or if Mr. Lee terminates his employment with
good reason, in anticipation of, or within the
24-month
period following, a change of control, as defined in the
employment agreement, Mr. Lee is also entitled to receive
the foregoing benefits and an immediate vesting of his
previously unvested stock awards. The employment agreement also
provides that if payments received under the agreement and other
payments received under other agreements or employee benefit
plans result in the imposition of an excise tax under
section 4999 of the Code, Mr. Lee will receive a
gross-up payment to cover the cost of the excise tax.
Under their respective employment agreements, each executive
officer of Tower (other than Bruce W. Sanderson, its Managing
Vice President, NY & Mid-Atlantic Territory, who does
not have an employment agreement with Tower) has agreed to serve
in his current position
and/or
in
such other positions as Tower may assign. The term of service
under the agreements continues for one year for Francis
Colalucci, senior vice president, chief financial officer and
treasurer of Tower, Gary Maier, senior vice president, and chief
underwriting officer of Tower, Christian Pechmann, senior vice
president, underwriting of Tower, Laurie Ranegar, senior vice
president of operations of Tower, Ron Libby, managing vice
president, New England territory of Tower and James Dulligan,
managing vice president, of finance of Tower and two years for
Elliot Orol, senior vice president, general counsel and
secretary of Tower, Joel Weiner, senior vice president, chief
actuary and strategic planning officer of Tower, Salvatore
Abano, senior vice president and chief information officer of
Tower, Richard Barrow, chief accounting officer of Tower and
Michael Haines, managing vice president of financial operations
of Tower, followed by automatic additional one-year terms unless
a notice not to extend the term is provided by Tower or the
employee three months (in the case of Messrs. Colalucci,
Pechmann, Abano and Dulligan), six months (in the case of
Messrs. Maier, Libby and Haines) or one year (in the case of
Messrs. Orol, Weiner and Barrow, and Ms. Ranegar) prior to the
end of the term.
If an executive officers (other than
Mr. Sandersons, who does not have an employment
agreement with Tower) employment terminates as a result of
disability or death, his employment agreement automatically
terminates, and he or his designated beneficiary or
administrator, as applicable, is entitled to accrued salary
through the termination date and a prorated target bonus.
Additionally, all stock-based awards will vest and his stock
options will remain exercisable for one year after the date his
employment terminates (or until the last day of the stock option
term, whichever occurs first).
If Tower terminates the employment of the executive officer
(other than Mr. Sanderson, who does not have an employment
agreement with Tower) without cause or if the executive officer
terminates his employment with good reason, as defined in his
employment agreement, then the terminated employee is entitled
to (i) his accrued base salary and a prorated target bonus,
(ii) a cash severance payment equal to 100% of the sum of
his annual base salary and his target annual bonus,
(iii) the continuation of health and welfare benefits for
one year and (iv) three months (or until the last day of
the stock option term, whichever occurs first) to exercise any
vested stock options. If Tower terminates an executive
officers employment agreement without cause, or if the
executive officer terminates his employment with good reason, in
anticipation of, or within the
24-month
period following, a change in control as defined in the
employment agreement, the executive officer is entitled to
receive the foregoing benefits and is also entitled to immediate
vesting of his previously unvested stock awards. The employment
agreements also provide that if payments received under the
agreement and other payments received under other agreements or
employee benefit plans result in the imposition of an excise tax
under section 4999 of the Code, the executive officer will
receive a tax gross-up payment to cover the cost of the excise
tax.
The merger does not constitute a change of control or otherwise
entitle the relevant employee of Tower to enhanced severance
benefits under the employment agreements described above.
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Planned
Retirement of Key Personnel
Tower currently anticipates that Francis M. Colalucci, senior
vice president, chief financial officer, treasurer and director
of Tower will retire from his position as the senior vice
president, chief financial officer and treasurer of Tower during
the 2010 calendar year. Tower currently anticipates that
Mr. Colalucci will continue as a director of Tower until
his current term expires in May of 2010. Tower is currently
engaged in a process to identify a new senior vice president,
chief financial officer and treasurer.
Merger
Sub
Merger Sub, a Delaware corporation, is a wholly-owned subsidiary
of Tower that was formed solely for the purpose of effecting the
merger. Merger Sub has not conducted and will not conduct any
business prior to the merger. Michael H. Lee is the president,
chief executive officer and a director of Merger Sub.
Mr. Lee also serves as the chairman of the board of
directors, president and chief executive officer of Tower.
Francis M. Colalucci is the senior vice president, chief
financial officer, treasurer and a director of Merger Sub.
Mr. Colalucci also serves as senior vice president, chief
financial officer, treasurer and a director of Tower. Elliot S.
Orol is the senior vice president, general counsel, secretary
and a director of Merger Sub. Mr. Orol is also the senior
vice president, general counsel and secretary of Tower. Joel S.
Weiner is the senior vice president, chief actuary and strategic
planning officer of Merger Sub. Mr. Weiner also serves as
the senior vice president, chief actuary and strategic planning
officer of Tower. Gary S. Maier is the senior vice president and
chief underwriting officer of Merger Sub. Mr. Maier also
serves as senior vice president and chief underwriting officer
of Tower.
Merger Subs principal executive offices are located at
120 Broadway, 31st Floor, New York, New York 10271 and
its telephone number is
(212) 655-2000.
Important business and financial information about Tower is
incorporated by reference into this proxy statement/prospectus.
See Where You Can Find More Information below.
88
SUA
SPECIAL MEETING
Date,
Time and Place
This proxy statement/prospectus is being furnished to SUAs
stockholders as part of the solicitation of proxies by
SUAs board of directors for use at the special meeting to
be held on November 10, 2009 at 9:00 a.m. central
standard time at, 222 South Riverside Plaza, 19th Floor, in
the Cook County Room, Chicago, IL 60606.
Purpose
of the SUA Special Meeting
The purpose of the special meeting will be to consider and vote
upon the proposal to adopt the merger agreement. In addition,
SUA is also asking for you to approve the adjournment or
postponement of the SUA special meeting, for the solicitation of
additional proxies in the event there are not sufficient votes
present, in person or represented by proxy, at the time of the
SUA special meeting to adopt the merger agreement.
SUA
Record Date; Shares Entitled to Vote
Holders of SUA stock on the record date are entitled to notice
of the SUA special meeting, but only holders of shares of SUA
common stock at the close of business on the SUA record date are
entitled to vote at the SUA special meeting or any adjournment
or postponement thereof. The holders of SUA Class B common
stock will be entitled to receive notice of the SUA special
meeting, but are not entitled to vote at the SUA special meeting
or any adjournment or postponement thereof. As of the SUA record
date, there were 14,574,596 shares of SUA common stock
outstanding.
The SUA record date is earlier than the date of the SUA special
meeting and the date that the merger is expected to be
completed. If you transfer your SUA common stock after the SUA
record date but before the special meeting, you will retain the
right to vote at the SUA special meeting, but you will have
transferred the right to receive the merger consideration. To
receive the merger consideration, you must beneficially own your
SUA stock through the completion of the merger.
Quorum
A quorum of stockholders is necessary to take action at the SUA
special meeting. The presence, in person or by proxy, of
stockholders entitled to cast at least a majority of the votes
that all stockholders are entitled to cast on the particular
matter constitutes a quorum. Votes cast in person or by proxy at
the special meeting will be tabulated by the inspectors of
election appointed for the SUA special meeting. The inspectors
of election will determine whether a quorum is present at the
special meeting. In the event that a quorum is not present at
the SUA special meeting, SUA expects that the meeting will be
adjourned or postponed to solicit additional proxies.
Required
Vote
Each outstanding share of SUA common stock on the SUA record
date entitles the holder to one vote at the SUA special meeting.
Completion of the merger requires, among other conditions, the
adoption of the merger agreement by the affirmative vote of a
majority of the outstanding shares of SUA common stock entitled
to vote at the SUA special meeting. In the event the special
meeting will need to be adjourned or postponed for the
solicitation of additional proxies in the event there are not
sufficient votes present, in person or represented by proxy, at
the time of the SUA special meeting to adopt the merger
agreement, the affirmative vote of a majority of the shares of
SUA common stock entitled to vote and present, in person or
represented by proxy, at the SUA special meeting will be
required.
Treatment
of Abstentions, Not Voting and Incomplete Proxies
Abstentions and broker non-votes will be treated as
present for purposes of determining the presence of a quorum,
but will have the same effect as a vote AGAINST the
adoption of the merger agreement. Once a
89
share is represented at the SUA special meeting, it will be
counted for the purpose of determining a quorum at the SUA
special meeting and any adjournment or postponement of the SUA
special meeting, unless the holder is present solely to object
at the beginning of the SUA special meeting to the transaction
of any business because the meeting is not lawfully called or
convened. However, if a new record date is set for the adjourned
or postponed SUA special meeting, then a new quorum will have to
be established.
If you are a stockholder of record, and you sign and return a
proxy card without giving specific voting instructions, your
shares will be voted as recommended by SUAs board of
directors on all matters listed in the notice for the SUA
special meeting. If you hold your shares in street name and do
not provide your broker with voting instructions (including by
returning a blank voting instruction card), your shares may be
treated as broker non-votes.
Voting by
SUA Directors and Executive Officers
As of October 7, 2009, directors and executive officers of
SUA held and were entitled to vote, 290,632 shares of SUA
common stock, or approximately 2.0% of the voting power of the
issued and outstanding shares of SUA common stock. It is
currently expected that SUAs directors and executive
officers will vote their shares in favor of adopting the merger
agreement and other proposals described in this proxy
statement/prospectus, although none of them have entered into
any agreements obligating them to do so.
Voting of
Proxies by Registered Holders
Giving a proxy means that an SUA stockholder authorizes the
persons named in the enclosed proxy card to vote its shares at
the SUA special meeting in the manner it directs. An SUA
stockholder may vote by proxy or in person at the SUA special
meeting. To vote by proxy, an SUA stockholder may, if it is a
registered holder (that is, it holds its stock in its own name),
submit a proxy by mail by completing and returning the proxy
card in the enclosed envelope. The envelope requires no
additional postage if mailed in the United States.
Shares Held
in Street Name
If you are an SUA stockholder and your shares are held in
street name in a stock brokerage account or by a
bank or nominee, you must provide the record holder of your
shares with instructions on how to vote the shares. Please
follow the voting instructions provided by the bank or broker.
You may not vote shares held in street name by returning a proxy
card directly to SUA or by voting in person at the SUA special
meeting unless you provide a legal proxy, which you
must obtain from your bank or broker. Further, brokers who hold
shares of SUA common stock on behalf of their customers may not
give a proxy to SUA to vote those shares with respect to the
merger without specific instructions from their customers, as
brokers do not have discretionary voting power on such proposals.
Therefore, if you are an SUA stockholder and you do not instruct
your broker or other nominee on how to vote your shares:
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your broker or other nominee may not vote your shares on the
proposal to adopt the merger agreement, which broker non-votes
will have the affect of a vote AGAINST such proposal; and
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your broker or other nominee may vote your shares on the other
proposals to be considered at the SUA special meeting.
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Revocability
of Proxies and Changes to an SUA Stockholders
Vote
Stockholders of SUA may change their vote or revoke their proxy
at any time before the proxy is voted at the SUA special
meeting. Stockholders of record may change their vote or revoke
their proxy by: (1) delivering to SUA (Attention: Corporate
Secretary) at the address on the first page of this proxy
statement/prospectus a written notice of revocation of the
proxy, (2) delivering to SUA an authorized proxy bearing a
later date, or (3) attending the SUA special meeting and
voting in person. Attendance at the meeting in and of itself,
without voting in person at the meeting, will not cause a
previously granted proxy to be revoked. For
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shares held in street name, stockholders may change their vote
by submitting new voting instructions to their broker, bank or
other nominee or, if a stockholder obtains a legal proxy from
their broker, bank or other nominee giving the stockholder the
right to vote their shares at the SUA special meeting, by
attending the meeting and voting in person.
Solicitation
of Proxies
The expense of soliciting proxies will be borne by SUA. Proxies
will be solicited by mail and may be solicited, for no
additional compensation, by officers, directors or employees of
SUA or its subsidiaries, by telephone, facsimile, electronic
mail or in person. Brokerage houses and other custodians,
nominees and fiduciaries may be requested to forward soliciting
material to the beneficial owners of SUA common stock, and will
be reimbursed for their related expenses.
Delivery
of Proxy Materials to Households Where Two or More Stockholders
Reside
As permitted by applicable law, only one copy of the proxy
materials, which includes the proxy statement/prospectus, is
being delivered to SUAs stockholders residing at the same
address, unless such stockholders have notified SUA of their
desire to receive multiple copies of the proxy materials. SUA
will promptly deliver within thirty (30) days, upon oral or
written request, a separate copy of the proxy materials to any
stockholder residing at an address to which only one copy was
mailed. If you are a stockholder at a shared address to which
SUA delivered a single copy of the proxy materials and you
desire to receive a separate copy of this proxy
statement/prospectus, please submit your request by mail to
Investor Relations, Specialty Underwriters Alliance, Inc.,
222 South Riverside Plaza, Suite 1600, Chicago, Illinois
60606 or by calling
(312) 277-1600.
If you desire to receive a separate proxy statement/prospectus
and/or
annual report in the future, or if you are a stockholder at a
shared address to which SUA delivered multiple copies of the
proxy materials and you desire to receive one copy in the
future, submit a request in writing to American Stock
Transfer & Trust Co., 59 Maiden Lane, New York,
NY 10038 or by calling
(712) 921-8200.
If you are the beneficial owner, but not the record holder, of
shares of SUA common stock, your broker, bank or other nominee
may only deliver one copy of this proxy statement/prospectus to
multiple stockholders who share an address, unless that nominee
has received contrary instructions from one or more of the
stockholders. SUA will deliver promptly, upon written or oral
request, a separate copy of this proxy statement/prospectus to a
beneficial holder at a shared address to which a single copy of
the documents was delivered. If you are a beneficial owner at a
shared address to which only one copy of the proxy
statement/prospectus was delivered and you desire to receive a
separate proxy statement/prospectus
and/or
annual report in the future, or if you are a beneficial owner at
a shared address to which SUA delivered multiple copies of this
proxy statement/prospectus and you desire to receive one copy in
the future you will need to contact your broker, bank or other
nominee to request such change.
Attending
the SUA Special Meeting
You are entitled to attend the SUA special meeting only if you
are a holder of record or a beneficial owner of SUA stock as of
the close of business on September 25, 2009, or you hold a
valid proxy for the SUA special meeting. If you are the
stockholder of record, your name will be verified against the
list of stockholders of record prior to your admittance to the
SUA special meeting. You should be prepared to present photo
identification for admission. If you hold your shares in street
name, you should provide proof of beneficial ownership on the
SUA record date, such as a brokerage account statement showing
that you owned SUAs common stock as of the SUA record
date, a copy of the voting instruction card provided by your
broker, bank or other nominee, or other similar evidence of
ownership as of the SUA record date, as well as your photo
identification, for admission. If you do not provide photo
identification or comply with the other procedures outlined
above upon request, you will not be admitted to the SUA special
meeting.
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SUA
CORPORATE GOVERNANCE
SUAs board of directors has adopted a comprehensive set
of corporate governance principles to reflect its commitment to
corporate governance and the role of such principles in building
and sustaining stockholder value. These principles are discussed
more fully below and are set forth in SUAs Corporate
Governance Guidelines and Principles, SUAs Code of
Business Conduct and Ethics and the committee charters for
SUAs Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee. Each of these
documents, including each of the committee charters, is
available under the heading Corporate Governance in
the Investor Relations section of SUAs website
located at www.suainsurance.com or by written request to
Specialty Underwriters Alliance, Inc., Investor Relations,
222 South Riverside Plaza, Suite 1600, Chicago, IL 60606.
SUAs board of directors regularly reviews corporate
governance developments and modifies SUAs Corporate
Governance Guidelines and Principles, SUAs Code of
Business Conduct and Ethics and the committee charters as
warranted.
Independence
The board of directors has determined that each of its directors
other than Mr. Smith, including all those serving on each
of the above-referenced committees, meets the standards for
independence as defined in the applicable SEC rules and
applicable listing standards. The members of the Audit Committee
also meet the independence standards of Section 10A(m)(3)
of the Securities Exchange Act of 1934.
Corporate
Governance Guidelines and Principles
SUAs Corporate Governance Guidelines and Principles sets
forth overall standards and policies for the responsibilities
and practices of SUAs board of directors and its
committees, including reviewing, approving and monitoring
fundamental financial and business strategies and major
corporate actions; ensuring processes are in place for
maintaining SUAs integrity; assessing SUAs major
risks and reviewing options for their mitigation; selecting,
monitoring and evaluating the performance of SUAs board of
directors members and committees; selecting, evaluating and
compensating SUAs chief executive officer and overseeing
succession planning; and providing counsel and oversight on the
selection, evaluation, development and compensation of senior
management.
Code of
Business Conduct and Ethics
All of SUAs employees, including its chief executive
officer, chief financial officer and principal accounting
officer, and directors are required to comply with its Code of
Business Conduct and Ethics. It is SUAs intention to
disclose any amendments to, or waivers from, any provisions of
this code as it applies to its named executive officers and
directors in a
Form 8-K
within four days of such amendment or waiver as well as on
SUAs website.
Board
Committees
The board of directors has established an Audit Committee, a
Compensation Committee, an Executive Committee, a Nominating and
Corporate Governance Committee and a Strategic Review Committee.
Audit
Committee
SUAs current Audit Committee consists of
Messrs. Zimmermann, Dean and Whitehead. The board of
directors has determined that Mr. Zimmermann is an
audit committee financial expert as defined by the
applicable SEC rules. The board of directors has determined that
all members of the Audit Committee are independent and satisfy
the relevant SEC and NASDAQ independence requirements for
members of the Audit Committee. SUA monitors the independence of
members of the Audit Committee through the use of annual
questionnaires and a requirement for committee members to inform
SUA of any changes or developments
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during the year that may have a bearing on their independence.
The principal responsibilities of the Audit Committee are:
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to assist the board of directors in fulfilling its oversight
responsibilities by reviewing: the financial reports and other
financial information SUA provides to any governmental body or
the public; SUAs systems of internal controls, established
by management and the board of directors, regarding finance,
accounting, legal compliance and ethics; and SUAs
auditing, accounting and financial reporting processes generally;
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to serve as an independent and objective body to monitor
SUAs financial reporting process and internal control
system;
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to select, evaluate and, when appropriate, replace SUAs
independent auditor; and
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to review and appraise the audit efforts of SUAs
independent auditor and internal auditors; and to provide an
open avenue of communication among the independent auditor,
financial and senior management, the internal auditors, and the
board of directors.
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At least annually, the Audit Committee reviews the Audit
Committee Charter. The charter was last amended in early 2008
and approved by the full board of directors.
Compensation
Committee
SUAs current Compensation Committee consists of
Messrs. Dean, Groth and Philp. Each member of the
Compensation Committee is an independent director under
applicable listing standards, an outside director as
defined in Section 162(m) of the Internal Revenue Code and
a non-employee director as defined in
Rule 16b-3
under the Securities Exchange Act of 1934. SUA monitors the
independence of members of the Compensation Committee through
the use of annual questionnaires and a requirement for committee
members to inform SUA of any changes or developments during the
year that may have a bearing on their independence. The board of
directors adopted a charter for the Compensation Committee in
2004. The Compensation Committee reviews the Compensation
Committee Charter annually. The charter was last revised in 2007
and approved by the full board of directors. The principal
responsibilities of the Compensation Committee are:
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to determine the level of compensation paid to SUAs chief
executive officer;
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to approve the level of compensation paid to SUAs other
executive officers;
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to determine award grants under, and administer, SUAs
equity incentive plans and review and establish any and all
other executive compensation plans adopted from time to time by
SUA;
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to ensure SUAs executive officers are compensated
effectively in a manner consistent with SUAs stated
compensation strategy, internal equity considerations,
competitive practice and the requirements of the appropriate
regulatory bodies; and
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to communicate to stockholders SUAs compensation policies
and the reasoning behind such policies, as required by the SEC.
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Robert Dean, as Chairman of the Compensation Committee,
schedules the meetings of the committee and sets the agenda for
each meeting. The Compensation Committee often invites members
of management to attend part of its meetings to provide
information and feedback concerning compensation issues. At each
of the six meetings of the Compensation Committee in 2008, the
committee met in executive session, at which no members of
management were present, for at least part of the meeting.
Although the Compensation Committee Charter allows the committee
to delegate some or all of its duties to
sub-committees
comprised of one or more of its members, the Compensation
Committee has never exercised this power. All actions of the
committee have been taken by the full Compensation Committee.
93
Role
of Executives in Establishing Compensation
Members of management are regularly invited to attend meetings
of the Compensation Committee; however, members of management do
not attend executive sessions of the committee. Courtney Smith,
SUAs chief executive officer, provides recommendations
directly to the Compensation Committee regarding the
compensation to be paid to other officers, including all the
other executive officers of SUA. In addition, SUAs general
counsel assists the committee in setting agendas, gathering
information and materials and drafting proposals, plans and
memoranda.
Compensation
Consultant
Pursuant to its charter, the Compensation Committee is vested
with the authority to retain advisors and approve such
persons fees and terms. During 2008, the Compensation
Committee retained Frederic W. Cook & Co., Inc. to
provide advice to the committee. Frederic W. Cook consults
directly with, and reports directly to, the Compensation
Committee and provides no other services to SUA. No other
compensation consultants were retained by the Compensation
Committee, the board of directors or management during 2008.
Frederic W. Cook was retained in 2006 and 2007 principally to
evaluate SUAs current compensation programs and to make
recommendations regarding potential changes to be implemented in
the future. It currently provides the Compensation Committee
with competitive data and business and technical considerations
and provides information on industry and comparable company
compensation trends when requested by the Compensation
Committee. Frederic W. Cook & Co., Inc. does not
recommend particular pay levels for particular executives, but
does provide feedback to the Compensation Committee when
requested on compensation issues related to SUAs
executives.
Compensation
Committee Interlocks and Insider Participation
Robert E. Dean, Raymond C. Groth and Paul A. Philp are members
of the Compensation Committee. No committee member (i) was,
during 2008, an officer or employee of SUA, (ii) was
formerly an officer of SUA, or (iii) had any relationship
requiring disclosure under the SECs rules governing
disclosure of related person transactions (Item 404 of
Regulation S-K).
No executive officer of SUA served as a director or member of
the compensation committee of another entity whose directors or
executive officers served as a member of SUAs board of
directors or the Compensation Committee.
Executive
Committee
SUAs Executive Committee consists of
Messrs. Whitehead and Smith. The principal duties of the
Executive Committee are:
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to exercise certain authority of the board of directors with
respect to matters requiring action between meetings of the
board of directors; and
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to decide issues from time to time delegated by the board of
directors.
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Nominating
and Corporate Governance Committee
The Nominating and Corporate Governance Committee consists of
Messrs. Groth, Philp and Zimmermann. Each member of this
committee is an independent director under applicable SEC rules
and applicable listing standards. SUA monitors the independence
of members of the Nominating and Corporate Governance Committee
through the use of annual questionnaires and a requirement for
committee members to inform SUA of any changes or developments
during the year that may have a bearing on their independence.
The board of directors adopted a charter for the Nominating and
Corporate Governance Committee in 2004. At least annually, the
committee reviews its charter. The charter was last revised in
2007. The principal duties of the Nominating and Corporate
Governance Committee are:
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to recommend to the board of directors proposed nominees
for election to the board of directors by the stockholders at
annual meetings, including an annual review as to the
re-nomination of incumbents and proposed nominees for election
by the board of directors to fill vacancies which occur between
stockholder meetings;
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to develop and recommend to the board of directors a Code of
Business Conduct and Ethics and to review the code at least
annually;
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to make recommendations to the board of directors regarding
corporate governance matters and practices and to oversee an
annual evaluation of the performance of the board of directors
and management;
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to annually evaluate this committees performance and
charter; and
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to approve certain related person transactions.
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Strategic
Review Committee
During 2009, the board of directors established a Strategic
Review Committee to assist the board of directors in fulfilling
its responsibilities with respect to strategic planning. The
members of the Strategic Review Committee are
Messrs. Raymond C. Groth (Chair), Robert E. Dean and Paul
A. Philp. The Committees responsibilities include:
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to review and evaluate long-range objectives and the strategic
business plan for SUA;
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to meet with, and provide guidance to, management with respect
to the strategic planning process and initiatives to achieve
SUAs long-term financial and strategic objectives;
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to review and consult with management regarding strategic
options available to SUA, including with respect to possible
acquisitions, mergers, divestitures, financings and changes in
capital structure;
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to review, evaluate and discuss with management potential
inquiries or proposals received by SUA with respect to possible
strategic transactions and the status thereof and the
development of procedures for responding to such potential
inquires or proposals;
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to monitor and apprise the board of directors regarding
significant developments and conditions in the insurance
industry and capital markets that may have an impact upon
SUA; and
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to review and approve (or recommend approval by the full board
of directors, as the case may be), any major corporate
transactions outside the ordinary course of business, including
potential debt equity financings, proposed mergers,
acquisitions, divestitures or investments that may arise from
time to time.
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Director
Qualifications
The board of directors as a whole is responsible for nominating
individuals for election to the board of directors by the
stockholders and for filling vacancies on the board of directors
that may occur between annual meetings of the stockholders. The
Nominating and Corporate Governance Committee is responsible for
identifying, screening and recommending candidates to the entire
board of directors based upon the appropriate skills and
characteristics required of board members in the context of the
current
make-up
of
the board of directors. The Committee may consider suggestions
for potential directors from other directors and stockholders.
In evaluating a person as a potential nominee to serve as a
director of SUA, the Nominating and Corporate Governance
Committee considers, among other factors, the following:
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whether or not the person has any relationships that might
impair his or her independence, such as any business, financial
or family relationships with SUA, its management or their
affiliates;
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whether or not the person serves on boards of, or is otherwise
affiliated with, competing companies;
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whether or not the person is willing to serve as, and willing
and able to commit the time necessary for the performance of the
duties of, a director of SUA;
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the contribution which the person can make to the board of
directors and SUA, with consideration being given to the
persons business and professional experience, education
and such other factors as the Nominating and Corporate
Governance Committee may consider relevant; and
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the character and integrity of the person.
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95
The Nominating and Corporate Governance Committee also considers
such other relevant factors as it deems appropriate, including
the current composition of the board of directors, the balance
of management and independent directors, the need for Audit
Committee expertise and the evaluations of other prospective
nominees. In connection with this evaluation, the Nominating and
Corporate Governance Committee determines whether to interview
the prospective nominee, and, if warranted, one or more members
of the Nominating and Corporate Governance Committee, and others
as appropriate, interview prospective nominees in person or by
telephone. After completing this evaluation and interview, the
Nominating and Corporate Governance Committee makes a
recommendation to the full board of directors as to the persons
who should be nominated by the board of directors, and the board
of directors determines the nominees after considering the
recommendation and report of the Nominating and Corporate
Governance Committee.
There are no differences in the manner in which the Nominating
and Corporate Governance Committee evaluates nominees for
director based on whether the nominee is recommended by a
stockholder.
Director
and Executive Officer Stock Ownership Guidelines
The board of directors approved amended stock ownership
guidelines for SUAs executive officers and non-employee
directors in November 2008. The guidelines are intended to
further align the interests and actions of the executive
officers and non-employee directors with the interests of
SUAs stockholders. The CEO and CFO are expected to hold an
amount of common stock equal to the lesser of (a) fifty
percent of all vested grants of equity awards to the executive
officer after March 2007, net of applicable taxes, or
(b) an amount of common stock with a market value equal to
two times his or her base salary. All other executive officers
are expected to hold an amount of common stock equal to the
lesser of (a) fifty percent of all vested grants of equity
awards to the executive officer after March 2007, net of
applicable taxes, or (b) an amount of common stock with a
market value equal to one times his or her base salary. The
non-employee directors are expected to hold an amount of common
stock equal to the lesser of (a) fifty percent of all
vested grants of equity awards to the director after March 2007,
net of applicable taxes, or (b) an amount of common stock
with a market value equal to two times his or her annual
retainer.
Communication
with the Board of Directors
SUAs stockholders who wish to communicate with the board
of directors or any individual director can write to:
Scott Goodreau
Senior Vice President, General Counsel,
Administration & Corporate Relations and Secretary
Specialty Underwriters Alliance, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Your letter should indicate that you are a stockholder of SUA.
Depending on the subject matter of your inquiry, management will:
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forward the communication to the director or directors to whom
it is addressed;
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attempt to handle the inquiry directly, as might be the case if
you request information about SUA or it is a stockholder-related
matter; or
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not forward the communication if it is primarily commercial in
nature or if it relates to an improper or irrelevant topic.
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At each meeting of the board of directors, a member of
management will present a summary of all communications received
since the last meeting that were not forwarded and make those
communications available to any requesting director.
96
Certain
Relationships and Transactions
SUA has adopted written policies and procedures with respect to
the approval of related person transactions. Pursuant to this
policy, subject to certain exceptions, the Nominating and
Corporate Governance Committee of SUAs board of directors
must approve any interested transaction between SUA and any
related person (as defined in the applicable SEC rules).
SUAs policy defines an interested transaction
as any transaction, arrangement or relationship or series of
similar transactions, arrangements or relationships (including
any indebtedness or guarantee of indebtedness) in which:
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the aggregate amount involved will or may be expected to exceed
$120,000 in any calendar year,
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SUA is a participant, and
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any related person has or will have a direct or indirect
interest (other than solely as a result of being a director or a
less than 10 percent beneficial owner of another entity).
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In determining whether to approve an interested transaction, the
Nominating and Corporate Governance Committee takes into
account, among other factors it deems appropriate, whether the
interested transaction is on terms no less favorable than terms
generally available to an unaffiliated third party under the
same or similar circumstances and the extent of the related
persons interest in the transaction. If an interested
transaction will be ongoing, the Nominating and Corporate
Governance Committee may establish guidelines for SUAs
management to follow in its ongoing dealings with the related
person. Thereafter, the Nominating and Corporate Governance
Committee, on at least an annual basis, reviews and assesses
ongoing relationships with the related person to see that they
are in compliance with the guidelines and that the interested
transaction remains appropriate.
SUAs policy deems the following types of transactions to
be pre-approved by the Nominating and Corporate Governance
Committee:
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employment agreements with executive officers that meet certain
criteria,
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director compensation that meet certain criteria,
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any transaction with another company at which a related
persons only relationship is as an employee (other than an
executive officer), director or beneficial owner of less than
10% of that companys shares, if the aggregate amount
involved does not exceed the greater of $50,000, or
2 percent of that companys total annual revenues,
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transactions where all stockholders receive proportional
benefits, and
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transactions involving competitive bids.
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In addition, SUAs policy requires that its general counsel
institute and maintain specific procedures, including but not
limited to the use of questionnaires, to ensure that SUA
maintains records of related persons and interested transactions
so that all related person interested transactions that are
required to be disclosed in its filings with the SEC are
disclosed in accordance with all applicable laws, rules and
regulations.
Since the beginning of 2008, there have been no transactions in
excess of $120,000 between SUA and a related person in which the
related person had a direct or indirect material interest.
97
SUA
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security
Ownership
The following table provides information as of October 7,
2009, with respect to ownership of SUA common stock by
(i) each beneficial owner of five percent or more of SUA
common stock known to SUA, (ii) each of SUAs most
highly compensated executive officers in fiscal 2008,
(iii) each director of SUA and (iv) all directors and
executive officers as a group. Except as otherwise noted, each
person named below has sole investment and voting power with
respect to the securities shown. Also, unless otherwise
indicated, the business address for each person below is 222
South Riverside Plaza, Suite 1600, Chicago, Illinois 60606.
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Number of Shares
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Percent of Stock
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Name and Address
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Beneficially Owned(1)
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Outstanding
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Hallmark Financial Services, Inc.
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1,429,615(2
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)
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9.90
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%
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Aegis Financial Corporation
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1,421,838(3
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)
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9.85
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%
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North Run Capital, LP
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1,327,300(4
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)
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9.19
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%
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The Philip Stephenson Revocable Living Trust
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954,167(5
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)
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6.61
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%
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Wellington Management Company, LLP
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772,102(6
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)
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5.35
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%
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Renaissance Technologies, LLC
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770,400(7
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)
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5.34
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%
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Whitebox Advisors, LLC
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759,996(8
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)
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5.26
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%
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Peter E. Jokiel
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245,069(9
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1.67
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%
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Courtney C. Smith
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222,974(10
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1.51
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%
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Gary J. Ferguson
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87,689(11
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*
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Barry G. Cordeiro
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76,297(12
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*
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Scott W. Goodreau
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40,687(13
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*
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Robert E. Dean
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31,500(14
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*
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Mark E. Pape
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0(15
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*
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Robert H. Whitehead
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30,000(16
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*
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Russell E. Zimmermann
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30,500(17
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*
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Raymond C. Groth
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30,000(18
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*
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Paul A. Philp
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30,000(19
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*
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All executive officers and directors as a group
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885,032(20
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5.83
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%
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(1)
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Shares beneficially owned as reported for each of the named
executive officers, each director and all directors and
executive officers as a group include shares underlying options
exercisable within 60 days of October 7, 2009.
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(2)
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This information is based upon a Schedule 13D/A filing with
the SEC dated June 9, 2009 made by Hallmark Financial
Services, Inc., setting forth information as of June 9,
2008 and includes shares which may be deemed to be beneficially
held by Mark E. Schwarz, American Hallmark Insurance Company of
Texas and Hallmark Specialty Insurance Company. The address for
Hallmark Financial Services, Inc. is 777 Main Street,
Suite 1000, Fort Worth, TX 76102.
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(3)
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This information is based upon a Schedule 13G filing with
the SEC dated February 12, 2009 made by Aegis Financial
Corporation, setting forth information as of December 31,
2008 and includes shares which may be deemed to be beneficially
held by Scott L. Barbee. The address for Aegis Financial
Corporation is 1100 North Glebe Road, Suite 1040,
Arlington, VA, 22201.
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(4)
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This information is based upon a Schedule 13G/A filing with
the SEC dated February 17, 2009 made by North Run Capital,
LP setting forth information as of December 31, 2008 and
represents shares held by North Run Master Fund, LP (NRM
Fund), for which North Run Capital, LP is the investment
manager. North Run Advisors, LLC is the general partner of North
Run Capital, LP and of North Run GP, LP which is the special
general partner of NRM Fund. Todd B. Hammer and Thomas B. Ellis
are the sole members of North Run Advisors, LLC.
Mr. Hammer, Mr. Ellis, North Run Capital, LP, North
Run GP,
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LP and North Run Advisors, LLC have shared voting and
dispositive power with respect to the shares and, as sole
members of North Run Advisors, LLC, Messrs. Hammer and Ellis may
direct the vote and disposition of such shares. The address of
North Run Capital, LP is One International Place,
Suite 2401, Boston, MA 02110.
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(5)
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This information is based upon a Schedule 13D/A filing with
the SEC dated November 28, 2008 made by The Philip
Stephenson Revocable Living Trust, and includes shares which may
be deemed to be held by George Philip Stephenson. The address of
The Philip Stephenson Revocable Living Trust is 99 Canal Center
Plaza, Suite 420, Alexandria, VA 22314.
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(6)
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This information is based upon a Schedule 13G filing with
the SEC dated February 17, 2009 made by Wellington
Management Company, LLP, setting forth information as of
December 31, 2008. The address for Wellington Management
Company, LLP is 75 State Street, Boston MA 02109.
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(7)
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This information is based upon a Schedule 13G filing with
the SEC dated February 13, 2009 made by Renaissance
Technologies, LLC, setting forth information as of
December 31, 2008 and includes shares that may be deemed to
be beneficially held by James H. Simons. The address for
Renaissance Technologies, LLC is 800 Third Avenue, New York, New
York 10022.
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(8)
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This information is based upon a Schedule 13G filing with
the SEC dated February 17, 2009 made by Whitebox Advisors,
LLC, setting forth information as of December 31, 2008 and
includes shares that may be deemed to be beneficially held by
Whitebox Combined Advisors, LLC, Whitebox Combined Partners,
L.P., Whitebox Combined Fund, L.P., Whitebox Combined Fund,
Ltd., Whitebox Intermarket Advisors, LLC, Whitebox Intermarket
Partners, L.P., Whitebox Intermarket Fund, L.P., and Whitebox
Intermarket Fund, Ltd. The address for Whitebox Advisors, LLC is
3033 Excelsior Boulevard, Suite 300, Minneapolis, MN 55416.
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(9)
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Peter E. Jokiel is SUAs executive vice president and chief
financial officer. The number of shares beneficially owned
includes 136,000 shares issuable upon exercise of options
that are currently exercisable.
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(10)
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Courtney C. Smith is SUAs president, chief executive
officer and chairman of the board of directors. The number of
shares beneficially owned includes 190,000 shares issuable
upon exercise of options that are currently exercisable.
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(11)
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Gary J. Ferguson is a senior vice president and chief claims
officer. The number of shares beneficially owned includes
64,000 shares issuable upon exercise of options that are
currently exercisable.
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(12)
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Barry G. Cordeiro is a senior vice president and chief
information officer. The number of shares beneficially owned
includes 30,000 shares issuable upon exercise of options
that are currently exercisable.
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(13)
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Scott W. Goodreau is a senior vice president, general counsel,
administration & corporate relations and secretary.
The number of shares beneficially owned includes
30,000 shares issuable upon exercise of options that are
currently exercisable.
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(14)
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Robert E. Dean is a Director. The number of shares beneficially
owned includes 11,500 shares held in living trust as to
which Mr. Dean has shared voting and dispositive power with
his wife and also includes 20,000 shares issuable upon
exercise of options that are currently exercisable.
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(15)
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Mark E. Pape is a Director.
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(16)
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Robert H. Whitehead is a Director. The number of shares
beneficially owned includes 20,000 shares issuable upon
exercise of options that are currently exercisable.
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(17)
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Russell E. Zimmermann is a Director. The number of shares
beneficially owned includes 20,000 shares issuable upon
exercise of options that are currently exercisable.
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(18)
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Raymond C. Groth is a Director. The number of shares
beneficially owned includes 20,000 shares issuable upon
exercise of options that are currently exercisable.
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(19)
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Paul A. Philp is a Director. The number of shares beneficially
owned includes 20,000 shares issuable upon exercise of
options that are currently exercisable.
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(20)
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The total shares beneficially owned by all executive officers
and directors as a group (13 people) includes
594,400 shares issuable upon exercise of options that are
currently exercisable. The only executive officers of SUA
included in this total but not otherwise shown on this table are
Daniel A. Cacchione, senior vice president and chief
underwriting officer; Scott K. Charbonneau, vice president and
chief
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actuary; and Daniel J. Rohan, vice president and controller.
Mr. Cacchione beneficially owned 12,142 shares, which
includes 10,000 shares issuable upon exercise of options
that are currently exercisable. Mr. Charbonneau
beneficially owned 28,741 shares, which includes
20,000 shares issuable upon exercise of options that are
currently exercisable. Mr. Rohan beneficially owned
18,460 shares, which includes 14,400 shares issuable
upon exercise of options that are currently exercisable.
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Section 16(a)
Beneficial Ownership Reporting Compliance
Under the U.S. securities laws, SUAs officers,
directors and holders of more than 10% of its common stock are
required to report their initial ownership of common stock and
any subsequent changes in that ownership to the SEC. Due dates
for those reports are specified by those laws, and SUA is
required to disclose in this document any failure in the past
year to file by the required due dates. Based solely on written
representations of its directors, officers and holders of more
than 10% of SUAs common stock and on copies of reports
that have been filed with the SEC, SUA believes all directors,
officers and holders of more than 10% of SUAs common stock
have complied with all filing requirements applicable to them
with respect to transactions in its common stock during 2008,
except as described below.
On May 4, 2008, each of SUAs executive officers,
including Courtney C. Smith, Peter E. Jokiel, Gary J. Ferguson,
Barry G. Cordeiro, Scott W. Goodreau, Daniel A. Cacchione, Scott
K. Charbonneau and Daniel J. Rohan, were granted restricted
stock units. Due to an inadvertent error by SUA, the
corresponding Form 4 statements were not filed with
the SEC within the prescribed time period. Upon discovery of the
error, SUA immediately filed Form 4 statements on
behalf of each executive officer with the SEC on May 27 and
May 28, 2008.
STOCKHOLDER
PROPOSALS
In the event that the stockholders of SUA do not adopt the
merger agreement, stockholders interested in submitting a
proposal (other than the nomination of directors) for inclusion
in the proxy materials to be distributed by SUA for the 2010
annual meeting of stockholders may do so by following the
procedures prescribed in
Rule 14a-8
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). To be eligible for inclusion,
stockholder proposals must be received at SUAs principal
executive offices no later than the close of business on
December 2, 2009, which is the 120th day prior to the
first anniversary of the date that SUA released the proxy
statement/prospectus to SUAs stockholders for its 2009
Annual Meeting. Any notice of stockholder proposals received
after that date will be considered untimely. To be included in
SUAs proxy materials, your proposal must also comply with
SUAs by-laws and SEC regulations under
Rule 14a-8
of the Exchange Act regarding the inclusion of stockholder
proposals in company-sponsored proxy materials. If SUA changes
the date of the 2010 annual meeting of stockholders by more than
30 days from the anniversary of this years Annual
Meeting, stockholder proposals must be received a reasonable
time before SUA begins to print and mail its proxy materials for
the 2010 annual meeting of stockholders. Proposals should be
sent to SUAs Corporate Secretary at Specialty
Underwriters Alliance, Inc., 222 South Riverside Plaza,
Suite 1600, Chicago, Illinois 60606.
Stockholders of record may also nominate directors or make
proposals at the 2010 Annual Meeting if such nomination or
proposal complies with the notice requirements of SUAs
by-laws. To obtain a copy of SUAs by-laws at no charge,
you may write to SUAs Corporate Secretary at the above
address. A current copy of the by-laws is also available on
SUAs corporate website at
www.suainsurance.com
. The by-laws may be found on
SUAs website as follows: from SUAs main web page,
first highlight (point to) the tab labeled Investor
Relations, then click on the heading Corporate
Governance which drops down. After the Corporate
Governance page loads, click on By-laws under the
Governance Documents heading.
100
DESCRIPTION
OF TOWER CAPITAL STOCK
The following summary of Tower capital stock is qualified in
its entirety by the provisions of Towers amended and
restated certificate of incorporation and amended and restated
by-laws which are incorporated by reference to Exhibit 3.1
to Towers Registration Statement on
Form S-1
(Amendment No. 2) filed on July 23, 2004;
Exhibit 3.1 to Towers Current Report on
Form 8-K
filed on October 26, 2007; and Exhibit 4.3 to
Towers Registration Statement on
Form S-1
(Amendment No. 3)
(No. 333-115310)
filed on August 25, 2004, respectively. As of
October 7, 2009, there were 145 record holders of
Tower common stock, 34 record holders of options currently
exercisable (1,043,985 of whose options are fully vested).
Common
Stock
Tower is authorized to issue up to an aggregate of
100,000,000 shares of common stock, $0.01 par value
per share, of which 40,479,611 shares of common stock were
issued and outstanding as of October 7, 2009. Except as
described below, Tower common stock has no preemptive rights or
other rights to subscribe for additional common stock, and no
rights of redemption, conversion or exchange. In the event of
liquidation, dissolution or
winding-up,
the holders of Tower common stock are entitled to share equally
in Towers assets, if any remain after the payment of all
its debts and liabilities and the liquidation preference of any
outstanding preferred shares. Holders of Tower common stock are
entitled to receive dividends as may be lawfully declared from
time to time by Towers board of directors. The rights,
preferences and privileges of holders of Tower common stock are
subject to the terms of any series of preferred stock which
Tower may issue in the future.
Preferred
Stock
Under Towers amended and restated certificate of
incorporation, the Tower board of directors is authorized,
subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an
aggregate of 2,000,000 shares of preferred stock,
$0.01 par value per share, in one or more series and to fix
or alter the designations, rights, preferences and any
qualifications, limitations or restrictions of the shares of
each of these series. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change of
control or decreasing the market price of Tower common stock and
could adversely affect the voting and other rights of the
holders of Tower common stock. On January 26, 2007, all
issued and outstanding shares of Tower preferred stock were
redeemed in full.
Issuance
of Shares
Subject to Towers amended and restated by-laws and
Delaware law, the board of directors has the power to authorize
the issuance of any of Towers unissued authorized shares
as it determines, including the issuance of any shares or class
of shares with preferred, deferred or other special rights.
Change of
Control Related Provisions in Towers Certificate of
Incorporation and By-Laws, and Delaware Law
A number of provisions in Towers amended and restated
certificate of incorporation and amended and restated by-laws
and the laws of the State of Delaware deal with matters of
corporate governance and the rights of stockholders. The
following discussion is a general summary of selected provisions
of Towers amended and restated certificate of
incorporation and amended and restated by-laws that might be
deemed to have an anti-takeover effect. These provisions may
have the effect of discouraging a future takeover attempt that
is not approved by Towers board of directors but which
individual stockholders might consider favorable. The following
description of selected provisions of Towers amended and
restated certificate of incorporation and amended and restated
by-laws and selected provisions of the DGCL are necessarily
general and you are referred in each case to Towers
amended and restated certificate of incorporation and amended
and restated by-laws, which are filed as exhibits to
Towers registration statement of which this proxy
statement/prospectus is a part, and to the provisions of those
laws.
101
Classified
Board of Directors; Removal of Directors; Filling of
Vacancies
Towers board of directors consists of no fewer than five
and no more than 13 directors and is divided into three
classes. After their initial term, directors in each class will
serve for a term of three years. The classes serve staggered
terms, such that the term of one class of directors expires each
year. As a result, any effort to obtain control of Towers
board of directors by causing the election of a majority of the
board of directors may require more time than would be required
otherwise.
Towers amended and restated by-laws provide that the
stockholders may not remove directors except for cause by a vote
of a majority of the voting power of the shares entitled to vote
in an election of directors. This may have the effect of slowing
or impeding a change in membership of Towers board of
directors that would effect a change of control. A director may
be removed for cause by the stockholders or directors only at a
meeting called for the purpose of removing him or her, and the
meeting notice must state that the purpose or one of the
purposes, of the meeting is the removal of directors.
Any vacancy on the board of directors, including a vacancy
resulting from an increase in the number of directors or
resulting from the removal of a director for cause, may be
filled by the vote of a majority of the directors then in
office, although less than a quorum. If the vacancy is not so
filled, it will be filled by the stockholders at the next annual
meeting of stockholders. These provisions give incumbent
directors significant authority that may have the effect of
limiting the ability of stockholders to effect a change in
Towers board of directors or management.
Towers board of directors has the power to increase the
number of directors up to a maximum of 13 directors and any
vacancies created by such increase may be filled by the vote of
a majority of the directors then in office, although less than a
quorum. This provision may have the effect of limiting the
ability of stockholders to effect a change in Towers board
of directors or management.
Power to
Call Special Meetings of Stockholders; Advance Notice Provisions
for Nomination of Directors and Presentation of New Business at
Meetings of Stockholders; Action by Written Consent
Towers amended and restated by-laws provide that, unless
otherwise required by law, special meetings of stockholders may
be called at any time only by the chairman of the board of
directors, the chief executive officer, the president or by the
board of directors pursuant to a resolution passed by a majority
of the entire board of directors. Stockholders are not entitled
to call special meetings. This provision may have the effect of
limiting the ability of stockholders to effect a change in
Towers board of directors or management or to accomplish
transactions that stockholders may otherwise deem to be in their
best interest.
Towers amended and restated by-laws require stockholders
to provide timely notice in writing to bring business before an
annual meeting of stockholders or to nominate candidates for
election as directors at an annual meeting of stockholders. In
the case of an annual meeting, notice is timely in the following
circumstances:
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If Tower provided a notice of annual meeting of stockholders in
the previous year, then a stockholders notice must be
delivered to or mailed to and received at Towers principal
executive offices not less than 90 nor more than 120 days
before the first anniversary of the date of the prior
years annual meeting and in any event at least
45 days prior to the first anniversary of the date on which
Tower first mailed its proxy materials for the prior years
annual meeting.
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If no proxy materials were mailed by Tower in connection with
the preceding years annual meeting, or if Tower has
changed the date of the meeting to be more than 30 calendar days
before or 70 calendar days after the anniversary of the date of
the prior years annual meeting, different notice
provisions apply. In these instances, Tower must receive notice
from a stockholder no later than 90 days before the annual
meeting or within 10 days following the date on which
notice of the date of the annual meeting is given to
stockholders or made public, whichever occurs first, and not
earlier than 120 days before the annual meeting.
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In the case of a special meeting of stockholders, the only
business that may be brought before a special meeting is that
set forth in the notice of the meeting given by SUA. The amended
and restated by-laws also specify the form and content of a
stockholders notice.
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In addition, under the provisions of Towers amended and
restated certificate of incorporation and amended and restated
by-laws, action may not be taken by written consent of
stockholders; rather, any action taken by the stockholders must
be effected at a duly called meeting.
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These provisions may make it more difficult for stockholders to
place a proposal or nomination on the meeting agenda and
therefore may reduce the likelihood that stockholders will seek
to take independent action to replace directors or seek a
stockholder vote with respect to other matters that are not
supported by management.
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Supermajority
Voting Requirement for Amendment of Certain Provisions of
Towers Certificate of Incorporation.
Towers amended and restated certificate of incorporation
requires the affirmative vote of at least 75% of the total
voting power of the outstanding shares entitled to vote at an
election of directors to amend or repeal the provisions of the
amended and restated certificate of incorporation with respect
to:
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the election and removal of directors;
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provisions relating to the liability of Towers directors;
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the provisions of Towers amended and restated certificate
of incorporation with respect to amendments to such certificate
of incorporation; and
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any provisions inconsistent with such provisions.
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Delaware
Corporate Law Anti-Takeover Provisions
Pursuant to Section 203 of the DGCL, with certain
exceptions, a publicly-held Delaware corporation may not engage
in any of a broad range of business combinations, such as
mergers, consolidations and sales of assets, with an
interested stockholder, as defined below, for a
period of three years from the date that such person became an
interested stockholder unless:
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the transaction that results in a persons becoming an
interested stockholder or the business combination is approved
by the board of directors of the corporation before the person
becomes an interested stockholder;
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upon consummation of the transaction which results in the
stockholder becoming an interested stockholder, the interested
stockholder owns 85% or more of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding shares owned by persons who are directors and also
officers and shares owned by certain employee stock
plans; or
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on or after the time the person becomes an interested
stockholder, the business combination is approved by the
corporations board of directors and by holders of at least
two-thirds of the corporations outstanding voting stock,
excluding shares owned by the interested stockholder, at a
meeting of stockholders.
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Under Section 203, an interested stockholder is
defined as any person, other than the corporation and any direct
or indirect majority-owned subsidiary, that is:
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the owner of 15% or more of the outstanding voting stock of the
corporation; or
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an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
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103
Section 203 does not apply to a corporation that so
provides in an amendment to its certificate of incorporation or
by-laws passed by a majority of its outstanding shares at any
time. Such stockholder action does not become effective for
12 months following its adoption and would not apply to
persons who were already interested stockholders at the time of
the amendment. Towers amended and restated certificate of
incorporation and amended and restated by-laws do not exclude it
from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more
difficult for a person who would be an interested stockholder to
effect various business combinations with a corporation for a
three-year period, although the stockholders may elect to
exclude a corporation from the restrictions imposed thereunder.
The provisions of Section 203 may encourage companies
interested in acquiring Tower to negotiate in advance with
Towers board of directors, because the stockholder
approval requirement would be avoided if a majority of the
directors then in office approve either the business combination
or the transaction which results in the stockholder becoming an
interested stockholder. These provisions also may have the
effect of preventing changes in Towers board of directors
or management. It is further possible that such provisions could
make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interest.
Listing
Tower common stock is listed on the NASDAQ Global Select Market
under the symbol TWGP.
Transfer
Agent and Registrar
The transfer agent and registrar for the Tower common stock is
BNY Mellon Shareholder Services.
Indemnification
of Tower Officers, Directors and Employees
Section 145 of the DGCL provides that a corporation may
indemnify directors and officers, as well as other employees and
individuals, against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings
in which such person is made a party by reason of such person
being or having been a director, officer, employee or agent to
Tower. The DGCL provides that Section 145 is not exclusive
of other rights to which those seeking indemnification may be
entitled under any certificate of incorporation, bylaws,
agreement, vote of stockholders or disinterested directors or
otherwise. Towers amended and restated certificate of
incorporation provides for indemnification by Tower of its
directors, officers and employees to the fullest extent
permitted by the DGCL.
Section 102(b)(7) of the DGCL permits a corporation to
provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability
(1) for any breach of the directors duty of loyalty
to the corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) for unlawful
payments of dividends or unlawful stock repurchases, redemptions
or other distributions or (4) for any transactions from
which the director derived an improper personal benefit.
Towers amended and restated certificate of incorporation
provides for such limitations of liability.
Tower maintains standard policies of insurance under which
coverage is provided (1) to its directors and officers
against loss arising from claims made by reason of breach of
duty or other wrongful act and (2) to Tower with respect to
payments which may be made by Tower to such directors and
officers pursuant to the above indemnification provision or
otherwise as a matter of law.
104
COMPARISON
OF RIGHTS OF TOWER STOCKHOLDERS AND SUA STOCKHOLDERS
Both Tower and SUA are incorporated under the laws of the State
of Delaware and, accordingly, the rights of the stockholders of
each are currently governed by the DGCL. Upon the completion of
the merger, all outstanding shares of SUA stock will be
converted into the right to receive the merger consideration,
which consists of Tower common stock. Therefore, upon the
completion of the merger, the rights of the former SUA
stockholders will be governed by Delaware law, Towers
certificate of incorporation, and Towers by-laws, in each
case, subject to the amendments thereto discussed above.
The following discussion is a summary of the current rights of
SUA stockholders and the current rights of Tower stockholders.
While this summary includes the material differences between the
two, this summary may not contain all of the information that is
important to you. You should carefully read this entire proxy
statement/prospectus, the relevant provisions of the DGCL and
the other governing documents which are referenced in this proxy
statement/prospectus for a more complete understanding of the
differences between being a stockholder of SUA and a stockholder
of Tower. Tower and SUA have filed with the SEC their respective
governing documents referenced in this summary of stockholder
rights and will send copies of these documents to you, without
charge, upon your request. See the section entitled Where
You Can Find More Information below.
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Rights of SUA Stockholders
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Rights of Tower Stockholders
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Outstanding Capital Stock
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As of October 7, 2009, SUAs outstanding share capital
consisted of 14,574,596 shares of common stock, par value
$0.01 per share, and 1,354,328 shares of SUA Class B
common stock, par value $0.01 per share. SUA common stock trades
on the NASDAQ Global Market.
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As of October 7, 2009, Towers issued and outstanding
share capital consisted of 40,479,611 shares of common
stock, par value $0.01 per share. Tower common stock trades on
the NASDAQ Global Select Market.
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Authorized Capital Stock
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SUAs authorized capital stock consists of
30,000,000 shares of common stock, par value $0.01 per
share, and 2,000,000 shares of SUA Class B common
stock, par value $0.01 per share and 1,000,000 shares of
preferred stock, par value $0.01 per share.
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Towers authorized capital stock consists of
100,000,000 shares of common stock, par value $0.01 per
share, and 2,000,000 shares of preferred stock, par value
$0.01 per share.
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Voting Rights of holders of SUAs Class B Common
Stock
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Prior to the merger, under SUAs amended and restated
certificate of incorporation, the holders of the Class B
common stock are not entitled to any voting rights, except as
otherwise required by law.
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Following the merger, former holders of SUA Class B common
stock that receive Tower common stock will be entitled to one
vote per share of Tower common stock.
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Stockholder Action by Written Consent
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The DGCL allows action by written consent to be made by the
holders of the minimum number of votes that would be needed to
approve such a matter at an annual or special meeting of
stockholders, unless this right to act by written consent is
denied in the certificate of incorporation.
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105
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Rights of SUA Stockholders
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Rights of Tower Stockholders
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SUAs amended and restated certificate of incorporation and
amended and restated by-laws provides that action by the
stockholders may be taken without a meeting, without prior
notice and without a vote of the stockholders, if a consent or
consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
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Towers amended and restated certificate of incorporation
and amended and restated by-laws provide that any action
required or permitted to be taken at any annual or special
meeting of stockholders of Tower may be taken only upon the vote
of the stockholders at an annual or special meeting duly noticed
and called, and may not be taken by written consent of the
stockholders pursuant to the DCGL.
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Number of Directors
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The DGCL provides that the board of directors of a Delaware
corporation must consist of one or more directors as fixed by
the corporations certificate of incorporation or by-laws.
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Under SUAs amended and restated certificate of
incorporation and amended and restated by-laws, the board of
directors will be 7, and may be altered from time to time by a
resolution of the SUA board of directors, but in no event will
it consist of less than one director.
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Under Towers amended and restated certificate of
incorporation and amended and restated by-laws, the board of
directors will consist of no fewer than five or more than
13 directors, the exact number to be determined from time
to time by resolution duly adopted by the board of directors.
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Classification
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The DGCL provides that the directors of a Delaware corporation
may, by the certificate of incorporation or by-laws, be divided
into one, two or three classes.
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Under SUAs amended and restated certificate of
incorporation and amended and restated by-laws the board of
directors is not classified.
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Under Towers amended and restated certificate of
incorporation and amended and restated by-laws the board of
directors is divided into three classes, which means that
members of only one of three classes of Towers directors
are elected each year.
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Removal
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The DGCL provides that any director or the entire board of
directors may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election
of directors, except in certain specified situations, including
in the case of a corporation whose board of directors is
classified and where stockholders may effect such removal only
for cause.
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Rights of SUA Stockholders
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Rights of Tower Stockholders
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Under SUAs amended and restated certificate of
incorporation and amended and restated by-laws, any director may
be removed at any time, either for or without cause, by the
affirmative vote of the holders of not less than a majority of
the voting power of all the shares of capital stock of SUA
issued and outstanding and entitled to vote for the election of
such director.
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Under Towers amended and restated certificate of
incorporation and amended and restated by-laws, subject to the
DGCL, any of the directors may be removed only for cause by the
affirmative vote of a majority of the entire board of directors
then in office if there were no vacancies or by a majority of
the combined voting power of the then outstanding shares of
stock of the corporation entitled to vote at an election of
directors. A director may be removed for cause by the
stockholders or directors only at a meeting called for the
purpose of removing him or her, and the meeting notice must
state that the purpose or one of the purposes of the meeting is
the removal of directors.
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Amendments to Certificate of Incorporation
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Under the DGCL, an amendment to the certificate of incorporation
requires (i) the approval of the board of directors, (ii) the
approval of a majority of the outstanding stock entitled to vote
upon the proposed amendment and (iii) the approval of the
holders of a majority of the outstanding stock of each class
entitled to vote thereon as a class.
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Under SUAs amended and restated certificate of
incorporation, SUA reserves the right to amend or repeal any
provision contained in its certificate of incorporation in any
manner prescribed by the laws of the State of Delaware.
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Towers amended and restated certificate of incorporation
provides that the affirmative vote of at least 75% of the voting
power of all of the then outstanding shares of capital stock of
Tower is required to adopt any provisions in the certificate of
incorporation or the by-laws that amend or contradict those
sections in the certificate of incorporation pertaining to,
among other things, the election of directors, the liability of
Towers directors and the amendment of the certificate of
incorporation.
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107
LEGAL
MATTERS
The validity of the Tower common stock issued in connection with
the merger will be passed upon for Tower by
Debevoise & Plimpton LLP. Certain tax matters related
to the merger will be passed upon for Tower by Debevoise &
Plimpton LLP. Certain tax matters related to the merger will be
passed upon for SUA by Stroock & Stroock & Lavan LLP.
EXPERTS
The consolidated financial statements and managements
assessment of the effectiveness of internal controls over
financial reporting (which is included in Managements
Report on Internal Control over Financial Reporting)
incorporated in this proxy statement/prospectus by reference to
the Annual Report on
Form 10-K
of SUA and its subsidiaries for the fiscal year ended
December 31, 2008 have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
such firm as experts in auditing and accounting.
The consolidated financial statements included in this proxy
statement/prospectus as
Annex D
of CastlePoint and
its subsidiaries as at December 31, 2008 and 2007 and for
the years ended December 31, 2008, 2007 and 2006 have been
so included in reliance on the report of PricewaterhouseCoopers
(Bermuda), an independent registered public accounting firm,
given on the authority of such firm as experts in auditing and
accounting.
The consolidated financial statements, financial statement
schedules and the effectiveness of internal control over
financial reporting of Tower and its subsidiaries incorporated
by reference in this proxy statement/prospectus have been
audited by Johnson Lambert & Co. LLP, an independent
registered public accounting firm, to the extent and for the
periods set forth in their reports incorporated herein by
reference, and are incorporated herein in reliance upon such
reports given upon the authority of said firm as experts in
auditing and accounting.
The historical consolidated financial statements of Hermitage
attached to this proxy statement/prospectus as
Annex E
and the historical consolidated financial
statements of Hermitage Insurance Company and subsidiary
attached to this proxy statement/prospectus as
Annex F
have been audited by Amper,
Politziner & Mattia, LLP, an independent auditing
firm, to the extent and for the periods set forth in their
reports included in
Annex E
and
F
to this
proxy statement/prospectus, and are attached to this proxy
statement/prospectus in reliance upon such reports given upon
the authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
Tower has filed a registration statement on
Form S-4
to register with the SEC the Tower common stock to be issued to
SUA stockholders in the merger, if approved. This proxy
statement/prospectus is a part of that registration statement
and constitutes a prospectus of Tower in addition to being a
proxy statement of SUA. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you
can find in the registration statement on
Form S-4,
of which this proxy statement/prospectus forms a part, or the
annexes to the registration statement. Tower and SUA file
annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any
reports, statements or other information that Tower and SUA file
with the SEC at the SECs public reference room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. These SEC filings are also available to the public from
the Internet worldwide web site maintained by the SEC at
http://www.sec.gov.
Reports, proxy statements and other information concerning Tower
and SUA may also be inspected at the offices of The NASDAQ Stock
Market, One Liberty Plaza, 165 Broadway, New York, NY 10006.
If you are an SUA stockholder, some of the documents previously
filed with the SEC may have been sent to you, but you can also
obtain any of them through SUA, the SEC or the SECs
Internet web site as described above. Documents filed with the
SEC are available from Tower or SUA without charge, excluding
all exhibits, except that, if SUA has specifically incorporated
by reference an exhibit in this proxy statement/prospectus, the
exhibit will also be provided without charge.
108
You may obtain documents filed with the SEC by requesting them
in writing or by telephone from the appropriate company at the
following addresses:
TOWER
GROUP, INC.
120
Broadway, 31st Floor
New York, New York 10271
(212) 655-2000
Attention: Elliot S. Orol
SPECIALTY UNDERWRITERS ALLIANCE, INC.
222 S. Riverside Plaza
Suite 1600
Chicago, IL
60606-6001
(312) 277-1600
Attention: Scott W. Goodreau
If you would like to request documents, SUA stockholders must do
so no later than November 3, 2009 in order to receive them
before the SUA special meeting.
You can also get more information by visiting Towers
website at
http://www.twrgrp.com
and SUAs website at
http://www.suainsurance.com
.
Materials from these websites and other websites mentioned in
this proxy statement/prospectus are not incorporated by
reference in this proxy statement/prospectus. If you are viewing
this proxy statement/prospectus in electronic format, each of
the URLs mentioned in this proxy statement/prospectus is an
active textual reference only.
The SEC allows Tower and SUA to incorporate by
reference information in this proxy statement/prospectus,
which means that Tower and SUA can disclose important
information to you by referring you to another document filed
separately with the SEC. The information incorporated by
reference is considered to be a part of this proxy
statement/prospectus, except for any information that is
superseded by information included directly in this document.
109
The documents listed below that Tower and SUA have previously
filed with the SEC are considered to be a part of this proxy
statement/prospectus. They contain important business and
financial information about the companies:
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Tower Filings
(File
No. 000-50990)
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Annual Report on
Form 10-K
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For the fiscal year ended December 31, 2008
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Quarterly Reports on
Form 10-Q
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For the quarters ended March 31, 2009 and June 30, 2009
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Current Reports on
Form 8-K
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Filed on January 15, 2009, January 28, 2009,
February 5, 2009, March 2, 2009, May 7, 2009,
June 17, 2009, June 22, 2009, June 23, 2009,
July 23, 2009, August 5, 2009, and September 9,
2009.
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Proxy Statement (Annual Stockholders Meeting)
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Filed on March 27, 2009
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The description of Tower common stock contained in its
registration statements on
Form S-1,
including any amendment or report filed for the purpose of
updating the description.
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Filed on May 7, 2004 and August 19, 2005
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SUA Filings
(File
No. 000-50891)
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Annual Report on
Form 10-K
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For the fiscal year ended December 31, 2008
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Quarterly Reports on
Form 10-Q
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For the quarters ended March 31, 2009 and June 30, 2009
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Current Reports on
Form 8-K
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Filed on March 6, 2009, May 5, 2009, May 8, 2009,
May 20, 2009, June 11, 2009, June 16, 2009,
June 22, 2009, June 23, 2009, July 2, 2009,
July 24, 2009 and August 11, 2009.
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Proxy Statement (Annual Stockholders Meeting)
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Filed on April 1, 2009
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The description of shares of SUA common stock contained in
its registration statement on
Form S-1,
including any amendment or report filed for the purpose of
updating the description.
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Filed on April 22, 2005
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Tower and SUA also incorporate by reference into this proxy
statement/prospectus each document filed with the SEC pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act by
Tower or SUA after the date of this proxy statement/prospectus,
but before the date of the SUA special meeting. To the extent,
however, required by the rules and regulations of the SEC, Tower
and SUA will amend this proxy statement/prospectus to include
information filed after the date of this proxy
statement/prospectus.
Tower has supplied all of the information contained or
incorporated by reference in this proxy statement/prospectus
relating to Tower, as well as all
pro forma
financial
information, and SUA has supplied all information contained or
incorporated by reference in this proxy statement/prospectus
relating to SUA. This document constitutes the prospectus of
Tower and a proxy statement of SUA.
110
TABLE OF
CONTENTS
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Page
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ARTICLE I
THE MERGER; CERTAIN RELATED MATTERS
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Section 1.1
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The Merger
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A-5
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Section 1.2
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Closing; Effective Time
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A-5
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Section 1.3
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Effects of the Merger
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A-6
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Section 1.4
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Certificate of Incorporation; Bylaws
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A-6
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Section 1.5
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Directors and Officers of Surviving Corporation
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A-6
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Section 1.6
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Effect on Capital Stock
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A-6
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Section 1.7
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Treatment of Options and Other Company Equity Awards
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A-7
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Section 1.8
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Certain Adjustments
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A-8
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Section 1.9
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Appraisal Rights
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A-8
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ARTICLE II
PAYMENT AND EXCHANGE OF CERTIFICATES; WITHHOLDING
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Section 2.1
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Payment and Exchange of Certificates
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A-9
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Section 2.2
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Withholding Rights
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A-10
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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Section 3.1
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Corporate Existence and Power
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A-11
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Section 3.2
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Corporate Authorization
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A-11
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Section 3.3
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Governmental Authorization
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A-12
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Section 3.4
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Non-Contravention
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A-12
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Section 3.5
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Capitalization
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A-13
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Section 3.6
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Subsidiaries
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A-13
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Section 3.7
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Company SEC Filings, etc.
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A-14
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Section 3.8
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Company Financial Statements
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A-15
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Section 3.9
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Company SAP Statements
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A-15
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Section 3.10
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Information Supplied
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A-15
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Section 3.11
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Absence of Certain Changes or Events
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A-16
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Section 3.12
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No Undisclosed Material Liabilities
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A-16
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Section 3.13
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Compliance with Laws
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A-16
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Section 3.14
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Litigation
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A-17
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Section 3.15
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Insurance Matters
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A-17
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Section 3.16
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Liabilities and Reserves
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A-19
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Section 3.17
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Title to Properties; Absence of Liens
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A-19
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Section 3.18
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Opinion of Financial Advisor
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A-19
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Section 3.19
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Taxes
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A-19
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Section 3.20
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Employee Benefit Plans and Related Matters; ERISA
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A-20
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Section 3.21
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Employees, Labor Matters
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A-21
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Section 3.22
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Environmental Matters
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A-21
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Section 3.23
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Intellectual Property
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A-21
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Section 3.24
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Material Contracts
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A-22
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Section 3.25
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Brokers and Finders Fees
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A-22
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Section 3.26
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Takeover Laws
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A-23
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Section 3.27
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Rating
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A-23
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Section 3.28
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Affiliate Transactions
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A-23
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Section 3.29
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No Other Representations and Warranties; Disclaimer
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A-23
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A-2
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Page
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
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Section 4.1
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Corporate Existence and Power
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A-24
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Section 4.2
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Corporate Authorization
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A-24
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Section 4.3
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Governmental Authorization
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A-24
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Section 4.4
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Non-Contravention
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A-25
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Section 4.5
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Capitalization; Interim Operations of Merger Sub
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A-25
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Section 4.6
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Parent SEC Filings, etc.
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A-26
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Section 4.7
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Parent Financial Statements
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A-26
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Section 4.8
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Information Supplied
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A-27
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Section 4.9
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Absence of Certain Changes or Events
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A-27
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Section 4.10
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No Undisclosed Material Liabilities
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A-27
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Section 4.11
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Compliance with Laws
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A-27
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Section 4.12
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Litigation
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A-28
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Section 4.13
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Taxes
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A-28
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Section 4.14
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Brokers and Finders Fees
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A-29
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Section 4.15
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Interested Stockholder
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A-29
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Section 4.16
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No Other Representations and Warranties; Disclaimer
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A-29
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ARTICLE V
CONDUCT OF BUSINESS
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Section 5.1
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Conduct of Business by the Company
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A-30
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Section 5.2
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Conduct of Business by Parent
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A-33
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ARTICLE VI
ADDITIONAL AGREEMENTS
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Section 6.1
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Preparation of the Proxy Statement/Prospectus and
Form S-4
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A-33
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Section 6.2
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Stockholders Meeting; Company Board Recommendation
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A-35
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Section 6.3
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No Solicitation
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A-35
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Section 6.4
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Access to Information
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A-38
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Section 6.5
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Reasonable Best Efforts
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A-39
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Section 6.6
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Employee Matters
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A-40
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Section 6.7
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Expenses
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A-41
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Section 6.8
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Transfer Taxes
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A-41
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Section 6.9
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Tax Treatment
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A-41
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Section 6.10
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Directors and Officers Indemnification and Insurance
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A-42
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Section 6.11
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Public Announcements
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A-43
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Section 6.12
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Notification
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A-43
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Section 6.13
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Section 16(b)
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A-44
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Section 6.14
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Listing of Parent Common Stock
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A-44
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Section 6.15
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Delisting of Common Stock
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A-44
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Section 6.16
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Principal Executive Offices of the Surviving Corporation
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A-44
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Section 6.17
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Partner Agent Program Agreement Amendments; Other Partner Agent
Matters
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A-44
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ARTICLE VII
CONDITIONS
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Section 7.1
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Conditions to Each Partys Obligation to Effect the Merger
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A-44
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Section 7.2
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Conditions to Obligations of Parent and Merger Sub
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A-45
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Section 7.3
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Conditions to Obligations of the Company
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A-46
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Section 7.4
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Frustration of Closing Conditions
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A-46
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A-3
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Page
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ARTICLE VIII
TERMINATION AND AMENDMENT
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Section 8.1
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Termination
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A-46
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Section 8.2
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Effect of Termination
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A-48
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Section 8.3
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Termination Payments
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A-48
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Section 8.4
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Procedure for Termination
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A-50
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ARTICLE IX
GENERAL PROVISIONS
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Section 9.1
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Non-Survival of Representations, Warranties, Covenants and
Agreements
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A-50
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Section 9.2
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Notices
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A-50
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Section 9.3
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Interpretation
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A-51
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Section 9.4
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Counterparts; Effectiveness
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A-51
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Section 9.5
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Entire Agreement; No Third Party Beneficiaries
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A-52
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Section 9.6
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Severability
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A-52
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Section 9.7
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Assignment
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A-52
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Section 9.8
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Amendment
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A-52
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Section 9.9
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Extension; Waiver
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A-52
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Section 9.10
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Governing Law and Venue; Waiver of Jury Trial
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A-53
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Section 9.11
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Remedies; Specific Performance
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A-53
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Section 9.12
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Definitions
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A-54
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Exhibit A
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Form of Amended and Restated Certificate of Incorporation of the
Company
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A-62
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Exhibit B
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Parent Tax Assumptions and Representations
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A-64
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Exhibit C
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Company Tax Assumptions and Representations
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A-67
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Exhibit D
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Form of Partner Agent Program Agreement Amendment
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A-70
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A-4
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, executed
on July 22, 2009 and dated as of June 21, 2009 (this
Agreement
), is by and among TOWER GROUP,
INC., a Delaware corporation (
Parent
), TOWER
S.F. MERGER CORPORATION, a Delaware corporation and a wholly
owned Subsidiary of Parent (
Merger Sub
), and
SPECIALTY UNDERWRITERS ALLIANCE, INC., a Delaware
corporation (the
Company
and, collectively
with Parent and Merger Sub, the
parties
).
RECITALS
WHEREAS, the respective Boards of Directors of Parent and Merger
Sub have determined that it is in the best interests of their
respective companies to enter into this Agreement and to
consummate the merger of Merger Sub with and into the Company
(the
Merger
), upon the terms and subject to
the conditions set forth in this Agreement;
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company to enter into
this Agreement and to consummate the Merger, upon the terms and
subject to the conditions set forth in this Agreement, and that
the Merger is fair to, and in the best interests of, the
stockholders of the Company;
WHEREAS, for United States federal income tax purposes, it is
intended that the Merger shall qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the
Code
), and the regulations
promulgated thereunder;
WHEREAS, the parties have entered into that certain Agreement
and Plan of Merger, dated as of June 21, 2009 (the
Original Agreement); and
WHEREAS, the parties wish to amend and restate the Original
Agreement in its entirety, effective as of June 21, 2009,
to correct certain numbers set forth in Section 3.5 and to
correct certain typographical errors.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth
in this Agreement, and intending to be legally bound hereby, the
parties hereby agree as follows:
ARTICLE I
THE MERGER;
CERTAIN RELATED MATTERS
Section
1.1
The
Merger
.
Upon the terms and subject to the
conditions set forth in this Agreement and in accordance with
the DGCL, at the Effective Time, Merger Sub shall be merged with
and into the Company. As a result of the Merger, the separate
corporate existence of Merger Sub will cease and the Company
will continue as the surviving corporation of the Merger under
the DGCL (the
Surviving Corporation
).
Section
1.2
Closing;
Effective Time
.
Subject to the provisions of
Article VII, the closing of the Merger (the
Closing
) will take place at 10:00 a.m.,
New York City time, on the fifth Business Day after the
satisfaction or, to the extent permitted by Law, waiver of the
conditions set forth in Article VII (excluding conditions
that, by their terms, cannot be satisfied until the Closing, but
the Closing shall be subject to the satisfaction or, to the
extent permitted by Law, waiver of those conditions), at the
offices of Stroock & Stroock & Lavan LLP,
180 Maiden Lane, New York, New York, unless another time, date
or place is agreed to in writing by the parties;
provided
,
however
, in the event that the Company
delivers a Walk-Away Notice pursuant to Section 8.1(d)(iii)
and Parent elects to deliver a
Top-Up
Notice, subject to the satisfaction or, to the extent permitted
by Law, waiver of the conditions set forth in Article VII,
the Closing Date shall be the third Business Day
following delivery of such
Top-Up
Notice, unless another time, date or place is agreed to in
writing by the parties. The date on which the Closing actually
occurs is hereinafter referred to as the
Closing
Date
. Subject to the provisions of this Agreement, as
soon as practicable on the Closing Date the Company shall file
with the Secretary of State of the State of Delaware a
certificate of merger, executed in accordance with, and in such
form as is required by, the relevant provisions of the DGCL (the
Certificate of Merger
). The Merger shall
become effective upon the filing of the Certificate of Merger or
at such later time
A-5
as is agreed to by the parties hereto and specified in the
Certificate of Merger (the time at which the Merger becomes
effective is herein referred to as the
Effective
Time
). The parties shall make all other filings or
recordings required under the DGCL in connection with the Merger.
Section
1.3
Effects
of the Merger
.
The Merger shall have the
effects set forth in the applicable provisions of the DGCL.
Without limiting the generality of the foregoing and subject
thereto, at the Effective Time, all the property, rights,
privileges, immunities, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation and all
debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving
Corporation.
Section
1.4
Certificate
of Incorporation; Bylaws
.
At the Effective
Time, the Certificate of Incorporation of the Company shall by
virtue of the Merger be amended and restated in its entirety to
read as set forth on Exhibit A hereto and, as so amended
and restated, shall be the certificate of incorporation of the
Surviving Corporation following the Effective Time until
thereafter amended in accordance with its terms and applicable
Law. At the Effective Time, the bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the
bylaws of the Surviving Corporation following the Effective Time
until thereafter amended in accordance with the Constituent
Documents of the Surviving Corporation and applicable Law,
except that references to Merger Subs name shall be
replaced by references to Specialty Underwriters
Alliance, Inc. This Section 1.4 shall be subject to
the obligations of Parent and the Surviving Corporation under
Section 6.10.
Section
1.5
Directors
and Officers of Surviving Corporation
.
As of
the Effective Time, each of the directors of the Company shall
resign and the directors of Merger Sub, at the Effective Time,
shall be the directors of the Surviving Corporation until their
successors have been duly elected and qualified or until their
earlier death, resignation or removal in accordance with the
Constituent Documents of the Surviving Corporation. The officers
of the Company, at the Effective Time, shall, from and after the
Effective Time, be the officers of the Surviving Corporation
until their successors have been duly appointed and qualified or
until their earlier death, resignation or removal in accordance
with the Constituent Documents of the Surviving Corporation.
Section
1.6
Effect
on Capital Stock
.
At the Effective Time, by
virtue of the Merger and without any action on the part of
Parent, Merger Sub, the Company or the holders of any of the
following securities:
(a) Each share of common stock of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and
nonassessable share of common stock, par value $0.01 per share,
of the Surviving Corporation.
(b) Each share of (i) common stock, par value $0.01
per share, of the Company (such shares, collectively, the
Common Stock
, and each, a
Common
Share
) and (ii) Class B Common Stock, par
value $0.01 per share, of the Company (the
Class B
Stock
, and each, a
Class B
Share
, and the Class B Shares collectively with
the Common Shares, the
Company Shares
), in
each case issued and outstanding immediately prior to the
Effective Time (other than any shares of Common Stock or
Class B Stock to be canceled pursuant to
Section 1.6(c) and any Dissenting Shares), shall be
converted into the right to receive an amount per Company Share
(subject to any applicable withholding Tax specified in
Section 2.2) equal to an amount of Parent Common Stock
equal to the product of one Company Share and the Common
Exchange Ratio (which Common Exchange Ratio is subject to
adjustment as set forth herein) and any cash paid in lieu of
fractional shares in accordance with Section 2.1(d)
(collectively, the
Merger Consideration
). At
the Effective Time, each Company Share converted into the right
to receive the Merger Consideration pursuant to this
Article I shall automatically be cancelled and shall cease
to exist and each holder of a certificate theretofore
representing any such Company Shares (each, a
Certificate
) or non-certificated Company
Shares represented by book-entry (
Book-Entry
Shares
) shall cease to have any rights with respect
thereto, except the right to receive (i) the Merger
Consideration upon surrender of such Certificates or Book-Entry
Shares in accordance with Section 2.1(c), without interest
(subject to any applicable withholding Tax specified in
Section 2.2); and (ii) any dividends and other
distributions in accordance with Section 1.8.
A-6
(c) Each Company Share held in the treasury of the Company,
if any, or otherwise owned by Parent or Merger Sub, or owned by
any direct or indirect Subsidiary of any such Person (other than
Company Shares held in an investment portfolio), in each case
immediately prior to the Effective Time, shall automatically be
canceled and retired and cease to exist without any conversion
thereof and no consideration shall be paid in exchange therefor.
Section 1.7
Treatment
of Options and Other Company Equity Awards
(a) At the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof, each
stock option issued pursuant to an Incentive Plan (each, an
Option
) and other equity-based awards
(excluding Deferred Stock Awards, which are discussed in
Section 1.7(b) below) issued pursuant to an Incentive Plan
denominated in shares of Common Stock (each such award, a
Company Compensatory Award
) that is
outstanding immediately prior to the Effective Time, whether or
not then vested, deliverable or exercisable, shall be assumed by
Parent and converted automatically at the Effective Time into an
option or such other substantially identical equity-based award,
as the case may be, denominated in shares of Parent Common Stock
and which has other terms and conditions substantially identical
to those of the related Company Compensatory Award (including
any accelerated vesting provisions therein) except that
(i) the number of shares of Parent Common Stock subject to
each such award shall be determined by multiplying the number of
shares of Common Stock subject to such Company Compensatory
Award immediately prior to the Effective Time by the Award
Exchange Ratio and (ii) if applicable, the exercise or
purchase price per share of Parent Common Stock (rounded upwards
to the nearest whole cent) shall equal (x) the per share
exercise or purchase price for the shares of Common Stock
otherwise purchasable pursuant to such Company Compensatory
Award immediately prior to the Effective Time divided by
(y) the Award Exchange Ratio;
provided
,
however
, that in no case shall the exchange of an Option
or any other Company Compensatory Award be performed in a manner
that is not in compliance with the adjustment requirements of
Section 409A of the Code and in the case of any Option that
is intended to be an incentive stock option under
Section 422 of the Code, such Option shall be determined in
a manner consistent with the requirements of Section 424(a)
of the Code. The portion of any Options that are vested
and/or
exercisable at the Effective Time shall be converted into vested
and/or
exercisable options, as applicable, denominated in shares of
Parent Common Stock, and the portion of any Options that are
unvested
and/or
not
exercisable at the Effective Time shall, after being converted
into options denominated in shares of Parent Common Stock, be
subject to the same terms and conditions of vesting and
exercisability as the applicable Option was immediately prior to
the Effective Time.
(b) Prior to the Effective Time, the Board of Directors of
the Company or the appropriate committee of the Board of
Directors of the Company, if necessary, shall adopt a resolution
providing that, at the Effective Time, each deferred stock award
in respect of a Company Share issued pursuant to an Incentive
Plan (a
Deferred Stock Award
) shall be
converted into the right to receive a deferred stock award in
respect of a share of Parent Common Stock at the Award Exchange
Ratio, rounded down to the nearest whole share (subject to any
applicable withholding Tax specified in Section 2.2);
provided
that
such converted deferred stock awards
in respect of Parent Common Stock shall remain subject to the
same restrictions that applied to the Deferred Stock Award
immediately prior to the Effective Time and shall otherwise have
the same terms and conditions (including vesting dates and date
of settlement in shares) as were in effect with respect to the
corresponding Deferred Stock Award immediately prior to the
Effective Time. Any portion of any Deferred Stock Award that is
vested as of the Effective Time shall be converted into vested
deferred stock awards in respect of shares of Parent Common
Stock, and any portion of any Deferred Stock Awards that is
unvested at the Effective Time shall, after being converted into
deferred stock awards denominated in shares of Parent Common
Stock, be subject to the same terms and conditions of vesting
(including any accelerated vesting provisions therein) and
delivery as the applicable Deferred Stock Award was immediately
prior to the Effective Time.
(c) Parent shall take such actions as are necessary for the
assumption and conversion of the Options and other Company
Compensatory Awards pursuant to Section 1.7(a), including
the reservation, issuance and listing of shares of Parent Common
Stock as is necessary to effectuate the transactions
contemplated by Section 1.7(a). As soon as reasonably
practicable after the Effective Time, Parent shall deliver to
each holder of any Options and other Company Compensatory Awards
an appropriate notice setting forth such holders
A-7
rights pursuant to such Options and agreements evidencing the
grants of such Company Compensatory Awards, and stating that the
Incentive Plans and such Options and agreements have been
assumed by Parent and shall continue in effect on the same terms
and conditions (subject to the adjustments required by
Section 1.7(a) after giving effect to the Merger and the
terms of the Incentive Plans). Parent shall prepare and file
with the SEC a registration statement on
Form S-8
with respect to the shares of Parent Common Stock issuable upon
exercise of the assumed Company Compensatory Awards promptly
following the Effective Time (and in no event later than 10
Business Days after the Effective Time) and Parent shall
exercise commercially reasonable efforts to maintain the
effectiveness of such registration statement for so long as such
assumed Company Compensatory Awards remain outstanding. The
Company and its counsel shall reasonably cooperate with and
assist Parent in the preparation of such registration statement.
(d) Subject to Parents compliance with the preceding
provisions of this Section 1.7, the parties agree that,
following the Effective Time, no holder of an Option, a Company
Compensatory Award or a Deferred Stock Award or any participant
in any Incentive Plan or employee benefit arrangement of the
Company or under any employment agreement shall have any right
hereunder to acquire any equity interest (including any
phantom stock or stock appreciation rights) in the
Company, any of its Subsidiaries or the Surviving Corporation.
(e) As soon as reasonably practicable following the date of
this Agreement and in any event prior to the Effective Time, the
Companys Board of Directors (or, if appropriate, any
committee administering Incentive Plans) shall adopt such
resolutions and take such actions that are necessary for the
treatment of the Options, Company Compensatory Awards and
Deferred Stock Awards pursuant to this Section 1.7.
Section
1.8
Certain
Adjustments
.
If, between the date of this
Agreement and the Effective Time, the Common Stock or Parent
Common Stock is changed into a different number of shares or a
different class by reason of any reclassification,
recapitalization, reorganization, combination or exchange of
shares, stock split, reverse stock split or a stock dividend or
dividend payable in any other securities or any similar
transaction or any transaction having the effect of any of the
foregoing, the Merger Consideration shall be appropriately
adjusted to provide to the holders of Company Shares and the
holders of Options and Deferred Stock Awards the same economic
effect as contemplated by this Agreement prior to such action
and as so adjusted shall, from and after the date of such event,
be the Merger Consideration.
Section
1.9
Appraisal
Rights
.
Notwithstanding anything in this
Agreement to the contrary, Class B Shares that are issued
and outstanding immediately prior to the Effective Time and
which are held by a stockholder who did not vote in favor of the
Merger (or consent thereto in writing) and who is entitled to
demand and properly demands appraisal of such shares pursuant
to, and who complies in all respects with, the provisions of
Section 262 of the DGCL (the
Dissenting
Stockholders
), shall not be converted into or be
exchangeable for the right to receive the Merger Consideration
(the
Dissenting Shares
), but instead such
holder shall be entitled to payment by the Company of the fair
value of such shares in accordance with the provisions of
Section 262 of the DGCL (and at the Effective Time, such
Dissenting Shares shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and such
holder shall cease to have any rights with respect thereto,
except the right to receive the fair value of such Dissenting
Shares in accordance with the provisions of Section 262 of
the DGCL), unless and until such holder shall have failed to
perfect or shall have effectively withdrawn or lost rights to
appraisal under the DGCL. If any Dissenting Stockholder shall
have failed to perfect or shall have effectively withdrawn or
lost such right, such holders Class B Shares shall
thereupon be treated as if they had been converted into and
become exchangeable for the right to receive, as of the
Effective Time, the Merger Consideration for each such
Class B Share, in accordance with Section 1.6(b),
without any interest thereon. The Company shall give Parent
(i) prompt notice of any written demands for appraisal of
any Class B Shares, attempted withdrawals of such demands
and any other instruments served pursuant to Section 262 of
the DGCL and received by the Company relating to
stockholders rights of appraisal, and (ii) the
opportunity to participate in all negotiations and proceedings
with respect to demands for appraisal under the DGCL.
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ARTICLE II
PAYMENT AND
EXCHANGE OF CERTIFICATES; WITHHOLDING
Section
2.1
Payment
and Exchange of Certificates
.
(a) Following the date of this Agreement and in any event
not less than five (5) Business Days prior to the mailing
of the Proxy Statement/Prospectus to the stockholders of the
Company, Parent shall designate a bank or trust company
reasonably acceptable to the Company to act as exchange agent
(the
Exchange Agent
) for purposes of, among
other things, paying the Merger Consideration. At or prior to
the Effective Time, Parent shall deposit with the Exchange
Agent, for the benefit of the holders of Certificates,
Book-Entry Shares and Deferred Stock Awards, cash and
certificates, or at Parents option, shares in book entry
form representing the shares of Parent Common Stock to be
exchanged in the Merger, in an amount sufficient to pay the
aggregate Merger Consideration to which all holders of Company
Shares and Deferred Stock Awards become entitled pursuant to
Article I and such cash in lieu of fractional shares to be
paid pursuant to Section 2.1(d) (the
Aggregate
Merger Consideration
) (the Aggregate Merger
Consideration, and any proceeds thereof being hereinafter
referred to as the
Exchange Fund
).
(b) The Exchange Agent shall invest the cash included in
the Exchange Fund as directed in writing by Parent in
(i) direct obligations of the United States of America,
(ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for payment of
all principal and interest, and (iii) commercial paper
obligations rated
A-1
or P1 or
better by Moodys Investors Service, Inc. or
Standard & Poors Corporation, respectively, or a
combination of the foregoing or in certificates of deposit, bank
repurchase agreements or bankers acceptances of commercial
banks with capital exceeding $1,000,000,000 and, in any such
case, no such instrument shall have a maturity exceeding three
months. Any interest and other income resulting from such
investments shall be paid to and be income of Parent. If for any
reason (including losses) the cash in the Exchange Fund shall be
insufficient to fully satisfy all of the payment obligations to
be made in cash by the Exchange Agent hereunder, Parent shall
promptly deposit cash into the Exchange Fund in an amount that
is equal to the deficiency required to fully satisfy such cash
payment obligations.
(c) Promptly, and in any event no later than three
(3) Business Days, after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each
Person who was a record holder of Company Shares immediately
prior to the Effective Time, whose Company Shares were converted
pursuant to Article I into the right to receive the Merger
Consideration, (A) a form of letter of transmittal for use
in effecting the surrender of Certificates in order to receive
payment of the Merger Consideration (which letter of transmittal
shall specify that delivery shall be effected, and risk of loss
and title to the Certificate shall pass, only upon actual
delivery of the Certificates to the Exchange Agent (or effective
affidavits of loss in lieu thereof), and shall otherwise be in
customary form and contain customary provisions), and
(B) instructions for use in effecting the surrender of the
Certificates (or effective affidavits of loss in lieu thereof)
in exchange for the Merger Consideration and any dividends or
other distributions to which such holder is entitled pursuant to
Section 1.8. Upon surrender to the Exchange Agent of a
Certificate (or effective affidavit of loss in lieu thereof),
together with a properly completed and executed letter of
transmittal and any other required documents, the Exchange Agent
shall promptly deliver to the holder of the Company Shares
represented by the Certificate (or effective affidavit of loss
in lieu thereof), or as otherwise directed in the letter of
transmittal, the Merger Consideration in the form of shares of
Parent Common Stock and cash and any dividends or other
distributions to which such holder is entitled pursuant to
Section 1.8, with regard to each Company Share represented
by such Certificate, less any required withholding Taxes as
specified in Section 2.2, and the Certificate shall be
canceled. No interest shall be paid or accrued on the Merger
Consideration, payable upon the surrender of Certificates. If
delivery of the Merger Consideration is to be made to a Person
holding a Certificate other than the Person in whose name a
surrendered Certificate is registered, it shall be a condition
of delivery that the Certificate so surrendered must be properly
endorsed or otherwise be in proper form for transfer, and the
Person who surrenders the Certificate must provide funds for
payment of any transfer or other Taxes required by reason of
delivery to a Person other than the registered holder of the
surrendered Certificate or establish to the reasonable
satisfaction of the Surviving Corporation that all Taxes have
been paid or are not
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applicable. Subject to Section 1.9, after the Effective
Time, a Certificate shall represent only the right to receive
the Merger Consideration in respect of the Company Shares
represented by such Certificate. Notwithstanding anything to the
contrary contained in this Agreement, any holder of Book-Entry
Shares shall not be required to deliver a Certificate or an
executed letter of transmittal to the Exchange Agent in order to
receive the Merger Consideration that such holder is entitled to
receive pursuant to this Article II.
(d) Notwithstanding anything in this Agreement to the
contrary, no fraction of a share of Parent Common Stock will be
issued in connection with the Merger, and, in lieu thereof, any
Company stockholder who would otherwise have been entitled to a
fraction of a share of Parent Common Stock, upon surrender of
title to Company Shares for exchange, shall be paid upon such
surrender (and after taking into account and aggregating Company
Shares represented by all Certificates and Book-Entry Shares
surrendered by such holder), cash (without interest) in an
amount equal to the product obtained by multiplying (i) the
fractional share interest to which such stockholder (after
taking into account and aggregating all Company Shares
represented by all Certificates and Book-Entry Shares) would
otherwise be entitled by (ii) the Closing Date Market Price.
(e) If a Certificate has been lost, stolen or destroyed,
Parent and the Surviving Corporation will cause the Exchange
Agent to accept an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed instead of the
Certificate;
provided
that
the Surviving
Corporation may require the Person to whom any Merger
Consideration is paid, as a condition precedent to the payment
thereof, to give the Surviving Corporation a bond in such
reasonable amount as it may direct or otherwise indemnify the
Surviving Corporation in a manner reasonably satisfactory to the
Surviving Corporation against any claim that may be made against
the Surviving Corporation with respect to the Certificate
claimed to have been lost, stolen or destroyed.
(f) At any time which is more than six (6) months
after the Effective Time, Parent shall be entitled to require
the Exchange Agent to deliver to it any portion of the Exchange
Fund that had been deposited with the Exchange Agent and has not
been disbursed in accordance with this Article II
(including interest and other income received by the Exchange
Agent in respect of the funds made available to it), and after
the Exchange Fund has been delivered to Parent, Persons entitled
to payment in accordance with this Article II shall be
entitled to look solely to Parent (subject to abandoned
property, escheat or similar Laws) for payment of the Merger
Consideration upon surrender of the Certificates held by them,
without any interest thereon. Any portion of the Exchange Fund
deposited with the Exchange Agent remaining unclaimed by holders
of Company Shares five (5) years after the Effective Time
shall, to the extent permitted by applicable Law, become the
property of Parent free and clear of any claims or interest of
any Person previously entitled thereto. None of the Surviving
Corporation, Parent, Merger Sub, any of their respective
Affiliates or the Exchange Agent will be liable to any Person
entitled to payment under this Article II for any
consideration which is delivered, in accordance with the terms
of this Agreement, to Parent in accordance with the immediately
preceding sentence or to a public official or Governmental
Entity pursuant to any abandoned property, escheat or similar
Law.
(g) From and after the Effective Time, the Surviving
Corporation shall not record on the stock transfer books of the
Company or the Surviving Corporation any transfers of shares of
Common Stock or shares of Class B Stock that were
outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates (or effective affidavits of
loss in lieu thereof) or Book-Entry Shares are presented for
transfer, they shall be canceled and treated as having been
surrendered for the Merger Consideration in respect of the
Company Shares represented thereby.
Section
2.2
Withholding
Rights
.
Each of Parent and the Exchange Agent
shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of
Company Shares, Options, Company Compensatory Awards or Deferred
Stock Awards such amounts as it is lawfully required to deduct
and withhold with respect to the making of such payment under
the Code or any provision of state or local Law or the Laws of
any other domestic or foreign jurisdiction. To the extent that
amounts are so withheld and paid to the appropriate taxing
authority by Parent or the Exchange Agent, as the case may be,
such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of
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the Company Shares, Options, Company Compensatory Awards or
Deferred Stock Awards, as the case may be, in respect of which
such deduction and withholding was made.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except as (x) disclosed in the Company SEC Documents filed
with or furnished to the SEC prior to the date of this Agreement
(other than statements in the Risk Factors sections contained in
the Company SEC Documents or any statements included in any
forward-looking statements disclaimer contained in
the Company SEC Documents) or (y) set forth in the
disclosure letter delivered by the Company to Parent on or prior
to the date of this Agreement (the
Company Disclosure
Schedule
), the Company represents and warrants to
Parent and Merger Sub as set forth in this Article III. For
purposes of the representations and warranties of the Company
contained herein, disclosure in any section of the Company
Disclosure Schedule of any facts or circumstances shall be
deemed to be disclosure of such facts or circumstances with
respect to all representations or warranties by the Company to
which the relevance of such disclosure to the applicable
representation and warranty is reasonably apparent on the face
thereof. The inclusion of any information in the Company
Disclosure Schedule or other document delivered by the Company
pursuant to this Agreement shall not be deemed to be an
admission or evidence of the materiality of such item, nor shall
it establish a standard of materiality for any purpose
whatsoever.
Section
3.1
Corporate
Existence and Power
.
The Company is a
corporation duly incorporated, validly existing and in good
standing under the Laws of the State of Delaware. Each of the
Company and its Subsidiaries has all requisite corporate,
partnership or other similar powers and authorities and all
governmental licenses, authorizations, permits, certificates,
registrations, consents, franchises, variances, exemptions,
orders and approvals required to own, lease and operate their
respective properties and to carry on their respective
businesses as currently conducted (the
Company
Permits
), except for those powers, licenses,
authorizations, permits, consents, franchises, variances,
exemptions, orders and approvals the absence of which would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect. The Company and its
Subsidiaries are in compliance with the terms of the Company
Permits, except where the failure to be in such compliance would
not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect. The Company is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is
required, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect. The Company has made available to Parent true and
complete copies of the Constituent Documents of the Company and
each of its Subsidiaries as currently in effect.
Section
3.2
Corporate
Authorization
.
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions to
which it is a party contemplated hereby subject, in the case of
the Merger, to obtaining the affirmative vote of the
stockholders of the Company representing a majority of the votes
eligible to be cast by such holders approving the Merger and
adopting this Agreement at a stockholders meeting duly called
and held for such purpose (the
Requisite Stockholder
Vote
). The execution, delivery and performance by the
Company of this Agreement and the consummation by the Company of
the transactions to which it is a party contemplated hereby have
been duly and validly authorized and approved by the Board of
Directors of the Company, and no other corporate action on the
part of the Company is necessary to authorize this Agreement or
to consummate the transactions to which it is a party
contemplated hereby, except that consummation of the Merger is
subject to the Requisite Stockholder Vote, and to the
effectiveness of the Certificate of Merger with the Secretary of
State of the State of Delaware.
(b) The Board of Directors of the Company, at a meeting
duly called and held and at which a quorum of directors was
present, has by resolutions duly adopted unanimously
(i) determined that this Agreement and the Merger are fair
to and in the best interests of the Company and its stockholders
and declared the Merger to be
A-11
advisable, (ii) approved and adopted this Agreement and the
plan of merger herein providing for the Merger, upon the terms
and subject to the conditions set forth herein,
(iii) approved the execution, delivery and performance by
the Company of this Agreement and the consummation of the
transactions to which it is a party contemplated hereby, upon
the terms and subject to the conditions set forth herein and
(iv) resolved, subject to Section 6.3, to recommend
approval of each of the matters constituting the Requisite
Stockholder Vote by the stockholders of the Company (such
recommendation, the
Company Board
Recommendation
) and that such matters and
recommendation be submitted for consideration at the Company
Stockholders Meeting.
(c) This Agreement has been duly executed and delivered by
the Company and, assuming due power and authority of, and due
execution and delivery by, the other parties, constitutes a
valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, moratorium, reorganization or
similar Laws affecting the rights of creditors generally and the
availability of equitable remedies (regardless of whether such
enforceability is considered in a proceeding in equity or at
law) (together, the
Bankruptcy and Equity
Exception
). The Requisite Stockholder Vote is the only
vote of the holders of any class or series of capital stock of
the Company necessary to adopt this Agreement or approve the
transactions to which the Company is a party contemplated hereby.
Section
3.3
Governmental
Authorization
.
The execution, delivery and
performance by the Company of this Agreement and the
consummation by the Company of the transactions to which it is a
party contemplated hereby require at or prior to the Closing no
consent or approval by, or filing with, any Governmental Entity,
other than (a) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware and appropriate
documents with the relevant authorities of other states in which
the Company is qualified to do business, (b) compliance
with any applicable requirements of the HSR Act,
(c) compliance with any applicable requirements of the
Securities Act, the Exchange Act, and any other applicable
federal or state securities Laws or blue sky Laws,
(d) compliance with any applicable requirements of Nasdaq,
(e) approvals or filings under all applicable state Laws
regulating the business of insurance (collectively,
Insurance Laws
) as set forth in
Section 3.3 of the Company Disclosure Schedule (the
Company Insurance Approvals
), (f) the
Parent Insurance Approvals (assuming the accuracy and
completeness of Section 4.3(e)), (g) those consents,
approvals or filings as may be required as a result of the
business or identity of Parent or any of its Affiliates
(assuming the accuracy and completeness of Section 4.3(e))
and (h) any other consents, approvals or filings the
failure of which to be obtained or made would not, individually
or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect or prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
Section
3.4
Non-Contravention
.
The
execution, delivery and performance by the Company of this
Agreement do not, and the consummation of the transactions to
which it is a party contemplated hereby will not,
(a) violate or conflict with or result in any breach of any
provision of the Constituent Documents of the Company or any of
its Subsidiaries, (b) assuming receipt of the Requisite
Stockholder Vote and compliance with the matters referred to in
Section 3.3 and Section 4.3 (and assuming the accuracy
and completeness of Section 4.3(e)), violate or conflict
with any provision of any applicable Law, Order or Company
Permit, (c) violate or conflict with or result in any
breach or constitute a default, or an event that, with or
without notice or lapse of time or both, would constitute a
default under, or cause the termination, cancellation,
acceleration or other change of any right or obligation or the
loss of any benefit to which the Company or any of its
Subsidiaries is entitled, or require consent by any Person
under, any loan or credit agreement, note, mortgage, indenture,
lease, Company Benefit Plan, or other agreement, obligation or
instrument to which the Company or any Subsidiary of the Company
is a party, or by which they or any of their respective
properties or assets may be bound or affected and the
performance of which involves, alone or together with a series
of other related loans, credit agreements, notes, mortgages,
indentures, leases, Company Benefit Plans, agreements,
obligations or instruments, annual consideration in excess of
$250,000 or (d) subject to the receipt of the Parent
Insurance Approvals (and assuming the accuracy and completeness
of Section 4.3(e)), result in the creation or imposition of
any Lien on any asset of the Company or any of its Subsidiaries,
except in the case of clause (b), (c) or (d), as would not,
individually or in the aggregate, reasonably be expected to have
a
A-12
Company Material Adverse Effect or prevent or materially delay
the consummation of the transactions contemplated by this
Agreement.
Section
3.5
Capitalization
.
(a) The authorized capital stock of the Company consists of
(i) thirty million (30,000,000) shares of Common Shares,
par value $0.01 per share, (ii) two million (2,000,000)
Class B Shares, par value $0.01 per share, and
(iii) one million (1,000,000) shares of preferred stock,
par value $0.01 per share (the
Company Preferred
Stock
). As of June 19, 2009 (the
Company
Capitalization Date
), (A) 14,779,417 Common
Shares were issued and 14,571,596 Common Shares were
outstanding, (B) 1,333,884 Class B Shares were issued
and outstanding and (C) no shares of Company Preferred
Stock were issued and outstanding. As of the Company
Capitalization Date, (1) Options to purchase an aggregate
of 718,066 Common Shares (of which, Options to purchase an
aggregate of 713,066 Common Shares were currently exercisable)
were issued and outstanding, (2) Deferred Stock Awards in
respect of an aggregate of 330,460 Common Shares were issued and
outstanding and (3) 207,821 Common Shares were held by the
Company in its treasury and 1,414,526 Common Shares were
reserved for issuance upon the exercise of outstanding Options
and Deferred Stock Awards. Except for issuances of 29,012
Class B Shares to Partner Agents and 1,000 shares of
common stock of SUA Insurance Services, Inc. to the Company,
from March 31, 2009 to the date hereof, the Company has not
issued or permitted to be issued any Company Securities or
Company Subsidiary Securities, other than pursuant to and as
required by the terms of the Incentive Plans and, from
March 31, 2009 to the date hereof, the Company has not
issued any stock options or other awards under the Incentive
Plans. All outstanding shares of capital stock of the Company
have been, and all Common Shares that may be issued pursuant to
any Incentive Plan will be, when issued in accordance with the
respective terms thereof, duly authorized and validly issued and
are (or, in the case of Common Shares that have not yet been
issued, will be) fully paid and nonassessable, and free and
clear of preemptive or other similar rights, and were not (or,
in the case of Common Shares that have not yet been issued, will
not be) issued in violation of the Constituent Documents of the
Company. No Subsidiary or controlled Affiliate of the Company
owns any Company Shares.
(b) Except as set forth in Section 3.5(a), as of the
Company Capitalization Date, there are no outstanding
(i) shares of capital stock or voting securities of or
ownership interests in the Company, (ii) securities of the
Company convertible into or exercisable or exchangeable for
shares of capital stock or voting securities of or ownership
interests in the Company or (iii) options or other rights
to acquire from the Company, or other obligations of the Company
to issue or pay cash valued by reference to, any capital stock
or other voting securities or ownership interests in or
securities convertible into or exercisable or exchangeable for
capital stock or voting securities or ownership interests in the
Company (the items in clauses (i), (ii), and (iii) being
referred to collectively as the
Company
Securities
). As of the date of this Agreement, there
are no binding obligations of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any of
the Company Securities.
(c) Since March 31, 2009 through the date of this
Agreement, the Company has not declared, set aside, made or paid
to the stockholders of the Company any dividends or other
distributions (whether in cash, stock or property) in respect of
any of its capital stock.
Section
3.6
Subsidiaries
.
Section 3.6
of the Company Disclosure Schedule lists, as of the date of this
Agreement, each of the Companys Subsidiaries and its
jurisdiction of incorporation, formation or domicile. All of the
outstanding capital stock of, or other voting securities or
ownership interests in, each of the Companys Subsidiaries
is owned beneficially and of record by the Company, directly or
indirectly, free and clear of any Lien and free of any
restriction on the right to vote, sell or otherwise dispose of
such capital stock or other voting securities or ownership
interests, including preemptive or other similar rights (other
than those restrictions under applicable Insurance Laws, the
Securities Act and the Exchange Act). All outstanding shares of
capital stock of each Subsidiary of the Company have been duly
authorized and validly issued and are fully paid and
nonassessable and were not issued in violation of the
Constituent Documents of such Subsidiary of the Company. There
are no outstanding (a) shares of capital stock or voting
securities of or ownership interests in any Subsidiary of the
Company, (b) securities of the Company or any Subsidiary of
the Company convertible into or exercisable or exchangeable for
shares of capital stock or other voting securities
A-13
or ownership interests in any Subsidiary of the Company or
(c) options or other rights to acquire from the Company or
any Subsidiary of the Company, or other obligation of the
Company or any Subsidiary of the Company to issue or pay cash
valued by reference to, any capital stock or other voting
securities or ownership interests in, or any securities
convertible into or exercisable or exchangeable for any capital
stock or other voting securities or ownership interests in, any
Subsidiary of the Company (the items in clauses (a),
(b) and (c) being referred to collectively as the
Company Subsidiary Securities
). As of the
date of this Agreement, there are no binding obligations of the
Company or any Subsidiary of the Company to repurchase, redeem
or otherwise acquire any of the Company Subsidiary Securities.
Each of the Subsidiaries of the Company is a corporation duly
organized, validly existing and in good standing under the Laws
of the jurisdiction in which it is organized and has all
requisite power and authority to own, lease and operate its
properties and assets and to carry on its business as it is
currently being conducted. Each of the Subsidiaries of the
Company is duly qualified, authorized or licensed to do business
in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such
qualification, authorization or licensing necessary, except to
the extent that the failure to be so qualified, authorized or
licensed or to be in good standing would not, individually or in
the aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section
3.7
Company
SEC Filings, etc
.
(a) The Company has timely filed all reports, schedules,
forms, registration statements and other documents required to
be filed by the Company with the SEC since January 1, 2007
(together with any documents furnished during such period by the
Company to the SEC on a voluntary basis on Current Reports on
Form 8-K
and any reports, schedules, forms, registration statements and
other documents filed with the SEC subsequent to the date
hereof, collectively, the
Company SEC
Documents
). Each of the Company SEC Documents, as
amended prior to the date of this Agreement, complied (and each
Company SEC Document filed subsequent to the date hereof will
comply) in all material respects with, to the extent in effect
at the time of filing or furnishing, the requirements of the
Securities Act and the Exchange Act applicable to such Company
SEC Documents, and none of the Company SEC Documents when filed
or furnished or, if amended prior to the date of this Agreement,
as of the date of such amendment, contained, or with respect to
Company SEC Documents filed subsequent to the date hereof, will
contain, any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The Company maintains a system of internal control over
financial reporting (within the meaning of
Rules 13a-15(f)
and
15d-15(f)
of
the Exchange Act) sufficient to provide reasonable assurances
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP. The Company (i) maintains disclosure
controls and procedures (within the meaning of
Rules 13a-15(e)
and
15d-15(e)
of
the Exchange Act) sufficient to ensure that information required
to be disclosed by the Company in the reports that it files and
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, including that information required
to be disclosed by the Company in the reports that it files and
submits under the Exchange Act is accumulated and communicated
to management of the Company, as appropriate, to allow timely
decisions regarding required disclosure and (ii) has
disclosed, based upon the most recent (prior to the date of this
Agreement) evaluation by the chief executive officer and chief
financial officer of the Company of the Companys internal
control over financial reporting, to its auditors and the audit
committee of the Board of Directors of the Company (A) all
significant deficiencies and material weaknesses in the design
or operation of the Companys internal control over
financial reporting which are reasonably likely to adversely
affect in any material respect its ability to record, process,
summarize and report financial data and (B) any fraud,
whether or not material, that involves management or other
employees who have a significant role in the Companys
internal control over financial reporting. The Company has made
available to Parent true and complete copies of any such
disclosure made by management to the Companys independent
auditors and the audit committee of the Board of Directors of
the Company since January 1, 2007.
(c) Neither the Company nor any of its Subsidiaries is a
party to, or has any commitment to become a party to, any joint
venture, off-balance sheet partnership or any similar Contract
(including any Contract relating to any transaction or
relationship between or among the Company and any of its
Subsidiaries, on the
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one hand, and any unconsolidated Affiliate, including any
structured finance, special purpose or limited purpose entity,
on the other hand, or any off-balance sheet
arrangement (as defined in Item 303(a) of
Regulation S-K
of the SEC)), where the result, purpose or intended effect of
such Contract is to avoid disclosure of any material transaction
involving, or material liabilities of, the Company or any of its
Subsidiaries in the Company SEC Documents.
Section
3.8
Company
Financial Statements
.
The consolidated
financial statements (including all related notes thereto) of
the Company included in the Company SEC Documents (if amended,
as of the date of the last such amendment filed prior to the
date of this Agreement) fairly present in all material respects
the consolidated financial position of the Company and its
consolidated Subsidiaries, as at the respective dates thereof,
and the consolidated results of their operations, the changes in
stockholders equity and their consolidated cash flows for
the respective periods then ended (subject, in the case of the
unaudited statements, to normal year-end audit adjustments and
to the absence of information or notes not required by GAAP to
be included in interim financial statements) in conformity with
GAAP during the periods involved (except, in the case of the
unaudited statements, as permitted by the SEC) applied on a
consistent basis (except as may be indicated therein or in the
notes thereto).
Section
3.9
Company
SAP Statements
.
Since January 1, 2007,
each of the Company Insurance Subsidiaries has filed all annual
and quarterly statements, together with all exhibits,
interrogatories, notes, schedules and any actuarial opinions,
affirmations or certifications or other supporting documents in
connection therewith required to be filed with or submitted to
the insurance departments of their respective jurisdictions of
domicile on forms prescribed or permitted by such department
(collectively, the
Company SAP Statements
),
except for such failures to file or submit which would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect. The Company has delivered or
made available to Parent, to the extent permitted by applicable
Law, true and complete copies of all annual Company SAP
Statements for each Company Insurance Subsidiary for the periods
beginning January 1, 2007 and through the date hereof and
the quarterly Company SAP Statements for each Company Insurance
Subsidiary for the quarterly periods ended March 31, 2009
and, once duly and timely filed, June 30, 2009, each in the
form (including exhibits, annexes and any amendments thereto)
filed with the applicable insurance regulatory authority and
true and complete copies of all examination reports of insurance
departments and any insurance regulatory authorities received by
the Company or any of its Subsidiaries on or after
January 1, 2007 and through the date hereof. The Company
SAP Statements were prepared in all material respects in
conformity with SAP applied on a consistent basis for the
periods covered thereby (except as may be indicated in the notes
thereto), and the Company SAP Statements fairly present, in all
material respects, the statutory financial position of such
Company Insurance Subsidiaries as at the respective dates
thereof and the statutory results of operations of such Company
Insurance Subsidiaries for the respective periods then ended. No
material deficiency has been asserted in writing with respect to
the Company SAP Statements by the domiciliary state insurance
department of such filing Company Insurance Subsidiary that has
not been remedied. The annual statutory balance sheets and
income statements included in the Company SAP Statements have
been, where required by applicable Insurance Law, audited by an
independent accounting firm of recognized national or
international reputation, and the Company has delivered or made
available to Parent true and complete copies of such audit
opinions.
Section
3.10
Information
Supplied
.
The information supplied or to be
supplied by the Company specifically for inclusion in the
Form S-4
shall not, at the time the
Form S-4
is declared effective by the SEC, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, except that no representation or
warranty is made by the Company with respect to statements made
therein based on information supplied by or on behalf of Parent
or Merger Sub specifically for inclusion in the
Form S-4.
The Proxy Statement/Prospectus will not, at the date the Proxy
Statement/Prospectus is first mailed to the stockholders of the
Company and at the time of the Company Stockholders Meeting,
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except
that, in each case, no representation or warranty is made by the
Company
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with respect to statements made therein based on information
supplied by or on behalf of Parent or Merger Sub specifically
for inclusion in the Proxy Statement/Prospectus.
Section
3.11
Absence
of Certain Changes or Events
.
Since
December 31, 2008, (i) the Company and its
Subsidiaries have conducted their respective businesses in the
ordinary course consistent with their past practices,
(ii) there has not been any event, change, circumstance or
effect that has had or is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect and (iii) the Company has not taken any action or
failed to take any action that would have resulted in a breach
of Sections 5.1(a), 5.1(b)(ii), 5.1(b)(iv), 5.1(b)(v),
5.1(b)(vi), 5.1(b)(viii), 5.1(b)(xi), 5.1(b)(xii), 5.1(b)(xiii),
5.1(b)(xvii), 5.1(b)(xviii) (other than with respect to
underwriting, claims handling or loss control practices,
guidelines or policies), or with respect to the forgoing
sections, Section 5.1(b)(xx), had such sections been in
effect since December 31, 2008.
Section
3.12
No
Undisclosed Material Liabilities
.
There are
no liabilities or obligations of the Company or any of its
Subsidiaries of any nature, whether accrued, contingent,
absolute, determined, determinable or otherwise, whether or not
required by GAAP to be reflected on a consolidated balance sheet
of the Company and its Subsidiaries other than:
(a) liabilities or obligations reflected or reserved
against in the Companys consolidated balance sheet as of
March 31, 2009 included in the Company SEC Documents or in
the notes thereto; (b) insurance claims or related
litigation or arbitration arising in the ordinary course of
business since March 31, 2009; (c) liabilities or
obligations that were incurred since March 31, 2009 in the
ordinary course of business; and (d) liabilities or
obligations which would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
Section
3.13
Compliance
with Laws
.
(a) Since January 1, 2007, (i) the business and
operations of the Company and its Subsidiaries have been
conducted in compliance with all applicable Laws (including
Insurance Laws) and (ii) the Company has complied with the
applicable listing and corporate governance rules and
regulations of Nasdaq except, in each case, where the failure to
so conduct such business and operations or comply with such
rules and regulations would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect, or prevent or materially delay the consummation
of the transactions contemplated by this Agreement.
(b) All of the Company Permits of each Company Insurance
Subsidiary conducting insurance operations are in full force and
effect in accordance with their terms and there is no proceeding
or investigation to which the Company or any Subsidiary of the
Company is subject before a Governmental Entity that is pending
or threatened in writing that would reasonably be expected to
result in the revocation, failure to renew or suspension of, or
placement of a restriction on, any such Company Permits, except
where the failure to be in full force and effect in accordance
with their terms, revocation, failure to renew, suspension or
restriction would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect, or prevent or materially delay the consummation of the
transactions contemplated by this Agreement.
(c) There is no proceeding to which the Company or any
Subsidiaries of the Company is subject before any Governmental
Entity pending or threatened in writing regarding whether any of
the Subsidiaries of the Company has violated any applicable Laws
(including Insurance Laws), nor, any investigation by any
Governmental Entity pending or threatened in writing with
respect to possible violations of any applicable Laws, except
for proceedings or investigations relating to violations or
possible violations which would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect, or prevent or materially delay the consummation
of the transactions contemplated by this Agreement. Since
January 1, 2007, each Company Insurance Subsidiary has
filed all material reports required to be filed by it with its
domiciliary state insurance department or such failure to file
has been remedied. There are no written agreements, memoranda of
understanding, commitment letters or similar undertakings
binding on the Company Insurance Subsidiaries to which the
Company or any Company Insurance Subsidiary is a party, on the
one hand, and any Governmental Entity is a party or addressee,
on the other hand, or Orders specifically with respect to the
Company or any Company Insurance Subsidiary, that (i) limit
in any material respect the ability of any of the Company
Insurance Subsidiaries to issue insurance policies under the
Company Permits, (ii) impose any requirements on the
Company or any of the Company Insurance Subsidiaries in respect
of risk-based capital requirements that materially increase or
modify the risk-based capital requirements imposed
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under applicable Insurance Laws, (iii) relate to the
ability of any of the Company Insurance Subsidiaries to pay
dividends or (iv) restrict in any material respect the
conduct of business of the Company or any of the Company
Insurance Subsidiaries.
Section
3.14
Litigation
.
There
is no action, suit, investigation, claim, complaint, demand,
summons, cease and desist letter, subpoena, injunction, notice
of violation or other proceeding pending against or threatened
in writing against the Company or any of its Subsidiaries or
pending against or threatened in writing against any present or
former officer, director or employee of the Company or any
Subsidiary of the Company in connection with which the Company
or any Subsidiary of the Company has an indemnification
obligation, before any Governmental Entity (other than insurance
claims litigation or arbitration arising in the ordinary course
of business), which, if determined or resolved adversely in
accordance with the plaintiffs or claimants demands,
would, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect, or would reasonably
be expected to prevent or materially delay the consummation of
the transactions contemplated hereby. There is no Order
outstanding against the Company or any of its Subsidiaries which
would, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect, or would reasonably
be expected to prevent or materially delay the consummation of
the transactions contemplated hereby.
Section
3.15
Insurance
Matters
.
(a) Except for immaterial facultative reinsurance
placements, Section 3.15 of the Company Disclosure Schedule
sets forth a true and complete list, as of the date hereof, of
all ceded and assumed reinsurance or retrocession treaties,
contracts and arrangements, including pooling arrangements
(i) in force as of the date of this Agreement to which the
Company or any of its Subsidiaries is a party, including any
such treaty, contract or arrangement with any Affiliate of the
Company and (ii) that have expired or terminated and under
which any material liability, obligation or right continues in
force as of the date hereof (the treaties, contracts or
arrangements referred to in clauses (i) and
(ii) collectively, the
Company Reinsurance
Agreements
). Neither the Company nor any of its
Subsidiaries has any liabilities or obligations under any
Company Reinsurance Agreement that has expired or terminated,
other than possible reinstatement premiums if the Company makes
a claim under the Company Reinsurance Agreements set forth in
Section 3.15 of the Company Disclosure Schedule. The
Company Reinsurance Agreements are in full force and effect in
accordance with their terms. Neither the Company nor any
Subsidiary of the Company is in material default as to any
material provision of any Company Reinsurance Agreement. Since
January 1, 2007, neither the Company nor any of its
Subsidiaries has received any written notice to the effect that
(i) the financial condition of any reinsurer party to any
Company Reinsurance Agreement is materially impaired with the
result that a default thereunder may reasonably be anticipated
or (ii) there is a dispute with respect to any material
amounts recoverable or payable by the Company or any of its
Subsidiaries pursuant to any Company Reinsurance Agreement.
(b) With respect to any Company Reinsurance Agreement for
which any Company Insurance Subsidiary has taken credit for
reinsurance ceded on its Company SAP Statement, (i) there
is no written or oral agreement between any of the Company or
any Subsidiary of the Company and the assuming reinsurer that
would under any circumstances reduce, limit, mitigate or
otherwise affect any actual or potential loss to the parties
under any such Company Reinsurance Agreement, other than inuring
contracts that are explicitly defined in any such Company
Reinsurance Agreement, (ii) for each such Company
Reinsurance Agreement entered into, renewed or amended on or
after January 1, 2007, for which risk transfer is not
reasonably considered to be self-evident, documentation
concerning the economic intent of the transaction and the risk
transfer analysis evidencing the proper accounting treatment, as
required by SSAP No. 62, is available for review by the
domiciliary state insurance departments for each of the Company
Insurance Subsidiaries, (iii) from and after
January 1, 2007, each of the Company Insurance Subsidiaries
complies and has complied in all material respects with all of
the requirements set forth in SSAP No. 62 and
(iv) from and after January 1, 2007, each of the
Company Insurance Subsidiaries has and has had appropriate
controls in place to monitor the use of reinsurance and comply
with the provisions of SSAP No. 62.
(c) Prior to the date of this Agreement, the Company has
made available to Parent a true and complete copy of all
actuarial reports prepared by actuaries, independent or
otherwise, (i) with respect to any Company
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Insurance Subsidiary since January 1, 2007 and
(ii) relating to, prepared pursuant to or prepared in
connection with, any of the OneBeacon Arrangements, in each
case, along with all material attachments, addenda, supplements
and modifications thereto (the
Company Actuarial
Analyses
). Each Company Actuarial Analysis was based
upon, in all material respects, an accurate inventory of
policies in force for the Company and the Company Insurance
Subsidiaries, as the case may be, at the relevant time of
preparation and was prepared in conformity with generally
accepted actuarial principles in effect at such time,
consistently applied (except as may be noted therein).
(d) Except for regular periodic assessments in the ordinary
course of business or assessments based on developments that are
publicly known within the insurance industry, as of the date of
this Agreement, no material claim or material assessment is
pending or threatened in writing against any Company Insurance
Subsidiary by any state insurance guaranty association in
connection with such associations fund relating to
insolvent insurers.
(e) Since January 1, 2007, to the knowledge of the
Company, (i) each Partner Agent, at the time such Partner
Agent wrote, sold or produced business for or on behalf of the
Company or any Subsidiary of the Company that requires a
License, was duly licensed and appointed as required by
applicable Law, in the particular jurisdiction in which such
Partner Agent wrote, sold or produced business and
(ii) each of the Partner Agent Agreements and any other
agency agreements and appointments between the Partner Agents
and the Company
and/or
any
Subsidiary of the Company is valid and binding and in full force
and effect in accordance with its terms, except in the case of
clause (i) or (ii), as would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect. To the knowledge of the Company, no Partner
Agent has been since January 1, 2007, or is currently, in
material violation (or with or without notice or lapse of time
or both, would be in material violation) of any term or
provision of any Law applicable to the writing, sale or
production of insurance or other business for the Company or any
Subsidiary of the Company. As of the date of this Agreement, no
Partner Agent individually accounting for five percent (5%) or
more of the total gross premiums of the insurance business of
the Company and its Subsidiary for the year ended
December 31, 2008 has indicated in writing to the Company
or any Subsidiary of the Company that such Partner Agent will be
unable or unwilling to continue its relationship as a Partner
Agent with the Company or any Subsidiary of the Company within
12 months after the Closing. Since January 1, 2007, no
Person other than a Partner Agent has acted as an insurance
producer, reinsurance intermediary, agent, managing general
agent, wholesaler, broker, solicitor, adjuster or customer
representative for or on behalf of the Company or any of the
Subsidiaries of the Company, in each case, with respect to
writing, selling or producing insurance business.
(f) All policies, binders, slips, certificates, and other
agreements of insurance, in effect as of the date hereof
(including all applications, supplements, endorsements, riders
and ancillary agreements in connection therewith) that are
issued by the Company or the Subsidiaries of the Company and any
and all marketing materials, agents agreements, brokers
agreements or managing general agents agreements are, to the
extent required under applicable Law, on forms approved by
applicable insurance regulatory authorities or which have been
filed and not objected to by such authorities within the period
provided for objection, and such forms comply in all material
respects with the Insurance Laws applicable thereto and, as to
premium rates established by the Company or any Subsidiary of
the Company which are required to be filed with or approved by
insurance regulatory authorities, the rates have been so filed
or approved, the premiums charged conform thereto in all
material respects, and such premiums comply in all material
respects with the Insurance Laws applicable thereto.
(g) Prior to the date of this Agreement, the Company has
made available to Parent (i) a true and complete copy of
each OneBeacon Arrangement and (ii) true and complete
copies of all material consents or approvals received from and
all material filings made with any Governmental Entity in
connection with the acquisition of Potomac Insurance Company of
Illinois by the Company (the
Potomac
Acquisition
) and the OneBeacon Arrangements. The
Potomac Acquisition and each OneBeacon Arrangement complied, and
is currently in compliance, with all requirements under
applicable Laws and the Company received all required consents,
approvals or non-disapprovals from, and made all required
filings with, any Governmental Entity in connection with the
Potomac Acquisition and the OneBeacon Arrangements. Except for
the OneBeacon
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Arrangements, the Company has no risks, liabilities or
obligations under any underwriting contract, insurance policy,
endorsement, reinsurance contract, facultative contract or
retrocession agreement, in each case, written or entered into
prior to November 23, 2004.
Section
3.16
Liabilities
and Reserves
.
The reserves carried on the
Company SAP Statements of each Subsidiary of the Company were,
as of the respective dates of such Company SAP Statements, in
compliance in all material respects with the requirements for
reserves established by the insurance departments of the state
of domicile of such Subsidiary of the Company, were determined
in all material respects in accordance with generally accepted
actuarial principles in effect at such time, consistently
applied and were computed on the basis of methodologies
consistent in all material respects with those used in prior
periods, except as otherwise noted in the Company SAP Statements
to the extent required under SAP;
provided
,
that
it is acknowledged and agreed by Parent and Merger Sub that the
Company is not making any representation or warranty in this
Section 3.16 as to the adequacy or sufficiency of reserves.
Section
3.17
Title
to Properties; Absence of
Liens
.
Section 3.17 of the Company
Disclosure Schedule sets forth a true and complete list of all
real property leased to or by the Company or any of its
Subsidiaries providing for an annual rent of more than $100,000
(collectively, the
Leased Real Property
). The
Company or one of its Subsidiaries has in all material respects
a valid leasehold interest in all Leased Real Property, in each
case as to such leasehold interest, free and clear of all
material Liens (other than Permitted Liens). Neither the Company
nor any of its Subsidiaries owns any real property or any
interests in real property.
Section
3.18
Opinion
of Financial Advisor
.
The Board of Directors
of the Company has received an opinion from FBR Capital
Markets & Co., Inc. (
FBR
), dated as
of the date of this Agreement and addressed to the Board of
Directors of the Company to the effect that, as of the date
hereof and based upon and subject to the limitations,
qualifications and assumptions set forth therein, the Merger
Consideration to be received by the holders of Company Shares
pursuant to this Agreement is fair, from a financial point of
view, to such holders of Company Shares (other than Parent and
its Subsidiaries, except in the case of Company Shares held in
investment portfolios of Parent or any of its Subsidiaries). The
Company has been authorized by FBR to include such opinion in
its entirety in the Proxy Statement/Prospectus.
Section
3.19
Taxes
.
(a) All material Tax Returns required by applicable Law to
be filed with any Taxing Authority by, or on behalf of, the
Company or any of its Subsidiaries have been duly filed when due
(including extensions) in accordance with all applicable Laws,
and all such Tax Returns are true, correct and complete in all
material respects.
(b) The Company and each of its Subsidiaries has duly and
timely paid or has duly and timely withheld and remitted to the
appropriate Taxing Authority all material Taxes due and payable,
or, where payment is not yet due, has established in accordance
with the applicable accounting standard an adequate accrual for
all material Taxes on the most recent financial statements
contained in the Company SEC Documents and on the Company SAP
Statements.
(c) The federal income Tax Returns of the Company and its
Subsidiaries, through the Tax year ended December 31, 2004,
have closed and no federal income Tax Return has been examined.
(d) There is no claim, audit, action, suit, request for
written ruling, proceeding or investigation pending or
threatened in writing against or with respect to the Company or
any of its Subsidiaries in respect of any Tax, Tax Return or Tax
Asset which (except in the case of a request for a written
ruling) if determined adversely would, individually or in the
aggregate, be expected to result in a material Tax deficiency.
(e) Neither the Company nor any of its Subsidiaries has
constituted either a distributing corporation or a
controlled corporation (within the meaning of
Section 355(a)(1)(A) of the Code) in a distribution of
stock qualifying for tax-free treatment under Section 355
of the Code (i) in the two (2) years prior to the date
of this Agreement or (ii) in a distribution that would
otherwise constitute part of a plan or series
of related transactions (within the meaning of
Section 355(e) of the Code) in conjunction with this
Agreement.
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(f) The Company and each of its Subsidiaries have withheld
all material amounts required to have been withheld by them in
connection with amounts paid or owed to any employee,
independent contractor, creditor, shareholder or any other third
party; such withheld amounts were either duly paid to the
appropriate Taxing Authority or set aside in accounts for such
purpose. The Company and each of its Subsidiaries have reported
such withheld amounts to the appropriate Taxing Authority and to
each such employee, independent contractor, creditor,
shareholder or any other third party, as required under
applicable Law.
(g) Neither the Company nor any of its Subsidiaries is
liable for any Taxes of any Person (other than the Company and
its Subsidiaries) as a result of being (i) a transferee or
successor of such Person, (ii) a member of an affiliated,
consolidated, combined or unitary group that includes such
Person as a member or (iii) a party to a tax sharing, tax
indemnity or tax allocation agreement or any other agreement to
indemnify such Person.
(h) Neither the Company nor any of its Subsidiaries will be
required to include any item of income in, or exclude any item
of deduction from, taxable income for any period (or portion
thereof) ending after the Effective Date, as a result of any
change in method of accounting for a taxable period ending on or
prior to the Effective Date under Section 481 of the Code
(or any corresponding provision of state, local or foreign Law).
(i) No Subsidiary of the Company is organized in a
jurisdiction other than the United States.
(j) Neither the Company nor any of its Subsidiaries has
entered into any transaction that is a listed
transaction, as defined in Treasury Regulation
§ 1.6011-4(b)(2).
(k) As of the date of this Agreement, neither the Company
nor any of its Subsidiaries has taken or agreed to take any
action or knows of any fact or circumstance that is reasonably
likely to prevent the Merger from qualifying as a
reorganization within the meaning of
Section 368(a) of the Code.
(l) All Deferred Stock Awards are in respect of stock
entitled to vote within the meaning of Section 368(c) of
the Code.
Section
3.20
Employee
Benefit Plans and Related Matters; ERISA
.
(a) Section 3.20(a) of the Company Disclosure Schedule
sets forth as of the date of this Agreement a true and complete
list of the Company Benefit Plans, including all Company Benefit
Plans subject to ERISA or similar provisions of
non-U.S. Law.
With respect to each such Company Benefit Plan, the Company has
made available to Parent a true and complete copy of such
Company Benefit Plan, if written, or a description of the
material terms of such Company Benefit Plan if not written, and
to the extent applicable, (i) all trust agreements,
insurance contracts or other funding arrangements, (ii) the
most recent actuarial and trust reports for both ERISA funding
and financial statement purposes, (iii) the most recent
Form 5500 with all attachments required to have been filed
with the IRS or the Department of Labor or any similar reports
filed with any comparable Governmental Entity in any
non-U.S. jurisdiction
having jurisdiction over any Company Benefit Plan and all
schedules thereto, (iv) the most recent IRS determination
or opinion letter, and (v) all current summary plan
descriptions.
(b) Each Company Benefit Plan intended to be qualified
under Section 401(a) of the Code, and the trust (if any)
forming a part thereof, has received a favorable determination
letter from the IRS that the Company Benefit Plan is so
qualified, or an advisory or opinion letter that the form of
such plan document satisfies the requirements to be so
qualified, and, to the knowledge of the Company, there are no
existing circumstances or any events that would reasonably be
expected to adversely affect the qualified status of any such
plan. Each Company Benefit Plan has been administered and
operated in all material respects in accordance with its terms
and with applicable Law.
(c) Neither the Company nor any of its Subsidiaries, nor
any of their ERISA Affiliates contributes to, sponsors or
maintains or has in the past sponsored, maintained, contributed
to or had any liability in respect of any pension plan subject
to Section 412 of the Code or Section 302 or
Title IV of ERISA.
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(d) There are no claims pending or threatened in writing
with respect to any of the Company Benefit Plans by any employee
or otherwise involving any such plan or the assets of any such
plan (other than routine claims for benefits), except as would
not, individually or in the aggregate, be material.
(e) No Company Benefit Plan is a multiemployer
plan within the meaning of Section 4001(a)(3) of
ERISA or is a multiple employer plan within the
meaning of Section 4063 or 4064 of ERISA. Neither the
Company nor any of its Subsidiaries has at any time during the
last six (6) years contributed to or been obligated to
contribute to any such type of plan.
(f) Neither the Company nor any of its Subsidiaries has any
material liability in respect of post-retirement health, medical
or life insurance benefits for retired, former or current
employees of the Company or its Subsidiaries except as required
by Law.
(g) Except as set forth in Section 3.20(g) of the
Company Disclosure Schedule, the consummation of the
transactions to which the Company is a party contemplated
hereby, will not, either alone or in combination with another
event, (i) entitle any current or former director, officer
or employee of the Company or of any of its Subsidiaries to
severance pay, unemployment compensation or any other payment,
(ii) result in any payment becoming due, accelerate the
time of payment or vesting, or increase the amount of
compensation due to any such director, officer or employee,
(iii) result in any forgiveness of indebtedness, trigger
any funding obligation under any Company Benefit Plan or impose
any restrictions or limitations on the Companys rights to
administer, amend or terminate any Company Benefit Plan or
(iv) result in any payment (whether in cash or property or
the vesting of property) to any disqualified
individual (as such term is defined in Treasury
Regulation Section 1.280G-1)
that would reasonably be construed, individually or in
combination with any other such payment, to constitute an
excess parachute payment (as defined in
Section 280G(b)(1) of the Code).
Section
3.21
Employees,
Labor Matters
.
(a) Neither the Company nor any of its Subsidiaries is a
party to or bound by any collective bargaining agreement, and
there are no labor unions or other organizations representing,
purporting to represent or, to the knowledge of the Company,
attempting to represent any employees of the Company or any of
its Subsidiaries in their capacity as such.
(b) Since January 1, 2007, there has not occurred or
been threatened in writing any material strike, slowdown, work
stoppage, concerted refusal to work overtime or other similar
labor activity or union organizing campaign with respect to any
employees of the Company or any of its Subsidiaries. There are
no labor disputes subject to any formal grievance procedure,
arbitration or litigation and there is no representation
petition pending or threatened in writing with respect to any
employee of the Company or any of its Subsidiaries.
Section
3.22
Environmental
Matters
.
Except as would not, individually or
in the aggregate, reasonably be expected to have a Company
Material Adverse Effect, (a) neither the Company nor any of
its Subsidiaries has received any written notice, demand,
request for information, citation, summons or order, and no
complaint has been filed, no penalty has been assessed, no
liability has been incurred, and no investigation, action,
written claim, suit or proceeding is pending or is threatened in
writing by any Governmental Entity or other Person with respect
to or arising out of any applicable Environmental Law and
(b) to the knowledge of the Company, no release
of a hazardous substance (as those terms are defined
in the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. § 9601 et seq.) has
occurred at, on, above, under or from any properties that
currently or formerly owned, leased, operated or used by the
Company, any Subsidiary of the Company or any predecessors in
interest that are reasonably likely to result in any cost,
liability or obligation of the Company or any Subsidiary of the
Company under any applicable Environmental Law.
Section
3.23
Intellectual
Property
.
(a) Except as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect, (i) each of the Company and each of its
Subsidiaries owns or otherwise has a valid
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and enforceable license right to use Intellectual Property used
in the respective businesses of the Company and each of its
Subsidiaries as currently conducted and (ii) all patents
and all registrations for trademarks, service marks and
copyrights owned by the Company or its Subsidiaries are valid
and subsisting.
(b) Except as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect, (i) there are no claims pending or threatened in
writing by any Person alleging that the Company or its
Subsidiaries or their respective businesses as conducted on the
date of this Agreement infringes the Intellectual Property of
any Person and (ii) to the knowledge of the Company, no
Person is infringing the Intellectual Property owned by the
Company or any of its Subsidiaries.
(c) The Company and its Subsidiaries have established and
are in compliance with commercially reasonable security programs
that are sufficient to protect (
i
) the security,
confidentiality and integrity of transactions executed through
their computer systems, including encryption
and/or
other
security protocols and techniques when appropriate and
(
ii
) the security, confidentiality and integrity of all
confidential or proprietary data except, in each case, which
would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries has suffered a material
security breach with respect to their data or systems, and
neither the Company nor any of its Subsidiaries has notified
customers or employees of any information security breach.
Section
3.24
Material
Contracts
.
(a) The Company has made available to Parent a true and
complete copy of each Contract to which the Company or any of
its Subsidiaries is a party as of the date of this Agreement or
by which the Company, any of its Subsidiaries or any of its
respective properties or assets is bound as of the date of this
Agreement, which: (i) is a material contract
within the meaning of Item 601(b)(10) of
Regulation S-K
promulgated by the SEC; (ii) contains covenants of the
Company or any of its Subsidiaries not to compete or engage in
any line of business or compete with any Person in any
geographic area; (iii) requires referrals of business or
requires the Company or any of its Subsidiaries to make
available investment opportunities to any person on a priority,
equal or exclusive basis; (iv) pursuant to which the
Company or any of its Subsidiaries has entered into a
partnership or joint venture with any other Person (other than
the Company or any of its Subsidiaries) that is material to the
business of the Company and its Subsidiaries, taken as a whole;
(v) provides for future payments that are conditioned on,
in whole or in part, or that cause an event of default as a
result of, a change of control or similar event; (vi) is a
Company Reinsurance Agreement; (vii) is a Partner Agent
Agreement; (viii) is a OneBeacon Arrangement;
(ix) relates to or evidences indebtedness for borrowed
money or any guarantee of indebtedness for borrowed money by the
Company or any of its Subsidiaries in excess of one hundred
thousand dollars ($100,000); (x) evidences any guarantee of
obligations of any Person other than a wholly-owned Subsidiary
of the Company; or (xi) would prevent or materially delay
the consummation or otherwise reduce the contemplated benefits
of any of the transactions contemplated by this Agreement. Each
instrument of the type described in clauses (i) through
(xi) of this Section 3.24 is referred to herein as a
Material Contract
.
(b) Each Material Contract is (assuming due power and
authority of, and due execution and delivery by the parties
thereto other than the Company or any of its Subsidiaries) a
valid and binding obligation of the Company or its Subsidiaries
party thereto, subject to the Bankruptcy and Equity Exception,
except (i) to the extent it has previously expired or
terminated in accordance with their terms and (ii) for any
failures to be valid and binding which would not, individually
or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any other
party to any Material Contract is in breach of or in default
under any Material Contract, and no event has occurred that,
with the lapse of time or the giving of notice or both, would
constitute a default thereunder by any party thereto, except for
such breaches and defaults which would not, individually or in
the aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section
3.25
Brokers
and Finders Fees
.
Except for FBR, the
fees and expenses of which will be paid by the Company, there is
no investment banker, broker, finder or other intermediary that
has been retained by or is authorized to act on behalf of the
Company or any of its Subsidiaries who is entitled to any fee or
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commission from the Company or any of its Subsidiaries in
connection with the transactions to which the Company is a party
contemplated hereby.
Section
3.26
Takeover
Laws
.
No fair price,
moratorium, control share acquisition,
interested stockholder or other anti-takeover
statute or regulation is applicable to this Agreement, the
Merger or the other transactions contemplated hereby by reason
of the Company being a party to this Agreement, performing its
obligations hereunder and consummating the Merger and the other
transactions contemplated hereby.
Section
3.27
Rating
.
As
of the date hereof, A.M. Best Company has not threatened in
writing to lower or place under surveillance any rating
presently assigned to the Company or any of its Subsidiaries.
Section
3.28
Affiliate
Transactions
.
There are no transactions,
agreements, arrangements or understandings between (
i
)
the Company or any of its Subsidiaries, on the one hand, and
(
ii
) any directors, officers or stockholders of the
Company, on the other hand, of the type that would be required
to be disclosed under Item 404 of
Regulation S-K
under the Securities Act.
Section
3.29
No
Other Representations and Warranties;
Disclaimer
.
(a) Except for the representations and warranties made by
the Company in this Article III, neither the Company nor
any other Person makes any express or implied representation or
warranty with respect to the Company or any of its Subsidiaries
or their respective businesses, operations, assets, liabilities,
condition (financial or otherwise) or prospects, and the Company
hereby disclaims any such other representations or warranties.
In particular, without limiting the foregoing disclaimer, except
for the representations and warranties made by the Company in
this Article III, neither the Company nor any other Person
makes or has made any representation or warranty to Parent,
Merger Sub, or any of their Affiliates or Representatives with
respect to (i) any financial projection, forecast,
estimate, budget or prospect information relating to the
Company, any of its Subsidiaries or their respective businesses
or operations, or (ii) any oral or written information
presented to Parent, Merger Sub, or any of their Affiliates or
Representatives in the course of their due diligence
investigation of the Company, the negotiation of this Agreement
or in the course of the transactions contemplated hereby.
(b) Notwithstanding anything contained in this Agreement to
the contrary, the Company acknowledges and agrees that neither
Parent, Merger Sub nor any other Person has made or is making
any representations or warranties whatsoever, express or
implied, beyond those expressly given by Parent and Merger Sub
in Article IV hereof, including any implied representation
or warranty as to the accuracy or completeness of any
information regarding Parent furnished or made available to the
Company or any of its Affiliates or Representatives. Without
limiting the generality of the foregoing, the Company
acknowledges and agrees that no representations or warranties
are made with respect to any projections, forecasts, estimates,
budgets or prospect information that may have been made
available to the Company or any of its Affiliates or
Representatives.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Except as (x) disclosed in the Parent SEC Documents filed
with or furnished to the SEC prior to the date of this Agreement
(other than statements in the Risk Factors sections contained in
the Parent SEC Documents or any statements included in any
forward-looking statements disclaimer contained in
the Parent SEC Documents) or (y) set forth in the
disclosure letter delivered by Parent to the Company on or prior
to the date of this Agreement (the
Parent Disclosure
Schedule
), Parent and Merger Sub represent and warrant
to the Company as set forth in this Article IV. For
purposes of the representations and warranties of Parent and
Merger Sub contained herein, disclosure in any section of the
Parent Disclosure Schedule of any facts or circumstances shall
be deemed to be disclosure of such facts or circumstances with
respect to all representations or warranties by Parent and
Merger Sub to which the relevance of such disclosure to the
applicable representation and warranty is reasonably apparent on
the face thereof. The inclusion of any information in the Parent
Disclosure Schedule or other document delivered by Parent or
Merger Sub pursuant to this Agreement
A-23
shall not be deemed to be an admission or evidence of the
materiality of such item, nor shall it establish a standard of
materiality for any purpose whatsoever.
Section
4.1
Corporate
Existence and Power
.
Each of Parent and
Merger Sub is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation.
Each of Parent and its Subsidiaries has all requisite corporate,
partnership or other similar powers and authorities and all
governmental licenses, authorizations, permits, certificates,
registrations, consents, franchises, variances, exemptions,
orders and approvals required to own, lease and operate their
respective properties and to carry on their respective
businesses as currently conducted (the
Parent
Permits
), except for those powers, licenses,
authorizations, permits, consents, franchises, variances,
exemptions, orders and approvals the absence of which would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect. Parent and its Subsidiaries
are in compliance with the terms of the Parent Permits, except
where the failure to be in such compliance would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect. Parent is duly qualified to do
business as a foreign corporation and is in good standing in
each jurisdiction where such qualification is required, except
for those jurisdictions where the failure to be so qualified
would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect. Parent has
made available to the Company true and complete copies of the
Constituent Documents of Parent and Merger Sub as currently in
effect.
Section
4.2
Corporate
Authorization
.
(a) Each of Parent and Merger Sub has all necessary
corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to
consummate the transactions to which it is a party contemplated
hereby. The execution, delivery and performance by each of
Parent and Merger Sub of this Agreement and the consummation by
each of Parent and Merger Sub of the transactions to which it is
a party contemplated hereby have been duly authorized and
approved by all necessary corporate or other similar action on
the part of Parent and Merger Sub, and no other corporate action
on the part of Parent or Merger Sub are necessary to authorize
this Agreement or to consummate the transactions to which it is
a party contemplated hereby, except that consummation of the
Merger is subject to the effectiveness of the Certificate of
Merger with the Secretary of State of the State of Delaware.
This Agreement has been duly executed and delivered by each of
Parent and Merger Sub and, assuming due power and authority of,
and due execution and delivery by, the Company, constitutes a
valid and binding obligation of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its
terms, subject to the Bankruptcy and Equity Exception.
(b) The respective Boards of Directors of Parent and Merger
Sub, each at a meeting duly called and held and at which a
quorum of directors was present, have by resolutions duly
adopted unanimously (i) determined that this Agreement and
the Merger are in the best interests of Parent and Merger Sub,
respectively, and declared the Merger to be advisable,
(ii) approved and adopted this Agreement and the plan of
merger herein providing for the Merger, upon the terms and
subject to the conditions set forth herein and
(iii) approved the execution, delivery and performance by
Parent or Merger Sub, as the case may be, of this Agreement and
the consummation of the transactions to which Parent or Merger
Sub, as the case may be, is a party contemplated hereby, upon
the terms and subject to the conditions set forth herein.
(c) Parent, as the sole stockholder of Merger Sub as of the
date of this Agreement, has adopted this Agreement. No other
vote of the holders of any class or series of capital stock of
Parent or Merger Sub is required by Law, the Constituent
Documents of Parent or Merger Sub or otherwise for Parent and
Merger Sub to issue the shares of Parent Common Stock
representing the Merger Consideration or to otherwise consummate
the transactions to which they are a party contemplated hereby.
Section
4.3
Governmental
Authorization
.
The execution, delivery and
performance by Parent and Merger Sub of this Agreement and the
consummation by each of Parent and Merger Sub of the
transactions to which it is a party contemplated hereby require
at or prior to the Closing no consent or approval by, or filing
with, any Governmental Entity, other than (a) the filing of
the Certificate of Merger with the Secretary of State of the
State of Delaware and appropriate documents with the relevant
authorities of other states in which Parent and Merger Sub are
qualified to do business, (b) compliance with any
applicable requirements of the HSR Act, (c) compliance with
any applicable requirements of the Securities Act, the Exchange
Act, and any
A-24
other applicable federal or state securities Laws or blue
sky Laws, (d) compliance with any applicable
requirements of Nasdaq, (e) approvals or filings under
Insurance Laws as set forth in Section 4.3 of the Parent
Disclosure Schedule (the
Parent Insurance
Approvals
and, with the Company Insurance Approvals,
the
Transaction Approvals
), (f) the
Company Insurance Approvals (assuming the accuracy and
completeness of Section 3.3(e)), (g) those consents,
approvals or filings as may be required as a result of the
business or identity of the Company or any of its Affiliates
(assuming the accuracy and completeness of Section 3.3(e))
and (h) any other consents, approvals or filings the
failure of which to be obtained or made would not, individually
or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect or prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
Section
4.4
Non-Contravention
.
The
execution, delivery and performance by Parent and Merger Sub of
this Agreement do not, and the consummation by each of Parent
and Merger Sub of the transactions to which it is a party
contemplated hereby will not, (a) violate or conflict with
or result in any breach of any provision of the Constituent
Documents of Parent or any of its Subsidiaries,
(b) assuming compliance with the matters referred to in
Section 3.3 and Section 4.3 (and assuming the accuracy
and completeness of Section 3.3(e)), violate or conflict
with any provision of any applicable Law, Order or Parent
Permit, (c) violate or conflict with or result in any
breach or constitute a default or an event that, with or without
notice or lapse of time or both, would constitute a default
under, or cause the termination, cancellation, acceleration or
other change of any right or obligation or the loss of any
benefit to which Parent or any of its Subsidiaries is entitled,
or require consent by any Person under, any contracts which are
material contracts as such term is defined in
Item 601(b)(10) of
Regulation S-K
promulgated by the SEC or (d) subject to the receipt of the
Company Insurance Approvals (and assuming the accuracy and
completeness of Section 3.3(e)), result in the creation or
imposition of any Lien on any asset of Parent or any of its
Subsidiaries, except in the case of clause (b), (c) or (d),
as would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect or prevent or
materially delay the consummation of the transactions
contemplated by this Agreement.
Section
4.5
Capitalization;
Interim Operations of Merger Sub
.
(a) The authorized capital stock of Parent consists of one
hundred million (100,000,000) shares of common stock,
$0.01 par value per share (
Parent Common
Stock
) and two million (2,000,000) shares of
Series A Perpetual Preferred Stock. As of the close of
business on June 16, 2009, 40,484,732 shares of Parent
Common Stock were issued and outstanding (including shares held
in treasury), of which 495,966 were shares of Parent Common
Stock subject to vesting or other restrictions and
1,255,066 shares of Parent Common Stock were reserved for
issuance upon the exercise or payment of outstanding stock
options or other equity related awards (such stock option and
restricted share plans and programs, collectively, the
Parent Incentive Plans
), and
73,858 shares of Parent Common Stock were held by Parent in
its treasury or by its Subsidiaries. From March 31, 2009 to
the date hereof, Parent has not issued or permitted to be issued
any shares of capital stock or Parent Securities, other than
pursuant to and as required by the terms of the Parent Incentive
Plans and, from March 31, 2009 to the date hereof, Parent
has not issued any stock options or other awards under the
Parent Incentive Plans. All outstanding shares of capital stock
of Parent have been, and all shares of Parent Common Stock to be
issued in connection with the Merger and the other transactions
contemplated by this Agreement, will be, when so issued, validly
issued and outstanding, fully paid, nonassessable and free and
clear of preemptive or other similar rights, and were not (or,
in the case of Parent Common Stock to be issued in the Merger,
will not be) issued in violation of the Constituent Documents of
Parent.
(b) Except as set forth in Section 4.5(a), as of
June 16, 2009, there are no outstanding (i) shares of
capital stock or voting securities of or ownership interests in
Parent, (ii) securities of Parent convertible into or
exercisable or exchangeable for shares of capital stock or
voting securities of or ownership interests in Parent or
(iii) options or other rights to acquire from Parent, or
other obligations of Parent to issue or pay cash valued by
reference to, any capital stock or other voting securities or
ownership interests in or securities convertible into or
exercisable or exchangeable for capital stock or voting
securities or ownership interests in Parent (the items in
clauses (i), (ii), and (iii) being referred to collectively
as the
Parent Securities
). As of the date of
this Agreement, there are no binding obligations of Parent or
any of its Subsidiaries to repurchase, redeem or otherwise
acquire any of the Parent Securities.
A-25
(c) The authorized capital stock of Merger Sub consists
solely of 1,000 shares of common stock, par value $0.01 per
share, all of which are issued and outstanding and all of which
are owned beneficially and of record by Parent. All of the
issued and outstanding shares of capital stock of Merger Sub
have been duly authorized and validly issued and are fully paid
and nonassessable and free and clear of preemptive or other
similar rights, and were not issued in violation of the
Constituent Documents of Merger Sub. Merger Sub has not
conducted any business prior to the date of this Agreement and
has, and prior to the Effective Time will have, no assets,
liabilities or obligations of any nature other than those
incident to its formation or contemplated by this Agreement.
Section
4.6
Parent
SEC Filings, etc
.
(a) Parent has timely filed all reports, schedules, forms,
registration statements and other documents required to be filed
by Parent with the SEC since January 1, 2007 (together with
any documents furnished during such period by Parent to the SEC
on a voluntary basis on Current Reports on
Form 8-K
and any reports, schedules, forms, registration statements and
other documents filed with the SEC subsequent to the date
hereof, collectively, the
Parent SEC
Documents
). Each of the Parent SEC Documents, as
amended prior to the date of this Agreement, complied (and each
Parent SEC Document filed subsequent to the date hereof will
comply) in all material respects with, to the extent in effect
at the time of filing or furnishing, the requirements of the
Securities Act and the Exchange Act applicable to such Parent
SEC Documents, and none of the Parent SEC Documents when filed
or furnished or, if amended prior to the date of this Agreement,
as of the date of such amendment, contained, or with respect to
Parent SEC Documents filed subsequent to the date hereof, will
contain, any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Parent maintains a system of internal control over
financial reporting (within the meaning of
Rules 13a-15(f)
and
15d-15(f)
of
the Exchange Act) sufficient to provide reasonable assurances
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP. Parent (i) maintains disclosure
controls and procedures (within the meaning of
Rules 13a-15(e)
and
15d-15(e)
of
the Exchange Act) sufficient to ensure that information required
to be disclosed by Parent in the reports that it files and
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, including that information required
to be disclosed by Parent in the reports that it files and
submits under the Exchange Act is accumulated and communicated
to management of Parent, as appropriate, to allow timely
decisions regarding required disclosure and (ii) has
disclosed, based upon the most recent (prior to the date of this
Agreement) evaluation by the chief executive officer and chief
financial officer of Parent of the Parents internal
control over financial reporting, to its auditors and the audit
committee of the Board of Directors of Parent (A) all
significant deficiencies and material weaknesses in the design
or operation of the Parents internal control over
financial reporting which are reasonably likely to adversely
affect in any material respect its ability to record, process,
summarize and report financial data and (B) any fraud,
whether or not material, that involves management or other
employees who have a significant role in the Parents
internal control over financial reporting. Parent has made
available to Company true and complete copies of any such
disclosure made by management to Parents independent
auditors and the audit committee of the Board of Directors of
Parent since January 1, 2007.
(c) Neither Parent nor any of its Subsidiaries is a party
to, or has any commitment to become a party to, any joint
venture, off-balance sheet partnership or any similar Contract
(including any Contract relating to any transaction or
relationship between or among Parent and any of its
Subsidiaries, on the one hand, and any unconsolidated Affiliate,
including any structured finance, special purpose or limited
purpose entity, on the other hand, or any off-balance
sheet arrangement (as defined in Item 303(a) of
Regulation S-K
of the SEC)), where the result, purpose or intended effect of
such Contract is to avoid disclosure of any material transaction
involving, or material liabilities of, Parent or any of its
Subsidiaries in the Parent SEC Documents.
Section
4.7
Parent
Financial Statements
.
The consolidated
financial statements (including all related notes thereto) of
Parent included in the Parent SEC Documents (if amended, as of
the date of the last such amendment filed prior to the date of
this Agreement) fairly present in all material respects the
consolidated
A-26
financial position of Parent and its consolidated Subsidiaries,
as at the respective dates thereof, and the consolidated results
of their operations, the changes in stockholders equity
and their consolidated cash flows for the respective periods
then ended (subject, in the case of the unaudited statements, to
normal year-end audit adjustments and to the absence of
information or notes not required by GAAP to be included in
interim financial statements) in conformity with GAAP during the
periods involved (except, in the case of the unaudited
statements, as permitted by the SEC) applied on a consistent
basis (except as may be indicated therein or in the notes
thereto).
Section
4.8
Information
Supplied
.
The information supplied or to be
supplied by Parent or Merger Sub specifically for inclusion in
the
Form S-4
shall not, at the time the
Form S-4
is declared effective by the SEC, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, except that no representation or
warranty is made by Parent or Merger Sub with respect to
statements made therein based on information supplied by or on
behalf of the Company specifically for inclusion in the
Form S-4.
The information supplied or to be supplied by Parent or Merger
Sub specifically for inclusion in the Proxy Statement/Prospectus
to be sent to the stockholders of the Company in connection with
the Company Stockholders Meeting shall not, on the date the
Proxy Statement/Prospectus is first mailed to the stockholders
of the Company or at the time of the Company Stockholders
Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading,
except that, no representation or warranty is made by Parent or
Merger Sub with respect to statements made therein based on
information supplied by or on behalf of the Company specifically
for inclusion in the Proxy Statement/Prospectus.
Section
4.9
Absence
of Certain Changes or Events
.
Since
December 31, 2008, (i) Parent and its Subsidiaries
have conducted their respective businesses in the ordinary
course consistent with their past practices, (ii) there has
not been any event, change, circumstance or effect that has had
or is reasonably likely to have, individually or in the
aggregate, a Parent Material Adverse Effect and
(iii) Parent has not taken any action or failed to take any
action that would have resulted in a breach of Section 5.2,
except for Sections 5.2(c) or (d), had such section been in
effect since December 31, 2008.
Section
4.10
No
Undisclosed Material Liabilities
.
There are
no liabilities or obligations of Parent or any of its
Subsidiaries of any nature, whether accrued, contingent,
absolute, determined, determinable or otherwise, whether or not
required by GAAP to be reflected on a consolidated balance sheet
of Parent and its Subsidiaries other than: (a) liabilities
or obligations reflected or reserved against in Parents
consolidated balance sheet as of March 31, 2009 included in
the Parent SEC Documents or in the notes thereto;
(b) insurance claims or related litigation or arbitration
arising in the ordinary course of business since March 31,
2009; (c) liabilities or obligations that were incurred
since March 31, 2009 in the ordinary course of business;
and (d) liabilities or obligations which would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect.
Section
4.11
Compliance
with Laws
.
(a) Since January 1, 2007, (i) the business and
operations of Parent and its Subsidiaries have been conducted in
compliance with all applicable Laws (including Insurance Laws)
and (ii) Parent has complied with the applicable listing
and corporate governance rules and regulations of Nasdaq except,
in each case, where the failure to so conduct such business and
operations or comply with such rules and regulations would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect, or prevent or materially delay
the consummation of the transactions contemplated by this
Agreement.
(b) All of the Parent Permits of each Parent Insurance
Subsidiary conducting insurance operations are in full force and
effect in accordance with their terms and there is no proceeding
or investigation to which Parent or any Subsidiary of the Parent
is subject before a Governmental Entity that is pending or
threatened in writing that would reasonably be expected to
result in the revocation, failure to renew or suspension of, or
placement of a restriction on, any such Parent Permits, except
where the failure to be in full force and effect in accordance
with their terms, revocation, failure to renew, suspension or
restriction would not, individually
A-27
or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect, or prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
(c) There is no proceeding to which Parent or any
Subsidiary of the Parent is subject before any Governmental
Entity pending or, threatened in writing regarding whether any
of the Subsidiaries of the Parent has violated any applicable
Laws (including Insurance Laws) nor, any investigation by any
Governmental Entity pending or threatened in writing with
respect to possible violations of any applicable Laws, except
for proceedings or investigations relating to violations or
possible violations which would not individually or in the
aggregate, reasonably be expected to have a Parent Material
Adverse Effect, or prevent or materially delay the consummation
of the transactions contemplated by this Agreement. Since
January 1, 2007, each Parent Insurance Subsidiary has filed
all material reports required to be filed by it with its
domiciliary state insurance department or such failure to file
has been remedied. There are no written agreements, memoranda of
understanding, commitment letters or similar undertakings
binding on the Parent Insurance Subsidiaries to which Parent or
any Parent Insurance Subsidiary is a party, on the one hand, and
any Governmental Entity is a party or addressee, on the other
hand, or Orders specifically with respect to Parent or any
Parent Insurance Subsidiary, that (i) limit in any material
respect the ability of any of the Parent Insurance Subsidiaries
to issue insurance policies under the Parent Permits,
(ii) impose any requirements on Parent or any of the Parent
Insurance Subsidiaries in respect of risk-based capital
requirements that materially increase or modify the risk-based
capital requirements imposed under applicable Insurance Laws,
(iii) relate to the ability of any of the Parent Insurance
Subsidiaries to pay dividends or (iv) restrict in any
material respect the conduct of business of Parent or any of the
Parent Insurance Subsidiaries.
Section
4.12
Litigation
.
There
is no action, suit, investigation, claim, complaint, demand,
summons, cease and desist letter, subpoena, injunction, notice
of violation or other proceeding pending against, or threatened
in writing against Parent or any of its Subsidiaries, or pending
against or threatened in writing against any present or former
officer, director or employee of Parent or any Subsidiary of
Parent in connection with which Parent or any Subsidiary of
Parent has an indemnification obligation, before any
Governmental Entity (other than insurance claims litigation or
arbitration arising in the ordinary course of business), which,
if determined or resolved adversely in accordance with the
plaintiffs or claimants demands, would, individually
or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect, or would reasonably be expected to
prevent or materially delay the consummation of the transactions
contemplated hereby. As of the date of this Agreement, there is
no Order outstanding against Parent or any of its Subsidiaries
which would, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect, or would
reasonably be expected to prevent or materially delay the
consummation of the transactions contemplated hereby.
Section
4.13
Taxes
.
(a) All material Tax Returns required by applicable Law to
be filed with any Taxing Authority by, or on behalf of, Parent
or any of its Subsidiaries have been duly filed when due
(including extensions) in accordance with all applicable Laws,
and all such Tax Returns are true, correct and complete in all
material respects.
(b) Parent and each of its Subsidiaries has duly and timely
paid or has duly and timely withheld and remitted to the
appropriate Taxing Authority all material Taxes due and payable,
or, where payment is not yet due, has established in accordance
with the applicable accounting standard an adequate accrual for
all material Taxes on the most recent financial statements
contained in the Parent SEC Documents.
(c) The federal income Tax Returns of Parent and its
Subsidiaries, through the Tax year ended December 31, 2004,
have closed and no federal income Tax Return through such year
has been examined.
(d) There is no claim, audit, action, suit, request for
written ruling, proceeding or investigation pending or
threatened in writing against or with respect to Parent or any
of its Subsidiaries in respect of any Tax, Tax Return or Tax
Asset which (except in the case of a request for a written
ruling) if determined adversely would, individually or in the
aggregate, be expected to result in a material Tax deficiency.
(e) Neither Parent nor any of its Subsidiaries has
constituted either a distributing corporation or a
controlled corporation (within the meaning of
Section 355(a)(1)(A) of the Code) in a distribution of
stock
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qualifying for tax-free treatment under Section 355 of the
Code (i) in the two (2) years prior to the date of
this Agreement or (ii) in a distribution that would
otherwise constitute part of a plan or series
of related transactions (within the meaning of
Section 355(e) of the Code) in conjunction with this
Agreement.
(f) Parent and each of its Subsidiaries have withheld all
material amounts required to have been withheld by them in
connection with amounts paid or owed to any employee,
independent contractor, creditor, shareholder or any other third
party; such withheld amounts were either duly paid to the
appropriate Taxing Authority or set aside in accounts for such
purpose. Parent and each of its Subsidiaries have reported such
withheld amounts to the appropriate Taxing Authority and to each
such employee, independent contractor, creditor, shareholder or
any other third party, as required under applicable Law.
(g) Neither Parent nor any of its Subsidiaries is liable
for any Taxes of any Person (other than Parent and its
Subsidiaries) as a result of being (i) a transferee or
successor of such Person, (ii) a member of an affiliated,
consolidated, combined or unitary group that includes such
Person as a member or (iii) a party to a tax sharing, tax
indemnity or tax allocation agreement or any other agreement to
indemnify such Person.
(h) Neither Parent nor any of its Subsidiaries will be
required to include any item of income in, or exclude any item
of deduction from, taxable income for any period (or portion
thereof) ending after the Effective Date, as a result of any
change in method of accounting for a taxable period ending on or
prior to the Effective Date under Section 481 of the Code
(or any corresponding provision of state, local or foreign Law).
(i) Except as set forth in Section 4.13(i) of the
Parent Disclosure Schedule, no Subsidiary of Parent is organized
in a jurisdiction other than the United States.
(j) Neither Parent nor any of its Subsidiaries has entered
into any transaction that is a listed transaction,
as defined in Treasury Regulation § 1.6011-4(b)(2).
(k) As of the date of this Agreement, neither Parent nor
any of its Subsidiaries has taken or agreed to take any action
or knows of any fact or circumstance pertaining to Parent or any
of its Subsidiaries that is reasonably likely to prevent the
Merger from qualifying as a reorganization within
the meaning of Section 368(a) of the Code.
Section
4.14
Brokers
and Finders Fees
.
There is no
investment banker, broker, finder or other intermediary that has
been retained by or is authorized to act on behalf of Parent or
any of its Subsidiaries who is entitled to any fee or commission
from Parent or any of its Affiliates in connection with the
transactions to which Parent or Merger Sub is a party
contemplated hereby.
Section
4.15
Interested
Stockholder
.
At the time immediately
preceding the date of this Agreement, neither Parent, Merger Sub
nor any of their respective Affiliates is, with respect to the
Company, an interested stockholder, as such term is
defined in Section 203 of the DGCL.
Section
4.16
No
Other Representations and Warranties;
Disclaimer
.
(a) Except for the representations and warranties made by
Parent and Merger Sub in this Article IV, neither Parent,
Merger Sub nor any other Person makes any express or implied
representation or warranty with respect to Parent or any of its
Subsidiaries or their respective businesses, operations, assets,
liabilities, condition (financial or otherwise) or prospects,
and each of Parent and Merger Sub hereby disclaims any such
other representations or warranties. In particular, without
limiting the foregoing disclaimer, except for the
representations and warranties made by Parent and Merger Sub in
this Article IV, neither Parent, Merger Sub nor any other
Person makes or has made any representation or warranty to the
Company or any of its Affiliates or Representatives with respect
to (i) any financial projection, forecast, estimate, budget
or prospect information relating to Parent, any of its
Subsidiaries or their respective businesses, or (ii) any
oral or written information presented to the Company or any of
its Affiliates or Representatives in the course of their due
diligence investigation of Parent, the negotiation of this
Agreement or in the course of the transactions contemplated
hereby.
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(b) Notwithstanding anything contained in this Agreement to
the contrary, each of Parent and Merger Sub acknowledges and
agrees that neither the Company nor any other Person has made or
is making any representations or warranties whatsoever, express
or implied, beyond those expressly given by the Company in
Article III hereof, including any implied representation or
warranty as to the accuracy or completeness of any information
regarding the Company furnished or made available to Parent,
Merger Sub or any of their respective Affiliates or
Representatives. Without limiting the generality of the
foregoing, each of Parent and Merger Sub acknowledges and agrees
that no representations or warranties are made with respect to
any projections, forecasts, estimates, budgets or prospect
information that may have been made available to Parent, Merger
Sub or any of their respective Affiliates or Representatives.
ARTICLE V
CONDUCT OF
BUSINESS
Section
5.1
Conduct
of Business by the Company
.
(a) From the date of this Agreement until the earlier of
the Effective Time and the date, if any, on which this Agreement
is earlier terminated pursuant to Section 8.1, except
(x) as prohibited or required by applicable Law or by any
Governmental Entity, (y) as set forth in Section 5.1
of the Company Disclosure Schedule or (z) as otherwise
expressly contemplated, required or permitted by this Agreement,
unless Parent shall otherwise consent (which consent shall not
be unreasonably withheld, conditioned or delayed), the Company
shall, and shall cause each of its Subsidiaries to, conduct its
business in the ordinary course consistent with past practice in
all material respects and, to the extent consistent therewith,
use its commercially reasonable efforts to preserve intact in
all material respects its business organization and goodwill and
relationship with customers, third party payors, including
Governmental Entities, and others with which it has material
business dealings (including Partner Agents).
(b) In addition to and without limiting the generality of
the foregoing, from the date of this Agreement until the earlier
of the Effective Time and the date, if any, on which this
Agreement is earlier terminated pursuant to Section 8.1,
except (x) as prohibited or required by applicable Law or
by any Governmental Entity, (y) as set forth in
Section 5.1 of the Company Disclosure Schedule or
(z) as otherwise expressly contemplated, required or
permitted by this Agreement, unless Parent shall otherwise
consent (which consent shall not be unreasonably withheld,
conditioned or delayed), the Company shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly:
(i) amend or propose or agree to amend, in any material
respect, any of its Constituent Documents;
(ii) (A) declare, set aside, make or pay any dividend
or other distribution (whether in cash, stock or property) in
respect of any of its capital stock, except for dividends or
distributions by any wholly owned Subsidiary of the Company to
the Company or to any other wholly owned Subsidiary of the
Company, (B) adjust, split, combine or reclassify any of
its capital stock or issue or propose or authorize the issuance
of any other securities (including options, warrants or any
similar security exercisable for, or convertible into, such
other security) in respect of, in lieu of, or in substitution
for, shares of its capital stock or (C) repurchase, redeem
or otherwise acquire any Company Security or Company Subsidiary
Security, except (1) for repurchases of Company Shares in
an aggregate amount not to exceed the amount set forth in
Section 5.1(b)(ii) of the Company Disclosure Schedule or
(2) for repurchases of Company Shares in connection with
the exercise of Options or in connection with the vesting or
settlement of other equity and equity-linked awards outstanding
as of the date of this Agreement or awarded after the date of
this Agreement in accordance with the terms of this Agreement,
in each case, as required by the terms of the relevant Incentive
Plan (for purposes hereof, an exchange of Class B Shares
for Common Shares in accordance with the applicable Securities
Purchase Agreement between a Partner Agent and the Company shall
not be considered a repurchase, redemption or acquisition of
Company Securities);
(iii) issue, sell, grant, pledge, amend, grant any rights
in respect of or otherwise encumber, any Company Securities or
Company Subsidiary Securities or make any changes (by
combination, merger, consolidation, reorganization, liquidation
or otherwise) in the capital structure of the Company or any of
A-30
its Subsidiaries, except for (A) the issuance of Company
Shares as required pursuant to Contracts in effect prior to the
date of this Agreement and made available to Parent,
(B) the issuance of Company Shares, as required by the
terms of the relevant Incentive Plan, in connection with the
exercise of Options or the vesting or settlement of other equity
or equity-linked awards outstanding as of the date of this
Agreement, (C) issuances by a wholly owned Subsidiary of
the Company of capital stock to the Company or another wholly
owned Subsidiary of the Company, or (D) exchanges of Common
Shares for Class B Shares in accordance with the applicable
Securities Purchase Agreement between a Partner Agent and the
Company;
(iv) merge or consolidate with any other Person or acquire
any material assets or make a material investment in (whether
through the acquisition of stock, assets or otherwise) any other
Person, except for (A) acquisitions of inventory, equipment
and software in the ordinary course of business or
(B) investment portfolio transactions in accordance with
the Companys or any of its Subsidiaries investment
guidelines;
(v) sell, lease, license, subject to a material Lien,
except for a Permitted Lien, or otherwise dispose of any
material assets, product lines or businesses of the Company or
any of its Subsidiaries (including capital stock or other equity
interests of any Subsidiary) except (A) pursuant to
Contracts in effect prior to the date of this Agreement, true
and correct copies of which have been made available to Parent
prior to the date hereof, and ordinary course renewals thereof,
(B) investment portfolio transactions in accordance with
the Companys or any of its Subsidiaries investment
guidelines or (C) sales, leases or licenses of inventory,
equipment, software and other assets in the ordinary course of
business;
(vi) (A) make any loans, advances or capital
contributions to any other Person, except (1) by the
Company or any of its Subsidiaries to or in the Company or any
of its Subsidiaries and (2) for investment portfolio
transactions in accordance with the Companys or any of its
Subsidiaries investment guidelines in effect on the date
hereof; (B) create, incur, guarantee or assume any
indebtedness, except for (1) transactions among the Company
and its wholly owned Subsidiaries or among the Companys
wholly owned Subsidiaries, (2) indebtedness for borrowed
money incurred to replace, renew, extend, refinance or refund
any existing indebtedness on materially no less favorable terms,
(3) guarantees by the Company on materially no less
favorable terms to replace or renew any existing guarantee of
existing indebtedness for borrowed money of Subsidiaries of the
Company or (4) indebtedness for borrowed money incurred
pursuant to agreements in effect prior to the date of this
Agreement and set forth in Section 5.1(b)(vi) of the
Company Disclosure Schedule; (C) make or commit to make any
capital expenditure other than capital expenditures set forth in
the Companys capital budget for fiscal 2009 previously
made available to Parent; or (D) cancel any debts of any
Person to the Company or any Subsidiary of the Company or waive
any claims or rights of material value, except for cancellations
or waivers in the ordinary course of business;
(vii) except as required by Contracts in effect prior to
the date of this Agreement, true and correct copies of which
have been made available to Parent prior to the date hereof, or
Company Benefit Plans, (A) increase the compensation or
other benefits payable or provided to the Companys
directors or to employees at or above the Vice President level;
(B) except in the ordinary course of business consistent
with past practice, increase the compensation or other benefits
payable or provided to the Companys employees below the
Vice President level (the ordinary course including, for this
purpose, the employee salary and short- and long-term incentive
compensation review process and related adjustments
substantially as conducted each year), provided that the Company
may make cash incentive grants to new hires in a value
substantially equivalent to the value of equity awards
historically granted to new hires in the ordinary course of
business; (C) enter into any employment, change of control,
severance or retention agreement with any employee of the
Company (except (1) for an agreement, other than a change
of control agreement, with an employee below the Vice President
level who has been hired to replace a similarly situated
employee who is a party to an existing employment agreement
(such new agreement to contain substantially similar terms to
the existing agreement), (2) for renewals or replacements
of existing employment agreements with current employees upon
expiration of the term of the applicable agreement on
substantially the same terms as the previous agreement, or
(3) separation agreements entered into with employees in
the ordinary course of business consistent with past practice in
connection with terminations
A-31
of employment;
provided
,
that
the Company shall
not enter into any separation agreement or arrangement without
obtaining a general release of claims from the applicable
employee); or (D) except as permitted pursuant to
clause (C) above, establish, adopt, enter into or amend any
Company Benefit Plan for the benefit of any current or former
directors, officers or employees or any of their beneficiaries,
except as would not result in a material increase in cost to the
Company or as is required (x) to comply with
Section 409A of the Code or (y) by the terms of such
agreement, plan, trust, fund, policy or arrangement;
(viii) (A) settle or compromise any material claim,
audit, arbitration, suit, investigation, complaint or other
proceeding in excess of the amount of the corresponding reserve
established on the consolidated balance sheet of the Company as
reflected in the most recent applicable Company SEC Document
plus any applicable third party insurance proceeds, except
(1) as required by any Contract in effect prior to the date
of this Agreement, true and correct copies of which have been
made available to Parent prior to the date hereof, (2) for
any settlements or compromises of insurance claims or litigation
or arbitration arising in the ordinary course of business, or
(3) for any settlements or compromises involving total
aggregate payments not in excess of the amount set forth in
Section 5.1(b)(viii) of the Company Disclosure Schedule, it
being understood that this subsection (3) shall be in
addition to and not in limitation of subsections (1) and
(2) above, or (B) enter into any consent decree,
injunction or similar restraint or form of equitable relief in
settlement of any material claim or audit that would materially
restrict the operations of the business after the Effective Time;
(ix) (A) modify or amend in any materially adverse
respect or terminate any Material Contract, (B) enter into
any successor agreement to an expiring Material Contract that
changes the terms of the expiring Material Contract in a way
that is materially adverse to the Company or any Subsidiary of
the Company or (C) enter into any new agreement that would
have been considered a Material Contract if it were entered into
at or prior to the date hereof;
(x) effect or permit a plant closing or
mass layoff as those terms are defined in Worker
Adjustment and Retraining Notification Act of 1988 (together
with any similar state or local Law,
WARN
)
without complying with the notice requirements and all other
provisions of WARN;
(xi) except as required by applicable Law or changes in
GAAP or SAP, materially change any of its accounting policies
(whether for financial accounting or Tax purposes);
(xii) except in the ordinary course of business and in a
manner consistent with past practice (A) make or rescind
any Tax election, (B) settle or compromise any claim
related to Taxes, (C) enter into a written and legally
binding agreement with a Taxing Authority relating to Taxes or
(D) amend any Tax Return;
(xiii) (A) make a request for a written ruling of a
Taxing Authority relating to Taxes or (B) change any of its
methods of reporting income or deductions (including changes in
methods of accounting) for federal income Tax purposes from
those employed in the preparation of its federal income Tax
Returns for the taxable year ended December 31, 2007 other
than any change that may be required under the Code and the
Treasury Regulations promulgated thereunder;
(xiv) take any action that would reasonably be expected to
prevent the Merger from qualifying as a reorganization within
the meaning of Section 368(a) of the Code;
(xv) enter into or renew or extend any agreements or
arrangements that materially limit or otherwise restrict the
Company or any Subsidiary of the Company or any of their
respective Affiliates or any successor thereto, or that would,
after the Effective Time, limit or restrict Parent or any of its
Affiliates (including the Surviving Corporation) or any
successor thereto, from engaging or competing in any line of
business or in any geographic area;
(xvi) terminate, cancel, amend or modify any insurance
policies maintained by it covering the Company or any of its
Subsidiaries or their respective properties which is not
replaced by a comparable amount of insurance coverage;
A-32
(xvii) adopt a plan of complete or partial liquidation,
dissolution, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries;
(xviii) alter or amend in any material respect any existing
reinsurance, underwriting, claim handling, loss control,
investment, actuarial, financial reporting or accounting
practices, guidelines or policies (including compliance
policies) or any material assumption underlying an actuarial
practice or policy, in each case except as may be required by
applicable Law, GAAP or SAP;
(xix) take any action that would reasonably be expected to
(A) result in any condition to the Merger set forth in
Article VII not being satisfied or (B) prevent,
materially delay or materially impede the consummation of the
Merger or any other transactions contemplated by this
Agreement; or
(xx) authorize any of, or commit, resolve, propose or agree
to take any of, the foregoing actions.
Section
5.2
Conduct
of Business by Parent
.
From the date of this
Agreement until the earlier of the Effective Time and the date,
if any, on which this Agreement is earlier terminated pursuant
to Section 8.1, except (x) as prohibited or required
by applicable Law or by any Governmental Entity, (y) as set
forth in Section 5.2 of the Parent Disclosure Schedule or
(z) as otherwise expressly contemplated, required or
permitted by this Agreement, unless the Company shall otherwise
consent (which consent shall not be unreasonably withheld,
conditioned or delayed), Parent shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly:
(a) (A) amend or propose or agree to amend any of its
Constituent Documents in such a manner that would cause holders
of Common Stock that receive Parent Common Stock pursuant to the
Merger to be treated differently than holders of Parent Common
Stock or (B) declare, set aside or pay any dividend payable
in cash, stock or property or make any other distribution with
respect to such shares of capital stock or other ownership
interests (except that a wholly owned Subsidiary may declare and
pay a dividend to its parent and Parent may declare and pay
regular quarterly dividends in the ordinary course of business);
(b) take any action that would reasonably be expected to
prevent the Merger from qualifying as a reorganization within
the meaning of Section 368(a) of the Code;
(c) adopt a plan of complete or partial liquidation or
dissolution with respect to Parent or resolutions providing for
or authorizing such a liquidation or dissolution;
(d) take any action that would reasonably be expected to
(A) result in any condition to the Merger set forth in
Article VII not being satisfied or (B) prevent,
materially delay or materially impede the consummation of the
Merger or any other transactions contemplated by this
Agreement; or
(e) authorize any of, or commit, resolve, propose or agree
to take any of, the foregoing actions.
ARTICLE VI
ADDITIONAL
AGREEMENTS
Section
6.1
Preparation
of the Proxy Statement/Prospectus and
Form S-4
.
(a) As promptly as reasonably practicable after the date of
this Agreement, but in any event within forty (40) days
hereof, (i) the Company shall prepare, together with
Parent, and file with the SEC the proxy statement (as amended or
supplemented from time to time, the
Proxy
Statement/Prospectus
) to be mailed to the stockholders
of the Company relating to the Company Stockholders Meeting and
(ii) Parent shall prepare, together with the Company, and
file with the SEC a registration statement on
Form S-4
(of which the Proxy Statement/Prospectus shall be a part) with
respect to the issuance of Parent Common Stock in the Merger
(such
Form S-4,
and any amendments or supplements thereto, the
Form S-4
).
Each of Parent and the Company shall use its reasonable best
efforts to have the Proxy Statement/Prospectus cleared by the
SEC and the
Form S-4
declared effective by the SEC, in each case, as promptly as
reasonably practicable, and to keep the
Form S-4
effective as long as is necessary to consummate the Merger and
the other transactions
A-33
contemplated hereby. Parent shall furnish to the Company all
information as may be reasonably requested by the Company in
connection with any such action and the preparation, filing and
mailing of the Proxy Statement/Prospectus and the Company shall
furnish to Parent all information as may be reasonably requested
by Parent in connection with any such action and the preparation
and filing of the
Form S-4.
Subject to applicable Law, as promptly as reasonably practicable
after the SEC or its staff advises that it has no further
comments on the Proxy Statement/Prospectus or that the Company
may commence mailing the Proxy Statement/Prospectus, the Company
shall use its reasonable best efforts to cause the Proxy
Statement/Prospectus to be mailed to the stockholders of the
Company. No filing of, or amendment or supplement to, the Proxy
Statement/Prospectus or the
Form S-4,
as applicable, shall be made by the Company or Parent, as
applicable, and no response to any comments of the SEC or its
staff with respect thereto shall be submitted by the Company or
Parent, as applicable, without providing the other party a
reasonable opportunity to review and comment thereon and giving
due consideration to inclusion in the Proxy Statement/Prospectus
or
Form S-4,
as applicable, or any such response comments reasonably proposed
by either party. If at any time prior to the Effective Time, any
information relating to the Company or Parent, or any of their
respective Affiliates, directors or officers, should be
discovered by the Company or Parent which should be set forth in
an amendment or supplement to the Proxy Statement/Prospectus or
Form S-4,
so that such document would not include any misstatement of a
material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under
which they are made, not misleading, the party that discovers
such information shall promptly notify the other party and an
appropriate amendment or supplement describing such information
shall be promptly filed with the SEC and, to the extent required
by Law, mailed to the stockholders of the Company. Both parties
shall notify the other party promptly of the receipt of notice
of the time when the
Form S-4
shall become effective, the issuance of any stop order, the
suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in
any jurisdiction, any comments from the SEC or the staff of the
SEC with respect to the Proxy Statement/Prospectus or the
Form S-4,
as applicable, and of any request by the SEC or the staff of the
SEC for amendments or supplements to the Proxy
Statement/Prospectus or
Form S-4,
as applicable, or for additional information. The Company or
Parent, as applicable, shall respond promptly to any comments or
requests from the SEC or the staff of the SEC and shall supply
the other party with copies of all correspondence between such
party or any of its Representatives, on the one hand, and the
SEC or the staff of the SEC, on the other hand, with respect to
the Proxy Statement/Prospectus or the
Form S-4.
(b) None of the information supplied or to be supplied by
the Company or Parent for inclusion or incorporation by
reference into (i) the
Form S-4
will, at the time the
Form S-4
is filed with the SEC and at the time it becomes effective under
the Securities Act, 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,
and (ii) the Proxy Statement/Prospectus will, at the date
of mailing to stockholders and at the time of the Company
Stockholders Meeting to be held in connection with the Merger,
contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided
,
that
, in each case of (i) and (ii),
neither party shall be responsible or liable for any statements
made or incorporated by reference therein based on information
supplied by the other party for inclusion or incorporation by
reference therein.
(c) Each of the Company and Parent shall cause the Proxy
Statement/Prospectus and the
Form S-4
to comply as to form in all material respects with the
requirements of the Exchange Act and the Securities Act, as the
case may be, and the rules and regulations of the SEC
thereunder, except that no representation or warranty shall be
made by either party with respect to statements made or
incorporated by reference therein based on information supplied
by the other party for inclusion or incorporation by reference
in the Proxy Statement/Prospectus or
Form S-4.
Parent and the Company shall make any necessary filings with
respect to the Merger under the Securities Act and the Exchange
Act and the rules and regulations thereunder.
(d) Each party will take any action required to be taken
under any applicable state or foreign securities Laws in
connection with the Merger or, in the case of Parent, the
issuance of Parent Common Stock in the
A-34
Merger and each party shall furnish all information concerning
it and the holders of its capital stock as may be reasonably
requested in connection with any such action.
Section
6.2
Stockholders
Meeting; Company Board Recommendation
.
As
promptly as reasonably practicable after the SEC or its staff
advises that it has no further comments on the Proxy
Statement/Prospectus or that the Company may commence mailing
the Proxy Statement/Prospectus, but in any event within
forty-five (45) days thereof, the Company, acting through
its Board of Directors, and in accordance with applicable Law
and the rules and regulations of Nasdaq, shall (a) unless
this Agreement is validly terminated pursuant to
Article VIII, duly call, give notice of, convene and hold a
meeting of the stockholders of the Company for the purpose of
obtaining the Requisite Stockholder Vote and such other matters
as the Board of Directors of the Company may decide (the
Company Stockholders Meeting
) and use
reasonable best efforts to solicit and secure the Requisite
Stockholder Vote in accordance with applicable legal
requirements;
provided
,
however
,
that
the
Company shall be permitted to delay or postpone convening the
Company Stockholders Meeting (i) to the extent necessary to
ensure that any supplement or amendment to the Proxy
Statement/Prospectus or the
Form S-4
required to be provided to the stockholders of the Company is so
provided, (ii) if as of the time at which the Company
Stockholders Meeting is originally scheduled there are
insufficient shares of Common Stock represented (in person or by
proxy) to constitute a quorum necessary to conduct the business
of the Company Stockholders Meeting or (iii) for the
purpose of soliciting additional proxies, if proxies granted by
the time of the Company Stockholders Meeting are insufficient to
obtain the Requisite Stockholder Vote;
provided
,
that
the Company shall reconvene or reschedule the
Company Stockholders Meeting as soon as practicable after such
adjournment or postponement; and (b) subject to
Section 6.3(d), include in the Proxy Statement/Prospectus
the Company Board Recommendation.
Section
6.3
No
Solicitation
.
(a) The Company agrees that it shall, and shall cause its
Subsidiaries, directors, officers and employees to, and shall
use its reasonable best efforts to cause its other
Representatives to, immediately cease and cause to be terminated
all existing discussions or negotiations with any Person
conducted heretofore with respect to any Takeover Proposal.
Except as permitted by Section 6.3(b), the Company shall
not, and shall cause each of its Subsidiaries, directors,
officers and employees not to, and shall use its reasonable best
efforts to cause its other Representatives not to, directly or
indirectly, (i) solicit, initiate or knowingly encourage,
or knowingly facilitate, any Takeover Proposal or the making or
consummation thereof or (ii) enter into, continue or
otherwise participate in any discussions (except, in response to
an inquiry from such Person, to notify such Person of the
existence of the provisions of this Section 6.3) or
negotiations regarding, or furnish to any Person any non-public
material information in connection with, any Takeover Proposal.
Except in connection with a Superior Proposal and after
complying with the provisions of Section 6.3(d) and
Section 6.3(e), including Section 6.3(d)(ii), the
Company agrees that it shall not, and shall cause its
Subsidiaries, directors, officers and employees not to, and
shall use its reasonable best efforts to cause its other
Representatives not to, terminate, amend, modify, waive or fail
to enforce any provision of any standstill or
similar obligation of any Person with respect to any Takeover
Proposal. The Company agrees that any material violations of the
restrictions set forth in this Section 6.3(a) by any
Representative of the Company shall be deemed to be a breach by
the Company.
(b) Notwithstanding the provisions of the second sentence
of Section 6.3(a), at any time prior to obtaining the
Requisite Stockholder Vote, in response to an unsolicited, bona
fide, written Takeover Proposal received after the date of this
Agreement which did not arise as a result of a breach of the
Companys obligations under Section 6.3(a),
(A) the Company and its Representatives may contact such
Person making such Takeover Proposal (and its representatives)
solely to clarify the terms and conditions thereof and
(B) if the Board of Directors of the Company determines in
good faith (after consultation with its outside legal counsel)
that the failure to take such actions would, or would reasonably
be expected to, be inconsistent with its fiduciary duties under
applicable Law, the Company and its Representatives may
(1) furnish information with respect to the Company and its
Subsidiaries to the Person making such Takeover Proposal (and
its representatives),
provided
that
(A) prior
to so furnishing such information the Company has entered into a
confidentiality agreement with such Person containing standstill
provisions no less restrictive to such Person than the
standstill provisions of the Confidentiality Agreement are to
Parent, its Affiliates and their respective
A-35
Representatives and otherwise on terms not less restrictive in
the aggregate to such Person than the provisions of the
Confidentiality Agreement are to Parent, its Affiliates and
their respective Representatives and (B) all such
information has previously been provided or made available to
Parent or its Representatives or is provided or made available
to Parent or its Representatives prior to or substantially
concurrent with the time it is provided to such Person; and
(2) participate in discussions or negotiations with the
Person making such Takeover Proposal (and its representatives)
regarding such Takeover Proposal.
(c) Except as permitted by Section 6.3(d), none of the
Board of Directors of the Company nor any committee thereof
shall (i) withdraw (or modify or qualify in a manner
adverse to Parent) the Company Board Recommendation, including
by amendment or supplement to the Joint Proxy
Statement/Prospectus or the
Form S-4,
(ii) fail to include the Company Board Recommendation in
the Proxy Statement/Prospectus, (iii) approve, adopt or
recommend, or publicly propose to approve, adopt or recommend,
any Takeover Proposal (any action described in these clauses
(i), (ii) or (iii) being referred to as a
Recommendation Withdrawal
), or
(iv) allow the Company or any of its Subsidiaries to
execute or enter into any letter of intent, memorandum of
understanding, agreement in principle, merger agreement,
acquisition agreement, option agreement, joint venture
agreement, partnership agreement, or other similar Contract
(other than a confidentiality agreement referred to in
Section 6.3(b)) providing for, with respect to, or in
connection with, any Takeover Proposal;
provided
,
however
,
that
(A) the delivery by the
Company, the Board of Directors of the Company or any committee
thereof of any notice specified in Section 6.3(e) shall not
be deemed to be or constitute a Recommendation Withdrawal and
(B) the provision of factual information by the Company to
its stockholders shall not be deemed to be or constitute a
Recommendation Withdrawal so long as the disclosure through
which such factual information is conveyed, taken as a whole, is
not contrary to or materially inconsistent with the Company
Board Recommendation.
(d) Notwithstanding the provisions of Section 6.3(c),
at any time prior to obtaining the Requisite Stockholder Vote,
and subject in each case to the prior compliance with
Section 6.3(e), (i) the Board of Directors of the
Company
and/or
any
authorized committee thereof may make a Recommendation
Withdrawal if the Board of Directors of the Company determines
in good faith, after consultation with its outside legal
counsel, that the failure to take such action would be
reasonably likely to be inconsistent with its fiduciary duties
under applicable Law; or (ii) without limiting the effect
of the Section 6.3(c) proviso and Section 6.3(d)(i)
and the rights provided for thereunder, in response to an
unsolicited, bona fide, written Takeover Proposal which did not
arise as a result of a breach of the Companys obligations
under Section 6.3(a) and that the Board of Directors of the
Company determines in good faith (after consultation with its
financial advisor and outside legal counsel) constitutes a
Superior Proposal, the Company may terminate this Agreement
pursuant to Section 8.1(d)(ii) and this
Section 6.3(d)(ii) and, concurrently with such termination,
may enter into a definitive agreement with respect to such
Superior Proposal;
provided
,
that
Parent shall
have the option, exercisable within four (4) Business Days
following the notice referred to in Section 6.3(e)(ii)(A),
to cause this Agreement and the plan of merger contained herein
to be submitted for the Requisite Stockholder Vote and, if
Parent exercises this option, then the Board of Directors of the
Company shall promptly give notice of, convene and hold the
Company Stockholders Meeting and the Company shall not be
entitled to terminate this Agreement pursuant to
Section 8.1(d)(ii) and this Section 6.3(d)(ii) or to
enter into a definitive agreement with respect to such Superior
Proposal prior to any termination of this Agreement in
accordance with its terms and
provided
,
further
,
that
the Company shall not terminate this Agreement
pursuant to Section 8.1(d)(ii) and this
Section 6.3(d)(ii), and any such purported termination
shall be void and of no force or effect, unless the Company pays
to Parent the fee and expenses payable pursuant to
Section 8.3(e) prior to or concurrently with such
termination. For the avoidance of doubt, Parents exercise
or failure to exercise its option to force the Company
Stockholders Meeting to be convened and held shall in no way
affect Parents rights to terminate this Agreement or to
the Termination Fee or the Transaction Expenses.
(e) Notwithstanding anything to the contrary contained in
this Agreement, neither the Board of Directors of the Company
nor any authorized committee thereof may make a Recommendation
Withdrawal or terminate this Agreement pursuant to
Section 8.1(d)(ii) and Section 6.3(d)(ii), unless
(i) if such Recommendation Withdrawal is not being made as
a result of a Superior Proposal, the Company shall have provided
to Parent four (4) Business Days prior written notice
advising Parent that the Board of Directors of the Company
intends
A-36
to take such action and specifying the reasons therefor or
(ii) if such Recommendation Withdrawal or termination is
being made as a result of a Superior Proposal, (A) the
Company shall have provided to Parent four (4) Business
Days prior written notice advising Parent that the Board of
Directors of the Company intends to take such action and
specifying the reasons therefor, as well as the material terms
and conditions of any Superior Proposal (including the identity
of the Person making such Superior Proposal and copies of all
documents or correspondence evidencing such Superior Proposal),
(B) during such four (4) Business Day period, if
requested by Parent, the Company shall have, and shall have
caused its Subsidiaries, directors, officers and employees to
have, and shall have used its reasonable best efforts to cause
its other Representatives to have, engaged in good faith
negotiations with Parent regarding any amendment to this
Agreement proposed in writing by Parent and (C) at the end
of such four (4) Business Day period such Takeover Proposal
continues to constitute (in the good faith judgment of the Board
of Directors) a Superior Proposal after taking into account any
such amendments that Parent shall have agreed to make prior to
the end of such four (4) Business Day period. The parties
understand and agree that to comply with this
Section 6.3(e) any material revisions to the terms of such
Superior Proposal shall require the Company to deliver to Parent
a new notice and to continue negotiations during a new
negotiation period, as contemplated by subclauses (A),
(B) and (C) of this Section 6.3(e) above.
(f) In addition to the obligations of the Company set forth
in the other provisions of this Section 6.3, the Company
shall as promptly as practicable (and in any event within
24 hours after receipt) (i) advise Parent orally and
in writing of (A) any Takeover Proposal, the material terms
and conditions of any such Takeover Proposal (including any
material changes thereto) and the identity of the Person making
the Takeover Proposal and (B) any request for non-public
information relating to the Company or any Subsidiary of the
Company other than requests for information not reasonably
expected to be related to a Takeover Proposal and
(ii) provide to Parent copies of all documents or
correspondence evidencing such Takeover Proposal or request. The
Company shall thereafter keep Parent reasonably informed on a
reasonably current basis of the status of any such Takeover
Proposal (including any material change to the terms thereof) or
request.
(g) Nothing contained in this Section 6.3 shall
prohibit the Company or the Board of Directors of the Company
from (i) taking and disclosing to the stockholders of the
Company a position contemplated by
Rule 14e-2(a)
under the Exchange Act or making a statement contemplated by
Item 1012(a) of
Regulation M-A
or
Rule 14d-9
under the Exchange Act, (ii) making any disclosure to the
stockholders of the Company if the Board of Directors of the
Company determines in good faith, after consultation with its
outside legal counsel, that the failure to make such disclosure
would be reasonably likely to be inconsistent with its fiduciary
duties under applicable Law or (iii) informing any Person,
in response to an unsolicited inquiry from such Person, of the
existence of the provisions contained in this Section 6.3;
provided
that
(A) nothing in
Section 6.3(g)(ii) shall limit the Companys or its
Board of Directors or authorized committees
obligation to comply with Section 6.3(c),
Section 6.3(d) and 6.3(e) with respect to a Recommendation
Withdrawal or a Superior Proposal, and (B) any disclosure
made pursuant to Item 1012(a) of
Regulation M-A,
Rule 14d-9
or
Rule 14e-2(a)
shall be deemed to be a Recommendation Withdrawal, unless the
response of the Companys Board of Directors or an
authorized committee thereof (x) is one of a rejection,
(y) an expression of no opinion or (z) a
statement that it is unable to take a position and in the case
of subclauses (y) and (z), concurrently therewith,
expressly reaffirms the Company Board Recommendation to the
Companys stockholders, in any event, it being understood
that a stop, look and listen communication (or any
similar communication) to the stockholders of the Company
pursuant to
Rule 14d-9(f)
under the Exchange Act shall not be deemed to be or constitute a
Recommendation Withdrawal.
(h) For purposes of this Agreement:
Takeover Proposal
means any proposal
or offer relating to (i) any direct or indirect purchase or
other acquisition, in one transaction or a series of related
transactions, by any Person or group (other than Parent or any
of its Subsidiaries) of shares of voting or equity securities of
the Company representing more than twenty percent (20%) of the
voting securities or such class of equity securities,
respectively, of the Company outstanding after giving effect to
the consummation of such purchase or other acquisition,
including pursuant to a tender offer or exchange offer by any
Person or group that, if consummated in accordance with its
terms, would result in such Person or group beneficially owning
more than twenty
A-37
percent (20%) of such voting securities or class of equity
securities, as the case may be, of the Company outstanding after
giving effect to the consummation of such tender or exchange
offer; (ii) any direct or indirect purchase or other
acquisition, in one transaction or a series of related
transactions, by any Person of assets (including equity
securities of any Subsidiary of the Company) or businesses that
constitute more than twenty percent (20%) of the assets
(measured by the fair market value thereof) or account for more
than twenty percent (20%) of the net income of the Company and
its Subsidiaries, taken as a whole; or (iii) any merger,
consolidation, business combination, recapitalization,
reorganization, liquidation, dissolution or other similar
transaction involving the Company or any of its Subsidiaries
pursuant to which any Person or group (other than Parent or any
of its Subsidiaries) would hold shares of voting or equity
securities of the Company representing more than twenty percent
(20%) of the voting securities or such class of equity
securities, respectively, of the Company or of any resulting
parent company of the Company outstanding after giving effect to
the consummation of such transaction.
Superior Proposal
means a bona fide,
unsolicited Takeover Proposal (with all references to
(i) more than twenty percent (20%) when
referring to the voting securities or equity securities of the
Company (or of any resulting parent company of the Company) in
the definition of Takeover Proposal being deemed to
be a reference to more than seventy-five percent
(75%), and (ii) more than twenty percent
(20%) when referring to the assets or the net income of
the Company and its Subsidiaries in the definition of Takeover
Proposal being deemed to be references to all or
substantially all) made in writing that is on terms that
the Board of Directors of the Company determines in good faith
(after consulting with its financial advisor and outside legal
counsel), taking into account the legal, financial, regulatory,
timing and other aspects of the Takeover Proposal and the Person
making the Takeover Proposal (including any
break-up
fees, expense reimbursement provisions and conditions to
consummation), (A) is more favorable from a financial point
of view to the stockholders of the Company than the transactions
contemplated hereby (including any written offer by Parent
capable of acceptance by the Company to amend this Agreement in
accordance with Section 6.3(e) which is received prior to
the expiration of the applicable negotiation period under
Section 6.3(e)), and (B) is fully financed or
reasonably capable of being fully financed, reasonably likely to
receive all required governmental approvals on a timely basis
and otherwise reasonably capable of being completed on the terms
proposed.
Section
6.4
Access
to Information
.
The Company shall, and shall
cause each of its Subsidiaries to, afford the Representatives of
Parent reasonable access during normal business hours to the
Companys and its Subsidiaries properties, books,
records, Contracts and personnel, and shall furnish, and shall
cause to be furnished, as promptly as reasonably practicable to
Parent (a) a copy of each report, schedule and other
document received, filed, furnished, published or announced by
it during such period pursuant to the requirements of federal or
state securities Laws or any Governmental Entity and
(b) all other information concerning the Companys and
its Subsidiaries business, properties and personnel as
Parent may reasonably request;
provided
that
the
Company may restrict the foregoing access to those Persons who
have entered into or are bound by a confidentiality agreement
with the Company or to the extent required by applicable Law.
Without limiting the generality of the foregoing, from the date
hereof through the Effective Time, to the extent permissible
under applicable Law (a) and subject to Parent entering
into customary confidentiality agreements, the Company shall,
and shall cause each of its Subsidiaries to, make available to
Parent and, if desired by Parent, Parents actuary,
independent or otherwise, a true and complete copy of all
actuarial reports prepared by actuaries, independent or
otherwise, with respect to any Company Insurance Subsidiary, all
material attachments, addenda, supplements and modifications
thereto, and all work papers of actuaries, independent or
otherwise, with respect thereto and with respect to the Company
Actuarial Analyses, in each case, to the extent not provided
prior to the date hereof, and the Company shall consult with
Parent (and consider in good faith the advice of Parent and
Parents independent actuary, if any) with respect to
setting the Companys loss and loss adjustment expense
reserves and (b) the Company shall, and shall cause each of
its Subsidiaries to reasonably cooperate with Buyer in its
investigation of the Company and its Subsidiaries and their
respective businesses and in its integration planning, including
in connection with the integration of the Companys
Insurance Subsidiaries into pooling arrangements with
Parents insurance company Subsidiaries. All such access
shall be subject to reasonable restrictions imposed from time to
time with respect to the provision of privileged communications
or any applicable confidentiality agreement with any Person. In
conducting any
A-38
inspection of any properties of the Company and its
Subsidiaries, Parent and its Representatives shall not
(i) materially interfere with the business of the Company
or any of its Subsidiaries conducted at such property or
(ii) damage any property or any portion thereof. Prior to
the Effective Time, Parent and its Representatives shall not
have the right to conduct environmental testing or sampling at
any of the facilities or properties of the Company or any of its
Subsidiaries. All information obtained pursuant to this
Section 6.4 shall continue to be governed by the
Confidentiality Agreement which shall remain in full force and
effect in accordance with its terms. No investigation pursuant
to this Section 6.4 shall affect the representations and
warranties or conditions to the obligations of the parties
contained herein.
Section
6.5
Reasonable
Best Efforts
.
(a) Subject to the terms and conditions of this Agreement,
each of the Company, Parent and Merger Sub shall use its
reasonable best efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary,
proper or advisable under this Agreement and applicable Laws and
regulations to consummate the transactions contemplated hereby
as soon as reasonably possible after the date of this Agreement
(and in any event no later than the Outside Date), including
(i) preparing and filing as promptly as practicable all
documents to effect all necessary applications, notices,
petitions, filings and other documents and to obtain as promptly
as practicable all consents, clearances, waivers, licenses,
orders, registrations, authorizations, approvals and permits
contemplated by this Agreement and (ii) taking all
reasonable steps as may be necessary or advisable to make all
necessary filings and obtain all such consents, clearances,
waivers, licenses, orders, registrations, authorizations,
approvals and permits (including providing all necessary
information and documentary material and providing personnel as
necessary to attend any regulatory meetings, hearings or other
proceedings). In furtherance and not in limitation of the
foregoing, each of the Company, Parent and Merger Sub agrees to
make, as promptly as reasonably practicable after the date of
this Agreement and in any event within twenty-five
(25) days of the date of this Agreement, (A) an
appropriate filing of a Notification and Report Form pursuant to
the HSR Act, (B) appropriate filings required by the
Transaction Approvals and (C) all other necessary filings
with any other Governmental Entity with respect to the
transactions contemplated hereby and to supply as promptly as
practicable any additional information and documentary material
that may be reasonably requested pursuant to such requirements
and to use its reasonable best efforts to cause the expiration
or termination of the applicable waiting periods under the HSR
Act and the receipt of the Transaction Approvals to occur in the
most expeditious manner practicable. The Company and Parent will
each request early termination of the waiting period with
respect to the Merger under the HSR Act.
(b) To the extent permissible under applicable Law or any
rule, regulation or restriction of any Governmental Entity, each
of the Company, Parent and Merger Sub shall, in connection with
the efforts referenced above to obtain all requisite approvals,
clearances and authorizations for the transactions contemplated
hereby under the HSR Act or any other approval of a Governmental
Entity (including the Transaction Approvals), use its reasonable
best efforts to (i) cooperate in all respects with each
other party in connection with any filing or submission and in
connection with any investigation or other inquiry, including
any proceeding initiated by any private party, (ii) keep
the other parties apprised of the status of matters relating to
completion of the transactions contemplated hereby and promptly
inform the other parties of any communication received by such
party from, or given by such party to, the Antitrust Division of
the Department of Justice (the
DOJ
), the
Federal Trade Commission (the
FTC
) or any
other Governmental Entity and of any material communication
received or given in connection with any proceeding by any
private party, in each case regarding any of the transactions
contemplated hereby, (iii) permit the other parties, or the
other parties legal counsel, to review any filing,
submission or other communication given by it to the DOJ, the
FTC or any other Governmental Entity or, in connection with any
proceeding by any private party, with any other Person (it being
understood that each party shall, without limitation, have the
right to review in advance, subject to applicable Laws relating
to the exchange of information, all of the information relating
to such party, and any of its respective Subsidiaries, which
appears in any filing made with, or materials submitted to, any
third party or any Governmental Entity, with respect to this
Agreement or the Merger), (iv) consult with the other
parties in advance of any meeting, conference, conference call,
discussion or communication with, the DOJ, the FTC or any such
other Governmental Entity or, in connection with any proceeding
by any private party, with any
A-39
other Person and (v) to the extent permitted by such
Governmental Entity or other Person, give the other parties the
opportunity to attend and participate in such meetings,
conferences, conference calls, discussions and communications.
(c) If any objections are asserted with respect to the
transactions contemplated hereby under any applicable Law or if
any suit is instituted by any Governmental Entity or any private
party challenging any of the transactions contemplated hereby as
violative of any applicable Law, each of the Company, Parent and
Merger Sub shall use its reasonable best efforts to resolve any
such objections or challenges as such Governmental Entity or
private party may have to such transactions under such
applicable Law so as to permit consummation of the transactions
contemplated hereby on the terms set forth in this Agreement as
soon as reasonably possible after the date of this Agreement
(and in any event no later than the Outside Date).
(d) Notwithstanding anything to the contrary herein, Parent
shall not be required to take any actions pursuant to this
Section 6.5 (and the Company shall not, and shall cause its
Subsidiaries, directors, officers and employees not to, and
shall use its reasonable best efforts to cause its other
Representatives not to, take any actions, without the prior
written consent of Parent (which consent shall not be
unreasonably withheld or delayed)) which if undertaken would,
individually or in the aggregate, reasonably be expected to have
(1) a Company Material Adverse Effect or (2) a Parent
Material Adverse Effect (it being agreed that for purposes of
this clause (2) a Parent Material Adverse
Effect shall be deemed to occur at the level of
materiality at which the event, change, circumstance or effect
in question, if it were an effect on the Company and its
Subsidiaries instead of Parent and its Subsidiaries, would
constitute a Company Material Adverse Effect) (clause (1)
or (2), a
Regulatory Material Adverse Effect
).
Section
6.6
Employee
Matters
.
(a) Until the second anniversary of the Effective Time (the
Benefits Continuation Period
), the Surviving
Corporation shall provide, or cause to be provided, for those
employees of the Company and its Subsidiaries who continue as
employees of the Surviving Corporation or any of its
Subsidiaries during all or a portion of the Benefits
Continuation Period (the
Continuing
Employees
), either (
i
) employee benefits
substantially similar in the aggregate to the employee benefits
in effect immediately prior to the Effective Time, (
ii
)
Parents employee benefit plans on the same terms as
similarly-situated employees of Parent and its Subsidiaries or
(
iii
) a combination of (i) and (ii), in each case in
the discretion of Parent. Until December 31, 2010, the
Surviving Corporation shall provide, or cause to be provided,
for Continuing Employees, compensation opportunities (including
salary, wages and bonus opportunities but excluding equity
incentive opportunities) substantially similar in the aggregate
to the compensation opportunities in effect immediately prior to
the Effective Time. Nothing herein shall be deemed to be a
guarantee of employment for any current or former employee of
the Company or any of its Subsidiaries, or to restrict the right
of Parent or the Surviving Corporation to terminate any such
employee or to give any person any right to any specific terms
or conditions of employment.
(b) The Surviving Corporation shall (i) waive any
applicable pre-existing condition exclusions and waiting periods
with respect to participation and coverage requirements in any
replacement or successor welfare benefit plan of Parent or the
Surviving Corporation that a Continuing Employee is eligible to
participate in following the Effective Time to the extent such
exclusions or waiting periods were inapplicable to, or had been
satisfied by, such Continuing Employee immediately prior to the
Effective Time under the analogous Company Benefit Plan in which
such Continuing Employee participated, (ii) provide each
Continuing Employee with credit for any co-payments and
deductibles paid prior to the Effective Time (to the same extent
such credit was given under the analogous Company Benefit Plan
prior to the Effective Time) in satisfying any applicable
deductible or
out-of-pocket
requirements, and (iii) recognize service prior to the
Effective Time with the Company and any of its Subsidiaries for
purposes of eligibility to participate and vesting and level of
benefits (but not for purposes of benefits accrual under any
defined benefit pension plan) to the same extent such service
was recognized by the Company or any of its Subsidiaries under
the analogous Company Benefit Plan in which such Continuing
Employee participated immediately prior to the Effective Time;
provided
that
the foregoing shall not apply to the
extent it would result in any duplication of benefits for the
same period of service.
A-40
(c) From and after the Effective Time, except as otherwise
agreed in writing between Parent and a Company employee, Parent
will cause the Surviving Corporation and its Subsidiaries to
honor, in accordance with its terms (including any rights of
amendment, modification or termination provided therein),
(i) each existing employment, change in control, severance
and termination protection plan or agreement between the Company
or any of its Subsidiaries and any officer, director or
employee, (ii) all obligations in effect as of the
Effective Time under any bonus, bonus deferral and vacation
plans, programs or agreements of the Company or any of its
Subsidiaries and (iii) all obligations in effect as of the
Effective Time pursuant to any outstanding retention or equity
based plans, programs or agreements, and all vested and accrued
benefits under any employee benefit, employment compensation or
similar plans, programs, agreements or arrangements of the
Company or any of its Subsidiaries.
(d) With respect to matters described in this
Section 6.6 (and the matters described in
Section 1.7), the Company shall consult with Parent (and
consider in good faith the advice of Parent) prior to sending
any material notices or other material communication materials
to its employees or former employees. Prior to the Effective
Time, subject to applicable Law, the Company shall provide
Parent with reasonable access to such employees and contact
information for former employees for purposes of Parent
providing reasonable notices or other communication materials
regarding Parent compensation and benefit plans and the matters
described in this Section 6.6 (and the matters described in
Section 1.7),
provided
that
such notices or
other communication materials are reasonably approved in advance
by the Company.
(e) Notwithstanding anything herein to the contrary, any
Continuing Employee who terminates employment during the period
ending on the second anniversary of the Effective Time shall be
entitled to severance pay and benefits no less favorable than
the severance pay and benefits such Continuing Employee would
have been entitled to pursuant to the severance plans and
arrangements in effect immediately prior to the Effective Time.
(f) Nothing contained herein, whether express or implied,
(i) shall be treated as an amendment or other modification
of any Company Benefit Plan or (ii) subject to the
requirements of this Section 6.6, shall limit the right of
Parent or the Surviving Corporation or any of its Subsidiaries
to amend, terminate or otherwise modify any Company Benefit Plan
following the Closing Date.
Section
6.7
Expenses
.
Except
as otherwise set forth herein to the contrary, whether or not
the Merger is consummated, all Expenses incurred in connection
with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such Expenses. As used in
this Agreement,
Expenses
includes all
out-of-pocket
fees and expenses (including all reasonable fees and expenses of
outside counsel, accountants, investment bankers, experts and
consultants to a party and its Affiliates) incurred by a party
or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and
performance of this Agreement and the transactions contemplated
hereby, including the preparation, filing, printing and mailing
of the Proxy Statement/Prospectus and the solicitation of the
Requisite Stockholder Vote.
Section
6.8
Transfer
Taxes
.
The Company and Parent shall
reasonably cooperate in the preparation, execution and filing of
all returns, questionnaires, applications or other documents
regarding any real property transfer, sales, use, transfer,
value added, stock transfer and stamp Taxes, and transfer,
recording, registration and other fees and any similar Taxes
that become payable in connection with the transactions
contemplated hereby.
Section
6.9
Tax
Treatment
.
It is the intention of the parties
that the Merger shall qualify as a reorganization
within the meaning of Section 368(a) of the Code and the
regulations promulgated thereunder, and that this Agreement
shall constitute a plan of reorganization within the
meaning of
Section 1.368-2(g)
of the US Treasury regulations. Each party shall use
commercially reasonable efforts to cause the Merger to so
qualify. Each party shall provide the other party with
officers certificates at such time or times as may be
reasonably requested in order to enable the respective counsel
of such parties to render the opinions set forth in
Sections 7.2(e) and 7.3(d), such certificates to be
substantially in the form of Exhibits B and C (allowing for
such amendments to such Exhibits as counsel reasonably deem
necessary for purposes of rendering such opinions or to account
for changes in facts or circumstances as of the Closing Date);
provided
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that
no party shall be required to deliver any such
certificate if any representations contained therein would be
inaccurate or untrue.
Section
6.10
Directors
and Officers Indemnification and
Insurance
.
(a) From and after the Effective Time, the Surviving
Corporation shall, and Parent shall cause the Surviving
Corporation to, to the fullest extent permitted by Law
(including to the fullest extent authorized or permitted by any
amendments to or replacements of the DGCL adopted after the date
of this Agreement that increase the extent to which a
corporation may indemnify its officers and directors), indemnify
and hold harmless (and advance expenses, provided the Person to
whom expenses are advanced provides a reasonable and customary
undertaking (which shall not include posting of any collateral)
to repay such advances if it is ultimately determined that such
Person is not entitled to indemnification) the present and
former directors and officers of the Company and its
Subsidiaries, or any fiduciaries under any Company Benefit Plan
(each, an
Indemnified Party
) against any and
all costs or expenses (including reasonable attorneys fees
and expenses), judgments, fines, losses, claims, damages,
penalties, liabilities and amounts paid in settlement in
connection with any actual or threatened claim, action, suit,
proceeding or investigation, whether civil, criminal,
administrative, regulatory or investigative, arising out of,
relating to or in connection with any circumstances,
developments or matters in existence, or acts or omissions
occurring or alleged to occur prior to or at the Effective Time,
including the approval of this Agreement or the transactions
contemplated hereby or arising out of or pertaining to the
transactions contemplated hereby, whether asserted or claimed
prior to, at or after the Effective Time, to the same extent
such Indemnified Parties are indemnified or have the right to
advancement of expenses as of the date of this Agreement by the
Company pursuant to the Certificate of Incorporation and Bylaws
of the Company and the agreements listed on Section 6.10(e)
of the Company Disclosure Schedule between the Company and any
of the Indemnified Parties.
(b) Subject to the next sentence, the Surviving Corporation
shall, and Parent shall cause the Surviving Corporation to, at
no expense to the beneficiaries, either (i) continue to
maintain in effect for six (6) years from the Effective
Time directors and officers liability insurance and
fiduciary liability insurance having terms and conditions at
least as favorable to the Indemnified Parties as the
Companys currently existing directors and
officers liability insurance and fiduciary liability
insurance (the
Current Insurance
) with
respect to matters existing or occurring at or prior to the
Effective Time (including the transactions contemplated hereby),
or (ii) purchase a six (6) year extended reporting
period endorsement with respect to the Current Insurance (a
Reporting Tail Endorsement
) and maintain this
endorsement in full force and effect for its full term. To the
extent purchased after the date hereof and prior to the
Effective Time, such insurance policies shall be placed through
such broker(s) and with such insurance carriers as may be
specified by Parent and as are reasonably acceptable to the
Company;
provided
that
such insurance carrier has
at least an A− rating by A.M. Best with
respect to directors and officers liability
insurance and fiduciary liability insurance. Notwithstanding the
foregoing, in no event shall Parent or the Surviving Corporation
be required to expend for any such policies contemplated by this
Section 6.10(b) an annual premium (measured for
tail purposes by reference to 1/6th the premium
paid therefor) amount in excess of 300% of the annual premiums
currently paid by the Company for such insurance;
provided
further
that if the annual premiums of
such insurance coverage exceed such amount, Parent or the
Surviving Corporation shall obtain a policy with, in the
Surviving Corporations good faith determination, the
greatest coverage available for a cost not exceeding such
amount. Notwithstanding the first sentence of this
Section 6.10(b), but subject to the second and third
sentences of this Section 6.10(b), the Company shall be
permitted at its sole and exclusive option to purchase a
Reporting Tail Endorsement prior to the Effective Time.
(c) The certificate of incorporation and bylaws of the
Surviving Corporation shall include provisions for
indemnification, advancement of expenses and exculpation of the
Indemnified Parties on the same basis as set forth in the
Constituent Documents of the Company in effect on the date of
this Agreement. Following the Effective Time, the Surviving
Corporation shall, and Parent shall cause the Surviving
Corporation to, maintain in effect the provisions in its
certificate of incorporation and bylaws providing for
indemnification, advancement of expenses and exculpation of
Indemnified Parties, as applicable, with respect to the facts or
circumstances occurring at or prior to the Effective Time, to
the fullest extent permitted from time to time under applicable
Law, which provisions shall not be amended except as required by
applicable Law or except
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to make changes permitted by applicable Law that would enlarge
the scope of the Indemnified Parties indemnification
rights thereunder.
(d) If Parent or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or
merges into any other Person and is not the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its
properties and assets to any Person, then, and in each such
case, Parent shall cause proper provisions to be made prior to
the consummation of any transaction of the type described in
clause (i) or clause (ii) of this sentence so that the
successors and assigns of Parent or the Surviving Corporation,
as the case may be, shall assume all of the obligations set
forth in this Section 6.10.
(e) From and after the Effective Time, Parent and the
Surviving Corporation agree not to, directly or indirectly,
amend, modify, limit or terminate the advancement of expenses,
exculpation and indemnification provisions of the agreements
listed on Section 6.10(e) of the Company Disclosure
Schedule between the Company and any of the Indemnified Parties,
or any such provisions contained in the Surviving
Corporations Constituent Documents.
(f) This Section 6.10 is intended for the irrevocable
benefit of, and to grant third party rights to, the Indemnified
Parties and their heirs, legal representatives and assigns and
shall be binding on all successors and assigns of Parent and the
Surviving Corporation. Each Indemnified Party shall be a
third-party beneficiary of this Section 6.10, and entitled
to enforce the covenants contained in this Section 6.10. If
any Indemnified Party makes any claim for indemnification or
advancement of expenses under this Section 6.10 that is
denied by Parent
and/or
the
Surviving Corporation, and a court of competent jurisdiction
determines that the Indemnified Party is entitled to such
indemnification, then Parent or the Surviving Corporation shall
pay such Indemnified Partys costs and expenses, including
reasonable legal fees and expenses, incurred in connection with
pursuing such claim against Parent
and/or
the
Surviving Corporation. The rights of the Indemnified Parties
under this Section 6.10 shall be in addition to any rights
such Indemnified Parties may have under the Constituent
Documents of the Company, the Constituent Documents of any of
the Companys Subsidiaries or the Surviving Corporation or
under any applicable Contracts, insurance policies or Laws.
Section
6.11
Public
Announcements
.
The parties agree that the
initial press release concerning this Agreement and the
transactions contemplated hereby shall be a joint press release
approved in advance by the Company and Parent. Following such
initial press release, Parent and the Company shall consult with
each other before issuing, and give each other the opportunity
to review and comment upon, any press release or other public
statements with respect to the transactions contemplated hereby
and shall not issue any such press release or make any such
public statement prior to such consultation, except as such
party may reasonably conclude may be required by applicable Law,
court process or by obligations pursuant to any listing
agreement with any national securities exchange or national
securities quotation system;
provided
,
however
,
that
the restrictions set forth in this Section 6.11
shall not apply to any release or public statement (a) made
or proposed to be made by the Company in accordance with
Section 6.3 or (b) in connection with any dispute
between the parties regarding this Agreement or the transactions
contemplated hereby. The Company shall provide Parent with its
stockholder lists and allow and facilitate Parents contact
with the stockholders of and prospective investors in the
Company and following a Recommendation Withdrawal, such contacts
may be made by Parent and its Representatives without regard to
the foregoing limitations of this Section 6.11.
Section
6.12
Notification
.
The
Company shall promptly notify Parent, and Parent shall promptly
notify the Company, of (a) any notice or other
communication received by such party from any Governmental
Entity in connection with the transactions contemplated hereby
or from any Person alleging that the consent of such Person is
or may be required in connection with the transactions
contemplated hereby, if the subject matter of such communication
or the failure of such party to obtain such consent would
reasonably be expected to have a Company Material Adverse Effect
or a Parent Material Adverse Effect, (b) any matter
(including a breach of any representation, warranty, covenant or
agreement contained in this Agreement) that would reasonably be
expected to lead to the failure to satisfy any of the conditions
to Closing in Article VII and (c) any action, suits,
claims, investigations or proceedings commenced or, to such
partys knowledge, threatened in writing against, relating
to or involving or otherwise affecting such party or any of its
Subsidiaries which relate to the
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transactions contemplated hereby. Failure to comply with this
Section 6.12 shall not result in the failure of any
condition under Article VII to be satisfied, unless such
condition would have otherwise been satisfied but for such
failure to comply with this Section 6.12.
Section
6.13
Section 16(b)
.
The
Company and Parent shall take all steps reasonably necessary to
cause the transactions contemplated hereby and any other
dispositions of equity securities of the Company or acquisitions
of equity securities of Parent (and, in each case, derivative
securities) in connection with the transactions contemplated
hereby by each individual who is a director or executive officer
of the Company or Parent to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
Section
6.14
Listing
of Parent Common Stock
.
Parent shall use its
reasonable best efforts to cause the shares of Parent Common
Stock to be issued and the shares of Parent Common Stock to be
reserved for issuance upon exercise of Options to be approved
for listing, upon official notice of issuance, on the Nasdaq.
Section
6.15
Delisting
of Common Stock
.
Each of the parties agrees
to cooperate with each other in taking, or causing to be taken,
all actions necessary to delist the Common Stock from Nasdaq and
terminate its registration under the Exchange Act;
provided
that
such delisting and termination shall
not be effective until after the Effective Time.
Section
6.16
Principal
Executive Offices of the Surviving
Corporation
.
Parent acknowledges its current
intention to maintain the Surviving Corporations principal
executive offices in Chicago, Illinois following the Effective
Time.
Section
6.17
Partner
Agent Program Agreement Amendments; Other Partner Agent
Matters
.
The Company shall, and shall cause
its Subsidiaries, directors, officers and employees to, and
shall use its reasonable best efforts to cause its other
Representatives to, use their reasonable best efforts to
negotiate and enter into amendments with the Partner Agents to
each of the applicable Partner Agent Program Agreements
identified on Schedule 6.17(a) in the form attached hereto
as Exhibit D or otherwise in form and substance reasonably
acceptable to Parent. Notwithstanding the forgoing, the
execution and delivery of any such amendments shall not be a
condition to closing under Article VII of this Agreement.
The Company shall, and shall cause its Subsidiaries, directors,
officers and employees to, and shall use its reasonable best
efforts to cause its other Representatives to, use their
reasonable best efforts to negotiate and enter into agreements
of the type set forth on Schedule 6.17(b) with the Partner
Agents identified on such schedule. Notwithstanding the
forgoing, the execution and delivery of any such agreements
shall not be a condition to closing under Article VII of
this Agreement
ARTICLE VII
CONDITIONS
Section
7.1
Conditions
to Each Partys Obligation to Effect the
Merger
.
The respective obligations of the
Company, Parent and Merger Sub to effect the Merger are subject
to the satisfaction or, to the extent permitted by Law, waiver
on or prior to the Closing Date of the following conditions:
(a)
Stockholder Approval
.
The
Requisite Stockholder Vote shall have been obtained.
(b)
Certain Regulatory Approvals
.
(i) All waiting periods (and any extensions thereof)
applicable to the Merger under the HSR Act shall have been
terminated or shall have expired; and
(ii) The Transaction Approvals shall have been obtained,
without the imposition of any material conditions or
restrictions that would, individually or in the aggregate,
reasonably be likely to have a Regulatory Material Adverse
Effect, or the waiting periods thereunder for the consummation
of the Merger applicable thereto shall have terminated or
expired, as applicable.
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(iii) Parent shall have caused the shares of Parent Common
Stock to be issued in the Merger and Parent Common Stock to be
reserved for issuance upon exercise of Options to have been
authorized for listing on Nasdaq, subject to official notice of
issuance.
(iv) The
Form S-4
shall have become effective under the Securities Act and shall
not be the subject of any stop order or proceeding seeking a
stop order.
(c)
No Injunctions or Restraints,
Illegality
.
No Law shall be in effect and no
temporary restraining order, preliminary or permanent injunction
or other Order issued by any court in the United States of
America or other United States Governmental Entity of competent
jurisdiction shall be in effect, having the effect of making
consummation of the Merger illegal or otherwise prohibiting
consummation of the Merger.
Section
7.2
Conditions
to Obligations of Parent and Merger Sub
.
The
obligations of Parent and Merger Sub to effect the Merger are
further subject to the satisfaction or, to the extent permitted
by Law, waiver by Parent on or prior to the Closing Date of the
following conditions:
(a)
Representations and
Warranties
.
The representations and
warranties of the Company set forth in Section 3.11(ii)
shall be true and correct in all respects as of the date of this
Agreement and as of the Closing Date as though made on and as of
the Closing Date. The representations and warranties of the
Company set forth in Sections 3.1, 3.2, 3.5 and 3.25 shall
be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made on and
as of the Closing Date. Except for the representations and
warranties of the Company set forth in Sections 3.1, 3.2,
3.5, 3.11(ii) and 3.25, each of the representations and
warranties of the Company set forth in this Agreement shall be
true and correct (without giving effect to any qualification or
limitation as to materiality or Company
Material Adverse Effect set forth therein) as of the date
of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent expressly made
as of an earlier date, in which case as of such earlier date),
except where the failure of such representations and warranties
to be true and correct (without giving effect to any
qualification or limitation as to materiality or
Company Material Adverse Effect set forth therein)
would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
(b)
Performance of Obligations of the
Company
.
The Company shall have performed or
complied in all material respects with all agreements and
covenants required to be performed by it under this Agreement at
or prior to the Closing.
(c)
Officers
Certificate
.
Parent shall have received a
certificate from an executive officer of the Company confirming
the satisfaction of the conditions set forth in
Sections 7.2(a) and 7.2(b).
(d)
No Material Governmental
Litigation
.
There shall not be pending any
material suit, action or proceeding brought by any United States
Governmental Entity of competent jurisdiction
(i) challenging the acquisition by Parent or Merger Sub of
Company Shares, (ii) seeking to restrain or prohibit the
consummation of the Merger or (iii) seeking to prohibit or
limit the ownership or operation by the Company or any of its
Subsidiaries or by Parent or any of its Subsidiaries of any
material portion of any business or assets of the Company and
its Subsidiaries, taken as a whole, or Parent and its
Subsidiaries, taken as a whole, which, if determined or resolved
adversely in accordance with plaintiffs or claimants
demands, in the case of clause (iii) above, would,
individually or in the aggregate, reasonably be likely to have a
Regulatory Material Adverse Effect.
(e)
Tax Opinion
.
Parent shall have
received from Debevoise & Plimpton LLP, counsel to
Parent, a written opinion dated the Closing Date to the effect
that for U.S. federal income tax purposes (i) the
Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and (ii) Parent
and the Company will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. In
rendering such opinion, counsel to Parent shall be entitled to
rely upon assumptions and representations provided by Parent and
the Company substantially in the form of Exhibits B and C
(allowing for such amendments to the representations as counsel
to Parent reasonably deems necessary
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for purposes of providing the opinion referred to in the
preceding sentence or to account for changes in facts or
circumstances as of the Closing Date).
(f)
No Material Adverse Effect
.
No
event, change, circumstance or effect shall have occurred since
the date hereof that has had or would, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section
7.3
Conditions
to Obligations of the Company
.
The
obligations of the Company to effect the Merger are further
subject to the satisfaction or, to the extent permitted by Law,
waiver by the Company, on or prior to the Closing Date of the
following conditions:
(a)
Representations and
Warranties
.
The representations and
warranties of Parent set forth in Section 4.9(ii) shall be
true and correct in all respects as of the date of this
Agreement and as of the Closing Date as though made on and as of
the Closing Date. The representations and warranties of Parent
set forth in Sections 4.1, 4.2, 4.5 and 4.14 shall be true
and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of
the Closing Date. Except for the representations and warranties
of Parent and Merger Sub set forth in Sections 4.1, 4.2,
4.5, 4.9(ii) and 4.14, each of the representations and
warranties of Parent and Merger Sub set forth in this Agreement
shall be true and correct (without giving effect to any
qualification or limitation as to materiality or
Parent Material Adverse Effect set forth therein) as
of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except to the extent
expressly made as of an earlier date, in which case as of such
earlier date), except where the failure of such representations
and warranties to be true and correct (without giving effect to
any qualification or limitation as to materiality or
Parent Material Adverse Effect set forth therein)
would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect.
(b)
Performance of Obligations of Parent and Merger
Sub
.
Each of Parent and Merger Sub shall have
performed or complied in all material respects with all
agreements and covenants required to be performed by it under
this Agreement at or prior to the Closing.
(c)
Officers
Certificate
.
The Company shall have received
a certificate from an executive officer of Parent confirming the
satisfaction of the conditions set forth in Sections 7.3(a)
and 7.3(b).
(d)
Tax Opinion
.
The Company shall
have received from Stroock & Stroock &
Lavan, LLP, counsel to the Company, a written opinion dated the
Closing Date to the effect that for U.S. federal income tax
purposes (i) the Merger will constitute a
reorganization within the meaning of
Section 368(a) of the Code and (ii) Parent and the
Company will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. In rendering such
opinion, counsel to the Company shall be entitled to rely upon
assumptions and representations provided by Parent and the
Company substantially in the form of Exhibits B and C
(allowing for such amendments to the representations as counsel
to the Company reasonably deems necessary for purposes of
providing the opinion referred to in the preceding sentence or
to account for changes in facts or circumstances as of the
Closing Date).
Section
7.4
Frustration
of Closing Conditions
.
None of the Company,
Parent or Merger Sub may rely on the failure of any condition
set forth in this Article VII to be satisfied if such
partys failure to act in good faith or to use its
reasonable best efforts to consummate the transactions
contemplated hereby in accordance with Section 6.5 has been
the principal cause of the failure of such condition to be
satisfied.
ARTICLE VIII
TERMINATION
AND AMENDMENT
Section
8.1
Termination
.
This
Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Effective Time,
whether before or after receipt of the Requisite Stockholder
Vote (with any termination by Parent also being an effective
termination by Merger Sub):
(a) by mutual written consent of Parent and the Company;
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(b) by either Parent or the Company, if:
(i) the Merger shall not have been consummated on or before
December 31, 2009 (the
Initial Outside
Date
);
provided
,
however
,
that
if
on the Initial Outside Date, any of the conditions to Closing
set forth in Section 7.1(a), Section 7.1(b),
Section 7.1(c) and Section 7.2(d) shall not have been
satisfied but all other conditions to Closing set forth in
Article VII shall be satisfied or shall be capable of being
satisfied, then the Initial Outside Date shall be extended to
February 28, 2010 if Parent or the Company notifies the
other in writing on or prior to the Initial Outside Date of its
election to extend the Initial Outside Date (as so extended, the
Outside Date
);
provided
,
however
, that the right to terminate this Agreement
and/or
to
extend the Initial Outside Date pursuant to this
Section 8.1(b)(i) shall not be available to a party whose
failure to comply in any material respect with any provision of
this Agreement has been the principal cause of the failure of
the Merger to be consummated by the Outside Date or the Initial
Outside Date, respectively;
(ii) any Governmental Entity in the United States of
competent jurisdiction that must grant a Transaction Approval
has denied such approval and such denial has become final and
non-appealable, any Law shall be in effect which has the effect
of making consummation of the Merger illegal or otherwise
prohibiting consummation of the Merger or any Governmental
Entity in the United States of competent jurisdiction issues an
Order or takes any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such Order or
other action shall have become final and non-appealable;
provided
,
however
,
that
the right to
terminate this Agreement pursuant to this
Section 8.1(b)(ii) shall not be available to any party
whose failure to comply in any material respect with any
provision of this Agreement has been the principal cause of the
denial of the application or imposition of such Order or
action; or
(iii) the Requisite Stockholder Vote shall not have been
obtained upon a vote taken thereon at the Company Stockholders
Meeting or at any adjournment or postponement thereof.
(c) by Parent:
(i) if the Company shall have breached or failed to perform
any of its representations, warranties, covenants or agreements
contained in this Agreement, which breach or failure to perform
(x) (A) is reasonably incapable of being cured by the
Company by the Outside Date or (B) if reasonably capable of
being cured, has not been cured by the Company within forty-five
(45) days following written notice to the Company from
Parent or Merger Sub of such breach, which notice states
Parents intention to terminate this Agreement pursuant to
this Section 8.1(c)(i), and (y) individually or in the
aggregate with other breaches or failures by the Company, would
result in a failure of any condition set forth in
Section 7.2(a) or Section 7.2(b); or
(ii) prior to the stockholders of the Company having voted
upon approval of this Agreement at the Company Stockholders
Meeting, if (A) the Board of Directors of the Company or
any committee thereof shall have effected a Recommendation
Withdrawal or (B) the Company shall have materially
breached its obligations or agreements contained in
Section 6.2, Section 6.3(a), Section 6.3(b),
Section 6.3(c), Section 6.3(d), Section 6.3(e) or
Section 6.3(f);
provided
,
however
,
that
Parents right to terminate this Agreement
pursuant to this Section 8.1(c)(ii) in respect of a
Recommendation Withdrawal (other than a Recommendation
Withdrawal in connection with a Takeover Proposal as
contemplated by Section 6.3(c)(iii)) under
subclause (A) of this Section 8.1(c)(ii) shall
terminate ten (10) Business Days following such
Recommendation Withdrawal.
(d) by the Company:
(i) if Parent or Merger Sub shall have breached or failed
to perform any of its representations, warranties, covenants or
agreements contained in this Agreement, which breach or failure
to perform (x) (A) is reasonably incapable of being cured
by Parent or Merger Sub, as the case may be, by the Outside Date
or (B) if reasonably capable of being cured, has not been
cured by Parent or Merger Sub, as the case may be, within
forty-five (45) days following written notice to Parent or
Merger Sub, as the case may be, from the Company of such breach,
which notice states the Companys
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intention to terminate this Agreement pursuant to this
Section 8.1(d)(i), and (y) individually or in the
aggregate with other breaches or failures by Parent or Merger
Sub, would result in a failure of any condition set forth in
Section 7.3(a) or Section 7.3(b);
(ii) prior to obtaining the Requisite Stockholder Vote, in
accordance with, and subject to the terms and conditions of,
Section 6.3(d)(ii); or
(iii) if (A) the Closing Date Market Price is less
than $20.00 and (B) the Company shall have delivered to
Parent, by 5:00 p.m., New York City time, on the second
Business Day following the last day of the Reference Period,
written notice of the Companys election to terminate this
Agreement pursuant to this Section 8.1(d)(iii) (the
Walk-Away Notice
), which election shall be
irrevocable (unless Parent shall have otherwise consented in
writing) and effective at 5:00 p.m., New York City
time, on the second Business Day following Parents receipt
of the Walk-Away Notice, unless during such two Business Day
period, Parent shall have elected, in its sole discretion, by
written notice to the Company (a
Top-Up
Notice
) to adjust the Common Exchange Ratio such that
the product of the Common Exchange Ratio multiplied by the
Closing Date Market Price equals or exceeds $6.51;
provided
that
, following a
Top-Up
Notice, the Common Exchange Ratio and the Merger Consideration
shall, for all purposes of this Agreement, be deemed to be as
set forth in such
Top-Up
Notice.
Section
8.2
Effect
of Termination
.
In the event of any
termination of this Agreement as provided in Section 8.1,
the obligations of the parties shall terminate and there shall
be no liability on the part of any party with respect thereto,
except for the confidentiality provisions of Section 6.4
and the provisions of Sections 3.25, 3.29, 4.14, 4.16, 6.7,
8.2, and 8.3 and Article IX, each of which shall survive
the termination of this Agreement and remain in full force and
effect;
provided
,
however
,
that
subject to
Section 8.3(g), neither Parent nor the Company shall be
released from any liabilities or damages arising out of any
material and intentional breach of this Agreement or fraud prior
to such termination.
Section
8.3
Termination
Payments
.
(a) In the event that this Agreement is validly terminated
by either the Company or Parent pursuant to
Section 8.1(b)(i) and (x) a Takeover Proposal was
publicly proposed or announced by any Person after the date of
this Agreement but before such termination and not withdrawn or
abandoned as of the time of such termination, and within twelve
(12) months after such termination of this Agreement, the
Company enters into a definitive agreement with any Person
pursuant to which there is eventually consummated a transaction
constituting a Takeover Proposal, or there is consummated a
transaction constituting a Takeover Proposal with any Person, or
(y) a Takeover Proposal was publicly proposed or announced
by any Person after the date of this Agreement but before such
termination and such proposal was withdrawn or abandoned prior
to the time of such termination, and within twelve
(12) months after such termination of this Agreement, the
Company enters into a definitive agreement with the Person that
publicly proposed or announced such Takeover Proposal pursuant
to which there is eventually consummated a transaction
constituting a Takeover Proposal, or there is consummated a
transaction constituting a Takeover Proposal with such Person,
then, in the case of either subclause (x) or (y), on the
date of consummation of such transaction, the Company shall pay
or cause to be paid to Parent (or its designees) Parents
Transaction Expenses
plus
the Termination Fee by wire
transfer of immediately available funds to an account designated
in writing by Parent. For purposes of this Section 8.3(a),
each reference to (i) more than twenty percent
(20%) when referring to the voting securities or equity
securities of the Company (or of any resulting parent company of
the Company) in the definition of Takeover Proposal
shall be deemed to be a reference to more than
seventy-five percent (75%), and (ii) more than
twenty percent (20%) when referring to the assets or the
net income of the Company and its Subsidiaries in the definition
of Takeover Proposal shall be deemed to be references to
all or substantially all.
(b) In the event that this Agreement is validly terminated
by either the Company or Parent pursuant to
Section 8.1(b)(iii), (x) the Company shall pay or
cause to be paid to Parent (or its designees) as promptly as
reasonably practicable (and, in any event, within two
(2) Business Days) following such termination,
Parents Transaction Expenses, unless as of the time of the
Company Stockholders Meeting, the Closing Date Market Price
would be an amount less than $20.00 and Parent has not delivered
a
Top-Up
Notice, and (y) if (A) a
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Takeover Proposal was publicly proposed or announced by any
Person after the date of this Agreement but before such
termination and not withdrawn or abandoned as of the time of the
Company Stockholders Meeting, and (B) within twelve
(12) months after such termination of this Agreement, the
Company enters into a definitive agreement with any Person
pursuant to which there is eventually consummated a transaction
constituting a Takeover Proposal, or there is consummated a
transaction constituting a Takeover Proposal with any Person,
then, on the date of consummation of such transaction, the
Company shall pay or cause to be paid to Parent (or its
designees) the Termination Fee, in each case, by wire transfer
of immediately available funds to an account designated in
writing by Parent. For purposes of this Section 8.3(b),
each reference to (i) more than twenty percent
(20%) when referring to the voting securities or equity
securities of the Company (or of any resulting parent company of
the Company) in the definition of Takeover Proposal
shall be deemed to be a reference to more than
seventy-five percent (75%), and (ii) more than
twenty percent (20%) when referring to the assets or the
net income of the Company and its Subsidiaries in the definition
of Takeover Proposal shall be deemed to be references to
all or substantially all.
(c) In the event that this Agreement is validly terminated
by Parent pursuant to Section 8.1(c)(i), (x) the
Company shall pay or cause to be paid to Parent (or its
designees) as promptly as reasonably practicable (and, in any
event, within two (2) Business Days) following such
termination, Parents Transaction Expenses, and
(y) if, within twelve (12) months after such
termination of this Agreement, the Company enters into a
definitive agreement with any Person pursuant to which there is
eventually consummated a transaction constituting a Takeover
Proposal, or there is consummated a transaction constituting a
Takeover Proposal with any Person, then, on the date of
consummation of such transaction, the Company shall pay or cause
to be paid to Parent (or its designees) the Termination Fee, in
each case, by wire transfer of immediately available funds to an
account designated in writing by Parent;
provided
that
the Company shall not be obliged to make any such
payments if at the time of such termination Parent is in
material breach of any representation, warranty, covenant or
agreement hereunder and such breach is reasonably incapable of
being cured by Parent by the Outside Date. For purposes of this
Section 8.3(c), each reference to (i) more than
twenty percent (20%) when referring to the voting
securities or equity securities of the Company (or of any
resulting parent company of the Company) in the definition of
Takeover Proposal shall be deemed to be a reference
to more than seventy-five percent (75%), and
(ii) more than twenty percent (20%) when
referring to the assets or the net income of the Company and its
Subsidiaries in the definition of Takeover Proposal shall be
deemed to be references to all or substantially all.
(d) In the event that this Agreement is validly terminated
by the Company pursuant to Section 8.1(d)(i), Parent shall
pay or cause to be paid to the Company (or its designees) as
promptly as reasonably practicable (and, in any event, within
two (2) Business Days) following such termination, the
Companys Transaction Expenses;
provided
that
Parent shall not be obliged to make such payments if at the time
of such termination the Company is in material breach of any
representation, warranty, covenant or agreement hereunder and
such breach is reasonably incapable of being cured by the
Company by the Outside Date.
(e) In the event that this Agreement is terminated by the
Company pursuant to Section 8.1(d)(ii), then, immediately
prior to and as a condition to such termination, the Company
shall pay or cause to be paid to Parent (or its designees) the
Termination Fee
plus
the Parents Transaction
Expenses by wire transfer of immediately available funds to an
account designated in writing by Parent.
(f) In the event that this Agreement is terminated by
Parent pursuant to Section 8.1(c)(ii), then the Company
shall promptly, but in no event later than two (2) Business
Days after the date of such termination, pay or cause to be paid
to Parent (or its designees) the Termination Fee
plus
the
Parents Transaction Expenses by wire transfer of
immediately available funds to an account designated in writing
by Parent.
(g) The parties agree and understand that in no event shall
(i) the Company be required to pay the Termination Fee or
the Parents Transaction Expenses, respectively, on more
than one occasion and (ii) Parent be required to pay the
Companys Transaction Expenses on more than one occasion.
Notwithstanding anything to the contrary in this Agreement, if
any party receives any payments from another party in respect of
any breach of this Agreement, and the receiving party is
entitled to receive or has received the Termination Fee or its
Transaction Expenses under this Section 8.3, (x) if
the payment in respect of the applicable breach is made
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before the payment of the Termination Fee and Transaction
Expenses, the amount of such Termination Fee and Transaction
Expenses shall be reduced by the aggregate amount of any
payments made by the breaching party in respect of any such
breaches of this Agreement and (y) if the payment of the
Termination Fee and Transaction Expenses is made before the
payment in respect of the applicable breach, the amount of such
payments in respect of the applicable breach shall be reduced by
the aggregate amount of the payment in respect of the
Termination Fee and Transaction Expenses. The parties
acknowledge that the agreements contained in this
Section 8.3 are an integral part of the transactions
contemplated hereby, and that, without these agreements, the
parties would not enter into this Agreement, and that any
amounts payable pursuant to this Section 8.3 do not
constitute a penalty. If a party fails to pay as directed in
writing by the other party the Termination Fee or the
Transaction Expenses due pursuant to this Section 8.3
within the time periods specified in this Section 8.3, the
party obligated to pay the Termination Fee or Transaction
Expenses shall pay the
out-of-pocket
costs and expenses (including reasonable legal fees and expenses
of outside counsel) incurred by the other party in connection
with any action, including the filing of any lawsuit, taken to
collect payment of such amounts, together with interest on such
unpaid amounts at the prime lending rate prevailing during such
period as published in The Wall Street Journal, calculated on a
daily basis from the date such amounts were required to be paid
until the date of actual payment.
Section
8.4
Procedure
for Termination
.
A termination of this
Agreement pursuant to Section 8.1 shall, in order to be
effective, require in the case of each of Parent and Merger Sub,
action by its Board of Directors or, to the extent permitted by
Law, the duly authorized designee of its Board of Directors, and
in the case of the Company, to the extent permitted by Law,
action by the Board of Directors of the Company. Termination of
this Agreement prior to the Effective Time shall not require the
approval of the stockholders of the Company. A terminating party
shall provide written notice of termination to the other parties
specifying with reasonable particularity the basis for this
termination. If more than one provision in Section 8.1 is
available to a terminating party in connection with a
termination, a terminating party may rely on any or all
available provisions in Section 8.1 for any termination.
ARTICLE IX
GENERAL
PROVISIONS
Section
9.1
Non-Survival
of Representations, Warranties, Covenants and
Agreements
.
None of the representations,
warranties, covenants and other agreements in this Agreement or
in any instrument delivered pursuant to this Agreement,
including any rights arising out of any breach of such
representations, warranties, covenants and other agreements,
shall survive the Effective Time, except for those covenants and
agreements contained herein and therein that by their terms
apply or are to be performed in whole or in part after the
Effective Time and this Article IX.
Section
9.2
Notices
.
All
notices and other communications hereunder shall be in writing
and shall be deemed duly given (a) on the date of delivery
if delivered personally, or by facsimile, upon confirmation of
receipt, (b) on the first (1st) Business Day following the
date of dispatch if delivered by a recognized
next-day
courier service or (c) on the third (3rd) Business Day
following the date of mailing if delivered by registered or
certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
If to Parent or Merger Sub, to:
Tower Group, Inc.
120 Broadway (31st Floor)
New York, New York 10271
Attention: General Counsel
Facsimile:
(212) 655-2199
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with a copy to (which shall not constitute notice):
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
Attention: Michael W. Blair, Esq.
Facsimile:
(212) 909-6836
If to the Company, to:
Specialty Underwriters Alliance, Inc.
222 South Riverside Plaza, Suite 1600
Chicago, Illinois 60606
Attention: General Counsel
Facsimile:
(312) 277-1816
with a copy to (which shall not constitute notice):
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Attention: Christopher J. Doyle, Esq.
Facsimile:
(212) 806-6006
Section
9.3
Interpretation
.
(a) When a reference is made in this Agreement to a
Section, clause or Schedule, such reference shall be to a
Section or clause of or Schedule to this Agreement unless
otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement. The phrases the date of this
Agreement, the date hereof and terms of
similar import, will be deemed to refer to June 21, 2009.
Whenever the content of this Agreement permits, the masculine
gender will include the feminine and neuter genders, and a
reference to singular or plural will be interchangeable with the
other. Whenever the words include,
includes or including are used in this
Agreement, they shall be deemed to be followed by the words
without limitation.
(b) References to any agreement or contract are to that
agreement or contract as amended, modified or supplemented from
time to time in accordance with the terms hereof and thereof.
References to any Person include the successors and permitted
assigns of that Person. References to any statute are to that
statute, as amended from time to time, and to the rules and
regulations promulgated thereunder. References to $
and dollars are to the currency of the United States
of America. References from or through any date mean, unless
otherwise specified, from and including or through and
including, respectively. The words hereby,
herein, hereof, hereunder
and words of similar import refer to this Agreement as a whole
(including any Schedules delivered herewith) and not merely to
the specific section, paragraph or clause in which such word
appears.
(c) The parties have participated jointly in negotiating
and drafting this Agreement. In the event that an ambiguity or a
question of intent or interpretation arises, this Agreement
shall be construed as if drafted jointly by the parties, and no
presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any
provision of this Agreement.
(d) No summary of this Agreement or Schedule delivered
herewith prepared by or on behalf of any party will affect the
meaning or interpretation of this Agreement or any such Schedule.
Section
9.4
Counterparts;
Effectiveness
.
This Agreement may be executed
in two (2) or more counterparts, including by facsimile,
each of which shall be deemed to be an original but all of which
shall constitute one and the same instrument. This Agreement
shall become effective when each party has received
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counterparts thereof signed and delivered (by electronic
communication, facsimile or otherwise) by all of the other
parties.
Section
9.5
Entire
Agreement; No Third Party Beneficiaries
.
(a) This Agreement, the Company Disclosure Schedule, the
Parent Disclosure Schedule and the Confidentiality Agreement
constitute the entire agreement, and supersede all prior
agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof and thereof.
(b) This Agreement is not intended to, and shall not,
confer upon any other Person other than the parties any rights
or remedies hereunder, except (i) as set forth in
Section 6.10 and (ii) from and after the Effective
Time, the rights of holders of Common Shares, Options and
Restricted Stock Awards to receive the Merger Consideration or
other payments set forth in Article II.
(c) The representations and warranties in this Agreement
are the product of negotiations among the parties and are for
the sole benefit of the parties. Any inaccuracies in such
representations and warranties are subject to waiver by the
parties in accordance with Section 9.9(b) without notice or
liability to any other Person. In some instances, the
representations and warranties in this Agreement may represent
an allocation among the parties of risks associated with
particular matters regardless of the knowledge of any of the
parties. Consequently, Persons other than the parties may not
rely upon the representations and warranties in this Agreement
as characterizations of actual facts or circumstances as of the
date of this Agreement or as of any other date.
Section
9.6
Severability
.
If
any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any Law or public
policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any
party. Notwithstanding the foregoing, upon such determination
that any term or other provision is invalid, illegal or
incapable of being enforced, the parties shall negotiate in good
faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable
manner in order that the transactions contemplated hereby are
consummated as originally contemplated to the greatest extent
possible.
Section
9.7
Assignment
.
Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties, in whole or
in part (whether by operation of law or otherwise), without the
prior written consent of the other parties, and any attempt to
make any such assignment without such consent shall be null and
void. This Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties and their respective
successors and assigns.
Section
9.8
Amendment
.
This
Agreement may be amended by the parties, by action taken or
authorized by their respective boards of directors, at any time
before or after the Requisite Stockholder Vote is obtained, but
after such approval no amendment shall be made which by Law or
in accordance with the rules of any relevant stock exchange
requires further approval by the stockholders of the Company
without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of
the parties.
Section
9.9
Extension;
Waiver
.
At any time prior to the Effective
Time, the parties, by action taken or authorized by their
respective boards of directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of
the obligations or other acts of the other parties, (b) to
the extent permitted by applicable Law, waive any inaccuracies
in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) to the extent
permitted by applicable Law, waive compliance with any of the
agreements or conditions contained herein. Any agreement on the
part of a party to any such extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of
such party. The failure of any party to this Agreement to assert
any of its rights under this Agreement or otherwise shall not
constitute a waiver of such rights, nor shall any single or
partial exercise by any party to this Agreement of any of its
rights under this Agreement preclude any other or further
exercise of such rights or any other rights under this Agreement.
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Section
9.10
Governing
Law and Venue; Waiver of Jury Trial
.
(a) This Agreement and any disputes or controversies
arising out of or relating to this Agreement or the transactions
contemplated hereby (whether in contract, tort or otherwise)
shall be governed by and construed in accordance with the laws
of the State of Delaware, without regard to principles of
conflicts of law thereof that are not mandatorily applicable by
statute and would permit or require the application of the laws
of another jurisdiction.
(b) EACH OF THE PARTIES HERETO (I) IRREVOCABLY SUBMITS
TO THE EXCLUSIVE PERSONAL JURISDICTION OF THE COURT OF CHANCERY
OF THE STATE OF DELAWARE (OR, IF THE COURT OF CHANCERY OF THE
STATE OF DELAWARE OR THE DELAWARE SUPREME COURT DETERMINES THAT,
NOTWITHSTANDING SECTION 111 OF THE DELAWARE GENERAL
CORPORATION LAW, THE COURT OF CHANCERY DOES NOT HAVE OR SHOULD
NOT EXERCISE SUBJECT MATTER JURISDICTION OVER SUCH MATTER, THE
SUPERIOR COURT OF THE STATE OF DELAWARE) AND THE FEDERAL COURTS
OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE OF
DELAWARE, AS WELL AS TO THE JURISDICTION OF ALL COURTS TO WHICH
AN APPEAL MAY BE TAKEN FROM SUCH COURTS, IN ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE
DOCUMENTS REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED
HEREBY, (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT, AS A
DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR INTERPRETATION OR
ENFORCEMENT HEREOF OR ANY SUCH DOCUMENT THAT IT IS NOT SUBJECT
THERETO OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE
BROUGHT OR IS NOT MAINTAINABLE IN SAID COURTS OR THAT VENUE
THEREOF MAY NOT BE APPROPRIATE OR THAT THIS AGREEMENT OR ANY
SUCH DOCUMENT MAY NOT BE ENFORCED IN OR BY SUCH COURTS, AND
(III) IRREVOCABLY AGREES THAT ALL CLAIMS WITH RESPECT TO
SUCH ACTION, SUIT OR PROCEEDING SHALL BE HEARD AND DETERMINED
EXCLUSIVELY BY SUCH A DELAWARE STATE OR FEDERAL COURT AND
FURTHER AGREES NOT TO BRING ANY SUCH ACTION, SUIT OR PROCEEDING
IN ANY OTHER COURT. THE PARTIES HEREBY CONSENT TO AND GRANT ANY
SUCH COURT JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER
THE SUBJECT MATTER OF SUCH DISPUTE AND AGREE THAT MAILING OF
PROCESS OR OTHER PAPERS IN CONNECTION WITH SUCH ACTION, SUIT OR
PROCEEDING IN THE MANNER PROVIDED IN SECTION 9.2 OR IN SUCH
OTHER MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND
SUFFICIENT SERVICE THEREOF.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE IN CONNECTION WITH THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH
SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT
(I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (II) EACH PARTY UNDERSTANDS AND HAS
CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY AND (IV) EACH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 9.10(c).
Section
9.11
Remedies;
Specific Performance
.
Except as otherwise
provided herein, any and all remedies herein expressly conferred
upon a party will be deemed cumulative with and not exclusive of
any other remedy conferred hereby, or by Law or equity upon such
party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy. The parties agree
that irreparable harm would occur and the parties would not have
any adequate remedy at Law in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that prior to the valid and effective
termination of this Agreement in accordance with
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Article VIII, the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement, this being in addition to any other remedy to which
they are entitled at Law or in equity.
Section
9.12
Definitions
.
As
used in this Agreement:
An
Affiliate
of any Person means
another Person that directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common
control with, such first Person, where control means
the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by
contract, as trustee or executor or otherwise.
Aggregate Merger Consideration
has the
meaning set forth in Section 2.1(a).
Agreement
has the meaning set forth in
the preamble hereto.
Award Exchange Ratio
means a fraction,
the numerator of which is the per share cash value of the Merger
Consideration (valuing the stock portion of such consideration
based on the closing price of Parent Common Stock on Nasdaq on
the last Business Day immediately preceding the Closing Date, as
reported by Bloomberg, L.P., or, if not reported thereby, by
another authoritative source mutually agreed by the parties) and
the denominator of which is the closing price of Parent Common
Stock on Nasdaq on the last Business Day immediately preceding
the Closing Date as reported by Bloomberg, L.P., or, if not
reported thereby, by another authoritative source mutually
agreed by the parties (rounded down to the nearest share).
Bankruptcy and Equity Exception
has
the meaning set forth in Section 3.2(c).
beneficially own
(and the related term
beneficial ownership
) has the meaning under
Section 13(d) of the Exchange Act.
Benefits Continuation Period
has the
meaning set forth in Section 6.6(a).
Book-Entry Shares
has the meaning set
forth in Section 1.6(b).
Business Day
means any day other than a
Saturday, a Sunday or any day on which Nasdaq is not open for
trading.
Bylaws
means the Amended and Restated
Bylaws of the Company, as in effect as of the date of this
Agreement.
Certificate
has the meaning set forth
in Section 1.6(b).
Certificate of Incorporation
means the
Amended and Restated Certificate of Incorporation of the
Company, as in effect on the date of this Agreement.
Certificate of Merger
has the meaning
set forth in Section 1.2.
Class B Share
has the meaning set
forth in Section 1.6(b).
Class B Stock
has the meaning set
forth in Section 1.6(b).
Closing
has the meaning set forth in
Section 1.2.
Closing Date
has the meaning set forth
in Section 1.2.
Closing Date Market Price
means the
volume weighted average price per share of Parent Common Stock
on Nasdaq (as reported by Bloomberg, L.P., or, if not reported
thereby, by another authoritative source mutually agreed by the
parties) for the Reference Period. The Closing Date Market Price
shall be calculated to the nearest one-hundredth of one cent.
Code
has the meaning set forth in the
recitals.
Common Exchange Ratio
means
(i) 0.28, if the Closing Date Market Price is greater than
or equal to $23.25 and less than or equal to $27.75;
(ii) if the Closing Date Market Price is greater than
$27.75, that
A-54
fraction (rounded to the nearest ten-thousandth) equal to the
quotient obtained by dividing $7.77 by the Closing Date Market
Price; (iii) if the Closing Date Market Price is greater
than or equal to $20.00 and less than $23.25, that fraction
(rounded to the nearest ten-thousandth) equal to the quotient
obtained by dividing $6.51 by the Closing Date Market Price; or
(iv) 0.3255, if the Closing Date Market Price is less than
$20.00;
provided
,
however
,
that
if Parent
shall have given a
Top-Up
Notice pursuant to Section 8.1(d)(iii), the Common Exchange
Ratio shall be as set forth in such notice pursuant to
Section 8.1(d)(iii).
Common Share
has the meaning set forth
in Section 1.6(b).
Common Stock
has the meaning set forth
in Section 1.6(b).
Company
has the meaning set forth in
the preamble hereto.
Company Actuarial Analyses
has the
meaning set forth in Section 3.15(c).
Company Benefit Plans
means each
written employee benefit plan, scheme, program, policy,
arrangement and contract (including any employee benefit
plan, as defined in Section 3(3) of ERISA, whether or
not subject to ERISA, and any bonus, deferred compensation,
stock bonus, stock purchase, restricted stock, stock option or
other equity-based arrangement, and any collective bargaining,
employment, termination, retention, bonus, change in control or
severance agreement, plan, program, policy, arrangement or
contract) under which any current or former director, officer or
employee of the Company or any of its Subsidiaries has any
present or future right to benefits, that is maintained,
sponsored or contributed to by the Company or any of its
Subsidiaries or which the Company or any of its Subsidiaries has
any obligation to maintain, sponsor or contribute, or with
respect to which the Company or any of its Subsidiaries would
incur any direct or indirect liability under the Code or ERISA
or any similar
non-U.S. law,
whether contingent or otherwise.
Company Board Recommendation
has the
meaning set forth in Section 3.2(b).
Company Capitalization Date
has the
meaning set forth in Section 3.5(a).
Company Compensatory Award
has the
meaning set forth in Section 1.7(a).
Company Disclosure Schedule
has the
meaning set forth in the preamble to Article III.
Company Insurance Approvals
has the
meaning set forth in Section 3.3.
Company Insurance Subsidiary
means any
Subsidiary of the Company that issues insurance policies.
Company Material Adverse Effect
means
any event, change, circumstance or effect that is materially
adverse to the business, assets, liabilities, financial
condition or results of operations of the Company and its
Subsidiaries, taken as a whole;
provided
,
however
,
that
none of the following shall constitute or be
considered in determining whether a Company Material Adverse
Effect has occurred: (a) changes or fluctuations in the
economy or the securities, credit or financial markets generally
in the United States; (b) national or international
political conditions or changes therein (including the
commencement, continuation or escalation of acts of war, armed
hostilities, sabotage or other acts of terrorism);
(c) changes generally affecting the property and casualty
insurance industry or the geographic areas in which the Company
and its Subsidiaries operate; (d) except with respect to
the representations in Section 3.4, any loss of, or adverse
change in, the relationship of the Company or any of its
Subsidiaries with its customers, employees, agents or other
producers, suppliers, financing sources, business partners or
regulators caused by the identity of Parent or the announcement,
negotiation, existence or performance of the transactions
contemplated by this Agreement; (e) changes in GAAP or SAP,
the rules or policies of the Public Company Accounting Oversight
Board or interpretation or application of any of the foregoing
after the date of this Agreement; (f) any failure by the
Company to meet any internal or external projections, forecasts
or estimates of revenues or earnings for any period;
provided
that
the exception in this
clause (f) shall not preclude a determination that any
event, change, circumstance or effect underlying such decline
has resulted in, or contributed to, a Company Material Adverse
Effect; (g) the suspension of trading in securities on NYSE
or Nasdaq or a decline in the price, or a change in the trading
volume, of the Common Stock on Nasdaq;
provided
that
the exception in this clause (g) shall not
preclude a determination that any event, change, circumstance or
effect underlying such decline has resulted in, or contributed
to, a Company Material Adverse Effect; or (h) any adverse
effect resulting from compliance
A-55
by the Company with the terms of this Agreement (other than the
terms of Section 5.1(a)), including the failure of the
Company to take any action prohibited by Article V of this
Agreement (other than the terms of Section 5.1(a)), or any
actions taken, or failure to take any action, which Parent has
requested in writing;
provided
that
the exceptions
in clauses (a), (b), (c) and (e) shall apply only to
the extent such event, change, circumstance or effect does not
(x) relate only to (or have the effect of relating only to)
the Company and its Subsidiaries or (y) disproportionately
adversely affect the Company and its Subsidiaries, taken as a
whole, compared to other companies of similar size operating in
the property and casualty insurance industry in similar
geographic areas in which the Company and its Subsidiaries
operate.
Company Permits
has the meaning set
forth in Section 3.1.
Company Preferred Stock
has the
meaning set forth in Section 3.5(a).
Company Reinsurance Agreements
has the
meaning set forth in Section 3.15(a).
Company SAP Statements
has the meaning
set forth in Section 3.9.
Company SEC Documents
has the meaning
set forth in Section 3.7(a).
Company Securities
has the meaning set
forth in Section 3.5(b).
Company Shares
has the meaning set
forth in Section 1.6(b).
Company Stockholders Meeting
has the
meaning set forth in Section 6.2.
Company Subsidiary Securities
has the
meaning set forth in Section 3.6.
Confidentiality Agreement
means the
confidentiality letter agreement, dated as of April 21,
2009, between FBR Capital Markets & Co., as
representative of the Company and Parent.
Constituent Documents
means, with
respect to any entity, the articles or certificate of
incorporation, the bylaws of such entity, or any similar charter
or other governing documents of such entity.
Continuing Employees
has the meaning
set forth in Section 6.6(a).
Contract
means all contracts,
agreements, commitments, arrangements, leases and other
instruments to which any Person is a party.
Current Insurance
has the meaning set
forth in Section 6.10(b).
Deferred Stock Award
has the meaning
set forth in Section 1.7(b).
DGCL
means the General Corporation Law
of the State of Delaware.
Dissenting Shares
has the meaning set
forth in Section 1.9.
Dissenting Stockholders
has the
meaning set forth in Section 1.9.
DOJ
has the meaning set forth in
Section 6.5(b).
Effective Time
has the meaning set
forth in Section 1.2.
Environmental Law
means any foreign,
federal, state or local law, treaty, statute, rule, regulation,
order, ordinance, decree, injunction, judgment, governmental
restriction or any other requirement of Law (including common
law) regulating or relating to the protection of human health
from exposure to any hazardous substance, natural resource
damages or the protection of the environment, including Laws
relating to the protection of wetlands, pollution, contamination
or the use, generation, management, handling, transport,
treatment, disposal, storage, release or threatened release of
hazardous substances.
ERISA
means the Employee Retirement
Income Security Act of 1974.
ERISA Affiliate
of any entity means
any other entity that, together with such entity, would be
treated as a single employer under Section 414 of the Code.
Exchange Act
means the Securities
Exchange Act of 1934.
A-56
Exchange Agent
has the meaning set
forth in Section 2.1(a).
Exchange Fund
has the meaning set
forth in Section 2.1(a).
Expenses
has the meaning set forth in
Section 6.7.
FBR
has the meaning set forth in
Section 3.18.
Form S-4
has the meaning set forth in Section 6.1(a).
FTC
has the meaning set forth in
Section 6.5(b).
GAAP
means United States generally
accepted accounting principles.
Governmental Entity
means any nation
or government, any state, agency, commission, or other political
subdivision thereof, any insurance regulatory authority or any
entity (including a court) of competent jurisdiction properly
exercising executive, legislative, judicial or administration
functions of the government.
HSR Act
means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
Incentive Plans
means the 2004 Stock
Option Plan of the Company, as amended and restated on
November 11, 2004, the 2007 Stock Incentive Plan of the
Company, adopted on March 31, 2007 and any other Company
employee or director stock option, stock purchase or equity
compensation plans, arrangements or agreements.
Indemnified Party
has the meaning set
forth in Section 6.10(a).
Initial Outside Date
has the meaning
set forth in Section 8.1(b)(i).
Insurance Laws
has the meaning set
forth in Section 3.3.
Intellectual Property
means:
(a) trademarks, service marks, logos, trade names and trade
dress, and all goodwill associated with the foregoing,
(b) domain names, (c) copyrights, software and
computer programs, (d) patents, (e) trade secrets,
(f) know-how, (g) proprietary information and
(h) all registrations and applications for registration of
any of the foregoing.
IRS
means the Internal Revenue Service.
knowledge
means (a) with respect
to Parent, the actual knowledge of the individuals named in
Section 9.1 of the Parent Disclosure Schedule and
(b) with respect to the Company, the actual knowledge of
the individuals named in Section 9.1 of the Company
Disclosure Schedule, in each case, as of the date of this
Agreement.
Law
means any statute, law, ordinance,
rule or regulation (domestic or foreign) issued, promulgated or
entered into by or with any Governmental Entity.
Leased Real Property
has the meaning
set forth in Section 3.17.
License
means any permit,
certification, approval, registration, consent, authorization,
franchise, variance, exemption or order issued by a Governmental
Entity.
Liens
means any mortgage, pledge,
hypothecation, assignment, encumbrance, lien (statutory or
other), other charge or security interest.
Material Contract
has the meaning set
forth in Section 3.24(a).
Merger
has the meaning set forth in
the recitals hereto.
Merger Consideration
has the meaning
set forth in Section 1.6(b), subject to adjustment pursuant
to Section 1.8, if applicable.
Merger Sub
has the meaning set forth
in the preamble hereto.
Nasdaq
means the NASDAQ National
Market System.
A-57
NYSE
means The New York Stock Exchange.
OneBeacon Arrangements
means,
(i) the Instrument of Transfer and Assumption, dated as of
February 10, 2004, between OneBeacon Insurance Company and
Potomac Insurance Company of Illinois, (ii) the Amendment
No. 1 to the Amended and Restated Reinsurance (Pooling)
Agreement, dated as of January 1, 2001, among OneBeacon
Insurance Company, OneBeacon America Insurance Company, American
Employers Insurance Company, The Employers Fire
Insurance Company, The Northern Assurance Company of America,
American Central Insurance Company, OneBeacon Midwest Insurance
Company, Potomac Insurance Company of Illinois, The Camden Fire
Insurance Association, Pennsylvania General Insurance Company,
Homeland Insurance Company of New York, Autoone Insurance
Company, PG Insurance Company of New York and Atlantic Specialty
Insurance Company and (iv) any other contract, agreement,
material notice or material arrangement entered into or made in
connection with the Potomac Acquisition, including any indemnity
received from OneBeacon Insurance Company or any of its
Affiliates.
Option
has the meaning set forth in
Section 1.7(a).
Order
means any order, writ,
injunction, decree, judgment or stipulation issued, promulgated
or entered into by or with any Governmental Entity.
Original Agreement
has the meaning set
forth in the recitals hereto.
other party
means, with respect to the
Company, Parent and Merger Sub, and means, with respect to
Parent or Merger Sub, the Company, unless the context otherwise
requires.
Outside Date
has the meaning set forth
in Section 8.1(b)(i).
Parent
has the meaning set forth in
the preamble hereto.
Parent Common Stock
has the meaning
set forth in Section 4.5(a).
Parent Disclosure Schedule
has the
meaning set forth in the Preamble to Article IV.
Parent Incentive Plans
has the meaning
set forth in Section 4.5(a).
Parent Insurance Approvals
has the
meaning set forth in Section 4.3.
Parent Insurance Subsidiary
means any
Subsidiary of Parent that issues insurance policies.
Parent Material Adverse Effect
means
any event, change, circumstance or effect that is materially
adverse to the business, assets, liabilities, financial
condition or results of operations of Parent and its
Subsidiaries, taken as a whole;
provided
,
however
,
that
none of the following shall constitute or be
considered in determining whether a Parent Material Adverse
Effect has occurred: (a) changes or fluctuations in the
economy or the securities, credit or financial markets generally
in the United States; (b) national or international
political conditions or changes therein (including the
commencement, continuation or escalation of acts of war, armed
hostilities, sabotage or other acts of terrorism);
(c) changes generally affecting the property and casualty
insurance industry or the geographic areas in which Parent and
its Subsidiaries operate; (d) except with respect to the
representations in Section 4.4, any loss of, or adverse
change in, the relationship of Parent or any of its Subsidiaries
with its customers, employees, agents or other producers,
suppliers, financing sources, business partners or regulators
caused by the identity of the Company or the announcement,
negotiation, existence or performance of the transactions
contemplated by this Agreement; (e) changes in GAAP or SAP,
the rules or policies of the Public Company Accounting Oversight
Board or interpretation or application of any of the foregoing
after the date of this Agreement; (f) any failure by Parent
to meet any internal or external projections, forecasts or
estimates of revenues or earnings for any period;
provided
that
the exception in this
clause (f) shall not preclude a determination that any
event, change, circumstance or effect underlying such decline
has resulted in, or contributed to, a Parent Material Adverse
Effect; (g) the suspension of trading in securities on NYSE
or Nasdaq or a decline in the price, or a change in the trading
volume, of the Parent Common Stock on Nasdaq;
provided
that
the exception in this clause (g) shall not
preclude a determination that any event, change, circumstance or
effect underlying such decline has resulted in, or contributed
to, a Parent Material Adverse Effect; or (h) any adverse
effect resulting from compliance by Parent
A-58
with the terms of this Agreement, including the failure of
Parent to take any action prohibited by Article V of this
Agreement, or any actions taken, or failure to take any action,
which the Company has requested in writing;
provided
that
the exceptions in clauses (a), (b), (c) and
(e) shall apply only to the extent such event, change,
circumstance or effect does not (x) relate only to (or have
the effect of relating only to) Parent and its Subsidiaries or
(y) disproportionately adversely affect Parent and its
Subsidiaries, taken as a whole, compared to other companies of
similar size operating in the property and casualty insurance
industry in similar geographic areas in which Parent and its
Subsidiaries operate.
Parent Permits
has the meaning set
forth in Section 4.1.
Parent SEC Documents
has the meaning
set forth in Section 4.6(a).
Parent Securities
has the meaning set
forth in Section 4.5(b).
parties
has the meaning set forth in
the preamble hereto.
Partner Agent
means an independent
general agent that has entered into a Partner Agent Agreement
with the Company
and/or
a
Company Insurance Subsidiary.
Partner Agent Agreement
means a
Partner Agent Program Agreement entered into by and between a
Partner Agent and the Company
and/or
a
Company Insurance Subsidiary under which the Partner Agent
produces business on behalf of a Company Insurance Subsidiary.
Permitted Liens
means (a) any
Liens for Taxes or other governmental charges not yet due and
payable or the amount or validity of which is being contested in
good faith, (b) carriers, warehousemens,
mechanics, materialmens, repairmens,
workmens, landlords or other similar Liens,
(c) pledges or deposits in connection with workers
compensation, unemployment insurance and other social security
legislation, (d) Liens that do not, individually or in the
aggregate, materially impair the continued use or operation of
the property to which they relate or the conduct of the business
of the Company and its Subsidiaries as conducted on the date of
this Agreement, (e) statutory Liens arising by operation of
Law with respect to a liability incurred in the ordinary course
of business and which is not yet due and payable or which is
being contested in good faith and by appropriate proceedings and
(f) immaterial easements, rights of way or other similar
matters or restrictions or exclusions that would be shown by a
current title report or other similar report.
Person
means an individual,
corporation, limited liability company, partnership,
association, trust, unincorporated organization, or other entity
or group (as such term is defined in the Exchange Act).
Potomac Acquisition
has the meaning
set forth in Section 3.15(g).
Proxy Statement/Prospectus
has the
meaning set forth in Section 6.1(a).
Recommendation Withdrawal
has the
meaning set forth in Section 6.3(c).
Reference Period
shall mean the
fifteen (15) consecutive Business Days immediately
preceding the fifth (5th) Business Day prior to the date
initially established as the Closing Date (or, in the event that
a Walk-Away Notice is delivered by the Company pursuant to
Section 8.1(d)(iii), the fifth (5th) Business Day prior to
the date that would have been the Closing Date as determined
pursuant to Section 1.2 hereof in the absence of a
Walk-Away Notice).
Regulatory Material Adverse Effect
has
the meaning set forth in Section 6.5(d).
Reporting Tail Endorsement
has the
meaning set forth in Section 6.10(b).
Representatives
means, with respect to
any party, collectively, each of such partys Subsidiaries,
each of such partys and its Subsidiaries respective
officers, directors and employees and any advisors, attorneys,
consultants or other representatives (acting in such capacity)
retained by such party or any of its controlled Affiliates.
Requisite Stockholder Vote
has the
meaning set forth in Section 3.2(a).
A-59
SAP
means statutory accounting
principals prescribed or permitted by the domiciliary state
insurance department of the applicable Company Insurance
Subsidiary or the Parent Insurance Subsidiary, as the case may
be.
SEC
means the Securities and Exchange
Commission.
Securities Act
means the Securities
Act of 1933, as amended.
SSAP
means a statement of standard
accounting practice.
Subsidiary
of any Person means any
corporation, partnership, joint venture, limited liability
company, trust, estate or other Person of which (or in which),
directly or indirectly, more than 50% of (a) the issued and
outstanding capital stock having ordinary voting power to elect
a majority of the board of directors of such corporation
(irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting
power upon the occurrence of any contingency), (b) the
interest in the capital or profits of such partnership, joint
venture or limited liability company or other Person or
(c) the beneficial interest in such trust or estate, is at
the time owned by such first Person, or by such first Person and
one or more of its other Subsidiaries or by one or more of such
Persons other Subsidiaries.
Superior Proposal
has the meaning set
forth in Section 6.3(h).
Surviving Corporation
has the meaning
set forth in Section 1.1.
Takeover Proposal
has the meaning set
forth in Section 6.3(h).
Tax
means income, gross receipts,
franchise, sales, use, ad valorem, property, payroll,
withholding, excise, severance, transfer, employment, estimated,
alternative or add-on minimum, value added, stamp, occupation,
premium, environmental or windfall profits taxes, and other
taxes, charges, fees, levies, imposts, customs, duties, licenses
or other assessments, together with any interest, additions to
tax, and any penalties.
Tax Asset
means any net operating
loss, net capital loss, investment tax credit, foreign tax
credit, charitable deduction or any other credit or tax
attribute that could be carried forward or back to reduce Taxes
(including deductions and credits related to alternative minimum
Taxes).
Tax Return
means any statement,
report, return, information return or claim for refund relating
to Taxes (including any elections, declarations, schedules or
attachments thereto), including, if applicable, any combined or
consolidated return for any group of entities that includes the
Company or any of its Subsidiaries, or the Parent or any of its
Subsidiaries.
Taxing Authority
means, with respect
to any Tax, the Governmental Entity that imposes such Tax, and
the agency (if any) charged with the collection of such Tax for
such Governmental Entity.
Termination Fee
means three million
dollars ($3,000,000).
Top-Up
Notice
has the meaning set forth in
Section 8.1(d)(iii).
Transaction Approvals
has the meaning
set forth in Section 4.3.
Transaction Expenses
means with
respect to Parent and its Affiliates or the Company and its
Affiliates, as applicable, an amount equal to all Expenses
incurred by such party and its Affiliates up to a maximum amount
of one million dollars ($1,000,000).
Walk-Away Notice
has the meaning set
forth in Section 8.1(d)(iii).
WARN
has the meaning set forth in
Section 5.1(b)(x).
(The
remainder of this page is left blank.)
A-60
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have
caused this Agreement to be signed by their respective officers
thereunto duly authorized, all as of the date first written in
the preamble above.
TOWER GROUP, INC.
Name: Michael H. Lee
|
|
|
|
Title:
|
President and Chief Executive Officer
|
TOWER S.F. MERGER CORPORATION
Name: Elliot S. Orol
|
|
|
|
Title:
|
Senior Vice President
|
SPECIALTY UNDERWRITERS ALLIANCE, INC.
Name: Courtney Smith
|
|
|
|
Title:
|
President and Chief Executive Officer
|
A-61
Exhibit A
AMENDED
AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SPECIALTY UNDERWRITERS ALLIANCE, INC.
The undersigned, being the
[ ]
of Specialty Underwriters Alliance, Inc., a corporation
organized and existing under the laws of the State of Delaware,
hereby certifies as follows:
1. The name of the Corporation is Specialty
Underwriters Alliance, Inc. The original Certificate of
Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on April 3, 2003. An Amended
and Restated Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on May 14, 2004
and an Amended and Restated Certificate of Incorporation was
filed with the Secretary of State of the State of Delaware on
May 19, 2005.
2. This Amended and Restated Certificate of Incorporation
was duly adopted by the stockholders in accordance with the
applicable provisions of the General Corporation Law of the
State of Delaware.
3. This Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provision of the
Corporations Certificate of Incorporation as heretofore
restated and amended.
4. The text of the Amended and Restate Certificate of
Incorporation is hereby amended and restated in its entirety to
read as follows:
FIRST
:
The name of the Corporation is
Specialty Underwriters Alliance, Inc.
SECOND
:
The Corporations
registered office in the State of Delaware is at Corporation
Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle 19801. The name of its registered agent at
such address is The Corporation Trust Company.
THIRD
:
The nature of the business of
the Corporation and its purpose is to engage in any lawful act
or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH
:
The total number of shares of
stock which the Corporation shall have authority to issue is
1,000 shares of Common Stock, par value $0.01 per share.
FIFTH
:
The name and mailing address of
the incorporator is as follows:
Purvi Shah
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
SIXTH
:
The following provisions are
inserted for the management of the business, for the conduct of
the affairs of the Corporation and for the purpose of creating,
defining, limiting and regulating the powers of the Corporation
and its directors and stockholders:
(a) The number of directors of the Corporation shall be
fixed and may be altered from time to time in the manner
provided in the By-Laws of the Corporation, and vacancies in the
Board of Directors and newly created directorships resulting
from any increase in the authorized number of directors may be
filled, and directors may be removed, as provided in the By-Laws
of the Corporation.
(b) The election of directors may be conducted in any
manner approved by the stockholders at the time when the
election is held and need not be by written ballot.
A-62
(c) All corporate powers and authority of the Corporation
(except as at the time otherwise provided by law, by this
Certificate of Incorporation or by the By-Laws of the
Corporation) shall be vested in and exercised by the Board of
Directors.
(d) The Board of Directors shall have the power without the
assent or vote of the stockholders to adopt, amend, alter or
repeal the By-Laws of the Corporation, except to the extent that
the By-Laws of the Corporation or this Certificate of
Incorporation otherwise provide.
(e) The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted
by the provisions of paragraph (7) of subsection (b)
of Section 102 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented.
Neither the amendment or repeal of this section nor the adoption
of any provision of this Certificate of Incorporation
inconsistent with this section shall adversely affect any right
or protection of a director of the Corporation existing at the
time of such amendment, repeal or adoption.
(f) The Corporation shall, to the fullest extent permitted
by Section 145 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented, or by
any successor thereto, indemnify any and all present and former
directors and officers of the Corporation or any fiduciaries
under any benefit plan or the Corporation whom it shall have
power to indemnify under said section from and against any and
all of the expenses, liabilities or other matters referred to in
or covered by said section. The Corporation shall advance
expense to the fullest extent permitted by said section. Such
right to indemnification and advancement of expenses shall
continue as to a person who has ceased to be a director or
officer of the Corporation or fiduciary under any benefit plan
of the Corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person. The
indemnification and advancement of expenses provided for herein
shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may have.
SEVENTH
:
The Corporation reserves the
right to amend or repeal any provision contained in this
Certificate of Incorporation in the manner now or hereafter
prescribed by the laws of the State of Delaware, and all rights
herein conferred upon stockholders or directors are granted
subject to this reservation.
IN WITNESS WHEREOF, the Corporation has cause this Amended and
Restated Certificate of Incorporation to be signed by
[ ],
its
[ ],
this
[ ]
day of
[ ],
20[ ].
Name:
Title:
A-63
Exhibit B
Form
of
Officers Certificate of Tower Group, Inc.
[ ],
2009
Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
|
|
|
|
Re:
|
The Amended and Restated Agreement and Plan of Merger, dated as
of June 21, 2009, among
Tower Group, Inc., Tower S.F. Merger Corporation and Specialty
Underwriters Alliance, Inc.
|
Ladies and Gentlemen:
This certificate is being delivered to you in connection with
your rendering the tax opinions referred to in
section 7.2(e) of the Amended and Restated Agreement and
Plan of Merger (the
Merger Agreement
), dated
as of June 21, 2009, among Tower Group, Inc.
(
Parent
), Tower S.F. Merger Corporation
(
Merger Sub
) and Specialty Underwriters
Alliance, Inc. (the
Company
). Capitalized
terms not defined herein have the meanings set forth in the
Merger Agreement.
Parent hereby represents and certifies that the following
statements are true, correct and complete as of the date hereof
and will be true, correct and complete at the Effective Time:
1. Parent has entered into the Merger Agreement and will
effect the Merger for the bona fide business reasons set forth
in the Proxy Statement/Prospectus.
2. The Merger will be consummated in compliance with the
terms of the Merger Agreement and none of the material terms and
conditions thereof has been or will be waived or modified. The
Merger Agreement represents the entire understanding among
Parent, Merger Sub and the Company with respect to the Merger.
3. The consideration to be received in the Merger by the
shareholders of the Company was determined by arms length
negotiations between Parent and the Company. In connection with
the Merger, shareholders of the Company will not receive,
directly or indirectly, any consideration other than shares of
Parent Common Stock and cash in lieu of fractional shares of
Parent Common Stock.
4. To the best of the knowledge of Parents
management, the shareholders of the Company, other than the
owners of the Class B Shares, will have no dissenters
rights in the Merger.
5. The payment of cash in lieu of fractional shares of
Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares
and does not represent separately bargained-for consideration.
6. Following the Effective Time, the Company will hold
(i) at least 90 percent of the fair market value of
the net assets held by the Company immediately prior to the
Merger and at least 90 percent of the fair market value of
the net assets held by Merger Sub immediately prior to the
Merger and (ii) at least 70 percent of the fair market
value of the gross assets held by the Company immediately prior
to the Merger and at least 70 percent of the fair market
value of the gross assets held by Merger Sub immediately prior
to the Merger. For purposes of this representation, amounts paid
by the Company or Merger Sub to dissenters, amounts paid by the
Company or by Merger Sub to shareholders who receive cash or
other property (including cash in lieu of fractional shares of
Parent Common Stock), amounts used by the Company or Merger Sub
to pay expenses incurred in connection with the Merger, amounts
paid by the Company in connection with all redemptions and
amounts distributed or to be distributed
A-64
(except for regular, normal dividends), by the Company
immediately preceding, in contemplation of, or otherwise as part
of an overall plan that includes the Merger, will be considered
assets held by the Company or Merger Sub, as the case may be,
immediately prior to the Effective Time.
7. No officer, director or representative of Parent or any
subsidiary of Parent had any discussions or negotiations with
the Company relating to the Merger prior to June 30, 2008.
8. At all times through the Effective Time, Parent has
owned and will own all of the stock of Merger Sub and has been
and will be in control of Merger Sub within the
meaning of Section 368(c) of the Code.
9. At the Effective Time, neither Parent nor any person
related to Parent within the meaning of Treas. Reg.
§ 1.368-1(e)(3) will have any agreement,
understanding, plan or intention to redeem, purchase or
otherwise reacquire any of the Parent Common Stock to be issued
to the shareholders of the Company in the Merger or to receive
the economic return on such stock.
10. Parent has, and at the Effective Time will have, no
plan or intention to (i) liquidate the Company or otherwise
cause the Company to cease to be properly treated as a
corporation for U.S. federal income tax purposes,
(ii) merge the Company with and into another entity (except
with respect to the Merger), (iii) sell or otherwise
dispose of any of the stock of the Company, except for transfers
(including successive transfers) of such stock to one or more
corporations controlled (within the meaning of
Section 368(c) of the Code) by Parent or (iv) cause
the Company to sell or otherwise dispose of any of its assets or
any of the assets of Merger Sub acquired in the Merger, except
for asset dispositions made in the ordinary course of business
or asset transfers described in Section 368(a)(2)(C) of the
Code or Treas. Reg. § 1.368-2(k).
11. Merger Sub will have no liabilities assumed by the
Company and will not transfer to the Company any assets subject
to liabilities in the Merger. Merger Sub has been newly formed
solely for the purpose of engaging in the Merger and has not
engaged and will not engage in any activity other than in
respect of the Merger as contemplated by the Merger Agreement,
and has not, since its formation, owned any assets, other than
assets with nominal values, incurred any indebtedness for money
borrowed, or issued stock or any other equity to any person
other than Parent. No stock of Merger Sub will be issued in the
Merger.
12. Following the Merger, members of Parents
qualified group will continue the Companys
historic business or use a significant
portion of the Companys historic business
assets in a business, as such terms are used in Treas.
Reg. § 1.368-1(d).
13. Parent has paid or will pay the expenses incurred by
Parent and Merger Sub in connection with the Merger and the
transactions related thereto. To the best of the knowledge of
Parents management, the Company has paid or will pay its
own expenses incurred in connection with the Merger and the
transactions related thereto.
14. There is no, and at the Effective Time there will be
no, inter-corporate indebtedness existing between Parent and the
Company or between Merger Sub and the Company that was issued,
was acquired, or will be settled at a discount.
15. In the Merger, stock of the Company representing
control of the Company, within the meaning of
Section 368(c) of the Code, will be exchanged solely for
shares of Parent Common Stock. Furthermore, no liabilities of
any Company stockholder will be assumed by Parent or Merger Sub.
For purposes of this representation, stock of the Company
exchanged in the Merger for cash or other property originating
with funds supplied by Parent or a party related to Parent will
be treated as outstanding Company stock on the date of the
Merger.
16. To the best of the knowledge of Parents
management, the Company does not have, and at the Effective Time
the Company will not have, outstanding any warrants, options,
convertible securities, or any other type of right pursuant to
which any person could acquire stock of the Company that, if
exercised or converted, would affect Parents acquisition
or retention of control of the Company, within
A-65
the meaning of Section 368(c) of the Code. Merger Sub does
not have, and at the Effective Time Merger Sub will not have,
outstanding any warrants, options, convertible securities, or
any other type of right pursuant to which any person could
acquire stock in Merger Sub, or following the Merger, stock in
Company.
17. Neither Parent nor, to the best of the knowledge of
Parents management, the Company, has or at the Effective
Time will have, any plan or intention for the Company to issue
additional stock that would result in Parent losing
control of the Company within the meaning of
Section 368(c) of the Code.
18. Neither Parent nor any subsidiary of Parent will,
directly or indirectly through any affiliated entities, have
owned, beneficially or of record, any stock of the Company at
any time during the five-year period ending at the Effective
Time.
19. Neither Parent nor Merger Sub is, or at the Effective
Time will be, an investment company within the
meaning of Section 368(a)(2)(F)(iii) of the Code or such
entity meets, and at the Effective Time will meet, the
diversification requirements of Section 368(a)(2)(F)(ii) of
the Code.
20. Neither Parent nor Merger Sub is, or at the Effective
Time will be, under the jurisdiction of a court in a
Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code or the subject of any
other receivership, insolvency, bankruptcy or similar proceeding.
21. None of Parent, Merger Sub, or, after the Merger, the
Company will take any position on any federal, state or local
income or franchise tax return, or take any other tax reporting
position that is inconsistent with the treatment of the Merger
as a reorganization within the meaning of Section 368(a) of
the Code or with any of the foregoing representations, unless
otherwise required by a final determination (as
defined in Section 1313(a)(1) of the Code) or by applicable
state or local income or franchise tax law.
22. The undersigned is authorized to make all of the
statements and representations set forth herein on behalf of
Parent.
Parent understands and agrees that you will rely on this
certificate in rendering your opinion concerning certain
U.S. federal income tax consequences of the Merger. Parent
hereby agrees to inform you if, for any reason, any of the
foregoing representations ceases to be true prior to the
Effective Time.
Very truly yours,
Tower Group, Inc.
By:
Title:
A-66
Exhibit C
Form
of
Officers Certificate of Specialty Underwriters
Alliance, Inc.
[ ],
2009
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
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Re:
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The Amended and Restated Agreement and Plan of Merger, dated as
of June 21, 2009, among
Tower Group, Inc., Tower S.F. Merger Corporation and Specialty
Underwriters Alliance, Inc.
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Ladies and Gentlemen:
This certificate is being delivered to you in connection with
your rendering the tax opinions referred to in
section 7.3(d) of the Amended and Restated Agreement and
Plan of Merger (the
Merger Agreement
), dated
as of June 21, 2009, among Tower Group, Inc.
(
Parent
), Tower S.F. Merger Corporation
(
Merger Sub
) and Specialty Underwriters
Alliance, Inc. (the
Company
). Capitalized
terms not defined herein have the meanings set forth in the
Merger Agreement.
The Company hereby represents and certifies that the following
statements are true, correct and complete as of the date hereof
and will be true, correct and complete at the Effective Time:
1. The Company has entered into the Merger Agreement and
will effect the Merger for the bona fide business reasons set
forth in the Proxy Statement/Prospectus.
2. The Merger will be consummated in compliance with the
terms of the Merger Agreement and none of the material terms and
conditions thereof has been or will be waived or modified. The
Merger Agreement represents the entire understanding among
Parent, Merger Sub and the Company with respect to the Merger.
3. The consideration to be received in the Merger by the
shareholders of the Company was determined by arms length
negotiations between Parent and the Company. In connection with
the Merger, shareholders of the Company will not receive,
directly or indirectly, any consideration other than shares of
Parent Common Stock and cash in lieu of fractional shares of
Parent Common Stock.
4. The shareholders of the Company, other than the owners
of the Class B Shares, will have no dissenters rights
in the Merger.
5. The payment of cash in lieu of fractional shares of
Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares
and does not represent separately bargained-for consideration.
6. At and immediately following the Effective Time, the
Company will hold (i) at least 90 percent of the fair
market value of the net assets held by it immediately prior to
the Merger and (ii) at least 70 percent of the fair
market value of the gross assets held by it immediately prior to
the Merger. For purposes of this representation, amounts paid by
the Company or Merger Sub to dissenters, amounts paid by the
Company or by Merger Sub to shareholders who receive cash or
other property (including cash in lieu of fractional shares of
Parent Common Stock), amounts used by the Company and Merger Sub
to pay expenses incurred in connection with the Merger, amounts
paid by the Company in connection with all redemptions and
amounts distributed or to be distributed (except for regular,
normal dividends), by the Company immediately preceding, in
contemplation of, or otherwise as part of an overall plan that
includes the Merger, will be considered assets held by the
Company or Merger Sub, as the case may be,
A-67
immediately prior to the Effective Time. Without limiting the
foregoing, in the last two years, there has been no share
repurchase, spin-off or other significant irregular distribution
by the Company (other than the repurchase of 275,000 shares
of Common Stock during the three months ended June 30,
2008, pursuant to the stock repurchase authority granted to the
Company by its Board of Directors in April 2008, all of which
took place prior to any discussions or negotiations relating to
the Merger), and, other than in the ordinary course of business,
there has been no significant debt repayment by the Company.
7. As of the Effective Time, no assets of the Company will
have been sold, transferred or otherwise disposed of which would
prevent the Company or members of Parents qualified
group from continuing the Companys historic
business and from using a significant portion
of the Companys historic business assets in a
business following the Merger, as such terms are used in Treas.
Reg. § 1.368-1(d).
8. To the best of the knowledge of the Companys
management, Parent has paid or will pay the expenses incurred by
Parent and Merger Sub in connection with the Merger and the
transactions related thereto. The Company has paid or will pay
its own expenses incurred in connection with the Merger and the
transactions related thereto.
9. There is no, and at the Effective Time there will be no,
inter-corporate indebtedness existing between Parent and the
Company or between Merger Sub and the Company that was issued,
was acquired, or will be settled at a discount.
10. In the Merger, stock of the Company representing
control of the Company, within the meaning of
Section 368(c) of the Code, will be exchanged solely for
shares of Parent Common Stock. Furthermore, no liabilities of
any Company stockholder will be assumed by Parent or Merger Sub.
For purposes of this representation, stock of the Company
exchanged in the Merger for cash or other property originating
with funds supplied by Parent or a party related to Parent will
be treated as outstanding Company stock on the date of the
Merger.
11. The Company does not have, and at the Effective Time
the Company will not have, outstanding any warrants, options,
convertible securities, or any other type of right pursuant to
which any person could acquire stock of the Company that, if
exercised or converted, would affect Parents acquisition
or retention of control of the Company, within the
meaning of Section 368(c) of the Code.
12. The Company does not have, and at the Effective Time
the Company will not have, outstanding any capital stock (or any
other interest treated as stock for U.S. federal income tax
purposes) other than the Company Shares.
13. The Company does not have, and at the Effective Time
will not have, any plan or intention for the Company to issue
additional stock that would result in Parent losing
control of the Company within the meaning of
Section 368(c) of the Code.
14. To the best of the knowledge of the Companys
management, neither Parent nor any subsidiary of Parent will,
directly or indirectly through any affiliated entities, have
owned, beneficially or of record, any stock of the Company at
any time during the five-year period ending at the Effective
Time.
15. The Company is not, and at the Effective Time will not
be, an investment company within the meaning of
Section 368(a)(2)(F)(iii) of the Code or the Company meets,
and at the Effective Time will meet, the diversification
requirements of Section 368(a)(2)(F)(ii) of the Code.
16. Immediately prior to the Effective Time the fair market
value of the assets of the Company will exceed the sum of its
liabilities, plus the amount of liabilities, if any, to which
the assets are subject.
17. The Company is not, and at the Effective Time will not
be, under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of
the Code or the subject of any other receivership, insolvency,
bankruptcy or similar proceeding.
18. The Company will not take any position on any federal,
state or local income or franchise tax return, or take any other
tax reporting position that is inconsistent with the treatment
of the Merger as a reorganization within the meaning of
Section 368(a) of the Code or with any of the foregoing
A-68
representations, unless otherwise required by a final
determination (as defined in Section 1313(a)(1)
of the Code) or by applicable state or local income or franchise
tax law.
19. At the Effective Time there will be no accrued, but
unpaid, dividends on the stock of the Company.
20. The undersigned is authorized to make all of the
statements and representations set forth herein on behalf of the
Company.
The Company understands and agrees that you will rely on this
certificate in rendering your opinion concerning certain
U.S. federal income tax consequences of the Merger. The
Company hereby agrees to inform you if, for any reason, any of
the foregoing representations ceases to be true prior to the
Effective Time.
Very truly yours,
Specialty Underwriters Alliance, Inc.
By:
Title:
A-69
Exhibit D
AMENDMENT
NO. [ ]
TO THE
[SPECIALTY UNDERWRITERS ALLIANCE, INC.][SUA INSURANCE
COMPANY]
[AMENDED AND RESTATED] PARTNER AGENT PROGRAM AGREEMENT
This amendment (Amendment) is made and entered into
as of June [ ], 2009 by and [between][among]
[Partner Agent] and Specialty Underwriters Alliance, Inc.[
and its wholly owned subsidiary SUA Insurance Company], and
amends the [Amended and Restated] Partner Agent Program
Agreement (Agreement) entered into by the parties on
[ ][,
as amended]. Any capitalized terms used but not defined in this
Amendment shall have the same meaning set forth in the
Agreement. In the event that any provision of this Amendment and
any provision of the Agreement are inconsistent or conflicting,
the inconsistent or conflicting provision of this Amendment
shall be and constitute an amendment of the Agreement and shall
control, but only to the extent that such provision is
inconsistent or conflicting with the Agreement.
Now, therefore, in accordance with Section IX, D of the
Agreement and in consideration of the mutual agreements and
covenants hereinafter set forth, the parties agree to amend the
Agreement, effective as of the date hereof, as follows:
1. The reference in the preamble to [Specialty
Underwriters Alliance, Inc. and its property and casualty
insurance subsidiaries and affiliates (collectively the
Company)] shall be deleted and replaced in its
entirety with the following: Specialty Underwriters
Alliance, Inc. and its property and casualty insurance
subsidiaries, including SUA Insurance Company (collectively the
Company).
2. SUA Insurance Company means Specialty
Underwriters Alliance, Inc.s wholly owned subsidiary
SUA Insurance Company, an Illinois domiciled insurance company.
3. Except as modified hereby, the Agreement shall remain in
full force and effect.
4. This Amendment may be executed in any number of
counterparts and by the parties on different counterparts each
in the like form. Each counterpart shall, when executed, be an
original but all the counterparts taken together shall
constitute one and the same instrument. The execution by a party
of one or more such counterparts shall constitute execution by
that party of this Amendment. This Amendment shall not be
effective until each of the parties has executed at least one
counterpart. Any facsimile copies hereof or signature hereon
shall, for all purposes, be deemed originals.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
A-70
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed on their behalf by their duly
authorized officers as of the day, month and year above written.
SPECIALTY UNDERWRITERS ALLIANCE, INC.
Name:
Title:
[SUA INSURANCE COMPANY]
Name:
Title:
[PARTNER AGENT]
Name:
Title:
A-71
Explanatory
Note Regarding Schedules
The following attachments, exhibits and schedules to the merger
agreement have not been publicly filed by Tower or SUA. Tower
and SUA hereby agree to provide a copy of any such omitted
attachments, exhibits and schedules to the SEC upon request.
Parent Disclosure Schedule to the Amended and Restated Agreement
and Plan of Merger, executed on July 22, 2009 and effective
as of June 21, 2009, by and among Tower Group, Inc.,
Specialty Underwriters Alliance, Inc. and Tower S.F.
Merger Corporation.
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Section 4.3 Parent Insurance Approvals
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Section 4.5 Capitalization; Interim Operations of Merger Sub
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Section 4.6 Parent SEC Filings, etc.
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Section 4.12 Litigation
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Company Disclosure Schedule to the Amended and Restated
Agreement and Plan of Merger, executed on July 22, 2009 and
effective as of June 21, 2009, by and among Tower Group,
Inc., Specialty Underwriters Alliance, Inc. and Tower S.F.
Merger Corporation.
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Section 3.3 Governmental Authorization
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Section 3.4 Non-Contravention
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Section 3.5(b) Capitalization
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Section 3.6 Subsidiaries
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Section 3.11 Absence of Certain Changes or Events
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Section 3.15(a) Insurance Matters Company
Reinsurance Agreements
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Section 3.17 Title to Properties
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Section 3.20(a) Company Benefit Plans
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Section 3.20(g) Company Benefit Plans
Severance, Acceleration, Etc.
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Section 5.1(b) Certain Permitted Conduct of Business by the
Company
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Section 6.10(e) Company Indemnification Agreements
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Section 9.12 Knowledge of the Company
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Schedule 6.17(a) Partner Agent Program
Agreement Amendments and Schedule 6.17(b) Other
Partner Agent Matters, in each case, to the Amended and Restated
Agreement and Plan of Merger, executed on July 22, 2009 and
effective as of June 21, 2009, by and among Tower Group,
Inc., Specialty Underwriters Alliance, Inc. and Tower S.F.
Merger Corporation.
A-72
Annex B
June 21, 2009
The Board of Directors
Specialty Underwriters Alliance Inc.
222 South Riverside Plaza
Suite 1600
Chicago, IL 60606
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of shares of Common
Stock and Class B Common Stock, in each case par value
$0.01 per share (collectively, the Shares), of
Specialty Underwriters Alliance Inc. (the
Company), of the Exchange Ratio (as defined below)
to be received by such holders pursuant to the Agreement and
Plan of Merger (the Merger Agreement) to be entered
into among Tower Group, Inc. (Purchaser), Tower S.F.
Merger Corporation, a wholly-owned subsidiary of the Purchaser
(Merger Sub) and the Company. Pursuant to the Merger
Agreement, Merger Sub will merge with and into the Company (the
Merger), whereupon the Company will continue as a
wholly-owned subsidiary of Purchaser. Each outstanding Share
(other than Shares held by the Company or its subsidiaries, the
Purchaser or its subsidiaries or Shares to which dissenter
rights are perfected) will be converted into the right to
receive a fraction (the Exchange Ratio) of a share
of common stock, par value $.01 per share, of the Purchaser
(Purchaser Common Stock) equal to (i) 0.28 if
such Market Price of the Purchaser Common Stock is greater than
or equal to $23.25 and less than or equal to $27.75, (ii) a
fraction equal to $7.77 divided by such Market Price if such
Market Price is above $27.75, (iii) a fraction equal to
$6.51 divided by such Market Price if such Market Price is
greater than or equal to $20.00 and less than 23.25 and
(iv) 0.3255 if such Market Price is less than $20.00 (it
being understood that the Company may terminate the Merger
Agreement if the Market Price is less than $20.00 and the
Purchaser does not offer additional Purchaser Common Stock to
deliver a value per share of $6.51). The Market
Price is the volume weighted average price per share of
Purchaser Common Stock on the Nasdaq Stock Exchange for the 15
consecutive trading days immediately preceding the fifth trading
day prior to the date initially established as the closing date
of the Merger.
FBR Capital Markets & Co., Inc. (FBR), as
part of its investment banking business, is regularly engaged in
the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of
listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as
financial advisor to the Company in connection with the proposed
Merger and will receive a fee for our services, a significant
portion of which is contingent upon the consummation of the
Merger. We will also receive a fee for rendering this opinion.
In addition, the Company has agreed to indemnify us and certain
related parties against certain liabilities and to reimburse us
for certain expenses arising in connection with or as a result
of our engagement. We and our affiliates provide a wide range of
investment banking and financial services, including financial
advisory, securities trading, brokerage and financing services.
In that regard, we and our affiliates have in the past provided
and may in the future provide investment banking and other
financial services to the Company, Purchaser and their
respective affiliates for which we and our affiliates would
expect to receive compensation. In particular, FBR acted as the
sole bookrunner and lead manager of the Companys initial
public offering in 2004 and served as its financial advisor in
connection with evaluating unsolicited merger proposals in 2008
and 2009, and we acted as a bookrunner and sole lead manager in
connection with the initial public offering and follow-on
offering of common stock of the Purchaser in 2004 and 2007,
acted as the sole initial purchaser and placement agent in
FBR
Capital Markets Corporation 1001 Nineteenth Street North
Arlington, VA 22209 703.312.9500 800.846.5050 www.fbr.com
B-1
the initial equity offering of an affiliate of the Purchaser in
2006 and advised this affiliate in 2008 regarding its
acquisition by the Purchaser, which closed earlier this year. In
the ordinary course of business, we and our affiliates may trade
in the securities and financial instruments of the Company,
Purchaser and their affiliates for our and our affiliates
own accounts and the accounts of customers. Accordingly, we may
at any time hold a long or short position in such securities and
financial instruments.
In arriving at our opinion, we have, among other things:
(i) reviewed a draft of the Merger Agreement, dated as of
June 21, 2009;
(ii) reviewed the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008, the Companys
Quarterly Report on
Form 10-Q
for the period ended March 31, 2009, certain unaudited
interim financial statements and other financial information
prepared by the management of the Company with respect to the
quarter ended March 31, 2009, which the management of the
Company has identified as being the most current financial
statements available, and other publicly available financial and
operating information;
(iii) reviewed the Purchasers Annual Report on
Form 10-K
for the year ended December 31, 2008, the Purchasers
Quarterly Report on
Form 10-Q
for the period ended March 31, 2009, the Purchasers
earnings release containing certain unaudited interim financial
statements and other financial information with respect to the
quarter ended March 31, 2009 and other publicly available
financial and operating information;
(iv) reviewed the reported stock prices and trading
histories of the shares of Common Stock and of the shares of
Purchaser Common Stock and a comparison of those trading
histories with each other and with those of other companies that
we deemed relevant;
(v) met with certain members of the Companys
management to discuss the business and prospects of the Company;
(vi) met with certain members of the Purchasers
management to discuss the business and prospects of the
Purchaser;
(vii) held discussions with certain members of the
Companys management concerning the amounts and timing of
cost savings and related expenses expected to result from the
Merger as furnished to us by the Companys management (the
Expected Synergies);
(viii) reviewed certain pro forma financial effects of the
Merger, including the Expected Synergies;
(ix) reviewed certain historical and forward-looking
business, financial and other information relating to the
Company provided to or discussed with us by the management of
the Company;
(x) reviewed certain historical and forward-looking
business, financial and other information relating to the
Purchaser provided to or discussed with us by the management of
the Purchaser;
(xi) reviewed certain financial and stock market data and
other information for the Company and the Purchaser and compared
that data and information with corresponding data and
information for companies with publicly traded securities that
we deemed relevant;
(xii) reviewed the financial terms of the proposed Merger
and compared those terms with the financial terms of certain
other business combinations and other transactions which have
recently been effected or announced; and
(xiii) considered such other information, financial
studies, analyses and investigations and financial, economic and
market criteria that we deemed, in our sole judgment, to be
necessary, appropriate or relevant to render the opinion set
forth herein.
In preparing our opinion, we have, with your consent, relied
upon and assumed the accuracy and completeness of all of the
financial, accounting, legal, tax and other information we
reviewed, and we have not assumed any responsibility for the
independent verification of any of such information. With
respect to the
B-2
financial forecasts provided to or discussed with us by the
management of the Company, including the Expected Synergies, the
financial forecasts provided to or discussed with us by the
management of the Purchaser and the unaudited interim financial
statements and other financial information prepared and provided
to us by the management of the Company or the management of the
Purchaser, we assumed that they were reasonably prepared on a
basis reflecting the best currently available estimates and
judgments of the Company or the Purchaser, as applicable. We
have assumed no responsibility for the assumptions, estimates
and judgments on which such forecasts, Expected Synergies and
interim financial statements and other financial information
were based and have not made any independent verification
thereof. In addition, we were not requested to make, and did not
make, an independent evaluation or appraisal of the assets or
liabilities (contingent, derivative, off-balance sheet or
otherwise) of the Company or any of its subsidiaries or of the
Purchaser or any of its subsidiaries, independently or combined,
nor were we furnished with any such evaluations or appraisals.
We express no opinion as to the future prospects, plans or
viability of the Company or the Purchaser, independently or
combined. With regard to the information provided to us by the
Company or the Purchaser, we have assumed that all such
information is complete and accurate in all material respects
and have relied upon the assurances of the management of the
Company or the Purchaser, as applicable, that they are unaware
of any facts or circumstances that would make such information
incomplete or misleading. We have made no independent evaluation
of any legal matters involving the Company or the Purchaser and
we have assumed the correctness of all statements with respect
to legal matters made or otherwise provided to the Company and
us by the Companys counsel or by the Purchasers
counsel. We have also assumed that there has been no change in
the assets, liabilities, business, condition (financial or
otherwise), results of operations or prospects of the Company or
of the Purchaser since the date of the most recent financial
statements made available to us that would be material to our
analysis. We have assumed, with your consent, that the Merger
will qualify for federal income tax purposes as a reorganization
under Section 368(a) of the Internal Revenue Code of 1986,
as amended. With your consent, we have also assumed that the
Merger Agreement, when executed, will conform to the draft
reviewed by us in all respects material to our analyses, that in
the course of obtaining any necessary regulatory and third party
consents, approvals and agreements for the Merger, no
modification, delay, limitation, restriction or condition will
be imposed that will have an adverse effect on the Company, the
Purchaser or the proposed Merger and that the Merger will be
consummated in accordance with the terms of the Merger
Agreement, without waiver, modification or amendment of any
term, condition or agreement therein that is material to our
analysis. Our opinion is necessarily based on financial,
economic, market and other circumstances and conditions as they
exist on and the information made available to us as of the date
hereof. Our opinion can be evaluated only as of the date of this
letter and any change in such circumstances and conditions,
including a change in stock price of the Purchaser, would
require a reevaluation of this opinion, which we are under no
obligation to undertake. We assume no responsibility to update,
revise or reaffirm our opinion based upon events or
circumstances occurring after the date hereof.
This letter does not constitute a recommendation to the Board of
Directors of the Company, the stockholders of the Company or any
other person as to how to vote or act on any matter related to
the Merger, and does not address the relative merits of the
Merger over any other alternative transactions which may be
available to the Company. We express no opinion as to the
underlying business decision of the Company to effect the
Merger, the structure or accounting treatment or taxation
consequences of the Merger or the availability or the
advisability of any alternatives to the Merger. Further, we
express no opinion as to the value of the Purchaser Common Stock
of the Purchaser upon the announcement or consummation of the
Merger or the price at which the common stock of the Purchaser
or the Company will trade at any time. We express no opinion
with respect to any other reasons, legal, business, or
otherwise, that may support the decision of the Board of
Directors of the Company to approve or cause the Company to
consummate the Merger. This letter addresses only the fairness,
from a financial point of view, of the Exchange Ratio pursuant
to the Merger Agreement. This letter does not address the
fairness of the Merger or of any specific portion of the Merger
(including without limitation as to the fairness of the amount
or nature of any compensation paid or payable to any of the
officers, directors or employees of the Company or its
subsidiaries), other than the Exchange Ratio to be received by
the holders of the Shares (other than Shares held by the
Purchaser or Merger Sub). This opinion has been approved by a
fairness committee of FBR.
B-3
It is understood that this letter is for the information and use
of the Companys Board of Directors in evaluating the
Merger and does not confer rights or remedies upon the
Purchaser. Furthermore, this letter should not be construed as
creating any fiduciary duty on the part of FBR to the Company,
the Companys Board of Directors or any other party. This
opinion is not to be reproduced, summarized, described or
referred to or given to any other person or otherwise made
public or used for any other purpose, or published or referred
to at any time, in whole or in part, without our prior written
consent, except that (i) this opinion may be referred to in
the Merger Agreement and (ii) this opinion may be referred
to, and a copy of this opinion may be included in its entirety,
in any filing that the Company is required to make with the
Securities and Exchange Commission in connection with the Merger
if such inclusion is required by law or regulation.
Based on and subject to the foregoing, and in reliance thereon,
we are of the opinion that, as of the date hereof, the Exchange
Ratio pursuant to the Merger Agreement is fair, from a financial
point of view, to the holders of shares of Common Stock and
Class B Common Stock (other than the Company, the Parent
and their respective subsidiaries).
Very truly yours,
FBR CAPITAL MARKETS & CO.
Joseph Kavanagh
Managing Director
James Neuhauser
Executive Vice President & Head of
Investment Banking
B-4
Annex C
Delaware
General Corporation Code Appraisal Rights
(section 262)
§ 262. Appraisal rights
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to
such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to § 228 of this
title shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholders shares of stock
under the circumstances described in subsections (b) and
(c) of this section. As used in this section, the word
stockholder means a holder of record of stock in a
stock corporation and also a member of record of a nonstock
corporation; the words stock and share
mean and include what is ordinarily meant by those words and
also membership or membership interest of a member of a nonstock
corporation; and the words depository receipt mean a
receipt or other instrument issued by a depository representing
an interest in one or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to
§ 251(g) of this title), § 252,
§ 254, § 257, § 258,
§ 263 or § 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of the meeting of stockholders to act
upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote
of the stockholders of the surviving corporation as provided in
§ 251(f) of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to
§§ 251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under § 253 of
this title is not owned by the parent corporation immediately
prior to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation,
any merger or consolidation in which the corporation is a
constituent corporation or the sale
C-1
of all or substantially all of the assets of the corporation. If
the certificate of incorporation contains such a provision, the
procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply
as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record
date for notice of such meeting with respect to shares for which
appraisal rights are available pursuant to subsection (b)
or (c) hereof that appraisal rights are available for any
or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholders
shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for
appraisal of such stockholders shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such stockholders
shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as
herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
§ 228 or § 253 of this title, then either a
constituent corporation before the effective date of the merger
or consolidation or the surviving or resulting corporation
within 10 days thereafter shall notify each of the holders
of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the
merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation
the appraisal of such holders shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holders shares. If
such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of
the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder
who is entitled to appraisal rights and who has demanded
appraisal of such holders shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the
merger or consolidation, the surviving or resulting corporation
or any stockholder who has complied with subsections (a)
and (d) of this section hereof and who is otherwise
entitled to appraisal rights, may commence an appraisal
proceeding by filing a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders.
C-2
Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any
stockholder who has not commenced an appraisal proceeding or
joined that proceeding as a named party shall have the right to
withdraw such stockholders demand for appraisal and to
accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) of this
section hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholders
written request for such a statement is received by the
surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal
under subsection (d) of this section hereof, whichever is
later. Notwithstanding subsection (a) of this section, a
person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such
person may, in such persons own name, file a petition or
request from the corporation the statement described in this
subsection.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after
such service file in the office of the Register in Chancery in
which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the
time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1
or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After the Court determines the stockholders entitled to
an appraisal, the appraisal proceeding shall be conducted in
accordance with the rules of the Court of Chancery, including
any rules specifically governing appraisal proceedings. Through
such proceeding the Court shall determine the fair value of the
shares exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. Unless
the Court in its discretion determines otherwise for good cause
shown, interest from the effective date of the merger through
the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective date of the
merger and the date of payment of the judgment. Upon application
by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court
may, in its discretion, proceed to trial upon the appraisal
prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such
stockholders certificates of
C-3
stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Courts decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or
resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees
and the fees and expenses of experts, to be charged pro rata
against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights
as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholders demand for an
appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval
may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right
of any stockholder who has not commenced an appraisal proceeding
or joined that proceeding as a named party to withdraw such
stockholders demand for appraisal and to accept the terms
offered upon the merger or consolidation within 60 days
after the effective date of the merger or consolidation, as set
forth in subsection (e) of this section.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
C-4
CastlePoint
Holdings, Ltd.
Consolidated
Financial Statements
As at December 31, 2008 and 2007 and
for the years ended
December 31, 2008, 2007 and 2006
D-1
Report of
Independent Registered Public Accounting Firm
To the Shareholder of Ocean I Corporation,
formerly known as CastlePoint Holdings, Ltd:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income and comprehensive
income, of shareholders equity and of cash flows present
fairly, in all material respects, the financial position of
CastlePoint Holdings, Ltd. and its subsidiaries at
December 31, 2008 and December 31, 2007, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted SFAS No. 157,
Fair Value Measurements in 2008.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hamilton, Bermuda
April 6, 2009
D-2
CastlePoint
Holdings, Ltd.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Fixed-maturity securities, available-for-sale, at fair value
(amortized cost $510,593 for 2008; $484,489 for 2007)
|
|
$
|
473,443
|
|
|
$
|
484,972
|
|
Equity securities, available-for-sale, at fair value (cost
$43,906 for 2008; $44,036 for 2007)
|
|
|
30,032
|
|
|
|
42,402
|
|
Short-term investments, available-for-sale, at fair value
(amortized cost $590 for 2008; $0 for 2007)
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
|
504,065
|
|
|
|
527,374
|
|
Investment in Partnership, equity method
|
|
|
|
|
|
|
8,503
|
|
Common trust securities statutory business trusts,
equity method
|
|
|
4,022
|
|
|
|
4,022
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
508,087
|
|
|
|
539,899
|
|
Cash and cash equivalents
|
|
|
292,196
|
|
|
|
153,632
|
|
Accrued investment income
|
|
|
3,960
|
|
|
|
4,064
|
|
Premiums receivable (primarily with related parties
See note 3)
|
|
|
184,251
|
|
|
|
125,597
|
|
Premiums receivable programs
|
|
|
27,827
|
|
|
|
9,083
|
|
Prepaid reinsurance premiums
|
|
|
25,270
|
|
|
|
3,475
|
|
Reinsurance recoverable on paid losses & loss
adjustment expense
|
|
|
748
|
|
|
|
22
|
|
Reinsurance recoverable on unpaid losses & loss
adjustment expense
|
|
|
15,526
|
|
|
|
315
|
|
Deferred acquisition costs (primarily with related
parties See note 3)
|
|
|
81,736
|
|
|
|
73,073
|
|
Deferred income taxes
|
|
|
8,868
|
|
|
|
7,051
|
|
Deferred financing fees
|
|
|
3,547
|
|
|
|
3,673
|
|
Other assets
|
|
|
5,263
|
|
|
|
7,174
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,157,279
|
|
|
$
|
927,058
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses (primarily with related
parties See note 3)
|
|
$
|
273,349
|
|
|
$
|
121,741
|
|
Unearned premium (primarily with related parties See
note 3)
|
|
|
262,984
|
|
|
|
217,518
|
|
Losses payable (primarily with related parties See
note 3)
|
|
|
43,702
|
|
|
|
8,527
|
|
Premiums payable (primarily with related parties See
note 3)
|
|
|
53,604
|
|
|
|
16,257
|
|
Accounts payable and accrued expenses
|
|
|
10,001
|
|
|
|
3,592
|
|
Other liabilities
|
|
|
9,319
|
|
|
|
3,595
|
|
Subordinated debentures
|
|
|
134,022
|
|
|
|
134,022
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
786,981
|
|
|
|
505,252
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities (Note 11)
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common shares ($0.01 par value, 100,000,000 shares
authorized, 38,305,735 shares issued as of
December 31, 2008 and 38,289,430 shares issued as of
December 31, 2007)
|
|
|
383
|
|
|
|
383
|
|
Additional
paid-in-capital
|
|
|
387,524
|
|
|
|
385,057
|
|
Accumulated other comprehensive (loss) income
|
|
|
(48,654
|
)
|
|
|
(1,051
|
)
|
Retained earnings
|
|
|
31,045
|
|
|
|
37,417
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
370,298
|
|
|
|
421,806
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,157,279
|
|
|
$
|
927,058
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
D-3
CastlePoint
Holdings, Ltd.
Consolidated
Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands except
|
|
|
|
per share amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (primarily with related parties
See note 3)
|
|
$
|
444,719
|
|
|
$
|
248,364
|
|
|
$
|
78,970
|
|
Insurance service revenue (primarily with related
parties See note 3)
|
|
|
37,827
|
|
|
|
7,453
|
|
|
|
2,334
|
|
Net investment income
|
|
|
31,457
|
|
|
|
29,506
|
|
|
|
11,184
|
|
Net realized (loss) gain on investments
|
|
|
(17,431
|
)
|
|
|
(8,236
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
496,572
|
|
|
|
277,087
|
|
|
|
92,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses (primarily with related
parties See note 3)
|
|
|
261,807
|
|
|
|
131,335
|
|
|
|
40,958
|
|
Commission and other acquisition expenses (primarily with
related parties See note 3)
|
|
|
183,121
|
|
|
|
91,602
|
|
|
|
29,405
|
|
Other operating expenses
|
|
|
39,341
|
|
|
|
17,851
|
|
|
|
12,153
|
|
Interest expense
|
|
|
11,418
|
|
|
|
9,416
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
495,687
|
|
|
|
250,204
|
|
|
|
83,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
885
|
|
|
|
26,883
|
|
|
|
9,450
|
|
Income tax (expense) benefit
|
|
|
(554
|
)
|
|
|
5,857
|
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
331
|
|
|
$
|
32,740
|
|
|
$
|
10,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
331
|
|
|
$
|
32,740
|
|
|
$
|
10,543
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized investment holding (losses) gains arising
during period
|
|
|
(67,305
|
)
|
|
|
(11,048
|
)
|
|
|
1,696
|
|
Less: reclassification adjustment for (losses) gains included in
net income
|
|
|
(17,431
|
)
|
|
|
(8,236
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,874
|
)
|
|
|
(2,812
|
)
|
|
|
1,661
|
|
Income tax benefit (expense) related to items of other
comprehensive income (loss)
|
|
|
2,271
|
|
|
|
104
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
|
(47,603
|
)
|
|
|
(2,708
|
)
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (loss)
|
|
$
|
(47,272
|
)
|
|
$
|
30,032
|
|
|
$
|
12,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
D-4
CastlePoint
Holdings, Ltd.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
331
|
|
|
$
|
32,740
|
|
|
$
|
10,543
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (Gain) on sale of investments
|
|
|
17,431
|
|
|
|
8,236
|
|
|
|
(35
|
)
|
Depreciation and amortization
|
|
|
380
|
|
|
|
220
|
|
|
|
25
|
|
Amortization of bond premium or discount
|
|
|
(275
|
)
|
|
|
(586
|
)
|
|
|
(396
|
)
|
Amortization of stock-based compensation expense
|
|
|
2,467
|
|
|
|
2,021
|
|
|
|
998
|
|
Amortization of deferred financing fees
|
|
|
126
|
|
|
|
110
|
|
|
|
|
|
Equity in limited partnerships
|
|
|
3,581
|
|
|
|
1,387
|
|
|
|
|
|
Deferred income tax
|
|
|
453
|
|
|
|
(5,857
|
)
|
|
|
(1,093
|
)
|
Warrants issued
|
|
|
|
|
|
|
|
|
|
|
4,605
|
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
104
|
|
|
|
(1,853
|
)
|
|
|
(2,211
|
)
|
Premiums receivable
|
|
|
(58,654
|
)
|
|
|
(80,667
|
)
|
|
|
(44,930
|
)
|
Premiums receivable programs
|
|
|
(18,744
|
)
|
|
|
(7,788
|
)
|
|
|
(1,295
|
)
|
Prepaid reinsurance premiums
|
|
|
(21,795
|
)
|
|
|
(3,475
|
)
|
|
|
|
|
Reinsurance recoverable on paid losses and loss adjustment
expense
|
|
|
(726
|
)
|
|
|
(22
|
)
|
|
|
|
|
Reinsurance recoverable on unpaid losses and loss adjustment
expense
|
|
|
(15,211
|
)
|
|
|
(315
|
)
|
|
|
|
|
Deferred acquisition costs
|
|
|
(8,663
|
)
|
|
|
(42,710
|
)
|
|
|
(30,363
|
)
|
Other assets
|
|
|
1,746
|
|
|
|
(3,776
|
)
|
|
|
(750
|
)
|
Increase in liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
151,608
|
|
|
|
87,549
|
|
|
|
34,192
|
|
Unearned premium
|
|
|
45,467
|
|
|
|
131,337
|
|
|
|
86,181
|
|
Losses payable
|
|
|
35,175
|
|
|
|
5,031
|
|
|
|
3,496
|
|
Premiums payable programs
|
|
|
37,348
|
|
|
|
15,185
|
|
|
|
1,072
|
|
Accounts payable and accrued expenses
|
|
|
6,409
|
|
|
|
1,053
|
|
|
|
2,538
|
|
Other liabilities
|
|
|
5,724
|
|
|
|
2,913
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operations
|
|
|
184,282
|
|
|
|
140,733
|
|
|
|
62,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(210
|
)
|
|
|
(1,547
|
)
|
|
|
(331
|
)
|
Purchases of fixed-maturity securities
|
|
|
(557,026
|
)
|
|
|
(492,618
|
)
|
|
|
(418,317
|
)
|
Purchases of equity securities
|
|
|
(35,808
|
)
|
|
|
(52,867
|
)
|
|
|
(40,000
|
)
|
Cost of purchase of shell company (net of cash acquired)
|
|
|
|
|
|
|
|
|
|
|
(2,795
|
)
|
Sales or maturity of fixed-maturity securities
|
|
|
532,157
|
|
|
|
303,298
|
|
|
|
127,315
|
|
Sale of investment in partnership
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
Sales of other investments
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
Sales of equity securities
|
|
|
17,543
|
|
|
|
(10,000
|
)
|
|
|
|
|
Net short-term investments (purchased) sold
|
|
|
(590
|
)
|
|
|
51,626
|
|
|
|
(51,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(39,015
|
)
|
|
|
(162,108
|
)
|
|
|
(385,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from subordinated debentures
|
|
|
|
|
|
|
29,301
|
|
|
|
96,916
|
|
Net proceeds from Tower Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Net proceeds from Private Offering
|
|
|
|
|
|
|
|
|
|
|
249,165
|
|
Net proceeds from Initial Public Offering
|
|
|
|
|
|
|
114,533
|
|
|
|
|
|
Registration costs paid and deferred
|
|
|
|
|
|
|
|
|
|
|
(942
|
)
|
Dividends to shareholders
|
|
|
(6,703
|
)
|
|
|
(3,611
|
)
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by financing activities
|
|
|
(6,703
|
)
|
|
|
140,223
|
|
|
|
357,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
138,564
|
|
|
|
118,848
|
|
|
|
34,784
|
|
Cash and cash equivalents, beginning of period
|
|
|
153,632
|
|
|
|
34,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
292,196
|
|
|
$
|
153,632
|
|
|
$
|
34,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
275
|
|
|
$
|
19
|
|
|
$
|
|
|
Cash paid for interest
|
|
$
|
11,467
|
|
|
$
|
9,446
|
|
|
$
|
174
|
|
See accompanying notes to the consolidated financial statements.
D-5
CastlePoint
Holdings, Ltd.
Consolidated
Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Capital
|
|
|
Income (loss)
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
($ in thousands)
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Tower Group, Inc., proceeds
|
|
|
26
|
|
|
|
14,974
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Private offering, net proceeds
|
|
|
270
|
|
|
|
248,895
|
|
|
|
|
|
|
|
|
|
|
|
249,165
|
|
Warrant to purchase common shares
|
|
|
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
4,605
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,543
|
|
|
|
10,543
|
|
Net unrealized gains
|
|
|
|
|
|
|
|
|
|
|
1,657
|
|
|
|
|
|
|
|
1,657
|
|
Stock based compensation
|
|
|
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
998
|
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,219
|
)
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
296
|
|
|
|
269,472
|
|
|
|
1,657
|
|
|
|
8,288
|
|
|
|
279,713
|
|
Initial public offering, net proceeds
|
|
|
87
|
|
|
|
113,564
|
|
|
|
|
|
|
|
|
|
|
|
113,651
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,740
|
|
|
|
32,740
|
|
Net unrealized loss
|
|
|
|
|
|
|
|
|
|
|
(2,708
|
)
|
|
|
|
|
|
|
(2,708
|
)
|
Stock based compensation
|
|
|
|
|
|
|
2,021
|
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,611
|
)
|
|
|
(3,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
383
|
|
|
$
|
385,057
|
|
|
$
|
(1,051
|
)
|
|
$
|
37,417
|
|
|
$
|
421,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
331
|
|
Net unrealized loss
|
|
|
|
|
|
|
|
|
|
|
(47,603
|
)
|
|
|
|
|
|
|
(47,603
|
)
|
Stock based compensation
|
|
|
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
|
2,467
|
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,703
|
)
|
|
|
(6,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
383
|
|
|
$
|
387,524
|
|
|
$
|
(48,654
|
)
|
|
$
|
31,045
|
|
|
$
|
370,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
D-6
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial Statements
for the
years, ended December 31, 2008, 2007 and 2006
CastlePoint Holdings, Ltd. (the Company), a Bermuda
holding company incorporated on November 16, 2005, was
organized to provide, through its subsidiaries, property and
casualty insurance and reinsurance business solutions, products
and services primarily to small insurance companies and program
underwriting managers in the United States. The Companys
subsidiaries are CastlePoint Bermuda Holdings, Ltd.
(CastlePoint Bermuda Holdings), another holding
company, CastlePoint Reinsurance Company, Ltd.
(CastlePoint Re) an operating reinsurance
subsidiary, CastlePoint Management Corp. (CastlePoint
Management) an insurance management company and
CastlePoint Insurance Company (CastlePoint Insurance
Company) an operating insurance company licensed in New
York and New Jersey.
On February 6, 2006, Tower Group, Inc. (Tower),
a Delaware corporation that is publicly traded in the
U.S. and the Companys sponsor, invested
$15.0 million in the Company in consideration of receiving
2,555,000 shares of the Companys common shares. At
that time, the Company and Tower entered into a master agreement
(Master Agreement) that set forth the terms and
conditions under which the companies would do business with each
other over the subsequent three years. References herein to
Tower refer to Tower Group, Inc. and its
subsidiaries, which include Tower Insurance Company of New York
(TICNY), Tower National Insurance Company
(TNIC) and its managing general agency, Tower Risk
Management (TRM).
On April 4 and 5, 2006, the Company issued a total of 27,025,000
common shares in a private offering for net proceeds of
$249.2 million. The Company used these proceeds and the
$15.0 million Tower invested in the Company prior to the
private offering as follows: (1) approximately
$250.0 million to capitalize the Companys reinsurance
subsidiary, CastlePoint Re; and (2) approximately
$14.0 million to capitalize the Companys intermediate
Bermuda holding company, CastlePoint Bermuda Holdings, which
owns CastlePoint Re.
On March 28, 2007, the Company completed its initial public
offering at an initial offering price per share of $14.50, in
which (i) the Company sold 8,697,148 shares it
registered on its own behalf, and (ii) certain selling
shareholders sold 119,500 shares the Company registered on
their behalf. The managing underwriters for the initial public
offering were Friedman, Billings, Ramsey & Co., Inc.,
Keefe, Bruyette & Woods, Inc., Cochran Caronia Waller
Securities LLC and Piper Jaffray & Co. The aggregate
proceeds of the offering were approximately $127.8 million,
of which the gross proceeds to the Company were approximately
$126.1 million. Net proceeds to the Company, after
deducting underwriting discounts of approximately
$8.5 million and other offering expenses of approximately
$3.6 million, were approximately $114 million. The
gross proceeds to the selling shareholders were approximately
$1.7 million in the aggregate, and net proceeds to the
selling shareholders were approximately $1.6 million in the
aggregate. The Company did not receive any of the proceeds of
the sale by the selling shareholders. Following the initial
public offering, the Company filed a second Registration
Statement on
Form S-1,
as amended (Registration
No. 333-1346628)
covering the resale by selling shareholders named therein of
26,646,589 common shares originally issued by the Company in the
private offering completed April 2006. The Company did not
receive any proceeds from the sales of selling shareholders
pursuant to this registration statement. On
March 7th 2008, the Company terminated its shelf
registration statement that was filed in August 2007 for the
shares purchased in the private offering in April 2006. As
a result of modifications to the SEC rules that became effective
February 15, 2008, non affiliated shareholders who still
own the private offering shares may sell their shares in an open
market without the shelf registration.
In November and December 2006, CastlePoint Management formed two
statutory business trusts, CastlePoint Management Statutory
Trust I and CastlePoint Management Statutory Trust II
(Trust I and Trust II, or
collectively, the Trusts), of which the Company owns
all of the common trust securities. In September 2007,
CastlePoint Bermuda Holdings formed a statutory business trust,
CastlePoint Bermuda
D-7
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Holdings Statutory Trust I (the CPBH Trust), of
which the Company owns all of the common trust securities. For
additional information see Note 15
Debt.
On December 4, 2006, CastlePoint Management purchased
40,000 shares of Towers Series A non-cumulative
convertible redeemable perpetual preferred stock (the
Tower Preferred Stock) with a $0.01 par value per
share and a $1,000 liquidation preference per share for an
aggregate amount of $40 million. As part of this agreement,
the Company also obtained an extension of the Master Agreement
for one year and the right of first refusal on any loss
portfolio transfers that Tower might cede during the life of the
Master Agreement. The dividends on Tower Preferred Stock were
non-cumulative and payable quarterly at a rate of 8.66% per
annum. Tower redeemed all of its perpetual preferred stock held
by CastlePoint Management on January 26, 2007, at the
redemption price of $40 million in the aggregate plus
approximately $0.3 million in interest that was paid in
January 2007. The proceeds of such redemption were used to
further capitalize CastlePoint Insurance. Although Tower
effected such redemption, CastlePoint retained the right of
first refusal from Tower, with respect to any insurance
companies Tower may acquire during the term of the Master
Agreement, subject to the receipt of any necessary regulatory
approvals, to assume such companies historical losses
pursuant to a loss portfolio transfer agreement (which must be
on mutually acceptable market competitive terms) if Tower
desires to cause these insurance companies to effect loss
portfolio transfers.
On December 4, 2006, CastlePoint Management purchased from
Tower all of the issued and outstanding capital stock of a
company known at that time as Tower Indemnity Company of
America, subsequently renamed to CastlePoint Insurance in early
2007. As of December 31, 2008, CastlePoint Insurance
Company is a licensed insurer in New York and New Jersey where
it writes direct and assumed insurance business, on an admitted
basis.
As more fully described in Note 16
Subsequent Events, CastlePoint was acquired by Tower
on February 5, 2009, at which time it became a wholly-owned
subsidiary of Tower.
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Note 2
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Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
CastlePoint Holdings, Ltd. (sometimes referred to as
CastlePoint Holdings or the Company),
and its wholly-owned subsidiaries, CastlePoint Bermuda Holdings
Ltd. (CastlePoint Bermuda Holdings), CastlePoint
Reinsurance Company, Ltd. (CastlePoint Re),
CastlePoint Management Corp. (CastlePoint
Management) and CastlePoint Insurance Company
(CastlePoint Insurance). These accompanying
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). All significant
intercompany balances have been eliminated in consolidation. The
accompanying financial statements present the financial position
of CastlePoint Holdings, Ltd. and its subsidiaries at
December 31, 2008 and 2007 and its operations for the
years, ended December 31, 2008, 2007 and 2006.
Use of
Estimates
The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Premiums
Earned
Premiums on insurance and reinsurance policies issued by the
Companys operating subsidiaries are considered
short-duration contracts. Accordingly, premium revenue,
including direct writings and reinsurance assumed, net of
premiums ceded to reinsurers, is recognized as earned in
proportion to the amount of
D-8
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
insurance protection provided on a pro-rata basis over the terms
of the underlying policies with the unearned portion being
reported as unearned premium. Prepaid reinsurance premiums
represent the unexpired portion of reinsurance premiums ceded.
Reinsurance
Accounting
Reinsurance arrangements are those that qualify for reinsurance
accounting in accordance with Statement of Financial Accounting
Standards (SFAS) No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts. Management believes the Companys
reinsurance arrangements qualify for reinsurance accounting in
accordance with SFAS 113. Management has evaluated its
reinsurance arrangements and determined that insurance risk is
transferred to the reinsurers. Reinsurance agreements have been
determined to be short-duration prospective contracts and are
earned in proportion to the amount of reinsurance protection
provided on a pro-rata basis over the terms of the underlying
policies with the unearned portion being reported as unearned
premium. These premiums can be subject to estimates based upon
information received from ceding companies and any subsequent
differences arising on such estimates are recorded in the period
in which they are determined.
Liability
for Loss and Loss Adjustment Expenses
The liability for loss and loss adjustment expenses represents
managements best estimate of the ultimate cost of all
reported and incurred but not reported losses that are unpaid as
of the balance sheet date. The liability for loss and loss
adjustment expenses is estimated on an undiscounted basis, using
individual case-basis valuation, statistical analyses, and
various actuarial procedures. Management believes that the
reserves for loss and loss adjustment expenses are adequate to
cover the ultimate cost of losses and claims to date; however,
because of the uncertainty from various sources, including
changes in reporting patterns, claims settlement patterns,
judicial decisions, legislation, and economic conditions, actual
loss experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the
balance sheet date. As adjustments to these estimates become
necessary, such adjustments are reflected in current operations.
The Companys losses and loss adjustment expense reserves,
for both reported and unreported claims obligations, are
maintained to cover the estimated ultimate liability for all of
the Companys insurance and reinsurance obligations. Losses
and loss adjustment expense reserves are categorized in one of
two ways: (i) case reserves, which represent unpaid losses
and loss adjustment expenses as reported by cedents to the
Company or as estimated by the Companys claims adjusters
retained by the Company, and (ii) incurred but not reported
reserves, or IBNR reserves, which are reserves for losses and
loss adjustment expenses that have been incurred, but have not
yet been reported to the Company, as well as additional amounts
relating to losses already reported, that are in excess of case
reserves. IBNR reserves are estimates based on all information
currently available to the Company and are reevaluated on a
quarterly basis utilizing the most recent information supplied
by the Companys cedents and by the Companys own
claims adjusters.
For insurance business the Company generally reserves separately
by line of business. The Company generally reserves for each
reinsurance treaty that the Company reinsures separately, so
that the Company is able to take into consideration the
underlying loss development patterns of each ceding company to
the extent supported in the data reported by each ceding
company. While ceding companies may report their own estimates
of IBNR, the Company independently analyzes the losses for each
treaty, and consequently the Company may choose to establish
IBNR reserves in an amount different from the amount reported by
the ceding company.
Cash
and Cash Equivalents
Cash and cash equivalents are carried at cost or amortized cost,
which approximates fair value, and include all securities that,
at their purchase date, have a maturity of 90 days or less.
D-9
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Investments
The Company accounts for its investments generally in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities
(SFAS No. 115), which requires that
fixed-maturity and equity securities that have readily
determinable fair values be segregated into categories based
upon the Companys intention for those securities. In
accordance with SFAS No. 115, the Company has
classified its fixed maturity securities and equity securities
as available-for-sale. The Company may sell its
available-for-sale securities in response to changes in interest
rates, risk/reward characteristics, liquidity needs or other
factors. Investments in limited partnerships are accounted for
under the equity method, at cost or at fair value, depending
upon the nature of the partnership and the Companys
ownership interest. See Investments in
partnerships and other funds below. Short term investments
are securities with a remaining maturity of less than one year
at the date of purchase and are classified as available for sale.
Fixed maturity and equity
securities:
Marketable fixed-maturity securities
and equity securities are reported at their estimated fair
values based primarily on quoted market prices from a recognized
pricing service or a broker- dealer, with unrealized gains and
losses, net of tax effects, excluded from net income and
reported as a separate component of accumulated other
comprehensive income in shareholders equity. Premiums and
discounts on fixed maturity investments are charged or accreted
to income over the anticipated life of the investment. Net
investment income, consisting of interest and dividends, net of
investment expenses, is recognized when earned and included in
Net investment income in the accompanying statement
of income. Realized investment gains and losses on the sale of
investments are determined based on the specific identification
method and are included in the accompanying statement of income.
Investments in partnerships and other
funds:
Investments in limited partnerships where
the Company has more than a minor interest are accounted for
under the equity method of accounting pursuant to Statement of
Position (SOP)
78-9,
Accounting for Investments in Real Estate Ventures,
and classified on the balance sheet as Investments in
partnerships, equity method. The Companys share of
net income is reported in the Companys net investment
income. The Company calculates its share of net income on the
basis of the Companys ownership percentage. Investments in
limited partnerships where the Companys interest is
considered to be minor and all other fund investments are
accounted for at either cost or fair value and classified on the
balance sheet as Equity securities. For these
investments, net investment income and realized gains and losses
are recognized as related distributions are received. Unrealized
gains (losses), net of tax effects, are excluded from net income
and reported as a separate component of accumulated other
comprehensive income in shareholders equity. The Company
calculates its fair value on the basis of the Companys
ownership percentage generally using the net asset value.
Common trust securities statutory business
trusts:
The Companys investment in the
common trust securities of the trusts are reported as
investments separately in the balance sheet. The securities are
recorded using the equity basis of accounting, which currently
approximates original cost.
Impairment of investment securities and limited partnerships
results in a charge to net realized gains or losses on
investments when a market value decline below cost is deemed to
be other-than-temporary. The Company regularly reviews all
investments to evaluate the necessity of recording impairment
losses for other-than-temporary declines in the fair value of
investments. In general, attention is focused on those
securities where fair value has been less than 80% of the
amortized cost or cost, as appropriate, for six or more
consecutive months. In evaluating potential impairment,
management considers, among other criteria: the current fair
value compared to amortized cost or cost, as appropriate; the
length of time the securitys fair value has been below
amortized cost or cost; managements intent and ability to
retain the investment for a period of time sufficient to allow
for any anticipated recovery in value; specific credit issues
related to the issuer; and current economic conditions.
Other-than-temporary impairment losses result in a charge to
income and a permanent reduction of the cost basis of the
underlying investment.
D-10
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Premiums
Receivable/Payable Programs
For all policies written, CastlePoint Management has the
authority and responsibility to collect, account, provide
receipt for and remit premiums; and to hold all monies,
including premiums, return premiums and monies received in a
fiduciary capacity. Program business is currently produced by an
agent appointed by CastlePoint Management; therefore premiums
are agency billed and are due to CastlePoint Management net of
commission. Net premiums due from agents are recorded as
premiums receivable on the balance sheet. Premiums payable to
insurance companies, after deducting any management fee due to
CastlePoint Management, are recorded as premiums
payable programs.
Commission
Income/Expenses Programs
Direct commission revenue from the Companys insurance
services segment is earned as the related insurance policies are
placed in relation to the services discussed below, which are
provided in performing the Companys program business.
Agency commission expenses are commissions paid to agents, which
are calculated as a percentage of premiums placed and recorded
as commission expenses. The services provided by the Company
include marketing and oversight of the programs. Fees for
services such as policy and claims administration and insurance
technology are negotiated at market terms. When such services
are rendered, the fees for such services are charged either as
an amount per policy or per claim or as a percentage of premium.
The Company recognizes such fees as income over the period in
which such services are rendered. In addition, the Company may
source these services from Tower pursuant to the service and
expense sharing agreement described in Note 3
Related Party Transactions.
Assumed
Commission Expense
Assumed commission expense on reinsurance premiums assumed is
expensed in a manner consistent with the recognition of
reinsurance premiums assumed, generally on a pro-rata basis over
the terms of the policies reinsured. Certain reinsurance
agreements contain provisions where the ceding commission rates
vary based on the loss experience under the agreements. The
Company records adjustments to the assumed commission expense in
the period in which changes in the estimated loss ratio are
determined. The Company records such assumed commission expense
based on its current estimate of subject losses.
Deferred
Acquisition Costs
Acquisition costs represent the costs of writing business that
vary with, and are primarily related to, the production of
insurance and reinsurance business. Policy and contract
acquisition costs, including assumed commissions and other
direct operating expenses are deferred and recognized as expense
as related premiums are earned. The Company considers
anticipated investment income in determining the recoverability
of these costs and believes they are fully recoverable.
Debt
Issuance Cost
The issuance costs related to the issuance of the junior
subordinated debentures by CastlePoint Management and
CastlePoint Bermuda Holdings have been recorded as deferred
financing fees and are being amortized over the term of the
debentures using the effective interest method.
Income
Taxes
The Company records taxes on its U.S. subsidiaries in
accordance with SFAS No. 109, Accounting for
Income Taxes. Under SFAS No. 109, income taxes
are recognized for tax payable or refundable for the current
year and deferred tax assets and liabilities are recognized for
the future tax consequences attributable to the differences
between the financial statement carrying amounts of existing
assets and liabilities and their
D-11
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
respective tax bases. In accordance with SFAS No. 109,
deferred tax assets and liabilities are determined using enacted
tax rates applicable to the period in which the temporary
differences are expected to be recovered or settled.
Accordingly, the current period income tax provision can be
affected by the enactment of new tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
SFAS No. 109 requires that all deferred income tax
assets be given full recognition, subject to the possible
provision of an allowance when it is determined that this asset
is unlikely to be realized. The Financial Accounting Standards
Board (FASB) developed a threshold by which the
valuation is to be measured, the
more-likely-than-not criterion. The process of
evaluating whether a valuation allowance is needed involves the
weighing of both positive and negative factors to determine
whether, based on the available evidence, it is more likely than
not that the deferred tax assets will be realized. Positive
factors (those suggesting that an allowance is not necessary)
that the Company considers include: evidence of sufficient
future taxable income and evidence of the existence of prudent
tax planning strategies that would permit realization of the
deferred tax asset.
FIN No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) , an interpretation of
FASB Statement No. 109, prescribes a recognition threshold
and a measurement attribute for the financial statement
recognition and measurement for uncertain tax positions taken or
expected to be taken in income tax returns. The relevant company
has to determine whether it is more likely than not that the
position would be sustained upon examination by tax authorities.
Tax positions that meet the more likely than not threshold are
then measured using a probability weighted approach recognizing
the largest amount of tax benefit that has greater than a 50%
likelihood of being realized upon ultimate settlement. The
Company reviewed whether it is more likely than not that its tax
positions will be sustained upon examination and concluded that
it had no uncertain tax positions as of December 31, 2008
that meet the FIN 48 criteria for measurement and
disclosure.
Equity
Compensation Plans
The Company accounts for its share compensation plans in
accordance with
SFAS No. 123-R,
Share-Based Payment. Accordingly, the Company
recognizes the compensation expense for awards of stock options
and restricted stock, based on the fair value of the award on
the date of grant, over the vesting period, which is the
requisite service period. The fair value of the awards will
amortize ratably over the vesting period as a charge to
compensation expense and an increase to additional paid in
capital in Shareholders Equity.
Offerings
and Incorporation Expense
Offering expenses incurred in connection with the Companys
initial public offering in March 2007 and the common share
offering in April 2006, were recorded as a reduction in paid in
capital. Offering expenses incurred in connection with the
Companys registration statement for an offering by selling
shareholders in August 2007, were recorded as expense.
Incorporation expenses not related to the raising of capital are
expensed as incurred and included in other operating expense.
Intangible
Assets
The Company has recorded, as an identifiable intangible asset,
state insurance licenses acquired through the purchase of
CastlePoint Insurance Company. The Company believes that these
licenses have an indefinite useful life. In accounting for such
assets, the Company follows SFAS No. 142,
Goodwill and Other Intangible Assets. In accordance
with SFAS No. 142, the Company does not amortize the
licenses but evaluates the recoverability of the assets on an
annual basis. An impairment loss is recognized if the carrying
value of an
D-12
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
intangible asset is not recoverable and its carrying value
exceeds its fair value. No impairment losses were recognized in
2008 or 2007.
Fixed
Assets
Furniture, computer equipment, leasehold improvements and
software are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization is provided using
the straight line method over the estimated useful lives of the
assets. The Company estimates the useful life for computer
equipment and software is for three years, servers for five
years, furniture for seven years and leasehold improvements for
the term of the lease.
Variable
Interest Entities
In December 2003, the FASB issued FASB Interpretation
No. 46(R), Consolidation of Variable Interest
Entities (FIN 46(R)), which establishes
accounting guidance for the identification of a variable
interest entity (VIE) and the consolidation of a VIE
by the party deemed to be the primary beneficiary. The primary
beneficiary of a VIE is the party that absorbs a majority of the
VIEs expected losses, receives a majority of the
VIEs expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or
other business relationship with a VIE. The Company has applied
the guidance in FIN 46(R) in determining that the Trusts
meet the definition of a VIE and that the Company is not the
primary beneficiary. See Note 15
Debt.
Recent
Accounting Developments
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements.
This new standard
provides guidance for using fair value to measure assets and
liabilities. Under SFAS 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity operates. In this
standard, the FASB clarifies the principle that fair value
should be based on the assumptions market participants would use
when pricing the asset or liability. In support of this
principle, SFAS 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted
prices in active markets and the lowest priority to unobservable
data such as the reporting entitys own data. Under the
standard, fair value measurements would be separately disclosed
by level within the fair value hierarchy. The provisions of
SFAS 157 are effective for financial statements issued for
years beginning after November 15, 2007. The Company
adopted SFAS No. 157 effective January 1, 2008
and the standard has not had a material impact on the
Companys consolidated financial statements.
In February 2008, the FASB issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2)
which delays the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for certain nonfinancial
assets and nonfinancial liabilities. Examples of applicable
nonfinancial assets and nonfinancial liabilities to which FSP
FAS 157-2
applies include, but are not limited to:
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Nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination that are not
subsequently remeasured at fair value;
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Reporting units measured at fair value in the goodwill
impairment test as described in SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS
142), and nonfinancial assets and nonfinancial liabilities
measured at fair value in the SFAS 142 goodwill impairment
test, if applicable; and
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Nonfinancial long-lived assets measured at fair value for
impairment assessment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
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D-13
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
As a result of the issuance of FSP
FAS 157-2,
the Company did not apply the provisions of SFAS 157 to its
intangible assets which are measured annually for impairment
testing purposes only.
In October 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3).
This FSP clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key
considerations in the determination of the fair value of a
financial asset when the market for that asset is not active.
The key considerations illustrated in the FSP
FAS 157-3
example include the use of an entitys own assumptions
about future cash flows and appropriately risk-adjusted discount
rates, appropriate risk adjustments for nonperformance and
liquidity risks, and the reliance that an entity should place on
quotes that do not reflect the result of market transactions.
FSP
FAS 157-3
was preceded by a press release that was jointly issued by the
Office of the Chief Accountant of the SEC and the FASB staff on
September 30, 2008 that provides immediate clarification on
fair value accounting based on the measurement guidance of
SFAS 157. FSP
FAS 157-3
and was effective upon issuance. The adoption of FSP
FAS 157-3
did not have a material impact on the Companys
consolidated financial statements.
In January 2009, the FASB has issued FASB Staff Position (FSP)
EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20.
This FSP amends the impairment guidance in EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets.
The FASB believes this guidance will achieve a more consistent
determination of whether an other-than-temporary impairment has
occurred. The FSP also retains and emphasizes the objective of
an other-than-temporary impairment assessment and the related
disclosure requirements in FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and other related guidance. The Company
applied the guidance set forth in this FSP in determining OTTI
of certain of its investments at December 31, 2008. The
adoption of FSP
EITF 99-20-1
did not have a material impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities.
This statement permits entities
to choose to measure many financial instruments and certain
other items at fair value at specified election dates. The
objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. This standard also establishes presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities. This statement is
expected to expand the use of fair value measurement. The
standard is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007. The
Company did not elect to implement the fair value option for
eligible financial assets and liabilities as of January 1,
2008.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)). This standard
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree.
SFAS No. 141(R) also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will become
effective for fiscal years beginning after December 15,
2008. The Company is currently evaluating the impact that the
adoption of SFAS No. 141(R) will have on its
consolidated financial statements. The Company has incurred
approximately $1.7 million of transaction costs, including
legal, accounting and other costs directly related to the
acquisition of Hermitage Insurance Group (see Note 16),
which has been deferred as at December 31, 2008 and will be
expensed in the first quarter of 2009.
D-14
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51
(SFAS No. 160). This standard establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective for fiscal years
beginning after December 15, 2008. The Company does not
expect the adoption of SFAS No. 160 to have a material
impact on its consolidated financial statements.
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Note 3
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Related
Party Transactions
|
On December 19, 2008 a joint proxy/registration statement
was sent to shareholders of Tower and CastlePoint pursuant to a
proposed merger of the two companies, which was previously
announced on August 5, 2008. See Subsequent Event
Note 16. The various reinsurance and service agreements
between Tower and CastlePoint remained in effect through
December 31, 2008 as described below.
The Company
and/or
its
subsidiaries are parties to a Master Agreement, certain
reinsurance agreements, management agreements and service and
expense sharing agreements with Tower
and/or
its
subsidiaries. In addition, CastlePoint Re participates as a
reinsurer on certain of Towers excess of loss reinsurance
agreements. The transactions listed below are classified as
related party transactions, as each counterparty may be deemed
to be an affiliate of the Company.
The Company sub-leases the space in New York, New York for the
headquarters of its subsidiaries, CastlePoint Management and
CastlePoint Insurance Company, from Tower Insurance Company of
New York, a subsidiary of Tower, at its cost.
Reinsurance Agreements:
In April 2006,
CastlePoint Re entered into three multi-year quota share
reinsurance agreements with Towers insurance subsidiaries
which were extended and will expire on their current terms in
April 2010: the brokerage business quota share reinsurance
agreement, the traditional program business quota share
reinsurance agreement, and the specialty program business and
insurance risk-sharing business quota share reinsurance
agreement.
For the three months ended December 31, 3008 CastlePoint Re
assumed 17.5% of Towers brokerage business under the
brokerage business quota share reinsurance agreement as compared
to 25% for the three months ended September 30, 2008, 35%
for the three months ended June 30, 2008 and 40% for the
three months ended March 31, 2008. The change to 25% as of
July 1, 2008 was on a new, renewal, and in force basis;
thus, there was a return of $31.8 million in unearned
premiums as of June 30, 2008 representing the difference
between the unearned premiums for policies written subject to
this agreement in prior periods at 35% and 40% ceding
percentages, respectively, and the 25% ceding percentage as of
July 1, 2008. This has been reflected as a reduction of
written premiums in the year ended December 31, 2008. For
the years ended December 31, 2007 and 2006 Castle Re
assumed in a range between 30% and 49%. The ceding commission
for this business was 36%, which is the sum of 34% provisional
ceding commission and 2% contingent commission based upon the
loss ratio. Based upon the loss ratio for brokerage business,
the Company has expensed the maximum ceding commission under
this agreement. The reduction in the ceding percentage on the
reinsurance business from Tower throughout the year reflected
the Companys overall strategic decision to increase the
primary business and moderate growth of its reinsurance
business. As part of the implementation of this decision the
reinsurance from Tower was reduced and primary business managed
by Tower and written in CastlePoint Insurance was increased. In
addition, CastlePoint Re allocated approximately
$130 million of its assets to purchase Hermitage Insurance
Company, which effectively reduced the amount of capital that
otherwise would be available in CastlePoint Re to underwrite
Towers business.
During the year ended December 31, 2008 the ceding
percentages from Tower pursuant to the traditional program
business quota share reinsurance agreement and the specialty
program business and insurance risk-sharing business quota share
reinsurance agreement remained unchanged such that CastlePoint
Re assumed 50% and 85% of Towers premiums and losses in
those businesses, respectively. The ceding commissions
D-15
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
under these agreements reflect the actual costs of commissions,
board, bureaus and taxes, and other fees paid to the program
underwriting agencies or risk sharing clients on a program by
program basis.
In October 2007, the Company, on behalf of CastlePoint
Insurance, and Tower jointly submitted two aggregate excess of
loss reinsurance agreements for the brokerage business for
review by the New York State Insurance Department. These
agreements remain subject to regulatory review and are deemed
approved and in effect. The purpose of the two aggregate excess
of loss reinsurance agreements is to cause the loss ratios for
the brokerage business of CastlePoint Insurance and Tower to be
approximately equal. Under the first agreement, Tower agrees to
reinsure 85% (the percentage will be adjusted to equal
Towers actual percentage of the total brokerage business
written by Tower and CastlePoint Insurance) of CastlePoint
Insurances brokerage business losses that are in excess of
a specified loss ratio for brokerage business written through
Tower Risk Management Corp., a subsidiary of Tower and its
Managing General Agency. Under the second agreement CastlePoint
Insurance agrees to reinsure 15% (the percentage will be
adjusted to equal CastlePoints actual percentage of the
total brokerage business written by Tower and CastlePoint) of
Towers brokerage business losses that are in excess of a
specified loss ratio for brokerage business. Under both
agreements, the loss ratio is calculated net of premiums paid
for and losses recovered from specific excess reinsurance,
property catastrophe reinsurance and facultative reinsurance, if
any, which inure to the benefit of the agreement, and before any
cessions to quota share reinsurance. For the year ended
December 31, 2008, premiums ceded to Tower for the
aggregate excess of loss treaty were $3.0 million and
premiums assumed from Tower for the same corresponding aggregate
excess of loss treaty were $3.0 million. As of
December 31, 2008 based upon the relative loss ratios
between CastlePoint and Tower prior to the aggregate excess of
loss agreements, CastlePoint Insurance had net losses payable to
Tower of $2.5 million under the aggregate excess of loss
agreements.
Management Agreements:
Tower and CastlePoint
have entered into business management agreements with each other
for brokerage business and program business; these management
agreements have been approved by the New York State Insurance
Department.
The business management agreement pertaining to Towers
brokerage business provides that a portion of Towers
brokerage business may be written directly in CastlePoint
Insurance with Tower Risk Management as the manager of this
business. For managing such business, Tower Risk Management
Corp. is paid a management fee calculated using the sliding
scale formula that was originally intended by the master
agreement among the parties to be paid to Tower Insurance
Company of New York for managing the brokerage business, net of
specific aggregate and property catastrophe excess of loss
reinsurance costs. The sliding scale commission provides that
Tower Risk Managements commission for the brokerage
business is 31% of net premiums written, which can increase to
33% or decline to 28% depending on the loss ratio.
The business management agreement pertaining to programs
business that is managed by CastlePoint Management provides that
a portion of program business may be written directly in
Towers insurance companies and that CastlePoint Management
would receive fees for providing certain underwriting and claims
services for this business. As manager of the program and risk
sharing business, CastlePoint Management performs certain
underwriting and claims services with respect to program
business and Tower reimburses CastlePoint Management for its
actual costs, which include commissions paid to program
underwriting agencies, fees paid to third party administrators
to adjust claims, plus an allowance to CastlePoint Management
for its actual internal costs, which for the year ended
December 31, 2008 was approximately 5% of gross premiums
written for programs business. Premiums payable and due to Tower
for program business at December 31, 2008 and
December 31, 2007 were $44.9 million and
$8.6 million, respectively. For the years ended
December 31, 2008, 2007 and 2006, CastlePoint Management
recorded commission revenue of
D-16
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
$37.8 million, $6.3 million and $2.3 million,
respectively, from Tower. The net underwriting impact related to
our reinsurance and management agreements with Tower discussed
above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net premiums earned
|
|
$
|
311,893
|
|
|
$
|
201,959
|
|
|
$
|
76,963
|
|
Net losses incurred
|
|
|
181,535
|
|
|
|
103,154
|
|
|
|
39,940
|
|
Net commission expense
|
|
|
117,003
|
|
|
|
72,835
|
|
|
|
26,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes balances with Tower:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in millions)
|
|
|
Premiums receivable
|
|
$
|
139.5
|
|
|
$
|
105.4
|
|
Loss and loss adjustment expenses
|
|
|
200.7
|
|
|
|
108.8
|
|
Unearned premium
|
|
|
203.2
|
|
|
|
175.2
|
|
Losses payable
|
|
|
38.6
|
|
|
|
1.7
|
|
Deferred acquisition costs
|
|
|
69.1
|
|
|
|
61.7
|
|
Service and Expense Sharing
Agreements:
CastlePoint Management is a party to
service and expense sharing agreements with Tower and certain of
its subsidiaries. For the years ended December 31, 2008,
2007 and 2006, Tower charged CastlePoint Management
$1.3 million, $0.7 million and $0.5 million,
respectively, for services rendered in support of CastlePoint
Managements infrastructure as contemplated by the service
and expense sharing agreements.
In addition to the services rendered in support of CastlePoint
Managements infrastructure, Tower rendered services for
CastlePoint Managements program business contemplated by
the service and expense sharing agreements. For these services,
Tower charged CastlePoint Management $1.1 million,
$0.5 million and $0.2 million, respectively, for the
years ended December 31, 2008, 2007 and 2006.
As more fully described in
Note 16 Subsequent Events,
CastlePoint was acquired by Tower on February 5, 2009, at
which time it became a wholly-owned subsidiary of Tower.
D-17
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
The amortized cost and fair value of the total
available-for-sale investments as of December 31, 2008 and
2007 were as follows (in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agencies securities
|
|
$
|
6,343
|
|
|
$
|
494
|
|
|
$
|
|
|
|
$
|
6,837
|
|
Corporate fixed maturities
|
|
|
118,950
|
|
|
|
965
|
|
|
|
(9,564
|
)
|
|
|
110,351
|
|
Mortgage & asset-backed securities
|
|
|
385,300
|
|
|
|
4,206
|
|
|
|
(33,251
|
)
|
|
|
356,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
510,593
|
|
|
|
5,665
|
|
|
|
(42,815
|
)
|
|
|
473,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
43,906
|
|
|
|
|
|
|
|
(13,874
|
)
|
|
|
30,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
555,089
|
|
|
$
|
5,665
|
|
|
$
|
(56,689
|
)
|
|
$
|
504,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agencies securities
|
|
$
|
8,598
|
|
|
$
|
214
|
|
|
$
|
|
|
|
$
|
8,812
|
|
Corporate fixed maturities
|
|
|
132,268
|
|
|
|
1,372
|
|
|
|
(1,370
|
)
|
|
|
132,270
|
|
Mortgage & asset-backed securities
|
|
|
343,623
|
|
|
|
3,124
|
|
|
|
(2,857
|
)
|
|
|
343,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
484,489
|
|
|
|
4,710
|
|
|
|
(4,227
|
)
|
|
|
484,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
44,036
|
|
|
|
28
|
|
|
|
(1,662
|
)
|
|
|
42,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
528,525
|
|
|
$
|
4,738
|
|
|
$
|
(5,889
|
)
|
|
$
|
527,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the amortized cost and fair value of the
Companys investment in fixed-maturity securities as of
December 31, 2008, and 2007 by contractual maturity is
shown below. Actual maturity may differ from contractual
maturity because certain borrowers may have the right to call or
prepay certain obligations with or without call or prepayment
penalties.
D-18
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Amortized cost and fair value of the Companys investment
in fixed-maturity securities as of December 31, 2008 and
2007 is shown below:
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
Years to Maturity
December 31, 2008
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
25,837
|
|
|
$
|
25,844
|
|
One to five years
|
|
|
42,229
|
|
|
|
40,752
|
|
Five to ten years
|
|
|
44,747
|
|
|
|
42,347
|
|
Due after ten years
|
|
|
12,480
|
|
|
|
8,245
|
|
Mortgage and asset-backed securities
|
|
|
385,300
|
|
|
|
356,255
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
510,593
|
|
|
$
|
473,443
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
25,482
|
|
|
$
|
25,541
|
|
One to five years
|
|
|
73,578
|
|
|
|
74,646
|
|
Five to ten years
|
|
|
15,440
|
|
|
|
15,507
|
|
Due after ten years
|
|
|
26,366
|
|
|
|
25,388
|
|
Mortgage and asset-backed securities
|
|
|
343,623
|
|
|
|
343,890
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
484,489
|
|
|
$
|
484,972
|
|
|
|
|
|
|
|
|
|
|
Major categories of the Companys net investment income are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
$
|
28,960
|
|
|
$
|
23,843
|
|
|
$
|
8,908
|
|
Short term investments
|
|
|
257
|
|
|
|
164
|
|
|
|
100
|
|
Dividends on common stock
|
|
|
190
|
|
|
|
283
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
3,162
|
|
|
|
498
|
|
|
|
250
|
|
Mutual fund equities
|
|
|
14
|
|
|
|
1,926
|
|
|
|
|
|
Limited partnerships
|
|
|
(3,581
|
)
|
|
|
(1,497
|
)
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,765
|
|
|
|
5,523
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,767
|
|
|
$
|
30,740
|
|
|
$
|
11,636
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment expenses
|
|
$
|
1,310
|
|
|
$
|
1,234
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment income
|
|
$
|
31,457
|
|
|
$
|
29,506
|
|
|
$
|
11,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the equity method of accounting, the results of the
Companys investment in a limited partnership for the years
ended December 31, 2008 and 2007 (loss of $3.6 million
and $1.5 million, respectively) were included in net
investment income. The 2008 loss is comprised of the
Companys equity share of net investment income of
$0.3 million, realized losses of $6.3 million and an
unrealized gain of $2.4 million. The partnership was
liquidated in June 2008. The 2007 loss is comprised of the
Companys equity share of net investment income of
$0.5 million, realized gains of $0.2 million and an
unrealized loss of $2.2 million. There were no investments
in limited partnerships in 2006.
D-19
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Proceeds from the sale or maturity of fixed maturity securities
were $532.2 million, $303.3 million and
$127.3 million as of December 31, 2008, 2007 and 2006,
respectively. The Companys net realized gains/(losses) and
the change in net unrealized appreciation/(depreciation) on
investments, net of deferred taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
3,124
|
|
|
$
|
864
|
|
|
$
|
41
|
|
Gross realized losses
|
|
|
(2,045
|
)
|
|
|
(158
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
1,079
|
|
|
|
706
|
|
|
|
35
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
(18,553
|
)
|
|
|
(8,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
(18,553
|
)
|
|
|
(8,945
|
)
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
71
|
|
|
|
9
|
|
|
|
|
|
Gross realized losses
|
|
|
(23
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
48
|
|
|
|
3
|
|
|
|
|
|
Short Term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Total net realized (losses) gains
|
|
$
|
(17,431
|
)
|
|
$
|
(8,236
|
)
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized (depreciation) appreciation on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale
|
|
|
(37,634
|
)
|
|
|
(1,167
|
)
|
|
|
1,661
|
|
Equities available for sale
|
|
|
(12,240
|
)
|
|
|
(1,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
(49,874
|
)
|
|
$
|
(2,812
|
)
|
|
$
|
1,661
|
|
Deferred taxes
|
|
|
2,271
|
|
|
|
104
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized (depreciation) appreciation on
investments, net of tax
|
|
|
(47,603
|
)
|
|
|
(2,708
|
)
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (losses) gains and change in net unrealized
(depreciation) appreciation on investments
|
|
$
|
(65,034
|
)
|
|
$
|
(10,944
|
)
|
|
$
|
1,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-20
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
The Companys invested assets that were in an unrealized
loss position at December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
More Than 12 Months
|
|
|
Total
|
|
|
|
Number
|
|
|
Book
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Book
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Book
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
of Positions
|
|
|
Value
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
Losses
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
|
52
|
|
|
$
|
64,401
|
|
|
$
|
58,602
|
|
|
$
|
(5,799
|
)
|
|
$
|
8,298
|
|
|
$
|
4,533
|
|
|
$
|
(3,765
|
)
|
|
$
|
72,699
|
|
|
$
|
63,135
|
|
|
$
|
(9,564
|
)
|
Mortgage & asset backed
|
|
|
93
|
|
|
|
164,621
|
|
|
|
138,829
|
|
|
|
(25,792
|
)
|
|
|
9,082
|
|
|
|
1,624
|
|
|
|
(7,459
|
)
|
|
|
173,703
|
|
|
|
140,453
|
|
|
|
(33,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
145
|
|
|
|
229,022
|
|
|
|
197,431
|
|
|
|
(31,591
|
)
|
|
|
17,380
|
|
|
|
6,157
|
|
|
|
(11,224
|
)
|
|
|
246,402
|
|
|
|
203,588
|
|
|
|
(42,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
28
|
|
|
|
35,642
|
|
|
|
25,258
|
|
|
|
(10,384
|
)
|
|
|
7,735
|
|
|
|
4,245
|
|
|
|
(3,490
|
)
|
|
|
43,377
|
|
|
|
29,503
|
|
|
|
(13,874
|
)
|
Total
|
|
|
173
|
|
|
$
|
264,664
|
|
|
$
|
222,689
|
|
|
$
|
(41,975
|
)
|
|
$
|
25,115
|
|
|
$
|
10,402
|
|
|
$
|
(14,714
|
)
|
|
$
|
289,779
|
|
|
$
|
233,091
|
|
|
$
|
(56,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
|
17
|
|
|
$
|
28,206
|
|
|
$
|
26,836
|
|
|
$
|
(1,370
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,206
|
|
|
$
|
26,836
|
|
|
$
|
(1,370
|
)
|
Mortgage & asset backed
|
|
|
23
|
|
|
|
77,757
|
|
|
|
74,911
|
|
|
|
(2,846
|
)
|
|
|
3,669
|
|
|
|
3,658
|
|
|
|
(11
|
)
|
|
|
81,426
|
|
|
|
78,569
|
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
40
|
|
|
|
105,963
|
|
|
|
101,747
|
|
|
|
(4,216
|
)
|
|
|
3,669
|
|
|
|
3,658
|
|
|
|
(11
|
)
|
|
|
109,632
|
|
|
|
105,405
|
|
|
|
(4,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
9
|
|
|
|
21,383
|
|
|
|
19,721
|
|
|
|
(1,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,383
|
|
|
|
19,721
|
|
|
|
(1,662
|
)
|
Total
|
|
|
49
|
|
|
$
|
127,346
|
|
|
$
|
121,468
|
|
|
$
|
(5,878
|
)
|
|
$
|
3,669
|
|
|
$
|
3,658
|
|
|
$
|
(11
|
)
|
|
$
|
131,015
|
|
|
$
|
125,126
|
|
|
$
|
(5,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company had 173 securities in a
gross unrealized loss position amounting to $56.7 million
of which $42.8 million (145 securities) was attributable to
fixed maturities and $13.9 million (28 securities) was
attributable to equity securities. Of the $42.8 million
attributable to fixed maturities, $37.0 million were rated
investment grade. The remaining $5.8 million unrealized
loss was primarily attributed to 5 Commercial Mortgage-backed
Securities (CMBS) securities rated BB. There is a
non-agency residential mortgage-backed security rated AAA that
represents the Companys single largest unrealized loss in
the amount of $2.1 million in a fixed maturity security.
This security has been in an unrealized loss position for
6-12 months.
The market value at December 31, 2008 of the security is
57% of amortized cost. The largest single unrealized loss in an
equity security was $1.8 million, representing a preferred
stock investment in Royal Bank of Scotland, an international
bank, rated BBB.
Corporate Fixed Maturities
The unrealized
loss position of $9.6 million in corporate fixed maturities
relates to 52 securities all rated BBB- or above of which
$5.8 million was in an unrealized loss position for less
than 12 months and $3.8 million was in an unrealized
loss position for more than 12 months as of
December 31, 2008. The security with the largest unrealized
loss in this group is HVB Funding Trust ($1.7 million)
issued October 14, 1999, with a coupon of 9.0% and a book
yield of 6.9%, rated A-. The finance sector has been negatively
impacted by the general market disruptions caused by the
significant decline in market liquidity. The remaining corporate
securities are distributed over the following
industries banks, brokerage, insurance, other
finance, media, pipelines and utilities. The impairment on all
fixed corporate maturities, with the exception of Lehman
Brothers, is considered temporary at December 31, 2008 and
is generally the result of the current market dislocations and
lack of liquidity. The Company has both the ability and intent
to hold these securities until a full recovery of fair value,
which may be maturity.
Mortgage and Asset Backed Securities
The
unrealized loss in mortgage and asset backed securities of
$33.3 million relates to 93 issues, with 83 issues rated
AAA and 1 issue rated A+ ($25.9 million), 1 issue rated
BBB- ($1.6 million) and 4 issues rated BB
($5.8 million) and 4 issues not rated ($14,000). All of
these securities, except for certain positions with unrealized
losses amounting to $7.5 million, had been in an unrealized
loss position for less than 12 months as of
December 31, 2008. The five securities rated BBB- and below
are CMBS and were purchased after June 30, 2007. Since all
five securities are rated less than AA, a cash flow analysis was
performed pursuant to Emerging Issues Task Force
(EITF)
99-20-1.
None of these securities indicated a reduction in cash flow on a
present value basis from what was originally expected at the
D-21
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
date of purchase. The impairment on all mortgage and asset
backed securities, except as discussed below, is considered
temporary at December 31, 2008 and is due to the market
disruptions caused by the significant decline in market
liquidity affecting this sector. The Company has both the
ability and intent to hold these securities until a full
recovery of fair value, which may be maturity.
Equity Securities
The unrealized loss in
equity securities (primarily preferred securities) of
$13.9 million relates to 28 issues. The largest single
equity security in an unrealized loss position at
December 31, 2008 was an investment in Royal Bank of
Scotland noted above. This security has been in an unrealized
loss position for 6 12 months. The unrealized
loss is due to market disruptions caused by the significant
decline in market liquidity affecting the overall banking
industry. The remaining unrealized loss of $12.0 million is
comprised of 25 preferred stock and 2 common stock issues with
no one unrealized loss at December 31, 2008 exceeding
$1 million. The Company has both the ability and intent to
hold all equity securities in a loss position at year end until
a full recovery of fair value.
For the year ended December 31, 2008, the company recorded
charges for other-than-temporary impairments of
$16.7 million primarily relating to Lehman Brothers
preferred stock and corporate debt holdings ($6.2 million),
a fund investment with a focus primarily on the financial
institutions segment of the credit markets (i.e., primarily
trust preferred, subordinated debt and preferred securities)
which was liquidated in the second quarter of 2008
($4.1 million), an investment in a bank loan fund
($2.8 million) and four publicly traded mortgage REIT
equity securities investing primarily in various mortgage-backed
securities, including CMBS and agency and non-agency residential
mortgage-backed securities ($1.7 million). The remaining
impairment charges ($1.9 million) relate to 4 securities (3
preferred stock securities, 2 of which were sold in the third
quarter of 2008, and 1 Residential Mortgage-backed Security
(RMBS)).
Management believes the securities that are
other-than-temporarily impaired at December 31, 2008 have
been identified and are properly reflected in the financial
statements.
On January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS 157), regarding fair value measurements.
The valuation technique used to fair value the financial
instruments is the market approach which uses prices and other
relevant information generated by market transactions involving
identical or comparable assets.
In accordance with SFAS 157, the Company has evaluated the
various types of securities in its investment portfolio to
determine an appropriate SFAS 157 fair value hierarchy
level for each security based upon trading activity and the
observability of market inputs. Based on this evaluation, each
price was classified into Level 1, 2 or 3. Level 1
inputs are quoted prices in active markets for identical
securities. Level 2 inputs are other than quoted prices
that are observable for the security, either directly or
indirectly. Level 3 inputs are unobservable inputs for the
security. Unobservable inputs are used to measure fair value to
the extent that observable inputs are not available, thereby
allowing for situations in which there is little, if any, market
activity for the security at the measurement date.
In accordance with SFAS 157, the Company determined that
its investments in publicly-traded equity securities are
categorized as Level 1 pricing. Investments in all fixed
maturities, including U.S. government securities and
preferred stock, are categorized as Level 2 pricing.
Through out the year, no securities in the Companys
portfolio were priced using unobservable inputs and, therefore,
the Company has not assigned any securities to Level 3.
D-22
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
As of December 31 2008, the Companys investments are
categorized into Levels as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Measurements
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
($ in thousands)
|
|
|
Fixed maturity investments
|
|
$
|
473,443
|
|
|
$
|
|
|
|
$
|
473,443
|
|
|
$
|
|
|
Short-term investments
|
|
|
590
|
|
|
|
|
|
|
|
590
|
|
|
|
|
|
Equity investments
|
|
|
30,032
|
|
|
|
267
|
|
|
|
29,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
504,065
|
|
|
$
|
267
|
|
|
$
|
503,798
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5
|
Property-Casualty
Insurance Activity
|
(a)
Premiums written, ceded and earned are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
Assumed
|
|
|
Ceded
|
|
|
Net
|
|
|
|
($ in thousands)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
183,258
|
|
|
$
|
381,467
|
|
|
$
|
(96,334
|
)
|
|
$
|
468,391
|
|
Change in unearned premiums
|
|
|
(40,438
|
)
|
|
|
(5,029
|
)
|
|
|
21,795
|
|
|
|
(23,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
142,820
|
|
|
$
|
376,438
|
|
|
$
|
(74,539
|
)
|
|
$
|
444,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
86,604
|
|
|
$
|
297,040
|
|
|
$
|
(7,419
|
)
|
|
$
|
376,225
|
|
Change in unearned premiums
|
|
|
(71,899
|
)
|
|
|
(59,437
|
)
|
|
|
3,475
|
|
|
|
(127,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
14,705
|
|
|
$
|
237,603
|
|
|
$
|
(3,944
|
)
|
|
$
|
248,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
|
|
|
$
|
165,151
|
|
|
$
|
|
|
|
$
|
165,151
|
|
Change in unearned premiums
|
|
|
|
|
|
|
(86,181
|
)
|
|
|
|
|
|
|
(86,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
|
|
|
$
|
78,970
|
|
|
$
|
|
|
|
$
|
78,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
The components of the liability for loss and
loss adjustment expenses as of December 31, 2008 and 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Reinsurance
|
|
|
|
Liability
|
|
|
Recoverables
|
|
|
|
($ in thousands)
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Case-basis reserves
|
|
$
|
134,634
|
|
|
$
|
1,292
|
|
IBNR reserves
|
|
|
138,715
|
|
|
|
14,234
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
273,349
|
|
|
$
|
15,526
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Case-basis reserves
|
|
$
|
52,601
|
|
|
$
|
|
|
IBNR reserves
|
|
|
69,140
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,741
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
D-23
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Activity in the liability for loss and loss adjustment expenses
for 2008 and 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance at January 1
|
|
$
|
121,741
|
|
|
$
|
34,192
|
|
|
$
|
|
|
Less reinsurance recoverables
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,426
|
|
|
|
34,192
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
260,513
|
|
|
|
132,585
|
|
|
|
40,958
|
|
Prior years
|
|
|
1,294
|
|
|
|
(1,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
261,807
|
|
|
|
131,335
|
|
|
|
40,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss portfolio transfer
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
77,528
|
|
|
|
24,348
|
|
|
|
6,787
|
|
Prior years
|
|
|
47,882
|
|
|
|
19,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
125,410
|
|
|
|
44,101
|
|
|
|
6,787
|
|
Net balance at December 31,
|
|
|
257,823
|
|
|
|
121,426
|
|
|
|
|
|
Add reinsurance recoverables
|
|
|
15,526
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
273,349
|
|
|
$
|
121,741
|
|
|
$
|
34,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys reserves represent managements best
estimate of the ultimate unpaid cost of all losses and loss
adjustment expenses incurred. Actuarial methodologies used to
estimate reserves include, but are not limited to, the paid and
incurred loss development methods, the loss ratio method, and
the paid and incurred Bornhuetter-Ferguson methods. Due to the
uncertainty associated with the reserving process, the ultimate
liability may differ, perhaps significantly, from the amounts
currently reserved by the Company.
The Company does not have exposure to asbestos and environmental
claims.
The Company does not discount reserves.
|
|
Note 6
|
Deferred
Acquisition Costs
|
Acquisition costs incurred that have been deferred and amortized
to income in 2008, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Deferred acquisition costs at January 1,
|
|
$
|
73,073
|
|
|
$
|
30,363
|
|
|
$
|
|
|
Cost paid during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission and brokerage
|
|
|
190,457
|
|
|
|
133,084
|
|
|
|
58,794
|
|
Other underwriting and acquisition costs
|
|
|
1,327
|
|
|
|
1,228
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost paid during period
|
|
|
191,784
|
|
|
|
134,312
|
|
|
|
59,768
|
|
Amortization
|
|
|
(183,121
|
)
|
|
|
(91,602
|
)
|
|
|
(29,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs at December 31,
|
|
$
|
81,736
|
|
|
$
|
73,073
|
|
|
$
|
30,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-24
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(a)
|
Authorized
and issued
|
The Companys authorized share capital is 100,000,000
common shares with a par value of $0.01 each, of which there
were 38,305,735 and 38,289,430 common shares issued and
outstanding as of December 31, 2008 and 2007 respectively.
The increase in share count was a result of 16,305 restricted
shares issued to the non employee directors.
At December 31, 2008, Tower held 6.7% of the Companys
outstanding common shares. The Company also issued ten-year
warrants to Tower to purchase an additional 1,127,000 of the
Companys common shares at an exercise price of $10.00 per
share, which shares represented 2.7% of the common shares
outstanding on a fully-diluted basis at December 31, 3008.
The shares held by Tower, together with the shares issuable upon
exercise of the Tower warrants, represented 9.4% of the
Companys outstanding common shares on a fully-diluted
basis at December 31, 2008.
The holders of the Companys common shares are entitled to
receive dividends and are allocated one vote per share, provided
that, if the controlled shares of any shareholder or group of
related shareholders constitute more than 9.5% percent of the
outstanding common shares of the Company, their voting power
will be reduced to 9.5% percent. There are various restrictions
on the ability of certain shareholders to dispose of their
shares.
As more fully described in Note 16
Subsequent Events, CastlePoint was acquired by Tower
on February 5, 2009, at which time it became a wholly-owned
subsidiary of Tower.
The warrants were issued to Tower in recognition of the full
value received from Tower as the Companys sponsor, which
included the development of the Companys business
strategy, the development of the private offering to raise
initial funds for the Companys operations, and the
transfer of certain executives to the Company. In consideration
of Towers contribution, the Company issued warrants to
Tower to purchase up to 1,127,000 common shares of the Company.
The 1,127,000 common shares issuable upon exercise of the
warrants represented what the company believed would be an
acceptable number of common shares to grant to Tower to
compensate Tower for its contributions to the Company. The
warrants became effective as of April 6, 2006 and were due
to expire on April 6, 2016. The warrants were exercisable
at a price per share of $10.00, equal to the price per share
paid by investors in the private offering.
The warrants may be settled using either the physical settlement
or net-share settlement methods. The warrants have been
classified as equity instruments, in accordance with
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. The warrants were initially measured at an
aggregate fair value of $4.6 million and recorded as
additional paid-in capital with an offsetting charge to other
operating expenses in the Consolidated Statement of Income and
Comprehensive Income.
The fair value of the warrants issued was estimated on the date
of grant using the Black-Scholes option-pricing model. The
volatility assumption used, of 25%, was derived from the
historical volatility of the share price of a range of
publicly-traded Bermuda reinsurance companies with similar types
of business to that of the Company. No allowance was made for
any potential illiquidity associated with the absence of public
trading of the Companys shares at that time. The other
assumptions in the option pricing model were as follows: risk
free interest rate of 5%, expected life of ten years and a
dividend yield of 1%.
As more fully described in
Note 16 Subsequent Events,
CastlePoint was acquired by Tower on February 5, 2009, at
which time it became a wholly-owned subsidiary of Tower and the
warrants were cancelled.
D-25
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 8
|
Equity
Compensation Plans
|
2006
Long-Term Equity Compensation Plan
The Company adopted the provision of
SFAS No. 123-R
effective January 1, 2006 and granted all of its stock
compensation after that date. The compensation cost of awards is
based on the grant-date value of those awards as calculated
under
SFAS No. 123-R
and amortized over the vesting period. The Companys 2006
Long-Term Equity Compensation Plan (the Plan)
provides for grants of any option, stock appreciation right
(SAR), restricted share, restricted share unit,
performance share, performance unit, dividend equivalent or
other share-based award. The total number of shares initially
reserved for issuance under the Plan was 1,735,021 common
shares. In 2007, the number of shares authorized under the Plan
was increased by 1 million shares, to a total of 2,735,021.
This increase was approved on February 27, 2007 by the
Companys Board of Directors, and by the shareholders at
the Companys Annual General Meeting of Members on
July 30, 2007. In 2006, 1,126,166 options were issued to
senior management and non-employee directors of the Company and
its subsidiaries. In 2007 and 2008, respectively 556,254 and
499,518 options were issued to certain officers and employees
and non-employee directors of the Company and its subsidiaries.
For the years ended December 31, 2007 and
December 31, 2008, respectively each of the Companys
three current non-employee directors received 4,094 and 5,435
restricted common shares. No SARs have been granted to date.
The Plan is administered by the Compensation Committee of the
Board of Directors of the Company. The stock options granted to
employees vest in three equal installments (14 months) over
42 months of service. For non-employee directors, the cost
is expected to be recognized over the vesting period of
12 months for grants dated April 4, 2006 and over the
vesting period of 36 months for grants dated March 22,
2007. The cost of the restricted stock granted to non employee
directors is expected to be recognized over the vesting period
of 12 months for the grants dated in 2007 and 2008.
The fair value of the options granted in 2006 was estimated
using the Black-Scholes pricing model as of April 4, 2006,
the date of the initial grant, with the following weighted
average assumptions: risk free interest rate of 5.0%, dividend
yield of 1.0%, volatility factors of the expected market price
of the Companys common shares of 25.0% and a
weighted-average expected life of the options of 10 years.
The fair value measurement objective of
SFAS No. 123-R
is achieved using the Black-Scholes model as the model
(a) is applied in a manner consistent with the fair value
measurement objective and other requirements of
SFAS No. 123-R,
(b) is based on established principles of financial
economic theory and generally applied in that field and
(c) reflects all substantive characteristics of the
instrument.
The fair value of the options granted in 2007 was estimated
using the Black-Scholes pricing model as of March 21, 2007
and April 30, 2007, the date of the grants, respectively,
with the following weighted average assumptions: risk free
interest rate of 5.0%, dividend yield of 1.0%, volatility
factors of the expected market price of the Companys
common shares of 25.0% and a weighted-average expected life of
the options of 6.2 years. The fair value of the options
granted in 2008 was estimated using the Black-Scholes pricing
model as of March 10, 2008, the date of the grants, with
the following weighted average assumptions: risk free interest
rate of 3.4%, dividend yield of 1.0%, volatility factors of the
expected market price of the Companys common shares of
33.0% and a weighted-average expected life of the options of
6.2 years. The fair value measurement objective of
SFAS No. 123-R
is achieved using the Black-Scholes model consistent with the
paragraph above.
D-26
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Stock
Options
The following table provides an analysis of stock option
activity for the three years ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
STOCK OPTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
1,618,783
|
|
|
$
|
11.50
|
|
|
|
1,082,666
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Granted at market value
03-10-08,
3-22-07,
04-04-06
respectively
|
|
|
499,518
|
|
|
|
10.12
|
|
|
|
539,447
|
|
|
|
14.50
|
|
|
|
1,126,166
|
|
|
|
10.00
|
|
Granted at market value 4-30-07
|
|
|
|
|
|
|
|
|
|
|
16,807
|
|
|
|
15.25
|
|
|
|
|
|
|
|
|
|
Forfeitures and expirations
|
|
|
|
|
|
|
|
|
|
|
(20,137
|
)
|
|
|
14.50
|
|
|
|
(43,500
|
)
|
|
|
10.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,118,301
|
|
|
|
11.18
|
|
|
|
1,618,783
|
|
|
|
11.50
|
|
|
|
1,082,666
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
908,105
|
|
|
|
10.89
|
|
|
|
376,133
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options granted
|
|
|
|
|
|
|
4.11
|
|
|
|
|
|
|
|
4.28
|
|
|
|
|
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of the three years ended
December 31, 2008 are shown on the following schedules:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10 2006
|
|
|
1,082,666
|
|
|
|
7.25 years
|
|
|
$
|
10.00
|
|
|
|
729,399
|
|
|
$
|
10.00
|
|
$14.5 03/22/07
|
|
|
519,310
|
|
|
|
8.25 years
|
|
|
$
|
14.50
|
|
|
|
173,104
|
|
|
|
14.50
|
|
$15.25 04/30/07
|
|
|
16,807
|
|
|
|
8.33 years
|
|
|
$
|
15.25
|
|
|
|
5,602
|
|
|
|
15.25
|
|
$10.12 03/10/08
|
|
|
499,518
|
|
|
|
9.19 years
|
|
|
$
|
10.12
|
|
|
|
|
|
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
2,118,301
|
|
|
|
7.96 years
|
|
|
$
|
11.18
|
|
|
|
908,105
|
|
|
|
10.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10 2006
|
|
|
1,082,666
|
|
|
|
8.25 years
|
|
|
$
|
10.00
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
$14.5 03/22/07
|
|
|
519,310
|
|
|
|
9.25 years
|
|
|
$
|
14.50
|
|
|
|
|
|
|
|
|
|
$15.25 04/30/07
|
|
|
16,807
|
|
|
|
9.33 years
|
|
|
$
|
15.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
1,618,783
|
|
|
|
8.58 years
|
|
|
$
|
11.50
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.00
|
|
|
1,082,666
|
|
|
|
9.25 years
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
1,082,666
|
|
|
|
9.25 years
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the simplified method outlined in the SEC Staff
Accounting Bulletin 110 to estimate lives for options
granted during the period as historical exercise data is not
available and the options meet the requirement set out in this
Bulletin.
D-27
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
As of December 31, 2008, and 2007 there was
$3.5 million and $4.0 million of unrecognized
compensation costs related to 1,210,196 and 1,242,650 non-vested
stock options, respectively. For employees, the cost is expected
to be recognized over the vesting periods of the individual
options which extend up to 42 months. For non-employee
directors, the cost is expected to be recognized over the
vesting period of 12 months for grants dated April 4,
2006 and over the vesting period of 36 months for grants
dated March 22, 2007. For the years ended December 31,
2008, 2007, and 2006 the Company recognized $2.4 million,
$2.0 million and $1.0 million of compensation expense
related to share-based compensation, respectively.
As of December 31, 2008 there was less than
$0.1 million of unrecognized compensation costs related to
16,305 non-vested restricted stock grants for non-employee
directors. These vest over 12 months. As of
December 31, 2007 there was less than $0.1 million of
unrecognized compensation costs related to 12,282 non-vested
restricted stock grants for non-employee directors. Theses were
vested in 2008.
As more fully described in
Note 16 Subsequent Events,
CastlePoint was acquired by Tower on February 5, 2009.
Under the terms of this transaction stock options and restricted
stock issued by CastlePoint were exchanged for Tower stock
options and restricted stock.
Bermuda
Under current Bermuda law, the Company has received an
undertaking from the Bermuda government exempting it from all
local income, withholding and capital gains taxes until
March 28, 2016. At the present time, no such taxes are
levied in Bermuda.
United
States
The Company and its
non-U.S. subsidiaries
believe that they do not engage in a trade or
business in the United States. Accordingly, the Company
and its
non-U.S. subsidiaries
have not recorded any provision for U.S. taxation.
Subsequent to Towers acquisition of CastlePoint, the
Company and its
non-U.S. subsidiaries
will be subject to U.S. taxation.
The Companys U.S. subsidiaries, CastlePoint
Management and CastlePoint Insurance Company, are subject to
income taxes and have recorded the appropriate balances for
current and deferred income taxes under SFAS No. 109
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Current federal income tax expense
|
|
$
|
101
|
|
|
$
|
|
|
|
$
|
2
|
|
Current state income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal and state income tax expense (benefit)
|
|
|
453
|
|
|
|
(5,857
|
)
|
|
|
(1,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
554
|
|
|
$
|
(5,857
|
)
|
|
$
|
(1,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are determined using enacted
tax rates applicable to the period the temporary differences are
expected to be recovered or net operating losses utilized.
Accordingly, the current period income tax provision can be
affected by the enactment of new tax rates. The net deferred
income taxes on the balance sheet reflect temporary differences
between the carrying amounts of the assets and liabilities for
financial reporting purposes and income tax purposes, tax
effected at a 35% rate for the period.
D-28
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
The component of deferred taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Claims reserve discount
|
|
$
|
1,708
|
|
|
$
|
488
|
|
Unearned premium
|
|
|
4,420
|
|
|
|
5,061
|
|
Stock options
|
|
|
1,179
|
|
|
|
653
|
|
Unrealized depreciation of securities, net
|
|
|
4,123
|
|
|
|
101
|
|
Investment impairments
|
|
|
2,105
|
|
|
|
640
|
|
State deferred tax
|
|
|
1,886
|
|
|
|
976
|
|
AMT credit
|
|
|
101
|
|
|
|
|
|
Other
|
|
|
83
|
|
|
|
117
|
|
Net operating and capital losses carried forward
|
|
|
9,001
|
|
|
|
8,230
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
24,606
|
|
|
$
|
16,266
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
7,583
|
|
|
|
9,215
|
|
Other
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
7,672
|
|
|
|
9,215
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(8,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
8,868
|
|
|
$
|
7,051
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded Federal and New York State deferred tax
benefits in relation to operating losses. Based upon projections
of future taxable income over the periods in which the deferred
tax assets are deductible, the Company believes it is more
likely than not that it will realize the Federal benefits of
these deductible differences and therefore did not establish a
valuation allowance for the years ended December 31, 2008
and 2007. In accordance with SFAS No. 109, the Company
anticipates that the related deferred tax assets will be
realized based on the generation of net commission income by
CastlePoint Management and the profitable premium volume written
in CastlePoint Insurance Company. For CastlePoint Management,
the Company established a valuation allowance on the deferred
tax asset pertaining to New York State income taxes because
future taxable income is not deemed likely.
In addition, the Company has recorded deferred tax benefits at
December 31, 2008 in relation to unrealized losses, Other
than temporary impairment, (OTTI) unrealized losses
and realized capital losses. Based upon the guidance in
FAS 109, the Company determined that as of
December 31, 2008 there was not sufficient objectively
verifiable evidence to support the realization of the deferred
tax assets held for unrealized losses and unrealized OTTI losses
on equity securities available for sale and realized capital
losses. Accordingly, the Company recorded a valuation allowance
of $6.2 million (representing a reduction in other
comprehensive income of $2.0 million and a charge to income
of $4.2 million).
D-29
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
The provision for federal income tax incurred is different from
that which would be obtained by applying the federal income tax
rate to net income before income taxes. The items causing these
differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Effective
|
|
|
|
2008
|
|
|
Tax Rate
|
|
|
|
($ in thousands)
|
|
|
Income tax expense at the Federal Statutory Rate
|
|
$
|
310
|
|
|
|
35
|
%
|
Tax advantaged investments
|
|
|
(283
|
)
|
|
|
(32
|
)%
|
State income taxes
|
|
|
(910
|
)
|
|
|
(103
|
)%
|
Effect of foreign operations
|
|
|
(4,663
|
)
|
|
|
(527
|
)%
|
Valuation allowance on New York State deferred tax assets
|
|
|
1,886
|
|
|
|
213
|
%
|
Valuation allowance on unrealized and realized losses
|
|
|
4,191
|
|
|
|
474
|
%
|
Other
|
|
|
23
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
554
|
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Effective
|
|
|
|
2007
|
|
|
Tax Rate
|
|
|
|
($ in thousands)
|
|
|
Income tax expense at the Federal Statutory Rate
|
|
$
|
9,409
|
|
|
|
35
|
%
|
Tax advantaged investments
|
|
|
(137
|
)
|
|
|
(1
|
)%
|
State income taxes
|
|
|
(976
|
)
|
|
|
(4
|
)%
|
Effect of foreign operations
|
|
|
(14,163
|
)
|
|
|
(53
|
)%
|
Other
|
|
|
10
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(5,857
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Effective
|
|
|
|
2006
|
|
|
Tax Rate
|
|
|
|
($ in thousands)
|
|
|
Income tax expense at the Federal Statutory Rate
|
|
$
|
3,307
|
|
|
|
35
|
%
|
Effect of foreign operations
|
|
|
(4,407
|
)
|
|
|
(47
|
)%
|
Other
|
|
|
7
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(1,093
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of FIN 48 on
January 1, 2007. The Company reviewed whether it is more
likely than not that its tax positions will be sustained upon
examination and concluded that it had no uncertain tax positions
as of December 31, 2008 and 2007 that meet the FIN 48
criteria for measurement and disclosure.
|
|
Note 10
|
Employee
Benefit Plans
|
United
States
The Company maintains a defined contribution Employee Pre-tax
Savings Plan (the 401(k) Plan) for its employees.
The Company contributes 50% of each participants
contribution up to 8% of the participants eligible
contribution.
D-30
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
Bermuda
The Company maintains three separate defined contribution plans
for its employees, all of which are managed externally. One plan
is for Bermudian employees (the Bermuda Plan), one
is for
non-U.S. and
non-Bermudian employees (the Non-Resident Plan) and
one is for U.S. citizens based in Bermuda (the 401(k)
Plan). Employees are only eligible to join these plans on
reaching the age of 23. For both the Bermuda and Non-Resident
Plans, the Company matches the employees contribution at
5% of the participants compensation. The Companys
contribution vests over 2 years. For U.S. citizens
based in Bermuda, a defined contribution Employee Pre-tax
Savings Plan (401(k) Plan) is available. The Company contributes
50% of each participants contribution up to 8% of the
participants eligible contribution.
In 2008, 2007 and 2006, the Company expensed $145,291, $99,395
and $31,042 for its defined contribution retirement plans,
respectively. The Company does not provide defined benefit
pension plans for its employees.
|
|
Note 11
|
Commitments
and Contingencies
|
|
|
(a)
|
Concentrations
of credit risk
|
As of December 31, 2008, the Companys assets
primarily consisted of investments, cash and assumed premium
receivable. The Company believes it bears minimal credit risk in
its cash on deposit as the banks where cash balances are held
participate in the FDICs Transaction Account Guarantee
Program and the US Treasury Guarantee Program for Money Market
Funds. Although there may be credit risk with respect to its
assumed premium receivable from Tower Insurance Company of New
York, an insurance company subsidiary of Tower, the Company
believes these premiums will be fully collectible.
At December 31, 2008, the Company does not have aggregate
investments in a single entity that are in excess of 10% of
shareholders equity.
At December 31, 2008, the Company had exposure to real
estate related securities in the form of mortgage backed
securities (CMBS, and RMBS), investment in a fund and investment
in common stocks in the amount of $325.3 million or 40.6%
of cash and invested assets. Of the total year end mortgage
related exposure of $325.3 million, $323.4 million is
rated AAA, of which $209.5 million is backed by government
agencies.
The Companys exposure to subprime mortgages amounted to
$75,000 at December 31, 2008.
|
|
(b)
|
Employment
agreements
|
The Company has entered into various employment agreements,
effective April 4, 2006 and thereafter with certain
individuals. The employment agreements provide for option
awards, executive benefits and severance payments under certain
circumstances.
During the year ended December 31, 2008 the company accrued
severance expense in the amount of $1.2 million in
anticipation of closing the CastlePoint Bermuda office. During
the year ended December 31, 2007 the company did not have
any accrued severance expense.
The Company leases
and/or
subleases space in Hamilton, Bermuda, New York, New York and
Lisle, Illinois. CastlePoint Re executed a sublease agreement
for premises in Hamilton, Bermuda, as of September 1, 2006,
which is expected to terminate on July 1, 2010. CastlePoint
Holdings, Ltd. entered in a one-year sublease agreement (on
behalf of one employee) for one residential premise in Hamilton,
Bermuda as of June 1, 2007. The term of this sublease will
expire March 31, 2009. CastlePoint Management currently
D-31
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
subleases office space in New York, New York from Tower
Insurance Company of New York, at its cost, pursuant to an
arrangement covered by the service and expense sharing agreement
between these parties. CastlePoint Management entered into an
agreement to lease office space in Lisle, Illinois, as of
October 1, 2006, which has been extended to expire on
June 30, 2009. Future minimum lease commitments for 2009
are $0.2 million and for 2010 $0.1 million and nothing
thereafter.
|
|
(d)
|
Security
Requirements
|
As required by the Companys reinsurance agreements with
its cedents, CastlePoint Re is required to collateralize amounts
through a letter of credit, cash advance, funds held or a trust
account. The amount of the letter of credit or trust is to be
adjusted each calendar quarter, and the required amount is to be
at least equal to the sum of the following contract amounts:
(i) unearned premium reserve, (ii) paid loss and loss
adjustment expense payable, (iii) loss and loss adjustment
expenses reserves, (iv) loss incurred but not reported,
(v) return and refund premiums, and (vi) less premium
receivable. As of December 31, 2008 and 2007, CastlePoint
Re maintained trusts and a collateralized letter of credit in
the amount of $375.2 million and $218.1 million,
respectively, at State Street Bank and Trust Company, a
Massachusetts trust company. As of December 31, 2008 and
2007 CastlePoint Insurance Company maintained a trust at the
same trust company in the amount of $15.7 million and
$8.0 million, respectively. Both CastlePoint Re and
CastlePoint Insurance Company earn and collect the interest on
the trust funds.
Regulatory
trusts
At December 31, 2008 and 2007, U.S. Treasury Notes
with fair values of approximately $6.6 million and
$2.6 million, respectively were on deposit with New York
State to comply with the insurance laws of the state of New
York, in which CastlePoint Insurance Company is licensed.
Alien
Excess or Surplus Lines Insurers
Effective July 31, 2006, CastlePoint Re entered into an
Alien Excess or Surplus Lines Trust Agreement
with State Street Bank and Trust Company, a Massachusetts
trust company, to establish a trust fund in the United States as
security for U.S. policyholders and third party claimants
in connection with seeking to qualify as an eligible or approved
excess or surplus lines insurer in certain
U.S. jurisdictions. As of December 31, 2008 and 2007,
CastlePoint Re maintained an alien excess or surplus lines trust
in the amount of zero and $5.8 million, respectively, at
State Street Bank and Trust Company. CastlePoint Re earns
and collects the interest on the trust funds. On
January 28, 2009 CastlePoint Re closed the account.
The Company maintains its cash balances at financial
institutions in both the United States and Bermuda. In the
United States, the Federal Deposit Insurance Corporation
(FDIC) secures accounts up to $250,000 at these
institutions. Bermuda laws do not give similar protection to
Bermuda depositors or checking account users or savers.
Management monitors balances in excess of insured limits and
believes they do not represent a significant credit risk to the
Company as the banks where cash balances are held participate in
the FDICs Transaction Account Guarantee Program and the US
Treasury Guarantee Program for Money Market Funds.
|
|
(f)
|
Commitments
through guarantees
|
In December 2006, the Company formed two Trusts, of which the
Company owns all of the common trust securities, through
CastlePoint Management. CastlePoint Holdings, Ltd. has
guaranteed, on a subordinated basis, CastlePoint
Managements obligations under its junior subordinated
debentures and distributions and other payments due on the
Trusts preferred securities. These guarantees, relating to
$104 million of
D-32
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
outstanding debt, provide a full and unconditional guarantee of
amounts due on the Trusts preferred securities. See
Note 15 Debt for additional details.
In September 2007, the Company formed a third Trust, of which
the Company owns all of the common trust securities, through
CastlePoint Bermuda Holdings. CastlePoint Holdings, Ltd. has
guaranteed, on a subordinated basis, CastlePoint Bermuda
Holdings obligations under its junior subordinated
debentures and distributions and other payments due on the
Trusts preferred securities. This guarantee, relating to
$31 million of outstanding debt, provides a full and
unconditional guarantee of amounts due on the Trusts
preferred securities. See Note 15
Debt for additional details.
From time to time, the Company is involved in various legal
proceedings in the ordinary course of business. For example, to
the extent a claim is asserted by a third party in a law suit
against one of the Companys insureds covered by a
particular policy, the Company may have a duty to defend the
insured party against the claim. The claim may relate to a
bodily injury, property damage or other compensable injuries as
set forth in the policy. Such proceedings are considered in
estimating the liability for loss and loss adjustment expenses.
The Company is not subject to any other pending legal
proceedings that management believes are likely to have a
material effect in the consolidated financial statements.
|
|
Note 12
|
Statutory
Financial Information and Accounting Policies
|
Bermuda
CastlePoint Re is registered as a Class 3 reinsurer under
The Insurance Act 1978 (Bermuda), amendments thereto and related
regulations (the Insurance Act). Under the Insurance
Act, CastlePoint Re is required to prepare statutory financial
statements and to file a Statutory Financial Return. As a
Class 3 insurer, the Insurance Act also requires
CastlePoint Re to maintain a minimum share capital and surplus
of $1,000,000 and to meet a minimum solvency margin. To satisfy
these requirements, CastlePoint Re was required to maintain a
minimum level of statutory capital and surplus of
$53.7 million and $43.0 million at December 31,
2008 and 2007. CastlePoint Re was also required to maintain a
minimum liquidity ratio. All requirements were met by
CastlePoint Re throughout the year ended December 31, 2008
and 2007.
Subsequent to December 31, 2008, CastlePoint Res
designation changed to a Class 3B insurer. Currently, there
is no change in the financial statement filings or in the
maintenance of minimum share capital and surplus requirements.
The statutory assets were approximately $724.0 million and
$592.5 million and statutory capital and surplus was
approximately $302.0 million and $331.0 million, as of
December 31, 2008 and 2007, respectively.
For Bermuda registered companies, there are some differences
between financial statements prepared in accordance with GAAP
and those prepared on a statutory basis. Certain assets are
non-admitted under Bermuda regulations, deferred policy
acquisition costs have been fully expensed to income under
Bermuda regulations and prepaid expenses and fixed assets have
been removed from the statutory balance sheet under Bermuda
regulations.
United
States
For regulatory purposes, CastlePoint Insurance Company,
domiciled in the state of New York, prepares its statutory basis
financial statements in accordance with practices prescribed or
permitted by the statutory accounting practices of CastlePoint
Insurance Companys state of domicile, New York, which
differ in certain significant respects from GAAP. Prescribed
statutory accounting practices (SAP) include state laws,
D-33
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices
encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to
company within a state, and may change in the future.
For the years ended December 31, 2008 and 2007, CastlePoint
Insurance Company reported statutory basis surplus with respect
to policyholders of $94.1 million and $59.6 million,
respectively, and was required to maintain minimum capital and
surplus of $4.0 million and $4.0 million,
respectively, in accordance with New York Insurance Law.
|
|
Note 13
|
Fair
Value of Financial Instruments
|
SFAS No. 107, Disclosure about Fair Value of
Financial Instruments, requires all entities to disclose
the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the balance sheet,
for which it is practicable to estimate fair value. The
Companys assets and liabilities in the balance sheet
approximate fair value, except for balances relating to
reinsurance contracts which are not in the scope of
SFAS No. 107. The Company uses the following methods
and assumptions in estimating the fair value of the financial
instruments presented:
Cash and cash equivalents and short term
investments:
The carrying amounts approximate
fair values.
Investments:
Fair value disclosures for
investments are included in Note 4
Investments.
Subordinated debentures:
The carrying values
reported in the accompanying balance sheets for these
instruments approximate fair value due to the stability in our
credit quality and a reduction since issuance in the risk free
rate offset by overall credit spread widening due to tighter
liquidity in the market place.
|
|
Note 14
|
Dividends
Declared
|
The aggregate amount of dividends declared and paid for the
years ended December 31, 2008, 2007 and 2006 were
$6.7 million, $3.6 million and $2.2 million
respectively.
Subordinated
Debentures
In November and December 2006, CastlePoint Management formed two
Trusts, of which CastlePoint Management owns all of the common
trust securities. On December 1, 2006 and December 14,
2006, respectively, the Trusts each issued $50.0 million of
trust preferred securities for cash at a fixed rate during the
first five years (equal to 8.66% and 8.551% per annum,
respectively), after which the interest rate will become
floating and equal to the three month London Interbank Offered
Rate (LIBOR) plus 3.5% per annum (calculated quarterly). The
Trusts invested the proceeds thereof and the proceeds received
from the issuance of the common trust securities in exchange for
approximately $103.1 million of junior subordinated
debentures (the CPM Debentures) issued by
CastlePoint Management, with terms which mirror those of the
trust preferred securities. On September 2007, CastlePoint
Bermuda Holdings formed a third Trust, of which CastlePoint
Bermuda Holdings owns all of the common trust securities. On
September 27, 2007, this Trust issued $30.0 million of
trust preferred securities for cash at a fixed rate during the
first five years (equal to 8.39% per annum), after which the
interest rate will become floating and equal to the three month
London Interbank Offered Rate (LIBOR) plus 3.5% per annum
(calculated quarterly). The Trust invested the proceeds thereof
and the proceeds received from the issuance of the common trust
securities in exchange for
D-34
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
approximately $30.9 million of junior subordinated
debentures (the CPBH Debentures) issued by
CastlePoint Bermuda Holdings, with terms which mirror those of
the trust preferred securities.
The CPM Debentures and the CPBH Debentures are unsecured
obligations of CastlePoint Management and CastlePoint Bermuda
Holdings, respectively, and are subordinated and junior in right
of payment to all present and future senior indebtedness of
CastlePoint Management and CastlePoint Bermuda Holdings. The CPM
Debentures issued to Trust I for CastlePoint Management
bear interest that is fixed at 8.66% until December 1,
2011, and the coupon will float quarterly thereafter at the
three months LIBOR rate plus 3.5% per annum calculated
quarterly. The CPM Debentures issued to Trust II for
CastlePoint Management bear interest that is fixed at 8.551%
until December 14, 2011, and the coupon will float
quarterly thereafter at the three months LIBOR rate plus 3.5%
per annum calculated quarterly. The CPBH Debentures issued to
Trust I for CastlePoint Bermuda Holdings bear interest that
is fixed at 8.39% until September 27, 2012, and the coupon
will float quarterly thereafter at the three months LIBOR rate
plus 3.5% per annum calculated quarterly. All of these
subordinated debentures have stated maturities of thirty years.
CastlePoint Management and CastlePoint Bermuda Holdings have the
option to redeem any or all of the debentures beginning five
years from the date of issuance, at the principal amount plus
accrued and unpaid interest. If CastlePoint Management or
CastlePoint Bermuda Holdings choose to redeem their debentures,
the Trusts would then redeem the trust preferred securities at
the same time. The issuer of the debentures has the right under
the indenture to defer payments of interest on the debentures,
so long as no event of default has occurred and is continuing,
by deferring the payment of interest on the debentures for up to
20 consecutive quarterly periods (Extension Period)
at any time and from time to time. During any Extension Period,
interest will continue to accrue on the debentures.
The Company has guaranteed, on a subordinated basis, CastlePoint
Managements obligations and CastlePoint Bermuda
Holdings obligations under the debentures and
distributions and other payments due on the Trusts
preferred securities. These guarantees provided a full and
unconditional guarantee of amounts due on the Trusts
preferred securities. Issuance costs of $1.5 million each
for Trust I and Trust II for CastlePoint Management
respectively were deferred and are being amortized over the term
of the subordinated debentures using the effective interest
method. Issuance costs of $0.9 million for Trust I for
CastlePoint Bermuda Holdings were deferred and are being
amortized over the term of the subordinated debentures using the
effective interest method. The proceeds of these issuances of
subordinated debentures were used for general corporate
purposes, including acquisition and capitalization of
CastlePoint Insurance Company.
The Trusts are unconsolidated variable interest entities
pursuant to FIN 46(R) because the holders of the equity
investment at risk do not have adequate decision making ability
over the Trusts activities.
|
|
Note 16
|
Subsequent
Events
|
Acquisition
of CastlePoint Holdings Ltd.
On February 5, 2009, Tower completed the acquisition of
100% of the issued and outstanding common stock of the Company,
pursuant to the stock purchase agreement (the
Agreement), dated as of August 4, 2008, by and among
Tower and the Company. Accordingly, the Company has been
delisted from the National Association of Securities Dealers
Automated Quotations. The acquisition will be accounted for
using the purchase method in accordance with
SFAS No. 141R, Business Combinations
(SFAS 141R). Under the terms of the Agreement,
Tower acquired the Company for approximately $489.5 million
comprised of 16,802,845 shares of Tower common stock with
an aggregate value of approximately $419.7 million, plus
$65.4 million of cash. The purchase consideration also
includes the fair value of the warrants held by Tower
D-35
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
of approximately $4.4 million which were surrendered
unexercised as part of the merger agreement and is presented as
follows:
|
|
|
|
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Purchase consideration
|
|
$
|
489,509
|
|
Estimated fair value of outstanding CastlePoint stock options
|
|
|
4,001
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
493,510
|
|
Fair value of investment in CastlePoint
|
|
|
34,673
|
|
Fair value of CastlePoint acquisition
|
|
$
|
528,183
|
|
Tower will begin to consolidate the financial statements as of
the closing date and in accordance with SFAS 141R, the
purchase consideration will be allocated to the assets acquired
and liabilities assumed, including separately identified
intangible assets, based on their fair values as of the close of
the acquisition, with the amounts exceeding the fair value
recorded as goodwill. Direct costs of the acquisition are
accounted for separately from the business combination and are
expensed as incurred. As the values of certain assets and
liabilities are preliminary in nature, they are subject to
adjustment as additional information is obtained, including, but
not limited to, valuation of separately identifiable
intangibles, fixed assets, and deferred taxes. The valuations
will be finalized within 12 months of the close of the
acquisition. When the valuations are finalized, any changes to
the preliminary valuation of assets acquired or liabilities
assumed may result in adjustments to separately identifiable
intangibles and goodwill.
Because of the merger, it was mutually decided with Tower that
they would not cede any business under the brokerage, specialty
and traditional programs quota share reinsurance contracts for
new and renewal business beginning January 1, 2009, and
that as of April 1, 2009 a new quota share treaty would be
put into effect that would cede a percentage of all business
written on Tower insurance subsidiaries paper to
CastlePoint Re, with that percentage ceded to be decided and at
a ceding commission at cost with no sliding scale commission.
Also, as of December 31, 2008 the aggregate excess of loss
treaties between Tower and CastlePoint Insurance for brokerage
business were terminated. And, as of January 1, 2009
CastlePoint Re decided not to participate on any of the Tower
excess of loss ceded treaties that renewed as of that date.
As a result of the merger, the Company will become a
controlled foreign corporation for U.S. tax
purposes. Under the applicable controlled foreign corporation
tax rules, most or all of the Companys income following
the merger will be included as taxable income by Tower and hence
be subject to U.S. taxation.
Acquisition
of Hermitage Insurance Group
On February 27, 2009, CastlePoint Reinsurance completed the
acquisition of HIG, Inc (Hermitage), a specialty
property and casualty insurance holding company, from a
subsidiary of Brookfield Asset Management Inc. for
$130 million. This transaction was previously announced on
August 27, 2008. Hermitage offers both admitted and excess
and surplus lines products and wrote over $100 million of
premiums in 2008.
CastlePoint will begin to consolidate the financial statements
as of the closing date and in accordance with SFAS 141R;
the purchase consideration will be allocated to the assets
acquired and liabilities assumed, including separately
identified intangible assets, based on their fair values as of
the close of the acquisition, with the amounts exceeding the
fair value recorded as goodwill. Direct costs of the acquisition
are accounted for separately from the business combination and
are expensed as incurred. As the values of certain assets and
liabilities are preliminary in nature, they are subject to
adjustment as additional information is obtained, including, but
not limited to, valuation of separately identifiable
intangibles, fixed assets, and deferred taxes. The valuations
will be finalized within 12 months of the close of the
acquisition. When the valuations are finalized, any changes to
the preliminary valuation of assets acquired or liabilities
assumed may result in adjustments to separately identifiable
intangibles and goodwill.
D-36
CastlePoint
Holdings, Ltd.
Notes to
Consolidated Financial
Statements (Continued)
The Company has incurred approximately $1.7 million of
transaction costs, including legal, accounting and other costs
directly related to the acquisition which will be expensed in
the first quarter of 2009. The Company expects to record
goodwill arising from the acquisition in the range of $15 to
$20 million. The goodwill consists largely of the synergies
and economies of scale expected from combining the operations of
the Company and Hermitage.
CastlePoint
Florida Insurance Company
In December 2008, the state of Florida authorized the
establishment of CastlePoint Florida Insurance Company as a
Florida domestic company. It was capitalized with a statutory
surplus of $10,000,000 in January 2009, and it received a
certificate of authority from Florida to transact business in
February 2009.
D-37
HIG,
Inc.
Contents
|
|
|
|
|
|
|
|
E-3
|
|
Consolidated financial statements:
|
|
|
|
|
|
|
|
E-4
|
|
|
|
|
E-5
|
|
|
|
|
E-6
|
|
|
|
|
E-7
|
|
|
|
|
E-8-E-23
|
|
E-2
Independent
Auditors Report
To the Board of Directors of
HIG, Inc.
We have audited the consolidated balance sheets of HIG, Inc.
(the Company) as of December 31, 2008, and
2007, and the related consolidated statements of operations and
comprehensive income (loss), changes in stockholders
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of HIG, Inc. as of December 31, 2008 and 2007 and
the results of operations and cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 17 to the consolidated financial
statements, on February 27, 2009, Company was acquired by
CastlePoint Reinsurance Company, Ltd., a subsidiary of Tower
Group, Inc.
As discussed in Note 6 to the consolidated financial
statements as of December 31, 2007, while within an
acceptable range, there is a significant potential for material
deviation in the Companys loss and loss adjustment expense
reserves as a result of the Companys newly implemented
enhanced reserve estimation methodology, combined with the
relatively small volume of reserves, and the frequency and
severity of two of its lines of business.
/s/ Amper,
Politziner & Mattia, LLP
June 30, 2009
Edison, New Jersey
E-3
HIG,
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale, at fair value
(amortized cost:
|
|
|
|
|
|
|
|
|
2008 $100,700; 2007 $140,085)
|
|
$
|
100,152
|
|
|
$
|
142,166
|
|
Common stock, available-for-sale, at fair value (cost
$3,094 2008 and 2007)
|
|
|
2,404
|
|
|
|
3,812
|
|
Short-term investments, at cost, which approximates fair value
|
|
|
123
|
|
|
|
4,765
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
102,679
|
|
|
|
150,743
|
|
Cash and cash equivalents
|
|
|
84,748
|
|
|
|
14,509
|
|
Accrued investment income
|
|
|
1,098
|
|
|
|
1,431
|
|
Premiums receivable (net of allowance: 2008 $5,247;
2007 $2,100)
|
|
|
13,178
|
|
|
|
9,946
|
|
Reinsurance recoverable on:
|
|
|
|
|
|
|
|
|
Paid losses and loss expenses
|
|
|
1,838
|
|
|
|
490
|
|
Unpaid losses and loss expenses
|
|
|
13,962
|
|
|
|
12,557
|
|
Deferred policy acquisition costs
|
|
|
12,125
|
|
|
|
9,847
|
|
Prepaid reinsurance premiums
|
|
|
7,184
|
|
|
|
4,246
|
|
Deferred tax asset, net
|
|
|
3,934
|
|
|
|
910
|
|
Intangible assets, net
|
|
|
910
|
|
|
|
1,050
|
|
Fixed assets, net
|
|
|
1,759
|
|
|
|
1,298
|
|
Other assets
|
|
|
266
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
243,681
|
|
|
$
|
207,185
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses
|
|
$
|
92,646
|
|
|
$
|
69,814
|
|
Reinsurance payable on paid losses
|
|
|
1,677
|
|
|
|
7
|
|
Unearned premiums
|
|
|
45,686
|
|
|
|
33,233
|
|
Commissions payable
|
|
|
1,505
|
|
|
|
1,236
|
|
Accounts payable and accrued expenses
|
|
|
4,435
|
|
|
|
2,918
|
|
Income taxes payable
|
|
|
|
|
|
|
411
|
|
Reinsurance payable
|
|
|
6,857
|
|
|
|
8,774
|
|
Due to policyholders
|
|
|
964
|
|
|
|
|
|
Other liabilities
|
|
|
23
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
153,793
|
|
|
|
117,425
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $2,832 per share: authorized, issued and
outstanding 1,095 shares
|
|
|
3,101
|
|
|
|
3,101
|
|
Preferred stock
|
|
|
|
|
|
|
3,000
|
|
Additional paid-in capital
|
|
|
71,843
|
|
|
|
66,948
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,343
|
)
|
|
|
1,281
|
|
Retained earnings
|
|
|
16,287
|
|
|
|
15,430
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
89,888
|
|
|
|
89,760
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
243,681
|
|
|
$
|
207,185
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
E-4
HIG,
Inc.
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
84,100
|
|
|
$
|
53,172
|
|
Net investment income
|
|
|
7,045
|
|
|
|
7,444
|
|
Realized loss on sales of investments
|
|
|
(3,065
|
)
|
|
|
(893
|
)
|
Other revenues
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
88,128
|
|
|
|
59,723
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
48,736
|
|
|
|
3,202
|
|
Commissions
|
|
|
19,617
|
|
|
|
11,118
|
|
Operating expenses
|
|
|
18,911
|
|
|
|
10,870
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
87,264
|
|
|
|
25,190
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for Federal income
taxes
|
|
|
864
|
|
|
|
34,533
|
|
Provision (benefit) for Federal income taxes
|
|
|
(128
|
)
|
|
|
12,115
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
992
|
|
|
|
22,418
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on securities
available-for-sale
|
|
|
(2,624
|
)
|
|
|
856
|
|
Reclassification adjustment for losses (gains) included in
earnings
|
|
|
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(1,632
|
)
|
|
$
|
23,853
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
E-5
HIG,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
Accumulated Other
|
|
|
Retained
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional Paid-
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Balance, January 1, 2007
|
|
|
1,095
|
|
|
$
|
3,101
|
|
|
|
385
|
|
|
$
|
3,000
|
|
|
$
|
55,913
|
|
|
$
|
(154
|
)
|
|
$
|
(1,916
|
)
|
|
$
|
59,944
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
|
|
|
|
|
|
1,435
|
|
Deemed contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,035
|
|
|
|
|
|
|
|
|
|
|
|
11,035
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,418
|
|
|
|
22,418
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,072
|
)
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
66,948
|
|
|
|
1,281
|
|
|
|
15,430
|
|
|
|
89,760
|
|
Prior Period Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, January 1, 2008
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
66,948
|
|
|
|
1,281
|
|
|
|
15,295
|
|
|
|
89,625
|
|
Other comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,624
|
)
|
|
|
|
|
|
|
(2,624
|
)
|
Deemed contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
1,895
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
992
|
|
|
|
992
|
|
Preferred Stock Cancellation
|
|
|
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
(3,000
|
)
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
1,095
|
|
|
$
|
3,101
|
|
|
|
|
|
|
$
|
|
|
|
$
|
71,843
|
|
|
$
|
(1,343
|
)
|
|
$
|
16,287
|
|
|
$
|
89,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
*
See note 5 to these consolidated financial
statements regarding prior period adjustment for fixed
assets.
E-6
HIG,
Inc.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
992
|
|
|
$
|
22,418
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Amortization of bond premium
|
|
|
332
|
|
|
|
149
|
|
Amortization of intangible assets
|
|
|
140
|
|
|
|
140
|
|
Depreciation of fixed assets
|
|
|
649
|
|
|
|
374
|
|
Realized losses on sales of investments
|
|
|
3,065
|
|
|
|
893
|
|
Income taxes incurred but not paid
|
|
|
(128
|
)
|
|
|
12,115
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
333
|
|
|
|
10
|
|
Premiums receivable
|
|
|
(3,232
|
)
|
|
|
(3,604
|
)
|
Reinsurance recoverable
|
|
|
(2,753
|
)
|
|
|
17,134
|
|
Deferred policy acquisition costs
|
|
|
(2,278
|
)
|
|
|
(3,574
|
)
|
Prepaid reinsurance premium
|
|
|
(2,938
|
)
|
|
|
(1,583
|
)
|
Other assets
|
|
|
(108
|
)
|
|
|
30
|
|
Unpaid losses and loss expenses
|
|
|
22,832
|
|
|
|
(35,132
|
)
|
Reinsurance payable on paid losses
|
|
|
1,670
|
|
|
|
|
|
Unearned premiums
|
|
|
12,453
|
|
|
|
10,004
|
|
Commissions payable
|
|
|
269
|
|
|
|
(1,800
|
)
|
Accounts payable and accrued expenses
|
|
|
1,517
|
|
|
|
635
|
|
Income taxes payable
|
|
|
(411
|
)
|
|
|
|
|
Reinsurance payable
|
|
|
(1,917
|
)
|
|
|
3,645
|
|
Due to policyholders
|
|
|
964
|
|
|
|
|
|
Other liabilities
|
|
|
(1,009
|
)
|
|
|
(462
|
)
|
Miscellaneous
|
|
|
(19
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
30,423
|
|
|
|
21,404
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Sale of fixed maturity securities
|
|
|
59,319
|
|
|
|
20,414
|
|
Purchase of fixed maturity securities
|
|
|
(23,035
|
)
|
|
|
(25,437
|
)
|
Net sales (purchases) of short-term investments
|
|
|
4,642
|
|
|
|
(3,323
|
)
|
Purchase of fixed assets
|
|
|
(1,110
|
)
|
|
|
(958
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
39,8l6
|
|
|
|
(9,304
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
70,239
|
|
|
|
7,028
|
|
Cash and cash equivalents, beginning of period
|
|
|
14,509
|
|
|
|
7,481
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
84,748
|
|
|
$
|
14,509
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
E-7
HIG,
Inc.
(000s
omitted, except share and per share data)
The consolidated financial statements of HIG, Inc. (the
Company) include its accounts and those of its
wholly-owned insurance subsidiaries, Hermitage Insurance Company
(Hermitage) and Kodiak Insurance Company
(Kodiak).
Hermitage was incorporated in the State of New York in 1984, to
underwrite commercial property and liability risks. Business is
received from a number of excess and surplus lines wholesale
producers. The Company is domiciled in New York, is admitted in
New York, Georgia, New Jersey, Pennsylvania, and Rhode Island
and qualifies as an approved non-admitted insurer in thirty
additional states.
As also noted in
Note 17-
Subsequent Events, on August 27, 2008, the shareholders of
the Company signed a Stock Purchase Agreement with CastlePoint
Reinsurance Company, Ltd. (CastlePoint), a
subsidiary of Tower Group, Inc. (Tower) to sell all
outstanding shares of the Company to CastlePoint. The
transaction received all of the required regulatory approvals
and closed on February 27, 2009. Under the terms of the
Stock Purchase Agreement, dated August 27, 2008 and amended
February 23, 2009, CastlePoint acquired the Company for
approximately $130 million.
Pursuant to a transaction that closed on June 3, 2005,
Hermitage was purchased by 2005662 Ontario Limited
(Ontario Limited), a wholly-owned subsidiary of
Brookfield Asset Management, each of which is incorporated in
the Province of Ontario, Canada. As part of the transaction,
Brookfield Asset Management, formerly Brascan Corporation,
acquired Hermitage and its subsidiaries, Kodiak and Vantage Data
Corporation (Vantage Data). The acquisition was
approved by the State of New York Insurance Department on
March 18, 2005 and the State of New Jersey Department of
Banking and Insurance on April 7, 2005.
On December 21, 2005, Hermitage was conveyed from Ontario
Limited to Brookfield Asset Management. On December 22,
2005, Hermitage was transferred from Brookfield Asset Management
to Brascan US Holdings, Inc., a wholly-owned subsidiary of
Brookfield Asset Management incorporated in the Province of
Ontario, Canada. On December 31, 2005, Hermitage was
transferred from Brascan US Holdings, Inc. to Brookfield
US Corporation, a wholly-owned subsidiary of Brookfield
Asset Management incorporated in the State of Delaware.
On March 18, 2008, ownership of Hermitage was transferred
from Brookfield US Corporation (BUSC) to
Brookfield Insurance Holdings, Inc., a wholly-owned subsidiary
of BUSC incorporated in the State of Delaware. As this transfer
was between entities under common control, no adjustment to net
book value was required. On March 31, 2008, Brookfield
Insurance Holdings, Inc. changed its name to HIG, Inc. The
financial statements contained herein have been adjusted to
reflect this transfer as though Hermitage was owned by HIG, Inc.
for all periods presented. Accordingly, the common stock and
additional paid-in capital amounts that are present reflect HIG,
Inc.s capital structure.
In 1997, Hermitage purchased 100% of the outstanding stock of
Kodiak for $2,500 and subsequently contributed additional
capital in the form of cash and investments with a cost of
$3,113. The acquisition was approved by the State of New Jersey
Department of Banking and Insurance on November 24, 1997.
On December 31, 2007, Hermitage accrued a surplus
contribution to Kodiak in the amount of $5,100. This transaction
was submitted to the New York State Insurance Department for
approval and was ultimately settled on February 5, 2008.
Kodiak is domiciled in the State of New Jersey and is licensed
to write certain property and casualty lines in New Jersey and
ten additional states.
E-8
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation
|
The accompanying financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
|
|
(b)
|
Basis
of Presentation
|
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change
in the future, as more information becomes known which could
impact the amounts reported and disclosed herein.
All of the Companys fixed maturity and equity securities
are classified as available-for-sale securities, and are stated
at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of
stockholders equity, net of applicable deferred taxes.
The Company does not invest in, hold or issue any derivative
financial instruments.
Premium and discount amounts are amortized into income based on
the stated contractual lives of the securities. The Company
recognizes income for the mortgage-backed and asset-backed bond
portion of its fixed maturity securities portfolio using the
constant effective yield method.
Net investment income, consisting of interest and dividends, net
of investment expense, is recognized when earned. Realized gains
and losses on investments are recognized when investments are
sold or redeemed on a specific identification basis.
|
|
(e)
|
Cash
and Cash Equivalents
|
Cash and cash equivalents are carried at cost, which
approximates their fair values. Investments having an original
maturity of less than one year at the date of acquisition are
classified as short-term investments. Securities having
maturities of less than three months are classified as cash
equivalents.
Premiums including amounts related to ceded reinsurance are
earned pro rata over the terms of the policies. The reserve for
unearned premiums is determined on a daily pro-rata basis.
|
|
(g)
|
Deferred
Policy Acquisition Costs
|
Deferred policy acquisition costs are costs that vary with and
are primarily related to the production of new and renewal
business. Such costs include commissions, premium taxes and
certain underwriting and policy issuance costs which are
deferred when incurred and amortized to expense as the related
written premiums are earned.
E-9
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(h)
|
Losses
and Loss Expenses
|
The Companys reserves for loss and loss adjustment
expenses include a) estimates for claims reported prior to
the close of the accounting period, b) estimates for claims
incurred but not reported as of the close of the accounting
period, c) development of claims paid
and/or
reported prior to the close of the accounting period and
d) deductions for anticipated reinsurance recoverables
related to these items.
Losses and loss adjustment expenses represent the estimated
ultimate net cost of all reported and unreported amounts
incurred through December 31 of each period presented. The
Company does not discount loss and loss adjustment expense
reserves. The reserves for unpaid losses and loss adjustment
expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the
effects of trends in loss severity and frequency, and were based
on the best data available to the Company; however, due to the
size of the Company and its limited spread of risk, those
estimates are subject to a significant degree of inherent
variability. Those estimates are continually reviewed and
adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current
operations. Although management believes that the estimates of
the reserves for unpaid losses and loss adjustment expenses at
December 31, 2008 and 2007 are reasonable in the
circumstances, it is possible that the Companys actual
incurred losses and loss adjustment expenses not conform to the
assumptions inherent in the determination of the reserves;
accordingly, the ultimate settlement of losses and loss
adjustment expenses may vary significantly from the estimates
included in the Companys financial statements. The Company
does not reserve for salvage and subrogation recoveries.
Reinsurance premiums ceded are charged against income ratably
over the life of the contract. Amounts recoverable from
reinsurers are estimated in a manner consistent with the
liability for unpaid losses and loss adjustment expenses
associated with the reinsured policies. Reserves for losses and
loss adjustment expenses and unearned premiums ceded to
reinsurers have been reported as assets in the consolidated
balance sheets. Amounts shown in the accompanying consolidated
statements of operations and comprehensive income (loss) for
earned premiums, losses and loss adjustment expenses,
commissions and operating expenses include both direct and
assumed business and are presented net of reinsurance ceded.
Depreciation on leasehold improvements is computed using the
straight-line method over the lease term. Depreciation on
furniture and equipment, computer hardware and software is
computed using the straight-line method over the estimated
useful lives of three years.
Expenditures for major renewals and betterments are capitalized,
and expenditures for maintenance and repairs are charged to
income as incurred. When fixed assets are retired, or otherwise
disposed of, the cost thereof and related accumulated
depreciation are eliminated from the accounts. Any gain or loss
on disposal is credited or charged to operations.
The Company accounts for income taxes using the liability
method. Accordingly, deferred tax assets and deferred tax
liabilities are recognized for the future tax consequences
attributable to the difference between the financial reporting
and tax bases of assets and liabilities using enacted tax rates
expected to apply in the years in which the differences are
expected to reverse.
E-10
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Companys acquisition by Ontario Limited in June 2005
resulted in additional intangibles of $1,400. The Company
recorded the intangibles and additional paid-in capital for this
amount in accordance with SFAS No. 141. The
intangibles consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
Lives
|
|
Distribution network
|
|
$
|
300
|
|
|
5 years
|
Trade names
|
|
|
400
|
|
|
Indefinite
|
Software
|
|
|
400
|
|
|
5 years
|
State licenses
|
|
|
300
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Intangible assets
|
|
$
|
1,400
|
|
|
$
|
1,400
|
|
Accumulated amortization
|
|
|
(490
|
)
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
910
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization expense of $140 in 2008 and in
2007.
The Company performs an annual impairment analysis to identify
potential impairment related to indefinite life intangible
assets and measures the amount of impairment loss, if any, to be
recognized. This annual test is performed on December 31 of each
year or more frequently if events or circumstances change that
require the Company to perform the impairment analysis on an
interim basis.
|
|
(m)
|
Other
Comprehensive Income (Loss)
|
Other comprehensive income (loss) consists of net unrealized
investment gains or losses on available-for-sale securities and
is presented separately in Note 4. These amounts are
reported net of deferred income taxes.
|
|
(n)
|
Fair
Value of Financial Instruments
|
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, premium receivables and accounts
payable approximate those assets and liabilities fair values due
to the short-term nature of the instruments. The fair value of
investments is addressed in Note 4.
|
|
(o)
|
New
Accounting Pronouncements
|
In September 2005, the Accounting Standards Executive Committee
issued Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts
(SOP 05-1).
SOP 05-1
provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance
and investment contracts.
SOP 05-1
defines an internal replacement as a modification in product
benefits, features, rights, or coverages that occurs by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract.
SOP 05-1
is effective for internal replacements occurring in fiscal years
beginning after December 15, 2006. The adoption of
SOP 05-1
effective January 1, 2007, did not have a material impact
on the Companys financial condition or results of
operations.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
defines fair
E-11
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
value, establishes a framework for measuring fair value and
expands disclosure about fair value measurements. It applies to
other pronouncements that require or permit fair value but does
not require any new fair value measurements. The statement
defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. SFAS No. 157 establishes a fair value
hierarchy to increase consistency and comparability in fair
value measurements and disclosures. The hierarchy is based on
the inputs used in valuation and gives the highest priority to
quoted prices in active markets. The Company adopted the
provisions of SFAS No. 157 on January 1, 2008,
which did not have an effect on the Companys consolidated
financial condition or results of operation. See Note 4 for
further financial statement disclosure required pursuant to
SFAS 157.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS No. 115
(SFAS No. 159). This standard permits an
entity to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions in
SFAS No. 159 are elective; however, the amendment to
SFAS No. 115 applies to all entities with
available-for-sale and trading securities. The FASBs
stated objective in issuing this standard is as follows:
to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting
provisions. The fair value option established by
SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A
business entity will report unrealized gains and losses on items
for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option:
(a) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the
equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments
and not to portions of instruments. SFAS No. 159 is
effective as of the beginning of the entitys first fiscal
year that begins after November 15, 2007. The Company did
not elect to implement the fair value option for eligible
financial assets and liabilities as of January 1, 2008 or
during the year ended December 31, 2008.
In February 2008, the FASB issued FSP
No. FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP
FAS 157-1).
FSP
FAS 157-1
provides a scope exception from SFAS 157 for the evaluation
criteria on lease classification and capital lease measurement
under SFAS No. 13, Accounting for Leases
and other related accounting pronouncements. Accordingly, the
Company did not apply the provisions of SFAS 157 in
determining the classification of and accounting for leases and
the adoption of FSP
FAS 157-1
did not have an impact on the Companys consolidated
financial statements.
In February 2008, the FASB issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2)
which delays the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for certain nonfinancial
assets and nonfinancial liabilities. Examples of applicable
nonfinancial assets and nonfinancial liabilities to which FSP
FAS 157-2
applies include, but are not limited to:
|
|
|
|
|
Nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination that are not
subsequently remeasured at fair value;
|
|
|
|
Reporting units measured at fair value in the goodwill
impairment test as described in SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), and nonfinancial assets and
nonfinancial liabilities measured at fair value in the
SFAS 142 goodwill impairment test, if applicable; and
|
|
|
|
Nonfinancial long-lived assets measured at fair value for
impairment assessment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
|
As a result of the issuance of FSP
FAS 157-2,
the Company did not apply the provisions of SFAS 157 to the
nonfinancial assets and nonfinancial liabilities within the
scope of FSP
FAS 157-2.
E-12
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In October 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3).
This FSP clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key
considerations in the determination of the fair value of a
financial asset when the market for that asset is not active.
The key considerations illustrated in the FSP
FAS 157-3
example include the use of an entitys own assumptions
about future cash flows and appropriately risk-adjusted discount
rates, appropriate risk adjustments for nonperformance and
liquidity risks, and the reliance that an entity should place on
quotes that do not reflect the result of market transactions.
FSP
FAS 157-3
was preceded by a press release that was jointly issued by the
Office of the Chief Accountant of the SEC and the FASB staff on
September 30, 2008 that provides immediate clarification on
fair value accounting based on the measurement guidance of
SFAS 157. FSP
FAS 157-3
was effective upon issuance. The Company applied the guidance
set forth in this FSP in determining the fair value of certain
of its investments at December 31, 2008.
In January 2009, the FASB issued FASB Staff Position (FSP)
EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20.
This FSP amends the impairment guidance in EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets.
The FASB believes this guidance will achieve a more consistent
determination of whether an other-than-temporary impairment has
occurred (OTTI). The FSP also retains and emphasizes
the objective of an other-than-temporary impairment assessment
and the related disclosure requirements in FASB Statement
No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and other related guidance. The
Company applied the guidance set forth in this FSP in
determining both the fair value and OTTI of certain of its
investments at December 31, 2008.
|
|
(p)
|
Future
Adoption of New Accounting Standards
|
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51
(SFAS No. 160). This standard establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the
beginning of the Companys fiscal year beginning after
December 15, 2008. The Company adopted
SFAS No. 160 on January 1, 2009 and does not
expect the adoption to have a material effect on its
consolidated financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)). This standard
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree.
SFAS No. 141(R) also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will become
effective as of the beginning of the Companys fiscal year
beginning after December 15, 2008. The Company will
evaluate the effect that the adoption of
SFAS No. 141(R) will have on its consolidated
financial condition and results of operations on a transaction
by transaction basis as the effect is fact specific.
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142. FSP
FAS 142-3
amends paragraph 11(d) of SFAS 142 to require an
entity to use its own assumptions about renewal or extension of
an arrangement, adjusted for the entity-specific factors in
paragraph 11 of SFAS 142, even when there is likely to
be substantial cost or material modifications. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and
E-13
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
interim periods within those fiscal years, with early adoption
prohibited. The provisions of FSP
FAS 142-3
are to be applied prospectively to intangible assets acquired
after January 1, 2009 for the Company, although the
disclosure provisions are required for all intangible assets
recognized as of or subsequent to January 1, 2009. The
Company adopted FSP
FAS 142-3
on January 1, 2009, and does not expect the adoption to
have a material effect on the Companys consolidated
financial condition and results of operations.
In April 2009, the FASB issued FSP
FAS 115-2,
FAS 124-2,
and
EITF 99-20-b,
Recognition and Presentation of Other-Than-Temporary
Impairments (FSP
FAS 115-2).
FSP
FAS 115-2
includes changes to the guidance for other-than-temporary
impairments (OTTI). Previously, an entity was
required to assess whether it has the intent and ability to hold
a security to recovery in determining whether an impairment of
that security is other-than-temporary. In addition, FSP
FAS 115-2
requires entities to initially apply the provisions of the final
standard to previously other-than-temporarily impaired
instruments existing as of the effective date by making a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The cumulative-effect
adjustment reclassifies the noncredit portion of a previously
other-than-temporarily impaired instrument held as of the
effective date to accumulated other comprehensive net loss from
retained earnings. FSP
FAS 115-2
is effective for interim and annual reporting periods ending
after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. However, FSP
FAS 157-4
and
FSP 115-2
must be adopted concurrently. In addition an entity that elects
to early adopt FSP
FAS 107-1
must early adopt FSP
FAS 157-4
and
FSP 115-2.
The Company adopted the provisions of FSP
FAS 115-2,
on January 1, 2009. See Note 4 Fair
Value of Financial Instruments for further information
about the impact of applying this standard.
The amortized cost and fair value of investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
$
|
4,168
|
|
|
$
|
285
|
|
|
$
|
|
|
|
$
|
4,453
|
|
Mortgage and asset-backed securities
|
|
|
42,671
|
|
|
|
1,409
|
|
|
|
(1,897
|
)
|
|
|
42,183
|
|
Corporate securities
|
|
|
31,182
|
|
|
|
243
|
|
|
|
(1,912
|
)
|
|
|
29,513
|
|
Agency securities
|
|
|
16,501
|
|
|
|
1,303
|
|
|
|
|
|
|
|
17,804
|
|
Municipal securities
|
|
|
6,178
|
|
|
|
120
|
|
|
|
(99
|
)
|
|
|
6,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
100,700
|
|
|
|
3,360
|
|
|
|
(3,908
|
)
|
|
|
100,152
|
|
Equity securities
|
|
|
3,094
|
|
|
|
|
|
|
|
(690
|
)
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,794
|
|
|
$
|
3,360
|
|
|
$
|
(4,598
|
)
|
|
$
|
102,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-14
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
$
|
6,563
|
|
|
$
|
328
|
|
|
$
|
|
|
|
$
|
6,891
|
|
Mortgage and asset-backed securities
|
|
|
57,209
|
|
|
|
949
|
|
|
|
(345
|
)
|
|
|
57,813
|
|
Corporate securities
|
|
|
73,051
|
|
|
|
1,486
|
|
|
|
(340
|
)
|
|
|
74,197
|
|
Agency securities
|
|
|
2,751
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
2,749
|
|
Municipal securities
|
|
|
511
|
|
|
|
5
|
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
140,085
|
|
|
|
2,771
|
|
|
|
(690
|
)
|
|
|
142,166
|
|
Equity securities
|
|
|
3,094
|
|
|
|
718
|
|
|
|
|
|
|
|
3,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,179
|
|
|
$
|
3,489
|
|
|
$
|
(690
|
)
|
|
$
|
145,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of investments in fixed
maturity securities at December 31, 2008, by contractual
maturity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
3,608
|
|
|
$
|
3,583
|
|
Due after one year through five years
|
|
|
21,965
|
|
|
|
24,301
|
|
Due after five years through ten years
|
|
|
27,066
|
|
|
|
26,659
|
|
Due after ten years
|
|
|
3,483
|
|
|
|
3,426
|
|
Mortgage and asset-backed securities
|
|
|
44,578
|
|
|
|
42,183
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,700
|
|
|
$
|
100,152
|
|
|
|
|
|
|
|
|
|
|
The above maturity table includes maturities which may differ
from contractual maturities because borrowers have the right to
call or prepay obligations with or without call or prepayment
penalties.
Proceeds from the sale of available-for-sale fixed maturity
securities for the years ended December 31, 2008 and 2007
were $59,319 and $20,414 respectively.
Net investment income by category of investment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Fixed maturity securities
|
|
$
|
6,902
|
|
|
$
|
7,229
|
|
Equity securities
|
|
|
268
|
|
|
|
74
|
|
Cash and short-term investments
|
|
|
254
|
|
|
|
634
|
|
Other investments
|
|
|
146
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,570
|
|
|
|
7,938
|
|
|
|
|
|
|
|
|
|
|
Investment expenses
|
|
|
(525
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
7,045
|
|
|
$
|
7,444
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, fixed maturity securities of
$4,290 and $2,378, respectively, were on deposit with the
various states where the insurance companies conduct business.
E-15
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The change in net unrealized gains (losses) on investments, and
related tax effect, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unrealized holding gains/(losses) on fixed maturity securities
|
|
$
|
(548
|
)
|
|
$
|
2,081
|
|
Unrealized holding gains (losses) on equity securities
|
|
|
(690
|
)
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,238
|
)
|
|
|
2,799
|
|
Tax effect
|
|
|
435
|
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
(803
|
)
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) on securities, net of tax
|
|
$
|
(2,624
|
)
|
|
$
|
1,435
|
|
|
|
|
|
|
|
|
|
|
The Company has reviewed its mortgage-backed security portfolio
and determined that the majority of these investments are in
pools that are backed by loans made to well-qualified borrowers
or in tranches that have minimal default risk. Predominately,
all of the Companys mortgage-backed securities that were
issued by financial institutions participating in subprime
lending activities are of investment grade quality. However, the
estimated fair values of these investments are subject to
fluctuation and unrealized holding gains and losses are
generally recorded in other comprehensive income. However, if a
decline in fair value is determined to be other-than-temporary,
the cost basis is written down to estimated fair value through
earning. During the year ended December 31, 2007 the
Company recognized $967 in other-than-temporary impairment
losses on certain of its asset-backed fixed maturity securities
that it did not have the intent to hold into a period where
recovery would occur. There were no securities that were
considered other-than-temporarily impaired as of
December 31, 2008. Management believes that the unrealized
losses represent temporary impairment of the securities, as the
Company has the intent and ability to hold these investments
until maturity or market price recovery.
The table below summarizes the gross unrealized losses of fixed
maturity securities as of December 31, 2008 and 2007 based
on the duration that the security has remained in an unrealized
loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
|
|
|
|
|
|
|
|
$
|
7,591
|
|
|
$
|
(1,897
|
)
|
|
$
|
7,591
|
|
|
$
|
(1,897
|
)
|
Corporate securities
|
|
|
1,455
|
|
|
|
(45
|
)
|
|
|
13,265
|
|
|
|
(1,941
|
)
|
|
|
14,720
|
|
|
|
(1,986
|
)
|
Municipal securities
|
|
|
146
|
|
|
|
(4
|
)
|
|
|
1,694
|
|
|
|
(21
|
)
|
|
|
1,840
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
1,601
|
|
|
$
|
(49
|
)
|
|
$
|
22,550
|
|
|
$
|
(3,859
|
)
|
|
$
|
24,151
|
|
|
$
|
(3,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
|
$
|
4,182
|
|
|
$
|
(155
|
)
|
|
$
|
16,919
|
|
|
$
|
(190
|
)
|
|
$
|
21,101
|
|
|
$
|
(345
|
)
|
Corporate securities
|
|
|
11,361
|
|
|
|
(247
|
)
|
|
|
12,359
|
|
|
|
(93
|
)
|
|
|
23,720
|
|
|
|
(340
|
)
|
Agency securities
|
|
|
|
|
|
|
|
|
|
|
895
|
|
|
|
(5
|
)
|
|
|
895
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
15,543
|
|
|
$
|
(402
|
)
|
|
$
|
30,173
|
|
|
$
|
(288
|
)
|
|
$
|
45,716
|
|
|
$
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fixed maturity securities with continuous unrealized losses
for less than 12 months were primarily due to the impact of
higher market interest rates rather than a decline in credit
quality.
|
|
4.
|
Fair
Value of Financial Instruments
|
The Companys estimates of fair value for financial assets
and financial liabilities are based on the framework established
in SFAS No. 157. The framework is based on the inputs
used in valuation and gives the highest priority to quoted
prices in active markets and requires that observable inputs be
used in the valuations
E-16
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
when available. The disclosure of fair value estimates in the
SFAS No. 157 hierarchy is based on whether the
significant inputs into the valuation are observable. In
determining the level of the hierarchy in which the estimate is
disclosed, the highest priority is given to unadjusted quoted
prices in active markets and the lowest priority to unobservable
inputs that reflect the Companys significant market
assumptions. The three levels of the hierarchy are as follows:
Level 1
Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities traded in
active markets. Included are those investments traded on an
active exchange, such as the NASDAQ Global Select Market.
Level 2
Inputs to the valuation methodology include quoted prices for
similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are
observable for the asset or liability and market-corroborated
inputs. Included are investments in U.S. Treasury
securities and obligations of U.S. government agencies,
municipal bonds, corporate debt securities, commercial mortgage
and asset-backed securities and certain residential
mortgage-backed securities.
Level 3
Inputs to the valuation methodology are unobservable for the
asset or liability and are significant to the fair value
measurement. Included are investments in certain illiquid
commercial and residential mortgage-backed securities.
The following table presents the level within the fair value
hierarchy at which the Companys financial assets and
financial liabilities are measured on a recurring basis as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale
|
|
$
|
100,152
|
|
|
$
|
|
|
|
$
|
99,902
|
|
|
$
|
250
|
|
Equity securities
|
|
|
2,404
|
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,556
|
|
|
$
|
2,404
|
|
|
$
|
99,902
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net of accumulated depreciation, consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Automobiles
|
|
$
|
44
|
|
|
$
|
|
|
Leasehold improvements
|
|
|
118
|
|
|
|
110
|
|
Furniture and equipment
|
|
|
360
|
|
|
|
347
|
|
Computer hardware and software
|
|
|
2,938
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,460
|
|
|
|
2,350
|
|
Less: Accumulated depreciation
|
|
|
1,701
|
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
1,759
|
|
|
$
|
1,298
|
|
|
|
|
|
|
|
|
|
|
E-17
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Depreciation expense was $649 and $374 for the years ended
December 31, 2008 and 2007, respectively.
In 2008, the Company recorded a prior period adjustment to
decrease stockholders equity by $135 due to the incorrect
capitalization of certain vendor invoices as internal software
development.
|
|
6.
|
Unpaid
Losses and Loss Expenses
|
The following table provides a reconciliation of the beginning
and ending balances for unpaid losses and loss adjustment
expenses for 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance, January 1,
|
|
$
|
69,814
|
|
|
$
|
104,946
|
|
Less: reinsurance recoverables
|
|
|
12,557
|
|
|
|
28,870
|
|
|
|
|
|
|
|
|
|
|
Net balance, January 1,
|
|
|
57,257
|
|
|
|
76,076
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and loss expenses:
|
|
|
|
|
|
|
|
|
Provision for current year claims
|
|
|
47,179
|
|
|
|
27,361
|
|
Decrease in provision for prior years claims
|
|
|
1,557
|
|
|
|
(24,159
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss expenses
|
|
|
48,736
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
Payment for losses and loss expenses:
|
|
|
|
|
|
|
|
|
Payment on current year claims
|
|
|
(12,504
|
)
|
|
|
(5,159
|
)
|
Payment on prior years claims
|
|
|
(14,805
|
)
|
|
|
(16,862
|
)
|
|
|
|
|
|
|
|
|
|
Total payments for losses and loss expenses
|
|
|
(27,309
|
)
|
|
|
(22,021
|
)
|
|
|
|
|
|
|
|
|
|
Net balance, December 31,
|
|
|
78,684
|
|
|
|
57,257
|
|
Plus: Reinsurance recoverables
|
|
|
13,962
|
|
|
|
12,557
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
|
|
$
|
92,646
|
|
|
$
|
69,814
|
|
|
|
|
|
|
|
|
|
|
The provision for incurred losses and loss adjustment expenses
of the prior years increased in 2008 as a result of the normal
re-estimation process of unpaid loss and loss adjustment
expenses primarily related to the other liability
line of business offset to an extent by the release of unpaid
loss and loss adjustment expenses related to the commercial
multi-peril line of business.
In 2007, the provision for incurred losses and loss adjustment
expenses of prior years decreased as a result of the
Companys enhanced reserve estimation methodology,
principally in the commercial multi-peril, other liability and
products liability lines of business. While within an acceptable
range, there is a significant potential for material deviation
in the Companys loss and loss adjustment expense reserves.
The effect on loss and loss adjustment expense reserves caused
by the change in estimate was $24,159.
Certain premiums and claims are assumed from and ceded to other
insurance companies under various reinsurance agreements.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders and failure of reinsurers to honor
their obligations could result in losses to the Company.
In the ordinary course of business, the Company reinsures a
significant portion of its policies with reinsurance companies
through excess of loss agreements. Such agreements serve to
limit the Companys potential loss from any one risk or
total losses in the aggregate. The Company ceded losses in
excess of $150 from January 1, 1999 through June 30,
2000, in excess of $175 from July 1, 2000 through
December 31,
E-18
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
2000, in excess of $200 during 2001 and 2002, in excess of $225
during 2003 and 2004, in excess of $250 during 2005 and 2006, in
excess of $350 during 2007, and in excess of $250 during 2008.
On December 20, 2007, the Company entered into a 100% Quota
Share Reinsurance Agreement with American Resources Insurance
Company (ARIC). In accordance with the agreement,
the Company assumes all policies written by ARIC, excluding
those issued in the Auto Warranty line of business, with an
effective date on or after October 1, 2007. As of
December 31, 2008 and 2007, the Company had an assumed
premium receivable of $48 and $2,294, respectively, and assumed
reinsurance payable on paid losses and loss adjustment expenses
of $251 and $7, respectively related to this treaty. Subsequent
to December 31, 2007, this agreement was terminated,
effective January 1, 2008.
On February 8, 2008, Kodiak entered into a 100% Quota Share
Reinsurance Agreement with ARIC. In accordance with the
agreement, the Company assumes all policies written by ARIC,
excluding those issued in the Auto Warranty line of business,
with an effective date on or after January 1, 2008.
On July 31, 2008, Kodiak entered into an additional 100%
Quota Share Reinsurance Agreement with ARIC. In accordance with
the agreement, Kodiak assumed the unearned premium on all
policies in force at October 1, 2007, excluding those
issued in the Auto Warranty line of business, and also assumes
the losses arising under such policies occurring on or after
October 1, 2007. This agreement was approved by the
New Jersey Department of Banking and Insurance on
July 17, 2008 and the State of Alabama Insurance Department
on July 28, 2008.
The Company continually evaluates the financial condition of
their reinsurers and monitor concentrations of credit risk
arising from activities or economic characteristics of the
reinsurers to minimize their exposure to significant losses from
future reinsurer insolvencies.
The effect of reinsurance on premiums written and earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Direct
|
|
$
|
89,276
|
|
|
$
|
76,718
|
|
|
$
|
68,838
|
|
|
$
|
62,304
|
|
Assumed
|
|
|
19,036
|
|
|
|
19,141
|
|
|
|
3,959
|
|
|
|
489
|
|
Ceded
|
|
|
(14,697
|
)
|
|
|
(11,759
|
)
|
|
|
(11,204
|
)
|
|
|
(9,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
93,615
|
|
|
$
|
84,100
|
|
|
$
|
61,593
|
|
|
$
|
53,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reinsurance ceded is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
13,962
|
|
|
$
|
12,557
|
|
Prepaid premiums
|
|
|
7,184
|
|
|
|
4,246
|
|
Losses and loss adjustment expenses incurred
|
|
|
6,696
|
|
|
|
(9,182
|
)
|
The Companys Federal income tax return is consolidated
with Brascan (US) Corporation and, on a consolidated basis, had
no Federal income tax liability. The Company is not a party to
any tax allocation or tax sharing agreement at this time. In
accordance with SFAS No. 109, the financial statements
include a provision for Federal income taxes incurred even
though payment of this item was not contractually required. Due
to the absence of a tax allocation or tax sharing agreement, an
offsetting amount was reported through stockholders equity
and deemed as a capital contribution.
E-19
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Significant components of the provision (benefit) for income
taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total current provision (benefit)
|
|
$
|
1,484
|
|
|
$
|
10,988
|
|
Total deferred provision (benefit)
|
|
|
(1,612
|
)
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
(128
|
)
|
|
$
|
12,115
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax computed at the Companys
U.S. Federal statutory rate of 35% to the reported income
tax provision (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Income tax provision at prevailing corporate income tax rates
applied to pretax income
|
|
$
|
302
|
|
|
$
|
12,087
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Nontaxable investment income
|
|
|
(24
|
)
|
|
|
(8
|
)
|
Federal/foreign tax/(benefit) incurred
|
|
|
(411
|
)
|
|
|
|
|
Other
|
|
|
5
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Net income tax (benefit) provision
|
|
$
|
(128
|
)
|
|
$
|
12,115
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset and liabilities are determined using the
enacted tax rates applicable to the period the temporary
differences are expected to be recovered. Accordingly, the
current period income tax provision can be affected by the
enactment of new tax rates. The net deferred income tax asset on
the balance sheet reflects the temporary differences between the
carrying amounts of the assets and liabilities for financial
reporting purposes and income tax purposes, tax effected at a
35% rate. Significant components of the Companys net
deferred tax assets as of December 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unearned premium reserves
|
|
$
|
2,693
|
|
|
$
|
2,027
|
|
Unpaid loss reserves
|
|
|
3,534
|
|
|
|
2,603
|
|
Allowance for doubtful accounts
|
|
|
1,837
|
|
|
|
735
|
|
Net unrealized losses on securities
|
|
|
433
|
|
|
|
|
|
Impairment related losses
|
|
|
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
8,497
|
|
|
|
5,703
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
4,244
|
|
|
|
3,446
|
|
Intangible assets
|
|
|
319
|
|
|
|
368
|
|
Net unrealized gains on securities
|
|
|
|
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
4,563
|
|
|
|
4,793
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
3,934
|
|
|
$
|
910
|
|
|
|
|
|
|
|
|
|
|
E-20
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In assessing the valuation of the deferred tax assets, the
Company considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. No
valuation allowance against deferred tax assets has been
established as the Company believes it is more likely than not
the deferred tax assets will be realized.
At December 31, 2008, the Company had no unused net
operating loss carryforwards or alternative minimum tax credit
carryforwards to offset against future taxable income.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense which were zero as
of December 31, 2008.
|
|
9.
|
Statutory
Financial Statements
|
The insurance companies prepare their statutory financial
statements in accordance with accounting practices prescribed or
permitted by the respective Departments of Insurance in which
they are domiciled (SAP).
Prescribed SAP includes a variety of publications of the
National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations and
general administrative rules. Permitted SAP encompass all other
accounting policies allowed by various departments of insurance.
The consolidated financial statements of the Company and its
subsidiaries have been prepared in accordance with GAAP, which
differ in certain respects from SAP.
The principal differences relate to (1) acquisition costs
incurred in connection with acquiring new and renewal business
are charged to expense under SAP but under GAAP are deferred and
amortized as the related premiums are earned;
(2) limitations on net deferred tax assets created by the
tax effects of temporary differences; (3) loss and loss
adjustment expense and unearned premium reserves are presented
gross of reinsurance with a corresponding asset recorded; and
(4) fixed maturity securities that qualify as available
-for-sale
are carried at fair value and changes in fair value are
reflected directly in stockholders equity, net of related
deferred taxes.
Statutory basis surplus and statutory basis net income of the
Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
|
|
|
GAAP
|
|
|
Statutory
|
|
|
GAAP
|
|
|
|
Surplus
|
|
|
Equity
|
|
|
Net Income
|
|
|
Net Income
|
|
|
As of and for the year ended December 31, 2008
|
|
$
|
73,428
|
|
|
$
|
89,888
|
|
|
$
|
1,317
|
|
|
$
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2007
|
|
$
|
76,871
|
|
|
$
|
89,760
|
|
|
$
|
30,876
|
|
|
$
|
22,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preferred stock was cancelled on August 5, 2008 and
consisted of 385 shares at a par value of $7.792. Upon
cancellation of the preferred stock, the total par value of
$3,000 was contributed as additional paid in capital.
The annual dividend rate of the preferred stock had been 4%. The
liquidation value of the preferred stock was $7.792 per share
plus unpaid cumulative preferred dividends. Each convertible
preferred shareholder had the right at any time and from time to
time to convert all or any part of the convertible preferred
shares held by such shareholder into common shares on the basis
of one (1) common share for each convertible preferred
share converted into a common share, all such common shares
issued to the holder of convertible preferred shares on such
conversion to be fully paid and non-assessable shares.
E-21
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
11.
|
Dividend
Restrictions
|
Insurance companies are required by law to maintain certain
minimum surplus on a statutory basis, and are subject to
risk-based capital requirements and to regulations under which
payment of a dividend from statutory surplus is restricted and
may require prior approval of regulatory authorities. Applying
the current regulatory restrictions as of December 31,
2008, and to the extent that statutorily defined surplus is
available, $7,455 would be available for distribution without
prior approval. Distribution by the Insurance Companies of the
excess of GAAP stockholders equity over statutory capital
and surplus to the Company is prohibited by law.
The Company did not declare or pay any dividends on common stock
during the year ended December 31, 2008. The Company
declared and paid dividends on common stock of $5,072 during the
year ended December 31, 2007.
Insurance companies are subject to certain risk-based capital
(RBC) requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus maintained
by a property and casualty insurance company is to be determined
based on the various risk factors related to it. At
December 31, 2008 and 2007, each of the insurance companies
met or exceeded its minimum RBC requirements.
|
|
13.
|
Retirement
Benefit Plan
|
The Company maintains a defined contribution plan pursuant to
Section 401(k) of the Internal Revenue Code for all
employees. The Company matches an amount equal to one hundred
percent of each participating employees pretax
contribution to a maximum of 4% of annual gross salary. The
Companys contributions to the plan for 2008 and 2007 were
$259 and $133, respectively.
The Company and its subsidiary lease office space suitable to
conduct its operations, including its home office in White
Plains, New York, and office facilities in Atlanta, Georgia ,
Glastonbury, Connecticut and Mobile, Alabama under varying terms
and expiration dates. These leases are considered operating
leases for financial reporting purposes. Some of these leases
have options to extend the length of the leases and contain
clauses for cost of living, operating expense and real estate
tax adjustments. Rental expense was $642 and $436 in 2008 and
2007, respectively.
At December 31, 2008, future minimum lease payments under
non-cancelable real estate leases (without provisions for
sublease income) are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2009
|
|
$
|
595
|
|
2010
|
|
|
506
|
|
2011
|
|
|
474
|
|
2012
|
|
|
57
|
|
|
|
|
|
|
Total
|
|
$
|
1,632
|
|
|
|
|
|
|
Certain rental commitments have renewal options extending
through the year 2011. Some of these renewals are subject to
adjustments in future periods.
E-22
HIG,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
15.
|
Related
Party Transactions
|
For the years ended December 31, 2008 and 2007, written
premiums of $1,731 and $1,859, respectively, with related
commissions of $381 and $409, respectively, were produced by an
entity for which one of its principals is on the Companys
Board of Directors. At December 31, 2008 and 2007, amounts
included in premiums receivable from this entity were $186 and
$174, respectively.
The Company is involved in litigation in the claims settlement
process in the normal course of business. However, the Company
is not subject to any current or pending legal proceedings that
management believes are likely to have a material adverse effect
on the accompanying financial statements.
On August 27, 2008, the shareholders of the Company signed
a Stock Purchase Agreement with CastlePoint Reinsurance Company,
Ltd. (CastlePoint), a subsidiary of Tower Group,
Inc. (Tower) to sell all outstanding shares of the
Company to CastlePoint. The transaction received all of the
required regulatory approvals and closed on February 27,
2009. Under the terms of the Stock Purchase Agreement, dated
August 27, 2008 and amended February 23, 2009,
CastlePoint acquired the Company for approximately
$130 million.
E-23
Annex F
Hermitage
Insurance Company and Subsidiary
Consolidated
Financial Statements
Years Ended December 31, 2007 and 2006 and
Periods from June 3, 2005 to December 31, 2005
(Successor)
and January 1, 2005 to June 2, 2005
(Predecessor)
F-1
Hermitage
Insurance Company and Subsidiary
Contents
|
|
|
|
|
|
|
|
F-3
|
|
Consolidated financial statements:
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8-F-24
|
|
F-2
Independent
Auditors Report
To the Board of Directors of
Hermitage Insurance Company and Subsidiary
We have audited the consolidated balance sheets of Hermitage
Insurance Company and Subsidiary (the Company) as of
December 31, 2007, 2006, and 2005 and the related
consolidated statements of operations and comprehensive income
(loss), changes in stockholders equity and cash flows for
the years ended December 31, 2007 and 2006. We have also
audited the accompanying consolidated statements of operations
and comprehensive income (loss), changes in stockholders
equity and cash flows for the periods January 1, 2005
through June 2, 2005 and June 3, 2005 through
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hermitage Insurance Company and Subsidiary as of
December 31, 2007, 2006 and 2005 and the results of
operations and cash flows for the years ended December 31,
2007 and 2006 and for the periods January 1, 2005 through
June 2, 2005 and June 3, 2005 through
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 6 to the consolidated financial
statements, the Companys loss and loss adjustment expense
reserves have been actuarially determined to be within an
acceptable range. However, there is a significant potential for
material deviation therein, as a result of a change implemented
during 2007 in the Companys reserve estimation
methodology, when combined with the relatively small volume of
reserves, and the frequency and severity of loss within two of
its lines of businesses.
/s/ Amper,
Politziner & Mattia, LLP
September 15, 2008
Edison, New Jersey
F-3
Hermitage
Insurance Company and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(000s omitted, except share and
|
|
|
|
per share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
available-for-sale,
at fair value (amortized cost: 2007 $140,085;
2006 $136,116; 2005-$121,154)
|
|
$
|
142,166
|
|
|
$
|
136,114
|
|
|
$
|
120,313
|
|
Common stock,
available-for-sale,
at fair value (cost $3,094 2007, 2006 and 2005)
|
|
|
3,812
|
|
|
|
3,688
|
|
|
|
3,250
|
|
Short-term investments, at cost, which approximates fair value
|
|
|
4,765
|
|
|
|
1,442
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
150,743
|
|
|
|
141,244
|
|
|
|
123,585
|
|
Cash and cash equivalents
|
|
|
14,509
|
|
|
|
7,481
|
|
|
|
9,210
|
|
Accrued investment income
|
|
|
1,431
|
|
|
|
1,441
|
|
|
|
1,325
|
|
Premiums receivable (net of allowance: 2007-$2,100; 2006-$1,100;
2005-$1,100)
|
|
|
9,946
|
|
|
|
6,342
|
|
|
|
5,909
|
|
Reinsurance recoverable on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss expenses
|
|
|
490
|
|
|
|
1,311
|
|
|
|
(56
|
)
|
Unpaid losses and loss expenses
|
|
|
12,557
|
|
|
|
28,870
|
|
|
|
29,374
|
|
Deferred policy acquisition costs
|
|
|
9,847
|
|
|
|
6,273
|
|
|
|
5,178
|
|
Prepaid reinsurance premiums
|
|
|
4,246
|
|
|
|
2,663
|
|
|
|
3,479
|
|
Deferred tax asset, net
|
|
|
910
|
|
|
|
2,762
|
|
|
|
3,665
|
|
Intangible assets, net
|
|
|
1,050
|
|
|
|
1,190
|
|
|
|
1,330
|
|
Fixed assets, net
|
|
|
1,298
|
|
|
|
714
|
|
|
|
111
|
|
Other assets
|
|
|
158
|
|
|
|
188
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
207,185
|
|
|
$
|
200,479
|
|
|
$
|
183,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses
|
|
$
|
69,814
|
|
|
$
|
104,946
|
|
|
$
|
104,127
|
|
Unearned premiums
|
|
|
33,233
|
|
|
|
23,229
|
|
|
|
20,379
|
|
Commissions payable
|
|
|
1,236
|
|
|
|
3,036
|
|
|
|
2,640
|
|
Accounts payable and accrued expenses
|
|
|
2,918
|
|
|
|
2,283
|
|
|
|
2,778
|
|
Income taxes payable
|
|
|
411
|
|
|
|
411
|
|
|
|
393
|
|
Reinsurance payable
|
|
|
8,781
|
|
|
|
5,136
|
|
|
|
2,754
|
|
Other liabilities
|
|
|
1,032
|
|
|
|
1,494
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
117,425
|
|
|
|
140,535
|
|
|
|
133,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $2,832 per share: authorized, issued and
outstanding 1,095 shares
|
|
|
3,101
|
|
|
|
3,101
|
|
|
|
3,101
|
|
Preferred stock, par value $7,792 per share: authorized, issued
and outstanding 385 shares
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Additional paid-in capital
|
|
|
66,948
|
|
|
|
55,913
|
|
|
|
53,056
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,281
|
|
|
|
(154
|
)
|
|
|
(983
|
)
|
Retained earnings (deficit)
|
|
|
15,430
|
|
|
|
(1,916
|
)
|
|
|
(8,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
89,760
|
|
|
|
59,944
|
|
|
|
49,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,185
|
|
|
$
|
200,479
|
|
|
$
|
183,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Hermitage
Insurance Company and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3,
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
2005 to
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2005 to June 2,
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
53,172
|
|
|
$
|
44,268
|
|
|
$
|
23,275
|
|
|
$
|
17,074
|
|
Net investment income
|
|
|
7,444
|
|
|
|
6,136
|
|
|
|
2,603
|
|
|
|
1,635
|
|
Realized (losses) gains on sales of investments
|
|
|
(893
|
)
|
|
|
(484
|
)
|
|
|
(15
|
)
|
|
|
736
|
|
Other revenues
|
|
|
|
|
|
|
61
|
|
|
|
137
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
59,723
|
|
|
|
49,981
|
|
|
|
26,000
|
|
|
|
19,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
3,202
|
|
|
|
21,667
|
|
|
|
21,221
|
|
|
|
1,645
|
|
Commissions
|
|
|
11,118
|
|
|
|
10,907
|
|
|
|
5,670
|
|
|
|
4,041
|
|
Operating expenses
|
|
|
10,870
|
|
|
|
7,493
|
|
|
|
5,966
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
25,190
|
|
|
|
40,067
|
|
|
|
32,857
|
|
|
|
7,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for Federal income
taxes
|
|
|
34,533
|
|
|
|
9,914
|
|
|
|
(6,857
|
)
|
|
|
12,006
|
|
Provision (benefit) for Federal income taxes
|
|
|
12,115
|
|
|
|
3,352
|
|
|
|
(2,609
|
)
|
|
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
22,418
|
|
|
|
6,562
|
|
|
|
(4,248
|
)
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on securities
available-for-sale
|
|
|
856
|
|
|
|
351
|
|
|
|
(987
|
)
|
|
|
(1,086
|
)
|
Reclassification adjustment for losses (gains) included in
earnings
|
|
|
579
|
|
|
|
478
|
|
|
|
4
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
23,853
|
|
|
$
|
7,391
|
|
|
$
|
(5,231
|
)
|
|
$
|
7,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Hermitage
Insurance Company and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2007 and 2006 and Periods from
June 3, 2005 to December 31, 2005 (successor) and
January 1, 2005 to June 2, 2005 (Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Predecessor company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005
|
|
|
1,095
|
|
|
$
|
3,101
|
|
|
|
385
|
|
|
$
|
3,000
|
|
|
$
|
10,454
|
|
|
$
|
1,151
|
|
|
$
|
23,915
|
|
|
$
|
41,621
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(612
|
)
|
|
|
|
|
|
|
(612
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 2, 2005
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
10,454
|
|
|
|
539
|
|
|
|
32,248
|
|
|
|
49,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 3, 2005
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
10,454
|
|
|
|
539
|
|
|
|
32,248
|
|
|
|
49,342
|
|
Paid-in capital change in ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,187
|
|
|
|
(539
|
)
|
|
|
(32,248
|
)
|
|
|
1,400
|
|
Deferred tax related to intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(490
|
)
|
|
|
(490
|
)
|
Additional contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Deemed contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,415
|
|
|
|
|
|
|
|
|
|
|
|
1,415
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(983
|
)
|
|
|
|
|
|
|
(983
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,248
|
)
|
|
|
(4,248
|
)
|
Prior period tax adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,740
|
)
|
|
|
(3,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
53,056
|
|
|
|
(983
|
)
|
|
|
(8,478
|
)
|
|
|
49,696
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829
|
|
|
|
|
|
|
|
829
|
|
Deemed contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
|
2,857
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,562
|
|
|
|
6,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
1,095
|
|
|
|
3,101
|
|
|
|
385
|
|
|
|
3,000
|
|
|
|
55,913
|
|
|
|
(154
|
)
|
|
|
(1,916
|
)
|
|
|
59,944
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
|
|
|
|
|
|
1,435
|
|
Deemed contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,035
|
|
|
|
|
|
|
|
|
|
|
|
11,035
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,418
|
|
|
|
22,418
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,072
|
)
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
1,095
|
|
|
$
|
3,101
|
|
|
|
385
|
|
|
$
|
3,000
|
|
|
$
|
66,948
|
|
|
$
|
1,281
|
|
|
$
|
15,430
|
|
|
$
|
89,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
Hermitage
Insurance Company and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 3, 2005 to
|
|
|
January 1, 2005 to
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 2,
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
(000s omitted, except share and per share data)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
22,418
|
|
|
$
|
6,562
|
|
|
$
|
(4,248
|
)
|
|
$
|
8,333
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of bond discount
|
|
|
149
|
|
|
|
499
|
|
|
|
434
|
|
|
|
394
|
|
Amortization of intangible assets
|
|
|
140
|
|
|
|
140
|
|
|
|
70
|
|
|
|
|
|
Depreciation of fixed assets
|
|
|
374
|
|
|
|
164
|
|
|
|
55
|
|
|
|
58
|
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
6
|
|
|
|
4
|
|
|
|
4
|
|
Realized (losses) gains on sales of investments
|
|
|
893
|
|
|
|
484
|
|
|
|
15
|
|
|
|
(736
|
)
|
Income taxes incurred but not paid
|
|
|
12,115
|
|
|
|
3,352
|
|
|
|
(2,609
|
)
|
|
|
3,673
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest income
|
|
|
10
|
|
|
|
(116
|
)
|
|
|
(101
|
)
|
|
|
(207
|
)
|
Premiums receivable
|
|
|
(3,604
|
)
|
|
|
(433
|
)
|
|
|
968
|
|
|
|
(300
|
)
|
Reinsurance recoverable
|
|
|
17,134
|
|
|
|
(863
|
)
|
|
|
(6,063
|
)
|
|
|
1,691
|
|
Deferred policy acquisition costs
|
|
|
(3,574
|
)
|
|
|
(1,095
|
)
|
|
|
263
|
|
|
|
154
|
|
Prepaid reinsurance premium
|
|
|
(1,583
|
)
|
|
|
816
|
|
|
|
(232
|
)
|
|
|
840
|
|
Other assets
|
|
|
30
|
|
|
|
56
|
|
|
|
(23
|
)
|
|
|
105
|
|
Unpaid losses and loss expenses
|
|
|
(35,132
|
)
|
|
|
819
|
|
|
|
19,125
|
|
|
|
(7,115
|
)
|
Unearned premiums
|
|
|
10,004
|
|
|
|
2,850
|
|
|
|
(294
|
)
|
|
|
(2,121
|
)
|
Commissions payable
|
|
|
(1,800
|
)
|
|
|
396
|
|
|
|
379
|
|
|
|
(281
|
)
|
Accounts payable and accrued expenses
|
|
|
635
|
|
|
|
(495
|
)
|
|
|
2,337
|
|
|
|
(708
|
)
|
Reinsurance payable
|
|
|
3,645
|
|
|
|
2,382
|
|
|
|
(802
|
)
|
|
|
502
|
|
Other liabilities
|
|
|
(462
|
)
|
|
|
907
|
|
|
|
(265
|
)
|
|
|
274
|
|
Miscellaneous
|
|
|
12
|
|
|
|
(14
|
)
|
|
|
(251
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,404
|
|
|
|
16,417
|
|
|
|
8,762
|
|
|
|
4,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of fixed maturity securities
|
|
|
20,414
|
|
|
|
65,085
|
|
|
|
17,877
|
|
|
|
4,156
|
|
Sale of equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,192
|
|
Purchase of fixed maturity securities
|
|
|
(25,437
|
)
|
|
|
(81,038
|
)
|
|
|
(32,029
|
)
|
|
|
(9,772
|
)
|
Purchase of equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,094
|
)
|
Net (purchases) sales of short-term investments
|
|
|
(3,323
|
)
|
|
|
(1,420
|
)
|
|
|
118
|
|
|
|
(120
|
)
|
Purchase of fixed assets
|
|
|
(958
|
)
|
|
|
(773
|
)
|
|
|
(21
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,304
|
)
|
|
|
(18,146
|
)
|
|
|
(14,055
|
)
|
|
|
(4,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,028
|
|
|
|
(1,729
|
)
|
|
|
1,707
|
|
|
|
(12
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
7,481
|
|
|
|
9,210
|
|
|
|
7,503
|
|
|
|
7,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,509
|
|
|
$
|
7,481
|
|
|
$
|
9,210
|
|
|
$
|
7,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of pushed down accounting related to capital contribution
of intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
Hermitage
Insurance Company and Subsidiary
Notes to
Consolidated Financial Statements
(000s omitted, except share and per share
data)
The consolidated financial statements of Hermitage Insurance
Company (the Company) include its accounts and those
of its wholly-owned insurance subsidiary company, Kodiak
Insurance Company (Kodiak).
The Company was incorporated in the State of New York in 1984,
to underwrite commercial property and liability risks. Business
is received from a number of excess and surplus lines wholesale
producers. The Company is domiciled in New York, is admitted in
New York, Georgia, New Jersey, Pennsylvania, and Rhode Island
and qualifies as an approved non-admitted insurer in thirty-one
additional states.
Pursuant to a transaction that closed on June 3, 2005, the
Company was purchased by 2005662 Ontario Limited (Ontario
Limited), a wholly-owned subsidiary of Brookfield Asset
Management, each of which are incorporated in the Province of
Ontario, Canada. As part of the transaction, Brookfield Asset
Management, formerly Brascan Corporation, acquired the Company
and its subsidiaries, Kodiak and Vantage Data Corporation
(Vantage Data). The acquisition was approved by the
State of New York Insurance Department on March 18, 2005
and the State of New Jersey Department of Banking and Insurance
on April 7, 2005.
On December 21, 2005, the Company was conveyed from Ontario
Limited to Brookfield Asset Management. On December 22,
2005, the Company was transferred from Brookfield Asset
Management to Brascan US Holdings, Inc., a wholly-owned
subsidiary of Brookfield Asset Management incorporated in the
Province of Ontario, Canada. On December 31, 2005, the
Company was transferred from Brascan US Holdings, Inc. to
Brookfield US Corporation, a wholly-owned subsidiary of
Brookfield Asset Management incorporated in the State of
Delaware.
In 1997, the Company purchased 100% of the outstanding stock of
Kodiak for $2,500 and subsequently contributed additional
capital in the form of cash and investments with a cost of
$3,113. The acquisition was approved by the State of New Jersey
Department of Banking and Insurance on November 24, 1997.
On December 31, 2007, the Company accrued a surplus
contribution to Kodiak in the amount of $5,100. This transaction
was submitted to the New York State Insurance Department for
approval and was ultimately settled on February 5, 2008.
Kodiak is domiciled in the State of New Jersey and is licensed
to write certain property and casualty lines in New Jersey.
As a result of Ontario Limiteds acquisition of ownership
interest of the Company, the Company adopted the push
down method of accounting effective June 3, 2005.
Under this method, and in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations, the assets and liabilities of
the Company were revalued to reflect Ontario Limiteds cost
basis, which is based on the fair values of such assets and
liabilities on the date Ontario Limiteds ownership
interests were acquired. In accordance with
SFAS No. 141, the cost of the acquisition was
allocated to assets acquired and liabilities assumed based on
the fair values as of the close of acquisition. As a result, the
Company recorded intangible assets in the amount of $1,400. No
other adjustments were made to the carrying value of other
assets or
F-8
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
liabilities. The effect of the use of the push down accounting
as a result of Ontario Limiteds acquisition of common
stock is as follows:
|
|
|
|
|
Assets:
|
|
|
|
|
Investments
|
|
$
|
111,374
|
|
Cash
|
|
|
7,503
|
|
Accounts receivable, net
|
|
|
6,877
|
|
Reinsurance recoverable
|
|
|
23,256
|
|
Deferred policy acquisition costs
|
|
|
5,441
|
|
Prepaid insurance premiums
|
|
|
3,247
|
|
Deferred tax asset
|
|
|
3,690
|
|
Intangible assets
|
|
|
1,400
|
|
Fixed assets, net
|
|
|
149
|
|
Other assets
|
|
|
1,445
|
|
|
|
|
|
|
Total assets
|
|
|
164,382
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Unpaid losses and loss expenses
|
|
|
85,002
|
|
Unearned premiums
|
|
|
20,673
|
|
Other liabilities
|
|
|
7,965
|
|
|
|
|
|
|
Total liabilities
|
|
|
113,640
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
50,742
|
|
|
|
|
|
|
The effect of the new basis of accounting and acquisition of
common stock on the Companys equity was recorded through
additional paid-in capital. For purposes of identification and
description, the Company is referred to as
Predecessor for the period from January 1, 2005
to June 2, 2005 and as Successor for the period
from June 3, 2005 to December 31, 2005.
|
|
3.
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation
|
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America and reflect the consolidated accounts
of the Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated.
|
|
(b)
|
Basis
of Presentation
|
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change
in the future, as more information becomes known which could
impact the amounts reported and disclosed herein.
F-9
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
All of the Companys fixed maturity and equity securities
are classified as available-for-sale securities, and are stated
at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of
stockholders equity, net of applicable deferred taxes.
The Company does not invest in, hold or issue any derivative
financial instruments.
Premium and discount amounts are amortized into income based on
the stated contractual lives of the securities. The Company
recognizes income for the mortgage-backed and asset-backed bond
portion of its fixed maturity securities portfolio using the
constant effective yield method.
Net investment income, consisting of interest and dividends, net
of investment expense, is recognized when earned. Realized gains
and losses on investments are recognized when investments are
sold or redeemed on a specific identification basis.
|
|
(e)
|
Cash
and Cash Equivalents
|
Cash and cash equivalents are carried at cost, which
approximates their fair values. Investments having an original
maturity of less than one year at the date of acquisition are
classified as short-term investments. Securities having
maturities of less than three months are classified as cash
equivalents.
Premiums including amounts related to ceded reinsurance are
earned pro rata over the terms of the policies. The reserve for
unearned premiums is determined on a daily pro-rata basis.
|
|
(g)
|
Deferred
Policy Acquisition Costs
|
Deferred policy acquisition costs are costs that vary with and
are primarily related to the production of new and renewal
business. Such costs include commissions, premium taxes and
certain underwriting and policy issuance costs which are
deferred when incurred and amortized to expense as the related
written premiums are earned.
|
|
(h)
|
Losses
and Loss Expenses
|
The Companys reserves for loss and loss adjustment
expenses include a) estimates for claims reported prior to
the close of the accounting period, b) estimates for claims
incurred but not reported as of the close of the accounting
period, c) development of claims paid
and/or
reported prior to the close of the accounting period and
d) deductions for anticipated reinsurance recoverables
related to these items.
Losses and loss adjustment expenses represent the estimated
ultimate net cost of all reported and unreported amounts
incurred through December 31 of each period presented. The
Company does not discount loss and loss adjustment expense
reserves. The reserves for unpaid losses and loss adjustment
expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the
effects of trends in loss severity and frequency, and were based
on the best data available to the Company; however, due to the
size of the Company and its limited spread of risk, those
estimates are subject to a significant degree of inherent
variability. Those estimates are continually reviewed and
adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current
operations. Although management believes that the estimates of
the reserves for unpaid losses and loss adjustment expenses at
December 31, 2007, 2006, and 2005 are reasonable in the
circumstances, it is possible that the Companys actual
incurred losses and loss adjustment expenses not conform to the
assumptions inherent in the determination of the reserves;
accordingly, the ultimate settlement of losses and loss
adjustment
F-10
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
expenses may vary significantly from the estimates included in
the Companys financial statements. The Company does not
reserve for salvage and subrogation recoveries.
Reinsurance premiums ceded are charged against income ratably
over the life of the contract. Amounts recoverable from
reinsurers are estimated in a manner consistent with the
liability for unpaid losses and loss adjustment expenses
associated with the reinsured policies. Reserves for losses and
loss adjustment expenses and unearned premiums ceded to
reinsurers have been reported as assets in the consolidated
balance sheets. Amounts shown in the accompanying consolidated
statements of operations and comprehensive income (loss) for
earned premiums, losses and loss adjustment expenses,
commissions and operating expenses include both direct and
assumed business and are presented net of reinsurance ceded.
Depreciation on leasehold improvements is computed using the
straight-line method over the lease term. Depreciation on
furniture and equipment, computer hardware and software is
computed using the straight-line method over the estimated
useful lives of three years.
Expenditures for major renewals and betterments are capitalized,
and expenditures for maintenance and repairs are charged to
income as incurred. When fixed assets are retired, or otherwise
disposed of, the cost thereof and related accumulated
depreciation are eliminated from the accounts. Any gain or loss
on disposal is credited or charged to operations.
The Company accounts for income taxes using the liability
method. Accordingly, deferred tax assets and deferred tax
liabilities are recognized for the future tax consequences
attributable to the difference between the financial reporting
and tax bases of assets and liabilities using enacted tax rates
expected to apply in the years in which the differences are
expected to reverse.
The Companys acquisition by Ontario Limited in June 2005
resulted in additional intangibles of $1,400. The Company
recorded the intangibles and additional paid-in capital for this
amount in accordance with SFAS No. 141. The intangibles
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
Distribution network
|
|
$
|
300
|
|
|
5 years
|
Trade names
|
|
|
400
|
|
|
Indefinite
|
Software
|
|
|
400
|
|
|
5 years
|
State licenses
|
|
|
300
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
Intangible assets
|
|
$
|
1,400
|
|
|
$
|
1,400
|
|
|
$
|
1,400
|
|
Accumulated amortization
|
|
|
(350
|
)
|
|
|
(
210
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,050
|
|
|
$
|
1,190
|
|
|
$
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
The Company recorded amortization expense of $140 in 2007 and
2006 and $70 during the period from June 3, 2005 to
December 31, 2005.
The Company performs an annual impairment analysis to identify
potential impairment related to indefinite life intangible
assets and measures the amount of impairment loss, if any, to be
recognized. This annual test is performed on December 31 of each
year or more frequently if events or circumstances change that
require the Company to perform the impairment analysis on an
interim basis.
|
|
(m)
|
Other
Comprehensive Income (Loss)
|
Other comprehensive income (loss) consists of net unrealized
investment gains or losses on available-for-sale securities and
is presented separately in Note 4. These amounts are
reported net of deferred income taxes.
|
|
(n)
|
Fair
Value of Financial Instruments
|
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, premium receivables and accounts
payable approximate those assets and liabilities fair values due
to the short-term nature of the instruments. The fair value of
investments is addressed in Note 4.
|
|
(o)
|
New
Accounting Pronouncements
|
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
an amendment of FASB Statements No. 133 and 140.
SFAS No. 155 requires that beneficial interests in
securitized financial assets be analyzed to determine whether
they are freestanding derivatives or hybrid instruments that
contain an embedded derivative requiring bifurcation and permits
entities to fair value any hybrid financial instrument that
contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 is effective for all
financial instruments acquired, issued or subject to a
remeasurement (new basis) event occurring after the beginning of
an entitys fiscal year that begins after
September 15, 2006. In January 2007, the FASB released
Statement 133 Implementation Issue No. B40, Embedded
Derivatives: Application of Paragraph 13(b) to Securitized
Interests in Prepayable Financial Assets
(B40). Implementation Issue No. B40 provides a
limited scope exception from paragraph 13(b) of
SFAS No. 133 for securitized interests that contain
only an embedded derivative that is tied to the prepayment risk
of the underlying prepayable financial assets if certain
criteria are met. Implementation Issue No. B40 is effective
upon the adoption of SFAS No. 155 with certain exceptions.
The Company adopted SFAS No. 155 effective
January 1, 2007 and it did not have a material impact on
its financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)
(FIN 48) to be effective for fiscal years
beginning after December 15, 2007. FIN 48 sets forth
criteria for recognition and measurement of tax positions taken
or expected to be taken in a tax return. FIN 48 requires that
companies recognize the impact of a tax position if that
position is more likely than not of being sustained
on audit, based on the technical merits of the position. FIN 48
also provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods and
disclosure. The Company does not believe the adoption will have
a material impact on its financial condition and results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and enhances
disclosures about fair value measurements.
SFAS No. 157 applies when other accounting
pronouncements require fair value measurements; it does not
require new fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim
F-12
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
periods within those fiscal years. The Company does not believe
the adoption will have a material impact on its financial
condition or results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, which provides reporting entities an option
to report selected financial assets, including investment
securities designated as available-for-sale, and liabilities,
including most insurance contracts, at fair value.
SFAS No. 159 establishes presentation and disclosure
requirements designed to facilitate comparisons between
companies that choose different measurement attributes for
similar types of assets and liabilities. The standard also
requires additional information to aid financial statement
users understanding of a reporting entitys choice to
use fair value on its earnings and also requires entities to
display on the face of the balance sheet the fair value of those
assets and liabilities which the reporting entity has chosen to
measure at fair value. SFAS No. 159 is effective as of
the beginning of a reporting entitys first fiscal year
beginning after November 15, 2007. The Company has elected
not to apply the provisions of SFAS No. 159 to its
eligible financial assets and financial liabilities on the date
of the adoption. Accordingly, the initial application of
SFAS No. 159 has no effect on the Company.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141 (R)
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in any business combination or a
gain from any bargain purchase. SFAS No. 141(R) also
sets forth the disclosures required to be made in the financial
statements to evaluate the nature and financial effects of any
business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the
Company to business combinations occurring on or after
January 1, 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51.
SFAS No. 160 establishes accounting and reporting
standards that require that the ownership interests in
subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the
parents equity; the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated
statement of income; and changes in a parents ownership
interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently.
SFAS No. 160 also requires that any retained
noncontrolling equity investment in the former subsidiary be
initially measured at fair value when a subsidiary is
deconsolidated. SFAS No. 160 also sets forth the
disclosure requirements to identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 applies to all entities that
prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary. SFAS No. 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. SFAS No. 160 must be
applied prospectively as of the beginning of the fiscal year in
which SFAS No. 160 is initially applied, except for
the presentation and disclosure requirements. The presentation
and disclosure requirements are applied retrospectively for all
periods presented. The Company does not have any noncontrolling
interests and, therefore, does not believe the adoption will
have a material impact on its financial condition or results of
operations.
In September 2006, the Securities and Exchange Commission (the
SEC) released SEC Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, which addresses how
uncorrected errors in previous years should be considered when
quantifying errors in current-year financial statements.
SAB No. 108 requires registrants to consider the
effect of all carry-over and reversing effects of prior year
misstatements when quantifying
F-13
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
errors in current year financial statements.
SAB No. 108 does not change the SEC staffs
previous guidance on evaluation of the materiality of errors. It
allows registrants to record the effects of adopting the
guidance as a cumulative effect adjustment to retained earnings.
This adjustment must be reported as of the beginning of the
first fiscal year ending after November 15, 2007
(January 1, 2006 for calendar year-end companies in either
the 2006 year-end
Form 10-K
or third quarter
Form 10-Q).
The adoption of SAB No. 108 did not have a material
impact on the financial condition or results of operations of
the Company.
Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts
(SOP 05-1),
became effective January 1, 2007.
SOP 05-1
provides guidance on accounting for deferred acquisition costs
on internal replacements of insurance and investment contracts
other than those specifically described in
SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of
Investments.
SOP 05-1
defines an internal replacement as a modification in product
benefits, features, rights, or coverage that occurs by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract. The adoption of
SOP 05-1
did not have a material impact on the financial condition or
results of operations of the Company.
The amortized cost and fair value of investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
$
|
6,563
|
|
|
$
|
328
|
|
|
$
|
|
|
|
$
|
6,891
|
|
Mortgage and asset-backed securities
|
|
|
57,209
|
|
|
|
949
|
|
|
|
(345
|
)
|
|
|
57,813
|
|
Corporate securities
|
|
|
73,051
|
|
|
|
1,486
|
|
|
|
(340
|
)
|
|
|
74,197
|
|
Agency securities
|
|
|
2,751
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
2,749
|
|
Municipal securities
|
|
|
511
|
|
|
|
5
|
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
140,085
|
|
|
|
2,771
|
|
|
|
(690
|
)
|
|
|
142,166
|
|
Equity securities
|
|
|
3,094
|
|
|
|
718
|
|
|
|
|
|
|
|
3,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,179
|
|
|
$
|
3,489
|
|
|
$
|
(690
|
)
|
|
$
|
145,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
$
|
7,233
|
|
|
$
|
54
|
|
|
$
|
(44
|
)
|
|
$
|
7,243
|
|
Mortgage and asset-backed securities
|
|
|
53,130
|
|
|
|
479
|
|
|
|
(525
|
)
|
|
|
53,084
|
|
Corporate securities
|
|
|
69,265
|
|
|
|
612
|
|
|
|
(473
|
)
|
|
|
69,404
|
|
Agency securities
|
|
|
5,946
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
5,831
|
|
Municipal securities
|
|
|
542
|
|
|
|
10
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
136,116
|
|
|
|
1,155
|
|
|
|
(1,157
|
)
|
|
|
136,114
|
|
Equity securities
|
|
|
3,094
|
|
|
|
594
|
|
|
|
|
|
|
|
3,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,210
|
|
|
$
|
1,749
|
|
|
$
|
(1,157
|
)
|
|
$
|
139,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
$
|
10,478
|
|
|
$
|
10
|
|
|
$
|
(168
|
)
|
|
$
|
10,320
|
|
Mortgage and asset-backed securities
|
|
|
24,851
|
|
|
|
73
|
|
|
|
(491
|
)
|
|
|
24,433
|
|
Corporate securities
|
|
|
85,825
|
|
|
|
468
|
|
|
|
(733
|
)
|
|
|
85,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
121,154
|
|
|
|
551
|
|
|
|
(1,392
|
)
|
|
|
120,313
|
|
Equity securities
|
|
|
3,094
|
|
|
|
167
|
|
|
|
(11
|
)
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124,248
|
|
|
$
|
718
|
|
|
$
|
(1,403
|
)
|
|
$
|
123,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of investments in fixed
maturity securities at December 31, 2007, by contractual
maturity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
9,375
|
|
|
$
|
9,352
|
|
Due after one year through five years
|
|
|
40,292
|
|
|
|
40,829
|
|
Due after five years through ten years
|
|
|
27,869
|
|
|
|
28,654
|
|
Due after ten years
|
|
|
5,340
|
|
|
|
5,518
|
|
Mortgage and asset-backed securities
|
|
|
57,209
|
|
|
|
57,813
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,085
|
|
|
$
|
142,166
|
|
|
|
|
|
|
|
|
|
|
The above maturity table includes maturities which may differ
from contractual maturities because borrowers have the right to
call or prepay obligations with or without call or prepayment
penalties.
Proceeds from the sale of available-for-sale fixed maturity
securities for the years ended December 31, 2007 and 2006
were $20,414 and $65,085, respectively, and for the periods from
June 3, 2005 to December 31, 2005 and January 1,
2005 to June 2, 2005 were $17,877 and $4,156, respectively.
F-15
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
Net investment income by category of investment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 3, 2005
|
|
|
January 1, 2005
|
|
|
|
|
|
|
|
|
|
to
|
|
|
to
|
|
|
|
Year Ended December 31,
|
|
|
December 31, 2005
|
|
|
June 2, 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Fixed maturity securities
|
|
$
|
7,229
|
|
|
$
|
5,964
|
|
|
$
|
2,648
|
|
|
$
|
1,734
|
|
Equity securities
|
|
|
74
|
|
|
|
70
|
|
|
|
42
|
|
|
|
20
|
|
Cash and short-term investments
|
|
|
634
|
|
|
|
510
|
|
|
|
179
|
|
|
|
66
|
|
Other investments
|
|
|
1
|
|
|
|
2
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,938
|
|
|
|
6,546
|
|
|
|
2,884
|
|
|
|
1,820
|
|
Investment expenses
|
|
|
(494
|
)
|
|
|
(410
|
)
|
|
|
(281
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
7,444
|
|
|
$
|
6,136
|
|
|
$
|
2,603
|
|
|
$
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, 2006, and 2005, fixed maturity
securities of $2,378, $2,290 and $2,267, respectively, were on
deposit with the various states where the insurance companies
conduct business.
The change in net unrealized gains (losses) on investments, and
related tax effect, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31, 2005
|
|
|
June 2, 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Unrealized holding gains/(losses) on fixed maturity securities
|
|
$
|
2,081
|
|
|
$
|
(2
|
)
|
|
$
|
(841
|
)
|
|
$
|
777
|
|
Unrealized holding gains on equity securities
|
|
|
718
|
|
|
|
594
|
|
|
|
156
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,799
|
|
|
|
592
|
|
|
|
(685
|
)
|
|
|
828
|
|
Tax effect
|
|
|
(978
|
)
|
|
|
(206
|
)
|
|
|
242
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
1,821
|
|
|
$
|
386
|
|
|
$
|
(443
|
)
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) on securities, net of tax
|
|
$
|
1,435
|
|
|
$
|
829
|
|
|
$
|
(983
|
)
|
|
$
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has reviewed its mortgage-backed security portfolio
and determined that the majority of these investments are in
pools that are backed by loans made to well qualified borrowers
or in tranches that have minimal default risk. Predominately,
all of the Companys mortgage-backed securities that were
issued by financial institutions participating in subprime
lending activities are of investment grade quality. However, the
estimated fair values of these investments are subject to
fluctuation and unrealized holding gains and losses are
generally recorded in other comprehensive income. However, if a
decline in fair value is determined to be other-than-temporary,
the cost basis is written down to estimated fair value through
earnings. During the year ended December 31, 2007, the
Company recognized $967 in other-than-temporary impairment
losses on certain of its asset-backed fixed maturity securities
that it does not have the intent to hold into a period where
recovery may occur.
F-16
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
The table below summarizes the gross unrealized losses of fixed
maturity securities as of December 31, 2007, 2006 and 2005
based on the duration that the security has remained in an
unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Mortgage and asset-backed securities
|
|
$
|
4,182
|
|
|
$
|
(155
|
)
|
|
$
|
16,919
|
|
|
$
|
(190
|
)
|
|
$
|
21,101
|
|
|
$
|
(345
|
)
|
Corporate securities
|
|
|
11,361
|
|
|
|
(247
|
)
|
|
|
12,359
|
|
|
|
(93
|
)
|
|
|
23,720
|
|
|
|
(340
|
)
|
Agency securities
|
|
|
|
|
|
|
|
|
|
|
895
|
|
|
|
(5
|
)
|
|
|
895
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
15,543
|
|
|
$
|
(402
|
)
|
|
$
|
30,173
|
|
|
$
|
(288
|
)
|
|
$
|
45,716
|
|
|
$
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
U.S. Government securities
|
|
$
|
2,647
|
|
|
$
|
(13
|
)
|
|
$
|
1,865
|
|
|
$
|
(31
|
)
|
|
$
|
4,512
|
|
|
$
|
(44
|
)
|
Mortgage and asset-backed securities
|
|
|
4,732
|
|
|
|
(19
|
)
|
|
|
19,437
|
|
|
|
(506
|
)
|
|
|
24,169
|
|
|
|
(525
|
)
|
Corporate securities
|
|
|
13,922
|
|
|
|
(64
|
)
|
|
|
16,919
|
|
|
|
(409
|
)
|
|
|
30,841
|
|
|
|
(473
|
)
|
Agency securities
|
|
|
|
|
|
|
|
|
|
|
5,831
|
|
|
|
(115
|
)
|
|
|
5,831
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
21,301
|
|
|
$
|
(96
|
)
|
|
$
|
44,052
|
|
|
$
|
(1,061
|
)
|
|
$
|
65,353
|
|
|
$
|
(1,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
U.S. Government securities
|
|
$
|
10,320
|
|
|
$
|
(168
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,320
|
|
|
$
|
(168
|
)
|
Mortgage and asset-backed securities
|
|
|
24,433
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
|
24,433
|
|
|
|
(491
|
)
|
Corporate securities
|
|
|
85,560
|
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
85,560
|
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
120,313
|
|
|
$
|
(1,392
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
120,313
|
|
|
$
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fixed maturity securities with continuous unrealized losses
for less than 12 months were primarily due to the impact of
higher market interest rates rather than a decline in credit
quality.
Fixed assets, net of accumulated depreciation, consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Leasehold improvements
|
|
$
|
110
|
|
|
$
|
110
|
|
|
$
|
97
|
|
Furniture and equipment
|
|
|
347
|
|
|
|
283
|
|
|
|
288
|
|
Computer hardware and software
|
|
|
1,893
|
|
|
|
999
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,350
|
|
|
|
1,392
|
|
|
|
771
|
|
Less: Accumulated depreciation
|
|
|
1,052
|
|
|
|
678
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
1,298
|
|
|
$
|
714
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
Depreciation expense was $374 and $164 for the years ended
December 31, 2007 and 2006, respectively, and $55 and $58
for the periods from June 3, 2005 to December 31, 2005
and January 1, 2005 to June 2, 2005, respectively.
|
|
6.
|
Unpaid
Losses and Loss Expenses
|
The following table provides a reconciliation of the beginning
and ending balances for unpaid losses and loss adjustment
expenses for 2007, 2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance, January 1,
|
|
$
|
104,946
|
|
|
$
|
104,127
|
|
|
$
|
92,116
|
|
Less: reinsurance recoverables
|
|
|
28,870
|
|
|
|
29,374
|
|
|
|
24,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, January 1,
|
|
|
76,076
|
|
|
|
74,753
|
|
|
|
68,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and loss expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for current year claims
|
|
|
27,361
|
|
|
|
25,428
|
|
|
|
28,862
|
|
Decrease in provision for prior years claims
|
|
|
(24,159
|
)
|
|
|
(3,761
|
)
|
|
|
(5,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss expenses
|
|
|
3,202
|
|
|
|
21,667
|
|
|
|
22,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for losses and loss expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment on current year claims
|
|
|
(5,159
|
)
|
|
|
(3,493
|
)
|
|
|
(5,317
|
)
|
Payment on prior years claims
|
|
|
(16,862
|
)
|
|
|
(16,851
|
)
|
|
|
(10,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments for losses and loss expenses
|
|
|
(22,021
|
)
|
|
|
(20,344
|
)
|
|
|
(16,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, December 31,
|
|
|
57,257
|
|
|
|
76,076
|
|
|
|
74,753
|
|
Plus: Reinsurance recoverables
|
|
|
12,557
|
|
|
|
28,870
|
|
|
|
29,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
|
|
$
|
69,814
|
|
|
$
|
104,946
|
|
|
$
|
104,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for incurred losses and loss adjustment expenses
of prior years decreased in 2006 and 2005 primarily as a result
of the re-estimation of unpaid loss and loss adjustment expenses
principally in the other liability line of business.
In 2007, the provision for incurred losses and loss adjustment
expenses of prior years decreased as a result of the
Companys newly implemented enhanced reserve estimation
methodology, principally in the commercial multi-peril, other
liability and products liability lines of business. While within
an acceptable range, there is a significant potential for
material deviation in the Companys loss and loss
adjustment expense reserves. The effect on loss and loss
adjustment expense reserves caused by the change in estimate was
$24,159.
Certain premiums and claims are assumed from and ceded to other
insurance companies under various reinsurance agreements.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders and failure of reinsurers to honor
their obligations could result in losses to the Company.
In the ordinary course of business, the Company reinsures a
significant portion of its policies with reinsurance companies
through excess of loss agreements. Such agreements serve to
limit the Companys potential loss from any one risk or
total losses in the aggregate. The Company ceded losses in
excess of $150 from January 1, 1999 through June 30,
2000, in excess of $175 from July 1, 2000 through
December 31, 2000, in excess of $200 during 2001 and 2002,
in excess of $225 during 2003 and 2004, in excess of $250 during
2005 and 2006 and in excess of $350 during 2007.
F-18
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
On December 20, 2007, the Company entered into a 100% Quota
Share Reinsurance Agreement with American Resources Insurance
Company (ARIC). In accordance with the agreement,
the Company assumes all policies written by ARIC, excluding
those issued in the Auto Warranty line of business, with an
effective date on or after October 1, 2007. As of
December 31, 2007, the Company had an assumed premium
receivable of $2,294 and assumed reinsurance payable on paid
losses and loss adjustment expenses of $7 related to this
treaty. Subsequent to December 31, 2007, this agreement was
terminated, effective January 1, 2008.
The Company continually evaluates the financial condition of
their reinsurers and monitor concentrations of credit risk
arising from activities or economic characteristics of the
reinsurers to minimize their exposure to significant losses from
future reinsurer insolvencies.
The effect of reinsurance on premiums written and earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
|
|
Direct
|
|
|
|
|
|
$
|
68,838
|
|
|
$
|
62,304
|
|
|
$
|
54,000
|
|
|
$
|
51,097
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
|
3,959
|
|
|
|
489
|
|
|
|
138
|
|
|
|
189
|
|
|
|
|
|
Ceded
|
|
|
|
|
|
|
(11,204
|
)
|
|
|
(9,621
|
)
|
|
|
(6,202
|
)
|
|
|
(7,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
$
|
61,593
|
|
|
$
|
53,172
|
|
|
$
|
47,936
|
|
|
$
|
44,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
June 3, 2005 to December 31, 2005
|
|
|
Period from
|
|
|
|
(Successor)
|
|
|
January 1, 2005 to June 2, 2005 (Predecessor)
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Direct
|
|
$
|
27,848
|
|
|
$
|
28,122
|
|
|
$
|
18,650
|
|
|
$
|
20,755
|
|
Assumed
|
|
|
269
|
|
|
|
289
|
|
|
|
57
|
|
|
|
65
|
|
Ceded
|
|
|
(5,369
|
)
|
|
|
(5,136
|
)
|
|
|
(2,913
|
)
|
|
|
(3,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
22,748
|
|
|
$
|
23,275
|
|
|
$
|
15,794
|
|
|
$
|
17,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reinsurance ceded is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
12,557
|
|
|
$
|
28,870
|
|
|
$
|
29,374
|
|
Prepaid premiums
|
|
|
4,246
|
|
|
|
2,663
|
|
|
|
3,479
|
|
Losses and loss adjustment expenses incurred
|
|
|
(9,182
|
)
|
|
|
6,831
|
|
|
|
8,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses ceded for the periods from
June 3, 2005 to December 31, 2005 and January 1,
2005 to June 2, 2005 were $8,609 and $(365), respectively.
The Companys Federal income tax return is consolidated
with Brascan (US) Corporation and, on a consolidated basis, had
no Federal income tax liability. The Company is not a party to
any tax allocation or tax sharing agreement at this time. In
accordance with SFAS No. 109, the financial statements
include a provision for Federal income taxes incurred even
though payment of this item was not contractually required. Due
to the absence of a tax allocation or tax sharing agreement, an
offsetting amount was reported through stockholders equity
and deemed as a capital contribution.
F-19
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
Significant components of the provision (benefit) for income
taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 3, 2005
|
|
|
January 1,
|
|
|
|
Year Ended
|
|
|
to
|
|
|
2005 to
|
|
|
|
December 31,
|
|
|
December 31, 2005
|
|
|
June 2, 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Total current provision (benefit)
|
|
$
|
10,988
|
|
|
$
|
2,848
|
|
|
$
|
(1,761
|
)
|
|
$
|
3,254
|
|
Total deferred provision (benefit)
|
|
|
1,127
|
|
|
|
504
|
|
|
|
(848
|
)
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
12,115
|
|
|
$
|
3,352
|
|
|
$
|
(2,609
|
)
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax computed at the Companys
U.S. Federal statutory rate of 35% to the reported income
tax provision (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
Year Ended
|
|
|
June 3, 2005 to
|
|
|
January 1, 2005 to
|
|
|
|
December 31,
|
|
|
December 31, 2005
|
|
|
June 2, 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
Income tax provision (benefit) at prevailing corporate income
tax rates applied to pretax income
|
|
$
|
12,087
|
|
|
$
|
3,470
|
|
|
$
|
(2,400
|
)
|
|
$
|
4,202
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nontaxable investment income
|
|
|
(8
|
)
|
|
|
(199
|
)
|
|
|
(272
|
)
|
|
|
(158
|
)
|
Other
|
|
|
36
|
|
|
|
81
|
|
|
|
63
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax provision (benefit)
|
|
$
|
12,115
|
|
|
$
|
3,352
|
|
|
$
|
(2,609
|
)
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys net deferred tax
assets as of December 31, 2007, 2006, and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium reserves
|
|
$
|
2,027
|
|
|
$
|
1,440
|
|
|
$
|
1,149
|
|
Unpaid loss reserves
|
|
|
2,603
|
|
|
|
3,757
|
|
|
|
3,806
|
|
Allowance for doubtful accounts
|
|
|
735
|
|
|
|
385
|
|
|
|
385
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
363
|
|
Impairment related losses
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,703
|
|
|
|
5,582
|
|
|
|
5,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
3,446
|
|
|
|
2,197
|
|
|
|
1,811
|
|
Intangible assets
|
|
|
368
|
|
|
|
417
|
|
|
|
466
|
|
Unrealized gains (losses) on securities
|
|
|
979
|
|
|
|
206
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
4,793
|
|
|
|
2,820
|
|
|
|
2,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
910
|
|
|
$
|
2,762
|
|
|
$
|
3,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had no unused operating
loss carryforwards or alternative minimum tax credit
carryforwards to offset against future taxable income.
F-20
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
Management periodically evaluates the reliability of its net
deferred tax asset and adjusts the level of the valuation
allowance if it is deemed more likely than not that all or a
portion of the asset is not realizable.
|
|
9.
|
Statutory
Financial Statements
|
The insurance companies prepare their statutory financial
statements in accordance with accounting practices prescribed or
permitted by the respective Departments of Insurance in which
they are domiciled (SAP).
Prescribed SAP includes a variety of publications of the
National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations and
general administrative rules. Permitted SAP encompass all other
accounting policies allowed by various departments of insurance.
The consolidated financial statements of the Company and its
subsidiaries have been prepared in accordance with GAAP, which
differ in certain respects from SAP.
The principal differences relate to (1) acquisition costs
incurred in connection with acquiring new and renewal business
are charged to expense under SAP but under GAAP are deferred and
amortized as the related premiums are earned;
(2) limitations on net deferred tax assets created by the
tax effects of temporary differences; (3) loss and loss
adjustment expense and unearned premium reserves are presented
gross of reinsurance with a corresponding asset recorded; and
(4) fixed maturity securities that qualify as
available-for-sale are carried at fair value and changes in fair
value are reflected directly in stockholders equity, net
of related deferred taxes.
Statutory basis surplus and statutory basis net income of the
Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2007
|
|
|
|
Statutory
|
|
|
Gaap
|
|
|
Statutory
|
|
|
Gaap
|
|
|
|
Surplus
|
|
|
Equity
|
|
|
Net Income
|
|
|
Net Income
|
|
|
Company
|
|
$
|
76,871
|
|
|
$
|
89,760
|
|
|
$
|
30,876
|
|
|
$
|
22,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2006
|
|
|
|
Statutory
|
|
|
Gaap
|
|
|
Statutory
|
|
|
Gaap
|
|
|
|
Surplus
|
|
|
Equity
|
|
|
Net Income
|
|
|
Net Income
|
|
|
Company
|
|
$
|
50,724
|
|
|
$
|
59,944
|
|
|
$
|
7,401
|
|
|
$
|
6,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Period from June 3, 2005 to
December 31, 2005
|
|
|
|
Statutory
|
|
Gaap
|
|
|
Statutory
|
|
Gaap
|
|
|
|
Surplus
|
|
Equity
|
|
|
Net Income
|
|
Net Income
|
|
|
Company
|
|
see note
|
|
$
|
49,696
|
|
|
see note
|
|
$
|
(4,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Period from January 1, 2005 to
June 2, 2005
|
|
|
|
Statutory
|
|
Gaap
|
|
|
Statutory
|
|
Gaap
|
|
|
|
Surplus
|
|
Equity
|
|
|
Net Income
|
|
Net Income
|
|
|
Company
|
|
see note
|
|
$
|
49,342
|
|
|
see note
|
|
$
|
8,333
|
|
The Companys statutory basis surplus and net income for
the twelve months ended December 31, 2005 were $41,847 and
$8,286, respectively.
The preferred stock consists of 385 shares at a par value
of $7.792 with the following terms. The annual dividend rate of
the preferred stock is 4%. The liquidation value of the
preferred stock is $7.792 per share plus unpaid cumulative
preferred dividends.
F-21
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
Each convertible preferred shareholder shall have the right at
any time and from time to time to convert all or any part of the
convertible preferred shares held by such shareholder into
common shares on the basis of one (1) common share for each
convertible preferred share converted into a common share, all
such common shares issued to the holder of convertible preferred
shares on such conversion to be fully paid and
non-assessable
shares.
|
|
11.
|
Dividend
Restrictions
|
Insurance companies are required by law to maintain certain
minimum surplus on a statutory basis, and are subject to
risk-based capital requirements and to regulations under which
payment of a dividend from statutory surplus is restricted and
may require prior approval of regulatory authorities. Applying
the current regulatory restrictions as of December 31,
2007, and to the extent that statutorily defined surplus is
available, $7,687 would be available for distribution without
prior approval. Distribution by the Insurance Companies of the
excess of GAAP stockholders equity over statutory capital
and surplus to the Company is prohibited by law.
The Company declared and paid dividends on common stock of
$5,072 during the year ended December 31, 2007. The Company
did not declare or pay any dividends on common stock during the
years ended December 31, 2006 and 2005.
Insurance companies are subject to certain risk-based capital
(RBC) requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus maintained
by a property and casualty insurance company is to be determined
based on the various risk factors related to it. At
December 31, 2007, 2006, and 2005, each of the insurance
companies met or exceeded its minimum RBC requirements.
|
|
13.
|
Retirement
Benefit Plan
|
The Company maintains a defined contribution plan pursuant to
Section 401(k) of the Internal Revenue Code for all
employees. The Company matches an amount equal to one hundred
percent of each participating employees pretax
contribution to a maximum of 4% of annual gross salary. The
Companys contributions to the plan for 2007 and 2006 were
$128 and $136, respectively, and for the periods from
June 3, 2005 to December 31, 2005 and January 1,
2005 to June 2, 2005 were $80 and $54, respectively.
The Company and its subsidiary lease office space suitable to
conduct its operations, including its home office in White
Plains, New York, and office facilities in Atlanta, Georgia and
Glastonbury, Connecticut under varying terms and expiration
dates. These leases are considered operating leases for
financial reporting purposes. Some of these leases have options
to extend the length of the leases and contain clauses for cost
of living, operating expense and real estate tax adjustments.
Rental expense was $436 and $408 in 2007 and 2006, respectively,
and $220 and $146 for the periods from June 3, 2005 to
December 31, 2005 and January 1, 2005 to June 2,
2005, respectively.
F-22
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
At December 31, 2007, future minimum lease payments under
non-cancelable real estate leases (without provisions for
sublease income) are as follows:
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
|
2008
|
|
$
|
440
|
|
2009
|
|
|
441
|
|
2010
|
|
|
443
|
|
2011
|
|
|
118
|
|
Certain rental commitments have renewal options extending
through the year 2011. Some of these renewals are subject to
adjustments in future periods.
|
|
15.
|
Related
Party Transactions
|
For the years ended December 31, 2007, 2006 and 2005,
written premiums of $1,859, $1,661 and $1,157, respectively,
with related commissions of $409, $366 and $257, respectively,
were produced by an entity for which one of its principals is on
the Companys Board of Directors. At December 31,
2007, 2006, and 2005, amounts included in premiums receivable
from this entity were $174, $219 and $72, respectively.
The Company is involved in litigation in the claims settlement
process in the normal course of business. However, the Company
is not subject to any current or pending legal proceedings that
management believes are likely to have a material adverse effect
on the accompanying financial statements.
On February 8, 2008, Kodiak entered into a 100% Quota Share
Reinsurance Agreement with ARIC. In accordance with the
agreement, the Company assumes all policies written by ARIC,
excluding those issued in the Auto Warranty line of business,
with an effective date on or after January 1, 2008.
On July 31, 2008, Kodiak entered into an additional 100%
Quota Share Reinsurance Agreement with ARIC. In accordance with
the agreement, Kodiak assumed the unearned premium on all
policies in force at October 1, 2007, excluding those
issued in the Auto Warranty line of business, and also assumes
the losses arising under such policies occurring on or after
October 1, 2007. This agreement was approved by the New
Jersey Department of Banking and Insurance on July 17, 2008
and the State of Alabama Insurance Department on July 28,
2008.
On March 18, 2008, the Company was transferred from
Brookfield US Corporation to Brookfield Insurance Holdings,
Inc., a wholly-owned subsidiary incorporated in the State of
Delaware. On March 31, 2008, Brookfield Insurance Holdings,
Inc. changed its name to HIG, Inc. (HIG).
On August 27, 2008, Tower Group, Inc. (Tower)
and CastlePoint Holdings, Ltd. (CastlePoint)
announced that CastlePoint Reinsurance Company, Ltd., a
Bermuda-based subsidiary of CastlePoint, entered into a
definitive agreement to acquire HIG. Under the terms of the
agreement, CastlePoint will pay Brookfield US Corporation
$27,000 in cash plus the adjusted closing book value of HIG.
On August 5, 2008, Tower announced that it had entered into
a definitive agreement to acquire CastlePoint. As a result of
the purchase of HIG, Tower and CastlePoint entered into a
separate agreement pursuant to which, following
CastlePoints acquisition of HIG, Tower agreed to buy
HIGs operating assets including rights to policy renewals
and producer appointments. Tower and CastlePoint do not expect
to consummate this renewal rights transaction unless
Towers acquisition of CastlePoint is not consummated or is
delayed. If this renewal rights transaction were to close, Tower
and CastlePoint have agreed to extend all of
F-23
Hermitage
Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements (Continued)
the reinsurance, management and service agreements between
themselves or their respective subsidiaries for one additional
year upon their expiration, currently scheduled for
March 31, 2010, at commission and management fee terms
which have been set to approximate current market terms,
provided that, under certain limited circumstances, the
extension will be for 6 months.
Upon the sale of the operating assets to Tower, CastlePoint will
retain HIGs financial assets including capital in the
operating insurance companies, insurance licenses, loss and loss
adjustment expense reserves and unearned premium reserves. In
addition, Towers managing general agency, Tower Risk
Management, will manage HIGs operating insurance companies
on behalf of CastlePoint based upon the terms of existing
management and service agreements between Tower and CastlePoint.
The transactions between HIG and CastlePoint and those between
Tower and CastlePoint, including any ancillary agreements, are
subject to customary regulatory approvals.
F-24
SPECIALTY UNDERWRITERS ALLIANCE, INC.
SPECIAL
MEETING OF STOCKHOLDERS NOVEMBER 10, 2009
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Specialty Underwriters Alliance, Inc., a Delaware corporation
(the Company), hereby appoints Courtney C. Smith, Peter E. Jokiel, and Scott W. Goodreau and each
of them the proxies of the undersigned with power to vote at the Special Meeting of Stockholders of
the Company to be held at 9 a.m. local time on November 10, 2009 at 222 South Riverside Plaza,
19
th
Floor, in the Lake County Room, Chicago, IL 60606, and at any adjournment or
postponement thereof (the Special Meeting), with all the power which the undersigned would have
if personally present, hereby revoking any proxy heretofore given. The undersigned hereby
acknowledges receipt of the proxy statement for the Special Meeting and instructs the proxies to
vote as directed on the reverse side.
(Continued and to be signed on the reverse side)
Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of
Stockholders to be held on November 10, 2009:
The notice and Proxy Statement are available at www.suainsurance.com.
|
|
How to request a copy of materials for this Special Meeting or future stockholder
meetings:
|
1. By Internet
www.suainsurance.com
2. By telephone (888) 782-4672
3. By email
InvestorRelations@suainsurance.com
|
|
To obtain directions to the Special Meeting, please contact Investor Relations at
(312) 277-1600.
|
SPECIAL MEETING OF STOCKHOLDERS
OF
SPECIALTY UNDERWRITERS ALLIANCE, INC.
November 10, 2009
Please date, sign and mail
your proxy card in the
envelope provided as soon as possible.
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