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SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Filed by a Party other than the Registranto
þ | Preliminary Proxy Statement | |
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
o | Definitive Proxy Statement | |
o | Definitive Additional Materials | |
o | Soliciting Material Pursuant to §240.14a-12 |
o | No fee required. | |
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
(1) | Title of each class of securities to which transaction applies: | ||
N/A | |||
(2) | Aggregate number of securities to which transaction applies: | ||
N/A | |||
(3) | 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): | ||
N/A | |||
(4) | Proposed maximum aggregate value of transaction: | ||
N/A | |||
(5) | Total fee paid: | ||
N/A | |||
o | Fee paid previously with preliminary materials. | |
þ | 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. |
(1) | Amount Previously Paid: | ||
$5,819.73 | |||
(2) | Form, Schedule or Registration Statement No.: | ||
Registration Statement on Form S-4 | |||
(3) | Filing Party: | ||
Tower Group, Inc. | |||
(4) | Date Filed: | ||
July 31, 2009 | |||
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The information in this proxy statement/prospectus is not complete and may be changed. We may not sell the securities offered by this proxy statement/prospectus until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction where an offer, solicitation or sale is not permitted. |
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120 Broadway 31st Floor New York, NY 10271 | 222 S. Riverside Plaza Suite 1600 Chicago, IL 60606-6001 |
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Michael H. Lee Chairman of the Board of Directors, President and Chief Executive Officer of Tower Group, Inc. | Courtney C. Smith President, Chief Executive Officer and Chairman of the Board of Directors of Specialty Underwriters’ Alliance, Inc. |
first being mailed to stockholders of SUA on or about [ • ], 2009.
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Tower Group, Inc. 120 Broadway 31st Floor New York, NY 10271 Attention: Elliot S. Orol Telephone Number:(212) 655-2000 | 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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![(SUA LOGO)](https://capedge.com/proxy/PRER14A/0000950123-09-046215/y78243p3y7824302.gif)
TO BE HELD ON [ • ], 2009
• | 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 | |
• | 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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List of Annexes | ||||
A-1 | ||||
B-1 | ||||
C-1 | ||||
D-1 | ||||
E-1 | ||||
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) | F-1 |
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Q: | When and where is the SUA special meeting? | |
A: | The SUA special meeting will take place on[ • ], 2009 at 9:00 a.m. central standard time, at 222 South Riverside Plaza, 19th Floor, in the Lake County Room, Chicago, IL 60606. | |
Q: | On what am I being asked to vote? | |
A: | 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. | |
Q: | What will happen in the merger? | |
A: | 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. | |
Q: | Why are the parties proposing to merge? |
A: | 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 SUA’s business by cross-selling products with Tower and accessing Tower’s higher “A−” A.M. Best Company rating (the 4th highest of 15 rating levels) instead of SUA’s lower “B+” A.M. Best Company rating (the 6th highest of 15 rating levels) and Tower’s 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 SUA’s scalable infrastructure. |
In addition, Tower believes that the merger will, among other benefits, (a) allow for the expansion of Tower’s underwriting capacity in the specialty property and casualty insurance market, which will further broaden Tower’s product offerings and (b) provide the opportunity for Tower to utilize SUA’s office headquarters to develop Tower’s brokerage business written through retail and wholesale agents in the midwestern United States. |
SUA further believes that the merger consideration payable to SUA stockholders represents a significant premium to the price of SUA’s 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. | ||
Please see “The Merger — SUA’s Reasons for the Merger” and “The Merger — Tower’s Reasons for the Merger” below for additional information. | ||
Q: | What will SUA stockholders receive in the merger? | |
A: | 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. | ||
Q: | Are SUA stockholders able to exercise appraisal rights? | |
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. | |
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. | ||
Q: | When do the parties expect to complete the merger? | |
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. | |
Q: | How will the combined company be managed? | |
A: | 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. | |
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. | |
Q: | Why is my vote important? | |
A: | 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. | |
Q: | What constitutes a quorum for the meeting? | |
A: | A majority of the outstanding shares having voting power being present, in person or represented by proxy constitutes a quorum for the meeting. |
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Q: | What stockholder vote is required to approve the items to be voted on at the SUA special meeting? | |
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. | |
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. | ||
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. | ||
Q: | Does the board of directors recommend adoption of the merger agreement? | |
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. | |
Q: | What is the record date for the special meeting? | |
A: | The record date for the SUA special meeting is[ • ], 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. | |
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. | |
Q: | How do I vote my shares? | |
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. | |
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. | ||
Q: | Who may attend the meeting? | |
A: | SUA stockholders (or their authorized representatives) and SUA’s 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 ([ • ], 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. |
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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. | |
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. | |
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. | |
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: | |
• 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. |
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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 reasonableout-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, IL60606-6001 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. |
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• | adoption by holders of SUA common stock of the merger agreement; | |
• | receipt of required regulatory approvals, including approvals by the California and Illinois departments of insurance; | |
• | absence of any injunctions or other legal restraints, having the effect of making the merger illegal or preventing the completion of the merger; | |
• | 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; |
• | 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; |
• | 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 | |
• | other customary closing conditions. |
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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; | |
• | 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 | |
• | the SUA stockholders have not adopted the merger agreement at the SUA special meeting. |
• | 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; TowerTop-Up Right” below; or | |
• | subject to Tower’s 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 | |
• | if Tower has breached the merger agreement in certain respects. |
• | 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 | |
• | if SUA has breached the merger agreement in certain respects. |
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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 | |
• | 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. |
• | 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; | |
• | 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 | |
• | 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”. |
• | to adopt the merger agreement; and | |
• | 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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• | adoption by holders of SUA common stock of the merger agreement; | |
• | receipt of required regulatory approvals, including approvals by the California and Illinois departments of insurance; | |
• | the absence of any injunctions or other legal restraints, having the effect of making the merger illegal or preventing the completion of the merger; | |
• | 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; |
• | 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; |
• | 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 | |
• | other customary closing conditions. |
• | 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; | |
• | 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; | |
• | Tower and SUA are expected to incur substantial transaction costs in connection with the merger; and | |
• | neither SUA nor Tower would realize any of the anticipated benefits of having completed the merger. |
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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 |
• | 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. |
• | 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; |
• | 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 |
• | 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”. |
• | employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect SUA’sand/or Tower’s ability to retain, recruit and motivate key personnel; |
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• | the attention of SUAand/or Tower management may be directed toward the completion of the merger and transaction-related considerations and may be diverted from theday-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 | |
• | third parties with business relationships with Tower or SUA may seek to terminateand/or renegotiate their relationships with Tower or SUA as a result of the merger, whether pursuant to the terms of their existing agreements with SUAand/or Tower or otherwise. |
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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; | |
• | 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; | |
• | withdraw (or modify or qualify in a manner adverse to Tower), the SUA board of directors recommendation regarding the merger proposal; | |
• | approve, adopt or recommend, or publicly propose to approve, adopt or recommend an alternative acquisition proposal; or | |
• | 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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• | a greater number of shares outstanding; |
• | different stockholders; |
• | different businesses, including with respect to the types of business written, geographical areas of operation and underwriting guidelines; and |
• | different assets, including investment portfolios, and capitalizations. |
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Table of Contents
• | Tower’s board of directors is divided into three classes and members of only one of three classes of Tower’s directors are elected each year, whereas SUA’s 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. |
• | 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. |
• | 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 Tower’s 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 SUA’s amended and restated certificate of incorporation. |
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Predecessor | ||||||||||||||||||||||||||||||||
Nov 23 | Jan 1 | |||||||||||||||||||||||||||||||
Six Months | to | to | ||||||||||||||||||||||||||||||
Ended June 30, | Year ended December 31, | Dec. 31 | Nov. 22 | |||||||||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005 | 2004 | 2004 | |||||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Results of Operations | ||||||||||||||||||||||||||||||||
Earned insurance premiums | $ | 70,140 | $ | 69,945 | $ | 143,465 | $ | 152,469 | $ | 110,891 | $ | 26,611 | $ | — | $ | — | ||||||||||||||||
Net investment income | 5,549 | 5,323 | 10,837 | 9,553 | 6,087 | 3,558 | 278 | 1,329 | ||||||||||||||||||||||||
Net realized gains (losses) on investments | 168 | 38 | (811 | ) | (27 | ) | 275 | (4 | ) | 2 | 390 | |||||||||||||||||||||
Other than temporary impairment losses | (1,835 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
Portion of loss recognized in other comprehensive income | 1,259 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net impairment recognized in earnings | (576 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
Total revenues | 75,281 | 75,306 | 153,491 | 161,995 | 117,253 | 30,165 | 280 | 1,719 | ||||||||||||||||||||||||
Net income (loss) | $ | 517 | $ | 5,715 | $ | 7,425 | $ | 12,589 | $ | 8,408 | $ | (17,996 | ) | $ | (8,155 | ) | $ | 650 | ||||||||||||||
Net income (loss) per share | ||||||||||||||||||||||||||||||||
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, | |||||||||||||||||||||||
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 |
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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 | % | ||||||||||||||
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Table of Contents
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
Table of Contents
INFORMATION OF TOWER
20
Table of Contents
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) | |||||||||||||||||
(31,913 | ) | 4 | (e) | |||||||||||||||||
26,013 | 2 | |||||||||||||||||||
236,407 | ||||||||||||||||||||
Fixed assets, net | 46,590 | 12,901 | (8,945 | ) | 4 | (b) | 50,546 | |||||||||||||
Investment in subsidiaries | — | — | 108,800 | 2 | ||||||||||||||||
(108,800 | ) | 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 | 108,800 | 2 | ||||||||||||||||
(138,088 | ) | 4 | (e) | 750,847 | ||||||||||||||||
Accumulated other comprehensive loss | (4,655 | ) | 894 | (894 | ) | 4 | (e) | (4,655 | ) | |||||||||||
Retained earnings | 210,832 | 2,573 | (2,573 | ) | 4 | (e) | ||||||||||||||
26,013 | 2 | |||||||||||||||||||
236,845 | ||||||||||||||||||||
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 | |||||||||||
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Table of Contents
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) | ThePro formaadjustments 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 thepro forma results including, (i) transaction costs of $11.4 million and $3.6 million, respectively, related to the acquisition of CastlePoint and Hermitage, (ii) CastlePoint’s severance expenses of $2.0 million and (iii) Tower’s gain of $7.4 million related to the acquisition of CastlePoint. |
22
Table of Contents
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 | |||||||||||||||||||||||||||||||||||||||
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1. | BASIS OF PRESENTATION |
• | 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 unauditedpro formacondensed consolidated financial information. |
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2. | PURCHASE PRICE AND RELATED CONSIDERATIONS |
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($ in thousands) | ||||
Purchase Consideration(a) | ||||
Purchase price paid | $ | 107,845 | ||
Estimated fair value of outstanding SUA stock options and deferred stock awards(b) | 955 | |||
Total purchase consideration | 108,800 | |||
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 | (26,013 | ) | ||
Recognized in earnings as gain on acquisition of SUA | 26,013 | |||
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 24.18 per share of Tower common stock, the closing price per share on September 22, 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 $107.8 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 SUA’s loss reserves as estimated by Tower’s management could result in an adjustment within the range of reasonable loss reserve estimates previously disclosed by SUA in itsForm 10-K for the year ended December 31, 2008. The high end estimate of such range was approximately $15 million greater than the net reserves carried by SUA at December 31, 2008. Such an adjustment to loss reserves would result in a reduction in the amount of negative goodwill. |
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3. | PRO FORMA ADJUSTMENTS RELATED TO TOWER, CASTLEPOINT AND HERMITAGE |
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4. | PRO FORMA ADJUSTMENTS RELATED TO TOWER AND SUA |
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5. | EARNINGS PER COMMON SHARE |
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Projections(1) | ||||||||
Year Ended December 31, | ||||||||
2010E | 2011E | |||||||
($ 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 SUA’s advisors. The information set forth above does not include projections of Tower’s 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 Tower’s first quarter earnings release. For Tower’s 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. |
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 |
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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 management’s 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 Company’s 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. |
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Six Months | Year | |||||||
Ended | Ended | |||||||
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Basic earnings per share | ||||||||
TGI historical | $ | 1.31 | $ | 2.49 | ||||
TGIpro forma(including CastlePoint and Hermitage) | 1.19 | 1.72 | ||||||
SUA historical | 0.03 | 0.48 | ||||||
Pro formacombined | 1.11 | 1.74 | ||||||
Equivalentpro formafor one share of SUA common stock(1) | 0.31 | 0.49 | ||||||
Diluted earnings per share | ||||||||
TGI historical | $ | 1.30 | $ | 2.47 | ||||
TGIpro forma(including CastlePoint and Hermitage) | 1.19 | 1.71 | ||||||
SUA historical | 0.03 | 0.47 | ||||||
Pro formacombined | 1.11 | 1.73 | ||||||
Equivalentpro formafor 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 formacombined | 0.12 | 0.20 | ||||||
Equivalentpro formafor 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 formacombined | 21.85 | N/A | ||||||
Equivalentpro formafor one share of SUA common stock(1) | 6.12 | N/A |
(1) | Thepro formaequivalent was calculated by multiplying thepro formacombined EPS by the exchange ratio of 0.28 shares of Tower common stock for each share of SUA common stock. |
(2) | TGI’s 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. |
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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 | ||||||||||||||||||||||||
September 22, 2009) | 26.10 | 22.88 | 0.070 | 7.04 | 6.09 | — |
Common Stock Close | ||||||||
Tower | SUA | |||||||
June 19, 2009 | $ | 24.00 | $ | 3.96 | ||||
September 22, 2009 | $ | 24.18 | $ | 6.63 |
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• | Form and Value of Per Share Merger Consideration and Business Condition and Prospects of SUA |
• | 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 SUA’s volume weighted average closing price of its common stock for thethirty-day trading period ending on June 19, 2009. | |
• | After an extensive market test conducted by SUA and FBR, which was overseen by SUA’s Strategic Review Committee, Tower’s offer was viewed by SUA’s board of directors as presenting the best value available to SUA stockholders. | |
• | The performance of Tower’s and SUA’s stock price relative to each other and general market indices, which showed that Tower’s stock price has generally outperformed SUA and Tower’s peers while SUA’s stock price had tended to under-perform Tower and SUA’s peers. | |
• | Because of Tower’s substantially larger market capitalization, Tower’s common stock is more liquid than SUA’s 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 Tower’s common stock price. | |
• | The board of directors’ belief, based upon discussions with SUA’s management and after a thorough review of SUA’s strategic alternatives, including the market-check overseen by SUA’s 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. | |
• | As a standalone public company, SUA has been generating a low return on equity and SUA’s common stock had been trading at a lowprice-to-earnings ratio and a lowprice-to-book multiple. | |
• | 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. | |
• | The perceived risks and uncertainties attendant to SUA’s 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. | |
• | 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. |
• | Strategic and Other Business Advantages |
• | The opportunity to create long-term stockholder value by increasing the growth of SUA’s business by cross-selling products with Tower and accessing Tower’s higher “A−” A.M. Best Company rating (the 4th highest of 15 rating levels) instead of SUA’s lower “B+” A.M. Best Company ratings (the 6th highest of 15 rating levels) and Tower’s 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 SUA’s business arising from improved financial flexibility and strong cash flow. | |
• | The opportunity to leverage SUA’s 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 SUA’s 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 |
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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. | |
• | The view of SUA’s board of directors, after consultation with SUA’s 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. |
• | 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 Tower’s“top-up” right; as described in “The Merger Agreement — Terms of the Merger — SUA Walk-Away Right; TowerTop-Up Right” below. |
• | 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 Tower’s 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 Tower’s expenses not to exceed $1,000,000. | |
• | 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. | |
• | The fact that no external financing is required for the transaction, thus increasing the likelihood that the merger will be consummated. |
• | Other Considerations |
• | 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. | |
• | Tower’s strong track record for completing acquisitions and integrating acquired companies. |
• | 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. | |
• | The effect of the public announcement of the merger on SUA’s stock price if stockholders of Tower or SUA do not view the merger positively. | |
• | 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. |
• | 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 SUA’s 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. |
• | The restrictions on the conduct of SUA’s 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. | |
• | The potential disruption to SUA’s 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 SUA’s partner agents. | |
• | 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. | |
• | 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 itsout-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. | |
• | 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 SUA’s 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. | |
• | 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. | |
• | 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. | |
• | 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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• | reviewed a draft of the merger agreement, dated June 21, 2009; | |
• | 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; |
• | met with certain members of SUA’s management (i.e., Courtney Smith, SUA’s 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; |
• | met with certain members of Tower’s management to discuss the business and prospects of Tower; |
• | held discussions with certain members of SUA’s management concerning the amounts and timing of cost savings and related expenses expected to result from the merger as furnished to FBR by SUA’s management (the “expected synergies”); | |
• | reviewed certainpro formafinancial effects of the merger on Tower, including the expected synergies; | |
• | 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; | |
• | 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; | |
• | 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 | |
• | 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. |
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Implied Valuation of Shares of SUA Stock | ||||||||||||
Valuation Methodology (as Applied to the Indicated Metric) | Minimum | Median | Maximum | |||||||||
Comparable Companies Analysis (2009 EPS estimate(1)) | $ | 2.75 | $ | 4.54 | $ | 5.73 | ||||||
Comparable Companies Analysis (book value) | $ | 2.02 | $ | 7.24 | $ | 12.86 | ||||||
Comparable Companies Analysis (tangible book value) | $ | 1.92 | $ | 9.16 | $ | 16.02 | ||||||
Comparable Acquisitions Analysis (LTM Net Income) | $ | 1.35 | $ | 4.35 | $ | 9.11 | ||||||
Comparable Acquisitions Analysis (book value) | $ | 4.17 | $ | 14.49 | $ | 24.07 | ||||||
Comparable Acquisitions Analysis (tangible book value) | $ | 3.84 | $ | 14.32 | $ | 22.20 | ||||||
Implied Premium Analysis (one month prior) | $ | 3.61 | $ | 4.78 | $ | 6.55 |
(1) | As provided by SUA management |
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• | Tower Group, Inc. | |
• | AmTrust Financial Services, Inc. | |
• | Safety Insurance Group, Inc. | |
• | Meadowbrook Insurance Group, Inc. | |
• | AMERISAFE, Inc. | |
• | National Interstate Corporation | |
• | SeaBright Insurance Holdings, Inc. | |
• | Hallmark Financial Services, Inc. | |
• | Eastern Insurance Holdings, Inc. | |
• | CRM Holdings, Ltd. |
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Target | Acquiror | |
HSB Group, Inc. | Munich Re | |
HIG, Inc. | CastlePoint Reinsurance Company, Ltd. | |
CastlePoint Holdings, Ltd. | Tower Group, Inc. | |
Philadelphia Consolidated Holding Corp. | Tokio Marine Holdings, Inc. | |
Darwin Professional Underwriters, Inc. | Allied World Assurance Company Holdings, Ltd. | |
Quanta Capital Holdings Ltd. | Catalina Holdings (Bermuda) Ltd. | |
Safeco Corporation | Liberty Mutual Holding Company, Inc. | |
National Atlantic Holdings Corporations | Palisades Safety and Insurance Association | |
ProCentury Corporation | Meadowbrook Insurance Group, Inc. | |
AmCOMP Incorporated | Employers Holdings, Inc. | |
North Pointe Holdings Corp. | QBE Insurance Group Limited | |
Commerce Group, Inc. | Fundacion Mapfre | |
Midland Company | Munich Re | |
SCPIE Holdings Inc. | Doctors Company, An Interinsurance Exchange | |
RTW, Inc. | Rockhill Holding Company | |
Alfa Corporation | Alfa Mutual Group | |
Professionals Direct, Inc. | Hanover Insurance Group, Inc. | |
James River Group, Inc. | D. E. Shaw & Company, LP | |
Ohio Casualty Corporation | Liberty Mutual Holding Company, Inc. | |
Bristol West Holdings, Inc. | Zurich Financial Services, AG | |
21st Century Insurance Group | American International Group, Inc. | |
Direct General Corporation | Elara Holdings, Inc. | |
Merchants Group, Inc. | American European Group | |
Republic Companies Group, Inc. | Delek Group Ltd. |
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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 | % |
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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 Tower’s ability to access capital in order to grow organically and through acquisitions. |
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• | The merger provides Tower with an opportunity to enhance its profile in the specialty business segment. | |
• | The opportunity to strengthen Tower’s brokerage division by (1) shifting certain resources of Tower currently supporting its specialty insurance business to its brokerage division and (2) utilizing SUA’s office headquarters to develop Tower’s brokerage business written through retail and wholesale agents in the midwestern United States. | |
• | The opportunity to utilize SUA for the expansion of Tower’s underwriting capacity in the specialty property and casualty insurance market and to further broaden Tower’s 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 SUA’s business by cross-selling products with Tower and accessing Tower’s higher “A−” A.M. Best Company rating (the 4th highest of 15 rating levels instead of SUA’s lower “B+” A.M. Best Company rating (the 6th highest of 15 rating levels) and Tower’s 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 SUA’s business arising from improved financial flexibility and strong cash flow. | |
• | The opportunity to leverage SUA’s 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 SUA’s 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. | |
• | 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. | |
• | 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; TowerTop-Up Right” below. |
• | The terms and conditions of the merger agreement, including the representations and warranties and conditions to closing, were within the range of reasonableness. | |
• | 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. | |
• | The fact that no external financing is required for the transaction, thus increasing the likelihood that the merger will be consummated. |
• | Other Considerations |
• | 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. | |
• | Tower’s strong track record for completing acquisitions and integrating acquired companies. |
• | 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. | |
• | The effect of the public announcement of the merger on Tower’s stock price if stockholders of Tower or SUA do not view the merger positively. | |
• | 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. | |
• | 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 SUA’s 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. | |
• | The possibility that combining Tower and SUA may be more difficult than expected. |
• | 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 Tower’s“top-up” right; as described in “The Merger Agreement — Terms of the Merger — SUA Walk-Away Right; TowerTop-Up Right” below. |
• | The potential disruption to Tower’s 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. | |
• | 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 itsout-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. |
• | 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. | |
• | 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 Tower’s 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 Tower’s expenses not to exceed $1,000,000. | |
• | 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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• | 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; |
• | 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 SUA’s voting securities immediately prior thereto continuing to hold at least 50% of the combined voting power of SUA’s or the surviving entity’s outstanding voting securities immediately after such merger or consolidation; | |
• | SUA’s board of directors approving a plan of complete liquidation or an agreement for the sale or disposition of all or substantially all of SUA’s assets, other than any such sale or disposition where all or substantially all of the holders of SUA’s 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 | |
• | 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 director’s 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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• | 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. | |
• | 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. | |
• | 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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• | a financial institution or insurance company; | |
• | a tax-exempt organization; | |
• | certain U.S. expatriates; | |
• | a person that is not a U.S. Holder; | |
• | a regulated investment company; | |
• | a pass-through entity or an investor in such an entity; | |
• | a trader in securities that electsmark-to-market accounting; | |
• | a dealer or broker in securities or currencies; | |
• | a person that holds SUA common stock as part of a hedge, straddle, constructive sale or conversion transaction; | |
• | 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; | |
• | a person that has a functional currency other than the U.S. dollar; | |
• | a person liable for the alternative minimum tax; and | |
• | a person that exercises dissenters’ rights. |
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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); | |
• | a U.S. Holder’s 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; | |
• | a U.S. Holder’s 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; | |
• | if a U.S. Holder acquired different blocks of SUA common stock at different times or at different prices, such stockholder’s tax basis and holding periods in its Tower common stock will be determined with reference to each block of SUA common stock; and | |
• | 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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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. Holder’s holding period for its shares of SUA common stock exchanged exceeds one year at the closing date. |
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Average | Merger | |||||
Tower | Consideration | |||||
Stock | Exchange | per Share of SUA | ||||
Price(1) | Ratio(2) | Stock(3) | ||||
$30.00 | 0.2590 | $ | 7.77 | |||
$29.00 | 0.2679 | $ | 7.77 | |||
$28.00 | 0.2775 | $ | 7.77 | |||
$27.00 | 0.2800 | $ | 7.56 | |||
$26.00 | 0.2800 | $ | 7.28 | |||
$25.00 | 0.2800 | $ | 7.00 | |||
$24.00 | 0.2800 | $ | 6.72 | |||
$23.00 | 0.2830 | $ | 6.51 | |||
$22.00 | 0.2959 | $ | 6.51 | |||
$21.00 | 0.3100 | $ | 6.51 | |||
$20.00 | 0.3255 | $ | 6.51 | |||
$19.00 | 0.3255 | $ | 6.18 | (4) | ||
$18.00 | 0.3255 | $ | 5.86 | (4) |
(1) | 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. | |
(2) | 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. | |
(3) | 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). | |
(4) | 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 willtop-up. In such circumstances, if Tower elects not totop-up, the merger agreement would terminate. See “The Merger Agreement — Terms of the Merger — SUA Walk-Away Right; TowerTop-Up Right” below. |
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• | approval by holders of SUA common stock of the merger proposal; | |
• | receipt of required regulatory approvals, including approvals by the California and Illinois departments of insurance; | |
• | 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; | |
• | absence of any injunctions or other legal restraints, having the effect of making the merger illegal or preventing the completion of the merger; and | |
• | effectiveness of this proxy statement/prospectus and the absence of a stop order or proceedings threatened or initiated by the SEC for that purpose. |
• | the truth and correctness of certain other of SUA’s 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; | |
• | the prior performance by SUA, in all material respects, of all of its obligations under the merger agreement; | |
• | receipt of a certificate executed by an executive officer of SUA as to the satisfaction of the conditions described in the preceding two bullets; | |
• | 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; |
• | receipt of a legal opinion from Tower’s 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 |
• | 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. |
• | the truth and correctness of certain of Tower’s 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; | |
• | the prior performance by Tower, in all material respects, of all of its obligations under the merger agreement; | |
• | 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 SUA’s 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. |
(a) | due incorporation, good standing, qualification and corporate power, organizational documents and governmental licenses, authorizations, permits and approvals to conduct its business; | |
(b) | 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; | |
(c) | required governmental filings and approvals; | |
(d) | the absence of conflicts between the execution, delivery or performance of the merger agreement and SUA’s or its subsidiaries’ organizational documents, any applicable law or order, certain of SUA’s 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; | |
(e) | capitalization and outstanding stock options and deferred stock awards; | |
(f) | SUA’s subsidiaries; | |
(g) | filings with the SEC and internal controls and procedures; | |
(h) | financial statements; | |
(i) | statutory statements of SUA’s insurance subsidiaries filed with state insurance departments; | |
(j) | the accuracy of information contained in this proxy statement/prospectus and compliance with SEC rules and regulations; | |
(k) | the absence of a material adverse effect on SUA since December 31, 2008; | |
(l) | the absence of undisclosed liabilities; | |
(m) | compliance with applicable laws, including insurance laws; | |
(n) | the absence of material litigation; | |
(o) | conduct of, and matters related to, SUA’s 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) | the absence of material claims and assessments by any state insurance guaranty association; | |
(q) | the determination of reserves; | |
(r) | SUA’s leases for real property; | |
(s) | receipt of the fairness opinion from FBR; | |
(t) | tax matters; | |
(u) | employee benefit plan matters, post-employment compensation and deferred compensation matters; | |
(v) | employee and labor matters; | |
(w) | environmental matters; | |
(x) | intellectual property rights; | |
(y) | material contracts of SUA and its subsidiaries; | |
(z) | finders’ fees due in connection with the merger; | |
(aa) | the absence of any threatened ratings downgrades by A.M. Best Company; and | |
(bb) | the absence of certain affiliate transactions between SUA and its directors, officers or stockholders. |
(i) | due incorporation, good standing, qualification and corporate power, and governmental licenses, authorizations, permits and approvals to conduct its business; | |
(ii) | 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; | |
(iii) | required governmental filings and approvals; | |
(iv) | the absence of conflicts between the execution, delivery or performance of the merger agreement and Tower’s or Merger Sub’s 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; | |
(v) | capitalization, ownership and operations of Merger Sub; | |
(vi) | filings with the SEC by Tower and internal controls and procedures of Tower; | |
(vii) | financial statements of Tower; | |
(viii) | accuracy of information supplied by Tower or Merger Sub for inclusion in this proxy statement/prospectus; | |
(vix) | the absence of a material adverse effect on Tower since December 31, 2008; | |
(x) | the absence of undisclosed liabilities; | |
(xi) | compliance with applicable laws, including insurance laws; | |
(xii) | the absence of certain material litigations or governmental orders; | |
(xiii) | tax matters; and | |
(xiv) | the absence of finders’ fees due in connection with the merger. |
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• | changes or fluctuations in the economy or the securities, credit or financial markets generally in the U.S.; | |
• | 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); | |
• | changes generally affecting the property and casualty insurance industry or the geographic areas in which SUA and its subsidiaries operate; | |
• | 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; | |
• | 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; | |
• | 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); | |
• | 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 party’s 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 | |
• | 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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• | 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; | |
• | 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; | |
• | 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; | |
• | repurchase, redeem or otherwise acquire any SUA securities or securities of an SUA subsidiary; | |
• | 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; | |
• | 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; | |
• | 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); | |
• | make any loans, advances or capital contributions to any other person; | |
• | create, incur, guarantee or assume any indebtedness; | |
• | make or commit to make any capital expenditure other than capital expenditures set forth in SUA’s capital budget for fiscal 2009; | |
• | 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; | |
• | increase the compensation or other benefits payable or provided to SUA’s directors or to employees at or above the vice president level, except pursuant to existing contracts; | |
• | increase the compensation or other benefits payable or provided to SUA’s employees below the vice president level; | |
• | enter into any employment, change of control, severance or retention agreement with any employee of SUA; | |
• | 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; | |
• | 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; |
• | 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; | |
• | modify or amend in any materially adverse respect or terminate certain contracts material to SUA; | |
• | effect or permit any plant closing or mass layoff; | |
• | 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; | |
• | enter into certain new agreements that would be material to SUA; | |
• | 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; | |
• | 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; | |
• | 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; | |
• | 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; | |
• | 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; | |
• | terminate, cancel, amend or modify any insurance policies maintained by it which are not replaced by a comparable amount of insurance coverage; | |
• | adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization of SUA or any of its subsidiaries; | |
• | 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 | |
• | 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. |
• | 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; | |
• | 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; |
• | 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; | |
• | 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 | |
• | 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. |
• | solicit, initiate or knowingly encourage, or knowingly facilitate, any takeover proposal or the making or consummation of a takeover proposal; or | |
• | 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. |
• | 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; | |
• | 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; | |
• | 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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• | contact the third party making the takeover proposal (and its representatives) solely to clarify the terms and conditions of the takeover proposal; and | |
• | 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: |
• | 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 SUA’s 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 | |
• | participate in discussions or negotiations with the third party making the takeover proposal. |
• | withdraw (or modify or qualify in a manner adverse to Tower), the SUA board of directors recommendation regarding the merger proposal; | |
• | fail to include the SUA board of directors recommendation in this proxy statement/prospectus; | |
• | 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 | |
• | 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 SUA’s no solicitation obligations) providing for, with respect to, or in connection with, any takeover proposal. |
• | 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 |
• | in response to an unsolicited, bona fide, written takeover proposal which did not arise as a result of a breach of SUA’s 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 suchfour-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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• | by mutual consent of Tower and SUA; | |
• | subject to certain limitations described in the merger agreement, by either Tower or SUA, if: |
• | the merger shall not have been consummated on or before December 31, 2009, as such date may be extended pursuant to the merger agreement; | |
• | 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 | |
• | the SUA stockholders have not adopted the merger agreement at the SUA special meeting. |
• | 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; | |
• | subject to Tower’s 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 reasonableout-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 |
• | 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; TowerTop-Up Right.” |
• | 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 | |
• | 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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• | 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 | |
• | 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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• | 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; SUA’s systems of internal controls, established by management and the board of directors, regarding finance, accounting, legal compliance and ethics; and SUA’s auditing, accounting and financial reporting processes generally; | |
• | to serve as an independent and objective body to monitor SUA’s financial reporting process and internal control system; | |
• | to select, evaluate and, when appropriate, replace SUA’s independent auditor; and | |
• | to review and appraise the audit efforts of SUA’s 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. |
• | to determine the level of compensation paid to SUA’s chief executive officer; | |
• | to approve the level of compensation paid to SUA’s other executive officers; | |
• | to determine award grants under, and administer, SUA’s equity incentive plans and review and establish any and all other executive compensation plans adopted from time to time by SUA; | |
• | to ensure SUA’s executive officers are compensated effectively in a manner consistent with SUA’s stated compensation strategy, internal equity considerations, competitive practice and the requirements of the appropriate regulatory bodies; and | |
• | to communicate to stockholders SUA’s compensation policies and the reasoning behind such policies, as required by the SEC. |
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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 | |
• | to decide issues from time to time delegated by the board of directors. |
• | 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; | |
• | 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; | |
• | to annually evaluate this committee’s performance and charter; and | |
• | to approve certain related person transactions. |
• | to review and evaluate long-range objectives and the strategic business plan for SUA; | |
• | to meet with, and provide guidance to, management with respect to the strategic planning process and initiatives to achieve SUA’s long-term financial and strategic objectives; | |
• | 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; | |
• | 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; | |
• | 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 | |
• | 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. |
• | 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; | |
• | whether or not the person serves on boards of, or is otherwise affiliated with, competing companies; | |
• | 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; | |
• | the contribution which the person can make to the board of directors and SUA, with consideration being given to the person’s business and professional experience, education and such other factors as the Nominating and Corporate Governance Committee may consider relevant; and | |
• | the character and integrity of the person. |
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• | forward the communication to the director or directors to whom it is addressed; | |
• | 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 | |
• | 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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• | the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, | |
• | SUA is a participant, and | |
• | 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). |
• | employment agreements with executive officers that meet certain criteria, | |
• | director compensation that meet certain criteria, | |
• | any transaction with another company at which a related person’s only relationship is as an employee (other than an executive officer), director or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved does not exceed the greater of $50,000, or 2 percent of that company’s total annual revenues, | |
• | transactions where all stockholders receive proportional benefits, and | |
• | transactions involving competitive bids. |
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Number of Shares | Percent of Stock | |||||||
Name and Address | Beneficially Owned(1) | Outstanding | ||||||
Hallmark Financial Services, Inc. | 1,429,615(2 | ) | 9.90 | % | ||||
Aegis Financial Corporation | 1,421,838(3 | ) | 9.85 | % | ||||
North Run Capital, LP | 1,327,300(4 | ) | 9.19 | % | ||||
The Philip Stephenson Revocable Living Trust | 954,167(5 | ) | 6.61 | % | ||||
Wellington Management Company, LLP | 772,102(6 | ) | 5.35 | % | ||||
Renaissance Technologies, LLC | 770,400(7 | ) | 5.34 | % | ||||
Whitebox Advisors, LLC | 759,996(8 | ) | 5.26 | % | ||||
Peter E. Jokiel | 245,069(9 | ) | 1.67 | % | ||||
Courtney C. Smith | 222,974(10 | ) | 1.51 | % | ||||
Gary J. Ferguson | 87,689(11 | ) | * | |||||
Barry G. Cordeiro | 76,297(12 | ) | * | |||||
Scott W. Goodreau | 40,687(13 | ) | * | |||||
Robert E. Dean | 31,500(14 | ) | * | |||||
Mark E. Pape | 0(15 | ) | * | |||||
Robert H. Whitehead | 30,000(16 | ) | * | |||||
Russell E. Zimmermann | 30,500(17 | ) | * | |||||
Raymond C. Groth | 30,000(18 | ) | * | |||||
Paul A. Philp | 30,000(19 | ) | * | |||||
All executive officers and directors as a group | 885,032(20 | ) | 5.83 | % |
(1) | 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 September 22, 2009. |
(2) | 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. | |
(3) | 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. | |
(4) | 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. |
(5) | 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. |
(6) | 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. |
(7) | 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. |
(8) | 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. |
(9) | Peter E. Jokiel is SUA’s 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. |
(10) | Courtney C. Smith is SUA’s 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. |
(11) | 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. |
(12) | 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. |
(13) | 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. |
(14) | 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. |
(15) | Mark E. Pape is a Director. |
(16) | 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. |
(17) | 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. |
(18) | 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. |
(19) | 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. |
(20) | 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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• | If Tower provided a notice of annual meeting of stockholders in the previous year, then a stockholder’s notice must be delivered to or mailed to and received at Tower’s principal executive offices not less than 90 nor more than 120 days before the first anniversary of the date of the prior year’s 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 year’s annual meeting. | |
• | If no proxy materials were mailed by Tower in connection with the preceding year’s 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 year’s 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 stockholder’s notice. | |
• | In addition, under the provisions of Tower’s 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. | |
• | 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. |
• | the election and removal of directors; | |
• | provisions relating to the liability of Tower’s directors; | |
• | the provisions of Tower’s amended and restated certificate of incorporation with respect to amendments to such certificate of incorporation; and | |
• | any provisions inconsistent with such provisions. |
• | the transaction that results in a person’s 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; | |
• | 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 | |
• | on or after the time the person becomes an interested stockholder, the business combination is approved by the corporation’s board of directors and by holders of at least two-thirds of the corporation’s outstanding voting stock, excluding shares owned by the interested stockholder, at a meeting of stockholders. |
• | the owner of 15% or more of the outstanding voting stock of the corporation; or | |
• | 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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Rights of SUA Stockholders | Rights of Tower Stockholders | |||
Outstanding Capital Stock | As of September 22, 2009, SUA’s 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. | As of September 22, 2009, Tower’s issued and outstanding share capital consisted of 40,483,046 shares of common stock, par value $0.01 per share. Tower common stock trades on the NASDAQ Global Select Market. | ||
Authorized Capital Stock | SUA’s 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. | Tower’s 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. | ||
Voting Rights of holders of SUA’s Class B Common Stock | Prior to the merger, under SUA’s 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. | 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. | ||
Stockholder Action by Written Consent | 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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Rights of SUA Stockholders | Rights of Tower Stockholders | |||
SUA’s 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. | Tower’s 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. | |||
Number of Directors | The DGCL provides that the board of directors of a Delaware corporation must consist of one or more directors as fixed by the corporation’s certificate of incorporation or by-laws. | |||
Under SUA’s 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. | Under Tower’s 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. | |||
Classification | 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. | |||
Under SUA’s amended and restated certificate of incorporation and amended and restated by-laws the board of directors is not classified. | Under Tower’s 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 Tower’s directors are elected each year. | |||
Removal | 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 | Rights of Tower Stockholders | |||
Under SUA’s 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. | Under Tower’s 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. | |||
Amendments to Certificate of Incorporation | 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. | |||
Under SUA’s 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. | Tower’s 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 Tower’s directors and the amendment of the certificate of incorporation. |
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120 Broadway, 31st Floor
New York, New York 10271
(212) 655-2000
Attention: Elliot S. Orol
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Tower Filings (FileNo. 000-50990) | ||
Annual Report onForm 10-K | For the fiscal year ended December 31, 2008 | |
Quarterly Reports onForm 10-Q | For the quarters ended March 31, 2009 and June 30, 2009 | |
Current Reports onForm 8-K | 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. | |
Proxy Statement (Annual Stockholders Meeting) | Filed on March 27, 2009 | |
The description of Tower common stock contained in its registration statements onForm S-1, including any amendment or report filed for the purpose of updating the description. | Filed on May 7, 2004 and August 19, 2005 | |
SUA Filings (FileNo. 000-50891) | ||
Annual Report onForm 10-K | For the fiscal year ended December 31, 2008 | |
Quarterly Reports onForm 10-Q | For the quarters ended March 31, 2009 and June 30, 2009 | |
Current Reports onForm 8-K | 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. | |
Proxy Statement (Annual Stockholders Meeting) | Filed on April 1, 2009 | |
The description of shares of SUA common stock contained in its registration statement onForm S-1, including any amendment or report filed for the purpose of updating the description. | Filed on April 22, 2005 |
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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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ARTICLE I THE MERGER; CERTAIN RELATED MATTERS | ||||||
Section 1.1 | The Merger | A-5 | ||||
Section 1.2 | Closing; Effective Time | A-5 | ||||
Section 1.3 | Effects of the Merger | A-6 | ||||
Section 1.4 | Certificate of Incorporation; Bylaws | A-6 | ||||
Section 1.5 | Directors and Officers of Surviving Corporation | A-6 | ||||
Section 1.6 | Effect on Capital Stock | A-6 | ||||
Section 1.7 | Treatment of Options and Other Company Equity Awards | A-7 | ||||
Section 1.8 | Certain Adjustments | A-8 | ||||
Section 1.9 | Appraisal Rights | A-8 | ||||
ARTICLE II PAYMENT AND EXCHANGE OF CERTIFICATES; WITHHOLDING | ||||||
Section 2.1 | Payment and Exchange of Certificates | A-9 | ||||
Section 2.2 | Withholding Rights | A-10 | ||||
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY | ||||||
Section 3.1 | Corporate Existence and Power | A-11 | ||||
Section 3.2 | Corporate Authorization | A-11 | ||||
Section 3.3 | Governmental Authorization | A-12 | ||||
Section 3.4 | Non-Contravention | A-12 | ||||
Section 3.5 | Capitalization | A-13 | ||||
Section 3.6 | Subsidiaries | A-13 | ||||
Section 3.7 | Company SEC Filings, etc. | A-14 | ||||
Section 3.8 | Company Financial Statements | A-15 | ||||
Section 3.9 | Company SAP Statements | A-15 | ||||
Section 3.10 | Information Supplied | A-15 | ||||
Section 3.11 | Absence of Certain Changes or Events | A-16 | ||||
Section 3.12 | No Undisclosed Material Liabilities | A-16 | ||||
Section 3.13 | Compliance with Laws | A-16 | ||||
Section 3.14 | Litigation | A-17 | ||||
Section 3.15 | Insurance Matters | A-17 | ||||
Section 3.16 | Liabilities and Reserves | A-19 | ||||
Section 3.17 | Title to Properties; Absence of Liens | A-19 | ||||
Section 3.18 | Opinion of Financial Advisor | A-19 | ||||
Section 3.19 | Taxes | A-19 | ||||
Section 3.20 | Employee Benefit Plans and Related Matters; ERISA | A-20 | ||||
Section 3.21 | Employees, Labor Matters | A-21 | ||||
Section 3.22 | Environmental Matters | A-21 | ||||
Section 3.23 | Intellectual Property | A-21 | ||||
Section 3.24 | Material Contracts | A-22 | ||||
Section 3.25 | Brokers and Finders’ Fees | A-22 | ||||
Section 3.26 | Takeover Laws | A-23 | ||||
Section 3.27 | Rating | A-23 | ||||
Section 3.28 | Affiliate Transactions | A-23 | ||||
Section 3.29 | No Other Representations and Warranties; Disclaimer | A-23 |
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB | ||||||
Section 4.1 | Corporate Existence and Power | A-24 | ||||
Section 4.2 | Corporate Authorization | A-24 | ||||
Section 4.3 | Governmental Authorization | A-24 | ||||
Section 4.4 | Non-Contravention | A-25 | ||||
Section 4.5 | Capitalization; Interim Operations of Merger Sub | A-25 | ||||
Section 4.6 | Parent SEC Filings, etc. | A-26 | ||||
Section 4.7 | Parent Financial Statements | A-26 | ||||
Section 4.8 | Information Supplied | A-27 | ||||
Section 4.9 | Absence of Certain Changes or Events | A-27 | ||||
Section 4.10 | No Undisclosed Material Liabilities | A-27 | ||||
Section 4.11 | Compliance with Laws | A-27 | ||||
Section 4.12 | Litigation | A-28 | ||||
Section 4.13 | Taxes | A-28 | ||||
Section 4.14 | Brokers and Finders’ Fees | A-29 | ||||
Section 4.15 | Interested Stockholder | A-29 | ||||
Section 4.16 | No Other Representations and Warranties; Disclaimer | A-29 | ||||
ARTICLE V CONDUCT OF BUSINESS | ||||||
Section 5.1 | Conduct of Business by the Company | A-30 | ||||
Section 5.2 | Conduct of Business by Parent | A-33 | ||||
ARTICLE VI ADDITIONAL AGREEMENTS | ||||||
Section 6.1 | Preparation of the Proxy Statement/Prospectus andForm S-4 | A-33 | ||||
Section 6.2 | Stockholders Meeting; Company Board Recommendation | A-35 | ||||
Section 6.3 | No Solicitation | A-35 | ||||
Section 6.4 | Access to Information | A-38 | ||||
Section 6.5 | Reasonable Best Efforts | A-39 | ||||
Section 6.6 | Employee Matters | A-40 | ||||
Section 6.7 | Expenses | A-41 | ||||
Section 6.8 | Transfer Taxes | A-41 | ||||
Section 6.9 | Tax Treatment | A-41 | ||||
Section 6.10 | Directors’ and Officers’ Indemnification and Insurance | A-42 | ||||
Section 6.11 | Public Announcements | A-43 | ||||
Section 6.12 | Notification | A-43 | ||||
Section 6.13 | Section 16(b) | A-44 | ||||
Section 6.14 | Listing of Parent Common Stock | A-44 | ||||
Section 6.15 | Delisting of Common Stock | A-44 | ||||
Section 6.16 | Principal Executive Offices of the Surviving Corporation | A-44 | ||||
Section 6.17 | Partner Agent Program Agreement Amendments; Other Partner Agent Matters | A-44 | ||||
ARTICLE VII CONDITIONS | ||||||
Section 7.1 | Conditions to Each Party’s Obligation to Effect the Merger | A-44 | ||||
Section 7.2 | Conditions to Obligations of Parent and Merger Sub | A-45 | ||||
Section 7.3 | Conditions to Obligations of the Company | A-46 | ||||
Section 7.4 | Frustration of Closing Conditions | A-46 |
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ARTICLE VIII TERMINATION AND AMENDMENT | ||||||
Section 8.1 | Termination | A-46 | ||||
Section 8.2 | Effect of Termination | A-48 | ||||
Section 8.3 | Termination Payments | A-48 | ||||
Section 8.4 | Procedure for Termination | A-50 | ||||
ARTICLE IX GENERAL PROVISIONS | ||||||
Section 9.1 | Non-Survival of Representations, Warranties, Covenants and Agreements | A-50 | ||||
Section 9.2 | Notices | A-50 | ||||
Section 9.3 | Interpretation | A-51 | ||||
Section 9.4 | Counterparts; Effectiveness | A-51 | ||||
Section 9.5 | Entire Agreement; No Third Party Beneficiaries | A-52 | ||||
Section 9.6 | Severability | A-52 | ||||
Section 9.7 | Assignment | A-52 | ||||
Section 9.8 | Amendment | A-52 | ||||
Section 9.9 | Extension; Waiver | A-52 | ||||
Section 9.10 | Governing Law and Venue; Waiver of Jury Trial | A-53 | ||||
Section 9.11 | Remedies; Specific Performance | A-53 | ||||
Section 9.12 | Definitions | A-54 | ||||
Exhibit A | Form of Amended and Restated Certificate of Incorporation of the Company | A-62 | ||||
Exhibit B | Parent Tax Assumptions and Representations | A-64 | ||||
Exhibit C | Company Tax Assumptions and Representations | A-67 | ||||
Exhibit D | Form of Partner Agent Program Agreement Amendment | A-70 |
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By: | /s/ Michael H. Lee |
Title: | President and Chief Executive Officer |
By: | /s/ Elliot S. Orol |
Title: | Senior Vice President |
By: | /s/ Courtney Smith |
Title: | President and Chief Executive Officer |
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CERTIFICATE OF INCORPORATION
OF
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
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Title:
A-63
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Officers’ Certificate of Tower Group, Inc.
[ ], 2009
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. |
A-64
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A-66
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Officers’ Certificate of Specialty Underwriters’ Alliance, Inc.
[ ], 2009
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. |
A-67
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TO THE
[SPECIALTY UNDERWRITERS’ ALLIANCE, INC.][SUA INSURANCE COMPANY]
[AMENDED AND RESTATED] PARTNER AGENT PROGRAM AGREEMENT
A-70
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By: |
By: |
By: |
A-71
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• | Section 4.3 Parent Insurance Approvals |
• | Section 4.5 Capitalization; Interim Operations of Merger Sub |
• | Section 4.6 Parent SEC Filings, etc. |
• | Section 4.12 Litigation |
• | Section 4.13 Taxes |
• | Section 9.1 Knowledge |
• | Section 3.3 Governmental Authorization |
• | Section 3.4 Non-Contravention |
• | Section 3.5(b) Capitalization |
• | Section 3.6 Subsidiaries |
• | Section 3.11 Absence of Certain Changes or Events |
• | Section 3.15(a) Insurance Matters — Company Reinsurance Agreements |
• | Section 3.17 Title to Properties |
• | Section 3.19 Taxes |
• | Section 3.20(a) Company Benefit Plans |
• | Section 3.20(g) Company Benefit Plans — Severance, Acceleration, Etc. |
• | Section 5.1(b) Certain Permitted Conduct of Business by the Company |
• | Section 6.10(e) Company Indemnification Agreements |
• | Section 9.12 Knowledge of the Company |
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![(FBR LOGO)](https://capedge.com/proxy/PRER14A/0000950123-09-046215/y78243p3y7824304.gif)
Specialty Underwriters’ Alliance Inc.
222 South Riverside Plaza
Suite 1600
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By: | /s/ Joseph Kavanagh |
By: | /s/ James Neuhauser |
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As at December 31, 2008 and 2007 and
for the years ended
December 31, 2008, 2007 and 2006
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formerly known as CastlePoint Holdings, Ltd:
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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 | ||||||
Additionalpaid-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 | ||||
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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 | |||||
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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 |
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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 | |||||||||
D-6
Table of Contents
Note 1 — | General |
D-7
Table of Contents
Note 2 — | Summary of Significant Accounting Policies |
D-8
Table of Contents
D-9
Table of Contents
D-10
Table of Contents
D-11
Table of Contents
D-12
Table of Contents
• | 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.” |
D-13
Table of Contents
D-14
Table of Contents
Note 3 — | Related Party Transactions |
D-15
Table of Contents
D-16
Table of Contents
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 |
D-17
Table of Contents
Note 4 — | Investments |
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 | |||||||
D-18
Table of Contents
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 | ||||
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 | ||||||
D-19
Table of Contents
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
Table of Contents
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 | ) | ||||||||||||||||||
D-21
Table of Contents
D-22
Table of Contents
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 |
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 | ||||||||
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
Table of Contents
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 | ||||||
Note 6 — | Deferred Acquisition Costs |
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
Table of Contents
Note 7 — | Capital Stock |
(a) | Authorized and issued |
(b) | Warrants |
D-25
Table of Contents
Note 8 — | Equity Compensation Plans |
D-26
Table of Contents
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 value03-10-08, 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 | ||||||||||||||||||||
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 | — | — | ||||||||||||||
D-27
Table of Contents
Note 9 | — Taxation |
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 | ) | ||||
D-28
Table of Contents
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 | ||||
D-29
Table of Contents
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 | )% | |||
Note 10 — | Employee Benefit Plans |
D-30
Table of Contents
Note 11 — | Commitments and Contingencies |
(a) | Concentrations of credit risk |
(b) | Employment agreements |
(c) | Operating leases |
D-31
Table of Contents
(d) | Security Requirements |
(e) | Deposit Insurance |
(f) | Commitments through guarantees |
D-32
Table of Contents
(g) | Legal Proceedings |
Note 12 — | Statutory Financial Information and Accounting Policies |
D-33
Table of Contents
Note 13 — | Fair Value of Financial Instruments |
Note 14 — | Dividends Declared |
Note 15 — | Debt |
D-34
Table of Contents
Note 16 — | Subsequent Events |
D-35
Table of Contents
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 |
D-36
Table of Contents
D-37
Table of Contents
E-3 | ||||
Consolidated financial statements: | ||||
E-4 | ||||
E-5 | ||||
E-6 | ||||
E-7 | ||||
E-8-E-23 |
E-2
Table of Contents
![(AMPER, POLITZINER & MATTIA, LLP LOGO)](https://capedge.com/proxy/PRER14A/0000950123-09-046215/y78243p3y7824306.gif)
HIG, Inc.
E-3
Table of Contents
December 31, | ||||||||
2008 | 2007 | |||||||
(000’s 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 | |||||
E-4
Table of Contents
For Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
(000’s 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 | |||
E-5
Table of Contents
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 | |||||||||||||||||||||||||
(000’s 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 | |||||||||||||||||
E-6
Table of Contents
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
(000’s 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 | ||||
E-7
Table of Contents
1. | Nature of Operations |
E-8
Table of Contents
2. | Summary of Significant Accounting Policies |
(a) | Principles of Consolidation |
(b) | Basis of Presentation |
(c) | Use of Estimates |
(d) | Investments |
(e) | Cash and Cash Equivalents |
(f) | Insurance Premiums |
(g) | Deferred Policy Acquisition Costs |
E-9
Table of Contents
(h) | Losses and Loss Expenses |
(i) | Reinsurance |
(j) | Fixed Assets |
(k) | Income Taxes |
E-10
Table of Contents
(I) | Intangibles |
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 | ||||
(m) | Other Comprehensive Income (Loss) |
(n) | Fair Value of Financial Instruments |
(o) | New Accounting Pronouncements |
E-11
Table of Contents
• | 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.” |
E-12
Table of Contents
(p) | Future Adoption of New Accounting Standards |
E-13
Table of Contents
3. | Investments |
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
Table of Contents
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 | |||||||
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 | ||||
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 | ||||
E-15
Table of Contents
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 | |||
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 | ) | |||||||||
4. | Fair Value of Financial Instruments |
E-16
Table of Contents
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 | ||||||||
5. | Fixed Assets, net |
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
Table of Contents
6. | Unpaid Losses and Loss Expenses |
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 | ||||
7. | Reinsurance |
E-18
Table of Contents
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 | ||||||||
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 | ) |
8. | Income Taxes |
E-19
Table of Contents
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 | |||
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 | |||
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
Table of Contents
9. | Statutory Financial Statements |
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 | ||||||||
10. | Preferred Stock |
E-21
Table of Contents
11. | Dividend Restrictions |
12. | Risk-Based Capital |
13. | Retirement Benefit Plan |
14. | Lease Obligations |
Year Ending December 31, | ||||
2009 | $ | 595 | ||
2010 | 506 | |||
2011 | 474 | |||
2012 | 57 | |||
Total | $ | 1,632 | ||
E-22
Table of Contents
15. | Related Party Transactions |
16. | Contingencies |
17. | Subsequent Events |
E-23
Table of Contents
F-1
Table of Contents
F-3 | ||||
Consolidated financial statements: | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8-F-24 |
F-2
Table of Contents
Edison, New Jersey
F-3
Table of Contents
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(000’s omitted, except share and | ||||||||||||
per share data) | ||||||||||||
ASSETS | ||||||||||||
Investments: | ||||||||||||
Fixed maturity securitiesavailable-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 | |||||||
F-4
Table of Contents
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) | |||||||||||||
(000’s 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 securitiesavailable-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 | |||||||
F-5
Table of Contents
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 | |||||||||||||||||||||||||
(000’s 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 | ||||||||||||||||||
F-6
Table of Contents
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) | |||||||||||||
(000’s 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 | — | |||||||||||
F-7
Table of Contents
(000’s omitted, except share and per share data)
1. | Nature of Operations |
2. | Acquisition |
F-8
Table of Contents
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 | ||
3. | Summary of Significant Accounting Policies |
(a) | Principles of Consolidation |
(b) | Basis of Presentation |
(c) | Use of Estimates |
F-9
Table of Contents
(d) | Investments |
(e) | Cash and Cash Equivalents |
(f) | Insurance Premiums |
(g) | Deferred Policy Acquisition Costs |
(h) | Losses and Loss Expenses |
F-10
Table of Contents
(i) | Reinsurance |
(j) | Fixed Assets |
(k) | Income Taxes |
(l) | Intangibles |
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
Table of Contents
(m) | Other Comprehensive Income (Loss) |
(n) | Fair Value of Financial Instruments |
(o) | New Accounting Pronouncements |
F-12
Table of Contents
F-13
Table of Contents
4. | Investments |
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
Table of Contents
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 | |||||||
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 | ||||
F-15
Table of Contents
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 | ||||||||
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 | ) | ||||||
F-16
Table of Contents
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 | ) | ||||||||||
5. | Fixed Assets, net |
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
Table of Contents
6. | Unpaid Losses and Loss Expenses |
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 | ||||||
7. | Reinsurance |
F-18
Table of Contents
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 | ||||||||
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 | ||||||||
8. | Income Taxes |
F-19
Table of Contents
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 | |||||||
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 | |||||||
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 | ||||||
F-20
Table of Contents
9. | Statutory Financial Statements |
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 |
10. | Preferred Stock |
F-21
Table of Contents
11. | Dividend Restrictions |
12. | Risk-Based Capital |
13. | Retirement Benefit Plan |
14. | Lease Obligations |
F-22
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Year Ending | ||||
December 31, | ||||
2008 | $ | 440 | ||
2009 | 441 | |||
2010 | 443 | |||
2011 | 118 |
15. | Related Party Transactions |
16. | Contingencies |
17. | Subsequent Events |
F-23
Table of Contents
F-24
Table of Contents
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
• | How to request a copy of materials for this Special Meeting or future stockholder meetings: |
• | To obtain directions to the Special Meeting, please contact Investor Relations at (312) 277-1600. |
Table of Contents
your proxy card in the
envelope provided as soon as possible.
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