1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996
REGISTRATION NO. 333-3956
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EXECUTIVE RISK INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1388171
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
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82 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06070
(860) 408-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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LEROY A. VANDER PUTTEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
EXECUTIVE RISK INC.
82 HOPMEADOW STREET
SIMSBURY, CT 06070
(860) 408-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies of all communications, including all communications sent to the agent for
service, should be sent to:
JAMES A. FITZPATRICK, JR., ESQ. PETER R. O'FLINN, ESQ.
JONATHAN L. FREEDMAN, ESQ. STEPHEN G. ROONEY, ESQ.
DEWEY BALLANTINE LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
1301 AVENUE OF THE AMERICAS 125 WEST 55TH STREET
NEW YORK, NEW YORK 10019-6092 NEW YORK, NEW YORK 10019-5389
(212) 259-8000 (212) 424-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of
this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 3, 1996
PROSPECTUS
JUNE , 1996
2,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,000,000 shares (the "Shares") of common stock, par value $.01
per share (the "Common Stock"), of Executive Risk Inc. ("ERI" or the "Company")
offered hereby (the "Offering") are being sold by Aetna Life and Casualty
Company ("AL&C" or the "Selling Stockholder"). See "Selling Stockholder." The
Company will not receive any proceeds from the sale of the Common Stock by the
Selling Stockholder.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "ER." The last reported sales price of the Common Stock on the NYSE
on May 31, 1996, was $35.25 per share. See "Price Range of Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS TO
TO THE DISCOUNTS AND THE SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
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Per Share.................. $ $ $
Total(3)................... $ $ $
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(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Selling Stockholder estimated at
$ . The Company will pay certain other expenses incurred in
connection with the Offering, estimated to be $ , subject to
adjustment.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
300,000 shares of Common Stock, at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public and
Underwriting Discounts and Commissions will be $ and $ ,
respectively. If such option is exercised in full, the Proceeds to the
Selling Stockholder will be unchanged from the amount set forth above, and
the Company will receive proceeds of $ before deduction of expenses
referred to in note (2) above. See "Underwriting."
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the Shares will be made in New York,
New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE CONNING & COMPANY
SECURITIES CORPORATION
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF
THIS DOCUMENT.
ERI, A DELAWARE CORPORATION, OWNS ALL OF THE SHARES OF CAPITAL STOCK OF
CERTAIN INSURANCE COMPANIES DOMICILED IN THE STATES OF CONNECTICUT AND DELAWARE.
THE CONNECTICUT AND DELAWARE INSURANCE LAWS REQUIRE PRIOR APPROVAL BY THEIR
RESPECTIVE STATE INSURANCE COMMISSIONERS OF ANY ACQUISITION OF CONTROL OF A
DOMESTIC INSURANCE COMPANY OR OF ANY COMPANY WHICH CONTROLS A DOMESTIC INSURANCE
COMPANY. ONE INSURANCE COMPANY SUBSIDIARY OF ERI IS DEEMED TO BE COMMERCIALLY
DOMICILED IN CALIFORNIA. THE CALIFORNIA INSURANCE LAW REQUIRES PRIOR APPROVAL BY
THE CALIFORNIA INSURANCE COMMISSIONER OF ANY ACQUISITION OF CONTROL OF AN
INSURANCE COMPANY COMMERCIALLY DOMICILED IN CALIFORNIA OR OF ANY COMPANY WHICH
CONTROLS SUCH AN INSURANCE COMPANY. "CONTROL" IS GENERALLY PRESUMED TO EXIST
THROUGH THE OWNERSHIP OF, OR THE HOLDING OF PROXIES WITH RESPECT TO, 10% OR MORE
OF THE VOTING SECURITIES OF AN INSURANCE COMPANY OR OF ANY COMPANY WHICH
CONTROLS AN INSURANCE COMPANY. ANY PURCHASER OF COMMON STOCK HOLDING POWER TO
VOTE 10% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK WILL BE PRESUMED TO
HAVE ACQUIRED CONTROL OF ERI'S INSURANCE SUBSIDIARIES UNLESS THE RELEVANT
INSURANCE COMMISSIONER, FOLLOWING APPLICATION BY SUCH PURCHASER, DETERMINES
OTHERWISE. ACCORDINGLY, ANY PURCHASE RESULTING IN A PURCHASER'S HOLDING THE
POWER TO VOTE 10% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK WOULD
REQUIRE PRIOR APPROVAL BY THE INSURANCE COMMISSIONERS OF THE ABOVE-REFERENCED
STATES.
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY, BY
THE SELLING STOCKHOLDER, OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC
OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN
ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE
UNITED STATES AND CANADA. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES
ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND
TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE SHARES AND THE
DISTRIBUTION OF THIS PROSPECTUS.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, NY 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. Copies of the above
reports, proxy statements and other information also may be inspected at the
offices of the NYSE, 20 Broad Street, New York, NY 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the securities offered hereby, reference is hereby
made to the Registration Statement and the exhibits and schedules filed
therewith, which may be obtained from the principal office of the Commission in
Washington, DC, upon payment of the fees prescribed by the Commission.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-12800) are incorporated by reference:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1995 (the "1995 Form 10-K");
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 (the "Form 10-Q");
(iii) Current Report on Form 8-K filed on March 26, 1996 (the "Form
8-K");
(iv) the sections entitled "Beneficial Ownership of Stock," "Executive
Compensation" (except the "Compensation Committee Report" and the
"Performance Graph"), and "Compensation Committee Interlocks and Insider
Participation" of the Company's Proxy Statement, filed with the Commission
on April 2, 1996; and
(v) description of the Company's capital stock contained in the
Company's Registration Statement on Form 8-A, filed with the Commission on
February 9, 1994, as amended by Form 8-A/A, filed with the Commission on
May 8, 1996, including any further amendment updating such description.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from their respective dates of filing. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person (including any
beneficial owner of Shares purchased in the Offering) to whom this Prospectus is
delivered, upon written or oral request, a copy of any or all of the foregoing
documents incorporated herein by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents). Written or telephone requests should be directed to the Company
at 82 Hopmeadow Street, Simsbury, CT 06070, Attention: Mr. Robert V. Deutsch,
Executive Vice President, 860-408-2000.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Except where otherwise indicated, (i) the "Company" or "ERI" refers
to Executive Risk Inc., with respect to any period subsequent to December 31,
1993 and to its wholly-owned subsidiary, Executive Re Inc. ("Executive Re"),
with respect to any period prior to January 1, 1994; (ii) "ERII" refers to
Executive Risk Indemnity Inc. and "ERSIC" refers to Executive Risk Specialty
Insurance Company (ERII and ERSIC are the Company's wholly-owned insurance
company subsidiaries and are sometimes collectively referred to as the
"Insurance Subsidiaries"); (iii) "ERMA" refers to Executive Risk Management
Associates, the Company's wholly-owned underwriting agency which offers
insurance policies issued by ERII and ERSIC, as well as by The Aetna Casualty
and Surety Company ("AC&S"); (iv) all financial information in this Prospectus
is presented in accordance with generally accepted accounting principles
("GAAP"), unless specified as being in accordance with statutory accounting
practices ("SAP"); and (v) the information contained in this Prospectus assumes
no exercise of the Underwriters' over-allotment option or the Aetna Stock
Option, as defined below.
THE COMPANY
ERI is a specialty insurance holding company that, through its
subsidiaries, develops, markets and underwrites directors and officers liability
insurance ("D&O") and other professional liability insurance products. Based on
the most recently available survey of the D&O industry by Watson Wyatt
Worldwide, the facility through which the Company and AC&S issue D&O is a
leading underwriter of primary D&O in the United States. From 1993 to 1995, the
Company's gross premiums written increased from $84.3 million to $210.6 million,
while its GAAP combined ratio declined from 107.2% to 95.5%. The Company
attributes this success primarily to the following factors: (i) an ability to
identify and capitalize on specialty insurance opportunities, including those in
underserved and new markets; (ii) increasing marketplace acceptance of the
Company as a direct insurer of D&O risks by both new insureds and previous AC&S
insureds; (iii) stable relationships with insureds and brokers, resulting from
an emphasis on client service in marketing, underwriting and claims handling;
(iv) pricing based on risk rather than market forces; and (v) a
performance-based culture, fostered by significant equity participation by the
Company's executive officers and directors (currently 21% of the Common Stock on
a fully diluted basis).
Historically, the Company has focused on writing D&O for domestic insureds,
which accounted for 76% of gross premiums written in 1995. The Company's
principal D&O insureds are commercial entities, financial institutions and
not-for-profit organizations, which represented 55%, 28% and 17% of gross
domestic D&O premiums written in 1995, respectively. In recent years, the
Company has expanded its product line to related specialty liability insurance
products, including errors and omissions liability insurance ("E&O") for lawyers
and other professionals (19% of gross premiums written in 1995), international
D&O through a joint venture with Union des Assurances de
Paris -- Incendie-Accidents ("UAP") (5% of gross premiums written in 1995) and
fiduciary and fidelity bond coverages.
The Company's E&O business is divided between Lawyers Professional
Liability ("LPL") and Miscellaneous Professional Liability ("MPL"). Gross
premiums written for LPL increased from $2.3 million in 1993 to $28.7 million in
1995. Gross premiums written for MPL grew from $1.6 million to $11.6 million
during the same period. The growth of the Company's E&O business demonstrates
the effectiveness of its overall strategy of identifying and serving insurance
markets which the Company believes are not being effectively served by other
insurers. For example, the Company identified large law firms (35 or more
lawyers) as one such underserved market. In this market, extensive risk
evaluation and underwriting are performed by the Company's LPL underwriters, all
of whom are attorneys formerly associated with large law firms. Additionally,
the Company's MPL department has expanded the classes of businesses it insures
and has formed alliances with wholesale brokers who control large blocks of E&O
business. Recent additions to the Company's MPL product offerings include E&O
insurance programs for automobile insurance agents, psychologists and temporary
help agencies.
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During the early 1990's, the Company perceived an opportunity to provide
professional liability insurance to foreign corporations whose directors and
officers are exposed to D&O risks, including, among others, risks arising in
connection with U.S. securities laws. In January 1993, ERI and UAP (the largest
insurance organization in France and the second largest in Europe) formed a
French insurance underwriting agency, known as UAP Executive Partners ("UPEX"),
in which each party has a 50% interest. UPEX is based in Paris and offers D&O
policies issued by UAP, a portion of each of which is reinsured by the Company.
The Company also reinsures international D&O business through its Dutch
subsidiary, Executive Risk N.V., founded in May 1995 to participate in
professional liability opportunities, principally in the Netherlands.
The following table sets forth ERI's gross premiums written by line of
business for the periods indicated:
YEAR ENDED DECEMBER 31,
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1995 GROSS 1994 GROSS 1993 GROSS
PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
WRITTEN OF TOTAL WRITTEN OF TOTAL WRITTEN OF TOTAL
(IN THOUSANDS)
D&O............................. $159,491 76% $104,871 81% $ 79,541 94%
Lawyers E&O..................... 28,744 14 17,964 14 2,275 3
Misc. E&O....................... 11,649 5 5,153 4 1,646 2
International D&O............... 9,934 5 1,620 1 785 1
Other........................... 822 -- 591 -- 8 --
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Total................. $210,640 100% $130,199 100% $ 84,255 100%
======== ===== ======== ======== ======= =====
While the Company seeks premium growth, management relies on a niche
strategy to maintain overall underwriting profitability levels. The Company
believes that certain niche markets have the advantage of reduced competitive
pressures and more attractive pricing formulas. The Company generally seeks to
compete in business lines where it can achieve an underwriting profit (i.e., a
combined ratio below 100%, which indicates profitability before taking net
investment income into account). The following table sets forth ERI's GAAP
ratios for the periods indicated.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
GAAP DATA:
Loss Ratio................................... 67.4% 67.6% 67.6% 71.5% 70.6%
Expense Ratio................................ 28.1 29.1 39.6 34.7 33.1
---- ---- ----- ----- -----
Combined Ratio............................... 95.5% 96.7% 107.2% 106.2% 103.7%
==== ==== ===== ===== =====
The Company prices insurance policies based primarily upon specific risk
exposure, including loss experience, rather than primarily upon market factors.
The table below sets forth statutory loss ratios for the periods indicated for
the Insurance Subsidiaries and the property/casualty industry as a whole. The
Insurance Subsidiaries' specialty products business is not directly comparable
to the business of the property/casualty industry as a whole.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
SAP DATA:
Insurance Subsidiaries Loss Ratio............... 67.4% 67.6% 67.6% 71.5% 73.0%
Industry Loss Ratio(1).......................... 78.9 81.1 79.5 88.1 81.1
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(1) Source: For 1991 through 1994, Best's Aggregates &
Averages-Property-Casualty; for 1995, BestWeek P/C Supplement.
The Insurance Subsidiaries conduct D&O business primarily through an
insurance facility (the "Facility") which consists of AC&S, ERII and ERSIC, each
of which can act as insurer or reinsurer, and ERMA, which acts as the product
developer, marketer and managing underwriter. In 1995, $99.0 million of gross
D&O premiums written were issued on ERII and ERSIC policies, as compared to $7.2
million in 1994.
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See "Business -- Markets." Approximately one-third of the growth in the
Company's gross premiums written from 1994 to 1995 was attributable to the
conversion of the Facility's insureds from AC&S policies to ERII or ERSIC
policies. It is unlikely that the rate of growth achieved in 1995 attributable
to such conversions can be sustained. Under the Facility, when the Company
issues an ERII or ERSIC D&O policy, the Company receives 100% of the gross
premiums written on that policy (and generally cedes 12.5% to AC&S), as compared
to the 50% it receives when an AC&S policy is issued. Also, ERI realizes an
incremental benefit from conversions to Insurance Subsidiaries' D&O policies
because of the elimination of the Company's payment to AC&S of an override
commission equal to 3% of gross premiums written on all AC&S D&O policies issued
through the Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
Both D&O and E&O are designed to protect insureds against lawsuits and
associated legal defense expenses. In connection with D&O coverage of
corporations, the most significant liabilities generally derive from lawsuits by
stockholders against directors and officers for alleged failures to discharge
duties to the corporation or violations of federal securities laws. In the case
of not-for-profit organizations, claims most often arise in connection with
employment practices litigation. E&O is offered to professionals, such as
attorneys, psychologists and insurance agents, among others, where the principal
source of potential claims is dissatisfied clients alleging breaches of
professional standards or ethical violations.
Approximately 94% of the Company's investment portfolio at March 31, 1996,
on a fair value basis, consisted of cash and investment grade fixed income
securities, primarily tax-exempt municipal securities. At that date, the
Company's investment portfolio had an amortized cost and fair value of $509.9
million and $531.7 million, respectively, and the tax equivalent yield on the
fixed maturity portfolio was 8.22%. The Company's investment philosophy is to
seek optimum yield, consistent with what management believes is a generally
conservative investment approach. At March 31, 1996, the Company's total assets
were $687.5 million and stockholders' equity was $105.0 million.
On March 26, 1996, the Company purchased 2,511,300 shares of its capital
stock from AC&S at a price of $29.875 per share, or approximately $75 million in
the aggregate (the "Repurchase Transaction"). Under the terms of the Amended and
Restated Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of
March 22, 1996 by and among ERI, AC&S and AL&C, the price is subject to upward
adjustment under certain circumstances. See "Recent Developments." Immediately
prior to the Repurchase Transaction, AC&S beneficially owned a total of
4,611,300 shares of ERI's then-outstanding capital stock, consisting of
3,286,300 shares of Common Stock, all 1,225,000 shares of the Class B Common
Stock and an option (the "Aetna Stock Option") to purchase 100,000 shares of
Common Stock at an exercise price of $12.00 per share. On March 29, 1996, AC&S
transferred the remaining 2,000,000 shares of Common Stock (which are the Shares
offered hereby), together with the Aetna Stock Option, to AL&C. Prior to the
repurchase of the Class B Common Stock, AC&S had the right to elect four
individuals to the Company's Board of Directors. Following the Repurchase
Transaction, AC&S has the right to nominate one director for election to the
Board of Directors. One individual designated by AC&S currently serves on the
Company's Board of Directors. See "Business Relationship with AC&S."
The Insurance Subsidiaries' current pooled rating from A.M. Best Company,
Inc. ("A.M. Best") is "A (Excellent)" and their current pooled claims-paying
ability rating from Standard & Poor's Corporation ("S&P") is "A+ (Good)." These
ratings are based upon factors of concern to policyholders, including financial
condition and solvency, and are not directed to the protection of investors. The
Company reviewed all material elements of the Repurchase Transaction, including,
but not limited to, the financing incurred to complete the Repurchase
Transaction (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"), with A.M. Best
and S&P prior to the consummation of the Repurchase Transaction. The Company's
ratings have been unaffected by the Repurchase Transaction. There can be no
assurance, however, that such ratings will not change in the future.
ERI employs approximately 250 people, most of whom are located at the
Company-owned headquarters building at 82 Hopmeadow Street, Simsbury,
Connecticut 06070.
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THE OFFERING
Common Stock offered by the Selling
Stockholder........................... 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)(2)........................ 9,006,855 shares
Use of proceeds......................... The Company will not receive any proceeds from the
sale of Shares by the Selling Stockholder. If the
Underwriters' over-allotment option is exercised
(see "Underwriting"), any net proceeds received by
the Company from the proceeds of shares sold
thereunder will be used for general corporate
purposes.
Dividend policy......................... The Company intends to continue to pay quarterly
cash dividends of $.02 per share of Common Stock
($.08 annually), subject to declaration by the
Board of Directors and certain regulatory and other
constraints.
NYSE symbol............................. ER
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(1) Excludes up to 300,000 shares of Common Stock which may be sold by the
Company upon exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of June 3,
1996. Does not include 100,000 shares of Common Stock issuable upon exercise
of the Aetna Stock Option, or 1,653,464 shares issuable upon exercise of
options held by current and former directors and employees.
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PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents consolidated historical and pro forma income
statement data for the three months ended March 31, 1996 and the year ended
December 31, 1995, adjusted to give effect to the Repurchase Transaction and the
related disposition of assets and incurrence of debt, as if they had been
consummated at January 1, 1995. The unaudited pro forma consolidated financial
data do not purport to represent what the Company's consolidated results of
operations would have been, or to project the Company's results of operations
for any future period or date, had the Repurchase Transaction and the related
disposition of assets and incurrence of debt occurred on January 1, 1995. The
pro forma financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
THREE MONTHS ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------------- -----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
PRO FORMA INCOME STATEMENT
DATA:
Gross premiums written......... $57,682 $57,682 $210,640 $ 210,640
Net premiums written........... 38,851 38,851 145,121 145,121
Net premiums earned............ 33,913 33,913 116,434 116,434
Net investment income.......... 7,375 (416)(a) 6,959 26,706 $ (1,743)(a) 24,963
Net realized gains............. 954 954 1,588 1,588
Other income................... 92 92 83 83
------ -------- ------- -------- ------ --------
Total operating
revenues........... 42,334 (416) 41,918 144,811 (1,743) 143,068
Loss and loss adjustment
expenses..................... 22,894 22,894 78,530 78,530
Policy acquisition costs....... 6,744 6,744 21,931 21,931
General & administrative
costs........................ 3,168 3,168 10,730 10,730
Long-term incentive
compensation................. 187 187 1,458 1,458
Interest expense............... 578 752(b) 1,330 2,022 3,150(b) 5,172
------ -------- ------- -------- ------ --------
Total operating
expenses........... 33,571 752 34,323 114,671 3,150 117,821
------ -------- ------- -------- ------ --------
Income before income taxes..... 8,763 (1,168) 7,595 30,140 (4,893) 25,247
Income tax expense............. 1,538 (316)(c) 1,222 4,854 (1,323)(c) 3,531
------ -------- ------- -------- ------ --------
Net income..................... $ 7,225 $ (852) $ 6,373 $ 25,286 $ (3,570) $ 21,716
====== ======== ======= ======== ====== ========
Earnings per common share --
assuming full dilution....... $ 0.60 $ 0.06 $ 0.66 $ 2.11 $ 0.18 $ 2.29
Weighted average shares
outstanding -- assuming full
dilution..................... 12,061 (2,373)(d) 9,688 11,978 (2,511)(d) 9,467
Operating margin(1)............ 20.3% 19.5% 21.3% 20.4%
- ------------------------------
(1) Consists of income before income taxes, excluding interest expense and
realized capital gains, divided by total revenues, excluding realized
capital gains.
8
10
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
The following notes describe the adjustments made in computing pro forma
consolidated financial data:
(a) Reflects the loss of investment income that otherwise would have been earned
on the Company's invested assets used as partial funding of the Repurchase
Transaction, at 5.8%, which was the Company's nominal yield on its fixed
maturity portfolio for the year ended December 31, 1995.
(b) Reflects additional interest expense, at a 7% assumed rate, which represents
the Company's anticipated borrowing rate on the incremental long-term debt
incurred as partial funding of the Repurchase Transaction.
(c) Reflects the tax benefit of lost investment income and incremental interest
expense at the statutory tax rate of 35% adjusted for the effects of tax
exempt interest income.
(d) Reflects the reduction in the weighted average shares outstanding resulting
from the Repurchase Transaction.
9
11
RISK FACTORS
Prospective investors in the Shares offered hereby should consider
carefully the matters set forth below, as well as the other information set
forth and incorporated by reference in this Prospectus.
RELATIONSHIP WITH AC&S
The Company derives a significant proportion of its revenue from insurance
written on AC&S policies, although, increasingly, the Company is writing
business on the policies of its own Insurance Subsidiaries (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations"). The agreements with AC&S relating to the
Facility place certain restrictions on the manner in which the Company may
conduct its business. These agreements distinguish between two types of
insurance business in which the Company may engage in the future. One type of
business consists of insurance business that complies with underwriting, claims
and reinsurance guidelines which are established by the Company with AC&S's
approval and which may not be altered without AC&S's consent. All other types of
insurance business are subject to volume restrictions (see "Business
Relationship with AC&S"). These restrictions may limit the Company's ability to
pursue business opportunities that it believes would be profitable.
On April 2, 1996, an affiliate of The Travelers Group Inc. ("Travelers")
purchased AC&S. Notwithstanding this transaction, AC&S remains a party to the
agreements relating to the Facility. The exclusive arrangement whereby
substantially all D&O written in the United States by AC&S and its former
parent, AL&C, is written through ERMA remains unchanged as a result of the
Travelers purchase; however, Travelers and its other affiliates are not bound by
this arrangement. A subsidiary of Travelers currently writes D&O in competition
with the Company and is likely to continue to compete with the Company in the
future.
An interruption or termination of the Company's contractual arrangements
with AC&S would, under certain circumstances, constitute an event of default
under the Company's existing senior loan agreements and could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's agreements with AC&S require a minimum two-year notice of
termination, and no such termination may become effective until year-end 1999,
subject to earlier termination upon the occurrence of specified events. These
events include the failure of the Company to meet certain specified financial
tests, the failure of the Company to comply with certain restrictions on its
ability to engage in non-Facility business and a change of control (as defined)
of the Company. In addition, ERMA's ability to underwrite Facility business on
behalf of AC&S may be suspended upon the failure of the Company to meet the same
specified financial tests which give rise to a right of termination.
Prior to the Repurchase Transaction, AC&S, as sole holder of the Class B
Common Stock, had the right under the Company's Certificate of Incorporation to
designate and elect four persons to the Company's Board of Directors. The Board
of Directors consisted during 1995 of twelve persons. It consists of eleven
persons as of the date of this Prospectus. Following the Repurchase Transaction,
AC&S has the right to nominate one director for election to the Board of
Directors. AC&S's designee for such purpose is Joseph P. Kiernan, who has been a
member of the Company's Board of Directors since 1986. Mr. Kiernan also has been
and will continue to be a member of one of two underwriting committees of each
Insurance Subsidiary's Board of Directors. This committee, called Underwriting
Committee A, is responsible for, among other things, determining underwriting
guidelines and acting in respect of insurance written through the Facility on
AC&S policies. Since any action by Underwriting Committee A requires unanimous
consent of its members, the AC&S designee effectively has a veto right with
respect to changes in guidelines affecting underwriting, claims handling and
reinsurance with respect to AC&S policies.
CERTAIN BUSINESS CONSIDERATIONS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition and general economic
conditions, including interest rate levels, as well as legislative initiatives,
the frequency of litigation, and the size of judgments obtained against
directors and officers. The impact of these factors can dramatically
10
12
affect demand for the Company's products, insurance capacity, pricing and claims
experience and, consequently, the Company's results of operations. The enactment
of the Private Securities Litigation Reform Act of 1995 (which is intended to
limit securities fraud lawsuits) is an example of an external factor that can
affect the market for the Company's products and services. Management does not
believe that the effects, if any, of this new statute on the D&O market will be
known for a number of years. Due to the Company's underwriting policy of pricing
its insurance products primarily according to perceived risk exposure rather
than according to pricing patterns in the market, it is possible that the
Company will seek to raise prices during times of excess insurance capacity (or,
will not seek to raise prices during times of limited insurance capacity) with
an accompanying adverse impact on the Company's results of operations, market
share or both.
The professional liability insurance sectors of the property/casualty
industry have experienced a prolonged "soft market," characterized by intense
competition and strong downward pricing pressures. The Company's business
strategy for continued growth relies on finding underserved D&O and E&O markets
where it can create and profitably underwrite attractive insurance products. The
Company's ability to pursue such strategy entails certain risks, due to the
highly competitive nature of the insurance industry. The Company competes with
domestic and foreign insurers and reinsurers, some of which have greater
financial, marketing and management resources and experience than the Company.
The Company may also be required to compete with new market entrants in the
future. Competition is based on many factors, including the perceived financial
strength of the insurer, pricing and other terms and conditions, levels of
customer service (including the speed with which claims are paid), ratings
assigned by independent rating organizations (including A.M. Best and S&P) and
reputation and experience in the business. This competition could have an
adverse effect on the Company's results of operations. In addition, with respect
to the Company's ratings, A.M. Best and S&P each reviews its ratings of
insurance companies from time to time. There can be no assurance that any
particular rating will continue for any given period of time or that it will not
be changed or withdrawn entirely if, in the judgment of the rating agency,
circumstances so warrant. If either the Company's A.M. Best rating or its
claims-paying ability rating from S&P were downgraded from its current level,
the Company's results of operations could be materially and adversely affected.
The Company has commenced offering E&O to members of various professions on
a program basis, that is, through wholesale brokers who control regional or
national books of business. These "program administrators" function similarly to
managing general agents. They are authorized to receive insurance applications
and issue Insurance Subsidiary policies, all in accordance with underwriting
criteria specified by the Company. Program administrators are not authorized to
handle or pay claims or to bind reinsurance. The use of third parties, such as
program administrators, is an accepted distribution methodology in the industry;
however, the Company has not previously authorized non-employees to bind
insurance coverage. Distribution through program administrators entails certain
fidelity, credit and underwriting risks not ordinarily encountered in connection
with the Company's other distribution methods.
REGULATION
The Insurance Subsidiaries are subject to a substantial degree of
regulatory oversight, which generally is designed to protect the interests of
policyholders as opposed to stockholders. Such regulation relates to authorized
lines of business, policy rates and forms, capital and surplus requirements,
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control and a variety of other financial and
nonfinancial components of an insurance company's business. The Company believes
that more, rather than less, regulation is likely in the future. The National
Association of Insurance Commissioners (the "NAIC") has adopted a system of
assessing the financial condition and stability of insurance companies, known as
"IRIS ratios," and a system to test the adequacy of statutory capital, known as
"risk-based capital," each of which applies to the Insurance Subsidiaries. IRIS
ratios consist of 11 ratios that are compiled annually from each insurance
company's statutory financial reports and then compared against the
NAIC-established "usual range" for each ratio. Companies like the Insurance
Subsidiaries, which are experiencing rapid premium growth, have fallen outside
the usual range for certain IRIS ratios from time to time. The risk-based
capital rules, required for the first time in regulatory filings for 1994,
establish statutory capital requirements based on levels of risk assumed by an
insurance company. The Insurance Subsidiaries' adjusted capital at
11
13
December 31, 1994 and 1995 was in excess of the applicable risk-based standards
as established by the NAIC. Failure to maintain risk-based capital at the
required levels, or generation of IRIS ratios far outside the NAIC's usual
range, could adversely affect the Insurance Subsidiaries' ability to secure
regulatory approvals as necessary or appropriate in connection with their
insurance businesses.
EFFECTS OF BANK INDEBTEDNESS AND COVENANTS
In connection with the financing of the Repurchase Transaction, the Company
entered into a Term Loan Agreement (the "Term Loan Agreement"), dated as of
March 26, 1996, by and among the Company, the banks signatory thereto and The
Chase Manhattan Bank (National Association), as Agent. The Company borrowed, and
there is currently outstanding, $70 million of senior term debt under the Term
Loan Agreement, $25 million of which was used to refinance bank indebtedness.
The Company is required to make principal payments on the term loan beginning in
November 1997 and at 6-month intervals thereafter, in the respective amounts of
$5 million, $5 million, $6 million, $6 million, $7 million, $7 million, $8
million, $8 million, $9 million and $9 million, respectively. The Term Loan
Agreement contains certain negative covenants by the Company, including, among
other things, restrictions on the incurrence of additional debt, the sale of
assets, the making of acquisitions, the payment of dividends and the incurrence
of liens. The Term Loan Agreement also contains certain financial covenants
requiring, among other things, that the Company maintain a minimum net worth, a
minimum statutory surplus and certain financial ratios. In addition, the Term
Loan Agreement provides that the termination or disavowal by any party thereto
of either of the Agency Agreement or the Quota Share Agreement (as such terms
are hereinafter defined; see "Business Relationship with AC&S"), shall
constitute an event of default unless, in either case, AC&S business reinsured
by ERII pursuant to the Quota Share Agreement represents less than 15% of the
gross premiums written (on a combined basis) of the Insurance Subsidiaries for
the 12-month period preceding such date of termination or disavowal. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
ERI is an insurance holding company. Dividends and other payments from the
Insurance Subsidiaries and ERMA are ERI's primary source of funds to pay
expenses, service debt and pay dividends, if any. The payment of dividends by
ERII and ERSIC is subject to restrictions set forth in the Delaware and
California insurance laws and the Connecticut insurance laws, respectively. In
general, these restrictions limit the aggregate amount of dividends or other
distributions that the Insurance Subsidiaries may declare or pay to ERI within
any 12 month period without the permission of the applicable regulatory
authority (generally to the greater of statutory net income for the preceding
year or 10% of statutory surplus), and require that the statutory surplus of the
applicable Insurance Subsidiary following any such dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate to its
financial needs. The maximum amount of dividends payable by the Insurance
Subsidiaries in 1996, without prior approval of the applicable state insurance
regulators, is $16.7 million. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources."
In addition, under applicable state insurance laws and regulations, no
person may acquire control of ERII, ERSIC or any corporation controlling either
of them unless such person has filed a statement containing specified
information with appropriate regulatory authorities and approval for such
acquisition has been obtained. Under applicable laws and regulations, any person
acquiring, directly or indirectly, or holding proxies with respect to, 10% or
more of the voting stock of any other person is presumed to have acquired
"control of such person." Accordingly, any purchase resulting in the purchaser
owning 10% or more of the outstanding Common Stock of ERI, in the Offering or
otherwise, would require prior approval by applicable regulatory authorities.
Such prior approval requirement also would apply to an acquisition of proxies to
vote 10% or more of the outstanding Common Stock of ERI and, therefore, in a
proxy contest could delay or prevent a stockholder from acquiring such proxies.
No assurance can be given as to whether or not the Company would seek to invoke
these laws and regulations in the event of a contested solicitation of proxies.
12
14
ADEQUACY OF LOSS RESERVES
The reserves for losses and loss adjustment expenses represent the
Company's estimates of liability on outstanding claims. These estimates involve
actuarial and statistical projections of the expected ultimate cost of
administering and settling these claims based on facts and circumstances then
known, predictions of future events, estimates of future trends in claims
severity and other variable factors such as inflation and new theories of
liability. As estimates, reserves may not accurately reflect amounts that are
ultimately incurred in administering and settling insured losses, particularly
in the instance of companies with relatively short operating histories or
companies that have a heavy reliance on relatively newer product lines, such as
the Company. If the reserve estimates prove to be inadequate, the Company would
be required to augment its reserves, resulting in a charge to earnings in the
period in which such action occurs. Although the Company believes that its
reserves are adequate, there can be no assurance that ultimate loss experience
will not exceed the Company's reserves, resulting in a material adverse effect
on the Company's financial condition and results of operations. Since 1988, the
Company has retained the services of an independent actuarial consulting firm to
provide opinions regarding reserves as required for state regulatory filings.
The Company intends to utilize such services in the future. In addition,
although the Company seeks to spread risk through the use of reinsurance
programs, like other insurance companies, it is subject to the risk of severe or
multiple losses, which could materially and adversely affect its financial
position and results of operations.
REINSURANCE
The Company has historically utilized reinsurance arrangements to limit the
amount of risk retained under policies written or reinsured by the Insurance
Subsidiaries. In addition to the D&O reinsurance obtained under the Facility
arrangements with AC&S, the Company currently has in place a number of
reinsurance programs pursuant to which it cedes risks. The ceding of risk to
reinsurers does not relieve the Company of liability to its insureds and
reinsureds, and consequently the Company is subject to credit risk with respect
to its reinsurers. While the Company endeavors to reinsure only with financially
sound reinsurers, there can be no assurance that the Company will not experience
difficulties in the future in recovering reinsurance recoverables under these
arrangements should one or more of its reinsurers suffer financial detriment.
The Company's reinsurance programs include some exposure to certain syndicates
of Underwriters at Lloyd's, London ("Lloyd's"). Lloyd's is currently undergoing
a restructuring, the success or failure of which could affect Lloyd's
syndicates' ability to meet their reinsurance obligations. In addition, the
availability and cost of reinsurance arrangements are subject to prevailing
market conditions, which are beyond the Company's control. The Company may in
the future choose to revise further its reinsurance practices to increase,
decrease or eliminate entirely the amount of risk it cedes to reinsurers.
DEPENDENCE ON MANAGEMENT AND KEY EMPLOYEES
The Company depends, and will continue to depend, to a great extent on the
services of its executive officers and key personnel who are identified under
"Management." The Company's Chairman and Chief Executive Officer, its Vice
Chairman and Chief Operating Officer, its President and Chief Underwriting
Officer and its Executive Vice President, Chief Financial Officer and Chief
Actuary have employment agreements, as do other key personnel. The respective
terms of these agreements expire in 1997, unless extended by mutual agreement.
The ability of the Company to underwrite and issue insurance policies profitably
is dependent on its ability to attract and maintain a staff of qualified
underwriters and service personnel. The Company does not carry any key person
life insurance policies on any of its executive officers or employees.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Company's Certificate of Incorporation and By-laws, its Stockholder
Rights Plan, the Agency Agreement and the Quota Share Agreement, as well as the
Delaware corporation law and the California, Delaware and Connecticut insurance
laws, all contain provisions that could have the effect of discouraging a
prospective acquirer from making a tender offer or otherwise attempting to
obtain control of the Company.
13
15
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's initial public offering ("IPO") of Common Stock occurred on
March 15, 1994, at a price to the public of $12.00 per share. The following
table sets forth the high and low closing prices of the Common Stock on the NYSE
and the cash dividends paid per share since the IPO for the periods indicated.
MARKET PRICE
------------- DIVIDEND
FISCAL PERIOD HIGH LOW PAID
1994:
First Quarter (from March 15)................................... $12 1/2 $10 7/8 --
Second Quarter.................................................. 14 7/8 10 7/8 $.02
Third Quarter................................................... 15 7/8 12 3/4 .02
Fourth Quarter.................................................. 14 1/4 12 1/4 .02
1995:
First Quarter................................................... $17 1/8 $13 5/8 $.02
Second Quarter.................................................. 19 16 5/8 .02
Third Quarter................................................... 23 7/8 18 3/8 .02
Fourth Quarter.................................................. 29 22 .02
1996:
First Quarter................................................... $33 $26 1/4 $.02
Second Quarter (through May 31)................................. 35 1/4 29 1/4 --
The Company intends to continue to pay quarterly cash dividends of $.02 per
share of Common Stock (a rate of $.08 annually). The payment of dividends is
subject to the discretion of the Board of Directors and will depend upon general
business conditions, legal and contractual restrictions on the payment of
dividends and other factors that the Board of Directors deems relevant.
As an insurance holding company, ERI depends in large part on dividends and
other payments from its subsidiaries for the payment of cash dividends to
stockholders. In the case of the Insurance Subsidiaries, such payments are
restricted by insurance laws, and insurance regulators have authority in certain
circumstances to prohibit payments of dividends and other amounts by the
Insurance Subsidiaries that would otherwise be permitted without regulatory
approval. The Company's loan agreements also restrict the payment of dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
14
16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996. The Offering will have no effect on the Company's
capitalization, unless the over-allotment option is exercised.
MARCH 31, 1996
--------------
(IN THOUSANDS)
Long-term debt................................................................. $ 70,000
Stockholders' equity:
Common Stock, $.01 par value;
authorized--50,000,000 shares
issued(1)--10,409,291 shares
outstanding(1)--8,994,041 shares.......................................... 104
Class B Common Stock, $.01 par value;
authorized--2,500,000 shares
issued--0 shares(2)
outstanding--0 shares(2).................................................. --
Additional paid-in capital..................................................... 87,064
Unrealized gains on investments, net of tax.................................... 14,388
Currency translation adjustments............................................... (55)
Retained earnings.............................................................. 45,063
--------------
Cost of shares in treasury, at cost:
--1,415,250 shares........................................................... (41,547)
--------------
Total stockholders' equity................................................... 105,017
--------------
Total capitalization................................................. $175,017
===========
- ------------------------------
(1) Does not include (i) 1,477,056 shares of Common Stock issuable upon exercise
of employee stock options, (ii) 100,000 shares of Common Stock issuable upon
exercise of the Aetna Stock Option, (iii) 43,467 shares of Common Stock
issuable upon exercise of options granted to directors under the Company's
Nonemployee Directors Option Plan; (iv) 40,850 shares of Common Stock
issuable upon exercise of options granted to former directors of Executive
Re; and (v) any shares of Common Stock issuable pursuant to the Company's
Stock Incentive Plan and Performance Share Plan.
(2) The above data reflect retirement of the Class B Common Stock, which took
effect May 10, 1996.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Shares by the
Selling Stockholder. If the Underwriters' over-allotment option is exercised
(see "Underwriting"), any net proceeds received by the Company with respect to
such exercise will be used for general corporate purposes.
15
17
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data as of March 31, 1996 and
1995 and for each of the three-month periods ended March 31, 1996 and 1995 have
been derived from unaudited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of such financial information for
those periods. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected for any
other interim period or for the full year. The consolidated financial data as of
December 31, 1995, 1994, 1993, 1992 and 1991 and for each of the years in the
five-year period ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein and the
Consolidated Financial Statements of the Company and related notes incorporated
by reference herein.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Gross premiums written............. $ 57,682 $ 35,633 $210,640 $130,199 $ 84,255 $ 82,667 $ 75,303
Net premiums written............... 38,851 25,470 145,121 108,285 70,519 74,605 72,903
Net premiums earned................ 33,913 25,287 116,434 94,961 69,014 71,926 68,994
Net investment income.............. 7,375 6,284 26,706 22,497 20,475 19,702 16,431
Net realized capital gains
(losses)......................... 954 (449) 1,588 (455) 1,964 869 536
Equity in earnings of ERMA......... -- -- -- -- 2,707 2,736 2,710
Other income (loss)................ 92 102 83 82 (364) -- --
------- ------- ------- ------- -------
Total revenues............ 42,334 31,224 144,811 117,085 93,796 95,233 88,671
Loss and loss adjustment
expenses......................... 22,894 17,058 78,530 64,171 46,640 51,427 48,736
Policy acquisition costs........... 6,744 4,880 21,931 18,723 18,613 18,535 17,871
General and administrative costs... 3,168 2,354 10,730 8,890 8,749 6,409 4,912
Long-term incentive compensation... 187 420 1,458 1,009 1,100 -- --
Interest expense................... 578 471 2,022 1,519 1,421 1,420 1,931
------- ------- ------- ------- -------
Total expenses............ 33,571 25,183 114,671 94,312 76,523 77,791 73,450
------- ------- ------- ------- -------
Income before income taxes......... 8,763 6,041 30,140 22,773 17,273 17,442 15,221
Income tax expense................. 1,538 743 4,854 3,533 2,360 2,870 2,442
------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting for
income taxes..................... 7,225 5,298 25,286 19,240 14,913 14,572 12,779
Cumulative effect of change in
accounting for income taxes...... -- -- -- -- -- 1,387 --
------- ------- ------- ------- -------
Net income......................... $ 7,225 $ 5,298 $ 25,286 $ 19,240 $ 14,913 $ 15,959 $ 12,779
======= ======= ======= ======= =======
Earnings per common and common
equivalent share(1).............. $ 0.60 $ 0.45 $ 2.11 $ 1.80 $ 3.53 $ 3.44 $ 2.96
======= ======= ======= ======= =======
Weighted average shares
outstanding...................... 12,028 11,747 11,956 10,108 3,128 3,120 3,110
Earnings per common share--assuming
full dilution(1)................. $ 0.60 $ 0.45 $ 2.11 $ 1.69 $ 1.69 $ 1.66 $ 1.49
======= ======= ======= ======= =======
Weighted average shares
outstanding-- assuming full
dilution......................... 12,061 11,819 11,978 11,365 9,238 9,230 9,220
BALANCE SHEET DATA:
Cash and invested assets........... $531,668 $454,994 $549,852 $431,849 $371,596 $319,773 $264,648
Total assets(2).................... 687,469 550,912 687,837 516,747 420,382 361,149 308,124
Long-term debt..................... 70,000 25,000 25,000 25,000 25,000 25,000 25,000
Stockholders' equity (2)........... 105,017 146,029 177,725 130,854 114,837 92,473 80,778
16
18
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OTHER DATA:
Loss ratio......................... 67.5% 67.5% 67.4% 67.6% 67.6% 71.5% 70.6%
Expense ratio...................... 29.2 28.6 28.1 29.1 39.6 34.7 33.1
------- ------- ------- ------- -------
Combined ratio..................... 96.7% 96.1% 95.5% 96.7% 107.2% 106.2% 103.7%
======= ======= ======= ======= =======
Ratio of net premiums written to
statutory surplus(3)(4).......... 1.4x 1.1x 1.2x 1.0x 0.7x 0.8x 0.8x
Statutory surplus(3) (at end of
period).......................... $112,727 $105,583 $121,465 $107,401 $ 94,445 $ 91,689 $ 89,866
Operating margin(5)................ 20.3% 22.0% 21.3% 21.1% 19.3% 19.3% 18.9%
Ratio of debt to total
capitalization................... 40.0 14.6 12.3 16.0 17.9 21.3 23.6
- ---------------
(1) Per share information is based on income before cumulative effect of change
in accounting for income taxes. Earnings per common and common equivalent
share and earnings per common share--assuming full dilution based on net
income were $3.88 and $1.81, respectively, for the year ended December 31,
1992.
(2) For the three months ended March 31, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993, respectively, includes $9.9 million, $5.5
million, $15.4 million, ($3.3) million and $12.4 million, net of deferred
taxes, in total assets and stockholders' equity from unrealized gains
(losses) pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(3) Statutory data has been derived from the financial statements of the
Insurance Subsidiaries prepared in accordance with SAP.
(4) Ratios of net premiums written to statutory surplus are calculated on a
rolling twelve month basis.
(5) Consists of income before income taxes, excluding interest expense, realized
capital gains (losses) and certain non-recurring expenses, divided by total
revenues, excluding realized capital gains (losses).
17
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
incorporated by reference herein.
GENERAL
Management's discussion and analysis of financial condition and results of
operations compares certain financial results for the quarter ended March 31,
1996 with the corresponding period for 1995 and for the year ended December 31,
1995 with the corresponding periods for 1994 and 1993. The results of the
Company from and after January 1 1994 include the consolidated results of ERMA,
ERII and ERSIC. The Company's results also include its 50% interest in UPEX, a
French insurance underwriting agency which is a joint venture between the
Company and Union des Assurances de Paris--Incendie-Accidents. This investment
is reported using the equity method of accounting. In addition, the Company's
1995 and 1996 results include Executive Risk N.V. ("ERNV"), a Dutch insurance
company incorporated in May 1995 in the Netherlands under the ownership of
Executive Re. The Company's 1993 results include the consolidated results of
Executive Re and its subsidiaries.
Prior to January 1, 1994, Executive Re and AC&S had 30% and 70% ownership
interests, respectively, in ERMA, a general partnership which functions as the
underwriting manager for substantially all D&O written by AC&S in the United
States and for all insurance written by ERII and ERSIC. On January 1, 1994, the
Company, Executive Re and AC&S consummated a restructuring and exchange (the
"Transaction"), as discussed in Note 3 of Notes to Consolidated Financial
Statements of the Company, under which AC&S assigned its 70% interest in ERMA to
the Company in exchange for (a) 1,225,000 shares of Common Stock, (b) 1,225,000
shares of Class B Common Stock and (c) an option to purchase 100,000 shares of
Common Stock at a price of $12 per share. As part of the restructuring,
Executive Re became a subsidiary of ERI.
On March 22, 1996, the Company entered into the Stock Purchase Agreement
with AC&S and AL&C. Under the Stock Purchase Agreement, the Company purchased,
on March 26, 1996 (the "Closing Date"), a total of 2,511,300 shares of its
capital stock from AC&S (consisting of 1,286,300 shares of Common Stock and all
of the 1,225,000 outstanding shares of Class B Common Stock). The purchase price
paid by the Company for the stock purchase was $29.875 per share (the "Purchase
Price"), or approximately $75 million in the aggregate. The Purchase Price is
subject to upward adjustment under certain circumstances. In summary, if within
six months of the Closing Date, (i) the Company and any third party shall enter
into an agreement under which such third party will acquire 30% or more of the
Company's outstanding Common Stock, or (ii) any third party shall have publicly
announced a tender offer which results in such third party's acquisition of 30%
or more of the Company's outstanding Common Stock (in either case, a "30%
Transaction"), then the Company shall pay to AL&C an amount in cash which is
equal to 2,511,300 times the excess, if any, of the price per share paid by such
third party over the Purchase Price (the "Excess Per Share Price"). If the
Company and any third party shall enter into any such agreement, or any third
party shall have publicly announced such a tender offer, with respect to a 30%
Transaction during the second six months following the Closing Date, the Company
shall pay AL&C an amount in cash which is equal to 1,883,475 times the Excess
Per Share Price, or 75% of the amount which would have been payable with respect
to such an agreement entered into, or tender offer announced, during the first
six-month period.
In connection with the Stock Purchase Agreement, the Company obtained a $70
million senior credit facility arranged through The Chase Manhattan Bank
(National Association), the proceeds of which have been used as follows: $38
million to partially finance the Repurchase Transaction, $25 million to
refinance the Company's existing bank debt and $7 million for general corporate
purposes. In connection with the credit facility, the Company has pledged the
stock of its direct subsidiary, Executive Re, and Executive Re has pledged the
stock of its direct subsidiary, ERII.
On April 2, 1996, Travelers acquired AC&S from its parent, AL&C. The
Company's contractual relationship with AC&S is not terminable as a result of
the closing of the Travelers acquisition of AC&S. The Company's agreements with
AC&S (see Note 4 of Notes to Consolidated Financial Statements of the
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Company) provide that absent certain extraordinary events or mutual consent of
the parties, such relationship is terminable no earlier than December 31, 1999.
Moreover, increasingly, the Company is writing business on the policies of its
own Insurance Subsidiaries. Consequently, management does not believe that the
Travelers acquisition of AC&S will have a material adverse effect on the
Company, its business or prospects.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on the Company.
Also, reevaluations of the Company's loss reserves could result in an increase
or decrease in reserves and a corresponding adjustment to earnings.
Additionally, the insurance industry is highly competitive. The Company competes
with domestic and foreign insurers and reinsurers, some of which have greater
financial, marketing, management resources and experience than the Company, and
it may compete with new market entrants in the future. Competition is based on
many factors, including the perceived market strength of the insurer, pricing
and other terms and conditions, services provided, the speed of claims payment,
the reputation and experience of the insurer, and ratings assigned by
independent rating organizations (including A.M. Best and S&P). ERII and ERSIC's
current pooled rating from A.M. Best is "A (Excellent)." ERII and ERSIC's
current pooled claims-paying ability rating from S&P is "A+ (Good)." These
ratings are based upon factors of concern to policyholders, including financial
condition and solvency, and are not directed to the protection of investors.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
Gross premiums written increased by $22.1 million, or 62%, to $57.7 million
in the first quarter of 1996 from $35.6 million in the first quarter of 1995.
The increase was due in part to growth in domestic and international D&O and
miscellaneous professional liability E&O. Also contributing to the rise in gross
premiums written was the Company's ability to issue ERII and ERSIC D&O policies,
rather than AC&S policies, to both new and renewing insureds. Converting
insureds to ERII or ERSIC policies from AC&S policies results in the Company
receiving 100% of the gross premiums written (and ceding 12.5% to AC&S) as
compared to receiving 50% when reinsuring AC&S' risks. In the first quarter of
1996, $40.7 million of gross D&O premiums written were issued on ERII and ERSIC
policies as compared to $6.4 million in the first quarter of 1995. As
approximately one-third of the increase in gross premiums written was
attributable to conversions from AC&S policies to ERII and ERSIC policies, it is
unlikely that the rate of growth achieved in the first quarter of 1996 can be
sustained in future periods.
Ceded premiums increased $8.6 million, or 85%, to $18.8 million in the
first quarter of 1996 from $10.2 million in the first quarter of 1995. The rise
in ceded premiums was due principally to an increase in direct premium volume, a
portion of which is ceded to reinsurers under the Company's various D&O and E&O
treaties.
As a result of the foregoing, net premiums written increased $13.4 million,
or 53%, to $38.9 million for the quarter ended March 31, 1996 from $25.5 million
for the quarter ended March 31, 1995. Over the same periods, net premiums earned
increased to $33.9 million from $25.3 million.
Net investment income increased by $1.1 million, or 17%, to $7.4 million
for the quarter ended March 31, 1996 from $6.3 million for the quarter ended
March 31, 1995. This increase resulted principally from growth in invested
assets from $445.9 million at March 31, 1995 to $509.9 million at March 31,
1996. The nominal portfolio yield of the fixed maturity portfolio at March 31,
1996 was 6.04%, compared to 6.24% at March 31, 1995. The tax equivalent yields
on the fixed maturity portfolio were 8.22% and 8.53% for these periods,
respectively.
The Company's net realized capital gains were $1.0 million in the first
quarter of 1996, as compared to net realized capital losses of $0.4 million in
the first quarter of 1995. In the first quarter of 1996, capital gains were
realized from the sale of the fixed maturity portfolios of ERI and Executive Re
to provide available cash for the Repurchase Transaction.
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Loss and loss adjustment expenses ("LAE") increased by $5.8 million, or
34%, from $17.1 million in the first quarter of 1995 to $22.9 million in the
comparable period of 1996 due to higher premiums earned. The Company's loss
ratio was 67.5% in both the first quarter of 1996 and the first quarter of 1995.
In connection with the Company's normal reserving review, which includes a
reevaluation of the adequacy of reserve levels for prior years' claims, the
Company reduced its unpaid loss and LAE reserves for prior report years by $1.5
million, or $0.08 per share on a fully diluted basis, in the first quarter of
1996. In the first quarter of 1995, the Company reduced its unpaid loss and LAE
reserves for prior report years by $1.1 million, or $0.06 per share on a fully
diluted basis. There can be no assurance that reserve adequacy reevaluations in
the future will produce similar reserve reductions and net income increases in
future quarters.
Policy acquisition costs increased by $1.8 million, or 38%, to $6.7 million
for the quarter ended March 31, 1996 from $4.9 million for the quarter ended
March 31, 1995. The Company's ratio of policy acquisition costs to net premiums
earned increased from 19.3% in the first quarter of 1995 to 19.9% in the first
quarter of 1996. The increase in the acquisition cost ratio was attributable to
both higher commission amounts paid to brokers and increased compensation and
related expenses incurred in hiring additional underwriting staff to support the
growth in the Company's business, partially offset by the savings achieved by
paying less in override commissions to AC&S as a result of converting D&O
insureds from AC&S policies to ERII and ERSIC policies.
General and administrative ("G&A") expenses increased $0.8 million, or 35%,
to $3.2 million in the first quarter of 1996 from $2.4 million in the first
quarter of 1995 due largely to increased compensation and related costs
associated with the growth of the business. The ratio of G&A costs to net
premiums earned was 9.3%, unchanged from the year earlier period.
The GAAP combined ratio increased to 96.7% in the first quarter of 1996
from 96.1% in the first quarter of 1995. The increase of 0.6 percentage points
was attributable to the increase in the policy acquisition cost ratio as
discussed above. A combined ratio below 100% generally indicates profitable
underwriting prior to the consideration of investment income, capital gains and
interest expense. A company with a combined ratio exceeding 100% can still be
profitable due to such factors as investment income and capital gains realized.
Interest expense of $0.6 million for the first quarter of 1996 and $0.5
million for the first quarter of 1995 was attributable principally to the
outstanding balances under the Company's bank credit agreement. The outstanding
balances were $25 million for the quarter ended March 31, 1995, $25 million from
January 1, 1996 through March 26, 1996 and $70 million from March 26 through
March 31, 1996. Interest expense will increase in future quarters as a result of
the increase in the credit facility obtained in connection with the Repurchase
Transaction. See "-- Liquidity and Capital Resources."
Income tax expense increased $0.8 million, or 107%, from $0.7 million in
the first quarter of 1995 to $1.5 million in the first quarter of 1996. The
Company's effective tax rate increased from 12.3% to 17.5% for the same periods.
The increase in the effective tax rate was due to an increase in the Company's
state tax liability and growth in pre-tax income outpacing the increase in
tax-exempt investment income.
As a result of the factors described above, the Company's net income for
the first quarter of 1996 increased $1.9 million, or 36%, to $7.2 million, or
$0.60 per share on a fully diluted basis, from $5.3 million, or $0.45 per share
on a fully diluted basis, in the first quarter of 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Gross premiums written increased by $80.4 million, or 62%, to $210.6
million in 1995 from $130.2 million in 1994. The increase was partially due to
growth in sales in all of the Company's key lines of business, including
domestic and international D&O, and lawyers professional liability and
miscellaneous professional liability E&O. Also contributing to the rise in gross
premiums written was the Company's ability to issue ERII and ERSIC D&O policies,
rather than AC&S policies, to both new and renewing insureds. Converting an
insured to ERII or ERSIC from AC&S results in the Company receiving 100% of the
gross premiums written (and generally ceding 12.5% to AC&S) as compared to
receiving 50% when reinsuring AC&S's risks. In 1995, $99.0 million of gross D&O
premiums written were issued on ERII and ERSIC policies as compared to $7.2
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million in 1994. Since approximately one-third of the increase in gross premiums
written was attributable to conversions from AC&S policies to ERII and ERSIC
policies, it is unlikely that the rate of growth achieved in 1995 can be
sustained in 1996.
Ceded premiums increased $43.6 million, or 199%, to $65.5 million in 1995
from $21.9 million in 1994. The rise in ceded premiums was partly attributable
to increased coverage purchased in 1995 under the Company's D&O reinsurance
arrangement to 100% of losses incurred in excess of $2.5 million up to a limit
of $10 million, subject to aggregate limits and other restrictions. In 1994, the
D&O reinsurance coverage purchased provided for 20% reinsurance protection on
losses incurred in excess of $2.5 million up to a limit of $10 million, subject
to aggregate limits and other restrictions. Also contributing to the rise in
ceded premiums was the increase in quota share reinsurance under the Company's
various other D&O and E&O treaties, resulting from an increase in direct premium
volume. The D&O excess of loss reinsurance coverage purchased in 1995 has been
renewed for 1996 under similar terms and conditions.
As a result of the foregoing, net premiums written increased $36.8 million,
or 34%, to $145.1 million in 1995 from $108.3 million in 1994. Over the same
periods, net premiums earned increased to $116.4 million from $95.0 million.
Net investment income increased by $4.2 million, or 19%, to $26.7 million
in 1995 from $22.5 million in 1994. This increase resulted principally from
growth in the Company's investment portfolio, measured on an amortized cost
basis, from $436.5 million at December 31, 1994 to $520.9 million at December
31, 1995, partially offset by a slight decline in investment yields. The
Company's equity investment balances were $26.1 million and $24.3 million at
December 31, 1995 and 1994, respectively, and the cash and short-term investment
balances were $20.2 million and $24.6 million, respectively, for the same
periods. The Company manages its portfolio on a total return basis, and, as
such, its investments in equity securities are made for their perceived superior
return potential over the long term. Growth in invested assets resulted
primarily from strong cash flows from insurance operations. The nominal
portfolio yield of the fixed maturity portfolio at December 31, 1995 was 6.09%,
as compared to 6.13% at December 31, 1994. The tax-equivalent yields on the
fixed maturity portfolio were 8.25% and 8.56% for these periods, respectively.
See "--Liquidity and Capital Resources."
The Company's net realized capital gains were $1.6 million in 1995, as
compared to net realized capital losses of $0.5 million in 1994. During the
second quarter of 1995, the Company realized a $2.8 million gain resulting from
the acquisition by USF&G Corporation ("USF&G") of Discover Re Managers, Inc.
("Discover Re"), of which the Company was a stockholder. In connection with this
transaction, a stock-for-stock swap of Discover Re stock for USF&G stock
occurred as well as the receipt and simultaneous exercise by the Company of a
warrant to purchase USF&G stock. In December 1995, the Company sold its entire
position in USF&G stock. See "-- Liquidity and Capital Resources" and Note 6 of
Notes to Consolidated Financial Statements of the Company. Partially offsetting
the gain were net realized capital losses from fixed maturities sold in order to
increase the portfolio's tax-equivalent yield.
Loss and LAE increased $14.3 million, or 22%, to $78.5 million in 1995 from
$64.2 million in 1994 due to higher premiums earned. The Company's loss ratio
declined slightly to 67.4% in 1995 from 67.6% in 1994. In connection with the
Company's normal reserving review, which includes a reevaluation of the adequacy
of reserve levels for prior years' claims, the Company reduced its unpaid loss
and LAE reserves in 1995 for prior report years by approximately $5.2 million.
In 1994, the Company reduced its unpaid loss and LAE reserves for prior report
years by approximately $4.1 million. These reductions produced corresponding
increases in the Company's net income of approximately $3.4 million, or $0.28
per share, in 1995 and $2.7 million, or $0.24 per share, in 1994. There is no
assurance that reserve adequacy reevaluations will produce similar reserve
reductions and net income increases in the future.
Policy acquisition costs increased $3.2 million, or 17%, to $21.9 million
in 1995 from $18.7 million in 1994. The Company's ratio of policy acquisition
costs to net premiums earned declined to 18.8% in 1995 from 19.7% in 1994. The
decrease in the acquisition cost ratio was primarily due to savings achieved by
paying less in override commissions to AC&S as a result of successfully
converting D&O insureds from AC&S to ERII and ERSIC policies.
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G&A expenses increased $1.8 million, or 21%, to $10.7 million for the year
ended December 31, 1995, as compared to $8.9 million for the year ended December
31, 1994. The increase in G&A costs was due largely to increased compensation,
benefit and related overhead costs associated with new employees hired to
support the growth in premium volume. The ratio of G&A costs to net premiums
earned remained relatively stable at 9.3% in 1995 versus 9.4% in 1994.
As a result of the declines in the aforementioned ratios, the Company's
GAAP combined ratio decreased to 95.5% in 1995 from 96.7% in 1994. A combined
ratio below 100% generally indicates profitable underwriting prior to the
consideration of investment income, capital gains and interest expense. A
company with a combined ratio exceeding 100% can still be profitable due to such
factors as investment income and capital gains realized.
Long-term incentive compensation in 1995 and 1994 of $1.5 million and $1.0
million, respectively, consisted of non-cash charges to earnings for the value
of the stock option element of the IPO Stock Compensation Plan ("IPO Plan"). See
Note 7 of Notes to Consolidated Financial Statements of the Company for a
further discussion of the IPO Plan.
Interest expense was incurred principally on the outstanding balance of $25
million under the Company's bank credit agreement. Interest expense increased by
$0.5 million, or 33%, to $2.0 million in 1995 as compared to $1.5 million in
1994, due primarily to higher interest rates and a higher average outstanding
balance on the debt during 1995. See "-- Liquidity and Capital Resources" and
Note 5 of Notes to Consolidated Financial Statements of the Company.
Income tax expense increased $1.4 million, or 37%, to $4.9 million for the
year ended December 31, 1995, as compared to $3.5 million for the year ended
December 31, 1994. The Company's effective tax rate increased slightly to 16.1%
in 1995 from 15.5% in 1994. The increase in the effective tax rate was due
principally to growth in pre-tax income outpacing the increase in tax-exempt
investment income. See Note 10 of Notes to Consolidated Financial Statements of
the Company.
As a result of the factors described above, net income increased $6.1
million, or 31%, to $25.3 million, or $2.11 per fully diluted share, in 1995
from $19.2 million, or $1.69 per fully diluted share, in 1994.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Gross premiums written increased by $45.9 million, or 55%, from $84.3
million in 1993 to $130.2 million in 1994. This growth was due primarily to a
$19.2 million increase in E&O premiums and an $18.0 million increase in D&O
premiums assumed from AC&S, principally in the commercial and not-for-profit
markets. Additionally, in 1994, the Company began issuing its own D&O policies.
Total D&O gross premiums written directly by ERII and ERSIC were $7.2 million.
Ceded premiums rose $8.2 million, or 60%, from $13.7 million in 1993 to
$21.9 million in 1994. This increase was due to increased cessions primarily on
E&O as a result of higher writings, partially offset by a reduction in
reinsurance coverage purchased on the D&O business. In 1994, the D&O reinsurance
coverage purchased provided for 20% reinsurance protection on losses incurred in
excess of $2.5 million up to a limit of $10 million, subject to aggregate limits
and other restrictions.
As a result of the foregoing, net premiums written increased $37.8 million,
or 54%, from $70.5 million in 1993 to $108.3 million in 1994. Over the same
period, net premiums earned increased from $69.0 million to $95.0 million.
Net investment income increased by $2.0 million, or 10%, from $20.5 million
in 1993 to $22.5 million in 1994. This increase resulted from growth in the
Company's investment portfolio, measured on an amortized cost basis, from $352.8
million at December 31, 1993 to $436.5 million at December 31, 1994, partially
offset by a higher concentration of the portfolio in equities and short-term
investments, both of which provide for lower yields. The Company's equity
balances were $24.3 million and $1.1 million, at December 31, 1994 and 1993,
respectively, and the cash and short-term investment balances were $24.6 million
and $6.9 million, respectively, for the same periods. Growth in invested assets
resulted primarily from increased cash flow from
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the ownership of ERMA and insurance operations, as well as proceeds received
from the IPO. The nominal portfolio yield of the fixed maturity portfolio at
December 31, 1994 was 6.13% as compared to 6.21% at December 31, 1993. The
tax-equivalent yields on the fixed maturity portfolio were 8.56% and 8.28% for
these periods, respectively. See "-- Liquidity and Capital Resources."
The Company's net realized capital losses were $0.5 million in 1994 versus
net realized capital gains of $2.0 million in 1993. The 1994 losses resulted
primarily from the sale of fixed maturity investments sold to increase the
portfolio's tax-equivalent yield while also utilizing capital loss carrybacks.
As a result of the Transaction described above and in Note 3 of Notes to
Consolidated Financial Statements of the Company, ERMA's 1994 financial position
and results of operations were consolidated with those of the Company. Equity in
earnings of ERMA in 1993 of $2.7 million represented the Company's proportionate
interest in the results of operations of ERMA using the equity method of
accounting.
Loss and LAE increased $17.6 million, or 38%, from $46.6 million in 1993 to
$64.2 million in 1994 due to higher premiums earned. The Company's loss ratio
remained unchanged at 67.6% from 1993. In 1994, the Company reduced its unpaid
loss and LAE reserves for prior report years by approximately $4.1 million. In
1993, the Company reduced its unpaid loss and LAE reserves for prior report
years by approximately $3.0 million. These reductions produced corresponding
increases in the Company's net income of approximately $2.7 million, or $0.24
per share, and $2.0 million, or $0.21 per share, in 1994 and 1993, respectively.
Policy acquisition costs increased $0.1 million, or 1%, from $18.6 million
in 1993 to $18.7 million in 1994. The Company's acquisition expense ratio
declined from 26.9% in 1993 to 19.7% in 1994. The decline was attributable to
the benefits of ERMA's net revenues realized from the agency agreements between
AC&S and ERMA entered into on January 1, 1994 in connection with the
Transaction, which were substantially accounted for as a reduction in the
Company's policy acquisition costs.
G&A expenses increased $0.2 million, or 2%, from $8.7 million in 1993 to
$8.9 million in 1994. The increase in expenses was due to increased regulatory
and pension costs, and certain G&A costs incurred by ERMA, offset partially by a
portion of ERMA's G&A revenues not related to policy acquisition. Additionally,
1993 G&A expenses included one-time legal and consulting services of $1.0
million related to the Transaction. The G&A expense ratio declined from 12.7% in
1993 to 9.4% in 1994.
As a result of the decline in policy acquisition expense and G&A expense
ratios, the Company's GAAP combined ratio decreased to 96.7% in 1994 from 107.2%
in 1993.
Long-term incentive compensation in 1994 of $1.0 million consisted of a
non-cash charge to earnings for the value of the stock option element of the IPO
Plan. In 1993, the $1.1 million of long-term incentive compensation consisted of
a one-time cash amount paid to participants in the IPO Plan in recognition of
their efforts in connection with the closing of the Transaction and in
consideration of their waiver of rights to receive the cash portion of
compensation payable under the IPO Plan. See Note 7 of Notes to Consolidated
Financial Statements of the Company.
Interest expense increased $0.1 million, or 7%, from $1.4 million in 1993
to $1.5 million in 1994 and was primarily attributable to the outstanding
balance on the Company's bank credit agreement. See "-- Liquidity and Capital
Resources" and Note 5 of Notes to Consolidated Financial Statements of the
Company.
Income tax expense increased by $1.1 million, or 50%, from $2.4 million in
1993 to $3.5 million in 1994. The Company's effective tax rate increased to
15.5% in 1994 from 13.7% in 1993. The increase in the effective tax rate was due
in part to growth in pre-tax income exceeding growth in tax-exempt investment
income and an increase in the Company's state tax liability. See Note 10 of
Notes to Consolidated Financial Statements of the Company.
As a result of the factors described above, net income increased $4.3
million, or 29%, from $14.9 million in 1993 to $19.2 million in 1994. Fully
diluted earnings per share were unchanged at $1.69 for both 1994 and 1993, as
net income gains were offset by the dilutive effects of the Transaction and the
IPO.
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LIQUIDITY AND CAPITAL RESOURCES
ERI is a holding company, the principal asset of which is equity in its
subsidiaries. ERI's cash flows depend primarily on dividends and other payments
from its subsidiaries. ERI's sources of funds consist primarily of premiums
received by the insurance subsidiaries, revenues received by ERMA under
insurance agency arrangements, investment income, and proceeds from the sales
and redemptions of investments. Funds are utilized principally to pay claims and
operating expenses, to purchase investments, and to pay interest and principal
under the Company's bank indebtedness.
Cash flows from operating activities were $24.8 million for the quarter
ended March 31, 1996 and $4.3 million for the quarter ended March 31, 1995. The
increase in operating cash flows resulted from the increase in net premiums
received resulting from higher net premiums written. In addition, the Company
settled fewer losses in the first quarter of 1996 than anticipated. These losses
could be settled in future quarters, depressing net cash flows in future
periods.
Cash flows from operating activities were $86.0 million, $78.7 million and
$37.0 million for 1995, 1994 and 1993, respectively. The increase in operating
cash flows in 1995 resulted principally from the increase in net premiums
received resulting from the increase in net premiums written. The Company
settled fewer losses than anticipated in 1995. Those losses that were not
settled in 1995 could be settled in 1996, depressing net cash flows in 1996.
Rising loss payments are expected of a maturing professional liability
underwriter. The primary components of the cash flow increase in 1994 over 1993
were increased net premiums received coupled with lower than anticipated loss
payments.
The Company believes that it has sufficient liquidity to meet its
anticipated insurance obligations as well as its operating and capital
expenditure needs. Consistent with the Company's emphasis on total return, the
Company's investment strategy emphasizes quality, liquidity and diversification.
With respect to liquidity, the Company considers liability durations,
specifically loss reserves, when determining investment maturities. In addition,
maturities have been staggered to produce a pre-planned pattern of cash flows
for purposes of loss payments and reinvestment opportunities. Average investment
duration of the fixed maturity portfolio at March 31, 1996 and December 31,
1995, 1994 and 1993 was approximately 4.5, 4.6, 4.1 and 3.4 years, respectively,
as compared to an expected loss reserve duration of 4.5 to 5.5 years. The
Company's short-term investment pool was $30.1 million (5.7% of the total
investment portfolio) at March 31, 1996, $20.2 million (3.7%) at December 31,
1995 and $24.6 million (5.7%) at December 31, 1994. The short-term investment
pool was increased in the first quarter to generate a funding source for the
initiation of an allocation to mortgage and asset backed securities, which began
early in the second quarter of 1996. The 1995 decrease in the short-term
investment pool was due to the purchase of fixed maturity investments acquired
for the purpose of enhancing investment yields. Cash and publicly traded fixed
income securities constituted 94.3% of the Company's total investment portfolio
at December 31, 1995.
The Company's entire investment portfolio is classified as available for
sale under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and is reported at fair value, with the resulting unrealized gains
or losses included as a separate component of stockholders' equity until
realized. Due to a rise in interest rates, the market value of the portfolio at
March 31, 1996 was 103% of amortized cost versus 105% of amortized cost at
December 31, 1995. At March 31, 1996 and December 31, 1995, stockholders' equity
was increased by $9.9 million and $15.4 million, respectively, to record the
Company's fixed maturity investment portfolio at fair value. Due to a decline in
interest rates, the market value of the portfolio at December 31, 1995 was 105%
of amortized cost versus 99% of amortized cost at December 31, 1994. The overall
increase in the market value of the portfolio resulted in an increase to
stockholders' equity at December 31, 1995 of $19.2 million, net of deferred
taxes. At December 31, 1994, stockholders' equity was decreased by $4.0 million,
net of deferred taxes, to record the Company's investment portfolio at fair
value. At March 31, 1996 and December 31, 1995, the Company owned no derivative
instruments, except for certain mortgage and other asset backed securities and
an interest rate swap agreement which was used to effectively convert a portion
of its floating rate debt to a fixed rate basis, thus reducing the impact of
interest rate changes on future income. The Company owned no derivative
instruments at December 31, 1994.
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Until November 9, 1994, the Company had a credit agreement to borrow up to
$25 million, of which $25 million was outstanding during 1993 and through April
1994. An amortization payment of $5 million was made during May 1994. On
November 9, 1994, the Company entered into an agreement to replace the loan with
a $50 million credit facility. That facility consisted of a term loan of $25
million, as well as an additional $25 million of borrowing capacity which was
available to the Company during 1995, but not drawn on, under a revolving credit
facility. At December 31, 1995, there was $25 million of senior indebtedness
outstanding under this facility.
On March 26, 1996, the Company repaid the previous bank indebtedness with a
portion of the proceeds of the $70 million senior credit facility, which was
arranged through The Chase Manhattan Bank (National Association) ("Chase"). In
addition, the Company has secured through Chase a $25 million revolving credit
facility. The Company has no current plans to draw funds under the revolving
credit facility. Interest accrues on principal balances outstanding under the
term loan and revolving credit facility at a rate per annum equal to (a) the
higher of (i) the federal funds rate plus a stipulated percentage and (ii)
Chase's prime rate or, (b) for London Interbank Offered Rate ("LIBOR") based
loans, LIBOR plus a stipulated percentage over LIBOR (the "Margin") based on the
Company's debt-to-capital ratio and its then effective S&P claims-paying ability
rating. With respect to $25 million of indebtedness, the Company currently has
in place an interest rate swap agreement that effectively converts a floating
interest rate to a semi-fixed interest rate. In addition, the Company has
agreed, under the Term Loan Agreement, that within 120 days from the closing of
the term loan, it will enter into an interest rate protection agreement
providing interest rate protection for an aggregate notional amount equal to at
least 50% of the principal outstanding under the term loan. The Company is
required to make principal payments on the term loan beginning in November 1997
and at 6-month intervals thereafter, in the respective amounts of $5 million, $5
million, $6 million, $6 million, $7 million, $7 million, $8 million, $8 million,
$9 million and $9 million, respectively. The terms of the credit agreements for
the term loan and the revolving credit facility require, among other things,
that the Company maintain certain defined minimum consolidated net worth and
combined statutory surplus levels, and certain debt leverage, premiums-
to-surplus and fixed charge ratios, and place restrictions on the payment of
dividends, the incurrence of additional debt, the sale of assets, the making of
acquisitions and the incurrence of liens. At March 31, 1996, there was $70
million outstanding under this facility.
On May 1, 1995, the Company and Chase entered into an equity swap
transaction for the Company's equity holdings in USF&G. The terms of the swap
provided that the Company was entitled to receive an interest rate of 4.84%,
based upon a notional amount of $3.9 million, in return for providing Chase with
the total return accruing to an owner of the Company's interest in USF&G stock
over the life of the swap. The swap expired in December 1995, concurrent with
the sale of the Company's USF&G equity position.
In March of 1996 and in each of March, June, September and December of
1995, the Company paid dividends to common stockholders of record of $0.02 per
share. Such common stock dividends totaled $0.2 million in the quarter ended
March 31, 1996 and $0.9 million in the year ended December 31, 1995.
ERII and ERSIC are subject to state regulatory restrictions which limit the
amount of dividends payable by these companies. Subject to certain net income
carryforward provisions, ERII must obtain approval of the Insurance Commissioner
of the State of Delaware (and, for so long as ERII is deemed to be commercially
domiciled in California, the California Insurance Commissioner) in order to pay,
in any 12-month period, dividends which exceed the greater of 10% of surplus as
regards policyholders as of the preceding December 31 and statutory net income
less realized capital gains for the preceding calendar year. In addition,
dividends may be paid by ERII only out of earned surplus. ERSIC must obtain
approval of the Insurance Commissioner of the State of Connecticut in order to
pay, in any 12-month period, dividends which exceed the greater of 10% of
surplus with respect to policyholders as of the preceding December 31 and
statutory net income for the preceding calendar year. In addition, ERSIC may not
pay any dividend or distribution in excess of the amount of its earned surplus,
as reflected in its most recent statutory annual statement on file with the
Connecticut Insurance Commissioner, without such Commissioner's approval. Both
ERII and ERSIC are required to provide notice to the Insurance Commissioners of
the States of Delaware and Connecticut, respectively, of all dividends to
shareholders within five business days after declaration and at least ten days
prior to payment. Additionally, Delaware and Connecticut law require that the
statutory surplus of ERII or ERSIC, as applicable, following any dividend or
distribution be reasonable in relation to its outstanding
25
27
liabilities and adequate for its financial needs. As a company which is
commercially domiciled in California, ERII is subject to these same restrictions
under the laws of that state. The maximum amount payable as dividends by ERII
and ERSIC in 1996, without prior approval of the applicable state insurance
regulators, is $16.7 million.
OTHER
Delaware and Connecticut, the respective states of domicile of ERII and
ERSIC, impose minimum risk-based capital requirements on all insurance companies
which were developed by the National Association of Insurance Commissioners
("NAIC"). The formulas for determining the amount of risk-based capital specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the insurance company's regulatory total adjusted
capital to its authorized control level risk-based capital, both as defined by
the NAIC. At December 31, 1995 and 1994, the total adjusted capital (as defined
by the NAIC) of ERII and ERSIC was in excess of the risk-based capital
standards.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of " ("SFAS 121"), which establishes standards for
recognizing and measuring the impairment of long-lived assets and related
goodwill. SFAS 121 encompasses both assets to be held and used in the course of
business and those assets which are held for disposal. The provisions of SFAS
121 require that such assets should be reviewed for possible impairment whenever
events or changes in circumstances require that the carrying value of the asset
may not be fully recoverable. An impairment loss is to be recorded when the net
undiscounted estimated future cash flows to be generated by the asset are less
than the asset's carrying value. This impairment loss is to be included in
income from continuing operations. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. The Company is currently reviewing the
provisions of SFAS 121 and anticipates no material financial statement impact to
the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 defines a fair value based method of accounting for
employee stock compensation plans and encourages the use of this method.
However, the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," may still be utilized with
supplemental pro forma disclosures of net income and earnings per share being
made in the footnotes as if the provisions of SFAS 123 had been applied. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The Company
is currently reviewing the provisions of SFAS 123 and its anticipated financial
statement impact to the Company.
26
28
BUSINESS
GENERAL
ERI is a specialty insurance holding company that, through its
subsidiaries, develops, markets and underwrites directors and officers liability
insurance ("D&O") and other professional liability insurance products. Based on
the most recently available survey of the D&O industry by Watson Wyatt
Worldwide, the facility through which the Company and AC&S issue D&O is a
leading underwriter of primary D&O in the United States. From 1993 to 1995, the
Company's gross premiums written increased from $84.3 million to $210.6 million,
while its GAAP combined ratio declined from 107.2% to 95.5%. The Company
attributes this success primarily to the following factors: (i) an ability to
identify and capitalize on specialty insurance opportunities, including those in
underserved and new markets; (ii) increasing marketplace acceptance of the
Company as a direct insurer of D&O risks by both new insureds and previous AC&S
insureds; (iii) stable relationships with insureds and brokers, resulting from
an emphasis on client service in marketing, underwriting and claims handling;
(iv) pricing based on risk rather than market forces; and (v) a
performance-based culture, fostered by significant equity participation by the
Company's executive officers and directors (currently 21% of Common Stock on a
fully diluted basis).
Historically, the Company has focused on writing D&O for domestic insureds,
which accounted for 76% of gross premiums written in 1995. The Company's
principal D&O insureds are commercial entities, financial institutions and
not-for-profit organizations, which represented 55%, 28% and 17% of gross
domestic D&O premiums written in 1995, respectively. In recent years, the
Company has expanded its product line to related specialty liability insurance
products, including errors and omissions liability insurance ("E&O") for lawyers
and other professionals (19% of gross premiums written in 1995), international
D&O through a joint venture with Union des Assurances de
Paris -- Incendie-Accidents ("UAP") (5% of gross premiums written in 1995) and
fiduciary and fidelity bond coverages.
The Company's E&O business is divided between Lawyers Professional
Liability ("LPL") and Miscellaneous Professional Liability ("MPL"). Gross
premiums written for LPL increased from $2.3 million in 1993 to $28.7 million in
1995. Gross premiums written for MPL grew from $1.6 million to $11.6 million
during the same period. The growth of the Company's E&O business demonstrates
the effectiveness of its overall strategy of identifying and serving insurance
markets which the Company believes are not being effectively served by other
insurers. For example, the Company identified large law firms (35 or more
lawyers) as one such underserved market. In this market, extensive risk
evaluation and underwriting are performed by the Company's underwriters, all of
whom are attorneys formerly associated with large law firms. Additionally, the
Company's MPL department has expanded the classes of businesses it insures and
has formed alliances with wholesale brokers who control large blocks of E&O
business. Recent additions to the Company's MPL product offerings include E&O
programs for automobile insurance agents, psychologists and temporary help
agencies.
During the early 1990's, the Company perceived an opportunity to provide
professional liability insurance to foreign corporations whose directors and
officers are exposed to D&O risks, including, among others, risks arising in
connection with U.S. securities laws. In January 1993, ERI and UAP (the largest
insurance organization in France and the second largest in Europe) formed a
French insurance underwriting agency, known as UAP Executive Partners ("UPEX"),
in which each party has a 50% interest. UPEX is based in Paris and offers D&O
policies issued by UAP, a portion of each of which is reinsured by the Company.
The Company also reinsures international D&O business through its Dutch
subsidiary, Executive Risk N.V., founded in May 1995 to participate in
professional liability opportunities, principally in the Netherlands.
ERI's strategy has been to position itself as a niche provider, developing
specialized expertise in specific industry groups, such as financial
institutions (in D&O) and large law firms (in E&O). Both D&O and E&O are
typically claims-made coverages, i.e., they are designed to protect insureds
against lawsuits and associated legal defense expenses with respect to liability
claims first made against insureds during the policy term. In connection with
D&O coverage of for-profit corporations, the most severe liabilities generally
derive from lawsuits by stockholders against directors and officers for alleged
failures to discharge duties to the corporation
27
29
or violations of federal securities laws. In the case of not-for-profit
organizations, the Company's coverage is most often implicated in employment
practices litigation. E&O is offered to professionals, such as attorneys,
psychologists and insurance agents, among others, where the principal source of
potential claims is dissatisfied clients alleging breaches of professional
standards or ethical violations. Fiduciary coverages are intended primarily to
protect those who invest and administer benefit plan trusts, and fidelity bond
coverages (or crime coverages) insure against losses associated with employee
defalcations and dishonesty. Employment practices liability insurance, which is
available to cover both the employing organization and its employees, insures
against losses associated with employment claims such as sexual harassment,
wrongful termination and discriminatory treatment.
MARKETS
Directors & Officers Liability Insurance. The Company markets its D&O
products in three principal sectors: Commercial Entities, Financial Institutions
and Not-for-Profit Organizations. The following table shows the gross domestic
D&O premiums written for each of these sectors for the periods indicated:
GROSS DOMESTIC D&O PREMIUMS
WRITTEN
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
SECTOR 1995 1994 1993
(IN THOUSANDS)
Commercial Entities................................. $ 88,318 $ 47,993 $30,564
Financial Institutions.............................. 45,169 36,922 32,251
Not-for-Profit Organizations........................ 26,826 20,547 16,734
-------- -------- -------
Total..................................... $160,313 $105,462 $79,549
======== ======== =======
Within each of the D&O sectors, ERI has targeted and developed particular
areas of expertise, a strategy that management believes has allowed ERMA and the
Insurance Subsidiaries to develop and adapt their insurance products more
knowledgeably and to underwrite submissions and process claims more
professionally than competing companies. Management believes that such
expertise, together with a strong reputation for prompt service and responsive
claims handling, reduces the pressure to compete on the basis of price during a
"soft market," such as that which has prevailed within the industry in recent
years.
The Commercial Entities sector focuses principally on coverages for
publicly owned, mid-sized companies. With respect to larger public companies,
which carry primary D&O coverage from other insurers, the Company principally
writes secondary layers of insurance (called "excess insurance"). In 1993, the
Company also began to focus on coverages for small commercial entities (assets
under $100 million), and during 1995, a product specifically designed for the
small non-public commercial entity was introduced by the Company. As with
respect to other sectors, ERI's Commercial Entities D&O strategy is to develop
particularized knowledge of selected sub-sectors and then utilize its
underwriting expertise in adapting coverage and assessing risks. During 1995,
the Commercial Entities sector underwrote approximately 1,400 policies and had
an underwriting staff of 29.
Within the Financial Institutions sector, the Company's subsidiaries
maintain specializations in several sub-sectors, such as community banks
(including small depository institutions under $250 million in assets), large
depository institutions, mortgage bankers and broker-dealers. During 1995, the
Company insured approximately 800 financial institutions, and 12 underwriters
were dedicated to this sector.
The third sector, Not-for-Profit Organizations, underwrites for a variety
of not-for-profit healthcare facilities (principally hospitals) and social
service/charitable organizations (such as foundations and chambers of commerce).
In 1995, policies were written covering approximately 1,200 hospitals and 4,500
service/charitable organizations, with 21 underwriters assigned to the sector.
Errors & Omissions Liability Insurance. ERMA underwrites and markets E&O,
both MPL and LPL, primarily on ERII and ERSIC policy forms directly, but does
offer some E&O through the Facility on AC&S forms. The MPL group was formed in
1992 and oversees the Company's basic line of non-lawyer related E&O products.
The MPL group currently operates with a staff of eight underwriters and is
dedicated
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30
to E&O products providing up to $5 million in coverage to a variety of
professionals, including smaller to medium-sized, independent professional firms
in the financial services and real estate sectors. During 1995, the Company's
Insurance Subsidiaries wrote approximately 1,900 MPL policies, generating
approximately $10 million in gross premiums written.
The Company wrote its first lawyers E&O in 1990, and following a research
and development program, formed the LPL underwriting group in 1993. With a staff
of seven attorney-underwriters, this group underwrites E&O for larger law firms
(those with 35 or more lawyers) on a primary or excess coverage basis. The
Company believes that its use of experienced lawyers in the marketing and
underwriting process has proven to be attractive to firms within the target
market. The Company currently covers approximately 80 firms, and gross premiums
written in the LPL product have grown from less than $2.5 million in 1993 to
approximately $29 million for the year ended December 31, 1995. Effective
January 1, 1996, the Company instituted a reinsurance program, involving a
number of domestic and international reinsurance markets, and the Company
markets lawyers E&O policies up to policy limits of $50 million each claim and
$100 million in the aggregate per policy. See "-- Reinsurance."
International. In January 1993, the Company entered into a joint venture
agreement with UAP to write D&O for European companies. Under the UPEX joint
venture agreement, the Company has agreed that it will not market D&O outside
North America, except that it may offer D&O through UPEX and in countries where
UPEX elects not to do business. At March 31, 1996, UPEX employed 18 persons at
its offices in Paris, which included seven underwriters. UPEX offers D&O
policies issued by UAP, up to a maximum $25 million policy limit, subject to
certain foreign currency adjustments, and the Company has a net 15%
participation in these policies. Commencing operations in November 1993, UPEX
underwrote $20.7 million in gross premiums in 1995.
The Company's Dutch subsidiary, ERNV, was founded in May 1995 to
participate in professional liability opportunities, principally in the
Netherlands. ERNV was formed initially to participate in a Netherlands-based D&O
pool, from which it assumed approximately $385,000 in gross premiums in 1995.
The Facility. The Insurance Subsidiaries conduct D&O business primarily
through the Facility, which consists of AC&S, ERII and ERSIC, each of which can
act as insurer or reinsurer, and ERMA, as the product developer, marketer and
managing underwriter. Generally, where an AC&S policy is issued, 50% of gross
D&O liability is ceded to ERII on a quota share basis, with other specified
percentages applicable to non-D&O policies. Where an Insurance Subsidiary's
policy is issued, 12.5% (as compared to 50% in 1994) of the gross D&O liability
is ceded to AC&S on a quota share basis, also with other specified percentages
applicable to non-D&O policies. For each reinsured policy, the reinsuring entity
receives premium from the reinsured entity and is obligated to pay a ceding
commission to the reinsured entity.
The Facility arrangements permit ERMA to underwrite D&O, E&O and other
specialty lines of insurance, whether issued by AC&S or the Insurance
Subsidiaries. Policies that do not conform to specific underwriting guidelines
are subject to volume limitations. ERMA is authorized to bind D&O coverage for
AC&S and the Insurance Subsidiaries, generally up to policy limits of $20
million (up to $30 million on a case-by-case basis). Certain E&O policies may be
bound through the Facility, generally up to a maximum policy limit of $25
million. In all cases, the Company's binding authority with respect to AC&S
policies is subject to agreed-upon underwriting guidelines. The Agency Agreement
and the Quota Share Agreement each requires a minimum two-year notice of
termination. No such termination may be effective before December 31, 1999,
subject to the occurrence of certain extraordinary events or mutual consent of
the parties.
Based on the most recently available survey of the D&O industry conducted
by Watson Wyatt Worldwide, the Facility is a leading underwriter of primary D&O
in the United States.
MARKETING
The Company's products are distributed principally through licensed
independent property and casualty brokers, excess and surplus lines brokers and
licensed wholesalers. During 1995, the Company received submissions from over
4,000 brokers, and no single office of any broker organization accounted for a
material
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31
portion of the 1995 gross premiums written through ERMA. The Company does not
believe that it is dependent on any one broker. Improvements to the Company's
product distribution system are regularly under review, and the Company has
instituted a program utilizing Connecticut-based account executives who spend a
significant portion of each month in assigned regions meeting with local
brokerage firms. Such programs are currently effective for a number of regions,
including Atlanta, Boston, Chicago, Dallas, Los Angeles and San Francisco.
The Company's eight-person marketing staff produces a widely distributed
quarterly newsletter, containing articles of interest to the D&O and E&O
industry. Advertisements, articles in trade publications, seminar participations
and convention sponsorships are among the other methods used to market the
Company's products. Particularly in the health care D&O line, arrangements with
national hospital and health care associations have been useful in presenting
the Company's products to target markets. During 1995, the Company instituted
certain "program administration" relationships with insurance agencies having
national or regional books of E&O program business. Under such a program
administration relationship, a third party entity becomes the Company's agent to
underwrite and issue E&O policies within guidelines specified by the Company.
Program administrators are not authorized to handle or pay claims or to bind
reinsurance. As of December 31, 1995, two program administration relationships
were in effect, one for automobile insurance agents E&O and one for
psychologists E&O. A program administration agreement for temporary help
agencies E&O was entered into in early 1996. Although the amount of business
conducted through program administrators was not significant in 1995, the
Company expects this business to grow in the future.
UNDERWRITING
The Company's general underwriting philosophy stresses two essential
factors: expert consideration of complex insurance submissions, including those
from harder-to-insure applicants, and profitability over premium growth.
Accordingly, the Company prices premiums based primarily upon specific risk
exposure, including loss experience, rather than primarily upon market factors.
The table below sets forth statutory loss ratios and combined ratios for the
periods indicated for the Insurance Subsidiaries and the property/casualty
industry.
The Insurance Subsidiaries' specialty products business is not directly
comparable to the business of the property/casualty industry as a whole.
YEAR ENDED DECEMBER 31,
----------------------------------------------
SAP DATA: 1995 1994 1993 1992 1991
Insurance Subsidiaries
Loss Ratio............................ 67.4% 67.6% 67.6% 71.5% 73.0%
Combined Ratio........................ 90.7 97.6 102.1 102.8 102.4
Industry(1)
Loss Ratio............................ 78.9% 81.1% 79.5% 88.1% 81.1%
Combined Ratio(2)..................... 105.0 107.1 105.7 114.6 107.6
- ------------------------------
(1) Source: For 1991 through 1994, Best's Aggregates &
Averages--Property-Casualty; for 1995, BestWeek P/C Supplement.
(2) Excludes policyholder dividends.
The Company emphasizes industry specialization within its underwriting
staff, which includes a number of professionals with operational experience from
the industries being underwritten. At December 31, 1995, ERMA had a staff of 75
underwriters, under the overall supervision of Stephen J. Sills, President,
Chief Underwriting Officer and a director of the Company. In evaluating
submissions, underwriters may consult with members of the Company's actuarial,
claims and legal departments, as they analyze various aspects of a prospective
insured's risk profile. Except with respect to the Company's higher volume,
lower risk not-for-profit business (not including hospitals, where a
Company-developed ratings system is utilized), submissions for D&O and E&O are
underwritten on a risk-by-risk basis. All policy pricing quotes must be approved
by an underwriter who has written delegated authority for the industry sub-group
involved. Underwriting authorities
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32
cover various significant aspects of coverage, including maximum limits, minimum
deductibles, permissible deviation from established premium rates and risk
exposure. As an example, a coverage quote for a bank that failed to meet
established underwriting criteria would have to be approved by the senior
underwriter or, in some cases, the Chief Underwriting Officer. Producing brokers
are not authorized to bind D&O coverage either for the Insurance Subsidiaries or
for AC&S under the Facility. As noted above, the Company initiated during 1995
certain program administration arrangements with respect to defined E&O
programs, under which producing agents may bind coverage within underwriting
parameters specified by the Company.
A large portion of policies issued through the Facility have a one-year
term, although multi-year policies are becoming increasingly common. Exceptions
include principally "run-off" D&O coverage, which is most often purchased to
protect the directors and officers of an acquired corporation during the three
to six year period following a merger or acquisition. Most submissions for
renewal of an expiring policy are re-underwritten and re-priced in accordance
with the standard underwriting practices and procedures, which generally do not
distinguish between new and renewal policies. The underwriting guidelines are
set by the respective underwriting committees of the Insurance Subsidiaries,
each of which has two distinct committees. For each Insurance Subsidiary,
Underwriting Committee A acts with respect to D&O and other business issued
through ERMA on AC&S and Insurance Subsidiary policies. Underwriting Committee
A, on which AC&S has one designee (two prior to April 1996), acts only by
unanimous vote. Underwriting Committee B of each Insurance Subsidiary is
comprised of Company employees and one outside director (not an AC&S designee),
and it acts with respect to policies written on the Insurance Subsidiaries' own
policies. The Company's Chief Underwriting Officer, Stephen J. Sills, chairs
each of the Underwriting Committees. See "Business Relationship with AC&S."
CLAIMS
Claims arising under insurance policies underwritten by the Company are
managed by the Company's claims department. Because of the nature of the
Company's policies and the persons covered by D&O, claims tend to be reported
soon after the occurrence of a loss or an event representing a potential loss.
Claims personnel are assigned to handle claims based, in part, on industry
specialization. At December 31, 1995, the Claims department consisted of 23
employees, including 16 claims handlers. To assist its staff in claims
management, the Company has developed a comprehensive automated electronic claim
file system for administering and investigating claims, and calculating and
updating case reserves.
REINSURANCE
The Company has historically utilized reinsurance arrangements to limit the
amount of risk retained under policies written or reinsured by the Insurance
Subsidiaries. With respect to D&O risks, the Company has in place an
excess-of-loss reinsurance treaty providing for 100% reinsurance protection (20%
in 1994), subject to aggregate limits and other restrictions, on losses incurred
in excess of $2.5 million up to a limit of $10 million. ERII and ERSIC also have
entered into quota share reinsurance treaties with various reinsurers, covering
D&O and E&O related losses, subject to certain restrictions and aggregate
limits. In addition, for the Company's D&O risks assumed from UAP, ERII has
entered into a quota share reinsurance treaty, with various reinsurers, which
generally provides for 70% reinsurance protection on losses incurred, subject to
certain restrictions and aggregate limits. Effective January 1, 1996, the LPL
product is reinsured through a number of domestic and international reinsurance
markets, in a program that generally limits the Company's per claim exposure to
slightly under $5 million and its per policy exposure to slightly under $10
million. With respect to MPL policies, the Company has secured quota share
reinsurance which generally limits its maximum loss to $1 million per claim and
per policy. The Company's reinsurance programs include some exposure to
syndicates at Lloyd's, which is currently undergoing a restructuring, the
success or failure of which could affect syndicates' ability to meet their
reinsurance obligations. In addition, the availability and cost of reinsurance
arrangements are subject to prevailing market conditions, which are beyond the
Company's control. As a result of these or other factors, the Company may in the
future choose to revise further its reinsurance practices to increase, decrease
or eliminate entirely the amount of risk it cedes to reinsurers.
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RESERVES
Both D&O and E&O policies are generally written on a claims-made policy. In
many cases, several years may elapse between the reporting of the claim or
covered act to the Company and the Company's payment on a related loss. The
Company reflects its liability for the ultimate payment of incurred losses and
LAE by establishing loss and LAE reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred. Reserves are
estimates involving actuarial and statistical projections of the cost of the
ultimate settlement and administration of claims, based on known facts and
circumstances, predictions of future events, estimates of future trends in
claims severity and other variable factors such as inflation and new concepts of
liability. As the Company becomes aware of new information, it may refine and
adjust its estimates of its ultimate liability. Actual losses and LAE paid may
deviate, perhaps substantially, from estimates reflected in the Company's
reserves in its financial statements.
Since 1988, the Company has retained the services of an independent
actuarial consulting firm to provide opinions regarding reserves as required for
state regulatory filings. The Company intends to retain such services in the
future. Although the Company believes that its reserves are adequate, there can
be no assurance that ultimate loss experience will not exceed the Company's
reserves, which may result in a material adverse effect on the Company's
financial condition and results of operations. The following table sets forth a
reconciliation of beginning and ending reserves for unpaid losses and LAE, net
of reserves for reinsured losses and LAE, for the years indicated.
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
(IN THOUSANDS)
Reserves for losses and LAE at beginning of period,
gross............................................ $254,758 $215,151 $188,438
Reinsurance recoverable at beginning of period..... (8,958) (6,053) --
-------- -------- --------
Reserves for losses and LAE at beginning of period,
net.............................................. 245,800 209,098 188,438
Provision for losses and LAE for current year
claims........................................... 83,775 68,304 49,687
Decrease in estimated ultimate losses and LAE for
prior year claims................................ (5,245) (4,133) (3,047)
-------- -------- --------
Total incurred losses and LAE...................... 78,530 64,171 46,640
Adjustment for foreign exchange loss on unpaid loss
and LAE.......................................... 58 27 --
Loss and LAE payments for claims attributable to:
Current year..................................... 792 587 142
Prior years...................................... 32,711 26,909 25,838
-------- -------- --------
Total payments..................................... 33,503 27,496 25,980
-------- -------- --------
Reserves for losses and LAE at end of period,
net.............................................. 290,885 245,800 209,098
Reinsurance recoverable at end of period........... 33,531 8,958 6,053
-------- -------- --------
Reserves for losses and LAE at end of period,
gross............................................ $324,416 $254,758 $215,151
======== ======== ========
As shown above, a result of the Company's normal reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior-years'
claims, was that in 1995 the Company reduced its unpaid loss and LAE reserves
for prior-years' claims by approximately $5.2 million. The Company does not
consider reserve reductions to represent a trend, and there can be no assurance
concerning future adjustments of reserves, positive or negative, for
prior-years' claims. The procedures used in determining appropriate reserves at
December 31, 1995 were consistent with prior-year reserving methodologies.
Except for the last six lines, the "Development of Reserves" table below
presents the development of unpaid loss and LAE reserves, net of reinsurance,
from 1987 through 1995. The last six lines of the table present that type of
development on a "gross-of-reinsurance" basis for the periods following the
Company's adoption of SFAS No. 113, "Accounting and Reporting For Reinsurance of
Short-Duration and Long-
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34
Duration Contracts," as of January 1, 1993. The top line of the table shows the
reserves for unpaid losses and LAE, net of reinsurance recoverables on unpaid
claims, at the end of each of the indicated years. That net reserve represents
the amount of unpaid losses and LAE for claims arising in the current year and
all prior years that were unpaid at the balance sheet date, including reserves
for losses incurred but not reported. The upper portion of the table also shows
the re-estimated amount of the previously recorded reserve based on experience
as of the end of each succeeding year. The estimate changes as more information
becomes known about the frequency and severity of claims for individual years.
DEVELOPMENT OF RESERVES
DECEMBER 31,
---------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995
(IN THOUSANDS)
Reserves for losses and LAE,
net........................... $11,459 $43,273 $76,277 $111,987 $157,131 $188,438 $209,098 $245,800 $290,885
Reserves re-estimated as of end
of year:
1 year later.................. 10,990 42,140 74,787 112,710 156,773 185,391 204,965 240,555
2 years later................. 10,345 38,653 70,708 112,333 153,726 181,258 199,720
3 years later................. 6,886 23,846 56,919 111,178 149,593 176,013
4 years later................. 2,801 10,057 55,764 110,597 144,348
5 years later................. 1,619 8,899 55,183 105,352
6 years later................. 1,635 8,916 49,938
7 years later................. 1,635 8,916
8 years later................. 1,635
Cumulative redundancy
(deficiency).................. 9,824 34,357 26,339 6,635 12,783 12,425 9,378 5,245
Cumulative paid as of:
1 year later.................. $ 5 $ 50 $ 1,088 $ 9,491 $ 20,075 $ 25,838 $ 26,909 $ 32,711
2 years later................. 33 449 4,815 26,321 44,814 47,270 56,823
3 years later................. 33 1,936 17,977 44,759 61,562 73,100
4 years later................. 1,283 2,072 26,483 56,572 78,916
5 years later................. 1,265 2,134 31,157 68,277
6 years later................. 1,265 4,421 38,435
7 years later................. 1,265 4,426
8 years later................. 1,265
Net reserve--December 31........ $209,098 $245,800 $290,885
Reinsurance recoverables........ 6,053 8,958 33,531
-------- -------- --------
Gross reserve--December 31...... $215,151 $254,758 $324,416
======== ======== ========
Net re-estimated reserve........ 199,720 240,555
Re-estimated reinsurance
recoverables.................. 2,290 8,974
-------- --------
Gross re-estimated reserve...... $202,010 $249,529
======== ========
Gross cumulative redundancy..... $ 13,141 $ 5,229
======== ========
In the Company's early years of operation, it had little or no actual loss
experience upon which to calculate reserves. As a result, its reserving
methodologies were based largely on industry data. In recent years, the Company
has developed data based upon its own loss experience. With this information
available, the Company believes it is capable of estimating future losses, and
consequently reserves, with a greater degree of accuracy than in the Company's
early years of operations. As shown above, the cumulative reserve redundancies
have fallen in recent years. There can be no assurance that the Company's
reserves will be sufficient to cover ultimate losses.
INVESTMENTS
The Company seeks optimum yield, consistent with what management believes
is a generally conservative investment approach, as evidenced by the portfolio's
quality characteristics, liquidity and diversification.
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The Company has established investment guidelines and policies and oversees
management of the investment portfolio through the Finance Committee of the
Company's Board of Directors. All investments are reviewed periodically by the
Finance Committee, and exceptional investment decisions are submitted for
advance approval. In addition to the specifications in the investment policy
statements, all investments of the Insurance Subsidiaries must meet the
applicable state statutory requirements.
Investments currently consist principally of U.S. Government securities,
and corporate and municipal obligations, but also include asset backed
securities, partnership interests and common equities (including mutual fund
shares). At March 31, 1996, the Company also owned agency-issued collateralized
mortgage obligations, known as planned amortization class ("PAC") bonds, with an
approximate market value of $8.5 million. The PAC bonds are rated AAA and are
structured such that their market values tend to be more stable than traditional
mortgage backed securities in volatile interest rate environments. Investments
in securities backed by the full faith and credit of the U.S. Government and
U.S. Government agencies may be made without limitation. Using two new money
managers, the Company intends to increase its allocation of investments to
mortgage and other asset backed securities from $17.9 million at March 31, 1996
to $50 million. Mortgage backed securities may be subject to prepayment risk in
periods of declining interest rates and extension risk in periods of rising
interest rates. Aside from interest rate risk similar to that experienced by any
fixed income investment, the Company does not believe a material risk is
inherent in its allocation to mortgage backed securities relative to its
earnings and liquidity. The Company's investment policies specify limitations
both according to type of investment and with respect to exposure to single
issuers.
Investments in publicly-traded fixed income securities, both short- and
long-term, are restricted to issues that maintain a quality rating equal or
equivalent to "A" or better from S&P or Moody's Investors Service, Inc.
("Moody's"). Should an investment in the portfolio be downgraded below this
rating, the investment is not necessarily sold immediately but is closely
monitored for further deterioration of credit quality and the need to write down
the book value of the investment. Private placements or other investments not
rated by those agencies are permitted, if approved by the Finance Committee and
reported to the Board of Directors.
The following table summarizes the investment portfolio of the Company, by
asset class, as of March 31, 1996.
MARCH 31, 1996
-------------------------------------------
FAIR VALUE COST(1) PERCENT(2)
(IN THOUSANDS)
U.S. Treasury or agency securities............. $ 18,905 $ 18,931 3.6%
Municipal securities........................... 389,420 376,342 73.2
Corporate fixed income securities.............. 44,940 43,879 8.4
Mortgage and other asset backed securities..... 17,874 17,077 3.4
Foreign government securities.................. 1,644 1,594 0.3
-------- -------- ------
Total fixed maturities............... 472,783 457,823 88.9
-------- -------- ------
Equity securities.............................. 28,788 21,938 5.4
Short-term investments and cash................ 30,097 30,097 5.7
-------- -------- ------
Total investments and cash........... $ 531,668 $509,858 100.0%
======== ======== ======
- ------------------------------
(1) Amortized cost for fixed maturities and short-term investments.
(2) Percent of total portfolio, based on fair value.
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At March 31, 1996, the Company's publicly-traded bond portfolio did not
contain any securities that were rated below investment grade. The following
table sets forth the composition of the Company's publicly-traded fixed income
securities, by quality rating, as of March 31, 1996.
MARCH 31,
RATINGS 1996(1)
(S&P/Moody's):
AAA/Aaa.......................................... 60.2%
AA/Aa............................................ 20.3
A/A.............................................. 18.4
BBB/Baa.......................................... 1.1
------
Total.................................... 100.0%
======
- ------------------------------
(1) Based on fair value.
REGULATION
As insurance companies, ERII and ERSIC are subject to supervision and
regulation in the states in which they transact business. Such supervision and
regulation, which is designed primarily for the protection of policyholders and
not stockholders, relates to most aspects of an insurance company's business and
includes such matters as authorized lines of business; underwriting standards;
financial condition standards; licensing of insurers; investment standards;
premium levels; policy provisions; the filing of annual and other financial
reports prepared on the basis of SAP; the filing and form of actuarial reports;
the establishment and maintenance of reserves for unearned premiums, losses and
LAE; transactions with affiliates; dividends; changes in control; and a variety
of other financial and nonfinancial matters. Additionally, ERMA is subject to
supervision and regulation under state insurance agency laws in the states in
which it does business as an insurance agent. Insurance regulatory authorities
have broad administrative powers to regulate trade practices and in that
connection to restrict or rescind licenses to transact business and to levy
fines and monetary penalties against insurers and insurance agents found to be
in violation of applicable laws and regulations.
COMPETITION
The insurance industry is highly competitive. ERI competes with domestic
and foreign insurers and reinsurers, some of which have greater financial,
marketing and management resources than ERI, and it may compete with new market
entrants in the future. The Company's major competitors are American
International Group, Inc. and The Chubb Corporation, which the Company believes
are the dominant competitors in the industry. Other competitors include ACE
Limited, Associated Electric & Gas Insurance Services Limited, CNA Financial
Corp., EXEL Limited, Gulf Insurance Company (a subsidiary of Travelers), Great
American Insurance Company, Lloyd's syndicates, PHICO Insurance Company,
Reliance Group Holdings, Inc. and Zurich-American Insurance Company. Competition
is based on many factors, including the perceived financial strength of the
insurer, pricing and other terms and conditions, services provided, ratings
assigned by independent rating organizations (including A.M. Best and S&P), the
speed of claims payment and the reputation and experience of the insurer.
Ultimately, this competition could affect the Company's ability to attract
business on terms having the potential to yield appropriate returns.
EMPLOYEES
At March 31, 1996, the Company employed approximately 250 employees. None
of the employees is subject to collective bargaining agreements and the Company
knows of no current efforts to implement such agreements. The Company believes
it has a good relationship with its employees.
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MANAGEMENT
Set forth below are the names, ages and titles of the persons who are
members of the Company's Board of Directors or executive officers of the Company
as of the date of this Prospectus. All directors of the Company are also
directors of each of the Insurance Subsidiaries.
NAME AGE CAPACITY
LeRoy A. Vander Putten..................... 61 Chairman, Chief Executive Officer and
Director
Robert H. Kullas........................... 51 Vice Chairman, Chief Operating Officer and
Director
Stephen J. Sills........................... 47 President, Chief Underwriting Officer and
Director
Robert V. Deutsch.......................... 36 Executive Vice President, Chief Financial
Officer and Chief Actuary
James A. FitzPatrick, Jr. ................. 46 Secretary
Gary G. Benanav............................ 50 Director
Barbara G. Cohen........................... 43 Director
John G. Crosby............................. 53 Director
Patrick A. Gerschel........................ 50 Director
Peter Goldberg............................. 60 Director
Joseph P. Kiernan.......................... 55 Director
Michael D. Rice............................ 53 Director
Joseph D. Sargent.......................... 66 Director
Certain officers of the Insurance Subsidiaries and ERMA are as follows:
NAME AGE CAPACITY(1)
Anthony J. Falkowski....................... 50 Senior Vice President--Claims
James A. Roberts........................... 45 Senior Vice President--Information Services
Mark I. Rosen.............................. 44 Senior Vice President--Claims and Chief
Legal Officer
Raymond Wahl............................... 48 Senior Vice President--Underwriting
David Condren.............................. 37 Vice President--Underwriting(2)
John F. Kearney............................ 38 Vice President--Underwriting
Jeffrey H. Koenig.......................... 33 Vice President--Finance and Controller(3)
David B. Lapin............................. 36 Vice President--Underwriting
Joseph A. Sterling, Jr. ................... 51 Vice President--Administration(2)
Douglas J. Dalrymple....................... 48 Treasurer(3)
- ------------------------------
(1) Each officer listed is an officer of ERII, ERSIC and ERMA, unless otherwise
specified.
(2) ERMA only.
(3) Insurance Subsidiaries only.
LeRoy A. Vander Putten. Mr. Vander Putten has been a director of the
Company since December 1986 and its Chief Executive Officer since January 1988.
He also served as the Company's Chairman from January 1988 through December
1993, and he resumed the office of Chairman in August 1994. He was the Company's
President from January 1988 until August 1994. Mr. Vander Putten served as
Chairman, President and Chief Executive Officer of ERII beginning in January
1988 and of ERSIC beginning in November 1991.
Robert H. Kullas. Mr. Kullas became Vice Chairman in April 1996, after
serving as President since August 1994. He has served as a director of the
Company, ERII and ERSIC, and as Chairman of the
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Partnership Committee of ERMA, since January 1994. From January 1994 until
August 1994, his title was Chairman of the Board of each of the Company, ERII
and ERSIC. In August 1994 his title became President and Chief Operating Officer
for each of the Company, ERII and ERSIC. Prior to joining the Company, Mr.
Kullas held various financial and planning positions in the Life, Financial and
Commercial Insurance Divisions at AL&C.
Stephen J. Sills. Mr. Sills became President in April 1996 and has served
as a director of the Company since December 1986. He served as Executive Vice
President of the Company from November 1990 until April 1996. Mr. Sills has
served as Executive Vice President of ERII and ERSIC since November 1990 and
November 1991, respectively. Prior to serving as Executive Vice President, Mr.
Sills served as Senior Vice President of the Company and ERII from December 1986
and April 1987, respectively. Mr. Sills has served as a director of ERII and
ERSIC since February 1987 and December 1991, respectively. Mr. Sills also has
served as President, and a member of the Partnership Committee, of ERMA since
January 1988.
Robert V. Deutsch. Mr. Deutsch became Executive Vice President in April
1996. From November 1990 until April 1996, he served as Senior Vice President of
the Company. He has also served as Chief Financial Officer and Chief Actuary of
the Company since November 1990. Mr. Deutsch has also served as Senior Vice
President, Chief Financial Officer and Chief Actuary of ERII and ERSIC since
November 1990 and November 1991, respectively. From June 1987 until November
1990, he served as Senior Vice President and Chief Actuary of the Company and
ERII.
James A. FitzPatrick, Jr. Mr. FitzPatrick has served as Secretary of the
Company, ERII and ERSIC since August 1986, February 1987 and November 1991,
respectively. He has been a partner at Dewey Ballantine since February 1989, and
from January 1983 to February 1989 was a partner at LeBoeuf, Lamb, Leiby &
MacRae.
Gary G. Benanav. Mr. Benanav has served as a director of the Company and
of ERII since April 1988 and as a director of ERSIC since December 1991, and has
been a member of the Partnership Committee of ERMA since January 1994. He is
currently an independent consultant, having served as Executive Vice President
of AL&C and head of AL&C's property/casualty lines from December 1993 until
April 1996. From April 1992 through December 1993, he served as Group Executive
responsible for Aetna Life Insurance and Annuity Company and Aetna
International. He also serves as a director of Barnes Group, Inc., Bristol, CT.
Barbara G. Cohen. Ms. Cohen has been nominated for election as a director
of the Company at the 1996 Annual Meeting, scheduled to be held on May 10, 1996.
Since 1993 Ms. Cohen has served as President of Kannon Consulting, a
Chicago-based marketing consulting firm. From 1991 to 1993 she was a senior
partner at Cambridge Group, Inc. and, prior to that, a partner in the Marketing
and Strategy practice of Booz, Allen & Hamilton, Inc.
John G. Crosby. Mr. Crosby has served as a director of the Company since
1987 and as a director of ERII and ERSIC, and a member of the Partnership
Committee of ERMA, since January 1994. Mr. Crosby is currently President and
Managing Director of the investment banking firm, Madison Partners, Inc., a
position he has held since September 1995. He served as Managing Director of LSG
Advisors ("LSG"), an investment banking firm and a division of Societe Generale
Securities Corp., from May 1993 through August 1995. From 1990 through May 1993,
Mr. Crosby served as Managing Director of The Lodestar Group ("Lodestar"),
predecessor to LSG. From 1980 to 1990, Mr. Crosby served as a Managing Director
and in various positions with Merrill Lynch & Co.
Patrick A. Gerschel. Mr. Gerschel has served as a director of the Company
and of ERII since July 1990, as a director of ERSIC since December 1991 and as a
member of the Partnership Committee of ERMA since January 1994. Mr. Gerschel has
served as Chairman of Gerschel & Co., a merchant banking firm, since 1980. Mr.
Gerschel has also served as Chairman of Rivondale/Santa Rita Resources since
1983. From 1978 to 1982, Mr. Gerschel was a Limited Partner of Lazard Freres &
Co. and, from 1978 to 1980, was Vice Chairman of Lazard Realty.
Peter Goldberg. Mr. Goldberg has served as a director of the Company, ERII
and ERSIC, and a member of the Partnership Committee of ERMA, since May 1994.
Mr. Goldberg has served as Chairman and
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a director of Calco Insurance Brokers & Agents, Inc. since 1993. Since 1993, Mr.
Goldberg also has served as President and a director of California Casualty
Management Company ("CCMC") and from 1980 to 1993 was Executive Vice President
and a director of CCMC.
Joseph P. Kiernan. Mr. Kiernan has served as a director of the Company,
ERII and ERSIC since December 1986, February 1987 and December 1991,
respectively. He has also served as a member of the ERMA Partnership Committee
since 1988. Mr. Kiernan serves as Chairman and Chief Executive Officer--Fidelity
and Surety, Travelers/Aetna Property Casualty Corp., a position assumed in April
1996. Prior to the Travelers acquisition of AC&S, Mr. Kiernan served as head of
AL&C's Bond and Standard Commercial Accounts strategic business units.
Michael D. Rice. Mr. Rice has served as a director of the Company since
1986. He has also served as a director of ERII and ERSIC, and a member of the
Partnership Committee of ERMA since January 1994. Mr. Rice has served as
President of Aon Specialty Group, an insurance brokerage firm, since 1989. From
1988 to 1989, Mr. Rice served as a Senior Vice President of Rollins, Burdick &
Hunter.
Joseph D. Sargent. Mr. Sargent has served as a director of the Company,
ERII and ERSIC since December 1986, February 1987 and December 1991,
respectively. He has also served as a member of the Partnership Committee of
ERMA since January 1994. Mr. Sargent currently serves as Chairman of Connecticut
Surety Corporation, a position he has held since December 1992. Mr. Sargent
served as Chairman, and later as Vice Chairman, of Conning & Company, an
investment banking firm, from 1991 to 1995 and as its Chairman and Chief
Executive Officer from 1988 to 1991. Mr. Sargent is a director of E.W. Blanch
Holdings, Policy Management Systems Corporation, Mutual Risk Management Ltd.,
MMI Companies, Inc. and Trenwick Group Inc.
Anthony J. Falkowski. Mr. Falkowski has served as Senior Vice President
and Claims Manager of ERII and ERSIC since June 1987 and November 1991,
respectively. Prior to joining the Insurance Subsidiaries, he served in various
positions with Chubb Insurance Group, including his last position as a Vice
President in the Claims Department.
James D. Roberts. Mr. Roberts has served as Senior Vice President of ERII
and ERSIC since November 1990 and November 1991, respectively. From April 1988
through November 1990, Mr. Roberts was Vice President and Chief Information
Officer of ERII. Prior to that date, Mr. Roberts held various positions within
Peat Marwick Main & Co. (now, KPMG Peat Marwick), serving as manager from 1986
to 1988.
Mark I. Rosen. Mr. Rosen became the Company's chief legal officer in 1991,
and he has served as Senior Vice President of ERII and ERSIC since April 1993.
From 1976 until 1991, Mr. Rosen was an attorney with the Federal Deposit
Insurance Corporation and was its Deputy General Counsel from 1988 until 1991.
He headed the branch responsible for litigating D&O claims.
Raymond Wahl. Mr. Wahl has served as Senior Vice President of ERII and
ERSIC since June 1991 and April 1992, respectively. From 1977 until 1991, Mr.
Wahl served in various underwriting related positions within National Union Fire
Insurance Company, a subsidiary of American International Group.
David Condren. Mr. Condren joined ERII in 1988, and has served as Vice
President in the Company's underwriting department since 1994. Prior to joining
the Company, Mr. Condren was associated with Peat Marwick Main & Co. (now, KPMG
Peat Marwick).
John F. Kearney. Mr. Kearney has served as Vice President of ERII and
ERSIC since July 1993. From 1987 until 1993, Mr. Kearney underwrote D&O
insurance with ERMA where, from November 1991 he was a Vice President. Prior to
joining ERMA, Mr. Kearney was an account executive with Merrill Lynch & Co.
Jeffrey H. Koenig. Mr. Koenig joined the Company as Assistant Controller
in 1987. He has served as Vice President of ERII and ERSIC since January 1996
and as Controller since April 1990 and November 1991, respectively. Prior to
joining the Company, Mr. Koenig held various positions at Coopers & Lybrand. He
is a certified public accountant.
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David B. Lapin. Mr. Lapin has served as Vice President of ERII and ERSIC
since July 1993. From 1987 to 1993, Mr. Lapin underwrote D&O insurance with
ERMA, where, from November 1991, he was a Vice President. Prior to joining ERMA,
Mr. Lapin was Underwriting Manager at Home Insurance Company.
Joseph A. Sterling, Jr. Mr. Sterling joined ERMA as Vice President,
Administration, in 1987. Prior to 1987, Mr. Sterling had served in various
capacities with AC&S.
Douglas J. Dalrymple. Mr. Dalrymple has served as Treasurer of ERII and
ERSIC since October 1992. From 1990 to 1992, Mr. Dalrymple was an Assistant Vice
President of CIGNA Corporation, and prior to that, he served in various
capacities with Equicor Equitable HCA Corp. and Equitable Life Assurance Society
of the United States.
BUSINESS RELATIONSHIP WITH AC&S
The Facility operates under an Amended and Restated Agency and Insurance
Services Agreement among AC&S, the Company and ERMA (the "Agency Agreement") and
an Amended and Restated Quota Share Reinsurance Agreement between AC&S and ERII
(the "Quota Share Agreement"). These agreements contain various provisions
governing the manner in which the Facility's business is conducted and the
nature and scope of the insurance business conducted by ERI and its
subsidiaries. Certain provisions of these agreements are summarized below:
Agency Agreement. Under the Agency Agreement, AC&S has authorized ERMA to
issue AC&S D&O policies with liability limits of up to $20 million (with up to
$30 million available on a case-by-case basis with AC&S's approval). The Agency
Agreement also authorizes ERMA to issue AC&S financial institution trust
department errors and omissions policies, fidelity bonds, kidnap and ransom
policies, commercial crime policies, mail policies, combination safe depository
policies and pension and welfare fund fiduciary responsibility policies which
meet the underwriting guidelines of Underwriting Committee A. The Agency
Agreement provides that, with minor exceptions, all of AC&S's D&O insurance in
the United States will be written through ERMA. This exclusive arrangement
applies to AC&S and its former parent, AL&C, as well as any other subsidiaries
of AL&C currently in existence or to be formed. It does not, however, apply to
Travelers, to its D&O subsidiary, Gulf Insurance Company, or to any other
Travelers subsidiary.
The Agency Agreement generally requires a minimum two year notice of
termination, and no such termination may be effective until December 31, 1999.
The Agency Agreement also may be terminated immediately if the Company
materially breaches any of its obligations thereunder or any of the business
restrictions applicable to it as described under "--Reinsurance Agreements." The
Agency Agreement may also be terminated in the event that any person other than
AC&S acquires 20% or more of ERI's voting securities or if ERI ceases to own all
of the voting stock or partnership interests of ERMA, or upon any suspension of
ERMA's underwriting authority under the Agency Agreement as described below.
Under the Agency Agreement, ERMA's underwriting authority may be suspended
upon the occurrence of any of the following events: (a) in the event that as of
the last date of any calendar year, the consolidated policyholders' surplus of
the Insurance Subsidiaries decreases by more than 20% compared to the last date
of the calendar year immediately preceding such calendar year; (b) if the
consolidated net premiums written to policyholders' surplus ratio of the
Insurance Subsidiaries for policies underwritten on behalf of AC&S under the
Agency Agreement is in excess of 3.5 to 1 for any rolling period of four
consecutive calendar quarters and such ratio for such subsidiaries is not
reduced below 3.5 to 1 for the rolling period of four consecutive calendar
quarters ended six months thereafter; (c) if the consolidated policyholders'
surplus of the Insurance Subsidiaries is less than $60 million; or (d) upon the
effective date of the termination of the Quota Share Agreement.
Under the Agency Agreement, ERMA currently pays AC&S an override commission
equal to 3% of gross written premiums with respect to AC&S D&O policies issued
through ERMA. It will continue to pay at the 3% level until on average, over a
rolling period of four consecutive quarters, more than 70% of ERI's Insurance
Revenues (defined below) during a period of four consecutive calendar quarters
are derived from sources other than the issuance, and reinsurance, of AC&S
policies, at which point the rate of the override
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commission would be 2%. The override commission will remain at the 2% level
until on average, over a rolling period of four consecutive calendar quarters,
more than 70% of the aggregate gross written premiums for all D&O written in the
United States through ERMA is directly written on policies of the Insurance
Subsidiaries. Thereafter ERI will not be required to pay AC&S any override with
respect to AC&S D&O policies issued through ERMA. For purposes of the foregoing,
"Insurance Revenues" means (a) AC&S's gross written premiums from all AC&S
policies underwritten by ERMA pursuant to the Agency Agreement, plus (b) the
consolidated gross premiums written of the Insurance Subsidiaries (excluding (i)
any such premiums attributable to any insurance assumed from AC&S pursuant to
the Quota Share Agreement and (ii) any such premiums which, pursuant to the
policies to which they relate, are required to be segregated for possible return
to the insured under such policies depending on any profit sharing,
experience-rating or other similar criteria set forth in such policy, except to
the extent such premiums are recorded as earned premiums by any of the Insurance
Subsidiaries during any of the four calendar quarters in question), plus (c) the
consolidated fee income of ERI, determined in accordance with GAAP, after
deducting any fees paid by AC&S or any affiliate of AC&S, plus (d) an amount
equal to (i) the fee income of any equity in which ERI owns 20% or more of the
outstanding equity interests, multiplied by (ii) the percentage of the
outstanding equity interest of such entity owned by ERI as of the date such fee
income is determined.
As to each AC&S policy issued by ERMA, ERMA deducts as its commission 24%
of that portion of the gross premiums written which is not ceded by AC&S to ERII
under the Quota Share Agreement. In addition, as to each such policy, on behalf
of AC&S ERMA withholds, from the portion of the premiums ceded by AC&S to ERII,
ERII's share of producers' commissions and general and administrative expenses
incurred.
The Agency Agreement states that ERI and AC&S anticipate that, over time,
an increasing portion of ERMA's revenue will be attributable to policies
underwritten on behalf of the Insurance Subsidiaries. The Agency Agreement
provides that ERMA is permitted to underwrite business on behalf of the
Insurance Subsidiaries on such terms as it may negotiate with them subject to
the limitations imposed on the business activities of the Insurance Subsidiaries
under their reinsurance agreements with AC&S described below under
"--Reinsurance Agreements." In addition, ERMA may enter into agreements to
underwrite insurance on behalf of third party insurers, subject to certain
conditions and limitations described below. See "--Limit on Additional Lines and
Third Party Paper."
ERI has guaranteed the obligations of ERMA to AC&S under the Agency
Agreement.
Reinsurance Agreements. The Quota Share Agreement requires AC&S to cede to
ERII 50% of its gross liability, up to $20 million per policy, on all of AC&S's
D&O policies issued through ERMA, 6.25% of its gross liability on financial
institution trust department E&O policies issued through ERMA, up to $5 million
per policy, and generally 50% of its gross liability on other specified policies
issued through ERMA, up to $5 million per policy. Under the Quota Share
Agreement, ERII pays AC&S a ceding commission, in addition to the amounts
withheld by ERMA on behalf of AC&S under the Agency Agreement, as follows: (a)
with respect to each D&O and financial institution trust department E&O policy
issued through ERMA, an amount equal to 3% of the portion of gross premiums
written on such policy payable to ERII under the Quota Share Agreement, and (b)
with respect to each fidelity bond and fiduciary policy issued through ERMA, an
amount equal to 5% of the portion of gross premiums written on such bond or
policy payable to ERII under the Quota Share Agreement. Such ceding commission
is intended to reimburse AC&S for premium taxes incurred. The Quota Share
Agreement also requires AC&S to retain, and not reinsure, at least 12.5% of its
gross liability on its D&O policies written through ERMA. AC&S has also entered
into reinsurance agreements with each of ERII and ERSIC under which ERII and
ERSIC currently cede to AC&S 12.5% (50% for 1994) of their gross liability on
D&O policies issued by ERII and ERSIC to U.S. insureds. These reinsurance
agreements contain terms substantially similar to those contained in the Quota
Share Agreement.
In the event the Quota Share Agreement is terminated for any reason other
than pursuant to the voluntary termination provisions thereof or certain other
limited reasons, or is terminated for any reason at a time when ERII's rating
from A.M. Best is B++ ("Very Good") or lower, then ERII is required to deposit
with AC&S security in an amount equal to its then pro rata share (the
"Reinsurer's Pro Rata Share") of AC&S's loss reserves, loss adjustment expenses
and unearned premiums with respect to the business reinsured
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under the Quota Share Agreement. In the event the Quota Share Agreement is
terminated by AC&S pursuant to such agreement's voluntary termination provisions
or for certain other limited reasons at a time when ERII's rating from A.M. Best
is higher than B++, the amount of the security required to be deposited by ERII
with AC&S pursuant to the agreement varies depending on the amount of ERII's
statutory surplus as of the effective date of such termination, with the amount
of such security ranging from 100% of such Pro Rata Share in the event that
ERII's statutory surplus as of the effective date of termination is less than
$100,000,000 to 0% of such Pro Rata Share if ERII's statutory surplus as of the
effective date of termination is greater than or equal to $750,000,000. Any
security deposited by ERII with AC&S pursuant to the Quota Share Agreement is
required to be adjusted quarterly to adjust the amount of such security in
relation to the then applicable Reinsurer's Pro Rata Share and certain other
variables, with ERII entitled to receive any excess security then on deposit and
required to supplement any such security in the amount of any deficiency in such
security, as the case may be. Generally, ERII is permitted to satisfy its
obligation to post security by establishing a trust account for the benefit of
AC&S but, under certain circumstances, ERII is required to post a letter of
credit in lieu of a trust account. These circumstances include any termination
of the agreement by AC&S as a result of any payment default by ERII or as a
result of the suspension of ERMA's underwriting authority under the Agency
Agreement.
Underwriting Committees. ERII and ERSIC each has two underwriting
committees of their respective Boards of Directors. One such committee
("Underwriting Committee A") acts with respect to D&O and other business issued
through ERMA on AC&S, ERII and ERSIC policies ("Underwriting Committee A
Business"). Underwriting Committee A, on which AC&S has one designee (two prior
to April 1996), acts only by unanimous vote. Approval of Underwriting Committee
A is required for any changes in or deviations from the underwriting,
reinsurance and claim guidelines applicable to Underwriting Committee A Business
and any changes to ERII's and ERSIC's affiliate arrangements. A second
underwriting committee of the Board of Directors of each of ERII and ERSIC
("Underwriting Committee B") acts with respect to (i) D&O and other business
written on ERII and ERSIC policies which does not conform with the
aforementioned guidelines of Underwriting Committee A, (ii) business, other than
D&O and specialty lines, written on ERII and ERSIC policies and (iii) business
written on policies of unrelated third party insurers which may be reinsured by
ERII or ERSIC ("Underwriting Committee B Business"). Underwriting Committee B is
responsible for the underwriting, claims and reinsurance guidelines for
Underwriting Committee B Business and acts by majority vote. AC&S does not have
the right to designate any members of Underwriting Committee B.
Limit on Additional Lines and Third Party Paper. Under the Quota Share
Agreement, ERII is precluded from insuring any business, or reinsuring any
insurer other than AC&S, and from engaging in any other business, except as
expressly provided in the Quota Share Agreement and the Exchange Agreement,
dated as of November 5, 1993 (the "Exchange Agreement"), by and among AC&S,
Executive Re and ERI. The Quota Share Agreement permits ERII to directly write
without limitation any of the lines of insurance business which ERMA has the
authority to underwrite on behalf of AC&S pursuant to the Agency Agreement and
which meets the applicable underwriting guidelines of Underwriting Committee A.
In addition, the Quota Share Agreement permits ERII to directly write errors and
omissions and other insurance lines (including D&O) which do not meet the
underwriting guidelines of Underwriting Committee A, provided such writing is
approved by Underwriting Committee B and a majority of ERII's Board of Directors
(any such line, a "Specialty Line") and provided further that after giving
effect to the writing of any such Specialty Lines the aggregate net written
premiums of ERII and the other insurance company subsidiaries of ERII
attributable to all Specialty Lines during any period of four consecutive
calendar quarters does not exceed 40% of the consolidated policyholders' surplus
of ERII and such other insurance company subsidiaries as determined based on the
most recent quarterly statements filed by each such insurer with its state of
domicile.
In addition, if ERII in good faith determines that it is unable to fully
develop its business by writing the lines of insurance which it is permitted to
write directly under the Quota Share Agreement (the "Permitted Lines") because
it does not have the proper authority, licensing or rating to do so, or it is
for some other reason impractical to do so, ERII may reinsure business within
any Permitted Line written by insurers other than
41
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AC&S, AC&S's affiliates or the Insurance Subsidiaries (a "Third-Party Insurer")
by entering into reinsurance arrangements and agreements with Third-Party
Insurers, provided (a) it affords AC&S a right of first offer prior to the
entering into most of such arrangements or agreements, (b) Underwriting
Committee B and a majority of the entire Board of Directors of ERII shall have
approved ERII's issuance of such reinsurance and (c) to the extent the
reinsurance in question relates to a Specialty Line, ERII, after giving effect
to such reinsurance, would be in compliance with the 40% of policyholders'
surplus limit referred to above.
ERMA has agreed that except as expressly permitted under the Agency
Agreement, it will not engage in any business or act as agent, broker,
representative or manager without the prior written consent of AC&S. Under the
Agency Agreement, ERMA is permitted to underwrite insurance on behalf of the
Insurance Subsidiaries on such terms as it may negotiate with them, provided the
issuance of such insurance by ERII is permitted under the applicable provisions
of the Quota Share Agreement or the issuance of such insurance by any of ERI's
other insurance company subsidiaries is permitted under the applicable
provisions of the Exchange Agreement, as the case may be. In addition, ERMA is
permitted to underwrite insurance and reinsurance on behalf of Third-Party
Insurers, provided that in most cases it affords AC&S a right of first offer
with respect to any such proposed underwriting agreement or arrangement.
Under the Exchange Agreement, ERI has agreed to cause ERSIC and any future
insurance company subsidiary of ERI to comply with the business limitations
applicable to ERII in the Quota Share Agreement as though such subsidiary were
itself subject to such restrictions, and to cause any future managing
underwriter to comply with the business limitations applicable to ERMA under the
Agency Agreement as though such managing underwriter were itself subject to such
restrictions.
RECENT DEVELOPMENTS
On March 26, 1996, the Company completed the Repurchase Transaction,
pursuant to which it purchased 2,511,300 shares of its capital stock from AC&S
at a price of $29.875 per share, or approximately $75 million in the aggregate.
Under the terms of the Stock Purchase Agreement, the price is subject to upward
adjustment under certain circumstances described below. Immediately prior to the
Repurchase Transaction, AC&S beneficially owned a total of 4,611,300 shares of
ERI's then-outstanding capital stock, consisting of 3,286,300 shares of Common
Stock, all 1,225,000 shares of the Class B Common Stock and the Aetna Stock
Option. The repurchased Common Stock was comprised of 1,286,300 shares of Common
Stock and all 1,225,000 shares of Class B Common Stock. On March 29, 1996, AC&S
transferred to AL&C the remaining 2,000,000 shares of Common Stock (which are
the Shares offered hereby) and the Aetna Stock Option. Prior to the repurchase
of the Class B Common Stock, AC&S had the right to elect four individuals to the
Company's Board of Directors. Following the Repurchase Transaction, AC&S has the
right, so long as the Agency Agreement remains in effect, to nominate one
director for election to the Board of Directors. One individual designated by
AC&S currently serves on the Company's Board of Directors.
Under the Stock Purchase Agreement, the purchase price was the average of
the closing prices of the Common Stock on the NYSE during the ten consecutive
trading days that ended on March 19, 1996, the third trading day prior to the
date on which the Agreement was signed. The Purchase Price is subject to upward
adjustment under certain circumstances. In summary, if within six months of the
March 26, 1996 closing date, (i) the Company and any third party shall enter
into an agreement under which such third party will acquire 30% or more of the
Company's outstanding Common Stock, or (ii) any third party shall have publicly
announced a tender offer which results in such third party's acquisition of 30%
or more of the Company's outstanding Common Stock (in either case, a "30%
Transaction"), then the Company shall pay to AL&C an amount in cash which is
equal to 2,511,300 times the excess, if any, of the price per share paid by such
third party over the Purchase Price (the "Excess Per Share Price"). If the
Company and any third party shall enter into any such agreement, or any third
party shall have publicly announced such a tender offer, with respect to a 30%
Transaction during the second six months following March 26, 1996, the Company
shall pay AL&C an amount in cash which is equal to 1,883,475 times the Excess
Per Share Price, or 75% of the amount which would have been payable with respect
to such an agreement entered into, or tender offer announced, during the first
six-month period.
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44
In connection with the Stock Purchase Agreement, the Company obtained a $70
million senior credit facility arranged through The Chase Manhattan Bank
(National Association), the proceeds of which have been used as follows: $38
million to partially finance the Repurchase Transaction, $25 million to
refinance the Company's existing bank debt and $7 million for general corporate
purposes. In connection with the credit facility, the Company has pledged the
stock of its direct subsidiary, Executive Re Inc., and Executive Re Inc. has
pledged the stock of its direct subsidiary, ERII. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
SELLING STOCKHOLDER
AL&C is the only Selling Stockholder. Prior to March 26, 1996, AL&C through
AC&S owned a total of 4,511,300 shares of the Company's capital stock, comprised
of 3,286,300 shares of Common Stock and all 1,225,000 shares of Class B Common
Stock. AC&S also owned the Aetna Stock Option. Since 1986, AC&S has had a number
of business relationships with the Company. See "Business Relationships with
AC&S." On March 26, 1996, the Company repurchased 1,286,300 shares of Common
Stock and all 1,225,000 shares of Class B Common Stock from AC&S pursuant to the
Stock Purchase Agreement, which also contained provisions related to the
Offering made hereby. See "Recent Developments." On March 29, 1996, AC&S
transferred the remaining 2,000,000 shares of Common Stock (which are the Shares
offered hereby), together with the Aetna Stock Option, to AL&C.
The Stock Purchase Agreement provides that the Company shall file with the
Commission a registration statement with respect to the resale by AL&C of all
2,000,000 shares of Common Stock (the "Remaining Common Stock") on or before May
31, 1996. The Company was obligated to use its reasonable efforts to cause such
registration statement to become effective and to remain effective for the
period specified by AL&C, so as to permit AL&C to complete the offering and sale
of the Remaining Common Stock. Under the Stock Purchase Agreement, the Company
has agreed to indemnify and hold harmless AL&C, its directors, officers,
affiliates and controlling persons, with respect to certain liabilities arising
out of the Offering made herein.
The following table sets forth certain information with respect to AL&C, as
Selling Stockholder (assuming no exercise of the over-allotment option):
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
------------------------- -------------------------
NUMBER PERCENT NUMBER PERCENT
OF COMMON OF TOTAL OF COMMON OF TOTAL
NAME OF SELLING STOCKHOLDER STOCK SHARES SHARES STOCK SHARES SHARES
Aetna Life and Casualty Company................. 2,100,000(1) 23% 100,000(1) 1%
- ------------------------------
(1) Includes 100,000 shares subject to the Aetna Stock Option.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, ERI will have outstanding 9,006,855 shares
of Common Stock, of which approximately 1.3 million shares will be "restricted
securities" (the "Restricted Shares") as that term is defined in Rule 144 under
the Securities Act ("Rule 144"). Other than shares owned by Company affiliates,
all of the Restricted Shares may be publicly sold in accordance with Rule
144(k), without regard to the volume, manner of sale or other limitations of
Rule 144. Approximately 700,000 shares of the Common Stock are held by
securityholders subject to the Lock-up period described below.
In connection with the underwriting agreement entered into with the
Underwriters, ERI, as well as each of its directors and executive officers and
AL&C, have agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangeable or
exercisable for
43
45
Common Stock without the prior written consent of the Representatives of the
Underwriters (the "Lock-up") for a period of 180 days after the date of this
Prospectus other than, in the case of ER1, pursuant to any employee or director
stock-based plan. After giving effect to the Offering, such directors and
executive officers and AL&C held as of the date of this Prospectus, in the
aggregate, approximately 22% of the Common Stock (on a fully diluted basis).
Upon completion of the Offering, there will be outstanding options to
purchase approximately 1.7 million shares of Common Stock, of which options to
purchase approximately 1.3 million shares are subject to the Lock-up period.
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46
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated the date hereof (the "Underwriting Agreement"), among the Company, AL&C
and Donaldson, Lufkin & Jenrette Securities Corporation and Conning & Company,
which are acting as representatives (the "Representatives") for the underwriters
named below (the "Underwriters"), the Selling Stockholder has agreed to sell to
the Underwriters and each of the Underwriters has severally agreed to purchase
the number of Shares set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
Donaldson, Lufkin & Jenrette Securities Corporation..................
Conning & Company....................................................
---------
2,000,000
=========
Under the terms of the Underwriting Agreement, the Underwriters are
obligated to take and pay for all such Shares, if any are taken. Under certain
circumstances, the commitments of nondefaulting Underwriters may be increased as
set forth in the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Shares directly to the public at the price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the Offering, the offering price and
such concession may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price, less the underwriting
discount. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the Offering of the
Shares made hereby. To the extent such option is exercised, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage of option shares as the number of Shares to be
purchased by said Underwriter shown in the foregoing table bears to the total
number of Shares initially offered by the Underwriters hereby.
Each of the Company and the Selling Stockholder has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act. The Company
has agreed to indemnify AL&C and its directors, officers, affiliates and
controlling persons with respect to certain liabilities arising out of the
Offering. In all cases, the indemnity includes indemnification for matters
arising under the federal securities laws.
Conning & Company provides the Company and Insurance Subsidiaries with
investment advisory, record-keeping and related services pursuant to an
agreement that is annually renewable in June. For services rendered during 1995,
the Company paid Conning & Company approximately $547,000.
The Company has agreed, for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives not to (i)
offer, sell, contract to sell, or grant any option to purchase or otherwise
dispose of any shares of Common Stock other than pursuant to any employee or
director stock-based plans, or (ii) file any registration statement under the
Securities Act with respect to shares of Common Stock other than pursuant to any
employee or director stock-based plans.
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CERTAIN LEGAL MATTERS
Certain legal matters in connection with the offering of the Shares made
hereby will be passed upon for the Company by Dewey Ballantine, 1301 Avenue of
the Americas, New York, New York. James A. FitzPatrick, Jr., Secretary of the
Company, is a member of Dewey Ballantine. From time to time, Dewey Ballantine
represents Donaldson, Lufkin & Jenrette Securities Corporation. Certain legal
matters in connection with the offering of the Shares made hereby will be passed
upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited
liability partnership including professional corporations, 125 West 55th Street,
New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company
incorporated by reference or appearing in the Company's Annual Report (Form
10-K) for the year ended December 31, 1995, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon incorporated by
reference or appearing therein and incorporated herein by reference. Such
consolidated financial statements and schedule are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
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- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary................... 4
Risk Factors......................... 10
Price Range of Common Stock
and Dividends...................... 14
Capitalization....................... 15
Use of Proceeds...................... 15
Selected Consolidated Historical
Financial Data..................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 27
Management........................... 36
Business Relationship with AC&S...... 39
Recent Developments.................. 42
Selling Stockholder.................. 43
Shares Eligible for Future Sale...... 43
Underwriting......................... 45
Certain Legal Matters................ 46
Experts.............................. 46
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CONNING & COMPANY
June , 1996
- ------------------------------------------------------
- ------------------------------------------------------
49
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the Common
Stock, other than underwriting discounts and commissions, a portion of which
will be paid by each of the Company and the Selling Stockholder, are estimated
(other than with respect to the SEC Registration Fee and the NASD Filing Fee) to
be as follows:
SEC Registration Fee.................................................... $ 26,073.28
NASD Filing Fee......................................................... 8,061.25
Blue Sky fees and expenses (including fees of counsel).................. 15,000.00
Accountants fees and expenses........................................... 30,000.00
Legal fees and expenses................................................. 90,000.00
Printing expenses....................................................... 150,000.00
-----------
Total......................................................... $229,134.53
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. The Registrant's Certificate of Incorporation
limits the liability of the Registrant's directors to the Registrant or its
stockholders to the fullest extent permitted by the Delaware statute as in
effect from time to time. Specifically, directors of the Registrant will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in the Delaware law, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Certificate of Incorporation of the Registrant provides that the
Registrant shall indemnify its officers and directors and former officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, the Registrant has the power to
indemnify any person who was or is a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding (other
than an action by or in the right of the Registrant) by reason of the fact that
he or she is or was a director, officer, employee, or agent of the Registrant,
against any and all expenses, judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if such person acted in good
faith and in a manner he or she reasonably believed to be in the best interest,
or not opposed to the best interest, of the Registrant and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
Registrant as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
The Company's officers and directors are also covered by a directors and
officers liability insurance policy issued by a third party. Additionally,
Joseph P. Kiernan serves on the Board of Directors at the request of The Aetna
Casualty and Surety Company ("AC&S") and is entitled to indemnification by AC&S
under certain circumstances in accordance with Connecticut law.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
1.1* -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of Executive Risk Inc.,
incorporated herein by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 (No. 33-70820) of the Company (herein the "S-1 Registration
Statement").
3.2 -- Restated Bylaws of Executive Risk Inc., incorporated herein by reference to
Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994.
4.1 -- Rights Agreement between Executive Risk Inc. and Mellon Bank, N.A., as Rights
Agent, incorporated by reference to Exhibit 4.2 to the S-1 Registration
Statement.
4.2 -- Amendment, dated as of April 8, 1996, to Rights Agreement between Executive
Risk Inc. and Mellon Bank, N.A., as Rights Agent.
5.1* -- Opinion of Dewey Ballantine.
10.1 -- Exchange Agreement, dated as of January 1, 1994, by and among Executive Re
Inc., Executive Risk Inc. and The Aetna Casualty and Surety Company,
incorporated herein by reference to Exhibit 10.1 to the S-1 Registration
Statement.
10.2 -- Agreement and Plan of Merger by and among Executive Re Inc., Executive Risk
Inc. and Executive Re Holdings Inc., incorporated herein by reference to
Exhibit 10.2 to the S-1 Registration Statement.
10.3 -- Stock Purchase Option between Executive Risk Inc. and The Aetna Casualty and
Surety Company, incorporated herein by reference to Exhibit 10.3 to the S-1
Registration Statement.
10.4 -- Amended and Restated Agency and Insurance Services Agreement by and among The
Aetna Casualty and Surety Company, Executive Risk Inc. and Executive Risk
Management Associates, incorporated herein by reference to Exhibit 10.4 to the
S-1 Registration Statement.
10.5 -- Amended and Restated Quota Share Reinsurance Agreement between The Aetna
Casualty and Surety Company and Executive Re Indemnity Inc., incorporated
herein by reference to Exhibit 10.5 to the S-1 Registration Statement.
10.6 -- Securityholders' Agreement among Executive Risk Inc., The Aetna Casualty and
Surety Company and the persons listed on Annex B thereto, incorporated herein
by reference to Exhibit 10.6 to the S-1 Registration Statement.
10.7 -- Credit Agreement, dated as of November 9, 1994, among Executive Risk Inc., the
Banks signatory thereto and The Chase Manhattan Bank, N.A. as Agent,
incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q for the period ended September 30, 1994.
10.8 -- Revolving Credit Agreement, dated as of November 9, 1994, among Executive Risk
Inc., the Banks signatory thereto and The Chase Manhattan Bank, N.A. as Agent,
incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form
10-Q for the period ended September 30, 1994.
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10.9 -- Agreement, dated as of June 18, 1993, by and among Executive Re Indemnity
Inc., Executive Re Inc., Executive Re Specialty Insurance Company and Conning
& Company, incorporated herein by reference to Exhibit 10.13 to the S-1
Registration Statement.
10.10 -- Joint Venture Agreement, dated January 21, 1993, between Executive Re Inc. and
Union des Assurance de Paris-IARD, incorporated herein by reference to Exhibit
10.17 to the S-1 Registration Statement.
10.11 -- Agreement for Purchase and Sale of Real Estate, dated as of July 22, 1994, by
and between Stephen L. Owens and Executive Re Indemnity Inc., incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ended September 30, 1994.
10.12 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Robert H. Kullas, incorporated herein by reference to Exhibit
10.13 to Annual Report on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K").
10.13 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Stephen J. Sills, incorporated herein by reference to Exhibit
10.14 of the 1994 10-K.
10.14 -- Employment Agreement, dated as of March 15, 1995, by and between Executive
Risk Inc. and Robert V. Deutsch, incorporated herein by reference to Exhibit
10.15 to the 1994 10-K.
10.15 -- Executive Risk Inc. Nonqualified Stock Option Plan, incorporated herein by
reference to Exhibit 10.23 to the S-1 Registration Statement.
10.16 -- Executive Risk Inc. Employee Incentive Nonqualified Stock Option Plan,
incorporated herein by reference to Exhibit 10.24 to the S-1 Registration
Statement.
10.17 -- Executive Risk Inc. IPO Stock Compensation Plan, incorporated herein by
reference to Exhibit 10.25 to the S-1 Registration Statement.
10.18 -- Executive Risk Inc. Incentive Compensation Plan, incorporated herein by
reference to Exhibit 10.19 to the 1994 10-K.
10.19 -- Executive Risk Inc. Retirement Plan, incorporated herein by reference to
Exhibit 10.27 to the S-1 Registration Statement.
10.20 -- Executive Risk Inc. Nonemployee Directors Stock Option Plan, incorporated by
reference to Exhibit 10.21 to the 1994 10-K.
10.21 -- Purchase and Sale Agreement, dated as of April 13, 1995, by and between Tower
Business Park Associates and Executive Risk Indemnity Inc., incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ended March 31, 1995.
10.22 -- Employment Agreement, dated as of March 31, 1995, by and between the Company
and LeRoy A. Vander Putten, incorporated herein by reference to Exhibit 10.2
to Quarterly Report on Form 10-Q for the period ended March 31, 1995.
10.23 -- Supplemental Pension Agreement by and among the Company, Aetna Life and
Casualty Company and LeRoy A. Vander Putten, dated as of March 31, 1995,
incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form
10-Q for the period ended March 31, 1995.
10.24 -- Executive Risk Inc. Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 10-K").
10.25 -- Executive Risk Inc. Performance Share Plan, incorporated herein by reference
to Exhibit 10.26 to the 1995 10-K.
10.26 -- Stock Purchase Agreement, dated as March 22, 1996 by and among the Executive
Risk Inc., The Aetna Casualty and Surety Company and Aetna Life and Casualty
Company, incorporated by reference to Exhibit 2 to Current Report on Form 8-K
dated March 25, 1996 (the "March 1996 8-K").
10.27 -- Term Loan Agreement, dated as of March 26, 1996, among Executive Risk Inc.,
the Banks signatory thereto and The Chase Manhattan Bank (National
Association), as Agent, incorporated by reference to Exhibit 3(a) to the March
1996 8-K.
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10.28 -- Stock Pledge Agreement, dated as of March 26, 1996, between Executive Risk
Inc. and The Chase Manhattan Bank (National Association), as Agent,
incorporated by reference to Exhibit 3(b) to the March 1996 8-K.
10.29 -- Stock Pledge Agreement, dated as of March 26, 1996, between Executive Re Inc.
and The Chase Manhattan Bank (National Association), as Agent.
10.30 -- Revolving Credit Agreement, dated as of March 26, 1996, among Executive Risk
Inc., the Bank's signatory thereto and The Chase Manhattan Bank (National
Association), as Agent.
10.31 -- Amended and Restated Stock Purchase Agreement, dated as of March 22, 1996 by
and among Executive Risk Inc., The Aetna Casualty and Surety Company and Aetna
Life and Casualty Company.
11.1 -- Statement regarding computation of per share earnings, incorporated by
reference to Exhibit 11 to the 1995 10-K.
21.1 -- Subsidiaries of Executive Risk Inc., incorporated by reference to Exhibit 21.1
to 1995 10-K.
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Dewey Ballantine (included in Exhibit 5.1).
24.1 -- Power of Attorney (included in the signature page to the registration
statement).
28.1 -- Information from reports furnished to State insurance regulatory authorities.
- ---------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes the following:
(a)(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) See Item 15.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hartford,
State of Connecticut, on June 3, 1996.
EXECUTIVE RISK INC.
By /s/ LEROY A. VANDER PUTTEN
LeRoy A. Vander Putten, Chairman
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to the Registration Statement has been signed by
the following persons in the capacities and on June 3, 1996.
SIGNATURE TITLE
/s/ LEROY A. VANDER PUTTEN Chairman, Director and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
LeRoy A. Vander Putten
* Vice Chairman, Director and Chief Operating Officer
- ------------------------------------
Robert H. Kullas
* President, Director and Chief Underwriting Officer
- ------------------------------------
Stephen J. Sills
* Director
- ------------------------------------
Gary G. Benanav
* Director
- ------------------------------------
John G. Crosby
* Director
- ------------------------------------
Patrick A. Gerschel
* Director
- ------------------------------------
Peter Goldberg
* Director
- ------------------------------------
Joseph P. Kiernan
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SIGNATURE TITLE
* Director
- ------------------------------------
Michael D. Rice
* Director
- ------------------------------------
Joseph D. Sargent
* Executive Vice President, Chief Financial Officer and
- ------------------------------------ Chief Actuary (Principal Financial and Accounting
Robert V. Deutsch Officer)
*By: LeRoy A. Vander
Putten
- ------------------------------------
LeRoy A. Vander Putten
as Attorney-in-Fact
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