AGREEMENT IN PRINCIPLE October 10, 1994
1. Agreement to Purchase. Fremont Compensation Insurance
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Company ("Fremont Compensation"), an indirect subsidiary of
Fremont General Corporation ("Fremont General"), agrees to
acquire all of the issued and outstanding shares (the "Shares")
of capital stock of Casualty Insurance Company (the "Company")
from its parent, The Buckeye Union Insurance Company ("Buckeye"),
a subsidiary of The Continental Corporation ("Continental") (the
"Acquisition"). The assets of the Company will include all of the
issued and outstanding shares of capital stock of Workers'
Compensation and Indemnity Company of California ("WCIC"). Each
party has taken the appropriate corporate action to approve this
Agreement in Principle. The purchase of the Shares will occur
pursuant to the terms of a definitive Stock Purchase Agreement
and ancillary agreements (collectively the "Stock Purchase
Agreement"), which will conform to the terms of this Agreement in
Principle.
2. Purchase Price. The aggregate purchase price for the
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Shares will be $250 million, all of which will be paid in cash at
the closing of the Acquisition (the "Closing"). The purchase
price will be funded from the assets of Fremont Compensation and
Fremont General. There is no financing contingency. The purchase
price will be subject to adjustment, as described in Section 7
below.
3. Other Business; Fronting Arrangements. The parties
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agree that all liabilities not pertaining to the workers
compensation insurance business in California, Indiana, Illinois,
Wisconsin and Michigan (the "Acquired States") will be either
removed from the Company or be reinsured by a Continental
affiliate prior to the Closing, in a manner to be mutually agreed
upon by the parties. All fronting arrangements enabling the
Company to do business in the Acquired States will be continued
by one or more Continental affiliates for a mutually agreed
period of time following the Closing.
4. Reinsurance Recoverable.
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(a) Accord Re. At the Closing, Continental Insurance Company
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will assume for the benefit of the Company the reinsurance
obligations of Accord Re with respect to the Workers'
compensation business in the Acquired States (the
"Transferred Business"). Such assumption will not adversely
affect the equity of the Company.
(b) Reinsurance Recoverable from Continental and its
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Affiliates. The parties mutually agree that a portion of the
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total reinsurance obligations from Continental and its affiliates
to the Company will be either collateralized or supported by a
letter of credit.
5. Other Services. Continental and its affiliates will
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continue to provide to the Company services currently performed
by Continental and its affiliates on behalf of the Company during
a transition period of up to one year from the Closing, at a
price of 115% of the cost of such services. The cost of such
services will be defined in the Stock Purchase Agreement as the
direct cost incurred by Continental and its affiliates.
Continental agrees that it will make all reasonable efforts to
transition to Fremont Compensation as soon as practicable the
services performed pursuant to this Section 5.
6. Reasonable Access.
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(a) Continental and its affiliates will make available to the
authorized representatives of Fremont Compensation such books,
records and personnel of the Company, Buckeye, Continental and
their affiliates as are reasonably necessary to permit Fremont
Compensation to negotiate the Stock Purchase Agreement and
investigate the accuracy of representations and warranties made
to it in the Stock Purchase Agreement. The Confidentiality
Agreement, dated July 5, 1994, between Fremont General and
Continental will remain in effect and apply to Fremont
Compensation's continuing review.
(b) Fremont Compensation will at its expense cause its
auditors, Ernst & Young ("E & Y"), to perform agreed upon
procedures with respect to the Company's records, such procedures
to be specified in the Stock Purchase Agreement and completed
prior to the Closing (the "Preclosing E & Y Procedures). E & Y
will commence such procedures promptly after execution of this
Agreement in Principle. The Company, Buckeye, Continental and
their affiliates will cooperate with E & Y in its performance of
the Preclosing E & Y Procedures.
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7. Balance Sheets; Methodology; Purchase Price Adjustment.
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(a) Prior to the signing of the Stock Purchase Agreement, the
parties will agree on the pro forma consolidated balance sheet of
the Company and WCIC as of June 30, 1994 (the "June 30 Balance
Sheet"), as if the depooling transactions referred to in Section
8 below had been effectuated.
(b) The parties will prepare the June 30 Balance Sheet using
the following assumptions:
(i) The portfolio assets (the "Portfolio Assets") to be
transferred to Fremont Compensation will consist exclusively
of cash, U.S. Treasury securities and accrued interest
receivable thereon, be reasonably acceptable to Fremont
Compensation and have a carrying value equal to their fair
market value.
(ii) Any deferred tax asset which is included in the
June 30 Balance Sheet shall be equal to an amount computed
using a tax rate of 35% and taking into account only items
that constitute temporary differences reflected in the June
30 Balance Sheet.
(iii) The amount of loss and loss adjustment expense
reserves ("Loss Reserves") shall be based on the following:
(A) Subject to verification of the accuracy of the
date provided to Milliman & Robertson, the report dated
June 27, 1994 prepared for the Company by Milliman &
Robertson is accepted by the parties to establish the
Company's ultimate voluntary business Loss Reserves for
accident years 1993 and prior.
(B) The proper analytical methodology to establish
the voluntary business Loss Reserved for accident year
1994, and if necessary, accident year 1995, shall be
mutually agreed and specified in the Stock Purchase
Agreement.
(C) The parties will agree to an amount necessary
to discharge the liabilities from business assumed from
the National Worker's Compensation Reinsurance Pool.
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(D) The parties will agree to methodology to
determine the loss adjustment expense reserves
necessary to discharge the Company's obligations for
business serviced on behalf of the National Worker's
Compensation Reinsurance Pool.
(iv) The provision for reinsurance recoverables,
statutory discount, policyholder dividend liabilities,
reserves for retrospective premium adjustments, reserves for
future audit premiums, any other accruals, and any other
assets and liabilities not described above will be
established on a basis mutually agreeable to the parties.
(c) The Company will prepare and deliver to Fremont
Compensation at least two weeks before the Closing an estimated
balance sheet as of the projected closing date, which will be
prepared on a basis consistent with the June 30 Balance Sheet.
Such estimated closing balance sheet will be "brought down" the
day before the Closing by marking the investment portfolio to
market as of such day. The parties will close on the basis of
such brought down estimated balance sheet (the "Closing Balance
Sheet"). Prior to the Closing, the assets and liabilities of the
Company will be adjusted by Continental as necessary so that the
Closing Balance Sheet reflects shareholders' equity of
$201,780,000.
(d) If the amount of Portfolio Assets set forth in the
Closing Balance Sheet is not in the range of $700,000,000 -
$740,000,000, the purchase price shall be decreased or increased
pursuant to a formula to be specified in the Stock Purchase
Agreement.
(e) Following the Closing, E & Y will perform an audit (the
"Acquisition Audit") of the Closing Balance Sheet at the expense
of Fremont Compensation. The assumptions determined as provided
in Section 7(b) above shall be used in the Acquisition Audit.
Continental, Buckeye and their affiliates will cooperate fully
with E & Y in the performance of the Acquisition Audit.
(f) If the parties do not agree on the results of the
Acquisition Audit, they will use their best efforts to resolve
any such dispute. If they are unable to agree, the dispute will
be finally determined by another independent accounting firm
chosen by the parties.
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(g) If the Acquisition Audit, as finally determined pursuant
to Section 7(f) above, shows that the amount of shareholders
equity (the "Actual Shareholders' Equity") was more than $250,000
greater or less than $201,780,000, then a post-closing adjustment
in the purchase price will be made by a cash payment by either
Fremont Compensation or Continental. In such event, Fremont
Compensation shall pay to Continental the amount by which the
Actual Shareholders' Equity exceeded $201,780,000 (the "Positive
Adjustment") or Continental shall pay to Fremont Compensation the
amount by which $201,780,000 exceeded the Actual Shareholders'
Equity. Provided, however, that if the Positive Adjustment is
more than $5,000,000, then Fremont Compensation will pay
$5,000,000 in cash and will return Portfolio Assets with a value
equal to the difference between the Positive Adjustment and
$5,000,000.
(h) In the Stock Purchase Agreement, Continental will make no
representation or warranty about, and provide no indemnity
concerning, the adequacy of the Company's Loss Reserves or the
collectibility of reinsurance recoverables (other than on
reinsurance provided by Continental or its affiliates) as those
matters will be addressed through the Preclosing E & Y Procedures
and the Acquisition Audit as described above.
8. Continental Pool. Prior to the Closing, the
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Transferred Business will be fully unwound from the Continental
pool without adversely affecting the Company's ability to do
business in the Acquired States. Continental will indemnify the
Company fully with respect to any liabilities that do not relate
to the Transferred Business.
9. Tax Matters.
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(a) Continental will hold the Company harmless from any tax
liabilities with respect to periods ending on or prior to the
Closing Date that are not appropriately reflected in the Closing
Balance Sheet.
(b) None of the Purchase Price will be allocated to the
covenant not to compete described in Section 11 below except to
the extent mutually agreed by the parties.
(c) At Fremont Compensation's option, Continental and Fremont
Compensation shall jointly make an election pursuant to IRC
section 338(h)(10) (and any analogous provision of state, local
or foreign law) to have the purchase
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of the Company's stock treated for tax purposes as a "deemed
asset acquisition."
(d) Continental and Fremont Compensation will consult in good
faith to determine whether an alternative structure for the
transaction (i.e., an exchange described in section 351 of the
IRC) will provide either party with a material tax benefit. In
the event the parties mutually agree upon any such alternative
structure, the proposed agreement shall be converted to such
alternative structure, with only such modifications as are
necessary to give effect to the change in structure.
10. Conditions to Closing. Consummation of the Acquisition is
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conditional upon the occurrence of the following:
(a) Negotiation and execution of the Stock Purchase
Agreement. The Stock Purchase Agreement will contain customary
representations and warranties to be brought down to Closing,
including representations with respect to the June 30 Balance
Sheet to be attached to the Stock Purchase Agreement. Subject to
Section 7(h) above, the representations and warranties made to
Fremont Compensation shall cover the accuracy of the Closing
Balance Sheet, and the Preclosing E & Y Procedures shall not
indicate that such representations and warranties are materially
incorrect. Any modifications in the assets and liabilities of the
Company required by Section 7(c) above shall have been completed.
(b) Review and approval of definitive documentation by the
Boards of Directors of Continental, Buckeye, the Company, Fremont
Compensation and Fremont General.
(c) Any requisite approvals from the Commissioners of
Insurance of the States of Illinois and California and of such
other states as needed, as well as compliance, if required, with
the Hart-Scott-Rodino Antitrust Improvements Act.
(d) No material adverse change in the operations, business,
financial condition, prospects or assets of the Company and WCIC,
taken as a whole. Provided, however, that the Stock Purchase
Agreement will exclude from the definition of a material adverse
change certain personnel losses in the California operations of
the Company due to the pendency of the Acquisition and any
downgrading in the claims
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paying rating of the Company provided by Moody's Investors
Services, Inc. or Standard & Poor's Corporation or in the rating
of the Company provided by A.M. Best Company, if such ratings
change has resulted from the pendency of the Acquisition and not
from changes in the ratings of Continental.
(e) Prior to the Closing Continental will supply audited
balance sheets as of December 31 in each of the years 1992 and
1993 and audited profit and loss statements for each of the years
ended on December 31, 1991, 1992 and 1993 in a form sufficient to
meet Fremont General's reporting requirements under Regulation S-
X.
11. Covenant Not to Compete. The Stock Purchase Agreement
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will contain a non-competition covenant prohibiting Continental
and its affiliates from competing with the Company for a period
of three years in the Acquired States. Exceptions to the covenant
will be made for certain passive investments, acquisitions of
companies that have only a de minimus worker's compensation
insurance business, national accounts, package accounts and a
limited amount of unso-licited business in the Acquired States.
This covenant will also prohibit soliciting any employees of the
Company to leave the Company's employ, hiring any of certain key
employees of the Company to be specified in the Stock Purchase
Agreement (the "Specified Employees") or hiring in the aggregate
more than 10% of the employees of the Company who are not
Specified Employees.
12. No Shop. For 30 days from the date hereof, Continental,
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the Company and their directors, officers, employees, agents and
affiliates will not, without Fremont Compensation's written
consent, provide any information to or encourage, solicit or
negotiate with, any corporation, individual or other entity with
respect to any acquisition, merger, sale of stock or other
substantial assets or other such proposal concerning the Company
("Acquisition Proposal"); provided however, that at Fremont
Compensation's option, the foregoing 30 day period may be
extended to 48 days from the date hereof. The parties understand
that Continental, the Company and their affiliates are agreeing
to the terms of this Section 12 to induce Fremont Compensation
and Fremont General to enter into this Agreement in Principle,
and to enter into a Stock Purchase Agreement within the time
period described above.
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13. Costs. Each of the parties shall bear its own costs in
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connection with the Acquisition. All fees owned to Goldman, Sachs
& Co. in connection with the Acquisition will be paid by
Continental. All fees owed to Chase Manhattan Bank or Chase
Securities, Inc. in connection with the Acquisition will be paid
by Fremont Compensation.
14. Publicity. The parties agree that the execution and
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delivery of this Agreement in Principle will be publicly
disclosed, but that the parties will release only a mutually
agreed upon text. Except as required by law, regulation or stock
exchange requirements, any other public announcement (including
the text thereof) of the proposed Acquisition may be made only
with the approval of both Continental and Fremont Compensation,
which approval shall not be unreasonably withheld.
15. Best Efforts. The parties will use their best efforts to
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enter into the Stock Purchase Agreement and to consummate the
Acquisition.
16. Governing Law. This Agreement in Principle and the Stock
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Purchase Agreement shall be governed by California law.
17. Conduct of Business. From the date hereof, the Company
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will not take action outside its ordinary course of business.
18. Termination. This Agreement in Principle shall be null
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and void if not accepted and agreed to by the parties on or
before October 10, 1994, and shall terminate if the Stock
Purchase Agreement has not been executed within 45 days from the
date hereof.
FREMONT COMPENSATION INSURANCE
COMPANY
By /s/James C. Little
Title: President & CEO
FREMONT GENERAL CORPORATION
By /s/James A. McIntyre
Title: Chairman, President & CEO
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THE BUCKEYE UNION INSURANCE COMPANY
By /s/Wayne H. Fisher
Title: Senior Vice President
THE CONTINENTAL CORPORATION
By /s/Wayne H. Fisher
Title: Senior Executive
Vice President
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