Form of
SUPPLEMENTAL ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of [
], by and among FOLKSAMERICA HOLDING COMPANY, INC., a New York corporation
("FHC"), FOLKSAMERICA REINSURANCE COMPANY, a New York domiciled insurance
company ("FRC," and, together with FHC, "Buyer") and a wholly owned subsidiary
of FHC, RISK CAPITAL REINSURANCE COMPANY, a Nebraska domiciled reinsurance
company ("Seller"), and [Citibank, N.A.], as Escrow Agent (the "Escrow Agent").
Certain capitalized terms have the meanings given to them in Annex A hereto.
W I T N E S S E T H :
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WHEREAS, Buyer, FHC, Seller and Risk Capital Holdings, Inc., a Delaware
corporation and the parent of Seller, are parties to an Asset Purchase
Agreement, dated as of January 17, 2000 (the "Purchase Agreement");
WHEREAS, pursuant to the Purchase Agreement, on the Closing Date, the Buyer
purchased all of the reinsurance operations of Seller;
WHEREAS, this is the Non-CPIS Escrow Agreement referred to in the Purchase
Agreement;
WHEREAS, pursuant to Section 2.04(b)(iii) of the Purchase Agreement, the
Seller is required to deposit funds into escrow in an amount equal to the
Deposited Amount (as defined below);
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth in this Agreement, the parties hereto hereby agree as follows:
1. Appointment of Escrow Agent. Each of Buyer and Seller hereby designates
and appoints the Escrow Agent as escrow agent, and the Escrow Agent hereby
accepts such appointment, on the terms and subject to the conditions of this
Agreement.
2. Deposited Amount; Escrowed Funds; Escrow Account.
(a) Seller hereby deposits with the Escrow Agent pursuant to Section
2.04(b)(iii) of the Purchase Agreement, and the Escrow Agent hereby acknowledges
receipt of, the Deposited Amount.
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(b) The Escrow Agent shall establish a segregated account (the "Escrow
Account") at its office located at its address set forth in Section 10 in which
to hold the Escrowed Funds and any securities in which the Escrowed Funds may,
from time to time, be invested. The Escrow Agent shall keep appropriate books
and records for the Escrow Account, including a list of securities in which the
Escrowed Funds are invested, any interest, dividends or other distributions on
or proceeds from any investment of Escrowed Funds and any amounts released from
the Escrow Account in accordance with Section 6. At the request of Buyer or
Seller from time to time, the Escrow Agent shall allow representatives of such
party to inspect and make copies of such books and records upon reasonable
notice during normal business hours. In any event, within 30 days of the end of
each calendar quarter, the Escrow Agent shall provide to Buyer and Seller a
statement of the list of securities in which the Escrowed Funds are invested,
the amount of any interest, dividends or other distributions on or proceeds from
any investment of Escrowed Funds and any amounts released from the Escrow
Account in accordance with Section 6. Escrowed Funds shall not be available to,
and shall not be used by, the Escrow Agent to set off any obligations of either
Buyer or Seller owing to the Escrow Agent in any capacity.
3. Investment of Escrowed Funds. The Escrow Agent shall invest and reinvest
the Escrowed Funds solely in Permitted Investments specified in written
instructions given to the Escrow Agent by both Buyer and Seller. The initial
investment instructions are attached hereto as Schedule 1. In the event that
Buyer and Seller do not give written directions to the Escrow Agent in a timely
manner, the Escrow Agent shall invest and reinvest the Escrowed Funds in
Permitted Investments selected by the Escrow Agent. Any returns on Escrowed
Funds, whether in the form of interest, dividends or other distributions or
otherwise, shall be added to the Escrow Account and shall constitute Escrowed
Funds. The Escrow Agent shall be entitled to make such investments in its
discretion and shall have no liability to Buyer or Seller arising, directly or
indirectly, from any investment made pursuant to this Section 3. The Escrow
Agent shall vote any securities in which the Escrow Funds are invested in
accordance with the instructions of Seller.
4. Reports on Paid Losses, Ending Reserves and Reserve
Deficiency/Redundancy Calculation. As soon as practicable (but not later than
ninety (90) days) after the Valuation Date, Buyer shall deliver to Seller and
the Escrow Agent each of the following:
(i) A report of independent public accountants designated by Buyer
(who may also be the independent public accountants of Seller or Buyer)
setting forth the amount of Paid Losses and showing in reasonable detail
the calculation thereof.
(ii) A report by an independent actuary designated by Buyer (who may
also be the independent actuary of Seller or Buyer, but not an employee of
either) setting
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forth the amount of Ending Reserves and showing in reasonable detail the
calculation thereof.
(iii) A report of independent public accountants designated by Buyer
(who may also be the independent public accountants of Seller or Buyer)
setting forth the difference of (1) the Beginning Reserves over (2) the sum
of Paid Losses plus Ending Reserves. Such difference shall be called
"Reserve Deficiency" if it is negative and "Reserve Redundancy" if it is
zero or positive. The Reserve Deficiency shall not exceed the Deposited
Amount. Such report shall show such calculation in reasonable detail.
5. Disputes.
(a) If at any time within the Objection Period Seller gives an Objection
Notice, Appointed Experts shall be engaged to separately determine the Reserve
Deficiency/Reserve Redundancy, and/or Ending Reserves and confirm the
calculation of Paid Losses. The Appointed Experts shall determine the Reserve
Deficiency/Reserve Redundancy, and/or Ending Reserves and confirm the
calculation of Paid Losses within forty-five (45) days of the date Seller gives
such notice. The determination by an actuary that is an Appointed Expert shall
be conducted (x) using its independent judgment based on prevailing facts,
circumstances and trends, (y) in accordance with generally accepted actuarial
standards and principles, and (z) to the extent not inconsistent with the
foregoing, in a manner and applying a method consistent with the determination
of the Beginning Reserves. It is understood that such actuary shall in no way be
inhibited in the use of its independent judgment. Except as provided in Section
5(c), the Appointed Experts' determinations and confirmations shall be final and
binding on all parties. Fees and expenses of the Appointed Experts shall be paid
equally by Buyer and Seller.
(b) Buyer and Seller agree to cooperate with and use all commercially
reasonable efforts to assist the Appointed Experts, including by furnishing all
information reasonably requested by them, in performing the services specified
hereby, and to negotiate in good faith to resolve the disputes under Section
5(a).
(c) Seller shall be entitled to dispute Paid Losses the calculation of
which shall have been confirmed by the Appointed Experts only to the extent that
Seller can show Paid Losses shall not have been incurred by Buyer in its
exercise of the reasonable business judgment of a reasonable reinsurer under
similar circumstances without regard to the availability of the Escrow Funds (it
being recognized that Buyer's rights to control payment of losses by cedents are
limited).
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6. Release of Escrowed Funds. Escrowed Funds shall be released from the
Escrow Account only in accordance with this Section 6.
(a) Tax Distributions. Within two business days after the end of each
calendar quarter (beginning with December 31, 2000), the Escrow Agent shall
release from the Escrow Account and deliver to Seller Escrowed Funds in an
amount equal to the tax that Seller notifies Buyer and the Escrow Agent is
actually payable (after giving effect to Seller's net operating losses) by the
Seller in respect of earnings on the Escrowed Funds since the end of the
immediately preceding calendar quarter (or, in the case of the first such
calendar quarter, since the date hereof) (such amounts, collectively, the "Tax
Distributions"). Buyer shall have no right to dispute the amount of taxes so
notified by Seller.
(b) By Mutual Instructions. The Escrow Agent shall release Escrowed Funds
from the Escrow Account in accordance with any mutual written instruction of
both Buyer and Seller.
(c) Paid Losses in Excess of Beginning Reserves.
(i) At the end of the first calendar quarter in which Paid Losses
(calculated with the references to "Valuation Date" in the definition
thereof being to such quarter-end and subject to Section 5(c)) exceed the
Beginning Reserves (such excess, the "Excess"), Buyer may give written
notice of the Excess to Seller. Such notice shall be accompanied by a
report of independent public accountants designated by Buyer (who may also
be the independent public accountants of Seller or Buyer) setting forth the
amount of Paid Losses and showing in reasonable detail the calculation
thereof. If at any time within thirty (30) days of the receipt of such
notice, Seller gives written notice to Buyer that it disputes the Paid
Losses or any component thereof, Appointed Experts shall be engaged to
confirm the calculation of Paid Losses. The Appointed Experts shall confirm
the calculation of the Paid Losses within forty-five (45) days of the date
Seller gives such notice, and give notice to the Escrow Agent of the amount
of the Excess. Except as provided in Section 5(c), the Appointed Experts'
confirmation of the calculation shall be final and binding on all parties.
On the later of (A) the end of the 30-day period referred to in this
Section 6(c)(i) and (B) the delivery by the Appointed Experts of their
confirmation of the calculation of the Excess, the Escrow Agent shall
release from the Escrow Account and deliver to Buyer Escrowed Funds in an
amount equal to any Excess.
(ii) Following the release of Escrowed Funds pursuant to Section
6(c)(i), from time to time, Buyer shall give written notice to Seller of
Paid Losses since the last such release to the end of any subsequent
calendar quarter ("Additional Paid Losses"), accompanied by a reasonably
detailed report of the Buyer's calculation of
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such Additional Paid Losses, at the end of such calendar quarter. Upon the
receipt of such report, the Escrow Agent shall release from the Escrow
Account and deliver to the Buyer Escrowed Funds in an amount equal to such
Additional Paid Losses.
(iii) The release of Escrowed Funds pursuant to Section 6(c) shall not
affect the right of Seller to dispute the amount of Paid Losses included in
any Reserve Deficiency or Reserve Redundancy submitted by or on behalf of
Buyer.
(d) Reserve Deficiency/Redundancy. On the Settlement Date:
(i) if there is a Reserve Deficiency, (x) the Escrow Agent shall
release from the Escrow Account and deliver to Buyer the Buyer Portion and
(y) the Escrow Agent shall release from the Escrow Account and deliver to
Seller the Seller Portion.
(ii) if there is a Reserve Redundancy, the Escrow Agent shall release
from the Escrow Account and deliver to Seller all of the Escrowed Funds.
(e) Liquidation of Investments. If necessary to satisfy any distributions
under this Agreement the Escrow Agent may sell or liquidate, in its sole
discretion, any one or more investments prior to maturity and the Escrow Agent
shall not be liable to Seller or to Buyer for any loss or penalties resulting
from or relating to such sale or liquidation; provided that the payee may (i)
extend any payment period in this Section 6 in order to avoid any loss of income
or principal from a premature liquidation of an escrow investment and/or (ii)
opt in writing to receive securities from the Escrow Account rather than
immediately available funds.
(f) Payments. Unless directed otherwise in writing by a payee, all payments
shall be made by wire transfer of immediately available funds to the account
specified by such payee.
7. Reports; Inspection Rights.
(a) Within 45 days of the end of each of the first three fiscal quarters of
Buyer of each year prior to the Valuation Date, Buyer shall deliver to Seller a
report setting forth (i) the Paid Losses (for such purposes, the references to
Valuation Date and audited financial statements in the definition thereof being
to such quarter-end and interim financial statements, respectively), (ii) the
Reserves as of such quarter-end, (iii) the calculation of each of the foregoing
in reasonable detail (including in the case of Paid Losses, a list of all
individual losses, if available from the ceding company) and (iv) such other
related matters as Seller reasonably requests, to the extent reasonably
available.
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(b) Within 90 days of the end of each fiscal year of Buyer prior to the
Valuation Date, Buyer shall deliver to Seller a report setting forth (i) the
Paid Losses (for such purposes, the references to Valuation Date and financial
statements in the definition thereof being to such year-end and year-end
financial statements), (ii) the Reserves as of such year-end, (iii) the
difference of (1) the Beginning Reserves over (2) the sum of Paid Losses
(calculated with the references to "Valuation Date" in the definition thereof
being to such year-end) plus the Reserves as of such year-end, (iv) the
calculation of each of the foregoing in reasonable detail (including in the case
of Paid Losses, a list of all individual losses, if available from the ceding
company) and (v) such other related matters as Seller reasonably requests, to
the extent reasonably available.
(c) From time to time as the Buyer and the Seller may reasonably agree (but
not less frequently than once per year) upon reasonable notice during normal
business hours, representatives of Seller (including its independent public
accountants and actuary) shall be permitted to inspect Buyer's books and records
involving the Business, including those relating to settlement and payment of
claims and work papers of Buyer's independent public accountants and actuary,
and, at Seller's expense, to make copies of them, and to discuss them with
Buyer's representatives (including its independent public accountants and
actuaries).
(d) The parties agree that Seller's receipt of reports or information
pursuant to this Section 7 shall not affect Seller's rights under Section 5 or
6.
8. Responsibility of Escrow Agent. The Escrow Agent shall not be
responsible for the genuineness of any signature or document presented to it
pursuant to this Agreement and may rely conclusively upon and shall be protected
in acting upon any judicial order or decree, certificate, notice, request,
consent, statement, instruction or other instrument believed by it in good faith
to be genuine or to be signed or presented by the proper person hereunder, or
duly authorized by such person or properly made. Notwithstanding anything to the
contrary in this Agreement, prior to taking any action hereunder, the Escrow
Agent may, if in doubt regarding its duties and obligations, seek instructions
from Buyer and Seller, and if such instructions are in conflict, the Escrow
Agent may seek instructions or other relief (including but not limited to
interpleader) from a court of competent jurisdiction, and further may request
such evidence, documents, certificates or opinions as it may deem appropriate.
The Escrow Agent shall be entitled to retain counsel both to advise it and in
connection with any court action, and such counsel's reasonable attorneys' fees
shall be borne by Buyer and Seller pursuant to Section 9. The Escrow Agent shall
be entitled to act in reliance upon the advice of counsel in all matters
pertaining to this Agreement, and shall not be liable for any action taken or
omitted by it in accordance with such advice and in the absence of gross
negligence or willful misconduct by the Escrow Agent. The Escrow Agent shall not
be responsible for any of the agreements contained herein except the performance
of its duties as expressly
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set forth herein. The duties and obligations of the Escrow Agent hereunder shall
be governed solely by the provisions of this Agreement, and the Escrow Agent
shall have no duties other than the duties expressly imposed herein and shall
not be required to take any action other than in accordance with the terms
hereof. The Escrow Agent shall not be bound by any notice of, or demand with
respect to, any waiver, modification, amendment, termination, cancellation,
rescission or supersession of this Agreement, unless in writing and signed by
Buyer, Seller and the Escrow Agent. In the event of any controversy or dispute
hereunder or with respect to any question as to the construction of this
Agreement, its liability hereunder is to be limited solely to gross negligence
or willful misconduct on its part; provided that the Escrow Agent's liability
with respect to the handling of funds shall be limited to ordinary negligence on
its part. Buyer and Seller shall indemnify and hold the Escrow Agent harmless,
and further protect and defend the Escrow Agent (with counsel selected by the
Escrow Agent) against any losses, liabilities and damages incurred by the Escrow
Agent as a consequence of any action taken or omitted to be taken by the Escrow
Agent in the performance of its obligations hereunder (including, without
limitation, the reasonable fees and disbursements of counsel), with the
exception of any losses, liabilities and damages arising from the Escrow Agent's
gross negligence or willful misconduct (or any liability arising from ordinary
negligence in the handling of funds). The representations and obligations of
Buyer and Seller to the Escrow Agent in this Agreement shall survive the
termination of this Agreement.
9. Fees of Escrow Agent. The Escrow Agent's fees for its services hereunder
shall be at the rate specified on Schedule 2 attached hereto, for so long as any
portion of the Escrowed Funds are held by the Escrow Agent hereunder. The fees
and expenses of the Escrow Agent (including the Escrow Agent's reasonable
attorney's fees) shall be paid one-half by Buyer and one-half by Seller.
10. Notices and Communications. All notices, demands and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given (1) if delivery by hand to a party at the address specified below,
upon delivery to a person authorized to receive mail for such party at such
address, (2) if sent by overnight courier to the address specified below, on the
next business day, (3) if mailed to the address specified below by certified
mail, return receipt requested, postage prepaid, on the fifth business day
following deposit in the mails, or (4) if sent by facsimile, upon receipt of
confirmation by the facsimile machine:
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If to Buyer, to:
Folksamerica Holding Company, Inc.
One Liberty Plaza
New York, New York 10006
Facsimile No.: (212) 385-3678
Attention: Steven E. Fass
with a copy to:
Morgan Lewis & Bockius, LLP
101 Park Avenue
New York, New York 10178
Facsimile No: (212) 309-6273
Attention: F. Sedgwick Browne
If to Seller, to:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, Connecticut 06830
Facsimile No.: (203) 861-7240
Attention: Chief Operating Officer or General Counsel
with a copy sent contemporaneously to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Facsimile No.: (212) 269-5420
Attention: Immanuel Kohn
If to the Escrow Agent, to:
Facsimile No.:
Attention:
or to such other address as such party shall designate by written notice to the
other parties hereto.
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11. Term; Amendment; Assignment. This Agreement shall continue until the
earlier of the date on which (a) all of the Escrowed Funds have been released
from the Escrow Account in accordance with Section 6 or (b) the Escrow Agent
receives a written notice of termination from Buyer and Seller; provided; that
Section 6(d)(ii)(y) shall survive the termination of this Agreement pursuant to
the foregoing clause (a). This Agreement may be amended only by a written
instrument signed by all of the parties hereto and shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Notwithstanding anything to the contrary in the
foregoing, Seller shall be permitted to assign its right to receive Escrowed
Funds in accordance with Section 6.
12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same instrument. In making proof of this Agreement
it shall be necessary to produce or account for only one such counterpart signed
by or on behalf of the party sought to be charged herewith.
13. Successor Escrow Agent. If the Escrow Agent wishes to resign as escrow
agent hereunder, the Escrow Agent must give written notice to Buyer and Seller
at least 90 days prior to the proposed date of resignation. Buyer and Seller
shall seek a successor escrow agent to replace the Escrow Agent. If a successor
escrow agent has not been appointed within 90 days after the Escrow Agent's
delivery of its resignation notice to Buyer and Seller, the Escrow Agent may
petition a court of competent jurisdiction to appoint such a successor escrow
agent. Resignation shall be effective upon appointment of a successor escrow
agent.
14. Entire Agreement. This Agreement, together with the Purchase Agreement
(including the attachments thereto) and the Transfer and Assumption Agreement
(as defined in the Purchase Agreement), contains the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby. No prior agreement, either written or oral, shall be construed to
change, amend, alter, repeat or invalidate this Agreement.
15. Representations of Buyer and Seller. Each of Buyer and Seller, in such
capacity, represents and warrants to the Escrow Agent that it has the power and
authority to enter into this Agreement and to carry out its obligations
hereunder, that it has duly authorized, executed and delivered this Agreement,
and this Agreement is its valid and legally binding obligation.
16. Governing Law. The validity, enforceability and construction of this
Agreement shall be governed by the laws of the State of New York (without giving
effect to principles of conflicts of laws).
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
FOLKSAMERICA HOLDING COMPANY, INC.
By:
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Name:
Title:
FOLKSAMERICA REINSURANCE COMPANY
By:
-------------------------------------------
Name:
Title:
SELLER:
RISK CAPITAL REINSURANCE COMPANY
By:
-------------------------------------------
Name:
Title:
ESCROW AGENT:
[CITIBANK, N.A.]
By:
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Name:
Title:
Schedule 1 to the Escrow Agreement
INITIAL INVESTMENT INSTRUCTIONS
Schedule 2 to the Escrow Agreement
FEES OF ESCROW AGENT
Acceptance Fee (one-time charge) [ ]
Administration Fee [ ]
Annex A to the Escrow Agreement
DEFINITIONS
"Appointed Experts" means (i) an independent actuary and/or, (ii) a firm of
independent public accountants, which shall be one of the "Big Five" firms of
public accountants, each of which shall be satisfactory to Buyer and Seller.
"Balance Sheet" means the Closing Date Balance Sheet of Seller delivered to
Buyer pursuant to Section 2.04(a) of the Purchase Agreement.
"Beginning Date" means the Closing Date.
"Beginning Reserves" means the Reserves as set forth on the Balance Sheet.
"Buyer Portion" means, subject to the last sentence of this paragraph, all
or a part of the (i) the Deposited Amount multiplied by a fraction of which (x)
the numerator is the Reserve Deficiency and (y) the denominator is the Deposited
Amount, plus (ii) the same fractional proportion of interest, dividends and
other distributions earned on the Deposited Amount to the Settlement Date, plus
(iii) to the extent that Buyer has not been fully compensated for principal and
interest on the Reserve Deficiency as calculated pursuant to (i) and (ii) above,
an amount equal to any Tax Distributions the Escrow Agent has released to Seller
for Tax Distributions including an amount of interest on such Tax Distributions
from the release date at a rate equal to the average rate of return on the
Deposited Amount to the Settlement Date. The final amount paid to Buyer shall be
reduced by amounts paid to Buyer pursuant to Section 6(c) and the amount of
interest in the Escrow Account shall be equitably allocated to Buyer with the
recognition that Buyer may have received all or a part of the Buyer Portion
under clause (i) above prior to the Settlement Date. If clause (iii) is
applicable, Buyer shall cooperate in any of Seller's efforts to seek a refund of
or tax benefit with respect to income taxes paid or tax benefits used by Seller
in respect of earnings on Escrowed Funds.
It is the intention of the above calculations that Buyer receive all or a
part of the Deposited Amount equal to the Reserve Deficiency and that Buyer (and
Seller, if applicable) receive on the Settlement Date an equitable apportionment
of interest on the amount of the Deposited Amount (taking into consideration any
distributions from the Escrowed Funds) to which they are entitled pursuant to
this Agreement.
"Closing Date" means , 2000
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"Business" means all business written prior to the Closing Date under the
Treaties (as defined in the Transfer and Assumption Agreement) for the account
of Seller, other than the CPIS Business.
"CPIS Business" means all business produced by Capital Protection Insurance
Services, LLC for the account of Seller.
"Deposited Amount" means the amount required to be deposited by the Seller
in the Escrow Account pursuant to Section 2.04(b)(iii) of the Purchase
Agreement.
"Ending Reserves" means the Reserves as of the Valuation Date. The
determination of Ending Reserves shall be (i) conducted by the independent
actuary making such determination (x) using its independent judgment based on
prevailing facts, circumstances and trends, (y) in accordance with generally
accepted actuarial standards and principles and (z) to the extent not
inconsistent with the foregoing, in a manner and applying a method consistent
with the determination of the Beginning Reserves and (ii) consistent with
Buyer's audited financial statements for the fiscal year that includes the
Valuation Date. It is understood that such actuary shall in no way be inhibited
in the use of its independent judgment.
"Escrowed Funds" means the Deposited Amount, together with any interest,
dividends or other distributions on or proceeds from any investment thereof
under the Escrow Agreement, less the aggregate amount of Tax Distributions.
"GAAP" means United States generally accepted accounting principles applied
on a basis consistent with those applied in preparing the Balance Sheet.
"Objection Notice" means a written notice to Buyer and the Escrow Agent
that Seller disputes the Reserve Deficiency/Reserve Redundancy, Paid Losses,
Ending Reserves and/or any component of any of the foregoing, and specifying in
reasonable detail the Seller's reasons for such dispute.
"Objection Period" means the period of sixty (60) days following Seller's
receipt of the latest of the reports referred to in Section 4.
"Paid Losses" means losses and loss adjustment expenses of the Business
actually paid by or on behalf of FRC from (but excluding) the Beginning Date to
(and including) the Valuation Date, less (x) any amounts actually received as of
the Valuation Date in respect of such losses and loss adjustment expenses
pursuant to insurance, reinsurance, retrocession or similar contracts, treaties,
agreements or arrangements and (y) salvage and subrogation actually received as
of the Valuation Date in respect of such losses and loss adjustment expenses;
provided that the portion of unallocated loss adjustment expenses included in
such
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loss adjustment expenses shall not exceed the amount of unallocated loss
adjustment expenses included in the Beginning Reserves except as the result of
the recharacterization as unallocated loss adjustment expenses, pursuant to a
change prescribed by the National Association of Insurance Commissioners or the
New York Insurance Department, of an item that at the date hereof would
constitute allocated loss adjustment expenses. For purposes of this provision,
unallocated loss adjustment expenses shall mean internal expenses for
compensation of FRC's officers and employees and related overhead expenses. The
calculation of Paid Losses shall be (x) made in accordance with GAAP and (y)
consistent with Buyer's financial statements for the fiscal period ending with
the Valuation Date.
"Permitted Investments" means investment grade securities issued, fully
guaranteed or fully insured by any State of the United States or any political
subdivision thereof (including "revenue" bonds) and money market funds
substantially all of whose assets consist of such securities, which shall not
(A) mature later than the Settlement Date or (B) be subject to any federal or
state income tax applicable to the Seller.
"Reserves" means, as of any date, (1) the reserve for unpaid losses,
including the case reserve and reserve for incurred but not reported (IBNR)
losses (including the reserve for unearned premium deficiency), plus (2) the
reserve for loss adjustment expenses; provided that the portion of unallocated
loss adjustment expenses included in such reserve shall not exceed the amount of
unallocated loss adjustment expenses included in the Beginning Reserves, plus
(3) unearned premium reserves, minus (4) anticipated salvage and subrogation,
minus (5) collectible reinsurance recoverables, in each case, on such date with
respect to the Business.
"Reserve Deficiency" has the meaning given to such term in Section 4(iii).
"Reserve Redundancy" has the meaning given to such term in Section 4(iii).
"Seller Portion" means all of the Escrowed Funds less the Buyer Portion.
"Settlement Date" means (a) if Seller does not give an Objection Notice
within the Objection Period, the second business day following the end of the
Objection Period, and (b) if Seller gives an Objection Notice within the
Objection Period, the second business day following the later of (x) the
determinations and confirmations by the Appointed Experts pursuant to Section
5(a) or (y) the resolution of any dispute regarding Paid Losses.
"Valuation Date" means the fifth anniversary of the Closing Date.